Join Date: Oct 2010
January 19th, 2012
Rajasthan Joint Venture Starts Oil Production In Bhagyam
Oil well that ends well
January 19, 2012
ONGC and Cairn – participants in the Rajasthan Joint Venture – have commenced production from the Bhagyam Field in Rajasthan. Bhagyam is the second largest of 25 discoveries made so far by Cairn in the Barmer Basin in Block RJ-ON-90/1.
The Bhagyam reservoir and facilities will entail a gradual and safe ramp up to reach the currently approved plateau rate of 40,000 barrels of oil per day (bopd). The commissioning of Bhagyam is a key milestone towards achieving the target production rate of 175,000 bopd by end FY 2011-12.
The Mangala, Bhagyam and Aishwariya (MBA) fields have gross recoverable oil reserves and resources of approximately one billion barrels. The Rajasthan Joint Venture will contribute more than 20 percent of current domestic crude production when they reach the currently approved plateau rate of 175,000 bopd.
Sudhir Vasudeva, Chairman & Managing Director, ONGC said, “Our joint venture is well placed to further increase production from Rajasthan,” adding that, “Beginning of oil production from Bhagyam field is a significant step towards further development of the MBA fields. This underlines our continued commitment to the optimal development of the Barmer basin in Rajasthan and determination to create value for the people of Rajasthan as well as the country.”
According to Rahul Dhir, Managing Director and Chief Executive, Cairn India, “The commencement of production from the Bhagyam field is yet another significant milestone for the Rajasthan Joint Venture.”
Dhir added that “The commissioning of Bhagyam illustrates how supportive policies are enabling companies to unlock the hydrocarbon potential and create significant value for our Nation. At this momentous occasion, we would like to thank all our partners, stakeholders and the people of Barmer, for their continuous support. We would like to reiterate our commitment to continue to explore, discover and produce more oil to support our country’s growth.”
Overlooked oil and gas sector comes to life
You can get blase talking billions.
And in India, you are constantly reminded of the presence of 1.2bn citizens, the pressure of numbers moving ever more people into remote and desert areas which were barely populated until recently.
One of those is the Thar desert in Rajasthan, near the Pakistan border.
It is said to be the world's most densely populated desert, with 3.5m people in an area the size of Belgium.
Many of them scratch a living out of the sand and scrub, and live in huts made from local shrubs, which look like they offer flimsy resistance when the monsoon comes.
For many, a very modest living can be made from grazing goats, but increasingly, it's in working for or supplying the bonanza taking place in the heart of the area.
That's where lots more billion-sized numbers come in.
It's where Cairn Energy bosses, visiting India this week, seem nonchalant and relaxed about the astonishing scale of what they achieved.
And they take some satisfaction from the impact corporate largesse is having on the local community.
Working with the World Bank, they are funding mobile health clinics, job training and help in setting up a dairy co-operative.
Six billion barrels
Amid all the humungous numbers, perhaps the most remarkable is that it has been done by 100 or so staff at the company's headquarters in Edinburgh's Lothian Road.
From there, the company powered into the FTSE 100 on a vast find in the desert of Rajasthan, west of Delhi and near the Pakistani border.
It reckons there's at least six billion barrels of oil under the sands.
At least one billion of those barrels are defined as 'proven and recoverable'.
If that produces for the next 40 years, at today's oil prices, the fields will deliver $100bn in revenue and other earnings to Indian government.
It ought also to deliver some very healthy profits to the owners of Cairn India, the company spun out by Cairn Energy, based in Delhi and listed in Mumbai.
Its assets were most recently valued (and the oil industry prefers the bigger impact you get with US dollars) at $5.6bn, with profits in 2010 just topping the £1bn mark.
Cairn India is sitting not only on that oil asset but a colossal infrastructure of wells, pipes, a vast processing plant and 400 miles of pipeline to refineries near the coast, heated to ensure a free flow of the black stuff.
It's all been put there in the eight years since the big strike in what became the Mangala oil field.
Slim and start again
Cairn Energy won't be getting so much of that profit though.
The Scottish company is voluntarily powering its way out of the FTSE100: "delivering shareholder value, slimming down, and starting to grow again".
This is on the business philosophy that it's easier to grow a small company quickly than to get the same expansion out of a large company.
And it helps deliver that strategy when they can survey the world's oil and gas prospects for new frontiers, with the calling card of having delivered the dream that keeps every oil prospector drilling.
The slimming down strategy has been to sell 40% of Cairn India, allowing the former parent company to distribute to shareholders a £2.2bn jackpot in the middle of next month.
Faith in family
That stake, along with control of the firm, has gone to Vedanta, owned by Indian metals tycoon Anil Agarwal, who also took on Petronas' former shareholding to get over the 50% line.
So will Cairn continue to be among those enjoying the profits?
Possibly not. It's sitting on 22%, valued at around $2.5bn, or £1.4bn.
It's lost control of the company, and Anil Agarwal is ringing some changes.
Included among those are the appointment of his brother as chairman of Cairn India and his daughter, Priya, to her first board position.
That's putting a lot of faith in family when they're looking after such a valuable asset, in a company that doesn't have much history in oil exploration and production.
That lack of control may accelerate a drawback and perhaps a complete withdrawal by the Scots from Cairn India.
At an extraordinary general meeting at the end of this month, the company is seeking shareholder permission to place blocks of shares on the open stock market when the time and price looks right.
That approach has tax advantages over a direct trade sale.
Such an exit is a possibility being considered with a striking lack of emotional attachment to the monumental achievement that flares gas, its shiny new pipework glistening through the heat haze of the Rajasthani desert - pumping the fuel for the rapid growth of this emerging economic giant.
Manvendra Singh watched Royal Dutch Shell pack up and leave India. A decade ago, the Indian MP was told by an executive of the oil company, as he closed up his trailer near the arid city of Jaisalmer, that the quality of the oil beneath the Rajasthani desert was good, but there was not enough of it.
So the Anglo-Dutch oil group, after drilling four exploration wells, was going home. It could not have been more wrong. Today Rajasthan is on its way to becoming a mini-Texas, supplying the world’s fastest growing economy after China. Its 125,000 barrels a day of oil represents almost 20 per cent of domestically generated oil supplies to a country home to nearly a fifth of humanity.
Rajasthan’s transformation into an oil economy is part of a bigger struggle for India to secure its energy security. Energy weakness is a key vulnerability for the emerging power as it still imports more than 70 per cent of its oil. Its dependence has been highlighted in recent months by the threat of international sanctions against Iran, one of its main suppliers, and a weak local currency.
Supplying India’s power stations with coal and gas and securing oil supplies to refineries is causing increasing concern and will be the subject of a high-level meeting between the country’s industrialists and Manmohan Singh, the prime minister, in New Delhi on Wednesday. Mr Singh is likely to face a barrage of complaints about environmental restrictions on coal and slow approvals of power projects.
However, he can take heart from a reawakening domestic oil and gas sector. Ignored by the world’s big energy companies for most of India’s post-independence history, this sector is showing new life, with energy investments representing the lion’s share of India’s $19.43bn in foreign direct investment in 2011.
Two stand out: one by BP, the British oil group; the other by Vedanta Resources, the UK-listed resources company. India was traditionally sidestepped by the global energy giants. Exploration to the east held better prospects in countries such as Thailand, Indonesia and Malaysia, while smaller countries, such as Nepal and Sri Lanka, were left to the smaller explorers.
India, distrustful of western participation, turned to the Russians to help its state oil companies such as the Oil and Natural Gas Corporation, the developer of the Bombay High field, and the Indian Oil Corporation. Liberalisation in the early 1990s, under Manmohan Singh, the then finance minister, invited the private sector to develop what were considered small fields and catalysed a local industry, led by Reliance Industries in gas production and refining capacity.
But disputes and the threat of value destruction chased away others, such as Enron, and the wider US oil industry. Now the landscape is rapidly changing and Indian energy assets hold renewed international appeal. The shift started with Vedanta, headed by Anil Agarwal, walking into an Edinburgh office and launching a dazzling bid for Cairn India, the company developing the Rajasthan fields. The $6.5bn that Vedanta paid Cairn Energy for its controlling stake is the first step in a broader Vedanta strategy to marry an oil business with metals assets and turn itself into a group to rival BHP Billiton.
While Vedanta battled for approvals, Bob Dudley, BP’s chief executive, swept in to buy a 30 per cent stake worth $7.2bn in deepwater offshore gas production off India’s east coast with Reliance Industries, controlled by Mukesh Ambani. More has since come into play. BG, the oil and gas producer, has put up for sale its 62 per cent stake in Gujarat Gas, worth an estimated $600m, as it turns its attention more squarely to Brazil. A local and international bidding contest is now under way.
Simultaneously, Indian companies are trailing their Chinese counterparts in a search beyond home shores. Gail, the state-owned Indian gas company, and the overseas arm of ONGC are potential buyers of Cove Energy’s 10 per cent share in the Rovuma gas fields off Mozambique. The deal could be worth $1.2bn.
Mr Singh has to harness this dynamism quickly to strengthen his country’s energy profile and has already made significant moves to de-politicise and professionalise the petroleum ministry. However, challenges remain.
First, he must streamline the investment process to minimise interference by a lumbering bureaucracy to make it easier for transactions to take place. It took 18 months for Vedanta to buy Cairn Energy’s stake in its subsidiary, while BP mulled its India investment for three years.
Second, he needs to reinvigorate India’s New Exploration Licensing Policy, which rather than inviting foreign participation to find energy reserves, in recent rounds has acted as a powerful disincentive.
Finally, New Delhi needs to globalise its state-owned oil companies to capture foreign energy assets. The overseas arm of ONGC, seemingly unlucky in developing an international portfolio, would do well to partner a big global energy company.
India turned one unpromising desert into a productive resource. It needs to repeat the miracle to boost its local production from 650,000 barrels of local production a day to more than 1m to take it to higher rates of growth.