Cairn abuzz at prospect of Greenland oil

AS he prepared for the taps to be turned on at Cairn Energy's massive Indian oil fields, five years after they were discovered, Mike Watts, head of exploration, admitted he was "pregnant with excitement".

But Watts wasn't gloating about how the Edinburgh-based oil explorer had been catapulted into the FTSE 100 by a hunch about the Rajasthan desert, a view that had been dismissed by Shell after early drilling came to nothing.

Speaking just days ahead of yesterday's ceremony, which officially began production from Cairn's giant Rajasthan fields, Watts wasn't even talking about India. Instead, his thoughts were thousands of miles away, in the northernmost reaches of the Atlantic Ocean.

Based on another hunch, Watts now believes it might be on the verge of an even bigger mine of black gold, this time in a country where no one has found a single barrel of oil – Greenland. Despite having no domestic oil industry, Greenland is believed to have massive undiscovered reserves. The US Geological Survey puts it on its list of top 10 countries in the world for undiscovered oil.

While a bigger profile was given to Cairn's plans to move into Tunisia, and possibly Iraq, Cairn has always had a belief in Greenland. It was so excited about the potential, Cairn kept its early movements quiet, believing that attracting attention to the region might encourage its rivals to seek a slice of the action. After securing a major exploration position to the south and west of Greenland, and completing early testing, Cairn is ready to talk it up.

"There's a lot of risk, but the risk is not political or commercial, it's technical, and technical risk is the only type of risk we can address," Watts says of the region. "It's very exciting to find yourself as an early entrant in one of the world's top ten countries. It's a bit like looking at the North Sea in the 1960s."

Greenland opened itself up to exploration for oil in a bid to gain economic independence from Denmark, from which it is an autonomous region. Despite being surrounded by a North Atlantic ocean which has numerous oil-producing regions, there have been just a handful of exploration wells in its waters, and none since the 1970s.

None of the pioneering wells struck oil and the industry looked elsewhere, put off by the lack of success, its remoteness and the threat posed by icebergs.

Stronger oil prices helped increase interest in the region when licences came up for grabs in 2008.

However, when details of the awards were published, Cairn was conspicuous for its relative lack of size compared with the other remaining players which were "super-majors", such as Chevron and Exxon.

Watts had what he still admits is "basically a hunch" about the potential of the region, prompting Cairn to gamble on its initial entry.

After spending $30 million (18m) on seismic and electromagnetic testing of the seabed, Cairn is growing in confidence, and it plans to spend another $30m (18m) or so next year acquiring more information. "Our judgment today is that we're getting more and more encouragement with every piece of data."

Both Watts and his boss, Sir Bill Gammell, are even prepared to talk about Greenland as being "potentially transformational" to Cairn, and that their feeling is similar to the growing confidence it had in India when, after 16 dry wells, it struck big in 2004.

Large discoveries easily transform small oil companies, but now that Cairn is a member of the FTSE 100, with a market capitalisation of more than 3 billion, it would take an altogether larger hit to be deemed "transformational".

Watts is unapologetic about using the term. The group, he says, has 25 discoveries in Rajasthan, equating to around 4 billion barrels of oil in the ground. This could be small beer if its next major project comes good.

"We've identified about 14 structures in Greenland which on their own could be of that order, three or four billion barrels," Watts says. "If one of the features works, you could be in the situation when you're in a little mini province."

Although the prediction seems remarkable, there is at least some evidence to back up the belief. As well as the US Geological Survey, oil slicks have been discovered on the ocean surface around the land mass. Experts believe these are not the result of a disaster, but natural seepage from the seabed to the surface, suggesting a working hydrocarbon system lies below, potentially a massive one.

It will have to be big to make it worthwhile for Cairn, such is the expense of operating in the region, with each exploration well expected to cost more than $100m (61m).

As well as being one of the world's most remote areas the water is cold, and while not extremely deep, it is not shallow either, at up to 800 metres. Ships will need to tow icebergs away from platforms.

But as a first mover into an expensive, remote and unproven area, Cairn acquired rights in Greenland on attractive terms.

Watts says the move into Rajasthan was similar, taking an area "where no one thought there was a chance of finding oil", backing its judgment, and striking big. The success in one remote and unfashionable area leads the company to believe it can do it again.

"Nothing has deterred us in the past, the opportunity is in these (remote] places. If you look for oil where everybody else has found it, you might find extra volumes, they won't be large, and they'll be on very tough commercial terms," he says.

"But if you go into a frontier area like Greenland, if you do find oil, the reward side is very, very interesting."

The interest, if it does strike oil, will quickly turn to what Cairn may do next.

"There's never been a catalytic entrepreneurial company with the financial power we have, or will have shortly, involved in one of the top 10 countries for oil exploration."