Pumping out 1,75,000 barrels of oil per day from its Rajasthan oil block, Cairn India has brought down the country's import bill by Rs 11,000 crore annually. But its plan to raise output to 200,000 bopd is hamstrung by delay in Government approvals.

Never mind that Cairn India’s Managing Director and CEO for six years, and poster boy of the oil drilling industry, Rahul Dhir, quit the company in early August; the private explorer has been pumping out oil from its fields in Rajasthan with great gusto.

At 1,75,000 barrels of oil a day (bopd) the current output has helped bring down the country’s import bill by Rs 11,000 crore annually.

But Cairn, whose scrip is part of the Sensex stocks, has been saying that if it is allowed to raise its output from the current levels, it has the potential to further reduce the import tab.

What is hampering the progress is delay in getting approvals to allow exploration in its development area.

Another challenge before it is the extension of the Ravva contract in the East coast which expires in 2019.

Recently, Vedanta Resources’ Anil Agarwal, who took over Cairn India last year from the Scottish ownership, had written to Prime Minister Manmohan Singh to ensure smooth exploration operations in the oil block.

Listing the procedural issues, he had said the Rajasthan production sharing contract (PSC) and the mining lease have enabling provisions that allow carrying on exploration in its development area.

But Cairn was asked to obtain Government approvals.

Delayed approvals

Delay in getting necessary approvals is not something that bothers Cairn alone. Most exploration and production companies in India have raised it at one point or the other.

This had led the Government to setting up a committee under C. Rangarajan, Chairman of the PM’s Economic Advisory Council, to review the profit-sharing mechanism and profit-sharing contracts (PSCs) in hydrocarbons exploration.

The company’s average daily gross operated production in fiscal 2012 from Rajasthan, Ravva and Cambay was 1,72,887 barrels of oil equivalent and the average price realisation was $102.7 / barrel of oil equivalent.

The immediate target before Cairn is to start producing gas from the Raageshwari fields in the Rajasthan block. Here, again, the industry awaits the strategy to be adopted by the Government for gas pricing and allocation.

However, Cairn says that Raageshwari is essentially meant to supply gas to meet the energy requirement of the Mangala Processing Terminal in the block.

Though 5 lakh bopd from the Rajasthan block, as it stated earlier, may be ambitious, Cairn is pushing to take production to 3 lakh bopd.

Cairn India Chairman Navin Agarwal recently said: “Based on the revised estimates, the total Rajasthan resource base now supports a potential production of 300,000 bopd, subject to approvals from the Government and our joint venture partner, ONGC, and further investments.”

“Such a production level is equivalent to more than 35 per cent of India’s current crude oil production, which will help reduce the annual import bill by over $10 billion (Rs 55,000 crore) and contribute annual revenue of $5 billion (Rs 27, 500 crore) to the Government,” he said.

Therefore, the beneficiaries of an envisaged increased output include the Central and State Governments (Rajasthan) as well as the joint venture partner, ONGC. The country’s exploration and production sector has been arguing for streamlining contract administration and speedy approval of work programmes and budgets, market-linked prices and the right incentives to increase production.

In fact, Cairn was initially looking at closing the last fiscal with an output of 200,000 bopd. But, for want of necessary approvals, it could not do so.

Cumulative production from Rajasthan has crossed 100 million barrels, generating more than $9 billion in gross revenues till date. But higher output would also mean tying up of crude sale agreements with refiners.

Sale agreements

Cairn, at present, has sales agreement with buyers — Reliance Industries, Essar Oil, and Indian Oil Corporation — for volumes in excess of 1,75,000 bopd for fiscal 2013.

The company has been seeking permission to export crude oil i.e., selling to export-oriented refineries. P. Elango, Director, Strategy and Business Services, and a member of Cairn India’s Executive Committee, now wearing the hat of interim CEO, recently told Business Line that “the matter is still under Government consideration.”

Meanwhile, to ensure that the current supplies are not diverted to any export-oriented units, the company has put in place a condition in the contract with buyers that restrict such a sale.

Gas and oil in Ravva

The 2012 fiscal was the 17th year of oil production from the Ravva oil and gas block.

Gross production from the field is 36,379 barrels of oil equivalent a day comprising an average daily oil production of 27,165 barrels and an average daily gas production of 55 million standard cubic feet.

Developed in partnership with ONGC, Videocon and Ravva Oil, Cairn became an operator in 1996. The PSC runs until 2019, just as is the case with Panna-Mukta-Tapti (PMT) joint venture fields, operated by ONGC-Reliance Industries-BG.

For Ravva, Cairn has found deeper prospects in the block and plans to drill an exploration well in 2013.

Deep assets

Today, Cairn has 10 blocks under its portfolio, located in Rajasthan – Barmer (one), Krishna Godavari Basin (four), Mumbai Offshore (one), Palar-Pennar (one), Cambay basin (one), Sri Lanka (one), and South Africa (one).

Exploration has not been easy for Cairn. While Rajasthan continues to be Cairn’s premium asset, the company has also declared force majeure in three blocks — one each in Krishna Godavari, Palar, and Mumbai offshore basin — because of delay in getting mandatory approvals from the Ministries of Defence and Space, respectively.

The contractors need to get these approvals once the blocks are awarded under the licensing rounds. Particularly after the 26/11 incident, the approvals for undertaking exploratory activities in the Western offshore have become more sensitive.

Over the next two years, Cairn envisages net capital expenditure of $2 billion. With the expected approvals, it plans to invest $600 million in its Rajasthan exploration.

Cairn, though, calls itself a mid-sized exploration company and wants to further expand its international footprint.

However, at home, an extension of its Ravva contract on the East Coast, which expires in 2019, will be a challenge for Cairn India.


(This article was published on September 2, 2012)
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