Sri Lanka Petroleum Exploration 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 • 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.

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.

Sri Lanka – Downstream – Domestic sales

Sri Lanka – Downstream – Domestic sales

Sri Lanka – Downstream pricing formula Ave Platts Sin FOB + Freight, Loss & Insurance US $/ Bbl + + + Jetty & Pipeline + Charges Rs/Litre Custom Duty + Rs/Litre Marketing & Dis. + Cost Rs/Litre Landed Cost Rs/Litre Port & Bank Charges Rs/Litre Excise Duty + Rs/Litre Finance Charges + Rs/Litre VAT at 10 -20% CIF Price Rs/Litre CIF Price US $/Bbl + Wholesale Cost At Installation Rs/ltr Dealer Discount 1. 75% Wholesale Price Consumer Price Rs/litre

Sri Lanka – Downstream reorganisation State/Private Owned Co. CEYPETCO St at e O wn ed M on op ol y Ceylon Petroleum Corporation Act Reg Public Utility Commission Act & ulat ion Petroleum Reform Act State PUC LIOC CPC Third Player Common User Facility Aviation Services

Sri Lanka - Legal Framework Sri Lanka Petroleum Exploration Legal Framework

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.

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

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

Sri Lanka - Management Sri Lanka Petroleum Exploration Management

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

Sri Lanka – Future Management Structure Ministry of 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

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

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

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

Sri Lanka – Management Committee (Clause 5) The Management Committee’s Functions include reviewing and approving - 1. Work programmes & budget 2. Relinquishment 3. Development applications 4. Plans for production and sale 5. Plans for site restoration

Sri Lanka - Legal Framework Sri Lanka Petroleum Exploration Licence Terms

Sri Lanka – Exploration Licence 1. 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

Sri Lanka – Development Licence 1. Licence period 20 years 2. May be extended by mutual agreement

Sri Lanka - Fiscal terms Sri Lanka Petroleum Exploration Fiscal Terms

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

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 - Capex and opex = Net cash flow

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

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).

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

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”

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

Sri Lanka fiscal terms – Negotiable profit sharing tranches (Clause 13) CFI 1. 0 to 1. 2 to 1. 4 to 1. 6 to 1. 8 to 2. 0 to 2. 2 to 2. 4 to 2. 6 to 2. 8 to 3. 0 > 3. 0 CO A% B% C% D% E% F% G% H% I% J% K% SL 100 A% 100 B% 100 C% 100 D% 100 - 100 F% E% G% 100 H% 100 I% 100 J% 100 K% CFI = Cash Flow Index CO = Contractor SL = Sri Lanka

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

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

Sri Lanka fiscal terms – Income Tax (Clause 14. 8) Tax holiday for 5 years from PRA production start

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

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

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

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

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

Sri Lanka fiscal terms – Hypothetical example of profit sharing tranches

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

Sri Lanka fiscal terms – Illustrative State Take – Shallow water

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