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Cablegate: Sri Lanka Oil Exploration: Cairn India Gets First Block

VZCZCXRO0733
RR RUEHBI RUEHLMC
DE RUEHLM #0648/01 1890843
ZNR UUUUU ZZH
R 070843Z JUL 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8369
INFO RUEHKA/AMEMBASSY DHAKA 0984
RUEHIL/AMEMBASSY ISLAMABAD 7973
RUEHKT/AMEMBASSY KATHMANDU 6145
RUEHNE/AMEMBASSY NEW DELHI 2144
RUEHKP/AMCONSUL KARACHI 2366
RUEHCG/AMCONSUL CHENNAI 8579
RUEHBI/AMCONSUL MUMBAI 6024
RUCPDOC/USDOC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 02 COLOMBO 000648

SENSITIVE

SIPDIS

STATE FOR SCA/INS, SCA/RA, AND EEB/ESC/IEC
COMMERCE FOR BRIAN WILLIAMS AND PAUL HUEPER
COMMERCE PLEASE PASS TO USGS/CRAIG WANDREY
TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: EPET ECON EINV CE
SUBJECT: SRI LANKA OIL EXPLORATION: CAIRN INDIA GETS FIRST BLOCK

REF: 07 COLOMBO 632

1. (SBU) Summary and comment: Sri Lanka, in its first ever offshore
oil exploration licensing round, will award a block to Cairn India
Ltd. The round attracted six bids from three companies (none
American), for the three blocks on offer. Against the advice of the
Petroleum Resources Development Secretariat, the Central Bank
Governor convinced the President that Sri Lanka should only award a
contract for the one block on which all three companies bid. The
Governor's intervention over the head of the Petroleum Secretariat
is an early example of the kind of political second guessing of
technocrats that is likely to make Sri Lanka's oil exploration
process as erratic as other major infrastructure projects have been.
Separately, Sri Lanka has made no progress in negotiations with
China and India over two additional blocks that Sri Lanka had
"reserved" for them. End summary.

CAIRN INDIA TO GET FIRST BLOCK
------------------------------

2. (SBU) Sri Lanka on July 7 signed a contract with Cairn India Ltd.
to explore one of eight Mannar Basin offshore oil blocks offered in
the country's first exploration licensing round. Cairn India is a
subsidiary of UK oil exploration firm Cairn Energy. It beat out
bids from ONGC Videsh Ltd (the international arm of Indian
parastatal Oil and Natural Gas Corporation) and Niko Resources of
Canada. Cairn won the rights to explore the second northernmost
block, termed "Block 1", just below the block that Sri Lanka
"reserved" for India as a government-to-government concession
(reftel). The government released few details on the Cairn
contract, saying only that Sri Lanka received a $1 million signing
bonus and would receive an additional $50 million bonus if oil
production occurs. Cairn India has successfully developed a number
of onshore oil tracts in Rajasthan and offshore tracts in Eastern
India's Krishna-Godavari Basin, which shares geological features
with the nearby Mannar Basin.

3. (U) Note: Although Ambassador attended the Houston Offshore
Technology Conference in May 2007 to provide USG perspective on the
upcoming licensing round, no U.S. firms submitted bids for the three
blocks. None contacted post to ask our views on the auction. Neil
de Silva, Director General of the Petroleum Resources Development
Secretariat (PRDS), told Econoff that four U.S. firms, a mix of
large and small, had expressed interest in the auction during the
Houston event, but had not actively followed up or bid. End note.

CENTRAL BANK MEDDLING PREVENTS CONTRACTS FOR TWO BLOCKS
-------------------------- ----------------------------

4. (SBU) Sri Lanka decided, during the course of evaluating the
total of six bids it received on the three Mannar Basin blocks it
offered, not to award contracts for Blocks 2 and 3, which received
two and one bid respectively. During deliberations of a cabinet
negotiating committee, Central Bank Governor Cabraal argued that
less than three bids was too few for Sri Lanka to be sure it was
getting good terms for the blocks.

5. (SBU) Cabraal told Econoff the Bank had sent two staffers to
study how Bahrain, Malaysia, and India had marketed their oil
fields. They had concluded that the Petroleum Resources Development
Secretariat had not done a good job marketing the exploration round.
It had not followed up with potential bidders, for example, to walk
them through the seismic imagery, pointing out the areas of high
potential carbon deposits. Econoff asked if scratching the auction
for Blocks 2 and 3, on the basis of a post-bidding decision about
minimum numbers of bids, would signal Sri Lanka's unreliability as
an exploration destination. The governor acknowledged that could be
so, but argued that was a better risk than signing a suboptimal
contract that Sri Lanka would have to "live with for generations."
He added that the Cairn bid for Block 1 was the only "serious bid"
of the six received.

TECHNOCRATS AND PRIVATE SECTOR DISMAYED
---------------------------------------

6. (SBU) Petroleum Secretariat Director de Silva, the government's
only real oil expert, told Econoff he had advocated awarding all

COLOMBO 00000648 002 OF 002


three blocks despite the low number of bids received. He believed
the number of bids was a result not of poor marketing, but of the
fact that Sri Lanka's overall oil production potential was small and
unproven -- exacerbated perhaps by the country's reputation for
political interference in processes like this bidding round. In de
Silva's view, all the bids had been "respectable." He believed Sri
Lanka stood to gain most by having two or three companies bringing
different techniques for finding oil, thereby increasing potential
for discoveries that could attract further exploration and
development.

7. (SBU) A principal in a major Sri Lankan conglomerate told Econoff
that his firm and other Ceylon Chamber of Commerce members also
opposed the decision to award only one block. These firms had no
oil exploration experience, but are hoping to provide oilfield
services to international exploration firms. He believed that, had
two or three blocks been awarded, there would have been sufficient
scale for Sri Lankan companies to invest in the equipment needed to
provide oilfield services. With just one block being explored, he
expected Indian companies would end up getting the services
contracts. He also thought that cancelling the tender for Blocks 2
and 3 would "spook" potential investors and harm Sri Lanka's long
term prospects as an oil exploration market. He planned to try to
convince the President to proceed with contracts for Blocks 2 and
3.

INDIA NOT INTERESTED IN NORTHERNMOST BLOCK
------------------------------------------

8. (SBU) Indian Embassy Economic Counselor told Econoff that ONGC
Videsh considered the far northern block reserved for India to have
little "prospectivity" and that India therefore had no interest in
discussing with the GSL terms for exploring the block. The PRDS
Director General told Econoff that India had never given a formal
response that it was not interested in the block; if it did, he
said, he would be pleased to have the block available to auction
off, as he thought the seismic data did indeed indicate good
prospects.

NO REPORT OF PROGESS WITH CHINA ON SOUTHERNMOST BLOCK
--------------------- -------------------------------

9. (SBU) Similarly, the PRDS Director General reported that he had
heard nothing from the Ministry of Foreign Affairs (which has the
lead on the bilaterally reserved blocks) about China's interest in
the southernmost block reserved for it. An MFA Economic Affairs
officer told Econoff that Sri Lanka had proposed terms for the block
to China last year and had not heard back from China since then.
(Note: The block reserved for China is in deep water, so it would
make sense for China to wait to see if companies exploring the
shallower blocks to the north find anything.)

COMMENT: CENTRAL BANK ROLE A SIGN OF POLITICS TO COME
------------------------ ----------------------------

10. (SBU) The Central Bank's argument that a good deal in the future
is better than a poor one now is reasonable. Unfortunately, in this
case, it reflects the kind of last minute second guessing that has
caused lengthy delays in other major Sri Lankan development
projects. The interference has disillusioned the PRDS Director
General, who told Econoff he was tempted to go back to his
oil-related professional work in Canada, which he had left behind in
order to help his country develop an oil industry. He recalled that
his selection as head of the Petroleum Secretariat two years earlier
had almost been derailed by one of the president's relatives seeking
the job, and he now feared the whole process would suffer from such
politicization. Past experience in Sri Lanka and the current
government's economic management style both suggest he is right to
be concerned.
BLAKE

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