SRI LANKA: OIL EXPLORATION PROSPECTS REAL, BUT CONSTRAINED

UNCLAS SECTION 01 OF 03 COLOMBO 000632

SIPDIS

SENSITIVE, SIPDIS
STATE FOR SCA/INS
MCC FOR S GROFF, D NASSIRY AND E BURKE

E.O 12958: N/A
TAGS: ECON EAID ENRG EPET ETRD CE
SUBJECT: SRI LANKA: OIL EXPLORATION PROSPECTS REAL, BUT CONSTRAINED
BY UNREALISTIC GOVERNMENT EXPECTATIONS

REF: A) 2006 COLOMBO 431 B) 2006 COLOMBO 1902
C) COLOMBO 200 D) COLOMBO 418


1. (SBU) Summary: U.S. experts who have looked at recent geological
survey data believe that significant petrochemical deposits lie off
the coast of Sri Lanka. On May 1, the Ambassador will join Sri
Lanka's Petroleum minister and others at the Offshore Technology
Conference in Houston to describe this potential investment
opportunity for U.S. oil companies. At that conference, Sri Lanka
will announce plans to solicit international bids on three of its
eight offshore exploration blocks between May and October this year.



2. (SBU) Summary cont'd: The U.S. Trade and Development Agency is
assisting Sri Lanka's inexperienced Petroleum and Resources
Development Secretariat in preparing a regulatory structure to
govern the oil exploration process. However, Sri Lanka turned down
the USG's offer to help it develop a marketing plan and a model
production sharing contract for the upcoming licensing round. It
did so in haste to get on with the licensing round -- a sign that
political expediency is likely to outweigh good judgment in this
critical national development opportunity. Similarly, Sri Lanka's
early decision to reserve an exploration block each for China and
India is troubling both as a reflection of how much sway those big
neighbors hold with Sri Lanka and as an indication of how Sri Lanka
continues to manage major national economic policies in a
non-transparent and non-market fashion. End summary.

EIGHT BLOCKS: THREE TO BE AUCTIONED NOW,
THREE LATER, TWO RESERVED FOR CHINA AND INDIA
--------------


3. (SBU) According to USG and other experts, seismic surveys
indicate the potential for significant oil and gas deposits in the
Mannar Basin off Sri Lanka's northern and western coasts. Sri
Lanka's Ministry of Petroleum and Petroleum Resources Development
has identified eight blocks for exploitation. According to the
Petroleum and Resources Development Secretariat, Sri Lanka will
promote and auction three of those blocks with a May-October 2007
licensing round; it plans to award exploration licenses in early
2008; exploration could begin in 2009; production could be possible
by 2012. Sri Lanka has reserved two other blocks for China and
India. It will keep the final three blocks aside for a future
bidding round. The eight blocks comprise both shallow and deeper
waters; the easiest to explore blocks will be auctioned first.
According to one U.S. expert, the Mannar Basin could contain among
the best oil and gas reserves in South Asia. High world oil prices,
if sustained, make it more likely that Sri Lanka's reserves will be
viable to develop.


4. (SBU) Petroleum Minister A.H.M. Fowzie will announce the opening
of the initial bidding round at the April 30-May 3 Offshore
Technology Conference in Houston. The conference will feature a May
1 industry breakfast focused on Sri Lanka, organized by the U.S.
Department of Commerce. Ambassador Blake will participate, to
describe U.S.-Sri Lanka relations and the investment climate in Sri
Lanka. Petroleum and Resources Development Secretariat Director
General Neil De Silva will give a technical overview of the offshore
oil potential in the Mannar Basin. The managing director of
Chevron's Caltex Sri Lanka operation will describe the private
sector perspective on investing in Sri Lanka.

PROMISE OF TWO BLOCKS TO INDIA
AND CHINA WITHOUT CLEAR TERMS
--------------


5. (SBU) Sri Lanka decided long before readying the upcoming
licensing round to allot an exploration block each to India (in
2003) and to China (in 2006). The GSL has told emboffs that it
reserved the blocks for India and China because it views the two
countries as "strategic partners." Some GSL officials have told us
that they likewise regard the United States as a strategic partner
and that it should get a block too. In response, we have emphasized
that we believe a competitive and transparent process would be best
for Sri Lanka and for the private companies that would bid on the
blocks, and that we are confident that U.S. companies could deliver
the best expertise and value.

COLOMBO 00000632 002 OF 003




6. (SBU) The GSL has not disclosed which blocks will go to India
and China, but has begun discussing possible terms for the eventual
award of blocks to Chinese and Indian firms. On February 7,
Minister Fowzie told the press that Sri Lanka hoped to receive $100
million each from China and India for the blocks. He recently told
Econoff that China had not yet replied to this proposal and that
discussions were underway with India. Post, on the advice of
USTDA's consultant, has recommended that Sri Lanka attempt to use as
a basis for these deals the same production sharing agreement that
would govern the competitively auctioned blocks. This would avoid
the distortive impact of having companies potentially bringing oil
up from different blocks under different financial terms.

FINAL THREE BLOCKS HELD IN RESERVE
--------------


7. (SBU) The final three blocks identified for future development
will be held in reserve, pending the outcome of the initial
licensing round. Director General De Silva believes the GSL will
learn from the initial licensing round, and will be able apply those
lessons in a later bidding round. Further, he notes that
technological advances might improve the viability of exploring the
more difficult fields. (Comment: This is one of Sri Lanka's most
prudent decisions involving offshore development so far.)

MARKETING AND BIDDING ROUND PLANS
--------------


8. (SBU) The GSL will announce which blocks will be available in
the initial licensing round on May 1 at the Offshore Technology
Conference. The Secretariat is currently evaluating several
proposals by consultants to assist in preparing for and marketing
the bidding round. These services will consist of preparing the
production sharing contract, conducting a road show, and writing
software to evaluate exploration bids. Dr. De Silva anticipates the
road show taking place in July and August in the United States,
London, Dubai and Singapore, leading to the blocks being auctioned
off by October, or no later than early 2008.

UNREALISTIC EXPECTATIONS FOR GSL-CONTRACTED CONSULTANT
-------------- --------------


9. (SBU) In 2006, USTDA offered to fund a consultant to develop a
production sharing contract and develop and implement marketing
plans. It funded a definitional mission for this work. The
Petroleum Resources and Development Secretariat used many of the
suggestions provided at that time to develop its plans. The
proposed USTDA grant would have improved the likelihood that Sri
Lanka received high quality, comprehensive services, and increased
the potential for a transparent bidding process for the fields. But
the Secretariat declined this offer, citing the need to minimize
preparatory time for these consultancy services (Ref B). The
Secretariat on February 15 published a small ad in a local paper to

SIPDIS
request proposals for these services, which Embassy reported (Ref
D). That RFP allowed only five weeks for submission of proposals,
which limited both the time for word to spread about the RFP and the
time companies would have to prepare bids. One U.S. company
official told Econoff that the fees the GSL expected to pay were
insufficient to provide the entire set of services requested.

USTDA CONSULTANT TO DRAFT PROPOSED
REGULATORY SYSTEM FRAMEWORK
--------------


10. (U) The GSL gladly accepted a related USTDA offer to grant
$474,000 to develop a regulatory structure to govern the oil
development process, including designing of a regulatory authority
(Ref C). This assistance will facilitate development of a
productive Secretariat while outlining world-class legal,
operational, environmental, and safety standards offshore.
Ambassador Blake and Secretary of the Treasury Jayasundera signed
the grant agreement on March 14. Several dailies reported the
signing on their front page, or on the first page of their business
section. In keeping with USTDA requirements, this technical
assistance project will be carried out by a U.S. company. USTDA's
request for bids opened on March 30 and will close on May 15.

COLOMBO 00000632 003 OF 003



U.S. MINERALS MANAGEMENT SERVICE CONDUCTS
RESOURCES MANAGEMENT SEMINAR
--------------


11. (SBU) Additional U.S. assistance was provided by the Minerals
Management Service, which held a three-day training course on
"managing oil and gas resources" in Colombo in December 2006.
Facilitated by USAID, the workshop covered oil and gas management
systems, leasing and tendering methodologies, risk management,
resource evaluation and inspection. The session concluded with a
simulated lease sale. Petroleum and Resources Development
Secretariat staff, as well as a core group of officials from various

SIPDIS
line agencies who are expected to work together on oil exploration
related work, attended the course. The workshop provided critical
first-time exposure to offshore development issues for most of the
attendees, who lacked any prior knowledge or experience in resource
management.


12. (SBU) Bio note: Dr. De Silva is the only real oil development
expert within the Ministry of Petroleum Resources Development. He
is a Canadian Sri Lankan dual citizen with M.Sc. and Ph.D. degrees,
a diploma in business administration. For over two decades, Dr. De
Silva has served as a petroleum geologist, petroleum geophysicist
and exploration manager, mainly in Newfoundland. He is a consultant
to the Integrated Ocean Drilling Program at Texas A&M University.
He returned to Sri Lanka at the government's request to lend
expertise to this critical national opportunity.)

COMMENT: FUMBLING A MAJOR OPPORTUNITY
--------------


13. (SBU) Despite our attempts to assist, and Dr. De Silva's
professionalism, we fear that Sri Lanka is fumbling this critical
opportunity to develop a valuable national resource. While Minister
Fowzie no longer blithely tells the press that oil derricks will
gush oil within eight months (as he did frequently last year),Sri
Lanka still appears unwilling to spend the time and resources to
get the offshore oil development process right the first time. If
so, it will never get as good a chance to convince the international
oil companies that it can be a professional partner in a long-term
and mutually profitable process. Still, Post continues to press for
appropriate planning, development and marketing of these fields, to
ensure that the bidding cycle as is competitive and transparent as
possible.
BLAKE