The area, known as block one, covers around 3,400 square kilometres off Sri Lanka's northwest coast, AHM Fowzie said. "There were three players who bid for the block and cabinet of ministers decided to give it to Cairn," Fowzie said in a statement.
Sri Lanka, which imports all its oil needs, offered three blocks to investors after seismic surveys showed oil deposits along the Gulf of Mannar close to neighbouring India.
However, in April the island withdrew two blocks after receiving fewer offers than expected. Besides Cairn, India's state-run ONGC Videsh and Canada's Niko Resources bid to explore block one.
Fowzie said he expects Cairn to send a team to sign the agreement by the end of the month. Sri Lanka has already allocated two other blocks to the governments of India and China.
More From This Section
The island spent just under $3 billion in 2007 importing oil, the nation's central bank governor said recently, adding that the fuel bill is expected to touch $4 billion this year.
Over 35 years ago, overseas companies explored areas off Sri Lanka's northwest coast, but failed to find any oil and gas reserves worth exploiting commercially.