India’s Cairn Oil and Gas is pushing ahead with its ambitious upstream expansion plans by extending a production sharing contract with the government by a decade, a move analysts said is a sign the company will maintain a sharp investment focus on the domestic market with an aim to double production in coming years.
The company, which currently contributes about one-fourth of India’s overall oil and gas production, is hoping that a sustained oil price recovery will offer plentiful opportunities to invest in the upstream sector.
In a push towards that vision, Cairn, part of Vedanta Resources, said late October that it signed a 10-year production sharing contract for its oil and gas block exploration works in the western state of Rajasthan with Indian petroleum and natural gas ministry. The contract extension would be applicable from May 2020.
“The extension will be a key determinant in our goal of doubling production capacities,” said Prachur Sah, deputy chief executive officer at Cairn Oil and Gas.
Cairn set a target to contribute 50% of India’s crude production in the next five years by investing as much as $5 billion to expand its crude production capacity to 500,000 b/d.
Analysts termed this contract extension “long awaited” as the company had sought the extension from the Indian government.
“Cairn Vedanta now has a certainty with respect to a forward-looking production profile. Considering that India is Cairn’s sole area of operations, the company remains uniquely intertwined with the trajectory of India’s upstream landscape,” said Rajeev Lala, associate director, upstream companies and transactions, at S&P Global Commodity Insights.
Investment focus
According to S&P Global, Dated Brent prices are expected to average $90-$95/b in Q4 and then ease into the mid-$80s in H1 2023 before recovering toward $90/b in H2 of next year. Supply-demand balances indicated stock builds likely through April despite the OPEC quota cuts announced and tapering SPR releases.
Cairn and other analysts are of the view that the contract extension would spur capital expenditure investment and encourage private players to invest in the upstream sector.
“The Rajasthan assets are the company’s main cash cow and positions the company to remain highly liquids-weighted as compared to a general E&P-wide push towards gas-weighted assets,” Lala said.
The Rajasthan block is India’s largest producing onshore oil block. Recently, Cairn won eight oil blocks and one coal bed methane block under the Discovered Small Field Round 3 bids, taking the company’s total assets in the country to 62.
“It is a matter of fantastic faith, or lack of choices, that Cairn continues to invest in a jurisdiction that has essentially capped the price of oil at $70-$75/b for the foreseeable future,” Lala added. “It is impressive that Cairn’s financiers are ok for such a risk-return profile even as their counterparts in other parts of the globe are worried about long-lead-oil-weighted investments by mid-sized companies.”
Cairn’s current total production capacity stands at 147,000 boe/d, with the Rajasthan block contributing 120,000 boe/d, or nearly 82% of total production. Cumulatively, the block has produced over 700 million barrels of oil equivalent in the last decade.
Rising production
The Rajasthan oil block marks the starting point of the Mangala pipeline, the world’s longest continuously heated and insulated pipeline that carries crude from the fields of Rajasthan to refineries in Gujarat.
Cairn recently said it achieved another milestone by producing 500 million barrels of oil from the Mangala oilfield, India’s largest onshore oilfield.
“This brings us closer to our target of doubling our production capacities in line with our chairman’s vision to contribute 50% to India’s domestic oil and gas production and contribute towards the country’s energy self-dependence,” Sah said.
Discovered in 2004 and put into production in 2009, Mangala is situated in the Barmer district of Rajasthan and during its discovery was considered the largest onshore hydrocarbon find in India in the preceding two decades.
According to Sah, 90% of the country’s domestic production comes from old and aging oil fields. Cairn recently partnered with Baker Hughes to enhance recovery from the Bhagyam field and to increase its recoverable reserves.
In addition, Cairn’s Ravva field had achieved a recovery factor of more than 50%. Mangala, Bhagyam and Aishwariya fields, the three major discoveries in the Rajasthan block, cumulatively have hydrocarbon reserves of approximately 2.2 billion boe.
The oil ministry in June said India would allow operators to sell locally produced crude in the domestic market without restrictions starting Oct. 1, but restrictions on exporting locally produced crude would remain.
Under the previous policy, the operator of a field cannot directly sell locally produced crude into the market and needed government permission for any sale of crude and condensate within the country. But under the new policy, the government would cease its function of allocating domestic crude and condensate output.
Cairn is of the view that the decision would attract many national and international companies to carry out exploration and production in India and help boost the government’s revenues.
“Cairn’s portfolio is a great dollar hedge for the government. Continuity here is useful for the government, and existential for Cairn,” Lala said, commenting on the company’s latest domestic production push.
Source: Hellenic Shipping News
