Has India lost the bid for Sri Lankan hydrocarbons?

oil rig

There have been signs of natural gas and oil reserves off the coast of Sri Lanka since the 1970s. However, a prolonged, bloody civil war lead to a halt in exploration. With the prospects of peace beginning to show, exploration resumed.

Cairn Ltd, an Indian oil and gas exploration company, began drilling the first well offshore for 30 years in 2011. This is a promising sign for Sri Lanka. The industry could produce significant and much-needed revenue and reduce reliance on the textile sector, as well.

Asia’s robust economic growth boosts demand for energy in the region — total liquid fuel consumption in Asian countries outside the Organization for Economic Cooperation is predicted to represent over 30% of world consumption by 2035. If hydrocarbons are found, there would be a ready market. Moreover, upstream initiatives would also find an agreeable domestic market in Sri Lanka.

Oil and petroleum products are currently imported from Iran. UN sanctions on Iran have proved significantly challenging for the Island. Indeed, the Ceylon Petroleum Corporation (CPC) state sanctions have made it difficult to obtain insurance or letters of credit for oil imports. The CPC even had to periodically shut Sri Lanka’s only refinery due to poor cash flow. While the recent easing of sanctions may ease Sri Lanka’s energy problems, Iran’s relationship with the P5+1 is less than certain in the long term. New initiatives would be welcome but require international exploration companies and their expertise.

The island is trying to build its fledgling hydrocarbon industry by actively wooing international oil companies in the hopes of reinvigorating oil and gas exploration. The Director General of the Petroleum Resource Development Secretariat, Saliya Wickramasuriya, stated contracts would be available on attractive terms.

Given the growing investment from Chinese enterprises and the historic relationship the country holds with India, it would be surprising to find either of the regional heavyweights opting out of the second round of auctioning – especially given the high potential shown in Mannar basin discoveries and the prolific hydrocarbon plays in the region. Yet, initial feedback from the most recent block auction may hold that very surprise.

Second round of licensing

The second round of licensing, which took place in November 2013, was expected to receive much attention from both Indian and Chinese corporations (both private and state-owned) along with extractive industry multinational giants. However, despite its oil discovery in the blocks obtained from the first round of bidding in 2007, reports suggest Cairn India Ltd. only bid for one exploration block. Indeed, there seemed to be little interest, with reports suggesting only three applicants had submitted bids.

There was thought to be both significant interest from India and China. Specifically, the overseas branch of the Indian state-owned Oil and Natural Gas Corporation Ltd (ONGC), had shown initial interest, yet sources state the company did not bid for any of the 13 blocks on offer. While there was some interest from a Singapore based company, Bonavista, it seems that Cairn Ltd was the only major explorer bidding.

Behind the scenes

Both business and economic ties between Sri Lanka and India seem to be waning, particular within the energy industry. There are reports that Sri Lanka has decided to partially take over a strategic oil storage depot in Trincomalee from Lanka IOC – the Sri Lankan branch of Indian Oil Corporation. Indeed, Lanka IOC’s chairman recently stated the company had “no plans to expand in Sri Lanka at the moment,” suggesting icy relations.

Similarly, public enterprises such as OVL have released statements emphasising their decision not to participate in their round of auctions – noting that they did not find the prospects of these blocks very viable. Yet, interestingly, OVL had previously approached the Ministry of External Affairs (MEA) for permission to take part in the recent bidding. Without such approval, OVL was unable to participate, suggesting a political rather than commercial rationale underpinned the bidding decision. The lack of interest upon bidding closure is  intriguing.

Sri Lanka’s relationship with regional powers and Western states is turbulent to say the least. Large and significant diaspora reside within its closest neighbor, India. Moreover, the wave of protests in Tamil Nadu against the Sri Lankan government’s alleged atrocities on Tamils, and India’s vote in favour of the US resolution against Sri Lanka at the United Nations Human Rights Council, may still hang over state relations. Moreover, diplomatic relations have not improved since the Indian Prime Minister boycotted the commonwealth summit.

Secondly, it is noteworthy that the Mannar basin is close to Tamil Nadu, a few kilometres away from the Indian coast. Suspicion by either side could only exacerbate tensions in Tamil diaspora – something the Sri Lankan administration will be keen to avoid given the only recent development of peace. Thus, it seems that political turbulence between the two states is effecting their commercial behaviour, and the consequences are arguably more detrimental for India.

While diplomatic fall-out explains the lack of interest from India, China’s response is less clear. China was understandably expected to look at exploration opportunities. Despite the lack of reported interest by China, there are unconfirmed reports that China’s C.N.P.C Company demanded Sri Lankan oil beds. This would not be unsurprising, as in 2013 China was Sri Lanka’s largest foreign investor, accounting for 24% of FDI. Moreover, China’s presence is felt physically in the form of a $500 million USD container port terminal that opened thanks to Chinese investment – the biggest investment in the state’s harbours to date. There seems to be only a strengthening relationship between the two countries.

No news is not necessarily bad news when it comes to block bidding. While initial reports suggest a lack of interest from Chinese firms, an analysis of Sri Lankan legislation shows an alternative story. There is no statutory requirement under Sri Lankan law to reveal a bidding party’s identity, so interested parties may be utilizing the lack of a legal requirement for transparency to keep their activities concealed. This would be sensible given the apparent competition between China and India. If this is indeed the case, India may have missed a trick.

Hydra-carbon industry can meet development needs

Sri Lanka needs investment, and the promise of a hydrocarbon industry would not be a bad thing. There is a marked dependence on the textile sector and little infrastructure. Even with heavy public and private investment from China, there is a long way to go. There is also a ready market available for hydrocarbons. Successful explorations and international investment are the only missing factors.

Initial comments suggest the recent round of bidding has been less successful than expected. Statements from Indian state officials and state enterprises suggest a reluctance to invest further in Sri Lanka, likely a side effect of weakening India-Sri Lanka relations.  This may not be the best decision. There are no statutory requirements to declare the bids of interested parties, and Chinese actors might have kept their interests concealed, giving China a diplomatic edge. Sri Lanka’s fledgling hydrocarbon industry could increase regional tension, but if further reserves are found, it could also help meet national development needs.

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Categories: Natural resources, Pacific Asia

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