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Interview

with Rahul Dhir, Managing Director, Cairn India

03.12.2010 / Energyboardroom

Lately, some issues have been raised about India’s capacity to attract international investors. But even so, Cairn India stands as one of the country’s leading upstream private investor. Looking back, do you consider the strategy of putting most of your eggs in one basket to be the right one?

Cairn India origins in the country date back to 16 years ago, when our predecessor company had a market capitalization of less than $100 million at the time – today, we are over $14 billion. All this value creation is attributed to our success in India, a country that has offered us a tremendous value creation opportunity in its upstream sector. The second driver of this success has been Cairn India’s very consistent investment – up to now we have invested more than $4 billion in our projects, having a comprehensive understanding of the local opportunities.

Cairn India spent a considerable amount of time and effort in drilling exploration wells; close to 200 wells across nine sedimentary basins, nearly a third of India’s basins, were covered through active exploration. Then we backed it up with important investments in development, both in offshore and onshore fields. Therefore, Cairn’s experience has frankly been very positive in India and it was definitely worth the effort.

However, when we look at the world’s top ten oil majors we don’t see any of them investing considerably in India’s upstream sector. Why so?

Based on our success, it becomes hard for us to imagine the reasons why the world’s majors have not invested in India. My sense is that people still don’t understand India’s full potential; about 80% of our sedimentary basins are not as well explored as elsewhere, so people have been very cautious about coming in. But on the upper side, the fiscal terms are very well understood; the licensing regime is very transparent; India has one of the fastest growing markets in the world; there is a very comprehensive downstream infrastructure with India being a net exporter of refined products; so there is no shortage of access to oil and gas, with the demand for gas being constrained only by supply bottlenecks. The government is very keen on overcoming these challenges by, for instance, giving open access to the pipelines. Therefore, it is a bit of a mystery to us to understand why some majors are not investing heavily in India’s upstream sector.

Based on Cairn India results, there doesn’t seem to be many reasons for concern to other foreign investors: your Q2 revenues were up by more than 220% QoQ basis, reaching $577 million, a ten fold increase over Q2 FY 2009-10, mainly driven by Rajasthan production. How are you adapting the company’s strategy to cope with so much growth and where will your future growth come from?

Q2 results were the combination of several years of hard work both in exploration and appraisal, development drilling, and very comprehensive midstream infrastructure. As I mentioned, India has a big refining capacity, but its access is very constrained– so it was a challenge to take our production from the field to the refineries. In order to do so, Cairn India built what is now the longest continuously heated and insulated pipeline in the world, linking our Northern Rajasthan fields to India’s refining network. This has been instrumental to quickly convert our production into cash-flow.

Cairn India as it is today was created in 2006, its main strategic driver was the production from relatively mature offshore assets, so our emphasis was mainly on maximizing recovery and on reducing production costs, with Ravva and CB/OS-2 fields being very successful examples. The second step has been to link the Northern Rajasthan fields to the main markets to initiate production and we have certainly been very successful in this task as well.

The third big strategic driver for Cairn India’s growth, in Rajasthan in particular, has been to further explore this highly prospective basin, covering around 3200 Km2 in the most prospective part of it. Since Cairn India started to explore this basin, we have seen a number of hydrocarbon discoveries, so far twenty-five, and the resource potential that we established is very significant. Our three main fields Mangala, Bhagyam and Aishwariya have established recoverable resources of 694 million barrels. But what we have seen, in those three fields alone, is a probable increase of the total volume by 300 million barrels with application of enhanced oil recovery (EOR) techniques. On top of that, the Barmer basin has a host of smaller fields and unconventional oil potential that could probably add another 150 million plus barrels; and there is further exploration potential, which could add another 250 million barrels – so Cairn India could grow the recoverable resource from this basin over the next few years by applying intelligent application of proven technologies. Therefore, Cairn India’s near-term focus for the next couple of years is to maximize the potential from Rajasthan.

Based on the experience that we have in operating and developing the offshore fields; in developing the Rajasthan fields; in building the unique pipeline infrastructure around; and in maximizing recoveries Cairn India is, on a global context, in a very unique position as a company with very strong execution skills and technology. Our longer-term vision is to leverage these skills both at home and abroad. We have a very strong balance sheet and proven track record, so we feel that Cairn India will be unconstrained in terms of future growth opportunities.

How Cairn India managed to overcome the major technical challenges to explore these fields – especially since you had no previous expertise in activates of this magnitude – such as building the world’s longest continuously heated and insulated pipeline, the Mangala Development Pipeline (MDP)?

The story of Cairn India is very interesting; we have gone through two rounds of ownership changes already. We started out as an Australian company, then we became a Scottish company, and then in 2007 we finally became an Indian company. Therefore, we’ve gone through multiple rounds of changes. The constant is that there is a real culture for innovation within Cairn.

If you look back, we started as an operator of an offshore field in Ravva, then we started exploring in the west coast and we discovered natural gas. Cairn, as an organization, had never really developed a gas field before, so we acquired the capabilities to do that. In the same way, we were one of the first companies to undertake deep-water exploration in India. Reliance, of course, has done a transformational work with the development of KG D-6 block, but the adjacent block to it, which ONGC is developing now, block KG-DWN-98/2, was the first deepwater exploration success in India, and it was explored by Cairn. Again, we had never done deepwater exploration before either.

After the deepwater discovery, we sold out 90% of the participation in the field to ONGC and employed the capital in Rajasthan, which turned out to be quite an interesting move. But then again Cairn as an organization had never done any onshore developments before, so we had to gear ourselves up in order to do that. Then we were faced with the challenge of taking these resources to the market hundreds of miles away, so Cairn India transformed itself in a company that could also do big pipeline projects.

Therefore, the underlying philosophy and constant in Cairn India has been to get the best talent we can from anywhere in the world and put it in practice right away – somewhat unique for an Indian company, as we have a very diverse technical and leadership team. Cairn has never been shy about sourcing the right people. For instance, in our leadership team we have eight different nationalities with very diverse backgrounds. The other constant Cairn India has maintained since its origins has been the courage to innovate. For instance, when we were faced with the issue of transporting Rajasthan waxy crude to far away markets we looked at about thirteen different technical concepts before we got to the one we implemented. Cairn has a basic DNA for innovation. We have just finished drilling the pilot wells for the EOR Mangala project now in a relatively early stage. When most of the industry only thinks of that in the field’s late life, we think ahead, allowing Cairn India to cut future production costs and maximize production.

When Cairn India started doing the development work for the Mangala field, we realized that there were a lot of opportunities from a reservoir optimization point of view. I believe this was the first time ever that reservoir optimization works were done within the first year of production from a field. The company actually just started the EOR studies to define their future development parameters. We are looking to start applying the EOR plan by probably 2013 after receiving necessary approvals. That’s symptomatic of how Cairn India does business.

Regarding the exploration of mature and marginal fields, do you believe that the Indian Government is giving the right incentives to promote this segment of the industry?

India has a well established fiscal structure with the production sharing contracts (PSCs), which works quite well. But the problem related to marginal fields in India is that in many cases they are kept unexplored because the PSUs hold these assets without obligations to explore them. In this sense, India is losing a big opportunity. If you go back to the first round of privatizations in the early 1990s, where three sets of fields were privatized, their successes have been phenomenal, with the PMT, operated by BG, and Ravva, operated by Cairn India, as very good examples of how fields that were considered to be marginal still held a great unexplored potential.

So I would have thought that, given the substantial production of those fields, the government would actually launch a comprehensive review of its marginal fields portfolio and would come up with a program for bringing in private innovation and capital into this segment, but this has not happened yet. For instance, in Ravva Cairn has worked under the same PSC framework but since it was given the chance to explore this field, it brought much needed investments and increased the production of this field many-fold. This is why I’m not sure that you need a new framework per se, what we do need is a review of the marginal fields that are existing within the government control or the ONGC control to see which ones would merit from private investment and innovation. The previous experiments worked quite well, so you would expect more to come.

Just to give you an idea, in Ravva Cairn India paid the government more than $4 billion as profit petroleum. It has been by all measures a major success. The government has been successful in establishing a framework in the licensing regime for exploration, so why not to do the same with other marginal fields where perhaps NOCs are not focusing or investing.

You have mentioned Cairn India’s openness towards local and foreign talent. As the world is looking at India as a HR powerhouse, how is Cairn taking advantage of the local expertise to its up-most?

About five or six years ago we recognized that there is a general demographic issue in the oil and gas industry with not enough young people, even in India, coming to our sector. So Cairn India took a very conscious decision that we would proactively change the company’s demography, targeting campus recruitments in a planned manner.

Thanks to these efforts, today Cairn India median age is 34, very low for our industry. About a third of our teams are less than 30 years old. Nationwide, there is a demographical advantage in India, where we have a lot more focus in education on technical disciplines than in places such as Europe and USA. Cairn India is taking advantage of that by proactively reaching out to the leading education institutes to say that this is a great career for men and women; and we have been very active in recruiting women engineers and geologists, trying to attract them also to our field operations. Another reason why Cairn India has been successful to attract young people to the industry is that we offer advantages to young professionals such as the international scholar program where people who complete five years with us have the option to go overseas for masters in geotechnical disciplines – all of them came back to Cairn India afterwards. Not to mention the tutoring programs we have where our more experienced workers pass on their hard-earned expertise to the new generations.

This industry is also historically very conservative in terms of giving responsibilities to young people. The conventional wisdom is that, since you’re dealing with heavy equipments, it is of high risk to hand them to young professionals. We at Cairn India believe that, with the right training, experience, and exposure, young people can do as well, if not better, than their older folks. Cairn India makes a very conscious effort to go out in search of the best talent and, once they are part of our team, build them up even more.

With so many changes and transformations going on in the Indian Oil & Gas sector, what role will Cairn India play in the local industry in the coming years?

We see Cairn India as a critical factor in providing energy security for India – this is our primary mission. We consider ourselves fortunate that we have a resource base that is really outstanding. So, in the very short and medium term, Cairn India’s focus is to apply the latest technologies to secure the exploration of our resources to its fullest potential, but also to be able to connect India to other international markets, since India’s energy demand will increase considerably in the coming decades. This is a critical factor in ensuring the energy security that India so greatly needs, and Cairn India has constantly contributed to that by not only exploring and producing some of India’s major fields, we have also built the necessary infrastructure for the country to take the best advantage of it.

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