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