Drilling for oil in Mannar Basin begins in July

Cairn Lanka will commence drilling for oil in the Mannar basin in July. In 2008, Cairn Lanka committed to spend US$ 112 million over a period of three years to conduct detailed seismic studies and to drill three wells in Block No 2 in the Mannar Basin. The Sunday Observer interviewed Director General PRDS Dr. Neil de Silva on the latest developments of the oil exploration project.

Excerpts of the interview:

Q: Cairn Lanka advertised locally and globally for drilling, testing and completing oil exploratory wells. Has the selection of suppliers been finalised?

A: Cairn Lanka received a good response from local and global companies to their advertisements. They are now evaluating tenders to award the contracts.

Q: A series of seismic studies have been conducted and data collected on undersea oil and gas accumulations in the Mannar basin. What are the resources found in the Mannar basin.

Sri Lanka Mannar Basin

A: A recent newspaper article had said that one billion barrels of oil could be found in the Mannar Basin. This is not factually correct. When it comes to estimating oil resources in frontier basins with poor geophysical and geological data very often a probabilistic method such as Monte Carlo Simulation is used.

In this method the statistical distribution of parameters used in the oil estimates is established using the 10th, 50th and 90th percentiles of the geological parameters like the area of traps, net pay thickness, porosity, hydrocarbon, saturation and the shrinkage factor.

These percentiles are derived from maps of geological formations known or believed to host discoveries and information from exploration wells in the area.

A computer program randomly picks values from the distributions and calculates the resource numbers over 4000 times which are then statistically analysed to provide the most likely estimate of oil in the basin.

The Mannar Basin has seen very little petroleum exploration. The Sri Lankan portion of the Basin covers approximately 30,000 sqkm and except for 1,750 sqkm covered by 3D seismic data recently acquired by Cairn Lanka, the rest of the basin is traversed by seismic lines 8 to 10km apart.

It is not possible to confidently map the traps and estimate the statistical distribution of area of traps for most of the basin because traps may be intersected by only one seismic line or may lie in between the seismic lines making it impossible to map their true shapes.

The same goes for other parameters such as net pay and hydrocarbon saturation as there is only one exploration well and the majority of the potential oil bearing layers have not been penetrated by the drill. Therefore with the available data it is not possible to estimate the amount of oil in the Mannar Basin confidently.

Q: What are the financial benefits for Sri Lanka, it the quest for oil becomes a reality?

A: The oil production share will be divided between the Government of Sri Lanka and Cairn Lanka. It will be calculated by Investment multiple, which is the ratio of accumulated net cash income to the accumulated investment, provided according to the Petroleum Resources Agreement.

At the beginning of the oil production process the Sri Lankan Government's share would be 15 percent and Cairn Lanka's 85 percent. The Sri Lankan Government will also receive a 10 percent royally - a US$ 50 million production bonus, the profit share based on the investment, a 15 percent tax on contractor profit and other taxes.

The exploration licence deemed to be valid for eight years consists of three stages, three two and three years.

As the years go by Sri Lanka's share will also increase to 17.5 percent, 20 percent, 40 percent, 60 percent and 85 percent while Cairn Lanka's share will come down to 82.5 percent, 80 percent, 60 percent, 40 percent and 15 percent. All aspects of the oil exploration deal are fully transparent and made available to the public through the PRDS website.