Short sell cairn

Cairn India Field May Cut Nation's Oil Import Bill

March 31 (Bloomberg) -- Cairn India Ltd., a unit of U.K.- based explorer Cairn Energy Plc, may produce enough crude from its field in Rajasthan state to slash the South Asian country's oil import bill by as much as 7 percent.

The explorer may start output in a month and generate more than $1 billion in 2010 based on current oil prices and a peak output rate that will reach 175,000 barrels a day, Chief Executive Officer Rahul Dhir said in an interview.

"The field will increase India's total oil production by 20 percent," Dhir said yesterday at the explorer's headquarters at Gurgaon, outside the national capital New Delhi. "We are helping substitute imports and generate cash for the central and state governments."

India imports more than 75 percent of its crude to meet demand in the world's second fastest-growing major economy. Cairn's gains from production will be capped by oil's 39 percent decline in a year as the global recession saps fuel consumption.

"The key risk for Cairn is oil prices," Deepak Pareek, analyst at Mumbai-based Angel Broking Ltd., said by telephone today. "The company's current share price reflects oil prices of around $65 a barrel and the upside from there is not very high."

Crude oil for May delivery was at $49.11 a barrel at 1:10 p.m. Singapore time. Yesterday, it fell $3.97, or 7.6 percent, to $48.41 a barrel, the lowest settlement on the New York Mercantile Exchange since March 18 and the biggest decline since March 2.

Crude Imports

Cairn gained 1.3 percent to 182.8 rupees at 11:53 a.m. in Mumbai trading, compared with a 1.1 percent increase in the Bombay Stock Exchange's benchmark Sensitive Index.

Asia's third-largest energy consumer spent $68 billion to buy crude from overseas in the year ended March 2008. The South Asian nation spent $70 billion on crude imports in the 10 months to Jan. 31 after oil prices rose to a peak in July, according to the Petroleum Planning and Analysis Cell, a department of India's oil ministry.

Cairn India will generate as much as $2 billion every year starting 2011, once it reaches the peak output rate, Dhir said.

The company may need to offer a discount on prices because of the quality of the crude it produces from the Rajasthan field, said Amit Rustagi, analyst at Mumbai-based Antique Stock Broking Ltd., which has a "sell" rating on the stock.

Crude Discount

"There is still uncertainty about the discount Cairn needs to give for the oil," Rustagi said. "The quality of the crude oil is not very good compared with regional benchmarks."

Cairn is still in discussions with potential customers on prices, Dhir said.

"There may be a discount on the crude to Brent but the Rajasthan crude will be benchmarked to a regional variety," Dhir said. "The oil will produce heavier products and the price will need to reflect this."

Cairn may also have to give away half its profit to the Indian government from 2013-14 onward after recovering 2 1/2 times its investment in the field, according to Rustagi.

The government has named Indian Oil Corp., the nation's largest refiner, and Mangalore Refinery & Petrochemicals Ltd., a unit of explorer Oil & Natural Gas Corp., as potential buyers of Cairn India's crude, Oil Secretary R.S. Pandey said March 24. Oil & Natural Gas, the nation's largest energy explorer, holds a 30 percent stake in Cairn's Rajasthan field.

Finding Buyers

Indian Oil may buy a "maximum" of 1.5 million metric tons a year (30,000 barrels a day) of crude oil from Cairn, Basavaraj Ningappa Bankapur, director of refineries, said Feb. 4. The New Delhi-based refiner will use as much as 1 million tons of the crude at its Panipat refinery, he said.

Cairn India has asked the Indian government to nominate a refiner to buy its crude oil from Rajasthan after Mangalore Refinery, the designated buyer, declined to take the entire output. The explorer may consider exporting the oil if a local buyer isn't found, Dhir said Jan. 29.

He wasn't concerned about finding a purchaser for the crude.

"We have the concept of 'five minutes to midnight," Dhir said. "Eventually, the right decision happens. You just have to have the patience. The people who have the bigger economic incentive" are the federal and state governments.

The Indian government, which doesn't allow exports of crude, designates buyers for oil produced in the country.

The explorer has sought additional land around its field in Rajasthan from the government because it sees higher production potential at the site.

Potential Oil

"Parts of some potential oil pools lie outside the boundaries of the marked field," Dhir said. "We have asked the government to include these few thousands square kilometers as part of the field and I see no reason why the government wouldn't do it."

The explorer has discovered in-place oil reserves of 3.5 billion barrels, of which 2 billion barrels lie in the three main fields known as Mangala, Bhagyam and Aishwarya.

Cairn plans to recover about a third of these reserves. The recovery rate may increase by as much as 15 percent from 2013 after the explorer flushes out the oil using water mixed with chemicals.

"We will test this from next year and want to see it over two years at least," Dhir said. The use of chemicals in the recovery may increase Cairn's cost of production to $15 a barrel from $9 a barrel, Dhir said.

Cairn will produce 30,000 barrels a day of oil from the field in the three months starting June and will increase output to 80,000 barrels a day in the last three months of the year, Dhir said. It will reach a peak production rate of 175,000 barrels a day in 2011.

The explorer has also constructed crude-oil processing facilities with a capacity of 205,000 barrels a day, 17 percent higher than its peak output rate.

"We don't want to be capacity constrained," Dhir said. "Were we to produce more, we will be ready to handle it."

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net .