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The Times: Red faces at Shell as Cairn hits black gold

By Carl Mortished, International Business Editor 

January 20, 2004


THE head of Shell suffered another embarrassment yesterday after a small Scottish company found more than half a billion barrels of crude on land bought from the oil giant for just $7.2 million (£4 million).


Shares in Cairn Energy jumped 182¼p, or 50 per cent, to 552¼p after stock market analysts said that the find could be worth up to $500 million.


The find will come as an embarrassment to Shell, which infuriated shareholders earlier this month after writing down the value of its proven oil reserves by 3.9 billion barrels. More than £4 billion has been wiped off the company since the announcement, prompting calls for the resignation of Sir Philip Watts, the chairman.


Cairn said that it had discovered two reservoirs at shallow depths after sinking a single well in a remote desert region in Western Rajasthan. The company believes that the reserve, which lies in an area equal to the size of 25 exploration blocks in the North Sea, could contain between 450 million and 1.1 billion barrels of oil. Of that amount, Cairn reckons that between 50 million and 200 million barrels may be recoverable with the potential to double the company’s 120 million barrels of reserves.


Bill Gammell, Cairn’s chief executive, said yesterday that more work needed to be done to evaluate and appraise the Indian reservoirs, but he was confident that the find was significant. “This discovery in isolation has the potential to transform the value of Cairn’s portfolio,” he said.


City analysts rushed to praise Cairn’s find, suggesting that it was a company-changing discovery. Based on the firm’s estimate that the net profit in each barrel was worth $4, Merrill Lynch calculated the net present value of the discovery between $140 million and $560 million with a mid-range of $280 million, roughly equal to yesterday’s gain in the stock market value of Cairn.


Mr Gammell said the flow rate of oil in the well would be tested over the next week, providing further data on the oilfield’s potential and a further three wells would be drilled over the next few months, enabling Cairn to map out the reservoir. He described the geological structure as “a large fault and a very simple structure, something like Brent”.


Mr Gammell made his name betting his company and a $5 million share issue on a single well in Bangladesh. The Sangu-1 turned up trumps with a trillion cubic feet of gas.


Owing to Bangladeshi politics, Cairn switched to India, buying into a field offshore of Madras. Cairn acquired its initial Rajasthan interest in 1997 when it took 10 per cent of a block with Shell. Shell viewed the licence as too speculative and Cairn increased its interest to 50 per cent. In September 2002 it bought out Shell’s remaining half-share for $7.25 million.


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