IHS Global Insight Perspective | |
Significance | The boost in investment reflects Cairn's confidence in the Rajasthan fields where 25 discoveries have been made, with further possibilities of incremental reserves from the Kaameshwari area. Given India's 75% reliance on imported oil and the dependence of India's refiners on imported crude, there is likely to be significant demand for Rajasthan's output which will justify the investment boost. |
Implications | Cairn is keen to get a return on its investment quickly, leading to plans to truck Rajasthan output 300km to the Gujarat coast from the start of production in the third quarter of 2009, until the Barmer-Gujarat pipeline becomes operational by the end of the year. |
Outlook | The near-term possibilities of exporting crude from Rajasthan are low, as Cairn has to prioritise supplies to the domestic market. However, Cairn's 580-km pipeline will travel to a port in Gujarat leaving open the possibility of exports at periods of low domestic demand. |
The Promise of Rajasthan
Cairn India will invest US$3.8 billion in three blocks in Rajasthan, more than double the previously approved cost of US$1.5 billion, according to the Economic Times of India. The development cost of the three large fields of Mangala, Bhagyam, and Aishwariya in Rajasthan is now proposed at US$2.9 billion compared to US$1.5 billion previously. Cairn's announcement follows a number of further discoveries at the Rajasthan fields over the past months. For example, at the Raageshwari oil field, 500 b/d of oil and 0.4 mmcf/d of gas was generated during testing in December (see India: 22 December 2008: Cairn India Strikes More Oil and Gas at Rajasthan Block). Further significant discoveries were made in the Kaameshwari 2 field, prompting Cairn to write a letter to the Petroleum Ministry last week asking for government approval to acquire an additional 238 sq. km of land that extends beyond the current contract boundary for further exploration. Factoring in the costs of exploring and developing incremental reserves in this area and in previously unexplored areas of the block could help explain the large increase in investment, although plans announced in October to increase the capacity of the processing terminal at the Mangala field may also have contributed (see India: 17 October 2008: Cairn India to Boost Investment in Rajasthan Fields). Cairn India has now made a total of 25 discoveries at the Rajasthan fields, which have turned the company from a relatively obscure upstream player in India to a major contributor to the country’s future crude output. Indeed, peak production estimates for the Rajasthan fields have grown over the past six months from 125,000 b/d to 175,000 b/d and the fields are expected to contribute to around a fifth of India's domestic crude oil output at these levels.
For the government, boosting crude production from Rajasthan is crucial from a supply-security perspective given India's 75% reliance on oil imports and the flagging ability of India's NOC Oil & Natural Gas Corp. (ONGC) to boost output from its onshore assets (see India: 19 January 2009: Falling Output from Onshore Oil and Gas Fields to Hit ONGC's Future Performance). Despite the importance of the project to these national goals, plans for construction of a 580-km pipeline to transport crude from the Rajasthan fields to Salaya in western Gujarat were delayed for months by the provincial authorities in Rajasthan because of wrangles over cost recovery proposals and tax issues. Indeed, at the same time gas output from the KG-D6 basin was also blocked by a gas pricing dispute, reflecting the bureaucratic delays facing investors in India. Cairn finally received the go-ahead for the pipeline a few days ago, which it now expects to be completed by the end of this year. The prospects of further land acquisition by Cairn as it seeks to boost incremental reserves may have helped persuade the authorities to sanction the pipeline given the benefits from land tax revenues, jobs for citizens, and the prospects of production royalties further down the line. The short time frame for the pipeline reflects the fact that construction is already well under way in other Indian states and with approval for the project from the central government and the authorities in Gujarat, construction can now proceed uninterrupted. However, in order to bring forward cash flow from the project (possibly in view of increased investment costs in field development) Cairn India plans to use hundreds of trucks to transport the oil as of the third quarter of 2009, when crude is expected to start flowing at a rate of 30,000 b/d. This is not an ideal solution, as trucking crude 300km to the Gujarat coast is likely to increase transit costs while creating difficulties in keeping the waxy crude warm to prevent it from solidifying. Prompt deliveries could also conceivably be impeded by India's congested infrastructure. However, this will ensure returns on investment for Cairn, while the precarious means of transportation is a temporary measure given that the pipeline is likely to be operational by the years end, coinciding with an increase in output from the fields to 50,000 b/d.
Outlook and Implications
While difficulties with the provincial authorities in Rajasthan appear to have been resolved, India's Petroleum Secretary R S Pandey has stated that Cairn India will have to prioritise crude sales from Rajasthan to refiners in India. Indeed, Cairn would only be allowed to export crude once internal demand has been met. Given that India's refineries require about 2 million b/d of crude against a domestic production level of just over 800,00 b/d, the prospects for crude oil exports from the area are not favourable unless output increases elsewhere in India. Indeed, IOC has already expressed an interest in sourcing crude to its Koyali and Panipat refineries in western India, although a supply agreement has yet to be negotiated. ONGC has also revived plans to construct a 15-million tonne refinery near the Rajasthan fields, hinting at its interest in using output to meet its own supply needs in the domestic market. In addition the Barmer-Gujarat pipeline runs near Reliance Industries’ massive Jamnagar refinery complex suggesting that output could be directed towards that facility.
Cairn India, however, appears to be leaving its marketing options open. Indeed, the 580-km pipeline is due to run all the way from Barmer to a port in Gujarat, suggesting output could be also exported by tanker at times of slackening domestic demand. Given that under India's production sharing agreements contractors are generally required to sell 100% of their output to the domestic market, Cairn may be counting itself lucky that it has the option to export any crude at all.