Sri Lanka, battered by four decades of Tamil separatist violence that ended a year ago, appears finally able to begin to exploit its sizable domestic oil and gas sources and reduce its crippling dependence on imports.

In one of the latest moves, Cairn Lanka, a subsidiary of the Edinburg-based Cairn Energy PLC, will begin a three-well drilling campaign off the Mannar Basin, located between southwestern Sri Lanka and the Indian coastline in the first quarter of next year, according to the British High Commission in Colombo.

This will mark the onset of petroleum exploration in the island country after a gap of 25 years. Cairn Lanka already has 3D seismic survey data on 1,750 square kilometers in the basin. The UK Trade and Investment (UKTI) section of the British High Commission in Colombo, has been advising British players about exploration opportunities in Sri Lanka.

The revelation of large oil and gas reserves is welcome news to an economy long crippled by strife and outdated unfortunate economic planning. Inward remittances from Sri Lankans working overseas form too much of GDP. Government spending for public administration and defense has remained high because of the now-concluded hostilities. But President Mahinda Rajapaksa has reversed a policy of selling off state-owned enterprises. Rajapaksa won a resounding re-election bid in January and has since been seeking to reinvigorate the Lankan economy, which is heavily dependent on tourism to earn foreign exchange. Tourism, given the country’s magnificent beaches and pleasant climate, is expected to recover with the war concluded.

Colombo has been looking to tap resources commercially that were largely inaccessible during the war against the Liberation Tigers of Tamil Eelam (LTTE) rebels. The conflict ended following a huge offensive in May last year that resulted in the killing of the Tiger chief Vellupillai Prabhakaran.

Gulf of Mannar

The Mannar Basin is a frontier petroleum province that has been virtually unexplored. Preliminary estimates indicate the presence of 1 billion barrels of oil in areas that had been under the LTTE’s control during the decades of conflict.

If proven, the reserves would provide a sizeable boost to Sri Lanka, which produces no oil and imported nearly US$3.5 billion worth in 2008.

Hopes of striking oil have risen with India’s success on the other side of the maritime boundary. Colombo holds eight oil and gas exploration blocks in Mannar, two of which have been granted to the governments of China and India, which backed Colombo’s war against the rebels.

Russia, another ally, has also been invited by Colombo to explore the oil & gas sector. Cairn India has one block for which it has set aside US$100 million for the first three years of exploration.

Colombo decided to allow foreign and private investors access to its offshore oil and gas fields as long ago as 2003. However, progress has been possible only now with the end of the ethnic violence.

India's Role

India believes that as an overall strategy, China, with the help of Pakistan, is keen to check India’s influence in the Indian Ocean. India has thus been unhappy about a deep-water port in Hambantota on Sri Lanka’s south coast that is being built with the help of the Chinese.

After being bested in Burma by the Chinese, who have largely tied up Burmese energy exports despite a concerted campaign by India to win concessions, New Delhi is also wary that Chinese energy firms are going to make a dash for the Mannar Basin oil and gas reserves that have been offered by Colombo for exploration.

Colombo recently sounded out India about its intentions in the Gulf of Mannar which might extend to the waters of both across their maritime boundary. The matter was discussed during the visit in June to India by Rajapaksa with Indian Prime Minister Manmohan Singh.

A joint statement reads: “Sri Lanka proposed discussions on establishing a joint information mechanism on the possibility of oil and gas fields straddling the India-Sri Lanka maritime boundary. The matter will be discussed further between the two sides.”

No Privatization in Lanka

Colombo reiterated that it will not allow privatization of its oil sector, highlighting that the government will keep close control over its natural resources, royalties, pricing and regulation.

A cabinet statement recently said, “The government of President Mahinda Rajapaksa promised to stop privatizations and we will use every opportunity to buy back sold assets.”

In this context, Colombo has decided to buy back the local unit of Royal Dutch Shell Plc, Europe’s largest oil company. The state currently owns 49 percent of Shell Gas Lanka, the island’s largest retailer of liquefied petroleum gas. Shell bought the Colombo Gas Company for US$37 million 15 years ago. Privatization of the state-owned Ceylon Petroleum Corporation has also been stopped.

Cairn in Asia

Cairn Energy is one of Europe's biggest independent oil and gas exploration and production companies. The company is listed on the London Stock Exchange with assets in India, Greenland, Bangladesh and now, Sri Lanka.

In India, the company recently raised crude oil reserves estimates at its Barmer fields located in the Thar Desert north western Rajasthan by 37 percent. It is on course to contribute one-fifth of India’s current oil production and bring down the oil import bill by nearly US$10 billion.

“The new estimates are at 2,40,000 barrels per day (bpd) which translates into equaling production from Mumbai High fields (India’s largest oilfield and run by state run ONGC),” Cairn India CEO Rahul Dhir told local media. “Based on our review, we estimate that the potential resource in the (Rajasthan) block is now estimated to be 6.5 billion barrels of oil equivalent (boe).”

The lone offshore Sangu gas field in Bangladesh was discovered by Cairn in 1996 and production started in 1998. The company supplies 35 million cubic feet gas per day. The field stands almost depleted now and is expected to last till 2011.

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com