Cairn set to reap rewards for its faith in India

Published on Wednesday 25 June 2008 22:52

THIRTEEN years after an obscure Edinburgh oil and gas explorer bought up a host of exploration assets that no-one else wanted, Cairn has started the final step towards extracting its massive Indian bonanza.

Sir Bill Gammell, whose Cairn Energy was propelled from a marginal player into one of Britain's largest 100 listed companies through discoveries in Rajasthan, said the company had reached a "breakthrough moment", with construction of a 600km, $800 million pipeline to develop the fields.

Around 80 per cent of the contracts to build the pipeline have now been awarded – mostly to local Indian players – and analysts are increasingly confident that Cairn can meet its aim of producing oil from the fields in the second half of 2009.

The timing of the pipeline could hardly be better for Cairn, as crude oil prices soar to record levels, approaching $140 a barrel last week.

Gammell, a former Scottish rugby international , told Cairn India's annual general meeting yesterday that, based on $100 a barrel oil, the company predicted it would have operating cash flow of $3 billion a year.

"Supply is getting very tight and demand in Asia is growing. Given the growth in infrastructure, demand here will continue to be strong," he said.

Cairn Energy demerged its Indian business last year, but retains control of the business, holding 65 per cent of Cairn India's shares, with Gammell chairing the company.

The Indian business already pumps 73,000 barrels a day from two fields in India, but the focus has always been on its Rajasthan discoveries.

The pipeline to develop the fields has been threatened by delays due to government red tape at both local and national level. But ultimately the way has been cleared, as the Indian government sought to use the project as a sign to reassure foreign investors, as it seeks to increase domestic oil production.

A senior Scottish oil executive said yesterday: "You could almost argue that any delays have helped them. The longer it has taken, the higher the price has gone."

There are still outstanding issues over crude pricing and taxation, but the Indian government has allowed for most of the cost of the pipeline to be recovered through oil revenues.

Yesterday there was also further news of the scale of Cairn's Indian fortunes.

Always known to be significant, the longer Cairn has held the Rajasthan fields, the more it expects to be able to extract.

Already expecting to produce 175,000 barrels of oil a day – which will represent more than 20 per cent of India's total production – the company believes techniques to enhance extraction mean it could produce up to 200,000 barrels a day.

Currently Cairn officially aims to extract 685 million barrels of oil from the giant Mangala field, but the company believes it could potentially extract a further 300 million barrels.

Cairn India also spelled out plans to invest another $2bn on exploration – almost double the amount it has spent so far – over the next 18 months,

including at least ten wells and numerous seismic operations.