CAIRN INDIA: Investors can stay invested

CAIRN India’s latest move to upgrade its reserve base has boosted investor sentiment, with its scrip gaining nearly 4% in a flat market. The company will now be able to extend its peak production level by 37%, compared to its earlier target of 175,000 barrels of oil per day (bopd). Higher peak production rate is linked to both finding new reserves and extracting more from the existing reserves. Cairn is using superior technology, both in mapping the geologies as well as in production to achieve this enhanced target. The crude oil in Rajasthan being highly viscous less than 10% of reserves can come out on its own, which is known as primary recovery. Further production will be possible by injecting water into reservoir, which is known as the secondary recovery and can take the recovery factor beyond 20%. The company plans to introduce enhanced oil recovery techniques (EORs) — chemical, polymer and alkali-surfactant-polymer flooding — earlier than usual to boost the recovery factor above 45%. The proposed increase in production would take at least a couple of years to materialise and necessitate further investments and government approvals. However, funding these additional investments should pose no problems for the company, with production from current facilities ramping up.
Cairn’s discoveries in Rajasthan now hold in-place reserves of close to 4 billion barrels of oil — a 10% upgrade from earlier estimates. In addition, it’s hopeful of finding reserves of another 2.5 billion barrels of oil, going ahead.
At present, the company’s production rate remains a depressed 20,000 bopd, while it has entered into agreements with four domestic refiners to supply 143,000 bopd. The delay in completion of its 670-km pipeline proves to be its main bottleneck.
This heated and heavily-insulated pipeline was earlier scheduled to be commissioned by the end of 2009, but is now expected to become functional only in the second quarter of 2010. The company that is currently trucking its output to the Kandla port will then be able to ramp up volumes to 125,000 bopd, to be further raised to 175,000 bopd by mid-2011. Investors should continue to stay invested in the company for the next few years to derive the full benefit of the company’s investments so far.