All eyes on Cairn’s next gas well, says Sri Lanka

Reuters: New investors who have shown interest in Sri Lankan oil and gas exploration await the results of Cairn India’s drilling of a second well in the Mannar Basin before committing to anything, Sri Lanka’s Oil Minister said on Tuesday.

Petroleum Industries Minister Susil Premajayantha confirmed that Russian gas export monopoly Gazprom, Malaysian State oil company Petronas and Vietnam have all held talks with Sri Lanka.

“Cairn has to inform the Government from time to time about their progress, and others are waiting to see what they find,” he said at the Reuters Global Oil Forum. “If they inform us that the gas discovery is commercially viable, there will be more investors into Sri Lanka.”

Cairn earlier this month said it had discovered natural gas in an exploration block in the Mannar Basin, off Sri Lanka’s north eastern coast in the Indian Ocean, but that more drilling was required to determine whether it was commercially recoverable.

Drilling on a second well commenced on 4 Octcober, Cairn has said. There are eight blocks in total on offer in the Mannar Basin. Cairn has one, and India and China have each been given one but have done no drilling.

Vietnam and Sri Lanka signed a deal on oil and gas cooperation during the visit of President Truong Tan Sang two weeks ago. Earlier discussions with Russia’s Gazprom and Malaysia’s Petronas have not produced agreements, Premajayantha said.

“The Vice Chairman of Gazprom came here with a delegation, and they had discussions with us... and they need more data to decide if they will do exploration,” Premajayantha told Reuters, referring to seismic data.

“When we meet them next, we will discuss those details,” he said. He did not give a timeline for that meeting.

Seismic work done earlier by Norway’s TGS Nopec Geophysical Co ASA showed some potential in the northern Cauvery Basin, which on the Indian side has producing wells, and in a basin off the island’s southern coast.

“There are indications in the Cauvery Basin and the southern basin, but since we have started in the Mannar Basin, we will continue there,” Premajayantha said.

The tendering process for the remaining blocks in Mannar is being decided, and the timeframe is not yet clear, he said. “The Vietnamese can bid at the next round,” he said.

Clarifying his earlier comments that gas production would be online in 18-24 months, Premajayantha said he would follow Cairn’s timeline. The driller has said it would need about six years if commercial gas deposits are found.

Sri Lanka hopes that a commercial find by Cairn will lead to higher bid prices for blocks, while it rebuilds its economy after a three-decade civil war that ended in 2009.

One consistent problem for Sri Lanka has been the drain on its Treasury from the bill for oil imports, which amounted to $ 2.98 billion through August, according to the Central Bank, which this year figured in a price of $ 90 per barrel in its forecasts.

“We are only a buyer, and it is not a buyer’s market, it is a seller’s market. So we can’t predict that. It is comfortable if crude is somewhere around $ 70 a barrel,” Premajayantha said.

Sri Lanka has power generation capacity of 2,806 megawatts (MW), 60 per cent of which runs on heavy fuel oil and the rest is a mix of hydropower and coal.

It is almost entirely dependent on petroleum imports, while its outdated Sapugaskanda Refinery produces 50,000 barrels a day of gasoline and diesel.

It has been seeking an investor to commit $ 2 billion to double the plant’s capacity and modernise it after an earlier deal with Iran fell through. That would save $ 300-400 million annually in refined product imports, Premajayantha estimates.

“We have done a feasibility study on it, so still we have not finalised anything. If we are sent proposals, we welcome that,” Premajayantha said. “The whole process will take about five years. There are no shortcuts with oil and gas.”

Sri Lanka is also moving forward with plans to convert 660 MW of power generation to liquefied natural gas via the conversion of three power plants, he said.