Cairn to drill three wells with $ 120 m capex for next five months

Business Standard, Mumbai: Last Saturday, when the fifth-generation Japanese ship Chikyu started ‘spudding’ or drilling a new well, Cairn India formally opened their new frontier, down south in the deep waters of Sri Lanka.

Exactly a year before, when Cairn’s parent company in the UK announced that the $70-billion Vedanta Group will acquire its Indian operation, nobody foresaw the tumultuous and agonising wait that lay ahead.

But in business, much like politics, it is always better to look ahead and not harp on the past. Cairn India’s investment-banker-turned-oil man CEO Rahul Dhir, has since gone through the toughest phase of his professional career in the last 12 months, combating a hostile joint venture partner and the Indian oil establishment. He is now eager to look ahead.

August has been significant for this young team of oil explorers in India. Two years earlier, oil production from its flagship acreage in Barmer, Rajasthan, had started.

Will Lanka be the next Rajasthan for Cairn? It is yet premature as drilling has just begun, but Cairn is taking no chances. After the Bihar finds failed, commercial viability of any hydrocarbon prospects in Lanka becomes very strategic.

Spread over 3,000 sq km, Mannar Basin Block – SL-2007-01-001 – is located in the north west of Sri Lanka, with water depths ranging from 400 meters to 1,900 meters. For the next five months, drilling will continue in three wells at a minimum capex of $120 million. Depending on the results, further ramping up of infrastructure is likely.

This block is a frontier basin with no prior deepwater well penetration. But multiple structural and stratigraphic plays have been identified. What everyone is banking on is the geological continuity of the known discoveries in the Cauvery basin.

After three decades of violence, Lanka is rebuilding itself. For the Russians and Chinese the energy opportunity is worth billions. Gazprom, the largest Russian-owned gas company is camping in Colombo to discuss possibilities of exploring oil.

So, Cairn Lanka – one of the 30 subsidiaries of Cairn India – that won the block in 2008, is intensifying its operations.

Commercial production was expected to start by 2014, but Economic Development Minister Basil Rajapaksa said, if the project becomes successful, Sri Lanka will no longer need to import oil.

India remains in the core of operations. Cairn India has participating interests in 10 blocks in three strategically focused areas — one in Rajasthan, three on the west coast and six on the east coast of India. Sri Lanka, so far, is the maiden overseas project. Of these eight blocks, including the three which are into production, are operated by them.

However, for Cairn, Rajasthan is of immense importance. The company is sticking to its stated vision of increasing the total production to 240,000 barrels per day, which many sector analysts believe can be higher at 300,000 barrels per day. Once Vedanta’s plans of setting up a local refinery for crude crystallises, the entire dynamics will change forever.

Both Bhagyam and Aishwaria field development plans are in place and the former can start production in October, subject to approvals from Oil and Natural Gas Corporation of India and the government.

But if the Cairn management is willing to accept part sharing of the royalty burden, it would translate into a near $2 billion revenue hit, impacting profitability of operations. But Dhir and his team are betting on Vedanta’s enviable growth and transformation record across continents and geographies.

For Cairn, eyeing newer energy hotspots in Africa, where Vedanta already plays the resources game along with other global big boys will become that much simpler going ahead, once the conflicting interests of Cairn Plc diminishes.

Fortunately, most believe the deal is almost complete. Shareholders, through a postal ballot, will vote on the conditions set by the government by next month. Vedanta too already has a toe hold in the company, buying 28.5 per cent of stake, a pre-cursor to its majority control.

Indeed, as Dhir would have said, this was the worst of times; this is the best of times for Cairn India.