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India lockdown: Cairn battles twin blows with upstream output cuts

Highlights

Cairn's output has fallen to about 160,000-165,000 boe/d

Company urges government to give tax relief for two quarters

Keeping capex plans unchanged, but will progress cautiously

Singapore — Cairn India has shut some wells and cut oil and gas production by about 13% as the energy explorer seeks to cushion itself from the twin blows of the coronavirus and plummeting prices, the company's CEO told S&P Global Platts in a recent interview.

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India announced a 21-day countrywide lockdown late last month to curb the spread of the coronavirus pandemic, prompting many of Cairn India's customers to declare force majeure on cargoes, while a sharp fall in manpower availability has made it difficult to keep upstream operations running.

Adding to the pain is a sharp fall in global oil prices that has squeezed the company's cash margins, posing a huge challenge for the company and also clouding the upstream outlook for the country as a whole, CEO Ajay Kumar Dixit said.

"For us, it's a double hit -- a lot of customers have come up with force majeure clauses and are not picking up cargoes. We had no option but close some wells. In addition, because of low oil prices, there is very little cash left to run day-to-day operations," Dixit said.

Before the lockdown, Cairn Energy was producing about 185,000-190,000 boe/d of oil and gas. Now, it has fallen to about 160,000-165,000 b/d, he added, with a caveat that there is a possibility for production to fall further.

Since oil and gas falls under essential goods and commodities -- which have been exempted from the lockdown -- Cairn India has been trying to maintain operations. But upstream operations were witnessing a huge shortfall in manpower.

"Instead of 7,000 that were working on a site, now we have about 1,000 people. Even labor contractors and suppliers have declared force majeure. We are taking all precautions against the virus at the facilities but running operations with a significant reduction in labor force is a big challenge," Dixit said.

Priority for domestic cargoes

Cairn is India's second-biggest upstream producer, after state-owned Oil and Natural Gas Corp., and produces about 25% of India's crude oil output.

The company has set a production target of 500,000 boe/d over the next few years.

Cairn, a part of Vedanta Resources Ltd., has plans to investment worth $3.5 billion over the next 3-4 years that will significantly ramp up its production.

Dixit said that under current circumstances, the government should encourage refiners to use domestically produced hydrocarbons first and then turn to imported cargoes. That would help companies like Cairn and ONGC to maintain cash flows.

"This will not only help in the short term but also something that should be part of the plan to encourage energy security. ... Keeping the upstream sector vibrant will be a key factor in achieving that security," he said.

Dixit urged the government to give the upstream sector relief from two taxes -- royalty tax and profit petroleum -- for at least two quarters that would give the industry some breathing space.

The federal government levies a 20% tax on oil price realized by upstream companies, while an equivalent amount has to be paid to the state governments. In addition, profit petroleum refers to a pre-determined share of the surplus petroleum output that operators have to pay as part of production sharing agreements.

Cairn's comments echoed that of ONGC, which has asked the government to abolish the oil tax if price realized by producers falls below $45/b. ONGC also has also asked for the 20% royalty paid to the state governments be halved.

Sharing the burden

India imports about 80% of its crude oil requirements. In 2019, the country's crude imports averaged around 4.5 million b/d.

"The government is saving a lot now on imports because of low oil prices. Some of that benefit can be diverted to the upstream sector in order to help us get some cushion from the dual shock," he added.

Dixit said that the company was keeping it capital expenditure plans unchanged for the year amid hope that oil prices would recover, but added that it would be moving cautiously on some of its investment plans.

"We are staying with oil plan for the time being. In my opinion, the current oil prices do not make business sense for anyone," he added.

Dixit said that Cairn was hoping the difficult period would ease soon and help overall oil and gas demand to recover quickly.

"The wells that we have shut - we can turn them on very quickly -- in one or two days," Dixit said.

Cairn's key producing assets are Rajasthan in the west, Cambay off the west coast and Ravva off the east coast. Its flagship asset is the Rajasthan block, where it has made close to 40 discoveries.

The company is also focusing on enhanced oil recovery at its Mangala, Bhagyam and Aishwarya fields as well as the Raageshwari project and a tight oil play in Barmer. Cairn's long-term vision is to increase its crude oil production share in India from 25% to 50%.