Rajasthan: Cairn's oil fountain

In August 2003, Cairn Energy Chief Executive Bill Gammell, a former Scotland rugby international and childhood friend of US President George Bush, was a man under siege.

Oil analysts were busy writing his epitaph after the Edinburgh-based oil and gas exploration firm, which he set up in 1980, decided to sell its last remaining interests in the North Sea.

A few months later, Cairn handed Gammell a £200,000 bonus for the company's stellar performance in 2003, taking his total earnings in the year to well past £580,000. August 2003 now seems ages ago as Gammell and his top team has made Cairn the darling of the British stock markets.

According to the company's annual report, £100 invested in Cairn on December 31, 1998 was worth £480 at the end of 2003. The same figure invested in the FTSE 250 is worth about £130.

So what went into the remarkable turnaround? The answer lies deep inside the stark, unforgiving wilderness of the Rajasthan deserts.

In January this year, the company, which steadfastly ignored the North Sea on its doorstep in favour of India, finally struck black gold at a field evocatively named Mangala (meaning bliss).

It was the largest oil discovery in onland India since 1985 when ONGC located more than a billion barrels of in-place oil reserves at Gandhar in Gujarat.

Mangala, located at the Barmer-Sanchore basin, is also expected to contain more than a billion barrels, of which up to 250 million barrels is thought to be recoverable. The oil, which is trapped in a large simple structure at relatively shallow depth, could produce 10,000 barrels per day on production.

The importance of the Mangala find becomes clearer considering the fact that it represents a quarter of the reserves of Bombay High, and the total discoveries in India in the last two years amounted to around 800 million metric tonnes of oil and oil equivalent gas.

Analysts say India, which imports 80 million to 90 million tonnes of crude oil annually (cost: over Rs 85,000 crore -- Rs 850 billion) against the total domestic availability of only 32-33 million tonnes, desperately needs to find more such buried treasures.

The government estimates the country's oil requirement will rise to 3.2 million barrels per day (around 2.2 million barrels now) by 2010. In the process, the country, which is now the seventh largest consumer of oil, will emerge as the fourth largest after the United States, China and Japan.

Naturally, Phil Tracy, chairman of Cairn Energy India Pty Ltd just can't hide his glee these days.

Speaking from his Edinburgh office, Tracy, who is also the worldwide engineering & operations director, says "After the sale of the North Sea blocks, we were criticised for putting all our eggs in one basket. The results show we are taking great care of the basket. Our conscious decision to concentrate on South Asia has paid off handsomely and Cairn is indeed becoming an energy powerhouse in India."

Tracy is on the dot: over 90 per cent of the company's profit after tax (up 75 per cent to £46.3 million in 2003) comes from its operations in India, with Bangladesh and Nepal accounting for the rest. Operating cash flow zoomed 69 per cent to £122.2 million in the same year. "Cairn is a firm player in India's fascinating energy growth story," Tracy says.

He, of course, doesn't blame the analysts for their earlier doomsday predictions, and admits smaller oil companies need to dish out regular bits of 'good news' so that shareholders get their money's worth.

Track records show India hasn't disappointed him as far as the 'good news flow' is concerned. Two months after the Mangala find, Cairn hit the jackpot again -- this time 81 km southeast of Mangala.

Preliminary estimates of oil in place (named N-A-1) range from 130 to 470 million barrels, with preliminary recoverable reserves estimated to be in the 20 to 80 million barrels range.

Cairn's footprints in India are set to increase in the days to come. Consider the acreage: the company has exclusive rights to search a 5,000 square km area in Rajasthan, which is the equivalent of about 25 North Sea blocks in size.

The company's relationship with Rajasthan dates back to 1997 when it bought out Shell in Bangladesh and acquired a share of the Rajasthan field as part of the same deal. Famously, Cairn bought out Shell from the block for a mere $7.25 million two years ago, a move which added to Shell's embarrassment in the wake of its row over its stated oil reserves.

Cairn engineers have so far drilled 14 exploration wells in Rajasthan, of which 10 have encountered oil or gas. Tracy says the company has already deployed four rigs in the state and the fifth is on route. "We are drilling one well per month," he says.

That's fantastic news for a company, which by its own admission made a 'slow start' in the country. Drilling in the southern part of the Rajasthan field initially had met with mixed results and an exploration well at the company's shallow water block in eastern India had reached 800 metres before the firm was forced to abandon the project.

Tracy says Cairn has proved how "patience and persistence" can pay off handsomely.

For proof, look at the sheer scale of its operations across India: the Krishna-Godavari basin (Ravva), Gujarat (Lakshmi, Gauri and Ambe and Parvati fields), Bihar (a field covering an area of 15,550 square km), and finally, Rajasthan (apart from Mangala and N-A-1, the Saraswati and Raageshwari discoveries are estimated to hold about 21 million tonnes and 14 million tonnes, respectively).

Cairn's success in India has many admirers, one of them being Subir Raha, chairman of ONGC, which produces 77 per cent of India's energy needs, and has struck a strategic alliance pact with the Scottish company. "The alliance will synergise the competencies of ONGC and Cairn, and enhance our cost efficiencies," he said.

Cairn's strategy in India is simple: add value through successful exploration, and then realise value through the sale of assets, and the process is continuous.

According to Mike Watts, Cairn's exploration director, "Cairn's growth strategy is driven by a focus on exploration combined with selective acquisitions and disposals."

Says Subhomoy Mukherjee, head of ICRA's oil and gas sector: "Cairn's self-financing model is a winner. The company's capital expenditure is small and it makes good money by farming out blocks as soon as it strikes oil or gas."

That explains the alliance with ONGC under which the domestic oil major paid $135 million for the following:

• Cairn farmed out 90 per cent exploration interest in its deep water exploration block KG-DWN-98/2 at the Krishna Godavari basin;
• Cairn sold 15 per cent in a block at the Cambay basin, and a 10 per cent interest in the Lakshmi and Gauri development areas. The current equity structure for these development areas are, therefore, Cairn 50 per cent, ONGC 40 per cent and Tata Petrodyne 10 per cent.
• ONGC and Cairn put in joint bids for NELP-IV on condition that Cairn will retain a 30 per cent interest in the blocks and ONGC will be the operator.

Analysts say the contribution of companies like Cairn to India's energy scenario is enormous as most global oil biggies like Exxon-Mobil and Chevron-Texaco have so far avoided India.

In fact, Gammell has been something of a lone voice in the international oil exploration industry for his consistently articulated view that India is one of the most under-valued oil producing countries in the world. Says Mukherjee, "Cairn's success will change perceptions about India.

Today Cairn is selling blocks to ONGC. Tomorrow they may have plenty of other suitors."

John Nicholson, who has worked between 2001 and 2004 as geology consultant on the NELP licence rounds for the Directorate General of Hydrocarbons in New Delhi, says the main question he still gets asked by the big companies is not about the prospectivity. It's 'Can we do business there? Is it a level playing field?'

"My answer is, if you can do business in Houston and Dallas, and Indonesia, and China, Angola and in the Middle East, why not go to India, where the industry is all set to run and run?"

In fact, it's the so-called international minnows like Cairn, Hardy Oil, Petrom. Heramex, and Niko Resources of Canada which have responded enthusiastically to the question.

There is no doubt that Cairns has evolved dramatically from a small company operating in the North Sea into one of Britain's leading oil exploration and production companies with a focus on India. While announcing the Mangala find, Bill Gammel had said: "In India they only produce around 600,000 barrels a day and import around 1.5 million."

That's a great incentive for Gammell to develop and produce as much oil as Cairn can in India. In 2003, he fell £40,000 short of the maximum bonus he could have received. The former rugby player is unlikely to miss his full score this time.

The reverse flow

If companies like Cairn are making a beeline for the Indian subcontinent, the country's oil giants are also looking overseas aggressively.

Last month, the Indian Oil Corporation joined the queue by announcing its decision to invest up to $2 billion to acquire a medium-sized overseas exploration company either in Britain, or Canada or Australia. It was a smart step by India's only Fortune 500 company.

India's oil hunt abroad has so far been spearheaded by ONGC Videsh (OVL), which already has nine overseas assets, and wants more. Deals have been struck in countries like Russia, Sudan, Vietnam, Syria, Iran, Iraq, Libya and Myanmar.

The two largest deals so far have been the $1.7 billion investment in Russia's Sakhalin Island in February 2001, and close to $1 billion in buying the Canadian company Talisman Energy's 25 per cent stake in the Greater Nile Petroleum Operating Company near Sudan's capital Khartoum.

OVL already gets 3 million tonnes of oil from Sudan and beginning 2005, expects to get another 5 million tonnes from Sakhalin.

OVL is not alone. Reliance Industries, for example, has bought a 30 per cent stake in an offshore field in Yemen. The project, in which ONGC has 40 per cent stake and British Petroleum another 30 per cent, struck oil in mid-June last year.

The real push for the great oil hunt abroad came from the India Hydrocarbons Vision 2025, prepared in February 2000.

The report called for secure acreages in identified countries for long-term supplies for two reasons: one, India at present depends on the Middle East for 65 per cent of its oil requirements, and any disruption in this supply will make the country extremely vulnerable; and second, the country's dependence on oil imports is estimated to grow to 91.6 per cent by 2020..

The acquisitions abroad, however, has had a fair share of criticism. Questions have been raised over the choice of the countries, which have been accused of severe violation of human rights, sponsorship of terrorist activities, and general misuse of oil revenues.

In Sudan, for example, over 2 million people have died since civil war broke out in 1983. Naturally, questions are raised on the logic of investing so heavily in such a country.

But oil company executives insist the investments are safe and secure as all countries are bound by the United Nations peace charter. Besides, all these projects are heavily insured as per international norms.

However, the real reason for investing in these countries is pretty simple: they give an opportunity for Indian companies to gain a toehold abroad.

More importantly, these are relatively smaller projects where global biggies are usually absent. If you still have doubts on this score, consider this: IOC, India's largest oil company, has a turnover of around $26 billion. The comparable figure for the smallest of the global oil giants, TotalFinaElf, was $94 billion.

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