The government is set to resume the search for deep-water offshore oil and gas, the move coinciding with a global renaissance in petroleum exploration prompted by a renewed emphasis on energy security, despite the shift to renewables.
“While we have the discoveries made by Cairn we need more – the more the oil and gas discoveries, the lower the investment risk Sri Lanka carried as a jurisdiction,” said Surath Ovitigama, Director-General of the Petroleum Development Authority of Sri Lanka (PDASL).
“To do that, you have to explore extensively and expeditiously.”
 Surath Ovitigama,
Director-General of the Petroleum Development Authority of Sri Lanka
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The PDASL is ready to offer exploration blocks on ‘open acreage policy’, which means offshore areas are open for investors to come in any time and pitch their exploration proposals, and not wait for the government to launch bid rounds.
This system is operated successfully in India, and used to draw investment to more difficult areas off and onshore.
PDASL, the new, independent regulator of exploration, is currently waiting for Cabinet approval to formally launch the open acreage program titled, ‘Explore Sri Lanka’, an ongoing and sustainable mechanism to increase the rate and extent of exploration in all offshore areas.
Sri Lanka was underexplored and as a ‘greenfield’ destination, was high risk for investors to come in.
“What we lacked earlier was a suitable framework for investors to come and explore,” Ovitigama said in an interview. “Until the Russia – Ukraine conflict, we were really fighting to attract oil and gas investors, Sri Lanka being a frontier region. Even natural gas was out. The interest was for renewables only.
“Many countries were relying on gas as a transition fuel before going fully into renewable energy. The Russia – Ukraine conflict changed that. Now the world can’t get enough of natural gas and as it happens, Sri Lanka is rich in gas. Now we are actually in a better position than we were three years ago.
“But we need to act fast,” Ovitigama stressed. “There is a closing window for fossil fuels, even gas. If we are ever going to get this out, we need to act now because the scales are tipped in our favour once again.”
SLD’s findings
Offshore seismic and airborne surveys have improved knowledge of the seabed around the island and prospects for oil and gas deposits, about which data is sold to exploration companies, while updated PDASL regulations have reduced risk for investors.
Globally, offshore oil and gas exploration spending will increase more than 20 percent this year and the growth will continue into the next, according to Schlumberger (SLB), the world’s largest oil services and equipment provider, which has done seismic surveys offshore Sri Lanka.
“Offshore is experiencing a renaissance, with significant breadth and anticipated durability,” SLB Chief Executive Olivier Le Peuch told the JP Morgan Energy Power and Renewable Conference in June.
Between 2022 and 2025, SLB said it expects exploration investments to almost double that of the 2016-2019 period.
The exploration revival, especially for gas, is supported by record profits of petroleum multinationals after oil and gas prices surged, giving investors more confidence in high-cost, high-risk deep-water drilling that can also yield high returns.
Offshore oil and gas exploration and production is one of the most capital intensive industries, requiring expensive equipment and highly skilled workers, with wells in the remote, harsh environment of the Northwest Atlantic Ocean having taken 20 years to come on-stream after discovery.
Western governments have said they are now giving more attention to energy security and alternative sources of supply, to reduce reliance on Russian oil and gas. Germany and Britain temporarily revived coal power plants after facing gas shortages, giving precedence to national security and business continuity over reducing emissions to fight climate change.
Natural gas, which has less emissions than oil and coal, is considered a ‘bridge fuel’ in the transition to renewable energy. Natural gas played a major role in reducing Chinese urban air pollution, displacing coal, in metropolitan areas such as Beijing.
Gap in energy supply
Asian countries, where energy demand is increasing as living standards rise, have shown concern of a gap in energy supply if fossil fuel use is stopped too early.
A realistic option to fill in this demand gap is to increase the supply of conventional energies such as natural gas, according to Tatsuya Terazawa, chairman of the Institute of Energy Economics, Japan, a think-tank.
Terazawa, a former Japanese government advisor, suggests offsetting the resulting increase in CO2 emissions, with great roles for ‘Carbon Capture, Utilisation, and Storage’ and other carbon removal technologies instead of substantially reducing the role of conventional energies.
While the world is on a steady march towards decarbonisation, the importance of natural gas as transition fuel has been sharply highlighted in the aftermath of Russia-Ukraine hostilities, said Ovitigama, an engineer with almost two decades of experience in the global oil and gas industry.
“Sri Lanka still has time to unlock her natural gas resources albeit with the rapidly closing window as we target a net-zero energy sector by 2048,” he said.
“Now there is interest from oil and gas super majors,” Ovitigama said. “They are talking to Schlumberger. The interest of these oil and gas companies might not be about Sri Lanka itself. They want to build up a better picture globally of the subsurface structures that may have oil and gas bearing potential.”
PDASL’s partnership with Schlumberger and Bell Geospace, which did an airborne gravity magnetic survey, is very valuable, he said.
“Not only because of the data gathering and processing but as it actually gives us third party backing, of a globally respected oil services player. Oil companies will talk with them more readily than they will talk to government.”
Increasing the exploration rate
The interest of oil and gas super majors thus far is evident by PDASL’s data licensing revenue which has already made it a foreign exchange generating, self-funded institution that contributes to state coffers.
A joint study in ultra-deep water off the east coast by TotalEnergies and Equinor, formerly Statoil, two of the largest oil firms, gave the PDASL data where it did not have data and an understanding of the eastern offshore areas.
“The vast majority of areas offshore we have not explored,” Ovitigama said. “The key is to increase the exploration rate and quantity of data. We have to start the first one of the new exploration activities. We hope that’ll open the flood gates and then no one will want to miss out.”
The latest exploration activity will be under the extensively revamped legal, fiscal and policy framework designed to promote an investor-friendly, transparent and robust regulatory process.
“Under the new Act, which set up the PDASL as a permanent, independent authority, four of the nine board members are appointed by the minister but their qualifications are stipulated by law – they can’t be random persons appointed by the minister – and their appointments must be approved by the Cabinet of Ministers,” Ovitigama said. For example, the director-general must have 15 years of oil and gas industry experience, a condition that was not there before.
The new Act also includes fiscal stability clauses, a key point. These projects typically last 20 years or more, so much can change during the course of a project. The fiscal stability clauses protect investors. It preserves the economics of what they entered into.
“If they find oil or gas, they can negotiate with the government to take it through to a production sharing agreement. If not, they can walk away. It gives everyone a comfort factor. These joint studies are done at no cost to government and the data gathered belongs to the State.”
The changes in policy framework were well-received, particularly in a highly volatile global energy investment landscape, and the PDASL was successful in engaging both new and familiar energy companies worldwide.
“We were making good progress with creating awareness and investor engagement at major international fora in 2021 and early 2022,” Ovitigama said. “Unfortunately, the economic and social unrest severely hampered crucial follow up engagement in 2022 and thus far in 2023 due to the resulting travel and recruitment freeze across the government.”
Although Cairn India discovered gas in two test wells in Block M2 of the Mannar Basin more than 10 years ago, and there was talk of using it to fuel power plants, the PDASL’s focus now is on further exploration rather than production from that block.
“For an investor coming in, having an interest only in Block M2 is like putting all your eggs in one basket, in a small geographical area. It’s just too much risk,” said Ovitigama. “For instance, if anything goes wrong with drilling and production from the Dorado well in Block M2, and in the worst case you have to kill it, that’s the end of the project.
“From an investor’s point of view, the gas that’s been found is good but more is better. And there is more – there’s under explored potential in the same block. If investors find one or two more discoveries, then it becomes a safe bet.”
Sri Lanka is already in a regional dialogue regarding a South Asian natural gas network, Ovitigama said. “Our National Policy on Natural Gas allows options for export. The presence of a regional natural gas network would therefore enhance the economics of producing Sri Lankan natural gas.
“This also helps Sri Lanka manage the energy transition from natural gas to renewables, including hydrogen. A greater portion of natural gas can be exported as the share of renewable energy in domestic consumption increases.”
The PDASL is now also trying to attract investment in offshore wind energy and use it to develop Sri Lanka’s ‘green hydrogen’ program.
Sri Lanka’s good fortune means that the country possesses both abundant natural gas as well as renewable energy resources, offshore, Ovitigama said.
“The PDASL is actively driving Sri Lanka’s ‘Green Hydrogen’ programaimed at utilising the excess offshore renewable energy in parallel with oil and gas exploration. As the most competent government institution to execute offshore energy projects, the PDASL’s objective is to provide Sri Lanka with energy security, energy independence and a decarbonisation path using indigenous energy resources.”
The profile of the investor has changed, with multinational oil and gas companies like France’s Total now calling themselves Total Energies and extending their business to renewable energy and biofuels.
“We need to adapt as well,” Ovitigama said. “We have produced a wind energy map, earmarking three areas offshore Sri Lanka which have been identified globally as one of the best locations for wind energy.”
Schlumberger exploration map of Sri Lanka