Final agreements leave Cairn ready to cash in on Indian oil

Published on Wednesday 29 July 2009 21:42

MORE than five years after being discovered, Cairn Energy's vast Indian oilfields are finally set to begin production next month.

The Edinburgh-based oil explorer has reached an agreement over the price it will be paid by the state-owned oil refineries, which will buy the initial crude produced from the fields in Rajasthan.

Pending final agreement from the national government in Delhi – which wants to reduce the amount of oil India imports – Cairn expects to draw first oil some time in August.

The latest agreement is the final major hurdle to generating revenue from Cairn's most significant asset.

Cairn owns exploration rights in North Africa and Greenland, but its 65 per cent stake in Cairn India is where almost all of its existing value lies and the latest development will be seen as a personal triumph for chief executive Sir Bill Gammell.

A series of major Indian finds, first discovered in early 2004, propelled Cairn from relative obscurity into one of Britain's leading oil explorers, giving it a place in the blue-chip FTSE-100.

The fields are situated in a remote part of north-west India and contain hundreds of millions of barrels of oil. They are expected to produce at least 175,000 barrels a day by 2011.

While analysts said yesterday's agreement was a significant development, Cairn was reluctant to celebrate before production begins. "We're pleased things are moving forward and we're nearing production," a spokesman said.

Rahul Dhir, the former Merrill Lynch investment banker who heads Cairn India, said in a statement that first oil from the Rajasthan fields would be a "major milestone" for the company.

Delays securing the agreement announced yesterday have already caused first oil to be moved back by at least two months.

While last year Cairn named a target of first oil in the third quarter of this year, it said it was "ready to go" from the Rajasthan fields at the end of May. Fears that the delays could force Cairn to accept a low price for the oil now appear to have eased.

While the exact terms of the agreement are confidential, Cairn said it would initially equate to a discount of 10-15 per cent to the market price of Brent Crude, the European benchmark for crude oil.

Richard Rose, an oil and gas analyst at Oriel Securities, said that the discount was at a level most in the City had expected, easing fears created by media reports that the discount could be more than 20 per cent.

Despite the price of Brent crude falling by 5 per cent yesterday, shares in Cairn Energy rose 18p to 2,401p, valuing the company at 3.3 billion.

Initial production from the fields will start by truck, with hundreds of lorries transporting up to 30,000 barrels of oil a day from the desert to coastal refineries. Barring interruptions caused by the region's unpredictable weather, Cairn expects to complete a 580km pipeline by the end of the year.

This will replace the trucks and should be transporting 50,000 barrels a day by the start of 2010, increasing to at least 175,000 barrels a day in 2011.

Cairn has permission to produce up to 175,000 barrels a day, but is applying to increase this to 205,000 barrels a day, believing its earlier forecasts on the fields were too conservative.