New ventures, old problems

What is the future scenario for your assets in Rajasthan? Could you also give us a brief overview of the flagship projects Cairn has been working on?
The gross hydrocarbon in place for us across assets is 7.8 billion boe with proved and probable reserve and resource base of 1.3 billion boe. About 18 months ago, we finished our exploration activity in Rajasthan. We drilled about 50 wells and did a full 3D seismic survey. Currently, we are in the process of putting the data together. It’s a very large block, more than 3,000 square kilometres. We have close to 600 operating and producing wells there.
We will put the data together to develop more drilling prospects in the future. Going by what we initially found in the exploration, it was largely tighter oil and tighter gas, which was not completely unexpected because we already found the bigger fields in Mangala Barmer Hill.
Our objective at this point is to work closely with anyone who has done a lot of work in shale, preferably from North American companies, to take [this asset] into production.
On the specific projects, initially we will take up four. One is on tight gas in RDG, which could be equal to about 250,000 boepd. The second and the third projects are related to enhanced recovery (EOR for Aishwariya and Bhagyam). Mangala is our biggest field, and we just executed one of the world’s largest EOR projects and it has been very successful. We want to replicate that in both Aishwariya and Bhagyam. The fourth project is our first big shot at the tight oil project in Barmer Hill.
We are pretty sure that these projects will drive the growth in near-to-medium term. We have already started engaging with EPC and drilling contractors.

How do you envisage monetising the finds and optimising production?
The US is a very different market because capital productivity tends to be much higher and they have made significant advancements in fracking technology that increases the yield. The initial productivity is quite high, especially when talking about gas.
The US also has a very robust and well developed services sector where you can call in rigs, fracking equipment or any other product or service that you want. If you want it tomorrow morning, it is there. Indian services sector is still developing. Therefore, the costs can be substantially higher.
I think we can go to other parts of the world, such as US, Canada, Dubai or Malaysia and source services from there. We are looking at brining in the technology from the Shale industry to monetise our tight oil and gas finds. We have also hired professionals with experience in unconventional resources to strengthen our focus on tight oil resources.
The important difference is that the big companies have been in India for a very long time and they know how the system works. It’s not just bringing in a rig and operating it. You have to understand the tectonic structures and how the legal structure works.
It is fairly time consuming unless the contract is large enough and long enough. There are only a few E&P players, such as ONGC and ourselves. It becomes very difficult for them to come and set up a base here on their own. If there were a lot of things to do, they would come and set it up, but operating just for two players is very difficult in terms of allocating the kind of resources that are required. This makes everything inefficient.
The discovered marginal fields round is expected to spur the demand for services and open up the services sector. The success of the marginal fields monetisation will lie in availability of competitive and technologically advanced services at reasonable costs.

How will you capitalise on these new ventures, given that the price of oil is still relatively low?
These are projects that we conceptualised with oil at USD 75. In the past one and a half years, we’ve made RDG and EOR projects viable even at USD 40. It’s more about productivity improvement and cost reduction through adoption of latest technology.
Should oil prices go higher, we can possibly extend the same to other tighter formations and extend the scope of the area. At this time, we just want to make sure we have commercial viability.
Hopefully, we will be among the first to come with a large capex project in this part of the world.
Superior initial well productivity and better characterisation has enabled us to enhance the expected gas recovery for RDG by 26% compared to the initial estimates. Phase – 1 is expected to increase gas production to 1.13-1.27 mcm (40-45 mcf) per day by the end of the 1H CY2017. Phase – 2 is expected to increase gas production upwards of 2.83 mcm (100 mcf) per day and condensate production to about 5,000 boepd.
In addition to the 30-35% recovery estimated from MBA fields through water-flood operations, the polymer flood program should provide a further recovery of 10-12%. The total of development and operating cost for Aishwariya EOR has been brought down by 21% from USD 19 per barrel to USD 15 per barrel over the last quarter. This has enabled improvement in IRR to 20% from 10% even while reducing Brent assumption from USD 45 per barrel to USD 40 per. Similarly, a 17% spend reduction for Bhagyam EOR from USD 18 per barrel to USD 15 per barrel has improved IRR to 15% from 10% with Brent assumption reduced from USD 45 per barrel to USD 40 per barrel.
Barmer Hill has significant exploration potential with hydrocarbons initially in place base of 1.4 billion boe and estimated ultimate recovery of 8-10%. For Aishwariya Barmer Hill, well completion cost for lateral wells was further reduced by over 30% to below USD 4.5 million per well surpassing the USD 4.5 million-5 million range indicated earlier. Cost savings from drilling and completion activities, and surface facility will drive a 15-20% reduction in the development cost of USD 300 million for an estimated ultimate recovery of 30 million barrels.

What challenges do you face in developing these tight oil and tight gas reserves?
The availability of the latest technology in this part of the world is a key challenge. We have been successful in sourcing and implementing it for our operations. Technology is quite functional across geographies. Usually the service providers have come from all over the world. We’ve had a lot of success in the tight gas project that we are doing in terms of fracking wells. We’ve seen a significant increase in initial well productivity to 226,560-283,200 cubic metres (8-10 mcf) per day or 1,500 boepd.
Let me also share that we had done 4D seismic in the Ravva field, in the state of Andhra Pradesh. It was the first of its kind in India and it really helped us because 4D adds another dimension. For that to happen, your seismic has to be perfect. The fourth dimension is time, and you can see where the hydrocarbons have moved and where they haven’t moved. It allows you to see where the oil is left with greater specificity.

What is your vision for your overseas assets?
In South Africa we are working with our partner PetroSA. We are awaiting a policy announcement to work out a long-term strategy.
We relinquished our assets in Sri Lanka, where we had found gas.

What are the benefits and rationale behind the upcoming merger with Vedanta?
The potential benefits from the merger are multi fold. Earnings will be de-risked through increased diversification for Cairn India shareholders, offering exposure to a larger, more resilient and more diversified natural resources player. It also provides access to Vedanta’s structurally low-cost and longer-life assets. The cash flows shall be more stable through the commodity and oil price cycle. The shareholders shall benefit from the potential re-rating of the group, increase in free float shares and trading liquidity.

Everyone talks about a shift toward a gas-based economy. How do you assess the potential of India’s gas market?
As I mentioned, we want to produce more gas. First, I think the government’s vision to create a gas-based economy is great because its cost is lower than both unconventional and crude.
Unconventionals and renewables are still expensive for the Indian market. Gas is cost-effective and a cleaner source of energy than crude oil. I think that the Prime Minister has done some great work in Gujarat, where the share of gas stands at around 24% of the energy mix. If you can do it in one place, we can do it in the whole country. It requires a lot of changes.
Mr. Pradhan is trying his best to get long-term gas supply. He’s done a great job. Enhanced gas infrastructure will give further impetus. We need pipelines, storage [facilities] and LNG terminals. It doesn’t matter if we import it or produce it. We can tie up with Russia or anywhere in the Middle East and import gas. Infrastructure will still be a big facilitator.
The recent decision of the GOI to provide viability gap funding /partial capital grant to GAIL for developing a pipeline project is a step in right direction. Such strategic and forward looking steps from the GOI would definitely improve the gas infrastructure in India.

What could be done to incentivise the creation of gas infrastructure?
The Prime Minister has a vision to increase gas penetration and move India to a gas based economy. I believe that gas infrastructure must be looked at as a separate industry and given infrastructure status. Funding of such projects needs to be made easier.
This development of infrastructure should also come from independent companies. The entire midstream sector has to develop. A cross-country grid needs to be created. One shouldn’t need to keep ordering LPG cylinders for cooking at home, there should be a pipeline connection to hook up to.
The gas infrastructure needs a different financing structure with a stable cashflow to reduce the cost of money. There are buyers and sellers, and either one will buy long-term capacity once you have a midstream player. When you are able to sell capacity, you can work with any bank in the world and get it financed much cheaper for a longer term. You are essentially taking out the risk.
It’s very important to look at development this way. If you are laying a water pipeline or electricity distribution network, no one is stopping you from laying a gas pipelines at the same time. You can also do it while you are laying roads. There are many options.

How do you evaluate the new Hydrocarbons and Licensing Exploration (HELP) policy?
I think it is a big fundamental step. The Ministry of Petroleum and Natural Gas wants to minimise its footprint. This regime will thus have minimal regulatory oversight. Lot of energy will be diverted to maximise the resource potential of the Nation. We’ve always believed in the country’s geology. It is going to create jobs and it is private-sector money.

What is Cairn’s strategy for the next three years?
The first and most important part is building reserves, which we are currently doing with all of these projects I have been talking about. Next is to ensure that these four flagship projects go into production in 18-24 months. We are confident that the introduction of the HELP policy and OALP together with liberalised gas pricing formula will be a benefit to our production in the years to come. Lastly, we believe that there is a lot of potential in the eastern part of India.

What would you say to international investors looking at joining the market in India?
I would say that India is a great place to invest, we’ve been in this country for 22 years. We have had a good run so far. We have created significant value for the Nation. We look forward to even more progressive decade.
India is politically quite stable and the returns are fairly decent. I am hopeful that the country will open up further. It would make a big difference if we had bigger players coming here to invest; it would make the country a lot more robust in its basic foundation.
If you look at Shell in Bangalore, for example, there was nothing like that few years back, but over the last 10 years you can see how much employment it created, how much transfer of skill happened. Overnight – and that means 5-10 years in the industry cycle – they were able to create a plethora of opportunities.

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