Big Interview: The Road Ahead

The journey of Cairn Oil and Gas, now a Vedanta company, is nothing short of spectacular. From making the country’s biggest oil discovery in more than two decades in Mangala fields of Rajasthan block in 2004, Cairn’s operations have grown at a rapid pace with the company becoming the country’s largest oil producer after ONGC with a share of over 25 per cent in domestic crude production. Not getting complacent with Rajasthan oil, still flowing at brisk pace, Cairn now plans to treble its oil production to 5,00,000 barrels of oil equivalent per day (boepd) over the next few years. It is thus aggressively participating in any opportunity available in the country to expand its exploration acreages. It recently won 41 out of the 55 hydrocarbon blocks offered under the Open Acreage Licensing Policy (OALP) that will help the company make Rajasthan one of the biggest onland oil producing hubs globally. Talking to Subhash Narayan of Financial Chronicle, Cairn Oil and Gas CEO Sudhir Mathur talks about the road ahead in a challenging oil market where operational dynamics are changing constantly. Excerpts:
Cairn’s success in striking oil in Barmer has become a folklore now. What’s next?

We continue to invest and are putting money to the tune of $2.5 billion in Rajasthan in multiple projects that will give us a volume increase of 150 million barrels in tide oil and gas. A lot of investment is going for enhancing oil recovery from the Rajasthan fields by using polymer techniques. After seeing the success of Mangala polymer project, we are extending it to out other two producing fields - Bhagyam and Aishwariya. We are also employing alkaline surfactant polymer (ASP) technique in all the three fields as part of our investment in enhanced oil recovery programmes. Besides, the crude handling capacity at Mangala Processing Terminal (MPT) is also being raised from about 880,000 barrels a day to 1.3 billion barrels. Moreover, fresh exploration has been initiated in our existing oil and gas blocks in Rajasthan and KG basin.

What will be the total investment in all your projects given that you have also bagged 41 of the 55 oil and gas blocks on offer under the new Open Acreage Licencing Policy (OALP) recently?

We have $4 billion capex plan in place. Till now we have done $2.3 billion worth of contracts. The total investment looks like $2.5 billion as of now. OALP investments will need to be worked out separately and numbers would be known after talking to vendor partners.

Why oil and gas blocks auctions under OALP attracted only Cairn and ONGC? What about other players, global investors?

Firstly, let me tell you that the government has done a great job by opening up exploration for all forms of hydrocarbons under OALP. It would have been great if the new exploration policy attracted global investors as well. Presence of large number of players helps the industry to grow and in turn benefits everyone. Though the policy is largely investment friendly, I feel that it should also have allowed export of crude. The biggest oil producers of the world come from open market economies and they expect to see that in other countries as well.

Is restriction on crude oil exports an impediment for attracting investment in country’s oil and gas sector?

Well much more than that, I feel that greater contract sanctity and availability of a trading platform are more important factors for attracting investors.  Contract sanctity is not what is written in the contract but the way it is practised. At the end of the day someone is bringing in money and the money does not belong only to individuals but also to shareholders.

Are you indicating that there is a need for a trading platform in oil on the lines of one being thought for gas?

Absolutely. The government is pushing gas consumption aggressively because it is a clean fuel. But development of gas market will take time to evolve. Also, gas is not easy to transport. Besides, there is a huge cost associated with liquefaction etc. But when you look at oil, India is a huge consumer already. So why do people need to go to any other part of the world to trade. Whether its incoming or outgoing oil operations, we should be creating a market for that in our own country. Though we have limited players, the volume is huge. So why go to Singapore to trade and hedge. Do it here. If you have a metals exchange, why not create a platform within the multi-commodity exchange (MCX) for trading of crude. And the time couldn’t have be more opportune with former petroleum secretary Saurabh Chandra now heading MCX.

Your next round of investment in Barmer would also result in gas flowing out from policies with respect gas conductive for companies?

In all the new policies, pricing freedom has been given to the operators including in the DSF (discovered small field) round. So, it’s not controlled pricing. So, it should be a very viable business.

You have cited certain problems in the policies, need for maintaining sanctity of contracts, but still you have been the biggest participant in the OALP round and you remain positive about the prospects in India. Why?

I think the new OALP is a much better written policy. Even under the previous policy regime, we signed a 25-year contract with the government. And we had just couple of issues. Two issues in 25 years in not so bad. The process of auction now is completely online. This removes any ambiguity about interpretation.

What is the position of the company with regard to extension of contract period for Barmer block that is ending in 2020?

Well the matter is sub-judice so it would not be correct on my part to comment on it. But that is not impacting our investment commitment. We have already signed the contracts, and we have been given the freedom to continue investing in the Rajasthan block by our chairman. Extension will happen.

What is your take on the new enhanced oil recovery or EOR policy?

I feel that the government has put in the right fiscal terms on EoR.  This will help companies to enhance country’s oil production rather than leaving the oil in the ground. EoR is a technology to extract it and more importantly bring the production forward. We welcome the cabinet’s decision to approve the policy framework on EOR and incentivise companies investing in ER/IR techniques to increase production. This policy will attract much-needed investments, and usher in a wave of best-in-class technologies to improve India’s hydrocarbons recovery.

The global oil market has been volatile with prices climbing up once again. How do you see oil markets moving from here?

Difficult to answer but I think very little spare oil capacity left in the world. It’s not that Saudis will turn the tap and oil will start flowing. Total spare capacity globally is only about a million or million-and-half barrels, which is very little. Other than that, I think two things impacting the markets; one is the US sanctions on Iran, I don’t know how that will go. If sanctions get implemented, a substantial portion of oil will go out of the market. This will pose serious challenge to crude prices. Plus, there is shortage of infrastructure. Production capability is there but there is no pipeline. So, till the time these issues remain, I think that crude prices would remain firm. Most producing and consuming nations find that they can live with crude prices in the range of $65-75 a barrel. But if there is a shortage, it would have to go up.

The US Shale oil became a balancing factor in the oil market during last spurt. But this time it has not happened. Why?

The US got about 10 billion barrels from shale and it made the country a great producer from being a big consuming nation. But US still faces bottleneck in the form of lack of adequate pipeline network to carry oil from fields to the markets. So, shale is getting expensive. The best possible shale delivery cost from a good basin in US is around $ 40-45 a barrel.

Government is pushing for mergers like HPCL with ONGC to allow create oil behemoths. Does it make sense for oil companies to have presence in all areas of the value chain?

The jury is always out on that. There are companies, which are just exploration companies, others are marketing entities, some have refinery operations with petrochemicals production. Value adding always makes sense. There are a lot of significant developments taking place in the petrochemical space. The downstream petrochemical business is getting very exciting. We would look at this segment as it adds value to our operations. If state-owned GAIL India comes up with sale of its petrochemical unit, we will certainly look at it in terms of making investments.

Is its right time to invest abroad?

Convergence of oil price and value of an asset is always a challenge. I feel that our hands are full with numerous domestic projects at present. But there is always an opportunity if it comes along. Not only financially opportunistic but also in the technology space.

Have you ever made any proposal to the government to buy ONGC’s entire stake in your Barmer block?

Never.

After merger of Cairn India with Vedanta how things have changed?

Vedanta has been a parent company of Cairn for a long time now. So, has nothing changed really. Capex is being provided. Top deck restructuring is a process that is internal to the oil gas business. We are embarking on large capex programme and hoping for a reasonable success in OALP. We reconfigured the organisation around strategic business units (SBUs) to have focus on various elements that is going to drive our growth. So, there are 7 SBUs now otherwise we were largely focused in Rajasthan and two of our other onshore blocks. We made a big investment in Suvali in Gujarat and doubled the production from offshore block in very late life from 10,000 to 20,000 barrels a day. And we awaiting extension of production sharing contract (PSC) for Ravva field in East Coast KG Basin so that more investment is made in exploration.

A lot of OALP block that you have won recently falls in Rajasthan. Does this help you in compressing the time taken for exploration and production activities in the new fields?

It does. We should be able to compress the timelines. Because we understand the terrain a lot better. We understand the people. We have been catalyst in some extent in uplifting that earlier backward district of Barmer. The GDP of the place is a lot higher now and our operations have positively impacted the life of people in the district and the region. With new investments the region will prosper further. People have already seen at this before.

subhashnarayan@mydigitalfc.com

Columnist: 
Subhash Narayan