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Sri Lanka – Petroleum Exploration

Sri Lanka – Petroleum Exploration. Sri Lanka Petroleum Exploration Overview, Law, Management Fiscal terms Prospectivity. Sri Lanka - Management. Sri Lanka Petroleum Exploration Overview. Sri Lanka - Location. India. Sri Lanka. Sri Lanka – Energy and economy - 1.

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Sri Lanka – Petroleum Exploration

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  1. Sri Lanka – Petroleum Exploration Sri Lanka Petroleum Exploration Overview, Law, Management Fiscal terms Prospectivity

  2. Sri Lanka - Management Sri Lanka Petroleum Exploration Overview

  3. Sri Lanka - Location India Sri Lanka

  4. Sri Lanka – Energy and economy - 1 • Growing demand for petroleum products at annual rate of 8%. Crude oil - 16 million barrels plus refined products - 12 million barrels. • High international oil prices. • Oil imports account for 10% of total import cost of the country. Annual oil bill - US$750 million. • No domestic oil resources and total import dependent - vulnerability to price and supply fluctuations.

  5. Sri Lanka – Energy and economy - 2 • Saturation of hydro power generation and increase in thermal power generation to meet demand for power growing at 8% per year. • Success of Indian oil and gas exploration activities. • Justification for renewing efforts to discover domestic hydrocarbon reserves.

  6. Sri Lanka – Downstream – Domestic sales

  7. Sri Lanka – Downstream – Domestic sales

  8. Sri Lanka – Downstream pricing formula Ave Platts Sin FOB US $/ Bbl + Freight, Loss & Insurance CIF Price Rs/Litre CIF Price US $/Bbl + + Jetty & Pipeline Charges Rs/Litre Landed Cost Rs/Litre Port & Bank Charges Rs/Litre + Wholesale Price + Wholesale Cost At Installation Rs/ltr + + Finance Charges Rs/Litre Custom Duty Rs/Litre Excise Duty Rs/Litre + + + Marketing & Dis. Cost Rs/Litre VAT at 10-20% Dealer Discount 1.75% Consumer Price Rs/litre

  9. Sri Lanka – Downstream reorganisation Regulation Public Utility Commission Act & Petroleum Reform Act Ceylon Petroleum Corporation Act State PUC State/Private Owned Co. State Owned Monopoly CEYPETCO LIOC CPC Third Player Common User Facility Aviation Services

  10. Sri Lanka - Legal Framework Sri Lanka Petroleum Exploration Legal Framework

  11. Sri Lanka – Legal framework • A comprehensive legal framework has been set up covering new frontier exploration and development. • It also encourages private investors both local and foreign. • Transparent and improved procedures are guaranteed. • Encourages best internationally accepted engineering practices. • Encourages protection of environment.

  12. Sri Lanka – Legal framework • The Act provides for the exploration and development of petroleum resources • It covers the following areas – • Petroleum resources ownership • Constitution of PRDC • Petroleum resources agreements, exploration blocks and development licences • Setting up the Petroleum Resources Development Secretariat • Fiscal provisions

  13. Sri Lanka – Legal framework Constitution of Sri Lanka Petroleum Resources Act Number 26 of 2003 with effect from 27 November 2003 Model Petroleum Resources Agreement 2004 Petroleum Resources Operations Regulations 2004 Marine Pollution Prevention Regulations 2004

  14. Sri Lanka - Management Sri Lanka Petroleum Exploration Management

  15. Sri Lanka – Management Constitution of PRDC Setting up the Secretariat Offer exploration blocks before the end of 2004

  16. Sri Lanka – Future Management Structure Ministry of Petroleum Resources Development Petroleum Resources Development Committee (PRDC) - policy Petroleum Resources Secretariat - technical PRA 1 Management Committee PRA 2 Management Committee PRA 3 Management Committee PRA 1 Operating Committee PRA 2 Operating Committee PRA 3 Operating Committee

  17. Sri Lanka – Petroleum Resources Development Committee (PRDC) Chairman = Secretary of Ministry of Petroleum Resources Development Members = Secretary of Ministry of Finance Secretary of Ministry of Defence Secretary of Ministry of Fisheries and Ocean resources Secretary of Ministry of Environment and Natural Resources Chairman of Board of Investment Chairman of Ceylon Petroleum Corporation Representative of Ministry of Policy Development and Implementation

  18. Sri Lanka – Petroleum Resources Secretariat CEO = Director General of Petroleum Resources (Titus Jayawardena) Director of Exploration Director of Development Director of Production Staff = Petroleum Geologist Exploration Geophysicist Petroleum Engineer Petroleum Economist Petroleum Lawyer Financial Controller

  19. Sri Lanka – Management Committee (Clause 5) Management Committee 1. Chairman from PRDC 2. Deputy Chairman from PRDC 3. Member from Treasury 4. etc. Members from each company

  20. Sri Lanka – Management Committee (Clause 5) • The Management Committee’s Functions • include reviewing and approving - • Work programmes & budget • 2. Relinquishment • 3. Development applications • 4. Plans for production and sale • 5. Plans for site restoration

  21. Sri Lanka - Legal Framework Sri Lanka Petroleum Exploration Licence Terms

  22. Sri Lanka – Exploration Licence • Exploration Licence • Maximum of 7 years • 2. 3 commitment phases • 3. Option to terminate after each phase • 4. 3 years maximum for each phase • 5. Relinquish 25% after phases 1 & 2 • 6. Relinquish all non-development areas • after phase 3. • 7. Bid work programme, not expenditure

  23. Sri Lanka – Development Licence • Development Licence • Licence period 20 years • 2. May be extended by mutual agreement

  24. Sri Lanka - Fiscal terms Sri Lanka Petroleum Exploration Fiscal Terms

  25. Sri Lanka fiscal terms – Aims To be internationally competitive To be flexible (progressive) To ensure an adequate State Take for Sri Lanka

  26. Sri Lanka fiscal terms – PRA structure Project To State To Contractors Gross revenue Cost recovery + Cost recovery Share profit oil Profit oil + Share profit oil Royalty - Royalty Income tax - Income tax - Capex and opex = Net cash flow

  27. Sri Lanka fiscal terms – PRA structure Project To State To Contractors Gross revenue Royalty Royalty Cost recovery + Cost recovery Profit oil + Share profit oil Share profit oil - Income tax Income tax - Capex and opex = Net cash flow

  28. Sri Lanka fiscal terms – Cost Recovery (Clause 12 and Appendix C) No cost recovery ceiling. Capex, opex, royalty are recoverable immediately (no depreciation of capex).

  29. Sri Lanka fiscal terms – Profit Sharing (Clause 13 and Appendix D) Profit petroleum = Project Revenue less Cost Recovery

  30. Sri Lanka fiscal terms – Profit Sharing (Clause 13 and Appendix D) Profit petroleum is shared on a sliding scale based on the “Cash Flow Index”

  31. Sri Lanka fiscal terms – Cash Flow Index (Clause 13 and Appendix D) Cash Flow Index = Cumulative revenue - opex - royalties Cumulative exploration + development costs or Cumulative net operating revenue Cumulative investment

  32. Sri Lanka fiscal terms – Negotiable profit sharing tranches (Clause 13) CFI = Cash Flow Index CO = Contractor SL = Sri Lanka

  33. Sri Lanka fiscal terms – Royalty (Clause 14) Royalty to the State is 5% of gross sales value.

  34. Sri Lanka fiscal terms – Income Tax (Clause 14) Tax rate = 15% Exploration & development costs depreciated at 50% straight line starting when asset is used

  35. Sri Lanka fiscal terms – Income Tax (Clause 14.8) Tax holiday for 5 years from PRA production start

  36. Sri Lanka fiscal terms – Ring Fences Ring fence = PRA for - (a) cost recovery & profit sharing (b) tax Ring fence for tax for unsuccessful exploration = whole of Sri Lanka

  37. Sri Lanka fiscal terms – Bonuses No signature bonuses No discovery bonuses No production bonuses

  38. Sri Lanka - Fiscal terms Sri Lanka Petroleum Exploration Economics of Fiscal Terms

  39. State Take from hypothetical, profitable, stand alone field developments (IHS data)

  40. State Take from hypothetical, profitable, stand alone field developments (IHS data)

  41. Sri Lanka fiscal terms – Hypothetical example of profit sharing tranches

  42. Sri Lanka fiscal terms – Economic assumptions Cauvery Basin Water depths very shallow (< 50 metres) Calm conditions all year round No strong tides Mannar Basin Water depths up to 2,500 metres Calm conditions except from May to Sep

  43. Sri Lanka fiscal terms – Illustrative State Take – Shallow water

  44. Sri Lanka fiscal terms – Illustrative Contractor NPV versus reserves – Shallow Water

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