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The Sunday Telegraph: Cairn's desert storm: The oil minnow bought the rights to drill in the Rajasthan wilderness from Shell for a paltry 4m. Its hunch paid off spectacularly and Cairn is now a FTSE100 company.: "Since that time, its market capitalisation has more than quadrupled to over 3bn today.": "At an oil price of around $50 per barrel, that production will translate into $2bn worth of net cashflow for Cairn." Sunday 20 November 2005

(Filed: 20/11/2005)

The oil minnow bought the rights to drill in the Rajasthan wilderness from Shell for a paltry 4m. Its hunch paid off spectacularly and Cairn is now a FTSE100 company. Sylvia Pfeifer travelled to India to see the oilfields and talked to the people responsible for getting them onstream

A group of men in bright orange overalls stands sweating in the baking heat of the Rajasthan desert. A 70 ft triangular drilling rig towers above them, the only feature in an otherwise empty skyline. Hundreds of metres below them, the drill they are tending is boring its way towards what they hope will be another oil discovery for Cairn Energy. By tomorrow, they will know whether they have hit the jackpot.

 
A Cairn drilling rig in the Rajasthan desert
A Cairn drilling rig in the Rajasthan desert

If successful, it will be Cairn's latest discovery in the wilderness of the Rajasthan desert. Some 16km to the east of the "NI North" prospect lies Mangala, the largest oil find in India for 22 years. The discovery of Mangala - which means "Goddess of Power" - in January 2004 changed Cairn almost overnight from an Edinburgh-based oil and gas explorer into a FTSE100 company. Since that time, its market capitalisation has more than quadrupled to over 3bn today.

For India, Mangala - and the 1bn barrels of oil it contains - has been just as, if not more, significant. Consistently ignored by the world's oil giants, the discovery has sparked renewed interest in the country as a viable and lucrative oil and gas province. With Cairn as its poster boy, India's latest bidding round for exploration licences attracted interest from a record number of international majors, including BP and Italy's ENI.

"The country is highly underexplored," says V K Sibal, the director general of India's directorate general of hydrocarbons. To date, just seven of the country's 26 hydrocarbon-bearing basins have been explored and Sibal's aim is to evaluate all of them by 2025.

It is an ambitious target but India desperately needs to find more buried treasures like Mangala. With the economy set to grow between 7 per cent and 8 per cent, the country's demand for oil and gas is forecast to double by 2020. It currently imports around 70 per cent of the oil it needs and with crude prices at record levels, India is spending an estimated $25bn a year on securing supplies.

For Sibal, the key to achieving his goal is to increase the number of operators exploring in India and bring in people with the right kind of knowledge.

"I believe in the knowledge of people and I want to get the knowledge by diversifying more," he says. "What we need is the people - people who are passionate about exploration."

It is a passion that he clearly sees in the team at Cairn. Unlike other independent explorers who normally spread their risk by taking minority stakes in fields around the world, Cairn has always made a point of taking 100 per cent positions in areas where little or no gas and oil has been found.

The two men behind this high-risk, high-reward approach are Bill Gammell, Cairn's chief executive, and Mike "Sniffer" Watts, the exploration director who is widely credited with spotting the right opportunities. Together since 1995, the two have forged a close relationship that thrives on friendly competition which extends to seeing who can be first out of an aeroplane.

"When it comes to Bill and Mike, it's a case of one and one makes three," says a Cairn executive. "Together, they probably have more ideas than they would alone."

According to Gammell, Cairn's strategy has always been to create value "by being an initiator and a pioneer". He is a fervent believer in the management concept that 20 per cent of your activities will account for 80 per cent of your results.

Hence his and Watt's decision a decade ago to shed assets in the US and the North Sea and instead put all their efforts into India and Bangladesh. The pair had noticed that the oil majors had overlooked the region, drilling some 8,000 wells around South and South East Asia but just 12 on the Subcontinent.

Cairn's relationship with Rajasthan dates back to 1997 when it bought out Shell in Bangladesh and acquired a stake in the Rajasthan field as part of the same deal. Famously, Cairn bought Shell's 50 per cent share in the block for a mere $7.25m (4m) three years ago. Since then, Cairn has drilled 100 wells - compared with just three wells that were drilled while Shell operated the block. It was Watts, who never tires from pulling out a map showing Cairn's acreage in Rajasthan, who got the early morning call last January that Cairn had hit the jackpot.

The message was crystal clear: "This is the real deal, Mike." He rang Gammell and the rest, as they say, is history.

Cairn's aggressive strategy has certainly paid off in Rajasthan. The scale of its acreage is immense: it is equivalent to 30 North Sea blocks and the company has so far built 300km of road through a desert wilderness that is dotted with hamlets of thatched huts where locals live and an array of wildlife, including camels, monkey and deer. Indian mobile phone companies have since extended their coverage to this remote region.

By betting big on India and Bangladesh, the company has also built up invaluable contacts and goodwill with the local, state and national politicians. Subir Raha, the executive chairman of India's biggest company, Oil and Natural Gas Corp (ONGC), is another high-level contact, in part because his company has a 30 per cent stake in the Rajasthan oilfields.

"The key element about doing business in India is alignment," says Gammell,

As a result an increasing emphasis is being placed on hiring local workers. According to Santosh Chandra, who heads Cairn's operations in the Cambay Basin in Gujarat, the reason the company has managed to maintain good relations in India is because "Cairn are seen as the guys who are really here for the long haul. They have re-invested every dollar they have made.".

Nevertheless, Cairn's exploration success is bringing with it a whole new set of challenges.

It has so far invested between $300m and $400m in Rajasthan and it will cost Cairn and its partner, ONGC, around $750m to bring Mangala into production as well as build a processing plant and power station. The field is expected to produce between 100,000 and 110,000 barrels a day by the time it is scheduled to come onstream in early 2008.

For all this to happen on time, Cairn and ONGC need to approve a field development plan by the end of this year. Key will be getting ONGC's sign-off on the plan, as well as some assurance from ONGC that it will build a pipeline to carry the crude oil from Mangala to the coast.

Raha says the pipeline is a priority for ONGC, not least because the company, which is still majority-owned by the government, plans to increase its own production from 1.1m barrels per day of oil and gas equivalent to more than 1.5m barrels per day by 2011.

Keeping the locals onside will also be crucial as the company's operations expand. Cairn has so far invested money in upgrading local infrastructure and supplying pumps and equipment to improve rural water supply.

Meanwhile for Cairn itself, a priority will also be to make sure that the entrepreneurial spirit that has defined the company until now does not get lost as it gets bigger and becomes a large-scale producer.

A possible turning point will come in three to four years' time, once Cairn's production hits 150,000 barrels per day. At an oil price of around $50 per barrel, that production will translate into $2bn worth of net cashflow for Cairn.

What it will do with that sort of money is a question that is already being pondered by Gammell. All options are still open but Gammell says one possibility could be a "mega-special dividend". Another would be to split the company into two separately listed companies, an exploration and a production stock.

He cautions, however, that for now, the focus is firmly on realising the value of Cairn's discoveries, as well as continuing to explore in other areas. The company has quietly built up a position in Nepal in recent years, a region that Watts believes could well turn into another lucrative oil and gas province.

Watts' enthusiasm for exploration not withstanding, there is one potential prospect in Cairn's acreage that may well have to remain out of bounds: underneath the Utarlai military airfield, just 55m from the border of Pakistan.

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