Cairn- Interview: Exploring Growth Avenues

From $6 billion in 2006 to $14 billion today, Cairn India’s valuation has gone up strongly. But the road had been full of hurdles. The company’s Executive Director & CFO Indrajit Banerjee talks about the company’s future growth plans and the challenges of the past in a telephonic interview with ETIG’s Ramkrishna Kashelkar. Excerpts:

What were the key challenges involved in executing the Rajasthan project?
Developing the Rajasthan field in the middle of desert was an enormous task. In 2007, it was one of largest onshore developments globally. And implementing it, while balancing out various uncertainties, was a huge challenge for the management. We had several key regulatory issues that lacked clarity. There was total uncertainty on evacuation of oil. On top of it, the project cost started soaring. Then there was the economic turmoil, credit crunch and crash in oil prices that created hurdles for fund raising. All this had to be considered while devising the best exploration and development methods. A lot of efforts went into tackling these issues. We spent a lot of time explaining the necessity to set up evacuation pipeline to the Gujarat coast and include its cost in field development plan to the government. With our JV partner ONGC firmly by our side, we managed to get the permission. We could have decided to wait for full clarity on all these issues before risking our capital. However, it was a conscious decision to go ahead. Importantly, we kept all our stakeholders informed of what we were doing. Finally, the efforts paid off.

How were your experiences in arrangement of funding?
The IPO had left us with cash of around $600 million, while there was $850 million debt facility contracted before the IPO. However, further funding became necessary as our project cost went up. Firstly, the global spurt in oil exploration increased the cost of commodities and oilfield services. And subsequently, the scope of the project increased to include the 690-km pre-heated pipeline to evacuate crude oil. By the time we felt the need for further funding, the world had entered the financial crunch and global banks were unwilling to lend. Indian banks, which were used to security-based lending, were not accustomed that time to fund the development of E&P assets. Even interest rates were going up. And this was the time our project was progressing at a ferocious speed and the pipeline had to be built up. The first thing we did was to relook at the financing options. In April 2008, we got an opportunity to raise $625 million by placing equity with a couple of long-term investors — a Singapore-based fund and Malaysia’s Petronas. This gave us a breather. At the same time, we optimized our capex plans to prioritise only that capex, which was absolutely essential to commence oil production. The priority was to aim for oil production at the earliest and meet our 2009 target. For example, rather than building all our processing trains simultaneously, we focused on building the first 30,000 bpd processing train, which was small but cheaper and quicker. We started selling oil since August 2009 by trucking even at high cost. This opened the tap of cashflows. By May 2010, when our pipeline partially commenced operations, we had sold nearly 6 million barrels of oil.

What hurdles did you face while raising debt from domestic banks?
It was a rare occasion of reserve based lending of such a large scale was being tied up. The main asset we have was oil in the ground. However, Indian banks then were not ready to accept that as security. We had to create a security, which was acceptable to them. Finally, a consortium of banks led by SBI took an extremely proactive view and accepted our participating interest in Rajasthan field as security. At that time, this was a novel thing in India. We raised 4,000 crore of debt from the consortium and another $750 million loan from Standard Chartered Bank in October 2009. We replaced earlier loan arrangement with this.

What has been Cairn’s capex on Rajasthan project so far? What is the planned capex for the next couple of years?
We have already spent nearly $3 billion on Rajasthan fields so far and plan to spend another $2 billion in 2010 and 2011 together. This will take care of our entire planned development work at the Rajasthan field to reach the plateau production level of 175,000 bpd. The capex, thereafter, will depend on lot many factors such as success of our EOR pilot, further exploratory successes and the government’s nods. Considering the growing cashflows from oil sales, we are well funded to see us through our current capex cycle. In fact, we may not need the entire $1.6-billion debt line arranged last October. These funding arrangements were done in times of uncertainty and with crude oil assumptions at much lower level than what they are now.

What are the challenges before the company in future? Where will the future growth come from?
Immediate challenges for us are reaching the plateau of 175,000 bpd production as early as possible. We are already at 125,000 bpd and Bhagyam and Aishwarya fields need to be operationalised. We have a vision to reach a production level of 240,000 bpd from the Rajasthan field. This will involve implementing enhanced oil recovery (EOR) techniques, exploiting oil reserves in the Barmer Hill formation and developing other smaller discoveries. We are taking all stakeholders with us to meet this vision.Similarly, we have all along maintained ourselves as low-cost efficient producer.
At Ravva and Cambay offshore fields, the direct production cost is around $2-2.5 per barrel, which is comparable to most efficient producers in the world. For Rajasthan field also, we need to achieve this distinction. During the quarter ended June 2010, this stood around $4 against our desired target of $3.5. With the production increasing, the average cost should come down.Future growth of the company will come from our ability to make the most out of Rajasthan field, where further exploration work is continuing. Our other exploration blocks will also provide another growth avenue. For example, we had a discovery in our KG basin block recently. Exploratory drilling in other couple of blocks is set to begin soon.

How do you view the proposed change in the promoter group of the company?
As this was a decision at the shareowners’ level, Cairn India had no role to play in this deal whatsoever. However, we believe this is a positive development particularly for retail shareholders. Vedanta’s willingness to acquire Cairn India and the price they are paying for it, are actually a great endorsement to the quality of our assets, the management capabilities and future growth prospects. As for the management, we are as focused on the company’s growth and committed to value creation as we ever were.