FINANCIAL TIMES: Cairn Energy: Indian adventure pays dividends: “Estimates for the whole of the Rajasthan exploration block range from 1.5bn and 2.5bn barrels of oil”: “His and Mr Gammell’s hunch that the area had been underexplored – they bought the Rajasthan block from Royal Dutch/Shell for $12.5m – has been borne out so far” (ShellNews.net) 17 Jan 05

By James Boxell

Published: January 17 2005

For Cairn Energy, 2004 did not end quite as well as it started. Cairn was one of the biggest success stories on the London stock market last year after it struck oil in the Rajasthan desert in January.

A string of further exploration successes in Rajasthan, western India, saw the company’s shares quadruple. In September, the tiny Edinburgh-based oil exploration group, was catapulted into London’s blue chip FTSE 100 index.

But in December, it reported its first dry wells in the northern area of its Rajasthan exploration block, an update that wiped 20 per cent off its market value and put its FTSE 100 position under immediate threat.

For Mike Watts, the exploration director who has worked in India since the early 1990s, the market’s reaction to the first disappointment from Rajasthan was as irrational as its previous over-exuberance.

The company is still sitting on a field – Mangala – that contains 1bn barrels of oil, according to independent auditors, at least one-third of which Cairn believes can be extracted. Estimates for the whole of the Rajasthan exploration block range from 1.5bn and 2.5bn barrels of oil.

But Cairn’s share price now reflects the core value of its assets and known discoveries with little premium placed on the potential for further finds. The company had been hoping that the geological structure that contains the oil in its Mangala field had extended northwards into an area of the block known as NC, or Shakti. But it was forced to reduce its estimates of oil in the NC area from 400m barrels to 20m-80m barrels after drilling dry wells.

“The problem was the market put NC in the same category as the Mangala field, but it was always just a preliminary figure,” says Mr Watts.

Cairn’s exploration team now wants to turn its attention to the west of the NC area, in the hope that the trail of oil from Mangala extends into that area. The Indian government has awarded Cairn another exploration licence for the new area – known as NV or Bagyyam – but has imposed a strict mid-May deadline on its drilling programme.

Mr Watts is planning to drill three wells a month in an attempt at finding more oil. He says the Rajasthan block has enough potential to keep explorers and developers busy for 20 years.

Cairn’s success in Rajasthan has led to it being used as a poster boy by the Indian government to attract international companies to invest in exploration in the country.

India is embarking on a roadshow to promote its latest round of licence awards. This will take in London, Houston, Calgary, Dubai and New Delhi, while Cairn is expected to take a prominent role. The company will also be a probable bidder for licences.

Bill Gammell, Cairn’s chief executive, a former international Scottish rugby winger and a friend of George W Bush, US president, and Tony Blair, British prime minister, says: “People can see from us the benefits of going into India.” He insists the relationship with the Indian government remains strong, despite a brewing tax dispute.

The Indian government has claimed that Cairn is liable for a royalty tax on future production from Rajasthan, while Cairn insists the tax should be paid by ONGC, the state-controlled Indian oil giant, which was expected to take up a 30 per cent stake in the Rajasthan block this month.

However, in spite of worries that the change of government last year could have caused problems, Mr Gammell talks of continuity. “We are not fly-by-nights. We have been in India for a long time,” he says. “We have been successful and our aims are aligned with the government as it looks to develop indigenous supplies. We have stayed the course and earned our stripes. The previous energy secretary is now the cabinet secretary to the new government. The strength of our relationship is still there.”

The next part of Cairn’s Indian adventure will involve the north of the country and the borders of Nepal. This is likely to cause anguish among environmentalists. Mr Watts will undertake a geological survey of the area, although any exploration drilling will not begin for three years.

As he points out, when Cairn took its Indian gamble, 8,000 wells had been drilled in south-east Asia but only 12 on the Indian subcontinent.

His and Mr Gammell’s hunch that the area had been underexplored – they bought the Rajasthan block from Royal Dutch/Shell for $12.5m – has been borne out so far. The challenge will be to see how much more potential they can uncover.