Cairn facing challenge to hit deadline for Indian pipeline

Published on Tuesday 25 August 2009 21:33

CAIRN Energy shrugged off fears of delays to its key Indian oil pipeline yesterday, but admitted that the timetable for completion was becoming "increasingly challenging".

The 580-kilometre pipeline, which will export millions of barrels of oil from the Rajasthan desert to coastal refineries, is crucial to Cairn's profitability from next year.

Chief executive Sir Bill Gammell said while he could not guarantee the pipeline would be operational before the end of the year as planned, "any delay will be a matter of weeks, not months".

Despite thousands of workers employed in the project, Gammell said it could be delayed by the weather, either in the monsoon season, or the extreme summer heat which prevents midday work.

Cairn was propelled into the FTSE-100 by a series of major oil discoveries in India, but its largest fields are only now set to begin production.

More than five years after its first major oil discovery in Rajasthan, the group confirmed yesterday that the first oil will be drawn from the fields at an official ceremony later this week.

Gammell, a former Scotland rugby international, said the first oil would be "huge" as an occasion, after a series of challenges had to be overcome.

Early production from Rajasthan will be taken by truck, partly to allow refineries to test how difficult the waxy crude, which needs to be heated to flow, is to refine.

While some analysts have predicted that Cairn will soon look to offload more of its stake in its Indian business after production begins, deputy chief executive Mike Watts said it was too early to do so.

Cairn is scheduled to produce 175,000 barrels a day from the fields by 2011. However, Watts, who heads the group's exploration business, said he believed there was still more value to be squeezed from Rajasthan.

By investing its early cash flow into its smaller discoveries, Watts predicted the group could sharply increase its production from its current plans.

"The first target is to get over 200,000 barrels a day, and then to get towards the capacity of the pipeline, which is about 240,000 barrels a day," Watts said.

"There's value growth in this asset. If you sold it now, you'd regret it in five years' time."

Cairn reported a first-half loss before tax and exceptional items of $20 million (12.2m), but is expected to become highly profitable and cash generative when its Indian production ramps up.

The company also outlined the early analysis of its next major exploration drive – offshore Greenland.

Cairn was awarded major exploration rights in Greenland and has completed extensive seismic testing, identifying more than a dozen locations which could contain billions of barrels of oil.

While no oil has ever been discovered in Greenland Watts said the group believed oil in the region could be "potentially transformational" for the company.

Shares closed down 37p at 2,586p.