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The Guardian (UK): Cairn shares plummet on Indian drilling disappointments and tax disputes: “Even after the fall, Cairn has still trebled in value since January, when it announced the discovery of up to 1bn barrels of oil on acreage bought from Shell for just £7m.” ( 18 Dec 04


Nils Pratley

Saturday December 18, 2004


Cairn Energy, a stock market sensation of 2004, saw its shares plunge 18% yesterday as the latest drilling reports from its huge oil discovery in Rajasthan in north west India brought no fresh successes.


The oil explorer also warned of a looming tax dispute with the Indian government, which contributed to the shares' 247p fall to £11.15, a decline that threatens Cairn's position in the FTSE 100 index. Its market value is now £1.8bn.


Even after the fall, Cairn has still trebled in value since January, when it announced the discovery of up to 1bn barrels of oil on acreage bought from Shell for just £7m. However, Cairn yesterday reported disappointing results from 'N-C', a 852 sq km plot adjacent to its main Mangala field.


Investors had hoped that the drilling would yield more major finds, but six of nine test wells were dry. Three wells indicated the presence of relatively viscous oil, but Cairn cut its estimate of potential reserves at N-C from 400m barrels to a range of 30m to 80m.


There was better news from Mangala itself, and a smaller field that has been named Aishwariya after the Indian goddess of bliss. Bill Gammell, the former Scottish rugby international who is Cairn's chief executive, expressed surprise at the market's reaction to what he called "a well-rounded announcement".


"Let's see where the share price is in a month's time," he said. "I don't believe there is anything materially different about the company today compared to yesterday other than we have had one disappointing drilling report, but we are drilling lots of different things."


On the basis of seismic and technical studies, Cairn was able to lift its production tar gets for Mangala and Aishwariya from 60,000-100,000 barrels per day to 80,000-100,000. Analysts reckon that 40% of the oil is recoverable using water-injection techniques and Mangala could produce close to 500m barrels.


The tax dispute was a complete surprise to investors and overshadowed other news, such as a larger-than-expected gas discovery. The Indian government is in effect arguing that Cairn will be liable for a royalty tax of about $3 a barrel on its oil production.


The company argues that the state-owned Oil and Natural Gas Company, which is expected to become a 30% investor in the Rajasthan developments, had agreed to pay the tax.


Cairn argued the government's stance does not tally with "either the wording or the intent" of the original production agreement. Mr Gammell described the disagreement as a "minor issue" and said it could only potentially affect the value of the Rajasthan assets by 5%.


Broker Merrill Lynch cut its estimate of fair value for Cairn's shares from £16.30 to £14.60 and said the disappointing drilling could force the company to seek a partner or buyer. It said: "We believe this news is likely to put pressure on Cairn to sell at least a partial, if not total, stake in the field.",,1376392,00.html

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