Petroleum exploration in Nepal does not look like getting off the ground in the immediate future as prospecting companies seem to have lost enthusiasm. Cairn Energy, which held an exploration licence for five blocks, or territories into which the country has been delineated for exploration, has pulled out.

Texana Resources has not withdrawn its notice on force majeure and has stopped exploration activities. Meanwhile, two companies that entered Nepal in 2012, BBB Champion Company and Emirates Associated Business Group, have dropped off the radar.

The “slow progress” on the exploration front has provoked the Ministry of Industry (MoI) to issue strongly worded warnings, and it has even been “considering” terminating the permits held by the four oil companies.

The ministry’s Petroleum Advisory Board has sought clarifications from the oil companies and they have been asked to furnish a convincing reply within 30 working days. The four companies have been told to explain the status of their Nepal operations. Industry Secretary Krishna Gyawali says the ministry has not decided yet, but is seriously mulling about terminating their contracts if they fail to furnish a convincing reply. “If their reply fails to convince us, we will move ahead with the licence cancellation,” he said.

The ministry is of the view that the companies can leave Nepal if they are not interested in exploration work here. “We found they are not serious about taking the exploration work ahead, but are only holding the licence,” said Gyawali. “There is no point asking these companies to stay if they don’t want to carry out the work for which they received the licences.”

Cairn Energy, a Scottish oil and gas company, had received a permit to drill for oil 10 years ago. It shut down its Nepal office citing “slow bureaucratic process” and “government indifference” six month ago.

With Cairn’s departure, Nepal’s oil exploration efforts that had been progressing at a crawl have suffered a serious setback. In fact, the entire petroleum exploration scenario has been characterised by the oil companies’ delay tactics and the government’s apathy.

Citing “unfavourable environment”, oil companies have invoked force majeure and remained idle while the government has been equally lethargic, neglecting to address their genuine issues or forcing them to get on with their task.

The history of petroleum exploration in Nepal is not so long. It gained momentum in the late 1990s when Houston-based Texana received a contract to drill for oil in two blocks, or regions into which the country has been divided for exploration purposes. The Tarai and Siwalik hills have been divided into 10 “exploration blocks” of 5,000 sq km each as being potential oil fields. Texana won the bid for Blocks 3 and 5 (in Banke and Chitwan) and entered into an agreement with the government in December 1998.

Six years later, the country’s petroleum exploration bid was further bolstered when Cairn received a licence to explore five more blocks—Blocks 1, 2, 4, 6 and 7 (Dhangadhi, Karnali, Lumbini, Birgunj and Malangawa respectively). However, with the political situation worsening (the Maoist conflict being the prime reason), both Texana and Cairn were forced to remain inactive till around 2009. It was only later that these companies started doing serious work.

Bharat Mani Gyawali, former operation advisor to Cairn in Nepal, said the company undertook geological structural mapping and hydrocarbon analysis from 2009 onwards. But progress was slower than expected, he added. In 2010, Cairn asked the government to amend its work plan which, Gyawali said, was necessary to allow it to move forward. But the department turned down its request. The Department of Mines and Geology (DoMG) said it was not legally possible to make the amendments as sought by Cairn. “Cairn was forced to leave Nepal as their repeated requests to create an environment for them to work remained unheard by the government,” said Gyawali.

Cairn has stopped its activities for the past two and a half years citing force majeure. Force majeure, a popular terminology in oil industry parlance, frees a party from fulfilling an obligation in the event of circumstances going beyond its control. “In 2011, the company was willing to withdraw its force majeure notice and get back to work,” said Gyawali. “However, the government never showed any seriousness.”

Both Texana and Cairn have already spent millions of dollars in Nepal on preliminary surveys and were ready to conduct an aeromagnetic survey. “Cairn was all set to call for tenders for the survey,” said Gyawali.

Another reason behind Cairn’s frustration is the government’s refusal to endorse the agreement it signed with Texana to acquire Blocks 3 and 5 (Nepalgunj and Chitwan). In 2006, Cairn’s subsidiary Capricorn had reached an agreement with Texana to acquire its permit to conduct exploration in these two blocks.

Cairn made yet another attempt to sell its licence in 2012 when it was approached by an Australian company and sought the government’s approval. “We held meetings with the energy minister and the Investment Board Nepal, but our proposal wasn’t endorsed,” said Gyawali.

The government, however, has said the Australian company, proposed by Cairn, was financially and technically weak to carry on with the project. “It’s true the agreement enables Crain to sell its shares,” said Rajendra Prasad Khanal, project chief of the Petroleum Explora-tion Promotion Project. “Howev-er, it does not mean the government should allow it to happen with a company which doesn’t seem to have capability.”

According to MoI officials, Cairn lost interest in Nepal after it sold its majority stake in Cairn India to Vedanta Resources in 2011. Vedanta, owned by Anil Agarwal, had acquired a majority stake in Cairn India for about US$ 9 billion in 2011. When the acquisition agreement did not materialize, Texana tried to transfer its right and obligations to Canadian-based Patriot Petro-leum Corp in 2011. Texana and Patriot signed a sales and purchase agreement under which Texana would assign to Patriot all its interests under a petroleum agreement for exploration of the two blocks for which it held the exploration licence.

Clause 64 of the agreement signed between the Nepal government and Texana allows the US-based company to transfer its project to any other company, and the government has to endorse it within 60 days of receiving the request. However, the DoMG has not approved Texana’s application till date.

Texana’s representative in Nepal said the company was very much interested in Nepal and would start preparations for an aeromagnetic survey soon. “We’re still confident that we can work here,” said Prabhat Yonjan, representative of Texana. Nevertheless, the company is still reluctant to withdraw its force majeure notice.

In 2012, two more companies entered Nepal. The government awarded three petroleum exploration blocks to US-based BBB Champion Company and Dubai-based Emirates Associated Business Group (EABG). BBB got Block 10 (Biratnagar) while EABG was given Blocks 8 and 9 (Janakpur and Rajbiraj).

Two years later, both the companies had dropped out of sight. DoMG officials said they had not been able to locate BBB while EABG has asked for a termination of its exploration licence.  

BBB had presented an ambitious work plan stating that it would complete the work within a year. In reply, the department had instructed it to come up with a modified and realistic plan. “We’re yet to get the modified plan,” said Khanal. “Since then, the company has been totally out of contact.”

The Industry Ministry is planning to seek the help of the US Embassy in Nepal to locate BBB. According to Khanal, the government has instructed EABG to clear all its liabilities if it wants to cancel the exploration licence. “We’ve told EABG to fulfill all its liabilities and then move ahead with the licence cancellation. But it has fulfilled only some of the liabilities,” he added.

One of the ironies in the country’s petroleum exploration efforts is that relations between the government and the oil companies have never been smooth. The oil companies, frustrated by the way of operation of the Industry Ministry and the DoMG, have accused them of not fulfilling their commitments. The government, on its part, said the companies never showed any seriousness even when the ground environment improved for them to start exploration work. “It took us six months to process one letter,” recalled Gyawali. “How can international companies work in such a situation?”

The oil companies have also pointed to lack of coordination between the ministries as being another impediment. “Though the Petroleum Advisory Board consists of several secretaries, it never made an effort to resolve the obstacles that the companies have to face in each ministry,” said Gyawali. Gyawali said the government should reform the Petroleum Act and Regulation make it compatible with the present scenario if it really wanted to attract serious companies to undertake petroleum exploration. “Given the rapid changes, at least we need to make the act compatible with those of India and Bangladesh if not better,” added Gyawali.

According to Gyawali, another step the government should take is form a high-level independent body to fast-track all issues related to petroleum exploration. Khanal says the department has proposed the ministry for amendment in the regulation. “The ministry is positive for this,” he added.

Will the government go ahead and terminate licence if they fail to get convincing reply? Khanal says their intention is not to terminate the licence totally. “We want to understand their problem. And, will work to create conducive environment for them to start exploration.”