VZCZCXRO9379
PP RUEHDE RUEHLMC
DE RUEHLM #0632/01 1171229
ZNR UUUUU ZZH
P 271229Z APR 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 5947
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0911
RUEHKA/AMEMBASSY DHAKA 0065
RUEHIL/AMEMBASSY ISLAMABAD 7046
RUEHKT/AMEMBASSY KATHMANDU 5131
RUEHLO/AMEMBASSY LONDON 3707
RUEHGP/AMEMBASSY SINGAPORE 5686
RUEHAD/AMEMBASSY ABU DHABI 0438
RUEHDE/AMCONSUL DUBAI 0115
RUEHKP/AMCONSUL KARACHI 2186
RUEHCG/AMCONSUL CHENNAI 7631
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000632 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
STATE FOR SCA/INS 
MCC FOR S GROFF, D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: ECON EAID ENRG EPET ETRD CE
SUBJECT:  SRI LANKA: OIL EXPLORATION PROSPECTS REAL, BUT CONSTRAINED 
BY UNREALISTIC GOVERNMENT EXPECTATIONS 
 
REF:  A) 2006 COLOMBO 431  B) 2006 COLOMBO 1902 
C) COLOMBO 200  D) COLOMBO 418 
 
¶1.  (SBU) Summary: U.S. experts who have looked at recent geological 
survey data believe that significant petrochemical deposits lie off 
the coast of Sri Lanka.  On May 1, the Ambassador will join Sri 
Lanka's Petroleum minister and others at the Offshore Technology 
Conference in Houston to describe this potential investment 
opportunity for U.S. oil companies.  At that conference, Sri Lanka 
will announce plans to solicit international bids on three of its 
eight offshore exploration blocks between May and October this year. 
 
 
¶2.  (SBU) Summary cont'd: The U.S. Trade and Development Agency is 
assisting Sri Lanka's inexperienced Petroleum and Resources 
Development Secretariat in preparing a regulatory structure to 
govern the oil exploration process.  However, Sri Lanka turned down 
the USG's offer to help it develop a marketing plan and a model 
production sharing contract for the upcoming licensing round.  It 
did so in haste to get on with the licensing round -- a sign that 
political expediency is likely to outweigh good judgment in this 
critical national development opportunity.  Similarly, Sri Lanka's 
early decision to reserve an exploration block each for China and 
India is troubling both as a reflection of how much sway those big 
neighbors hold with Sri Lanka and as an indication of how Sri Lanka 
continues to manage major national economic policies in a 
non-transparent and non-market fashion.  End summary. 
 
EIGHT BLOCKS: THREE TO BE AUCTIONED NOW, 
THREE LATER, TWO RESERVED FOR CHINA AND INDIA 
--------------------------------------------- 
 
¶3.  (SBU) According to USG and other experts, seismic surveys 
indicate the potential for significant oil and gas deposits in the 
Mannar Basin off Sri Lanka's northern and western coasts.  Sri 
Lanka's Ministry of Petroleum and Petroleum Resources Development 
has identified eight blocks for exploitation.  According to the 
Petroleum and Resources Development Secretariat, Sri Lanka will 
promote and auction three of those blocks with a May-October 2007 
licensing round; it plans to award exploration licenses in early 
2008; exploration could begin in 2009; production could be possible 
by 2012.  Sri Lanka has reserved two other blocks for China and 
India.  It will keep the final three blocks aside for a future 
bidding round.  The eight blocks comprise both shallow and deeper 
waters; the easiest to explore blocks will be auctioned first. 
According to one U.S. expert, the Mannar Basin could contain among 
the best oil and gas reserves in South Asia.  High world oil prices, 
if sustained, make it more likely that Sri Lanka's reserves will be 
viable to develop. 
 
¶4.  (SBU) Petroleum Minister A.H.M. Fowzie will announce the opening 
of the initial bidding round at the April 30-May 3 Offshore 
Technology Conference in Houston.  The conference will feature a May 
1 industry breakfast focused on Sri Lanka, organized by the U.S. 
Department of Commerce.  Ambassador Blake will participate, to 
describe U.S.-Sri Lanka relations and the investment climate in Sri 
Lanka.  Petroleum and Resources Development Secretariat Director 
General Neil De Silva will give a technical overview of the offshore 
oil potential in the Mannar Basin.  The managing director of 
Chevron's Caltex Sri Lanka operation will describe the private 
sector perspective on investing in Sri Lanka. 
 
PROMISE OF TWO BLOCKS TO INDIA 
AND CHINA WITHOUT CLEAR TERMS 
------------------------------ 
 
¶5.  (SBU) Sri Lanka decided long before readying the upcoming 
licensing round to allot an exploration block each to India (in 
2003) and to China (in 2006).  The GSL has told emboffs that it 
reserved the blocks for India and China because it views the two 
countries as "strategic partners."  Some GSL officials have told us 
that they likewise regard the United States as a strategic partner 
and that it should get a block too.  In response, we have emphasized 
that we believe a competitive and transparent process would be best 
for Sri Lanka and for the private companies that would bid on the 
blocks, and that we are confident that U.S. companies could deliver 
the best expertise and value. 
 
COLOMBO 00000632  002 OF 003 
 
 
 
¶6.  (SBU) The GSL has not disclosed which blocks will go to India 
and China, but has begun discussing possible terms for the eventual 
award of blocks to Chinese and Indian firms.  On February 7, 
Minister Fowzie told the press that Sri Lanka hoped to receive $100 
million each from China and India for the blocks.  He recently told 
Econoff that China had not yet replied to this proposal and that 
discussions were underway with India.  Post, on the advice of 
USTDA's consultant, has recommended that Sri Lanka attempt to use as 
a basis for these deals the same production sharing agreement that 
would govern the competitively auctioned blocks.  This would avoid 
the distortive impact of having companies potentially bringing oil 
up from different blocks under different financial terms. 
 
FINAL THREE BLOCKS HELD IN RESERVE 
---------------------------------- 
 
¶7.  (SBU) The final three blocks identified for future development 
will be held in reserve, pending the outcome of the initial 
licensing round.  Director General De Silva believes the GSL will 
learn from the initial licensing round, and will be able apply those 
lessons in a later bidding round.  Further, he notes that 
technological advances might improve the viability of exploring the 
more difficult fields.  (Comment:  This is one of Sri Lanka's most 
prudent decisions involving offshore development so far.) 
 
MARKETING AND BIDDING ROUND PLANS 
--------------------------------- 
 
¶8.  (SBU) The GSL will announce which blocks will be available in 
the initial licensing round on May 1 at the Offshore Technology 
Conference.  The Secretariat is currently evaluating several 
proposals by consultants to assist in preparing for and marketing 
the bidding round.  These services will consist of preparing the 
production sharing contract, conducting a road show, and writing 
software to evaluate exploration bids.  Dr. De Silva anticipates the 
road show taking place in July and August in the United States, 
London, Dubai and Singapore, leading to the blocks being auctioned 
off by October, or no later than early 2008. 
 
UNREALISTIC EXPECTATIONS FOR GSL-CONTRACTED CONSULTANT 
--------------------------------------------- --------- 
 
¶9.  (SBU) In 2006, USTDA offered to fund a consultant to develop a 
production sharing contract and develop and implement marketing 
plans.  It funded a definitional mission for this work.  The 
Petroleum Resources and Development Secretariat used many of the 
suggestions provided at that time to develop its plans.  The 
proposed USTDA grant would have improved the likelihood that Sri 
Lanka received high quality, comprehensive services, and increased 
the potential for a transparent bidding process for the fields.  But 
the Secretariat declined this offer, citing the need to minimize 
preparatory time for these consultancy services (Ref B).  The 
Secretariat on February 15 published a small ad in a local paper to 
 
SIPDIS 
request proposals for these services, which Embassy reported (Ref 
D).  That RFP allowed only five weeks for submission of proposals, 
which limited both the time for word to spread about the RFP and the 
time companies would have to prepare bids.  One U.S. company 
official told Econoff that the fees the GSL expected to pay were 
insufficient to provide the entire set of services requested. 
 
USTDA CONSULTANT TO DRAFT PROPOSED 
REGULATORY SYSTEM FRAMEWORK 
-------------------------------- 
 
¶10.  (U) The GSL gladly accepted a related USTDA offer to grant 
$474,000 to develop a regulatory structure to govern the oil 
development process, including designing of a regulatory authority 
(Ref C).  This assistance will facilitate development of a 
productive Secretariat while outlining world-class legal, 
operational, environmental, and safety standards offshore. 
Ambassador Blake and Secretary of the Treasury Jayasundera signed 
the grant agreement on March 14.  Several dailies reported the 
signing on their front page, or on the first page of their business 
section.  In keeping with USTDA requirements, this technical 
assistance project will be carried out by a U.S. company.  USTDA's 
request for bids opened on March 30 and will close on May 15. 
 
COLOMBO 00000632  003 OF 003 
 
 
 
U.S. MINERALS MANAGEMENT SERVICE CONDUCTS 
RESOURCES MANAGEMENT SEMINAR 
----------------------------------------- 
 
¶11.  (SBU) Additional U.S. assistance was provided by the Minerals 
Management Service, which held a three-day training course on 
"managing oil and gas resources" in Colombo in December 2006. 
Facilitated by USAID, the workshop covered oil and gas management 
systems, leasing and tendering methodologies, risk management, 
resource evaluation and inspection.  The session concluded with a 
simulated lease sale.  Petroleum and Resources Development 
Secretariat staff, as well as a core group of officials from various 
 
SIPDIS 
line agencies who are expected to work together on oil exploration 
related work, attended the course.  The workshop provided critical 
first-time exposure to offshore development issues for most of the 
attendees, who lacked any prior knowledge or experience in resource 
management. 
 
¶12. (SBU) Bio note: Dr. De Silva is the only real oil development 
expert within the Ministry of Petroleum Resources Development.  He 
is a Canadian Sri Lankan dual citizen with M.Sc. and Ph.D. degrees, 
a diploma in business administration.  For over two decades, Dr. De 
Silva has served as a petroleum geologist, petroleum geophysicist 
and exploration manager, mainly in Newfoundland.  He is a consultant 
to the Integrated Ocean Drilling Program at Texas A&M University. 
He returned to Sri Lanka at the government's request to lend 
expertise to this critical national opportunity.) 
 
COMMENT: FUMBLING A MAJOR OPPORTUNITY 
------------------------------------ 
 
¶13. (SBU) Despite our attempts to assist, and Dr. De Silva's 
professionalism, we fear that Sri Lanka is fumbling this critical 
opportunity to develop a valuable national resource.  While Minister 
Fowzie no longer blithely tells the press that oil derricks will 
gush oil within eight months (as he did frequently last year), Sri 
Lanka still appears unwilling to spend the  time and resources to 
get the offshore oil development process right the first time.  If 
so, it will never get as good a chance to convince the international 
oil companies that it can be a professional partner in a long-term 
and mutually profitable process.  Still, Post continues to press for 
appropriate planning, development and marketing of these fields, to 
ensure that the bidding cycle as is competitive and transparent as 
possible. 
BLAKE