India: Disappointments and disagreements dent Cairn
The stock market can be a fickle friend, as Cairn Energy found out at the end of 2004. After a spectacular run of exploration successes took it from relative obscurity to a place in London's premier FTSE-100 stock index in less than a year, its shares slumped by over 20% in December, following a disappointing appraisal result and a dispute over production taxes.
In an update on operations in Rajasthan, where it made several oil finds last year, the company revealed that estimates of reserves in its N-C discovery have been slashed, to 30m-80m barrels of oil. The field was originally thought to hold up to 400m barrels, but six out of nine appraisal wells failed to find hydrocarbons. Relatively heavy, 26°API oil, was found in the other three.
At the same time, it announced a disagreement with the government and state-owned Oil and Natural Gas Corporation (ONGC) over the payment of cess, a production tax. The block on which Cairn has made its discoveries was originally licensed to ONGC, before the new exploration licensing policy (Nelp) was introduced. As a result, cess is payable to the state government on any oil produced, a charge that does not apply with blocks licensed under Nelp.
Cairn argues that under the terms of its agreement with ONGC, the Indian company is liable to pay the cess. However, ONGC maintains that the cess should be split in the ratio of the companies' shareholdings, it has an option to take a 30% stake in any commercial discoveries on the block, which it exercised for the Mangala and Aishwariya fields in January. It claims that if it were responsible for all the cess, its combined tax and royalty bill would top $1bn, more than it expects to earn from the fields.
Cairn says it is still working to resolve the dispute, but plays down the possible effect. If it is held liable for a share of the cess, it expects the rate to be Rs900 ($20) a tonne, about $3 a barrel, and claims the production-sharing contract allows this cost to be recovered. Consequently, "Cairn's economic interest will be affected to a greater extent by production rates, the prevailing price of oil and the ultimate recovery of reserves in Rajasthan," says Bill Gammell, the firm's chief executive.
Although these issues cast a long shadow over the end of an otherwise phenomenal year, it was not all bad news. The output target for Mangala and Aishwariya has been raised from 60,000-100,000 b/d to 80,000-100,000 b/d, with the fields scheduled to come on stream in fourth-quarter 2007. Secondary recovery rates at Mangala, which has reserves of around 1bn barrels, are estimated at 22-32%, with the use of enhanced oil-recovery techniques, which could add another 5-15%, under consideration. The "aspirational target for ultimate recovery" for the field is over 40%. Aishwariya's reserves are still being reviewed, with an announcement expected in April.
Initial test results from a gas appraisal well, Raageshwari-4, were "encouraging", with the mean-gas initially in place estimate increased to 1.4 trillion cubic feet, although the company says the recovery rate from the find, a non-conventional volcanic reservoir, is likely to be low (20-30%). In January, another appraisal well, Raageshwari-5, found other gas reserves in a conventional, Fategarh sands reservoir. Further appraisal work is needed on the discovery, but Cairn says it bodes well for future gas exploration in the southern section of the block, where it plans to be active during the first half of 2005.
The company was granted an extension area to the north of the block for further appraisal of the N-V oil discovery, northwest of Mangala. Preliminary estimates for N-V are 80m-220m barrels of oil, but the extension contains several structurally closed sub-compartments that may hold further reserves. Appraisal is also under way on the N-R fields, southeast of Mangala, which are initially estimated to hold 50m-0.5bn barrels.