Cairn India will invest US $ 110 million in the initial stages of its commitment to explore for oil in the Mannar Basin.
An investment agreement was signed between the BOI and Cairn Lanka (Pvt) Ltd this week to this effect.
Cairn Lanka was incorporated as a fully owned subsidy of Cairn India when the Petroleum Resources Agreement was signed with the government last July.
According to the BOI agreement, Cairn Lanka will make an initial investment of more than USD 110 million towards the exploration of hydrocarbons.
The programme of work will be in the Block SL 2007-01-001 which is located in Sri Lanka’s side of the Mannar Basin. It covers approximately 3,000 square Kilometres (km2) in water depths of 200 metres to 1800 metres.
The signing of the investment agreement took place in Colombo last Thursday, between Dhammika Perera, Chairman and Director General BOI Sri Lanka, and P. Elango, Director, Cairn Lanka.
According to the Petroleum Resource Agreement, if commercially viable deposits of hydro carbons are found, based on the investment multiple the shares in profits will begin from 12.5 percent to Sri Lanka and increase to 60 percent within five years of commencement of oil extractions. Sri Lanka’s share could reach significant proportions towards later stages of the lifetime of an oil rig.
The government expects a 10 percent royalty, apart from the profit share based on the investment multiple, taxes (currently at 15 percent) and the revenue of the participating National Oil Company which will be incorporated if and when commercial oil extraction commences.
The government received a check for US$ 1 million as a signature bonus—for awarding Cairn India the license.
Cairn India said that the initial investment of US$ 110 million will be utilized to acquire 5,000 km of 2D, 1,000 km2 of 3D seismic data and drill three wells in the initial three years of the eight year exploration period.
"The Mannar basin is a frontier petroleum province that is yet to be explored. Cairn Lanka will invest in the region in exploring the block by applying the best in class technologies and industry practices in the search to establish whether commercial quantities of hydrocarbons can be found," it said in a statement.
An official of Cairn India told the Island Financial Review that seismic data available in London on the Mannar Basin will be purchased by the company although they plan to carry out their own surveys.
"We would naturally want to depend on our own data," he said, when officials of the company visited Sri Lanka in July.
Cairn will also place orders for oil rigs as it would take 12 to 24 months to be delivered and as such these orders will be made simultaneous with the seismic survey.
According to the Petroleum Resources Agreement (PRA), Cairn India will explore for oil and gas deposits with the license that is valid for eight years, broken up into three stages.
If commercially viable deposits are found, Cairn India will be bound by the PRA to engage local staff and provide the necessary training.
Petroleum Minister A. H. M. Fowzie said that Cairn India is bound by the agreement to employ resources and facilities available in Sri Lanka and can only employ resources and facilities from outside if they are unavailable in Sri Lanka.
As stated earlier, the PRA was signed in July, but was presented for cabinet approval only recently and, according to Fowzie, approved a few weeks ago.
Oil exploration is risky business and Cairn India has not calculated the odds of striking oil in the region. The Petroleum Resources Development Secretariat has,however, estimated a 60 percent probability of finding oil.
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