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‘Our interest in gas is re-emerging’

Private sector oil and gas explorer Cairn India, which accounts for about 25 per cent of India’s oil production,has embarked on a $3 billion capex plan involving an aggressive exploration and appraisal programme. In thisinterview with The Hindu, Chief Executive Officer P. Elango (51), a 26-year veteran of the oil and gas sector,discusses the company’s growth plans and says that he is not averse to acquisitions of companies that haveboth exploration and production potential.

Edited excerpts:

You’re coming off an excellent second quarter. How much of it was driven by high oil pricescombined with a depreciating rupee?

Yes, strong crude oil prices and rupee depreciation did help us but we were able to show an overall increasein production f rom all the three f ields.

Ultimately, everything is driven by volumes f or us, and on the volumes f ront, we had an excellent quarter.We began this journey of producing oil almost 20 years back with just 3,000 barrels f rom the Ravva f ield.From that to a record 2,13,000 barrels of oil per day (bopd) in the last quarter is a remarkable thing f or us.And, we are hoping to exit this f inancial year with 2,25,000 bopd. We have been able to consistently deliveron volume growth in both oil and gas f rom all the three f ields.

We are now engaged in a ‘high-risk-high-value’ exploration programme in Ravva. To be able to explore againin a 17-year-old f ield just goes to show that as technology changes, we can take a re- look at old data toproduce more oil and gas.

You are sitt ing on a cash pile of over $3 billion, and you have spoken of your desire to growthrough organic and inorganic means. Are you in the hunt for acquisit ions?

We are extremely happy to be sitt ing on such cash, and in our business, it is all about generating surplusesonly to reinvest. Our f irst priority is Rajasthan. And, this cash pile gives us tremendous f lexibility to investthere.

The challenges in Rajasthan are that we were not allowed to continue exploration in a producing f ield asper the interpretation of the Production Sharing Contract.

There was a breakthrough in February 2013 when the government allowed us to explore in a producingf ield. We then started exploring the Barmer basin; we drilled 6 wells. In f our of which, we encounteredoil/gas. We made one discovery f or which we have f iled f or commerciality. Init ial indications are good.

So, the f irst priority is to deploy the capital required in f urthering our business in Rajasthan and otherIndian blocks f or which we are looking at a $3 billion investment over the next 3 years. Eighty per cent ofthis investment will be in Rajasthan. The second option is looking f or growth outside India, both organicand inorganic. We’ve made a small beginning in Sri Lanka and South Af rica on the organic side. We will lookat inorganic opportunit ies too though not in the immediate f uture.

On the inorganic side, would you be looking at acquiring blocks or companies?

It will be companies that have both exploration and production potential. We are not weighing any optionsright now though.

What will be the impact on your business when the Barmer-Salaya pipeline extension to Bhogat iscompleted?

First, we always wanted the Rajasthan crude to not be land- locked. A crude oil f ield has to have a coastalf ace if it has to get the real value.

Secondly, we want to diversif y our source of buyers to ensure that there is healthy competit ive pressure toget right value f or the crude. Though purely on the volume perspective, our three current buyers can take allthe volume we produce. We want to ensure that we have more sources that can get access to this f ield.The Government would also like to allocate this crude to some of the coastal ref ineries in the country suchas MRPL, HPCL etc.

Meanwhile, we have been toying with the idea of swap agreement. We are presenting this case not only asa company but country as a whole. India imports $150 billion worth of crude oil.

All the domestically produced crude oil is being used by the domestic ref ineries. But in each type of crudeoil, you can extract dif f erent value f or it. So, such crude oil should go where maximum value can beextracted. In the case of Indian ref ineries, some of them were designed to handle domestically producedcrude oil only, and they have been conf igured to process the cheapest crude oil available.

Can you elaborate on the swap agreement you proposed?

It will be a tripartite agreement between our Rajasthan JV, a government chosen public sector ref inery (inthis case, IOC) as a canalising agency, and a third party who would be able to supply the necessary crudeoil required in the domestic market. We can get into swap agreement under which some volume of ourBarmer crude oil goes to the international market where it can get better price. The third party gets accessto low-sulphur crude and can sell it at a premium in the international market, while the equivalent quantumof crude oil could be imported through the third party. On a pilot basis, we have proposed this, and this willnot involve reducing volume to any of our current buyers. Ultimate platf orm to test the value of the crudeoil is international market.

In this deal, there is additional premium Barmer crude will get and that would be shared with IOC. The f irstpriority is to f ind whether there are buyers who can pay higher price. In a normal case, it will be a directexport but it is not allowed by the government. Since India continues to be an importer of oil, this swap dealwill benef it the country as a whole. So, it will be benef icial to the government even if it f etches a dollarhigher.

What are your plans for the KG Basin shallow waters block?

We’ve been in the east cost since 1994, and the Ravva f ield has produced more than 250 million barrels ofoil over the last 18 years.

So f ar, we’ve been producing f rom the younger rocks but there is a layer of older rock deeper than this.These rocks are known f or high pressure and temperature.

We studied this prospect, and have f ound the data interesting enough to drill an exploration well. This onewell will cost the joint venture about Rs.400 crore. Depending on the results, we may choose to drill onemore.

Second, we did a 4D seismic survey in Ravva to see how much of the oil has been produced. It showed ussome bypassed oil in the f ield. We quantif ied the bypassed oil, and have now decided that in the currentenvironment, it is economical to target this. We’ve got the required government approvals.

The interesting part is that the Ravva f ield will again see drilling activity f or the next 6-7 months at least.

Meanwhile, we’ve got the Def ence clearance f or the KG 0S-9 block where we can work on 65 per cent ofthe area. It is owned by us f ully, and we’ll be investing about Rs.500 crore in the block over the next 2-3years. We also have the Nagayalanka onshore block in AP where we init ially discovered oil and gas but toget it out we need to f ollow processes similar to producing shale gas. We will be drilling a well now af terwhich we hope to f ile declaration of commerciality bef ore the end of this f inancial year.

What is your take on gas pricing?

Our interest in gas is re-emerging. In Rajasthan, af ter our init ial exploration, we f ound some good gasprospects. We had also discovered some volume, and that was directed to internal consumption. Af terseeing the survey results, we thought we will be able f ind out gas resources, and started commercialisingour f ield in March 2013 supplying to a f ertilizer company in Gujarat using the existing pipeline.

Now potential f or gas is emerging. We were keen it should get right price and in this context, therecommendations of Rangarajan Committee is a good step f orward as it is important f or the governmentto move towards market-determined prices. People in India don’t realize the huge benef its of using gas inthe place of oil. If India is able to import same quantum of molecules in the f orm of gas instead of oil, it willresult in savings of 30-35 per cent in import bill, i.e., 30-35 per cent savings on $150 billion is a quite a largesum.

raghuvir.s@thehindu.co.in

balachandar.g@thehindu.co.in