‘Oil Matters for Asia’ is what a Reuters report said a few days ago. It might well be stating the obvious but it is the truth of the matter. Asia is in desperate need for vast quantities of this black gold. Reuters says that high oil prices are fast replacing Europe as the biggest danger for growth in Asia, threatening to smother consumer demand, while taking a knife to exports and reigniting inflation.
The Reuters report, generated from their Sydney office says that any threat to Asia is a threat to all, as the world is counting on the region to keep growing, in order to offset recession in Europe and a fitful recovery in the US. Taking this into consideration, one wonders why the US sanctions on buying oil from Iran. This comes from the fact that the region imports two thirds of its oil adding up to a very large bill. Asia spent a net US$447 billion (excluding Japan) on imports of oil and petroleum last year, which was up from 329 billion in 2011 and US$234 billion, the year before.
Oil price shock
In Sri Lanka, we are beginning to feel the oil price shock. Whatever the reasons maybe - geopolitics, local mismanagement or dollar fluctuations, the price at the pump is troubling the nation; and predictions are that it could certainly hamper our growth rate. According to a Reuters report, Fredric Neumann, an economist at HSBC has said that Asian exports to the west, which are already looking rather shaky, might be in for another knock.
Back in January, the IMF had warned that a total shut down of Iranian exports could trigger a price hike as much as 30%. This situation is particularly sticky for Asia, says Reuters, as China, India, Japan and South Korea are the largest importers of Iranian oil.
In Sri Lanka, this scenario has triggered our local analysts to spin ideas as to how to overcome the problem and chief amongst them is the austerity formula. Cutting down is a good thing; however, we need to be looking at this in the context of a forward thinking plan rather than going back on our tracks.
Mannar oil exploration
One of the targets of economic analysts is SUV owners. There are questions asked as to whether there is a disproportionate number of ultra-luxury vehicles on Colombo roads. To these analysts, the number of SUVS seems to be out of proportion, especially for a country emerging from a 30-year old civil war.
There is also the utopian idea of renewable energy, where we can all dream about running our cars on sun power or splitting the H2O molecule to somehow produce energy.
There are other economists who say, “Merely praying for the discovery of oil in the Mannar Basin will not suffice or send the problems away. Even if oil is finally discovered in Sri Lankan waters, it will take two to three years to drill and extract supplies by which time international oil prices would have fallen. Large new supplies of oil are expected in the Atlantic Ocean basins abutting Brazil and Ghana/ivory Coast. These will flood world oil markets from 2013 onwards, raising supply and depressing prices.”
Be that as it may, for this writer it all boils to just one solution and that is to earnestly explore our oil (hydrocarbon) resources. Discounting our natural resource at this juncture will be foolish to say the least. Our country has gone through a long an arduous journey during our 30-year war; and it is because we saw an end to it that oil exploration became possible. It’s not that we have got off to a good start, two of the three wells drilled by Cairn Lanka have shown signs of hydrocarbon deposits but that is only in one block – what about the others?
While Cairn Lanka has put the country on the global map of Hydrocarbon haves, we as a nation need to keep our own commitment on energy security going. Oil exploration is certainly a costly exercise and according to industry estimates Cairn Lanka has already invested over USD150 million in the first phase of exploration. To attract more investment in the exploration activity we should put the other blocks up for bid.
Auctioning oil blocks
Cairn Lanka’s success is drawing many suitors for the other remaining blocks and that includes Russian, Vietnamese and Indian national oil companies. This is a very good time to auction the blocks so that exploration activities spread to other parts of the country. It will not only increase investment but also the potential of finding more hydrocarbon in the country.
But one needs to award the blocks to those who have a clear understanding about the region’s geology and have proven track records of making hydrocarbon discoveries. To substantiate my point - Cairn Lanka, which made this historic discovery, is part of the same group, which is also credited with discovering hydrocarbon in the eastern coasts of India (east of India shares similar geological structures with the west of Sri Lanka). Cairn India is also credited with India’s biggest onshore crude oil discovery in the Thar Desert.
But in opening our blocks, we don’t need a paradigm shift in the way we look for solutions. We only need to shift gears and open the doors to players like Cairn Lanka and others - so that more areas are brought under hydrocarbon exploration i n the country. It is through more exploration that we will be able to take a step closer to energy security for our country.