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Billionaire Seeks to Double Cairn Oil Output: Corporate India

Cairn India Crude Storage Tank
A company handout photograph shows fabrication work in progress inside a Cairn India Ltd. crude storage tank in Barmer, India. Source Cairn India Ltd. via Bloomberg

Billionaire Anil Agarwal has asked Cairn India Ltd., which enjoys the highest profit margin among the top Asian oil companies, to explore ways to double output as his mining business in the South Asian nation founders.

Cairn India “has a mission” to accelerate its target to 400,000 barrels a day from about 200,000 barrels, Chief Executive Officer P. Elango said. The company, which possesses about $3 billion of cash, plans to drill 450 new wells in its fields in the northwestern state of Rajasthan, he said.

“The vision is to double production,” Elango said in an interview at his office in New Delhi, without giving a timeline and budget for the plan. “It’ll be about building on the exploration success and deploying technology to develop it faster. We’ve removed all hurdles in the eco-system and the right policy framework is in place.”

Agarwal, who bought Cairn India in 2011, is depending on higher returns from the $8.7 billion acquisition to counter a slump in his metals businesses after environmental challenges in India halted his iron ore mines and impeded plans for an integrated aluminum complex. Cairn India is boosting spending to extract from hard-to-access pockets and drill more wells in the Rajasthan field after winning state approval this year.

“The basin has the potential,” said P. Phani Sekhar, a Mumbai-based fund manager at Angel Broking Ltd., which owns Cairn India shares. “It’s a question of digging more wells and having the infrastructure in place. But you can’t increase the output as your wish, you need government approvals.”

More Wells

Cairn India, which will spend $918 million next month to buy back 171 million shares and reduce its equity capital by about 8.9 percent, fell 0.6 percent to 318.60 rupees as of 11:31 a.m. in Mumbai trading. The stock is little changed this year, lagging the 7.5 percent gain in the key S&P BSE Sensex.

Cairn India plans to spend $3 billion in three years to raise output, according to an Oct. 22 statement. In January 2013, the government approved the company’s plan to raise production to a peak rate of 300,000 barrels a day and next month allowed it to explore for new oil deposits in Rajasthan.

The company is spending $560 million in a so-called enhanced oil recovery project to produce from harder-to-extract pockets, Elango said. The project, planned to start in 2014, will yield an additional 100 million barrels from the block, which has proven reserves of 1 billion barrels.

Transport Cost

Cairn India’s operating expenses in Rajasthan, including the cost of transporting crude to the coast for sale to refineries, is about $3 a barrel, Elango said. The enhanced oil recovery project will add at least $7 a barrel to costs.

The Rajasthan field produces crude oil that has high wax content and solidifies at normal temperatures. Cairn has built a 600-kilometer (373-mile) heated pipeline from its oilfield to the western coast to supply refineries including those run by Reliance Industries Ltd. and Essar Oil Ltd. The line can transport as much as 300,000 barrels a day of crude from the area with the addition of pumps and storage, Elango said.

Agarwal said last week he regrets investing 500 billion rupees ($8 billion) on the aluminum complex in the eastern Indian state of Odisha. His Sesa Sterlite Ltd. is still waiting to light its 1.25 million ton smelter for want of bauxite, which it is unable to secure due to local opposition.

Cairn India’s profit surged 46 percent to 33.9 billion rupees in the three months ended Sept. 30, the fastest pace in three quarters. Profit margin, or net income as a percentage of sales, was 68.8 percent in the year ended March 31, the highest among Asian energy companies with a market value of at least $5 billion.

Profit Margin

Perth-based Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, has a profit margin of 30.6 percent, while New Delhi-based and Oil & Natural Gas Corp., India’s biggest explorer, has 14.9 percent. ONGC owns 30 percent of the Rajasthan block, with Cairn India holding the remaining stake.

“Two things are important, you need to keep your volumes up, and you have to keep your costs down,” Elango said. “We should build a company that can do at least 1 percent more recovery than anybody else.”

Explorers around the world typically recover about 35 percent of the oil from reservoirs and increasing the average recovery to 50 percent would yield an additional 1 trillion barrels, Elango said. The world had 1.7 trillion barrels of proven reserves at the end of 2012, according to BP Plc data.

Enhanced Recovery

The enhanced oil recovery project will help Cairn India increase output to as much as 50 percent from 35 percent, Elango said.

“Agarwal is a visionary man and a natural optimist, so he would always look at the larger picture,” said Jigar A. Shah, Mumbai-based head of research at Kim Eng Securities Pvt, which has a “buy” rating on Cairn India with a target price of 449 rupees. “Execution of the plan is another challenge.”

Agarwal’s Vedanta Resources Plc and unit Sesa Goa Ltd. completed buying a 59 percent stake in Cairn India from Cairn Energy Plc and other shareholders in December 2011. He combined India’s biggest copper producer Sterlite Industries (India) Ltd. iron-ore miner Sesa in August and transferred ownership of Cairn India to the merged entity, Sesa Sterlite.

“Agarwal acquired Cairn obviously to pump more oil,” Angel’s Phani Sekhar said. “Whether he’ll be able to discover more is a matter of destiny, but he isn’t one who will give up easily. He will certainly go ahead and do everything.”

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