By Thomas L. Davis and Amila Sandaruwan Ratnayake Courtesy The Diplomat

Developing natural gas resources will help the country overcome its economic crisis, provide energy security, and lower carbon dioxide emissions.

For now, Sri Lanka’s severe economic crisis seems to be in remission. Many challenges still confront the government and population, from a substantial national debt to question of whether it can afford imported energy. 

Sri Lanka is not alone. Many nations, economically developed and developing, now face unsustainable debt levels and energy insecurity (uncertainty in availability and affordability). Historically, debts have been inflated away, renegotiated, or defaulted on. But nations with no in-country energy production and inflation risk face a form of energy insecurity double-jeopardy. It is better to pay off a national debt by developing an in-country resource, natural or human. 

Sri Lanka has such a resource, although unknown to many. Off the Sri Lankan coast, there are discovered yet undeveloped natural gas fields – and the potential for additional discoveries. Developing the gas fields and more exploration could alleviate Sri Lanka’s debt, provide energy security for decades, and significantly lower its carbon dioxide emissions. 

The Economic Crisis

In recent years, Sri Lanka has endured the worst economic crisis since its independence in 1948. Until very recently, its economy was on a downward trend, intensified by COVID-19 health costs and the loss of tourism revenue during the pandemic. The economy shrank by nearly 8 percent in 2022-2023 and only posted growth in the first quarter of 2024. Since 2019, the number of Sri Lankan poor has increased from 4 to 7 million, now around 31 percent of the population. 

There is a strong energy component to the country’s economic woes. The high cost of imported energy and unavailability resulted in rolling blackouts. Transport fuel shortages marked by lengthy gasoline and diesel queues added to the people’s suffering. Headline inflation peaked at nearly 70 percent in 2022, and despite falling to only 4 percent at the end of 2023, high prices on many key items such as food and energy seem permanent.

Much of the crisis is the result of decades of trade deficits and borrowing, with a sizable portion of foreign exchange used to purchase oil and coal imports. A foreign currency shortage left little funds for government services and forced Sri Lanka into default. In 2022, the nation suspended repayment on $83 billion in domestic and foreign loans. A considerable proportion of the debt is in short-term international sovereign bonds issued at extremely high interest rates, which accounted for about 70 percent of annual interest payments in 2021. 

A $2.9 billion International Monetary Fund (IMF) assistance package was approved in 2023, and a $3 billion debt restructuring plan with bilateral creditors agreed on in June of this year. The present government’s reform policies and the IMF’s first and second tranches have reversed the economy’s downward trend with year-on-year growth reported at 5.3 percent in the first quarter of 2024. 

Energy Use 

Understanding Sri Lanka’s unique energy mix reveals the benefit of using its natural gas resources. Hydropower is widespread and has mostly ranged from 10-20 percent of energy consumption since 2010. This suggests it has reached or nearly reached existing infrastructure capacity, and growth beyond 20 percent is constrained by suitable new sites and costs.

Apart from hydropower, Sri Lanka imports most of the energy it consumes, primarily fossil fuels. Oil and coal provide over 80 percent of its energy consumption (power and transportation).

Sustained high fossil fuel prices place economic and political burdens on nations with little or no in-country production. The results are less energy availability and higher costs, depletion of U.S. dollar-dominated foreign reserves, and in many nations such as Sri Lanka, higher use of less expensive coal with increased CO2 emissions. 

Prior to the 2019 downturn, increased oil and coal use fueled three decades of growth in per capita GDP and, unavoidably, CO2 emissions. Fossil fuel consumption, GDP, and CO2 emissions decreased concurrently and significantly as the economic crisis began. Assuming the worst of the economic crisis is over, the three will again grow. Coal use has increased dramatically since 2010, reaching 17 percent of energy use in 2022, and has added to the nation’s CO2 emissions per unit of power. Despite this, coal is favored because it is regionally available, cheap to transport, easy to store, and inexpensive per unit of energy. 

The figure below illustrates the dependent relationship between Sri Lanka’s economic growth and increasing emissions.

Offshore Resources: A Potential Solution

Natural gas offers a path to both reduced emissions and reduced dependence on high-priced foreign energy sources.

Two undeveloped gas fields, Barracuda and Dorado, are located in Sri Lanka’s portion of the offshore Mannar basin. They were discovered by Cairn Lanka Pvt. Ltd. in 2011, then evaluated. Cairn departed Sri Lanka in 2015, stating that the fields would not be commercially viable – a decision made when spot prices for Asian liquefied natural gas (LNG) were entering a historically low price phase of less than $7.00/metric million British thermal units (MMbtu) and average international oil prices were below $40/barrel oil (BO). 

The offshore gas field discoveries are a proven yet undeveloped resource estimated to have a combined mid-case recoverable of 839 billion cubic feet of gas and 5.88 million barrels of condensate, a liquid derived from natural gas. Using a 2023 Asia LNG spot market price of $11.20/MMBtu and $70/BO as approximate proxies for market values, we can estimate values of $9.4 billion and $412 million for gas and gas liquids, respectively. 

There are no publicly available estimates of the development cost of the combined discoveries. Norway’s Irpa field, with development costs of around $1.4 billion, has similar hydrocarbon volumes and water-depth as the Sri Lankan gas fields. Based on that, they should be commercial at today’s prices. 

Beyond the known offshore gas fields, geologic research, exploration data, and a 2012 United States Geological Survey (USGS) resource assessment all indicate that the Mannar and Cauvery basins, which are within Sri Lankan and Indian waters, have significant natural gas and petroleum potential, with numerous exploration plays lacking a single test well. The USGS assessment estimates undiscovered, technically recoverable, conventional petroleum resources. 

We measure that 32 percent of the Cauvery basin and 66 percent of the Mannar basin are within Sri Lankan waters. Using the aforementioned proxies for market values and the USGS’ mean resource volumes yields a ballpark” value of $2.4 trillion for the undiscovered resources in the Sri Lankan portion of the Cauvery Basin and $4.7 trillion for the Sri Lankan portion of the Mannar Basin, using the conservative assumption that 5 percent of the USGS estimated resources will be discovered and economically recoverable.

And having an in-country energy source provides benefits beyond the dollar value.

Moving From Oil and Coal to In-Country Natural Gas

At present, there is no natural gas production or consumption in Sri Lanka despite the nation’s discovered gas fields and likelihood for additional discoveries. Importing LNG, once a consideration, now seems less likely, as plans to build LNG storage facilities for imports have stalled since 2021. Plus, imported LNG has price and availability risk, especially in South and East Asia, where it has been historically expensive and recently reached unaffordable levels with some of Sri Lanka’s neighbors, i.e. Bangladesh and Pakistan. 

For the most part, in-country produced natural gas is immune to energy insecurity drivers such as availability and affordability. Natural gas use in Sri Lanka should be favored for future power generation, as it would emit far less CO2 than the present burning of oil and coal. On average, oil releases 1.4 times more CO2 and coal 1.8 times more CO2, per energy unit, than burning natural gas. 

Climate change concerns and the move to net-zero emissions are discouraging new fossil fuel projects, such as natural gas fields, while encouraging renewable projects. Industrial scale solar and wind have a role in Sri Lanka’s energy mix but worldwide have a history of increasing electricity rates. Renewable energy projects also require government subsidies to cover build-out costs and needed base-load backup. The innate intermittency of solar and wind requires fossil fuel or nuclear power generation to be available to insure reliability and resilience to power grids. Natural gas is base-load power and switching from oil and coal to natural gas in Sri Lanka would be equivalent to expanding Sri Lanka’s present solar and wind power generation by six times, in terms of equivalent CO2 emissions.

Field development, new exploration, and the transition to natural gas in Sri Lanka will not happen without foreign investment. Challenges include the high cost of offshore exploration and development, especially in deep water (which entails costs of over $1 billion per field). There is risk to investment with no established in-country production to offset against. There is also opposition to fossil fuel projects in many economically advantaged nations, in the form of ESG-banking pledges, the lending policies of many multilateral development banks, and non-governmental organizations and foreign governments that recommend only funding renewable energy projects. 

Yet many traditional funding sources remain available to Sri Lanka, such as international oil companies (publicly traded and national oil companies), foreign government funding, the bond market, project partners, private equity, and export credit. There are also newer funding alternatives, such as energy asset secularization, that now allow medium-sized international oil companies to explore in nations like Sri Lanka.

Developing Sri Lanka’s discovered gas fields, returning exploration, and changing the energy sector from oil- and coal-based to natural gas are economically viable and desirable, assuming sustainable and responsible development. Key benefits include the alleviation of Sri Lanka’s debt; the creation of a secure, inexpensive, and reliable energy source for decades; and the reduction of its CO2 emissions to meet its international obligations in manner that does not economically deprive its population. 

Many will argue that Sri Lanka should not develop its fossil fuel resources because of climate change concerns. However, moving from its present oil and coal dominance to natural gas would reduce its emissions by about one-third at its present power consumption level. Besides, Sri Lanka emits and has emitted very little CO2: annually, 38.4 million tonnes in 2021, and cumulatively, 534 million tonnes from 1800-2022. For comparison, China emitted 10.3 billion tonnes in 2021 and cumulatively 261 billion tonnes from 1800-2022, while the United States emitted 5.6 billion tonnes in 2021, and cumulatively 427 billion tonnes from 1800-2022. 

Recent international events show that most nations with much larger CO2 emissions will place their energy security above climate change concerns if their economy and social well-being are threatened. 

Compelling arguments have been made that underinvestment in oil and gas worldwide will increase energy insecurity by constraining future supplies, increasing costs, and becoming a threat to global economic growth. Avoiding this will require far more than the present levels of investment despite claims that renewable energy will adequately supply the world’s needs during the energy transition. With sufficient investment, development, and exploration, Sri Lanka has the resources to avoid energy insecurity, while lowering its debt and CO2 emissions.