Sunday, November 10, 2013

‘Our interest in gas is re-emerging’

Private sector oil and gas explorer Cairn India, which accounts for about 25 per cent of India's oil production, has embarked on a $3 billion capex plan involving an aggressive exploration and appraisal programme. In this interview with The Hindu, Chief Executive Officer P. Elango (51), a 26-year veteran of the oil and gas sector, discusses the company's growth plans and says that he is not averse to acquisitions of companies that have both exploration and production potential.

You're coming off an excellent second quarter. How much of it was driven by high oil prices combined with a depreciating rupee?

Yes, strong crude oil prices and rupee depreciation did help us but we were able to show an overall increase in production from all the three fields.

Ultimately, everything is driven by volumes for us, and on the volumes front, we had an excellent quarter. We began this journey of producing oil almost 20 years back with just 3,000 barrels from the Ravva field. From that to a record 2,13,000 barrels of oil per day (bopd) in the last quarter is a remarkable thing for us. And, we are hoping to exit this financial year with 2,25,000 bopd. We have been able to consistently deliver on volume growth in both oil and gas from all the three fields.

We are now engaged in a 'high-risk-high-value' exploration programme in Ravva. To be able to explore again in a 17-year-old field just goes to show that as technology changes, we can take a re-look at old data to produce more oil and gas.

You are sitting on a cash pile of over $3 billion, and you have spoken of your desire to grow through organic and inorganic means. Are you in the hunt for acquisitions?

We are extremely happy to be sitting on such cash, and in our business, it is all about generating surpluses only to reinvest. Our first priority is Rajasthan. And, this cash pile gives us tremendous flexibility to invest there.

The challenges in Rajasthan are that we were not allowed to continue exploration in a producing field as per the interpretation of the Production Sharing Contract.

There was a breakthrough in February 2013 when the government allowed us to explore in a producing field. We then started exploring the Barmer basin; we drilled 6 wells. In four of which, we encountered oil/gas. We made one discovery for which we have filed for commerciality. Initial indications are good.

So, the first priority is to deploy the capital required in furthering our business in Rajasthan and other Indian blocks for which we are looking at a $3 billion investment over the next 3 years. Eighty per cent of this investment will be in Rajasthan. The second option is looking for growth outside India, both organic and inorganic. We've made a small beginning in Sri Lanka and South Africa on the organic side. We will look at inorganic opportunities too though not in the immediate future.

On the inorganic side, would you be looking at acquiring blocks or companies?

It will be companies that have both exploration and production potential. We are not weighing any options right now though.

What will be the impact on your business when the Barmer-Salaya pipeline extension to Bhogat is completed?

First, we always wanted the Rajasthan crude to not be land-locked. A crude oil field has to have a coastal face if it has to get the real value.

Secondly, we want to diversify our source of buyers to ensure that there is healthy competitive pressure to get right value for the crude. Though purely on the volume perspective, our three current buyers can take all the volume we produce. We want to ensure that we have more sources that can get access to this field. The Government would also like to allocate this crude to some of the coastal refineries in the country such as MRPL, HPCL etc.

Meanwhile, we have been toying with the idea of swap agreement. We are presenting this case not only as a company but country as a whole. India imports $150 billion worth of crude oil.

All the domestically produced crude oil is being used by the domestic refineries. But in each type of crude oil, you can extract different value for it. So, such crude oil should go where maximum value can be extracted. In the case of Indian refineries, some of them were designed to handle domestically produced crude oil only, and they have been configured to process the cheapest crude oil available.

Can you elaborate on the swap agreement you proposed?

It will be a tripartite agreement between our Rajasthan JV, a government chosen public sector refinery (in this case, IOC) as a canalising agency, and a third party who would be able to supply the necessary crude oil required in the domestic market. We can get into swap agreement under which some volume of our Barmer crude oil goes to the international market where it can get better price. The third party gets access to low-sulphur crude and can sell it at a premium in the international market, while the equivalent quantum of crude oil could be imported through the third party. On a pilot basis, we have proposed this, and this will not involve reducing volume to any of our current buyers. Ultimate platform to test the value of the crude oil is international market.

In this deal, there is additional premium Barmer crude will get and that would be shared with IOC. The first priority is to find whether there are buyers who can pay higher price. In a normal case, it will be a direct export but it is not allowed by the government. Since India continues to be an importer of oil, this swap deal will benefit the country as a whole. So, it will be beneficial to the government even if it fetches a dollar higher.

What are your plans for the KG Basin shallow waters block?

We've been in the east cost since 1994, and the Ravva field has produced more than 250 million barrels of oil over the last 18 years.

So far, we've been producing from the younger rocks but there is a layer of older rock deeper than this. These rocks are known for high pressure and temperature.

We studied this prospect, and have found the data interesting enough to drill an exploration well. This one well will cost the joint venture about Rs.400 crore. Depending on the results, we may choose to drill one more.

Second, we did a 4D seismic survey in Ravva to see how much of the oil has been produced. It showed us some bypassed oil in the field. We quantified the bypassed oil, and have now decided that in the current environment, it is economical to target this. We've got the required government approvals.

The interesting part is that the Ravva field will again see drilling activity for the next 6-7 months at least.

Meanwhile, we've got the Defence clearance for the KG 0S-9 block where we can work on 65 per cent of the area. It is owned by us fully, and we'll be investing about Rs.500 crore in the block over the next 2-3 years. We also have the Nagayalanka onshore block in AP where we initially discovered oil and gas but to get it out we need to follow processes similar to producing shale gas. We will be drilling a well now after which we hope to file declaration of commerciality before the end of this financial year.

What is your take on gas pricing?

Our interest in gas is re-emerging. In Rajasthan, after our initial exploration, we found some good gas prospects. We had also discovered some volume, and that was directed to internal consumption. After seeing the survey results, we thought we will be able find out gas resources, and started commercialising our field in March 2013 supplying to a fertilizer company in Gujarat using the existing pipeline.

Now potential for gas is emerging. We were keen it should get right price and in this context, the recommendations of Rangarajan Committee is a good step forward as it is important for the government to move towards market-determined prices. People in India don't realize the huge benefits of using gas in the place of oil. If India is able to import same quantum of molecules in the form of gas instead of oil, it will result in savings of 30-35 per cent in import bill, i.e., 30-35 per cent savings on $150 billion is a quite a large sum.
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