Territorial tangle casts shadow on Santos’ Bay of Bengal block

Territorial tangle casts shadow on Santos’ Bay of Bengal block

New Delhi: The Indian government plans to suspend the contractual obligations of Australian explorer Santos Ltd’s subsidiary relating to its block in the Bay of Bengal because it has been unable to resolve a maritime boundary dispute with Bangladesh, said people familiar with the matter.

The Bangladesh Navy has repeatedly denied Santos International Operations Pty Ltd access to its NEC-DWN-2004/2 block in the northern Bay of Bengal, said the people, who didn’t want to be named.

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In the sixth edition of India’s New Exploration Licensing Policy, or Nelp, the subsidiary was awarded a 100% working interest and operatorship of blocks NEC-DWN-2004/1 and NEC-DWN-2004/2, covering about 16,500 sq. km. in the Bengal Basin, Santos says on its website.

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The northern waters of the Bay of Bengal have been a subject of contention between India, Bangladesh and Myanmar as the land mass of the three countries surround these waters.

The two blocks are around 250km south-east of Kolkata and 175km from the Indian coast.

Santos signed a production sharing contract (PSC) for NEC-DWN-2004/2 on 2 March 2007 and commenced its first phase of exploration from 8 May 2007.

PSC obligations include work programme commitments and a bank guarantee pursuant to that. Santos has committed to an eight-year $70-million work programme covering the two offshore deep water exploration licences.

But due to the dispute, Santos was denied access to most of its NEC-DWN-2004/2 block and was finally forced to suspend seismic operations there from 10 February 2009.

Mint could not ascertain the status of the NEC-DWN-2004/1 block.

“This is a fit case for excusable delay. The relief to the company is imminent," said a senior petroleum ministry official, one of the people familiar with the matter.

According to communications between Santos International and India’s petroleum and natural gas ministry, the Union government has decided “there exists excusable delay thereby suspending performance of production sharing contract obligations for this block".

In a communication from John Chambers, regional manager, South and South-East Asia, Santos International, to D.N. Narasimha Raju, joint secretary in the petroleum and natural gas ministry, the company has asked for the implementation of the government’s decision.

Mint has reviewed copies of these communications.

The management committee for the block—comprising representatives of the Union government, the directorate general of hydrocarbons (DGH), a body under India’s ministry of petroleum, and Santos—is in favour of the draft agreement, according to the communications.

Mint could not ascertain whether an agreement for suspending the PSC obligations has been signed.

Raju and S.K. Srivastava, the director general of hydrocarbons, did not respond to phone calls or messages left on their cellphones.

Chambers could not be reached since he was away on a vacation.

Bangladesh has already taken recourse to arbitration to settle the dispute by taking it up with the United Nations Convention on the Law of the Sea (UNCLOS).

Analysts say India is due to submit a memorandum to the UN body by May 2012 regarding its contentions with Bangladesh.

India’s plan to leverage the January visit of Bangladesh Prime Minister Sheikh Hasina to India to upgrade the bilateral relationship and resolve the issue was not successful.

“We had requested MEA (ministry of external affairs) to take up the issue with the Bangladesh government, but there has been no success," said another petroleum ministry official, who also requested anonymity.

Vishnu Prakash, spokesman for the Indian foreign ministry, and Enamul Hoque Chowdhry, minister, press, at the Bangladesh high commission in New Delhi, did not reply to emails.

“The fallout of the ongoing impasse is on the oil and gas exploration efforts in the contentious areas of the Bay of Bengal. The production sharing contracts issued by the government of India to Santos are impacted, as nearly 50% of the demarcated blocks are claimed by Bangladesh," said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors.

He said it was logical that, under the circumstances, the operators cannot be held responsible for not completing the work in time as committed under the production-sharing contract.

“Hence, the government of India should release the operators from the obligations by accepting force majeure (a provision freeing a party from an obligation because of circumstances beyond its control) as provided in the production-sharing contracts," he said, adding that such a suspension could continue until the territorial limits are settled between the countries.

Graphic by Yogesh Kumar/Mint