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The Guardian: Rajasthan oil takes Cairn into FTSE 100

The Guardian: Rajasthan oil takes Cairn into FTSE 100

“Cairn was also able to announce another drilling success in Rajasthan, with a fifth oil discovery near Mangala, which it bought for a song from Shell.”

Doubts remain over field’s potential output

Terry Macalister

Wednesday September 8, 2004

Cairn Energy, the Edinburgh oil and gas group, yesterday became one of Britain’s top 100 companies, despite announcing a 40% slump in half-year profits and facing questions over its key oil discovery in India.

Shares in the company have soared since January when it found the massive Mangala field in Rajasthan. It took its place in the FTSE 100 yesterday at the expense of the building society, Bradford & Bingley.

But the euphoria was tempered by independent experts warning as few as 100m barrels might be recoverable from the field, rather than the 400m Cairn believes it can extract.

The company reported a fall in first-half profits to £22.9m, and shares in the Edinburgh-based firm – which have trebled this year – closed 1.6% lower at £14.50p.

The financial figures were not helped by a rise in administrative expenses, including a £3.2m charge for executives’ long-term incentive payments.

Chief executive Bill Gammell insisted the firm had been “transformed” by the finds in India.

Mr Gammell, a former Scottish rugby international, blamed the pre-tax profit fall on foreign exchange movements and the fact that the Indian government had exercised its right to claim a share of the production revenues from other Cairn fields.

“We don’t think it’s material,” he said of the financial figures. “Current production has always been just cashflow to move on with exploration.”

Cairn was also able to announce another drilling success in Rajasthan, with a fifth oil discovery near Mangala, which it bought for a song from Shell.

The company is planning to widen its exploration in the region to Nepal while completing the purchase of upstream assets in Bangladesh, also from the Anglo-Dutch group.

Cairn already has five rigs working in Rajasthan and 15 new exploration wells should be drilled by the year’s end.

Its entry into the FTSE 100 allowed it to shrug off the downbeat report from American reserve audit specialist DeGolyer and MacNaughton.

The independent auditors told Cairn there are at least 1bn barrels of oil in place at Mangala. This could be translated into recoverable reserves of 100m-320m barrels. It is too early to say how much oil there is in the fifth new exploration well but Cairn believes the total in place throughout its Rajasthan acreage is 2bn barrels.

It hopes to be producing 60,000-100,000 barrels a day towards the end of 2007. But its ability to press more oil out of the ground than DeGolyer expects could depend on injecting water into the wells, and Cairn admits this is a controversial issue in the local community because water is scarce.

Exploration director Mike Watts said it had found an underground source of salt water and may build a desalination plant to provide fresh water for local people.

The push in India comes as Cairn has won five new licences to operate in Nepal but has beat its final retreat from the UK North Sea with the disposal of its 10% stake in the Gryphon field.

Bruce Evers of Investec Securities was surprised at the negative City reaction to the latest announcements. “It’s bizarre. These are highly satisfactory results but there is so much interest in this [exploration] sector at present that everyone expects things to come in above expectation all the time.”

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