Could Cairn Find Lead to Greater India Interest?

A discovery in Rajasthan is at minimum a 50-million-barrel deposit; appraisal could show 200 million or more.

Cairn Energy Plc reported on January 12 it made a large oil discovery in the western Indian state of Rajasthan that had the potential to transform its prospects.

Cairn said initial estimates of the find ranged from 450 to 1,100 million barrels, with preliminary reserve estimates in the 50 to 200 million barrel range. Stock of the Edinburgh, Scotland-based independent responded immediately, and by mid-week it was up 61 percent.

"Whilst further evaluation and appraisal is required, I am confident that this discovery in isolation has the potential to transform the value of Cairn's portfolio," Bill Gammell, Cairn chief executive, said in a statement.

India's Minister of Petroleum and Natural Gas, Ram Naik, described the well as a New Year's gift to the nation. He said that in the years to come, Rajasthan would become the third-largest state after Gujarat and Assam on India's oil map. The discovery follows the discovery of gas by Indo-Korean Consortium in offshore Myanmar with estimated recoverable reserves of 4 to 6 trillion cubic feet.

Rajasthan Strike
The well is in the west Indian state of Rajasthan, about 60 kilometers north of the Saraswati oil field, near the Pakistan border. Cairn is conducting exploration across a 5,000-square-kilometer block there.

Oil & Natural Gas Corp., Ltd. (ONGC), the Indian state oil company, holds rights to 30 percent of commercial production on the block, the Cairn statement said.

Reliance on Imports
One appeal of the Cairn discovery in India stems from that country's heavy reliance on imported oil. The U.S. Energy Information Agency estimates nearly 30 percent of India's energy needs are met by oil, and more than 60 percent of that oil is imported. Given strong growth in oil demand, oil consumption is projected to climb from 2.1 million barrels per day in 2001 to 3.2 million barrels per day by 2010.

The Indian government is encouraging increased production of petroleum to reduce its dependence on imported oil. The cost of oil imports in 2001 was estimated at $11.5 billion, representing nearly one-fifth of total imports. It is expected that by 2010 almost three-quarters of India's oil and gas needs will be met by imports.

India now draws most of its oil from the Bombay High, Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The aging Bombay High basin, embracing India's largest producing fields, is operated by ONGC, which has dedicated $1.8 billion to an enhanced recovery program for this most productive crude oil source. The Bombay High fields produced a total of about 320,000 barrels per day in 2001. This is a decline from a production level of 454,000 barrels per day in 1995. A new recovery program, which involves drilling 145 new wells and the laying of about 245 kilometers of subsea pipeline, will be completed in 2006.

High Prospectivity
Another attractive factor emphasized by Cairn's discovery is that India has not yet been thoroughly examined for possible oil deposits. Exploration has taken place in only about one-quarter of India's 26 sedimentary basins. Offshore basins cover approximately 380,000 square kilometers, while onshore basins cover 1.34 million square kilometers. These basins may contain as much as 30 billion tons of hydrocarbon reserves, according to EIA estimates.

Wary of a growing reliance on imported oil, India's government instituted a bidding program called the New Exploration Licensing Policy (NELP) in 1997, which allowed foreign energy companies to bid for exploration rights. Prior to this policy, exploration was strictly limited to Indian enterprises.

Foreign firms initially hesitated to bid on oil exploration rights, and no bids were received from foreign energy companies in the first NELP round in 1999. However, by early 2000 India had awarded 25 oil exploration blocks. In all, India has held four licensing rounds so far with a fifth--NELP V--expected in April of this year.

Multinational oil companies have stayed away from the NELP process or bowed out after a short while. Cairn Energy is the largest of the independents involved in NELP bidding. In NELP I, contracts went to Reliance Industries of India teamed with Niko Resources of Canada. ONGC won eight blocks, three of which were in partnership with other public-sector Indian companies. Cairn Energy, Russia's Gazprom, Mosbacher Energy of the U.S., and Geopetrol of France all teamed with Indian firms to win single blocks.

NELP II, a second round of bidding for another 25 blocks, was concluded in March 2001. Multinational energy companies were again absent from the bidding process. Sixteen of the 25 blocks were awarded to ONGC with another four blocks to Hardy Oil of the UK in partnership with India's Reliance Petroleum. The others were awarded to either smaller independent firms or failed to receive bids.

In November 2002, nine oil and gas exploration blocks were awarded to a consortium of Reliance Industries Limited and Hardy Exploration and Production (India) under NELP III. Of the nine blocks, seven were deepwater blocks and two shallow water blocks. Nine more blocks out of the remaining 14 went to ONGC. Five of these blocks were onshore, three shallow, and one deepwater.

ONGC was awarded the bulk of the 21 oil and gas exploration blocks in the fourth NELP round late in 2003. ONGC, along with partners, won 15 blocks. Onshore, Cairn Energy won a Gaga Valley block and a block in Cambay basin in Gujarat in partnership with ONGC. Gujarat State Petroleum won three onshore blocks. ONGC and Oil India combined won the Rajasthan onshore block RJ-ONN-2002/1. Enpro Finance-Gail consortium was the winner for the Assam onshore block AA-ONN-2002/1.

Offshore, successful bids came from a Bharat Petroleum-ONGC joint venture, Hindustan Petroleum in consortium with ONGC, Reliance Industries teamed with Hardy Oil of the UK, and a partnership of OIL, ONGC, and BPCL.

What's Next for India?
India has scheduled a fifth NELP round for April. The total number of blocks awarded for exploration in last four years is 91.

Unlike previous rounds when the thrust was on deepsea exploration, Cairn's success may increase interest in onshore acreage. It also could prompt major international oil companies to get in on the action.