Cairn Seeks Oil Swaps to Circumvent Export Ban: Corporate India

Cairn India Ltd., the nation’s biggest onshore crude oil producer, is proposing swap deals in the commodity to help skirt the government’s ban on exports that yield higher margins.

Some Japanese utilities and Singapore-based refiners are interested in the high-wax crude extracted from Cairn’s fields in the northwestern state of Rajasthan, Chief Executive Officer P. Elango said in an interview. The company has sought India’s approval for a tripartite agreement that would replenish the exported volume with no loss to any of the parties including the government, he said.

Billionaire Anil Agarwal, who controls Cairn India, is seeking to increase the best profit margin among the biggest Asian oil companies as his metals and mining businesses founder in the South Asian country. Shipping to customers who are best equipped to process the low-sulfur crude may help the company command a premium versus a 15 percent discount on Brent prices it offers to local refiners, including Indian Oil Corp.

“In our case, what we are saying is not exports,” Elango said in New Delhi. “We are saying, let’s do a swap arrangement where this crude can go to another buyer” as some of them have much more value extraction potential of the oil, he said.

Cairn India, based in Gurgaon near New Delhi, has already sent a proposal to the government, which has been “received with an open mind,” Elango said. The three-way deal would essentially require Cairn India to flout India’s ban on crude oil exports, while its local customer makes up for the deficit by sourcing the commodity from an overseas supplier.

‘Open Mind’

R.C. Joshi, a spokesman at the oil ministry in New Delhi, declined to comment on the proposal.

India, which is struggling to contain a current-account deficit that reached a record high in the year to March 31, may not be convinced by the proposal, said Neelabh Sharma, an analyst at BOB Capital Markets Ltd. in Mumbai. Asia’s third-biggest oil consumer, which depends on imports to meet 80 percent of its energy requirements, would resist any move that may increase imports, he said.

“It’s going to be very difficult for Cairn to get approvals from the government,” Sharma said. “If allowed, it will mean more imports for India, which in turn will put more pressure on the rupee and the current account.”

India bought 184.8 million tons of crude oil from abroad in the year ended March 31 for $144.3 billion, which was 7.8 percent of the country’s gross domestic product.

Rupee’s Plunge

A widening current-account deficit sent the rupee tumbling to a record low in August and threatened to stoke inflation, prompting the central bank to raise borrowing costs twice in as many months even as the economy expanded at the slowest pace in a decade.

The rupee’s plunge also prompted policy makers to manage demand for dollars and the exchange rate by asking local refiners to buy the greenback from state-owned banks. This special facility ended two weeks ago after the rupee rose 12.6 percent from its record low.

While exports may benefit Cairn India and boost its profit margin, it may not help the country much, said Bhavesh Chauhan, a Mumbai-based analyst with Angel Broking Ltd.

“If the country doesn’t gain in the long-term, then the government may be hesitant to approve it,” he said.

Profit Margin

Cairn India’s profit surged 46 percent to 33.9 billion rupees ($556 million) in the three months ended Sept. 30, the fastest pace in three quarters. Its 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.

Shares of the company have risen 1.4 percent this year, compared with a 9.8 percent gain in the benchmark S&P BSE Sensex. They fell 0.5 percent to 323.45 rupees in Mumbai today.

Most Indian refineries are designed to process cheaper, high-sulfur crude, while that produced from the Rajasthan fields has low sulfur content. Currently, the government decides buyers for Cairn India’s crude from Rajasthan fields. Besides Indian Oil, the biggest government-controlled refiner, the crude is also sold to two non-state refiners -- Reliance Industries Ltd. and Essar Oil Ltd.

“The concept of oil security based on the principle that domestic crude should be used domestically is fairly outdated because every crude has got a type of grade, and it should find the home where it can extract the best value,” Elango said.

Operating Cost

Cairn India is also seeking to sell its oil overseas at a better price at a time when the company is undertaking an “enhanced oil recovery project” in Rajasthan, spending $560 million to produce from harder-to-extract pockets.

The project will yield an additional 100 million barrels from the block, which has proven reserves of 1 billion barrels, and will add at least $7 a barrel to costs from next year. At present, 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.

Cairn India also has a mission to double its production target from Rajasthan fields to 400,000 barrels a day. It plans to spend $3 billion in three years to raise output, according to an Oct. 22 statement.

New Delhi-based Oil & Natural Gas Corp., India’s biggest explorer, owns 30 percent of the Rajasthan block. Cairn India, which holds the rest and has about $3 billion of cash, is critical to owner Agarwal at a time when his metals earnings at Sesa Sterlite Ltd. are languishing due to mining restrictions and a ban on iron ore exports from the western state of Goa.

Faced with the setbacks, Agarwal, whose net worth is $2.7 billion, is banking on India’s energy demand, projected to increase 14 percent in the five years to 2015.

Elango said higher realization for Rajasthan crude will benefit the government as part of the revenue from the sale of crude goes back to the government.

“We are explaining to the government that this is good for the country and net-net we will do better,” Elango said. “We need to work out the details, and that’s my next target.”

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