COVER STORYCREATING WEALTH FOR THE NATION

QUANTIFYING SOCIAL INVESTMENTS

CHALLENGES OF THE FUTURE

Dear Readers,

refuses to translate into production!

to explore and discover and the endless meetings at

barriers associated with the remoteness of location and

is our endeavour to reach out to people working across

more shall follow, we have kept the focus on macro

trends of the sector and then relating the same to our

discoveries would be favourable!

Do write back to us with articles/views, critical or

otherwise at corporate.communication@cairnindia.com

respective individuals and these views do not consult to

Editor’s Note

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C O N T E N T S

Cairn India: Creating Wealth for the Nation and Securing Energy

Volatile Oil Markets: Securing the Future

Cairn India and Vedanta Resources: Facing Challenges of the Future

Drive to create O&G workforce of the future

People, Process, Environment

Quantifying Social Investments: IFC Financial Valuation Tool and Cairn India

Oil and Gas Companies: Socially Connected

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C O V E R S T O R Y

C O M M O D I T Y T R E N D S

P E R S P E C T I V E

H U M A N R E S O U R C E S

H E A LT H S A F E T Y A N D E N V I R O N M E N T

C O R P O R A T E S O C I A LR E S P O N S I B I L T Y

S O C I A L M E D I A

HEA

LTH

SAFETY ENVIRON

MEN

T ASSURANCE

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Cairn India:Creating Wealth for the Nation and Securing Energy

It is a classic story of the David and

the Goliath. A young E&P company

daring to dream, having the vision

and perseverance, was set to alter the

balance of domestic energy production

for India, the largest democracy in the

world. Cairn has been unlocking value

through discovery and development

of hydrocarbons in the sub-­continent

for more than 15 years. We pioneered

deepwater drilling in India through

Annapurna. Cairn also developed one

auction – Ravva, off the coast of Andhra

Pradesh. Currently we are contributing

domestic crude production through our

approximately 7%. The discovery of the

Mangala in 2004, the largest onshore

hydrocarbon discovery in India since

1985, changed the scope and the nature

of the business. The enormity of the

discovery, the largest in that year globally

the league of organisations having a key

role in the energy security hence future

growth trajectory of India. Three out

of the seven landmark oil discoveries

made in India between 2000 and 2005

have been by Cairn and the joint venture

partners.

resource nationalisation amongst

countries and the emergence of the new

“Seven Sisters” – the state run oil and

bill this year could reach $100 billion if

crude prices hover in the range of $100-­

$120/barrel with uncertainties in supply

from the Middle East. This would not only

the country has experienced double

digit growth in crude oil production for

2006-­2007 the crude production growth

was 5.6% which dipped to 0.4%,-­1.8%

and 0.5% respectively in the last few

2011, the production by Cairn India and

Reliance led to a double digit growth in

domestic crude oil production for the

to the 12th plan projects a growth rate

of 7% for commercial energy demand

C O V E R S T O R Y

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RJ-­ON-­90/1

RAVVA

PR-­OSN-­2004/1

For more than a decade, Cairn has been undertaking pioneering activities

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4

Currently we are contributing more than a fifth of the country’s domestic crude production through our Rajasthan fields. This is helping offset India’s crude oil import dependency by approximately 7%.

for a GDP growth of 9%. This is only

possible through a major supply side

management.

Cairn India has been a trailblazer in a

lot of areas in the oil and gas sector.

Over the years the organisation has

built an indigenous team with the

capability to execute projects across the

whole spectrum of the business -­ be it

exploration, discovery, development

and production. The team is capable of

executing projects with the scale of our

Rajasthan development, maximise the

assets like Ravva (Andhra Pradesh),

applying technology to transform from

gas to oil in Suvali, Gujarat and design

to implementation of new lines of

continuously heated and insulated

pipeline from Rajasthan to Gujarat. In

our stage of transformational growth

with the pipeline operations bringing in

the desired scale, our safety standards

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have been in the top quartile against

global benchmarks. Our terminal in

hydrocarbon facility, before connecting

with the market through our pipeline is a

maintained at half the global average

last year. Responsibility and concern for

the environment has been integrated in

our operation strategy be it the usage

of environment friendly completion

environmental footprint or our well pad

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design with horizontal deviated drilling

to optimise usage of land and minimise

disruption. We have been creating value

through substantial contribution to the

government exchequer with royalties

paid more than USD 1 billion, direct and

indirect taxes of more than USD 1 billion,

government of greater than USD 5 billion

in foreign exchange due to reduced

imports.

The continuous growth in production

and its asset base has led to increasing

valuation of the company, which has

ultimately enhanced shareholders wealth.

The investor community and the markets

have also endorsed our initiatives to

create value for our shareholders as a

result of which the market cap of the

company has nearly doubled from USD

6bn to USD 12bn since IPO.

Cairn India with the help of its joint

venture partners including ONGC

continues to create value and wealth

for the nation and strive towards

making the dream of India, an energy

independent country -­ a reality. As we

the organisation will keep working closely

with governments and communities

across the globe to develop faster, better

and more cost effective solutions for the

energy needs of growing economies thus

enriching lives of the local populace.

5

30th Aug 2011 Price % chg since

NIFTY 5,001 28

*Cairn India IPO on 9th Jan 2007

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Cairn India and Vedanta Resources:

Facing Challenges of the Future

The world of extractive industries has

been under a variety of pressures with a

seismic shift in terms of the way various

sectors like mining and oil & gas function.

The hard-­hat world of oil, gas and mining

has become intrinsically linked to the

has helped democratise the sector in

markets post the 2008 downturn,

traditional instruments of trading and

hedging used by organisations have to

be conducted in a different light. On the

other hand, demand in both the sectors

continue to be stoked from emerging

markets in the east rather than the

western countries while the supply side

has been constrained due to multiple

reasons of geopolitical risks, resource

nationalism, complexity of development

projects and location of resources across

increasingly remote and unfamiliar

territory.

transformation in terms of cost pressures,

consolidations, and nature of business

as well as vertical integration, bringing

about a change in the way we do

business. While a lot of the public oil

and gas majors, even the big guns,

have been vertically integrated with

their presence across the chain from

upstream to downstream and/or

retailing, independent O&Gs have always

preferred a particular segment for their

on a global scale, competition is actually

increasing with the appearance of new

companies from emerging economies.

commercial manner, along with further

privatisations in OECD countries such

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P E R S P E C T I V E

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every step of the value chain (particularly

in the U.S.) have also added to global

competitive pressure. To differentiate

from new competition, international

marketing, technological capabilities

to explore and produce on the most

challenging frontiers and scale and scope

to invest in new forms of energy. In the

mining industry, there is the scramble

to secure supplies of scarce resources

and to gain greater control over prices of

production units in an age of increasing

cost pressures, while many end users of

mining products have also gained control

of upstream assets. Companies are also

looking at other ways of achieving their

integration objectives, such as combining

strategic investment and off-­take or

partnership agreements to lower the

risk associated with integration, but still

investment in African Minerals with 20

year off-­take arrangement.

Sectors like oil and gas and mining

continue to climb up the political priority

list and according to a recent poll of

global CEOs by PwC – stakeholder

management, sustainability issues, etc.

are the key concerns of management

changing economic and social priorities,

governments across the globe are

tightening their grip on national resources

and are revisiting royalties and taxation

policies. It is common knowledge that

Sovereign Wealth Funds (SWFs), initially

set up with oil money, heavily invests in

the sector but non-­commodity based

SWFs are gradually increasing their

exposure in the mining industry in a bid

to diversify their investment portfolio.

Sectors like oil and gas and mining are continuing to climb up the political

priority list and according to a recent poll of global CEOs by PwC.

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They also look for and leverage on the

under-­valued resources. A key shift

has been the political overtones behind

SWF investments, with SWF route being

often used to lead the charge by foreign

government to secure national resources.

In such evolving times for both the

sectors, the acquisition of a majority stake

in Cairn India by Vedanta Resources plc

provides the perfect platform to build

the natural resource champion of the

resource champion” are some of the

energy philosophy and aspirations.

major to foray into oil and gas, while this

acquisition puzzled many. While about

gas, received in inheritance and built over

ore miner, inked a deal with Petrobras

and entered oil sector in 2007 to reduce

mining costs and currently holds stake in

more than 20 exploration blocks.

Vedanta has always shown an appetite

for strategic inorganic growth -­ acquiring

an asset and then scaling it up for

better returns, tending mostly towards

vertical integration in terms of taking

supply leadership to optimise the

performance of existing assets. Their

focus is on leveraging the low cost of

production, and in a lot of the acquired

assets, infusing them with new energy to

increase production by many multiples.

years and jump in revenue by 100 per

cent, while in Sesa Goa, the production

has gone up post acquisition by Vedanta,

by 115 per cent and the reserves by 75

per cent in three years. Its focus is on

organic and inorganic growth strategy for

bulk commodities and base metals.

In Cairn India, Vedanta Resources has

gained exposure to a new sector with

a top 20 non OECD E&P organisation.

Cairn India brings to the Vedanta stable

more than a decade of credibility with

pioneering efforts in the sector in the

sub-­continent, landmark discoveries,

reputation for technological adaptability

and innovation, exploration success

records, appetite for growth and new

avenues of business (midstream) with

a measured risk approach, which has

more often than not borne fruits, project

execution and delivery skills, and sound

corporate responsibility practices with

In Vedanta Resources, Cairn India has

a majority shareholder and owner, who

ambitions across various segments of the

oil and gas business, spanning multiple

geographies and helping leverage

international markets.

top global oil and gas entity, offering

unique value added solutions to cater

to energy requirements of emerging

economies across the globe with a deep

footprint in only select markets -­ and

million tonne plus annual production

business in copper and zinc and more

than 2.6 million tone for aluminum while

more than doubling its iron ore output in

excess of 50 million tone -­ underscores

the growth momentum, which can be

achieved despite economic pressures and

geopolitical risks, hence being targeted

for the next couple of years. Stakeholder

management, corporate reputation,

and the ability to deliver in challenging

times will be the key to synergising and

creating a natural resources champion

entity for the future.

Vedanta is not the -­

gas, received in inher-­

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Volatile Oil Markets: Securing the FutureEnergy is pivotal to economic growth

and as India, country with GDP of over

economy and the fourth largest energy

consumer, marches into the league of

top economies in the world, the need for

energy, to secure the needs of current

as well as future generation, would grow

exponentially. As compared to US &

22 barrels & 9 barrels of oil a year, an

average Indian burns close to 1 barrel a

year – representing the fact that there

is substantial upside for improvement

economy expands.

Securing energy is perhaps the

most critical challenge for India in

maintaining its economic growth rate. It

encompasses both physical supply and

(International Energy Agency) four major

concerns -­ Availability;; Deliverability;;

Affordability and Sustainability.

dependence which was about 50% in the

over 75% of its crude oil requirements –

creating serious concerns on the supply

security. Compounding the above

stability of the country with oil import

bill rising to approx. USD 100 billion in

2010-­11.

The globalisation of economy in

the recent years has brought new

opportunities, more interdependence

along with larger group of risks.

International oil market in the current

world is affected by events ranging from

broad based macroeconomic picture;;

geo-­politics;; weather to dynamics of

fundamentals supply/demand.

After recovering from the global

recessions, recent months have

witnessed several events like French

Strike;; Middle East North Africa (MENA)

Japanese Earthquake & Sovereign credit

crisis in US & Europe impacting the

international oil prices.

Oil prices rose to $125/bbl plus in April,

however receded subsequently due to

C O M M O D I T Y T R E N D S

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the double dip recession fear looming

Reduction in growth forecast of US,

Europe & China (contributing 50% of

with high unemployment & weak

economic data is forcing authorities to

come up with more income generating

policies and get economies on a

meaningful growth trajectory.

Market uncertainty is evident from

the wide forecast of oil prices by

International participant going into next

year. While most research divisions

crude prices in 2012 due to tight supply

demand fundamentals, Citibank in

its latest forecast has predicted $86/

year placing importance on the credit

events. Uncertainty & volatility of this

magnitude creates further challenges

in ensuring a stable and secure energy

atmosphere.

Ensuring supply security remains an

extremely challenging task for the

Government as dynamic

global environment

have a pro-­founding impact on the

economy and energy sector. In this

situation, increasing the domestic

production and reducing the import

reliance is an important element for

ensuring supply security.

which is now accounting for more

crude production, has contributed

security and bringing economic

to savings of foreign exchange and

is now responsible for the delivery

crude

production from its

operated assets

across the

country.

-­ Varun Gujaral

Commercial and New Business

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Drive to create O&G workforce of the future

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In recent days, the markets have

signalled concern about the economy.

and lagging economic indicators,

consumers, investors and businesses

are searching for some bright spot in

the market. Many believe that the oil

and gas industry, which has consistently

shown strength during this lengthy

economic downturn, has the potential

to help lift the economy if the right

energy policies are in place.

The industry, while shows promise,

is faced with its own challenges and

uncertainty. In addition to the existing

challenges relating to global energy

security, long term sustainability and the

uncertainty surrounding the investment

framework, the oil and gas industry

will face “new” challenges. Future

energy demand is expected to grow

substantially and the sector is in need of

massive investment – not just capital.

In order to meet the demand, the

industry will explore, develop and

produce oil and gas in increasingly

severe conditions. The ability to plan

and execute large-­scale, complex

development projects requires a highly

yet professionals with the required skill-­

set are a scarce commodity.

Over the last few decades, average age

of workforce in Indian upstream oil and

Whether one believes it is the result

of normally occurring competition,

attrition, aging or restructuring, one

theme permeates the current discussion

around human capital: how to develop,

deploy, and connect employees through

This issue has become particularly

workforce, combined with a diminishing

pipeline of new and experienced talent.

To guard against corporate brain drain,

companies need to formulate effective

strategies to attract and engage the

generation is not all. It is also about

managing existing talent and developing

the periodic table of talent.

International Oil Companies (IOCs) are

facing a real challenge that may have an

impact on expansion and growth plans,

a challenge that requires commitment,

cooperation, investment and new

approaches in developing, managing and

retaining the talent pool.

There are many issues that call for an

their strategies in the face of slowing

NOCs and IOCs avoid ranging back and

forth between skill shortage and skill

and IOCs joining forces, learning lessons

The challenge facing NOCs and IOCs

sustainable long-­term solutions to

manage workforce demographics, both

in boom and bust times.

Partnership between NOCs and IOCs

can contribute to addressing the

Collective collaboration and coordinated

cooperation between government,

academic and industry on the various

issues related to curricula, employment

and social policies, and programme

term than isolated initiatives.

environment operational challenges will

to develop skilled personnel, manage

costs and develop new technology. This

situation creates new challenges and new

uncertainty, but also new opportunities

for cooperation and partnership between

NOCs, IOCs and services companies,

to share risks, technology advances and

invest in R&D.

requires commitment, cooperation, investment

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Quantifying Social Investments

IFC Financial Valuation Tool and Cairn IndiaDiscovering the past to create a better

business for extractive industry including

oil and gas. It is this dichotomy of

synergising the past with the future,

by adhering to regulatory frameworks,

balancing investor expectations

and striving to create value for all

stakeholders, dealing with the sentiments

which surround “national resource”,

all this while operating in the most remote

of regions across countries with state of

the art technology.

Gaining the trust, cooperation and

partnerships of communities in these

frontier regions often becomes a business

necessity to ensure uninterrupted

operations and business activities. Since

the riches of the subsurface are often

found in the poorest and most remote of

regions, organisations invest a sizeable

portion in distributing the fruits of

hydrocarbon development to the resident

communities, trying again to balance this

need for developing energy resources

with the pace of development of the

local communities.

of community engagement initiatives

is not often appreciated or understood

by companies. Oil and gas is a sector

which offers a myriad range of activities,

all seemingly disconnected but bound

around a common product – the crude oil

or the gas!

The range of activities range from the

or oil services company person on the rig

of summer, to a community engagement

or social responsibility specialist

implementing programmes in remote

regions, to the oil trader surrounded

attendant – seemingly diverse persons

united by the same product. The same

paradoxes are also prevalent in costs.

While most are aware of the almost

perpetual windfall gains in the oil

business, one overlooks the risk capital

deployed during exploration time running

into hundreds of thousands of dollars per

day in remote onshore or offshore areas!

Fraught with such inherent

contradictions, it is imperative to have

a strategic approach for designing and

implementing community development

programmes in order to ensure that they

deliver the desired results of community

support, mitigate risks, and help in the

unhindered growth of business.

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the absence of any standardised

measurement matrix entails that the

impact of the social, environmental

and community investments cannot be

tangibly measured in business language.

investment for social initiatives also posed

various problems like:-­

Not being able to maximise the full

potential/impact of the investment

Not being able to compare the

investments

Not being able to advocate,

communicate, support and justify the

investments

Not being able to prioritise

investment options

initiatives

Awareness about such investments

within organisation and cross-­

functional collaboration

Cairn along with Newmont and Rio

Tinto are the organisations with whom

IFC collaborated extensively to come

up with the Sustainability Planning and

Financial Valuation Tool. The model was

piloted on a couple of projects like the

SMS programme initiated for farmers

in partnership with Reuters along

longest heated and insulated pipeline

in the world) and the mobile health van

programme in Rajasthan.

“Through this tool companies can

develop metrics to guide their community

investments and translate community

program outcomes into company value,

in terms that are understood by the

market – risk reduction, productivity

gains, savings, return on investment,

and enhanced reputation. An additional

incentive is that high-­performing

environmental and social programs

are increasingly seen as a proxy for

effective business management.

According to Multilateral Investment

Guarantee Agency (MIGA), a World Bank

political risk insurer, they would reduce

insurance premiums for an operation that

demonstrates rigorous risk management.”

– Excerpt from IFC article on Valuing

Returns on Sustainability Investments.

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The tool has been designed in a way to

supplement the traditional discounted

in the organisation but also contributions

etc. to wholly participate in the

implementation of the tool.

The two basic concepts comprising the

tool are direct value creation and indirect

cost of manpower, etc.) while the latter

investments through community risk

mitigation which involved steering clear

of risks which could result in delay of

construction, production postponement,

planning, legal action, etc.

The process involves rigorous

stakeholder analysis, traditional

the quality of social investments

simulation (algorithms which utilise

repeated random samplings to compute

results) to arrive at a net value accrued

to the company.

with Reuters involved providing crop

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advisory and marketing information

through the mobile phone for 10,000

farmers along the Cairn India pipeline

in Gujarat. This programme not only

helped maintain a continued relationship

with the farmers but ensured that the

communication was two way.

The farmers could also through their

mobile phones inform the organisation

about breaches in pipeline security

with pilferage, leakage, sabotage or

other maintenance issues. So while the

SMS programme helped increase the

income of farmers through the price

advisory, the farmers were also able to

act as the pipeline reporting contact for

the company. So both the modes of

value creation and value protection was

it also helped the company by providing

an effective replacement for pipeline

security personnel.

cases of pipeline security were reported

by farmers, thus preventing sabotage,

leak, and damage to the pipeline,

cost of $2 million for the company.

The second project studied was one

which involved access to preventive and

curative healthcare – the mobile health

van. The van operated and traveled

to 64 villages in and around the Cairn

project area in Rajasthan. The FV tool was

able to calculate and ascertain that this

the company as the alternative to setting

up 15 clinics to provide similar services to

the concerned population.

Another key saving was in terms of

mandays for workers from the village.

With the van servicing the local village

populace, loss of manhours/days due to

illness of village workers were minimised

and made negligible.

The same FV tool could be applied

holistically to quantify the returns of

various other CSR programmes and

provide a direction to implement future

management support and commitment,

an attitude for cross-­functional support

management, etc.) and developing

requisite expertise like value drive

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Stakeholder Analysis

1

TraditionalInvestment

Analysis (MPV)

2

Risk Quantification

5

Quality of Sustainability Investment

6

+

+

+

+

Value Protection(Indirect benefit)

3

Value Creation(Cost benefit

analysis)

4

Monte Carlo Simulation

7

Net Value to Company From Sustainability Investments

+

=

Source: IFC Article

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People, Process, EnvironmentOil & Gas is considered to be an unsafe

at various stages can be a threat to the

health and wellbeing of not just people

working on site, but also the communities

Good governance is the only way one

can ensure an economic climate which

is favourable not only to investments,

but also well being and sustainability

of people and environment that we

come in contact with. We, at Cairn, are

committed to protecting the health,

safety and wellbeing of people working

on our sites, people who come in contact

with our operations and the health and

sustainability of environment that we

operate in. ‘

Our Corporate Responsibility

Management System (CRMS) lays down

detailed guidelines and procedures that

support the delivery of our commitment

values and our approach to business.

Respect: for people, communities, the

environment, the rule of

law and human rights;;

Relationships: we believe that building

strong, open and lasting relationships

with our stakeholders is not merely

a social responsibility but is vital to

achieving our business goals;; and

Responsibility: We recognise our

responsibility to ensure our actions do

not harm people, the environment or

society.

While we follow the highest level of

international codes and standards in our

upgrade them.

The nature of the work involves some

inherent risks and facing challenging

environments. We strive to make sure

that everyone associated with our work

goes back home in the evening exactly

the way he/she arrives at the work in the

morning. Our goal is to create a healthy,

supportive working environment that can

help reduce absenteeism due to fatalities.

comprehensive one, wherein all the

process and procedures, to effectively

laid down. This system ensures that

the policies are implemented across

various activities through design,

implementation, operations, monitoring

and reporting as it is based on the

implementation in progress for the

Rajasthan operations.

We take precautions to avoid accidents or

pollution incidents, and all our operations

have rigorous procedures, equipment

and emergency teams in place to

training is mandatory for all visitors to the

site to ensure their safety.

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Companies are increasingly becoming

cautious about the issues concerning

environmental protecting, including air,

land and water quality.

Most of it is due to the heavy regulations

and compliances. These regulations

continue to evolve. For example, the

(EPA) greenhouse gas reporting rule was

and production sector on November 8,

2010 and requires companies to report

their 2011 greenhouse gas emissions

beginning in March 2012.

We at Cairn have been committed to

minimising the impact of our business

on the environment. We introduced

stringent measures, from initial impact

assessments to waste management, and,

in the event of any unplanned incident,

have put in place comprehensive

emergency response and oil spill

contingency plans.

Our approach to each new project

includes undertaking Preliminary

Environmental Impact Assessments

(PEIAs), Environmental Impact

Assessments (EIAs) and Social Impact

Assessments (SIAs), to minimise any

potential impacts of its activities

recognition from time to time. This

year, the Rajasthan operations won nine

safety awards in the 24th Mine Safety

Awards organised under the aegis of the

DGMS, Rajasthan.

Environment

According to the ‘Ernst & Young

the climate debate will continue to

complicate the strategic decision-­

making of oil and gas companies across

the industry.”

Today, climate change and sustainability

issues are a key component of corporate

agenda. The stakeholders are as

much interested and passionate about

these issues as they are about the

compensation.

HEA

LTH

SAFETY ENVIRON

MEN

T ASSURANCE

19

Oil and Gas Companies: Socially Connected Social networking is booming. Facebook

has become the most visited website on

Internet population visit social networking

or blogging sites.

Social networking is facilitating business

and personal relationships, with

individual sectors now starting to cotton

on to the potential of information sharing

via these channels.

Gartner predicts that by 2014, social

networking services will replace e-­mail

as the primary vehicle for interpersonal

communications, including knowledge

and information management for 20

percent of business users.

According to a study by Microsoft and

Accenture, nearly 75% of oil and gas

professionals see value in using social

media and collaboration tools at

technology at a corporate level. The study

which surveyed 275 professionals within

international, national and independent

oil and gas and related companies, found

that social media and collaboration

communications,

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technology adoption is primarily a

the same time, half of those surveyed said

their companies prohibit or restrict the

use of many of these publicly available

tools, such as photo-­sharing and social

networking sites.

On the other hand, the oil and gas

industry itself boasts of various social

networking sites, such as www.energy-­

networks.net, www.oilandgascommunity.

com, www.hsee.co.uk and www.oilpals.

com. These are facilitating knowledge

and information management.

Energy is a highly regulated industry,

and its companies are required to make

information available to their work forces

manner. Cloud computing, public

instant messaging systems and internal

social networks allow for more cross-­

barriers while keeping up with the

changing face of technology.

companies that are using social media

tools for other purposes. Chesapeake

Energy has successfully implemented

stream that posts current job openings,

interacts with followers and offers

career advice to nearly 2000 people.

opportunity to communicate via social

networks to media, Gulf Coast residents

and businesses affected by the spill,

concerned citizens, and employees.

industry from social media is most likely

the increased productivity, thanks to

improved collaboration and knowledge-­

sharing between workers. These

elements are important for driving

revenue, cutting costs and contributing

to the health and safety of workers (Oil

and Gas Collaboration Survey 2009)

industry.