Cairn India - IC

1 January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 November 20, 2009 For
Private Circulation Only - Sebi Registration No : INB 010996539 1

Cairn India
Initiating Coverage
Amit Vora
Tel: 022 - 4040 3800 Ext: 322
E-mail: amit.vora@angeltrade.com
Stock Info
REDUCE
Price Rs283
Target Price Rs253
Investment Period 12 months
Sector Oil & Gas
Market Cap (Rs cr) 53,647
Beta 0.9
52 Week High / Low 301/129
Avg Daily Volume 949613
Face Value (Rs) 10
BSE Sensex 17,022
Nifty 5,052
Shareholding Pattern (%)
Promoters 62.4
MF / Banks / Indian FIs 6.6
FII / NRIs / OCBs 25.7
Indian Public / Others 5.3
Abs. 3m 1yr #3yr
Sensex (%) 13.4 101.4 25.5
Cairn India (%) 17.3 118.2 105.7
BSE Code 532792
NSE Code CAIRN
Reuters Code CAIL.BO
Bloomberg Code CAIR@IN
Source: Company, Angel Research, Note: * Performance for 15 months period
Key Financials (Consolidated)
Y/E March (Rs cr) CY2007 FY2009* FY2010E FY2011E
Net Sales 1,012 1,433 2,786 8,796
% chg 41.5 94.5 215.7
Net Profit (25) 803 990 4,770
% chg - 23.2 381.8
OPM (%) 43.5 60.5 66.6 80.9
EPS (Rs) (0.1) 4.2 5.2 25.2
P/E (x) - 66.8 54.2 11.2
P/BV (x) 1.8 1.6 1.6 1.5
RoE (%) (0.1) 2.4 2.9 13.3
RoCE (%) (0.0) 1.1 3.6 14.9
EV/Sales (x) 48.7 35.9 19.1 6.0
EV/EBITDA (x) 111.9 59.4 28.7 7.4
Simmering over
Cairn Indias (CIL) stock price has spiked more than 2.5x its October 2008 lows driven by strong
crude prices and gradual de-risking of the Rajasthan project. However, given our subdued outlook
on long-term oil prices, we believe that the stock will underperform the markets going ahead. At
current levels, the stock is discounting long-term crude prices of US $85.1/bbl, which is high and
leaves no margin of safety. We believe that our long-term crude oil price assumption of US $75/bbl
is sufficient to incentivise incremental production going ahead. We Initiate Coverage on CIL
with a Reduce rating and SOTP-based Target Price of Rs253/share.
Rajasthan Reserve accretion story priced in: We believe that the Rajasthan Reserve
accretion story is far from over despite the significant reserve upgrades, however the same is
captured in current valuations. Apart from STOIIP of 2.1bnboe at MBA fields (currently under
development), CIL also has 1.7bnboe of additional gross STOIIP in other fields. However, the
2P reserves estimates of the same stands at 86mnboe, translating into a recovery rate of 5%,
which is much lower than the 48% recovery of MBA fields. We expect recoverable reserve of
172mnboe from these fields (10.1% recovery factor). However, the stock is currently discounting
a high 18.5% recovery rate from these fields. This is very high as the recovery rate of 18.5%
reflects incremental recoverable reserves of 316mnboe, an increase of 21% over the current
Reserve estimate from the block.
Attractive Exploratory portfolio albeit too early to factor in: Any success in CILs
Exploratory portfolio beyond Rajasthan is likely to re-rate the stock. The stock is currently
discounting high exploratory success rate of 34%. We, however, believe that any meaningful
exploratory success is sometime away, as CIL's Exploratory portfolio comprises assets at
early stages of exploration. For valuing the Exploratory upside, we have factored in a probabilistic
success ratio of 8.0% of CIL's net un-risked prospective resources of 1,400mnboe.
Enhanced Oil Recovery (EOR) opportunity captured in valuation: Given the scale,
EOR at MBA fields could be a challenging task as it is one of the largest field-wise EOR
implementation across the globe. We have factored in EOR rate of 15% for the MBA fields.
However, even if there is any improvement in EOR rate going ahead, we expect CIL to register
limited benefit due to the high costs involved and back-ended nature of EOR volumes.
Deepak Pareek
Tel: 022 - 4040 3800 Ext: 340
E-mail: deepak.pareek@angeltrade.com
Note: #Since listing on Jan. 9, 2007
2 January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 2
Cairn India
Oil & Gas
Table of Contents
Recommendation Arguments 3
Subdued Outlook on Crude impinging Valuation 3
Rajasthan Reserve accretion story priced in 4
Attractive Exploratory portfolio, but too early to factor in 6
EOR opportunity captured in valuations 7
Receding Concerns; Cess overhang persists 9
Technological prowess, excellent Management key positives 10
Risks to Recommendation 11
Financial Analysis 13
Outlook and Valuation 17
Target Price - Scenario analysis 26
Target Price - Sensitivity Analysis 27
Crude Oil Prices - Outlook 31
Historical trend of crude oil prices 31
Oil prices to decline in medium term 35
Long-term crude oil prices expected to remain firm 36
Crude oil prices v/s Upstream cost - F&D and Lifting costs 42
Industry Overview 45
Company Background 47
Asset Profile 51
Rajasthan Block: Infrastructure and development status 60
Pricing of Rajasthan crude 66
Annexure I - Reserves, Resources and their Recovery 68
Key Acronyms 72
Cairn India
Oil & Gas
Recommendation Arguments
Subdued outlook on crude impinging valuation
CIL is the only proxy play on crude oil prices amongst the listed E&P companies in India and its
stock has seen a strong correlation with crude oil prices. Compared to the other majors in the
segment, viz. ONGC, OIL India and RIL, CIL has the highest leverage to crude oil prices. ONGC
and OIL India have to bear the subsidy burden, which weakens their correlation with the crude oil
prices. In case of RIL, its upstream Revenues would largely accrue from gas sales going ahead.
Thus, CIL is a proxy play on medium-term crude oil prices, especially considering the fact that the
commodities market in India does not provide long-term futures contract for crude oil. Thus, for an
investor betting on increase/decrease in crude oil prices in the long run, CIL is an appropriate
proxy play on the same.
On the bourses, the CIL stock demonstrated strong correlation of 0.88, 0.89 and 0.96 with crude
in CY2007, CY2008 and CY2009 (till date), respectively. In fact, this correlation has only
strengthened over the years. We believe this increasing correlation is largely a factor of reducing
execution risks associated with the Rajasthan project development. We believe that CIL's share
price will continue to exhibit higher correlation with the crude oil prices over the near-to-medium
term, barring any surprises in production schedules/newer discoveries.
Compared to other majors viz.
ONGC, OIL India and RIL, CIL
has the hi ghest l everage to
crude oil prices
Source: Bloomberg, Angel Research
Exhibit 1: Correlation between Brent, CIL and ONGC
0
50
100
150
200
250
300
J
a
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-
0
7
M
a
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a
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8
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a
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a
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CIL ONGC BRENT
(
R
s
)
Since its October 2008 lows, the CIL stock has spiked more than 2.5x driven by strong crude oil
prices and gradual de-risking of the Rajasthan project. Given our outlook of subdued oil prices
going ahead, we believe CIL's stock is likely to underperform the benchmark indices.
Our long-term crude oil estimates are pegged at US $75/bbl (FY2012 onwards). We believe that
this will be sufficient to incentivise production from costlier sources such as Deepwater fields
(refer - Crude Oil Prices - Outlook). Ceteris paribus, CIL's current market price of Rs283/share
discounts crude oil price of US $85.1/bbl, which we believe is quite high and leaves no margin of
safety for investors.
At Rs283, t he CIL st ock
di scounts crude oi l pri ce of
US $85.1/bbl, which we believe
i s qui te hi gh and l eaves no
margin of safety
Cairn India
Oil & Gas
One such resource play in other Rajasthan fields is the Barmer Hill formation, a reservoir lying
above the Fatehgarh reservoir. Barmer Hill is low permeability reservoir, which is likely to result in
lower recovery rates. Technical studies (fracture stimulation) are currently underway to gauge the
recovery potential of the Barmer Hill formation. CIL management has estimated the Barmer Hill
formation to have around 400mn barrels of STOIIP reserves. We believe conversion of these
contingent resources to reserves will further augment CIL's reserve base.
Rajasthan Reserve accretion story priced in
We believe that the Rajasthan Reserve accretion story is far from over despite the significant
reserve upgrades, however the same is captured in current valuations. CIL estimates an asset
base of 3.8bn barrels at the Rajasthan block, of which around 2.1bn barrels are currently under
development, which has a total 2P +EOR resource base of 985mn barrels, translating into a
recovery rate of 48%. Apart from core MBA currently under development, CIL has 1.7bnboe of
additional gross STOIIP in small and other fields, with current 2P reserves of 86mnboe. This
translates into a recovery factor of 5% of the STOIIP, which is much lower than the 48% recovery
of core MBA fields at the Rajasthan block. Thus, there exists upside in terms of further reserve
addition at other Rajasthan fields. We believe leads from the developmental drilling could offer
interesting insights regarding the same and expect reserve accretions over the next 6-8 months.
Source: Company
Exhibit 3: Rajasthan Asset Base
1,293
468
293
2,054
300
1,408
3,762
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Mangala (M) Bhagyam(B) Aishwariya (A) Total MBA Rajasthan
Small Fields
Other
Rajasthan Fields
Total
Rajasthan
Likely to augment
Reserve base in
future
I
n
m
n
b
o
e
CIL has 1.7bnboe of additional
gr oss STOIIP i n smal l and
other fi el ds, wi th current 2P
r eser ves f or t he same at
84mnboe, t ransl at i ng i nt o a
recovery factor of 5% of the
STOIIP, which is much lower
than the 48% recovery of core
MBA at the Rajasthan block
Source: Company, Angel Research
Exhibit 2: Sensitivity with Crude and Exchange Rate
Crude Prices (US$/bbl)
60.0 65.0 70.0 75.0 80.0 85.0 90.0
42.0 197 212 229 246 254 265 281
43.0 201 216 234 247 255 271 287
44.0 203 221 238 248 260 277 293
45.0 207 225 243 253 265 282 299
46.0 211 230 248 258 271 288 305
47.0 215 234 249 258 276 294 306
48.0 219 239 254 263 281 299 312
E
x
c
h
a
n
g
e

R
a
t
e
(
R
s
/
U
S
$
)
Cairn India
Oil & Gas
Source: Company
Exhibit 4: Barmer Hill formation
Reservoirs similar to Barmer Hill, across the world, have seen primary recoveries ranging between
7-10%, while the secondary recovery has seen increase in output by 20%. Thus, cumulative
recovery from such fields has been close to 25-30%. For our valuation purposes, we have factored
in 10% recovery from the disclosed STOIIP for the Barmer Hill, which adds 40mmbl to recoverable
reserves. This in turn boosts the gross recoverable reserve base at the block by 3.7%.
Overall, there exists reserve accretion potential from other fields as well. To factor in the upsides
from future reserve accretion, we have assumed recovery rate of 4% from Southern fields and
recovery rate of 10% from other Rajasthan fields. Thus, we anticipate 172mnboe of recoverable
reserves from these fields (Barmer Hill, Southern fields and Other Rajasthan fields). Our estimate
captures a recovery rate at 10.1% of 3P STOIIP from these fields, which is fair considering that
reserves are yet to be validated and recoveries in these fields are likely to be much lower than
core MBA fields due to poor reservoir characteristics.
Ceteris paribus, CILs current market price of Rs283/share is discounting a high 18.5% recovery
rate from other Rajasthan fields. This is very high considering that the recovery rate of 18.5%
reflects recoverable reserves of 316mnboe, an increase of 21.1% over the current reserve estimate
from the block. Thus, any disappointment on further reserve accretion at Rajasthan would adversely
impact CIL's stock price.
Our recovery estimates largely
reflect in the CIL stock price,
which in turn means that any
positive newsflows from these
f i el ds woul d l ead t o no
meaningful valuation upsides
We believe the current market
pr i ce of Rs283/shar e i s
di scounti ng 18.5% Recovery
rate from the other Rajasthan
fields
Cairn India
Oil & Gas
Attractive Exploratory portfolio albeit too early to factor in
CIL is largely a single asset company with 92.3% of its net 2P reserves situated in Rajasthan
block. This has resulted in it being viewed as a finite entity instead of a perpetual entity. Hence, we
have valued the company on asset-based NAV basis than on cash flow multiple. Nonetheless, we
believe that exploratory success in the newer geographies could change perception of CIL being
a finite entity. Success in it exploratory portfolio beyond Rajasthan will also re-rate its valuation.
Thus, further discoveries will not only add to the valuation from the reserves perspective, but will
also change perception and the valuation methodology for CIL going ahead.
CIL estimates 1.4bnboe of net un-risked prospective resources in its Exploratory portfolio, which
has increased significantly over the last couple of years. The risked estimate of the same stands
at around 112mnboe, which reflects the probabilistic success ratio of 8.0%. The company's current
success ratio is at a high 40%.
CIL's current success ratio is
at a high 40%
We believe the lower success ratio for future discoveries is largely due to the fact that much of the
un-risked prospective resources are situated in the frontier and emerging plays based on diversity
of the basins. However, 61% of the same is situated in the highly prospective deepwater blocks.
Source: Company
Exhibit 6: Composition of Exploratory blocks
Source: Company
Exhibit 5: Net Un-risked Prospective Resource
-
500
1,000
1,500
2007 2008 2009
i
m
n
b
o
e
61% of CIL s net un-r i sked
pr ospect i ve r esour ce i s
si t uat ed i n t he hi ghl y
prospective deepwater blocks
Further discoveries will add to
the valuation from the reserves
per spect i ve and change
per cept i on and val uat i on
met hodol ogy f or CIL goi ng
ahead
Cairn India
Oil & Gas
We, however, believe that any meaningful exploratory success is sometime away as CILs asset
portfolio comprises assets at early exploration stage. Hence, to factor in a meaningful exploratory
upside at the current juncture would be premature. In line with the same, we have factored in a
probabilistic success ratio of 8.0% for CILs Exploratory portfolio. However, ceteris paribus,
current market price of Rs283/share reflects high Exploratory success rate of 34%.
Enhanced Oil Recovery opportunity captured in valuation
In its bid to extend plateau production from the Rajasthan block, CIL is likely to undertake EOR.CIL
estimates possible approvals for an off-take rate based EOR by 2011E and field-wise
implementation of the same from 2016E onwards. Successful implementation of EOR will also
result in extension of CIL's peak plateau production from the Rajasthan block to 8-9 years. CIL
plans to utilise polymer and alkaline-surfactant-polymer (ASP) flooding to enhance crude
recovery from the block. We, however, expect CIL to register limited benefits from EOR
implementation due to high cost involved and back ended nature of EOR volumes.
Source: Company
Exhibit 7: Exploration - Ongoing Programme
RJ-ONN-2003/1 GV-ONN-2002/1 GV-ONN-2003/1 VN-ONN-2003/1
2 to 4 wells
Complete drilling
operations, decision
on Phase II
Complete 550 km 2D
seismic; processing
and interpretation
Finish processing of
2D seismic. Decision
on Phase II
RJ-ON-90/1
Focus on material
resource additions
RAVVA
KG-ONN-2003/1
2 wells 2009
3 wells 2010
INDIA
RAVVA
Planning appraisal &
exploration wells to
support production
KG DWN 98/2
INDIA
KK DWN 2004/1
GS-OSN-2003/1
1 well in 2010
KG-DWN-98/2
3 wells 2009; Ultra-
deep drilling 2010
SL-2007-01-001
KK-DWN-2004/1
Complete 3,800 km
2D. Processing and
Interpretation
PR-OSN-2004/1 SL 2007 01 001
Seismic:5,000km 2D,
1,000km
2
3D by 2010
Drilling 2011
SRI LANKA
PR-OSN-2004/1
800 km
2
, 2010
Drilling 2011
NON-OPERATED
OPERATED
We bel i eve t hat any
meani ngf ul expl or at or y
success is sometime away as
CIL s asset por t f ol i o
compr i ses asset s at ear l y
exploration stage
We have f act or ed i n a
probabilistic success ratio of
8.0% f or CIL s
Exploratory portfolio
Source: Company
Exhibit 8: EOR likely to extend plateau production period
S h ti
EOR
Potential to
175,000
b d
Initial targeted
plateau production
Schematic
Potential to
extendand
enhance
plateau
l
R
a
t
e
bopd
p p
MBAWater flood
O
i
10 Years Q3 2009
Cairn India
Oil & Gas
Source: Company
Exhibit 10: Daqing - ASP Pilot performance
Application of EOR technique elsewhere in the world has also provided much higher yield than
15%, as anticipated by CIL. Daqing and Shengli (the two large fields in China) produced close to
100mnbbl oil per annum through polymer flooding. At the Daqing field in China, ASP pilot
(EOR method) is in application since 1994 and yielded incremental production of around 25%.
Similarly, the ASP pilot at Shengli has yielded more than 20% recovery.
Given the scale, EOR at MBA could be a challenging task as it is one of the largest field-wise
implementation of EOR across the globe. Consequently, we are currently factoring in incremental
recovery rate of 15% from EOR as per company guidance. But, we believe EOR potential is
largely factored in current valuations. Even if there is any improvement in EOR-based recovery
rate going ahead, we believe it will not add significantly to valuations, as EOR volumes are likely
to be back-ended.
CIL has conducted pilot and lab tests for implementation of EOR, which has yielded positive
results (laboratory test indicate a 30-40% incremental recovery potential through EOR
techniques). CIL claims EOR will approximately add 15% to the recovery factor for the MBA fields.
Source: Company
Exhibit 9: Laboratory test - Incremental ASP recovery post water flooding
Time
C
u
m
u
l
a
t
i
v
e
O
i
l
,
%
O
i
l
C
u
t
,
%
Cum Oil
Cum Cut
Currently, CIL claims EOR will
approximately add 15% to the
recovery factor for the MBA
fields
Even i f t her e i s any
i mprovement i n EOR-based
recovery rate going ahead, we
bel i eve i t wi l l not add
significantly to valuations, as
EOR volumes are likely to be
back-ended
Cairn India
Oil & Gas
Receding concerns; Cess overhang persists
Since listing, the two major factors that have impacted CIL's stock price include crude oil prices
(base price as well as discount on the same) and development updates relating to the scheduled
delivery of oil. Concerns/ lack of visibility in terms of discount on the quality of crude and timely
completion of the pipeline had impacted the stock performance in the past.
Major issues and concerns regarding timing of the monetisation of the reserves have however,
been addressed by production of first oil and likely completion of pipeline by early 2010. Also,
concerns over the pricing of Rajasthan crude oil have also been resolved. Overall,
commencement of oil production has resulted in gradual de-risking of the Rajasthan project. This,
we believe, would cushion the stock from any significant correction in crude oil prices going ahead.
Maj or concer ns r egar di ng
timing of the monetisation of
t he r eser ves have been
addr essed f ol l owi ng
production of first oil and likely
completion of pipeline by early
2010
We believe that CIL has an upper hand on the Cess front. We have assumed cess of Rs927/tonne
over the life of the field (cess at the time of signing of the PSC) for valuation purposes. However,
if CIL pays no cess on its share of crude production, our Target Price (ceteris paribus) would
increase by Rs8/share, up 3.0% to Rs261/share. In case of adverse ruling (cess liability
determined at Rs2,575/tonne), our Fair Value would reduce by Rs16/share, a decline of 6.3% to
Rs237/share. Thus, outcome of the cess issue will continue to be an overhang on stock valuations
in the medium term.
Outcome of the cess issue will
continue to be an overhang on
st ock val uat i ons i n t he
medium term
Source: Company, Angel Research; Note: RoU - Right of Usage of land for building of pipeline
Exhibit 11: Key Concerns phasing out
Issue Resolved Comments
Pipeline from MPT to Salaya Yes Construction of the pipleline from MPT to Salaya has
been completed (560km built out of total 590km
proposed to be built).
Crude off-take Yes CIL has been allowed to sell crude to multiple
nominees by the government (public and private
refiners) and sufficient allocation has been made for
near term in line with production levels. The export
option has also been provided in the event of
insufficient demand.
Pricing of crude Yes Pricing of crude oil has been fixed at a discount to
the bonny light prices based on the GWP of the
product slate.
Execution Risk Partially Delivery of first oil in Rajasthan has led to lower
execution risks.
Cairn India
Oil & Gas
Technological prowess, excellent Management key positives
CIL is a proven explorer of hydrocarbon having achieved a good success ratio of 40%. CIL has
been involved in three of the seven major discoveries in India over the past decade. Much of the
credit for the company's superior exploration capabilities is attributed to its experienced
management and application of best-in-class technology. CILs' exploratory prowess is well
exemplified by its historic success at the Rajasthan block. Notably, when Shell (original owner of
the Rajasthan block) was reducing its stake in the block due to lack of exploratory success, CIL,
based on feedback of its exploratory team, increased its stake in the block and acquired full
interest in the block in 2003. Post acquisition of the block, CIL reported major discoveries of the
Mangala, Bhagyam and Aishwariya (MBA) fields. Till date, CIL has made 25 discoveries in the
block. CILs exploratory success is attributed to application of superior technology such as sound
petroleum modeling system and seismic data application.
CILs' exploratory prowess is
well exemplified by its historic
success at the Rajasthan block
Adoption of advanced methods to enhance production coupled with excellent reservoir
management skills are evident from CIL's track record at the Ravva field, where it farmed-in as
operator in 1994 and has since significantly ramped up production from 4,500boepd to 50,000boepd
over the next five years. Moreover, reserves in the block have doubled along with a recovery
factor of over 60% (which is at the higher end of the global standard).
Much credit for CIL's superior technology is attributed to excellent management, which despite
hiccups, delivered the first oil in the Rajasthan block in line with its guidance. The Rajasthan block
( new hydrocarbon basin), which is not connected to any existing industry infrastructure, is one of
the largest projects undertaken by CIL and meeting the delivery schedule is a positive. CIL is also
building a pipeline for crude evacuation from the block.
We believe that the key differentiating factors for players in the E&P industry are management
quality and technological prowess. Pertinently, CIL outshines its PSU peers on both these fronts.
The key differentiating factors
f or pl ayer s i n t he E&P
i ndust r y ar e management
qual i t y and t echnol ogi cal
prowess
Source: Company
Exhibit 12: Advanced Technology in use
INDIA
OLD
Cairn reprocessed
Reprocessed and enhanced
regional gravity data used in
integrated basin modeling
Acquisition and
processing of best
in class seismic data
in KG and Palar
Basins Fully integrated Petroleum
systems modeling
Cairn India
Oil & Gas
Risks to Recommendation
Oil price fluctuations
CILs Fair Value has high sensitivity to crude oil prices. We believe that CIL is a proxy play on
crude as demonstrated by the strong correlation of its stock price with crude of 0.88, 0.89 and 0.96
in CY2007, CY2008 and CY2009, respectively. Thus, if oil prices were to continue trading strong
going ahead, there exists high chance of CIL's stock price ruling at the higher than our Fair Value
estimate. A higher oil price environment and/or lower discount for Rajasthan crude, poses an
upside risk to our estimate. However, the current stock price is discounting long-term crude oil
prices of US$85.1/bbl owing to which the risk-reward ratio of investing in the stock in not favourable.
Thus, large upside to valuation from sustainable higher oil prices is unlikely.
Variability in recovery rates
CIL has conducted substantial investigations to employ EOR, but there remains a risk that EOR
may not be as effective as the company anticipates it to be. We have assumed polymer and ASP
flooding to lift incremental crude recovery at Rajasthan from 33.4% (water flooding) to 48.3%,
translating into additional recovery of around 15.0%. We have ascribed a value of Rs19/share for
successful EOR execution by CIL, which constitutes almost 7.5% of our Fair Value. Thus, successful
implementation of EOR is important for the company. We believe our estimates of EOR recovery
are quite fair in spite of the fact that similar fields, across the world, have yielded incremental
recovery in the range of 20-25%. However, as EOR application at MBA is one of the largest one
around the globe, there exists a technical risk owing to which we have factored in lower recovery
rate, in line with the current management guidance.
Execution risk/delays in ramp up
Though production from the Mangala field has commenced, peak production and ramp up in
production from the MBA fields is contingent on allocation of further volumes to various refineries
by the government. Currently, the government has allocated volumes of 0.7MMTPA and 2.4MMTPA
for FY2010 and FY2011, respectively. However, we expect higher production forecasts for FY2010
and FY2011 at 1.3MMTPA and 5.5MMTPA respectively. Thus, it would require further allocation of
0.59MMTPA and 3.08MMTPA of crude oil to other refineries. However, following the recent
agreement between CIL and RIL, un-allocated volumes from the MBA fields would be lower than
mentioned earlier(volumes tied-up not disclosed by CIL). Pertinently, the risks associated with
slower ramp up in production have reduced considerably as the government recently has given
the go ahead for sales of MBA crude to private refineries as well.
Volumes allocated to PSU Refineries (MMTPA) FY2010E FY2011E
HPCL 0.3 0.5
MRPL 0.2 0.4
IOCL 0.2 1.5
Total 0.7 2.4
Production Forecast 1.3 5.5
Balance Quantity 0.6 3.1
as % of production forecast 45.7 56.2
Exhibit 13: Unallocated volumes of MBA production
Source: Infraline, Angel Research
Cairn India
Oil & Gas
Similarly, any delays in commissioning of the crude oil pipeline would also lead to delays in
ramp up of production from the MBA fields.
Uncertainty over Cess /Regulatory issues
We do not see immediate resolution of the cess issue for the Rajasthan block. The key issue of
contention beteween CIL and GoI is who is liable to pay the cess and at what rate. CIL believes
that the responsibility of payment of cess lies with the licensee of the block ie. ONGC in this case,
and the joint venture partners are not liable to pay the cess. While the GoI believes that as the
PSC provisions does not mention the cess obligation, CIL is also liable to pay it. Secondly, the
issue of rate of cess applicable also remains unresolved. CIL maintains that the cess payable is
Rs 927/tonne as the PSC states the fiscal liability clause and the rate of cess was Rs900/tonne at
the time of signing the contract. However, GoI has asked CIL to pay cess at the current rate. While
the matter is under arbitration, CIL is currently paying higher cess under protest at the rate of
Rs2,575/tonne. We believe the matter would most likely be settled in favour of CIL and it would be
required to pay cess at the rate of Rs927/tonne. Higher cess payment than our estimate would be
a negative for CIL by Rs16/share. Conversely, if CIL is exempt from paying the cess, it would
increase our Fair Value by Rs8/share.
Exchange rate fluctuations
Realisation from crude production from CIL's assets is US Dollar denominated. Therefore, any
appreciation/depreciation of the Rupee from our estimates would impact valuations. For every
Re1 appreciation in our long-term Rupee assumption (FY2012E onwards) of Rs/US $45, our Fair
Value would be adversely impacted by 2.0%.
E&P write-off risk
Much alike other E&P companies, CIL faces the E&P write-off risk (exploratory risk) in its E&P
business. The company may have to write off E&P expenditure on dry wells if it does not meet with
commensurate success on its E&P capex. This could in turn impact Profitability of the company.
Cairn India
Oil & Gas
Financial Analysis - Production to ramp up in FY2013E
Volume and Sales Outlook
We expect production from the MBA fields to fully ramp up in FY2013E. We have assumed MBA
peak production of 180,000bpd (Net working Interest 126,000bpd) from FY2013E, with the Mangala
field expected to achieve peak production of 125,000bpd (Net working Interest 87,500bpd) in
FY2012E. The Bhagyam and Aishwariya fields are expected to achieve peak production of
40,000bpd (Net working Interest 28,000bpd) and 15,000bpd (Net working Interest 10,500bpd) in
FY2012E and FY2013E, respectively. In FY2009, Cairn's production from its extant (Ravva and
Cambay) fields stood at 66,146boepd (Net working Interest 17,264boepd). By FY2013E, we expect
total production from all the fields at 244,932boepd (Net working Interest 143,912boepd), registering
a CAGR of 94.1% over FY2009-13E. Post this period, natural decline in production based on
water flooding will commence. However, with commencement of EOR, production at Rajasthan
block is likely to sustain for the subsequent 4-5 years. We expect on a Net working interest basis,
production is expected to increase 8.3x by FY2013E over FY2009 production levels. The MBA
fields are likely to account for majority of the company's total production by FY2013E.
Exhibit 14: Key Operating Assumptions
Particulars FY2010E FY2011E FY2012E FY2013E
Production estimates
Rajasthan Gross production
Mangala 9.5 40.2 45.6 45.6
Bhagyam - 0.9 12.8 14.6
Aishwariya - - 3.7 5.5
Total Rajasthan (mn barrels) 9.5 41.1 62.1 65.7
Ravva Gross production
Gas (bcm) 0.49 0.49 0.47 0.37
Crude oil (MMTPA) 2.1 2.1 2.0 2.0
Ravva O+OEG (MMTOE) 2.6 2.5 2.4 2.3
Ravva O+OEG (mnboe) 19.0 18.5 17.9 16.8
Cambay Gross production
Gas (bcm) 0.49 0.49 0.49 0.49
Crude oil (MMTPA) 0.5 0.5 0.5 0.5
Cambay O+OEG (MMTOE) 0.9 0.9 0.9 0.9
Cambay O+OEG (mnboe) 6.9 6.9 6.9 6.9
Key Pricing assumptions
Brent Crude (US $) 67.0 70.0 75.0 75.0
Discount for MBA crude (%) 15.0 15.0 15.0 15.0
Opex Rajasthan (US $/bbl) 10.0 5.0 4.0 4.0
Cairn India
Oil & Gas
Exhibit 16: Sales Growth Trend
41.5
94.5
215.7
48.8
(9.9)
(50.0)
0.0
50.0
100.0
150.0
200.0
250.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
FY2009 FY2010E FY2011E FY2012E FY2013E
% R
s
c
r
Total Reported Sales Sales growth (RHS)
On the Realisation front, we have assumed Brent crude price at US $67/bbl for FY2010E,
US $70/bbl for FY2011E and US $75/bbl FY2012E onwards and applied a discount of 15% to
arrive at the selling price for MBA crude (in line with the company guidance). Thus, on the back of
higher Volume growth, we expect Top-line to register a CAGR of 69.4% over FY2009-13E.
Source: Company
Exhibit 15 : Rajasthan Monetisation to increase Production
0
20
40
60
80
100
120
140
160
FY2009 FY2010E FY2011E FY2012E FY2013E
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OPM to touch a high of 83.6% in FY2012E, decline thereafter
We have assumed US $4.0/bbl as cash Opex and US $1.5/bbl as pipeline expenditure for the
MBA fields. However, to sustain peak production over the life of the field, EOR will be employed in
turn increasing the cost of production. We have assumed (as per company guidance)
US $11.0/bbl as cost of production for EOR volumes. There is no Royalty for the Rajasthan block,
whereas we assume cess at Rs927/tonne for valuation purposes. Similarly, as per the PSC,
Royalty and cess are nil for CB-OS-2 block, whereas Royalty stands at Rs481/tonne and cess at
Rs927/tonne for the Ravva block. With this, total direct Opex/bbl is expected to hover in the range
of US $8-8.5/bbl in pre-EOR application phase.
Cairn India
Oil & Gas
Profits to grow eight-folds by FY2013 over FY2009
We estimate Total Recouped costs to increase by 38.3% CAGR over FY2009-13E, with depletion
expected to be a major cost head. Depletion cost is expected to be around US $5.5/bbl over the
life of the Rajasthan field. On the Borrowings front, on account of the significant cash generation,
we expect Cairn to repay its entire debt in FY2013E and become a Debt-free company resulting in
nil Interest costs thereon. The company's effective Tax rate is also likely to be lower on account of
the benefits arising from the seven-year tax holiday that the MBA fields would avail. We estimate
the company's effective Tax rate at around 18.6% in FY2013E. We expect CIL to register 69.2%
CAGR in PAT over FY2009-13E, an eight-fold growth over FY2009 levels.
Exhibit 18: PAT Margin Trend
56.1
35.5
54.2
58.1
55.8
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY2009 FY2010E FY2011E FY2012E FY2013E
%
R
s
c
r
PAT PAT Margin (RHS)
With ramp up of production at the MBA fields, OPM is expected to expand by 2,310bp from 60.5%
in FY2009 to 83.6% in FY2012. However, these robust Margins will come off slowly with
increasing cost pressures (on account of EOR application) and hover at 60-65% levels towards
the later part of life of the field. On the back of OPM expansion and healthy Top-line growth, we
estimate 82.2% CAGR in EBITDA over FY2009-13E.
Exhibit 17: OPM Trend
60.5
66.6
80.9
83.6
81.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
0
2,000
4,000
6,000
8,000
10,000
12,000
FY2009 FY2010E FY2011E FY2012E FY2013E
%
R
s
c
r
EBITDA OPM(RHS)
Cairn India
Oil & Gas
RoE / RoCE to increase on commencement of production from MBA fields
In FY2009, CIL's RoCE and RoE stood at a low 1.1% and 2.4%, respectively. However, with the
commencement of production at the MBA fields, the company's Return Ratios are set to improve.
Thus, we expect the MBA fields to be major Revenue and Profit drivers for the company going
ahead. In FY2012E and FY2013E, we expect CIL to register RoCE of 22.4% and 19.9% respectively.
During the mentioned years, we expect CIL to register RoE of 20.5% and 17.7%, respectively.
Exhibit 19: DuPont Analysis
Particulars (x) CY2007 FY2009 FY2010E FY2011E FY2012E FY2013E
PAT / PBT (0.19) 0.81 0.73 0.80 0.81 0.81
PBT / EBIT (25.86) 2.31 0.98 0.98 0.99 1.02
EBIT / Sales (0.00) 0.30 0.48 0.69 0.72 0.67
Sales / Total Assets 0.03 0.04 0.07 0.22 0.31 0.29
Total Assets / Net worth 1.03 1.15 1.15 1.14 1.13 1.08
RoE (%) (0.1) 2.4 2.9 13.3 20.5 17.7
Cairn India
Oil & Gas
Outlook and Valuation
Outlook
Since its October 2008 lows, the CIL stock has spiked more than 2.5x driven by strong crude oil
prices and gradual de-risking of the Rajasthan project. In the past as well, CIL has demonstrated
strong correlation with the crude oil prices, which we expect will continue going ahead as well.
Thus, we see CIL as a proxy play on crude oil prices. However, given our outlook of weaker oil
prices going ahead, we believe CIL's stock is likely to underperform the benchmark indices.
Development work on the Rajasthan block is progressing well with production from the first train
having started, while production from Train-II is likely to commence in early 2010, followed by
Train-III in 1H2010 and Train-IV in 2012. Moreover, with recent approval of sales of crude oil to the
private refineries, we believe production growth is unlikely to be constrained on account of allocation
of sufficient volumes. Thus, we believe that the Rajasthan project will continue to further de-risk
going ahead. However, the cess issue is likely to be a major overhang on the stock price over the
medium term.
Valuation Methodology
We have valued CIL based on the asset-based NAV rather than perpetual going concern due to its
present single-asset nature. This in turn implies that we value CIL as a finite entity, which will
exhaust all its known reserves, and post which the company will cease its operations. Thus, the
asset-based NAV calculation does not consider the reinvestment capability of the company resulting
in lower valuations compared to valuation of a going concern entity. We believe exploratory success
beyond the Rajasthan block would likely change the perception and valuations methodology for
CIL, though it could be some time away.
We prefer the NAV method to value CIL's assets (viz. MBA block, Ravva field and Cambay fields)
as it has long-term visible cash flows arising out of its existing resource base, the value of which
cannot be captured using the traditional near-term Earnings multiples. Also, the varying profit
petroleum component makes valuations possible only on NAV basis. Moreover, separate NAV
methodology for each asset is best suited for valuing CIL as these assets are at different stages in
the sharing of government entitlement of the profit petroleum.
In order to value the development upsides from the Rajasthan field, we have used EV/boe as an
appropriate mechanism, as the timeline for monetisation of these assets are still not clear and no
FDP has been prepared for these assets. We have valued Barmer Hill, Southern fields and other
fields in Rajasthan based on implied EV/boe of core MBA fields(FY2011 - US $12.4/bbl).
At the plateau production rate, CIL will generate large amounts of Free Cash flows, which in turn
leads to FCF yields of around 10-15% for initial few years. However, the FCF yields are likely to
decline with increase in the government share of profit petroleum. Moreover, the increasing cost
of production on account of incremental EOR barrels is likely to reduce the FCF going ahead. We
believe, CIL is likely to generate FCF of US $33bn from its Rajasthan field, over the life, with large
part of the same likely to be generate in first ten year US$20bn (62% of the life of field FCF). Thus,
Cairn India
Oil & Gas
the valuations based on the FCF is inappropriate, till a clear re-investment plan is put in place by
the company, thus we believe NAV based valuation is best suited for valuing the company. CIL's
management has kept away from providing guidance on possible re-deployment of the huge cash
flows generated by the company. CIL has a good exploration track record, but the large cash it will
generate is unlikely to be consumed entirely by its exploration segment. In event of non-compliance
of liberal dividend policy, we believe there is risk of deployment of free cash in lower return
businesses. Another possible deployment of the cash would be an acquisition of producing property,
however buying the same would lead to little value creation for the company.
Valuation
We have valued CIL on SOTP methodology including sum of NAV-based valuation of the MBA
fields, Ravva and Cambay assets, while the others assets (developmental and Exploratory upsides)
have been valued on EV/boe basis. We have valued potential EOR upside of 308mn barrels of oil
recovery from Rajasthan block separately. Thus, we have valued the MBA fields - base and EOR
production - separately. Our NAV calculation is based on long-term crude oil prices of US $75/bbl.
We have calculated CIL's NAV by estimating cash flows on asset-by-asset basis with the associated
assumptions for production profile, oil/gas pricing, royalty/cess, opex, and fiscal terms.
Cairn India
Oil & Gas
Exhibit 20: Summary of Sum-of-the-Parts Valuation (SOTP)
Particulars (Rs cr) FY2010E FY2011E
Rajasthan Block
RJ -ON-90/1(MBA block) 29,945 35,380
Value per share 158 187
RJ -ON-90/1(MBA EOR) 3,282 3,676
RJ -ON-90/1(Barmer Hill) 2,032 2,388
RJ -ON-90/1(Southern fields) 406 478
Value per share 2 3
RJ -ON-90/1(Other fields) 3,414 4,012
Total Value of Rajasthan Block 39,079 45,934
CB-OS-2 729 575
Value per share 4 3
Ravva 2,010 1,828
Upside potential (KG-DWN-98/2) 278 302
Value per share 1 2
Exploratory porfolio upsides 1,596 1,731
Value per share 8 9
Total Asset value 43,693 50,371
Less: Corporate expenditure 2,487 2,414
Less: Net debt (33) (120)
Value per share (0) (1)
Equity value 41,239 48,076
Equity shares (cr) 190 190
Equity value per share 217 253
Source: Angel Research
Exhibit 21: Fair Value break-up (FY2011E)
187
19
13 3
21 242
3
10 2
9 1 (12.7)
253
130
155
180
205
230
255
280
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Cairn India
Oil & Gas
Asset-wise, CIL's Rajasthan block accounts for 96% (Rs242/share) of its value and is the biggest
contributor to our Target Valuation. This value is derived from the MBA fields and further
developmental upside from the Rajasthan block. Extant fields, viz. Ravva and Cambay form just
5.0% of our estimated Fair Value as these assets are mature and are in decline phase. Exploratory
upsides form around 4.3% of our estimates. As we value CIL based on asset based NAV, we
seperately deduct the value of Present value of future corporate expenditure, which impacts our
target price by Rs13/share.
Valuation of Rajasthan Fields
Rajasthan field (RJ -ON-90/1) is the key asset of the CIL. We have valued the same factoring in
reserve at the core MBA fields and developmental upsides from Barmer hill, Southern fields and
other fields. We have valued the MBA fields (including EOR) at Rs206/share, while the
developmental upsides constitute Rs37/share. Our NAV for the MBA fields implies an EV/boe of
US $12.4/bbl (end FY2011E, on 2P +EOR reserves) on CIL's Net Entitlement of crude.
Valuation of the MBA fields
Key assumptions for estimating cash flows from the MBA fields include:
We have assumed the Mangala field to commence production in September 2009, Bhagyam
in April 2010 and Aishwariya in April 2011.
Production profile includes EOR plateauing at 1,80,000bpd in FY2013E with a plateau production
period of eight years. Including EOR, we have assumed implied gross recovery of 981mnbbl
over FY2010-41E (proposed period under the FDP).
Total life of field development capex of US $3.4bn (net to CIL) including US $932mn to be
spent on pipeline.
Crude realisation is based on 15% discount to Brent (in line with company's guidance, but
higher than the benchmark Duri-Widhuri crude).
Cash direct opex is assumed at US $4.0/boe (FY2012E onwards) and at US $11.0/boe for
incremental barrels under EOR. Opex for FY2010E and FY2011E is assumed at US $10/bbl
and US $5/bbl, which is higher than normalised capex due to trucking. We estimate pipeline
opex of US $1.5/bbl.
Profit Petroleum is calculated after recovering the cumulative F&D investment and Opex. The
government's share of Profit Petroleum starts from FY2012E at 20% and remains at this level
till FY2014E. However, the same increases to 30% in FY2015E and further to 50% in FY2016E.
FY2017E onwards, the government share remains at 50% for the rest of the life of the field.
Tax holiday of seven years has been assumed on CIL's share of taxable profits. However, as
per Indian Tax laws, MAT payable during the period will be eligible for set off against the
applicable tax liability (foreign company tax rate of 42%) beyond the tax holiday period.
There is no royalty on CIL for the Rajasthan block. However, there is lack of clarity on the
liability of cess and the same is under dispute. Though the PSC does not specifically mention
the cess, the government has asked CIL to pay cess at the current rate of 2,550/MT. We have
assumed cess of Rs927/MT as CIL should be able to invoke the fiscal stability provisions of the
PSC, thus limiting the applicable rate of cess at Rs927/MT (at the time of execution of the PSC
in 1995). Though it is a recoverable cost and results in reduction in Profit Petroleum, it reduces
CIL's cash flows thus having a material impact on NAV.
Particulars FY2010E FY2011E
PV of free cash flow (Rs cr) 33,227 39,056
PV of free cash flow (US$ mn) 6,995 8,490
Implied share price (Rs) 175 206
Implied EV/boe US$ 10.2 12.4
Cairn India
Oil & Gas
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3
Cairn India
Oil & Gas
Valuation of Barmer Hill
Barmer Hill formation holds around 400mnbbl of resource potential. However, the reservoir depicts
low permeability nature, which would result in much lower recovery rate. Similar fields across the
world yield around 15-20% recovery. Thus, factoring in recovery of 15% and EV/boe of
US $12.4/bbl (implied EV/boe of MBA's fields), we have arrived at Fair Value of Rs12.6/share for
Barmer Hill.
Valuation of Southern fields
The Southern fields (Saraswati and Raageshwari oil fields) have been valued on EV/boe basis.
We have valued these fields at Rs2.5/share factoring in recovery of 4% of the potential resource
base and EV/boe of US $12.4/bbl (implied EV/boe of MBA's fields). The recovery is in line with the
reserve estimates at the fields.
Exhibit 23: Barmer Hill Valuation
Resources-mnboe 400.0 400.0
Recovery factor (%) 15.0 15.0
Recoverable reserves 60.0 60.0
EV/boe 10.2 12.4
CIL's Working interest (%) 70.0 70.0
CIL's share of Enterprise value (US $mn) 428 519
Enterprise value (Rs cr) 2,032 2,388
Implied value per share (Rs) 10.7 12.6
Exhibit 24: Southern Fields Valuation
Resources-mnboe 300 300
Recoverable reserves 12 12
EV/boe 10.2 12.4
CIL's share of Enterprise value(US $mn) 86 104
Enterprise value (Rs cr) 406 478
Valuation of other Rajasthan fields
We believe there exists upside reserve upsides from the other Rajasthan fields as well. To reflect
the same, we have factored in 10% recovery of the resource base and EV/boe of
12.4/bbl (implied EV/boe of MBA's fields). Consequently, we have arrived at the Fair Value of
Rs21.2/share for other Rajasthan fields.
Cairn India
Oil & Gas
Exhibit 26: KG-DWN-98/2 valuation
Resources-TCF 2.09 2.09
Resources-mnboe 391 391
Recoverable reserves (mnboe) 195 195
EV/boe 3.0 3.4
Enterprise value (Rs cr) 278 302
Valuation of Ravva and Cambay fields
To value the Ravva and Cambay fields, we have assumed balance useful life at the term to expiry
of the PSC as year 2014 for Cambay and year 2018 for Ravva. Our DCF-based Fair Value is
Rs9.5/share and Rs3/share for Ravva and Cambay, respectively.
Valuation of KG-DWN-98/2
We believe, ONGC's KG-DWN-98/2 deepwater block in the KG Basin (Cairn has a 10% stake)
holds considerable promise. Current estimates put reserve potential at 2.09TCF (ONGC's initial
assessment was 2-14TCF), but this is still relatively underexplored. With availability of deepwater
rig from RIL, ONGC is likely to drill further wells at the block in order to appraise the reserve
estimates of the block. We have valued 2.09 TCF of reserves from the field, with a recovery of
50% and EV/boe of US $3.0/bbl and 10% working interest of CIL in the field. We estimate the
block to contribute Rs 1.6/share to the valuations. However as CIL has only 10% stake in the
block, even significant increase reserves lead to limited valuation upside.
Exhibit 25: Other Rajasthan Fields Valuation
Resources-mnboe 1,008 1,008
Recovery factor (%) 10 10
EV/boe 10.2 12.4
Value of Other Exploration upsides
CIL has a net unrisked exploratory potential of 1.4bn barrels of O+OEG, while recoverable reserves
of the same is a mere 8% (Source Infraline, Company). It may be noted here that though we
believe that there exists immense exploratory upsides for CIL over medium to long term, we have
factored in exploratory upside of 8% due to limited near term expectations.
Cairn India
Oil & Gas
Exhibit 27: Value of Exploratory upsides
Net Unrisked Prospective resources-mnboe 1,400 1,400
Risk weightage (%) 8 8
EV/boe 3.0 3.4
Enterprise value (US $mn) 336 376
Valuation based on Forward Curve
If we value CIL based on the forward curve of oil prices traded on the Intercontinental Exchange
(ICE), we arrive at a Target Price of Rs312/share. The key difference between our oil expectation
and price derived from forward oil curve is the long-term crude oil prices. While we expect
long-term crude oil price to hover around US $75/bbl, forward curve reflects a price range of
US $88-98/bbl.
W
A
C
C

(
%
)
Exhibit 29: Target Price Sensitivity with long-term Crude and WACC
Crude Prices (US $/bbl)
60.0 65.0 70.0 75.0 80.0 85.0 90.0
9.0 233 253 274 285 299 318 338
10.0 224 243 263 274 287 305 324
11.0 215 234 253 263 276 293 311
12.0 207 225 243 253 265 282 299
13.0 200 217 235 244 256 272 288
14.0 193 210 227 236 247 263 278
15.0 187 203 219 228 239 254 269
Source: Bloomberg, Angel Research, Note: As on November 19, 2009
Exhibit 28: Forward Oil Curve
65
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S
$
/
b
b
l
Brent forward price
Thus, our Fair Valuation for CIL based on the NAVs of its E&P assets (producing as well as under
development) along with value of developmental and exploratory upsides works out to of
Rs253/share. Of the same, development and exploratory upsides are valued at Rs48/share.
We Initiate Coverage on CIL with a Reduce rating.
Cairn India
Oil & Gas
Importantly, post the stake increase, Petronas will hold 14.9% stake in CIL, slightly below the
Open Offer trigger of 15%. Thus, any further stake acquisition by Petronas would trigger an Open
Offer. As per SEBI regulations, if Petronas's stake were to exceed 15%, it would be required to
make an Open Offer for an additional 20%. As per the Open Offer guidelines, pricing of the Open
Offer would be done at a maximum of (a) 6 month's average price of CIL from the date of trigger of
the Open Offer, (b) 2 week's average price from the date of trigger of the Open Offer, and (c) the
Deal price.
We do not rule out further stake purchase by Petronas, which would trigger an Open Offer and in
turn increase chances of CIL's stock trading at slight discount to the NAV based on the forward
curve of crude oil prices. However, given that timing of the deal is unclear, we cannot ascribe value
based on the forward curve.
Petronas stake hike in CIL unlikely to impact valuation
The Malaysian state oil company, Petroliam Nasional Bhd (Petronas), acquired a further 2.3%
stake in CIL for a sum of US $240mn on October, 14, 2009 from CEP at Rs260/share, a slight
discount to the closing price of Rs263/share on the day. This is the second time that Petronas has
increased its stake in CIL since its IPO, which reflects the former's commitment as a long-term
investor in the project. CEP, on its part, will utilise the funds to accelerate the pace of exploration
projects in Greenland.
Source: BSE, Angel Research
Exhibit 30: Petronas's increasing stake in CIL
9.9%
12.6%
14.9%
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
First Tranche-IPO (Dec 2006) SecondTranche-(2QFY2009) ThirdTranche-(3QFY2010)
At Rs 224/share
At Rs 260/share
(
%
)
At Rs 160/share
Cairn India
Oil & Gas
Exhibit 32: Peer Comparison
Peer Companies Mkt Cap EV EBITDA EBITDA PAT P/E EV/EBITDA
(US $ mn) (US $ mn) (US $ mn) Margin (%) (US $ mn) (x) (x)
Rosneft Oil Co 95,350 115,733 15,632 28.7 8,808 10.3 7.4
Occidental Petroleum Corp 40,135 68,788 11,559 63.0 4,596 14.2 6.0
EnCana Corp 41,157 54,347 7,517 44.1 2,398 19.7 7.2
Canadian Natural Resources 36,943 46,807 8,264 60.4 3,220 13.2 5.7
Woodside Petroleum 32,964 36,928 3,583 72.8 1,501 22.2 10.3
Apache Corp 33,533 37,324 8,146 70.8 3,421 10.4 4.6
Anadarko Petroleum Corp 31,132 40,691 6,612 62.6 681 42.6 6.2
Devon Energy Corp 31,817 38,305 6,855 66.9 2,985 11.5 5.6
EOG Resources Inc 22,394 24,583 3,751 68.0 984 22.0 6.6
Talisman Energy Inc 18,136 19,836 4,604 56.1 752 23.9 4.3
Chesapeake Energy Corp 15,597 28,467 4,423 58.3 1,566 9.9 6.4
Southwestern Energy Co 14,551 15,510 1,922 72.0 819 18.0 8.1
Nexen INC 13,333 18,494 4,336 58.0 1,119 11.8 4.3
Murphy Oil Corp 11,391 11,762 2,929 16.6 1,022 11.8 4.0
Source: Bloomberg, Angel Research, Note: As on November 19, 2009
Exhibit 31: Bear, Base and Bull Case
147
23
74
9 253
8
79 340
100
150
200
250
300
350
B
e
a
r
C
a
s
e
C
e
s
s
@
R
s
2
,
5
7
5
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b
b
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B
u
l
l
C
a
s
e
R
s
/
S
h
a
r
e
Target Price- Scenario analysis
To gauge potential value in different scenarios, we create three potential scenarios for CIL, viz.
Bear case, Base case and Bull case. In a Bear case scenario, we have assumed adverse ruling
for CIL on the cess front, lower long-term crude oil prices of US $50/bbl and no exploratory
successes. The Value derived under the bear case scenario is Rs147/share, a mammoth 48%
downside from the current market price. Our Base case scenario factors in crude oil prices of US
$75/bbl, exploratory success rate of 8% and cess at Rs927/tonne. Our Base case scenario throws
up a Fair Value of Rs253/share, which is our Target Price. In a bullish scenario, if we assume
long-term crude oil prices of US $100/bbl and no obligation on CIL to pay cess, our Fair Value
estimate increases to Rs340/share, translating into an upside of 20.1% from current levels.
Cairn India
Oil & Gas
Exhibit 34: Sensitivity with long-term Crude and Discount on Crude
60.0 65.0 70.0 75.0 80.0 85.0 90.0
7.0 231 247 257 275 294 307 325
9.0 225 244 251 269 287 305 317
11.0 219 238 249 262 280 297 309
13.0 213 232 246 255 272 290 307
15.0 207 225 243 253 265 282 299
17.0 203 219 237 250 258 275 291
D
i
s
c
o
u
n
t

o
n

C
r
u
d
e
(
%
)
Sensitivity with Crude and Discount offered to Refiners
Due to its inferior crude quality, CIL is likely to fetch a discount for MBA crude to the benchmark
Brent crude prices. CIL management has stated that the discount based on the GPW for the MBA
crude over the last six months has ranged between 10-15%. Thus, another critical factor, which
impacts Target Price is variability in discount rate offered to refiners. We have factored in 15%
discount to Brent crude in our base case scenario, in line with management's guidance. However,
the same is higher than average discount compared to Duri-Widuri mix. At our long-term crude oil
assumption of US $75/bbl, 4% variability in the discount leads to 3.0-3.5% change in our Fair
Value estimates.
Target Price - Sensitivity Analysis
Sensitivity with long-term Crude oil prices and Exchange rate
The most crucial variable for determination of CIL's Fair Value is the long-term crude oil price
(FY2012E onwards). We believe that the oil prices at US $75/bbl provide adequate incentives to
producers (Refer Crude Oil Prices - Outlook). Thus, we have arrived at a Target Price of
Rs253/share for CIL benchmarking the same to our long-term crude oil assumption of US $75/bbl.
A 5% change to our long-term crude oil price assumption would result in 4.0-5.0% change in our
Fair Value estimates. Ceteris paribus, CIL's current market price of Rs283/share discounts crude
oil price of US $85.1/bbl, which we believe is quite high and leaves no margin of safety for investors.
Exhibit 33: Sensitivity with long-term Crude and Exchange Rate
60.0 65.0 70.0 75.0 80.0 85.0 90.0
42.0 197 212 229 246 254 265 281
43.0 201 216 234 247 255 271 287
44.0 203 221 238 248 260 277 293
45.0 207 225 243 253 265 282 299
46.0 211 230 248 258 271 288 305
47.0 215 234 249 258 276 294 306
48.0 219 239 254 263 281 299 312
E
x
c
h
a
n
g
e

R
a
t
e
(
R
s
/
U
S
$
)
Cairn India
Oil & Gas
Sensitivity with Cess rate
There is a dispute between the government and CIL over the liability and extent of liability on cess.
CIL has maintained that there is no specific mention of cess in the PSC owing to which they are
not liable to pay the same. However, even if they are liable to pay the same, it would be the cess
rates applicable at the time of signing of PSC, as the PSC has an in-built fiscal stability clause. The
government, on the other hand, mandates payment of cess at current rates.
CIL has agreed to pay Rs2,575/tonne under protest. The company has approached the Arbitration
mechanism for resolution of the issue. We believe there exists strong possibility of CIL winning the
case. Hence, we have assumed cess of Rs927/tonne over the life of the field (cess at the time of
signing of the PSC) for our valuation purposes. However, if CIL has to pay no cess on its share of
crude production, our Target Price (ceteris paribus) would increase by Rs8/share (up 3.1% from
the current Target Price) and giving a Fair Value of Rs261/share for the stock. If there is adverse
ruling, ie. if cess liability is determined at Rs2,575/tonne, our Fair Value for the stock would reduce
by Rs16/share, a decline of 6.3% from current Target Price to Rs 237/share. Thus, outcome of the
cess issue will continue to be an overhang on stock valuations in the medium term.
Exhibit 35: Sensitivity with Cess rate (Rs/tonne)
261
253
237
225
230
235
240
245
250
255
260
265
Nil 927 2,575
R
s
/
S
h
a
r
e
Sensitivity with Recovery rate at fields other than MBA in RJ-ON90/1
We believe there exists upside to CIL's current Reserve estimates from the Rajasthan block. In line
with this, we have assumed Recovery rate of 15.0%, 4.0% and 10.0% for the Barmer Hill, Rajasthan
Southern fields and Other Rajasthan fields, respectively. This implies a blended Recovery rate of
10.1% for the fields. We are currently factoring in development upside of Rs37/share from these
fields at our recovery rate estimates. If we were to increase our Recovery estimates by 5% at
these fields, our Target Price would increase by Rs18/share, up 7.1% to Rs271/share. Thus, there
is a strong co-relation between the Recovery rate at other fields other than MBA and our Fair Value
estimates for the stock.
Ceteris paribus, we believe the current market price of Rs283/share is discounting around 18.5%
Recovery rate from the other Rajasthan fields. This is very high considering that the Recovery rate
of 18.5% reflects Recoverable reserve of 316mnboe, which would be an increase of 21.1% over
the current Reserve estimate from the block. Thus, any disappointment on further Reserve accretion
at Rajasthan would adversely impact CIL's stock price.
Cairn India
Oil & Gas
Sensitivity with Exploratory success rate
We have assumed Exploratory success rate of 8.0% on CIL's 1,400mnboe of net un-risked resource
potential, which translates into value of Rs9.1/share. We estimate lower success ratio as much of
the resource potential is in the newer frontier play and requires further exploratory efforts before
deducing any meaningful exploratory success. However, ceteris paribus, current market price of
Rs283/share reflects high exploratory success rate of 34%.
Exhibit 37: Sensitivity with Exploratory success rate
250
256
261
267
273
240
245
250
255
260
265
270
275
5% 10.0% 15.0% 20.0% 25.0%
R
s
/
S
h
a
r
e
253
271
288
306
324
200
220
240
260
280
300
320
340
10.0% 15.0% 20.0% 25.0% 30.0%
R
s
/
S
h
a
r
e
Exhibit 36: Sensitivity with Recovery rate at fields other than MBA
Cairn India
Oil & Gas
Exhibit 38: Relative performance with peers
Exhibit 39: Relative performance with Sensex and Oil & Gas
Exhibit 40: Out performance relative to Sensex
Exhibit 41: Out performance relative to BSE Oil & Gas
CIL ONGC RIL
0
50
100
150
200
250
300
J
a
n
-
0
7
M
a
r
-
0
7
M
a
y
-
0
7
J
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l
-
0
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e
p
-
0
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v
-
0
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-
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-
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-
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J
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-
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-
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N
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-
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s
CIL Sensex BSE Oil &Gas
-
50
100
150
200
250
300
J
a
n
-
0
7
M
a
r
-
0
7
M
a
y
-
0
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J
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l
-
0
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S
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p
-
0
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N
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v
-
0
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-
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M
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-
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M
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N
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R
s
(25)
-
25
50
75
Sensex CIL
J
a
n
-
0
7
M
a
r
-
0
7
M
a
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-
0
7
J
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-
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N
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J
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-
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M
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M
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-
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N
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-
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-
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M
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-
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M
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-
0
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J
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-
0
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S
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-
0
9
N
o
v
-
0
9
%
BSE Oil &Gas CIL
(40)
(10)
20
50
J
a
n
-
0
7
M
a
r
-
0
7
M
a
y
-
0
7
J
u
l
-
0
7
S
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-
0
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N
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-
0
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J
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0
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M
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M
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0
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J
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N
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M
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-
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M
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-
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J
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-
0
9
S
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p
-
0
9
N
o
v
-
0
9
%
Cairn India
Oil & Gas
OPECs oil
price
management
Global
Economic
Growth
G liti l F t Geopolitical Factors
Energy Efficiency &
Biofuel Markets
Oil Prices Financial Speculation
Dollar x Euro
Brings Volatility to the Process
New
Refining
Units
Crude Oil Spare Crude Oil Spare
Capacity Levels
Aggregate
Demand
Outlook Outlook
Interest Rates
Crude Oil Prices - Outlook
In the recent past, crude oil prices have been extremely volatile. However, over the last 20-25
years, crude prices have been on an upward trend. Here we have tried to analyse the past trend
of crude oil prices, while trying to estimate the medium-term trend based on near-term demand
and supply estimates. We believe long-term prices will be driven by the economics of marginal
supplies.
Historical trend of Crude oil prices
Over 2000-2008, crude prices witnessed a significant surge from sub US $20/bbl (towards early
2000) levels to US $147/bbl in 2008. The factors that contributed to this significant surge in crude
prices included strong growth in the global economy, under-investment in the Upstream Oil Segment
over the past few decades, refining capacity imbalances and bottlenecks. Moreover, lower OPEC
spare capacity and forward inventory cover increased geo-political risks embedded in the prices.
The latter half of 2008 however, witnessed substantial correction in crude oil prices on account of
slowdown in the global economy. Crude tumbled to lows of US $32/bbl in December 2008, a
correction of almost 78% from its peak. This fall in crude and gas prices came on the back of the
recession in OECD economies, slowdown in demand for petroleum products across the globe
and near evaporation of speculative capital from the financial system. Thus, on account of the
slowdown in the global economy, there was a significant downgrade in the demand estimates for
crude oil.
Thereon however, crude oil has witnessed a significant rally with prices more than doubling to
US $75-80/bbl from the December 2008 lows of US $32/bbl. The crude prices surged due to the
green-shoots in the global economy, strong equity markets and expectations of economic revival.
Moreover, a weak Dollar and OPEC curbs helped prop the crude prices amidst sluggish OECD
demand, high inventories and widening OPEC spare capacity.
Key factors impacting Oil Prices
Crude oil prices are impacted by various factors, which could be clubbed as fundamental and
non-fundamental factors. Fundamental factors, which impact crude oil price, are stock levels and
crude oil spare capacity. On the other hand, non-fundamental factors, which impact the prices,
are speculation, interest rates and currency movement (Change in dollar value with respect to Euro).
Source: Angel Research
Exhibit 42: Oil Market Structure - Key factors impacting Oil Prices
Cairn India
Oil & Gas
The Dollar effect - How does the value of US Dollar affect oil prices?
Crude oil is denominated in the US Dollar, thus changes in the price of Dollar affects the oil price
in other currencies. A weak Dollar means, for example, lower price in Euros translating into higher
oil demand in the Euro zone, which with all other things being equal, would tighten the global oil
supply/demand balance.
Exhibit 43: Crude Oil Prices in US Dollar and Euro
0
20
40
60
80
100
120
140
160
Brent Crude (in US$/barrel) Brent Crude (in Euro/barrel)
J
a
n
-
0
3
A
p
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-
0
3
J
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-
0
3
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4
A
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-
0
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J
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A
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-
0
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J
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-
0
9
O
c
t
-
0
9
The value of currency can therefore be a very strong driver of the oil price levels. The oil price may
rise by 25% in Dollar terms, but that does not automatically mean that the oil price has risen by
25% in the consumer economies. The Euro or Yen value of crude oil, for instance, could move
differently to the US Dollar denominated value, depending on the relative strength of the currency
in question.
Another effect which is not directly linked to oil market fundamentals is investors buy commodities
future contracts as a hedge against inflation. Inflation in the US would imply a weaker US Dollar,
and resultant inflationary trends or fears of inflation could encourage buying of crude oil futures by
investors. As the US Dollar is the world's most widely adopted reserve currency, perceptions or
anticipation of inflation and Dollar depreciation can prompt holders of US-based assets to seek
exposure to other types of assets normally shielded from the impact of inflation in the US.
Exhibit 44: Brent Crude and Dollar Index; CRB Index and Dollar Index
60
65
70
75
80
85
90
95
0
20
40
60
80
100
120
140
160
J
a
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D
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x
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S
$
/
b
b
l
Brent Crude Dollar Index (RHS)
60
65
70
75
80
85
90
95
200
250
300
350
400
450
500
J
a
n
-
0
7
M
a
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7
M
a
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-
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7
J
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-
0
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-
0
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N
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-
0
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J
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-
0
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M
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I
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x
CRB Index Dollar Index (RHS)
Dollar decline drives
Commodity prices
Cairn India
Oil & Gas
Which way is Crude headed?
We believe that in the medium term (over FY2010 and FY2011) oil prices will be driven by the
demand and supply economics, which would track the inventory position in the OECD countries,
OPEC's spare capacity, adherence to the production cuts and growth in non-Opec output. Over
the longer term (FY2012 onwards) however, we believe that the oil prices will be driven by the
economics of marginal supplies and rate of decline from the current ageing fields.
Oil prices in Medium term
It is important to take stock of the inventory position in the OECD countries, OPEC's spare capacity,
adherence to the production cuts and growth in non-Opec output while tracking crude prices in the
medium term. This implies that the direction of the stock draws will determine the direction and
magnitude of the oil prices. Stock draws are in turn dependent on the demand outlook. Thus,
future demand would be a key determinant of the global crude oil prices.
In the recent past, driven by the revival in the global economy, the IEA has upgraded the demand
estimates for crude. In its recent monthly review (November 2009), IEA increased its crude oil
demand estimates by 0.20mnbpd and 0.10mnbpd for 2009 and 2010, respectively. As per IEA,
Global oil demand is on track for yoy growth in 4QCY2009 for the first time since 2QCY2008 and
is now seen averaging at 84.8mnbpd (a fall of 1.5mnbpd yoy) and 86.2mnbpd (a rise of 1.4mnbpd
yoy) levels for 2009 and 2010, respectively.
EIA, on the other hand, has been relatively conservative in its demand outlook and anticipates
global crude oil demand at 84.1mnbpd and 85.4mnbpd in 2009 and 2010, respectively. EIA estimates
world oil consumption to grow by 1.3mnbpd in 2010, with relatively strong growth in non-OECD
countries being partially offset by a marginal decline in OECD consumption.
OPEC has also raised its estimates of demand for its own crude in both 2009 and 2010 on
expectations that world oil demand will be stronger than predicted in light of an improving economic
outlook. The oil exporter club now expects demand for its crude to average 28.7mnbpd in 2009
(70,000bpd more than its previous forecast a month ago) and 28.5mnbpd in 2010 (110,000bpd
more than its previous forecast a month ago). The group said in its latest monthly oil market report
on November 11 that the higher projection for the current year nevertheless represented a
"considerable" decline of 2.3mnbpd compared with 2008. It also said that while growth in demand
for OPEC crude next year was currently projected at minus 0.2mnbpd, with a decline of around
400,000bpd in the first half, "the second half is expected to return to positive growth of about
100,000 bpd, indicating a sign of recovery".
Exhibit 45: Demand estimates by various agencies (mnbpd)
Source: Industry, Angel Research
Agencies CY2009 CY2010
IEA 84.80 86.20
EIA 84.14 85.41
OPEC 84.31 85.07
Cairn India
Oil & Gas
On the Supply front, EIA estimates non-OPEC supplies to average at 50.2mnbpd in 2009, up
0.54mnbpd. Similarly, for 2010, it estimates non-OPEC supplies to rise to 50.4mnbpd, up
0.26mnbpd.
OPEC now expects oil demand to average 84.31mnbpd this year, 80,000 bpd more than previously
predicted, largely due to the apparent recovery in the global economy. As per OPEC, "The world
economy now appears to be entering into a new phase, moving from a period of containing the
crisis to one of economic recovery". "OPEC has raised its estimate of demand for next year to
85.07mnbpd, 130,000bpd more than previously forecast and implying yoy growth of 760,000bpd,
up from the previous figure of 690,000bpd. The relatively small increase in demand stems from
the fact that the general economic recovery is expected to be "slow and weak". Most of the expected
increase in world oil demand in 2010 comes from countries outside the OECD, in particular China,
the Middle East, India and Latin America.
Thus, though there exists a difference over levels of expected demand for crude, agencies concur
with the fact that the worst is over on the demand front and is likely to pick up 2010 onwards.
OPEC has raised its estimate
of demand f or next year t o
85.07mnbpd, 130,000bpd more
than previously forecast and
i mpl yi ng yoy gr owt h of
760,000bpd, up f r om t he
previous figure of 690,000bpd
Source: EIA
Exhibit 46: World liquid fuel consumption
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
30
35
40
45
50
55
60
65
70
75
80
85
90
95
2002 2003 2004 2005 2006 2007 2008 2009 2010
China United States Other Countries Consumption
Total Consumption
Annual Growth
m
n
b
p
d
m
n
b
p
d
Source: EIA
Exhibit 47: World Consumption, non-OPEC Production (change yoy)
(100)
(80)
(60)
(40)
(20)
0
20
40
60
80
100
(4)
(3)
(2)
(1)
0
1
2
3
4
2006-Q1 2007-Q1 2008-Q1 2009-Q1 2010-Q1
U
S
$
/
b
b
l
m
n
b
p
d
World Oil Consumption Non-OPEC Production WTI Crude Oil Price (RHS)
Cairn India
Oil & Gas
Oil prices to decline in Medium term
Despite the lower increase in the non-OPEC output, the 'Call on OPEC' is likely to decline largely
on account of higher output of natural gas liquids (NGL) from OPEC countries. Thus, lower 'Call
on OPEC' coupled with surplus production capacity with OPEC are likely to keep OPEC production
targets in focus. We believe that given declining OPEC compliance to production cuts, probability
of oil prices increasing from current levels is limited. However, we believe that the current prices
do not offer significant downside as OPEC's pricing policy pegs prices at US $60-70/bbl. Moreover,
we expect oil prices to decline over the medium term owing to inventory overhang in the OECD
countries, higher NGL output by OPEC (thereby reducing Call on OPEC) and spare capacity with
OPEC. For instance, during 2QCY2009, forward inventory cover stood at 61 days, well above the
OECD commercial inventory average during that quarter. We believe that the current inventory
overhang in the OECD countries is likely to persist in the current year and will witness a gradual
decline from 2010. EIA also estimates forward inventory cover to reduce from 61 days (at end of
September 2009) to 59 days by end of 2010.
Exhibit 49: OPEC surplus production capacity
Source: EIA
0
1
2
3
4
5
6
7
1998 2000 2002 2004 2006 2008 2010
m
n
b
p
d
Shaded area represents 1998-2008 average (2.8 million barrels per day)
Source: EIA
Exhibit 48: Days of Supply of OECD Comm. Oil Stocks
40
45
50
55
60
65
70
J an2004 J an2005 J an2006 J an2007 J an2008 J an2009 J an2010
D
a
y
s
o
f
s
u
p
p
l
y
Colored band represents the range between the minimum and maximum observed
Thus, inventory days would continue to be on the higher end of the band compared to the previous
period. In conclusion, we maintain that the inventory overhang, strong output growth by
non-OPEC countries, lower Call on OPEC along with spare capacity available with OPEC will
Cairn India
Oil & Gas
We believe that long-term crude oil demand will continue to be a function of growth in population
and GDP growth as has been the case in the past.
Since 1970, world population has risen by more than three billion to reach the current more than
6.8 billion. Going ahead, with population growth likely to continue, energy requirements in general
and crude oil requirements in particular is likely to increase.
Source: EIA
Exhibit 50: World Energy Consumption by region
348
398
472
508
596
678
0
200
400
600
800
Quadrillion Btu
China and India
United States
Rest of World
History Projections
1990 2000 2006 2010 2020 2030
lead to decline oil prices in the medium term. Hence, we estimate crude to average US $67/bbl in
FY2010E and US $70/bbl in FY2011E. Currently, crude oil is hovering at around US $75-80/bbl
and is expected to decline in near term.
Long-term Crude expected to remain firm
We believe that in the long term crude oil prices will continue to rule firm driven by the economics
of marginal oil supplies, decline in production from the current fields and increasing oil demand
(particularly in the developing countries). In the long term, we estimate oil prices to average at
US $75/bbl. This is based on the premise that the oil will continue to be the primary fuel going
ahead as well.
Oil demand outlook
As per EIA's International Energy Outlook 2009, world energy consumption is set to increase from
472 quadrillion BTU in 2006 to 552 quadrillion BTU in 2015 and 678 quadrillion BTU in 2030 - an
increase of 44% over the mentioned period. This would result in average annual energy consumption
of 1.5% over the period. A significant part of this increase would be contributed by higher
consumption by the non-OECD countries, which are expected to see an increase in their energy
consumption by 2.3% over the period as against the 0.6% growth in OECD countries. Among the
non-OECD economies, China and India are the fastest growing and would be key for world energy
consumers. Since 1990, energy consumption, as a share of total world energy use, has increased
significantly in both these countries. China and India together accounted for about 10% of the
world's total energy consumption in 1990. In 2006, their combined share stood at 19%. EIA estimates
that strong economic growth in both countries would continue during the projected period, with
their energy use increasing by nearly two-folds and constituting 28% of the world energy
consumption in 2030 as per EIA projections.
Cairn India
Oil & Gas
Developing countries like China, India, Brazil and Russia are likely to witness accelerated pace of
development, which would in turn lead to increase in their GDP. Growth in GDP will result in
improving lifestyle in turn increasing the per capita oil consumption in these countries. Currently,
per capita oil consumption in developing countries such as India, China, Brazil and Russia is quite
low compared to the developed countries.
Source: OPEC
Exhibit 53: GDP of Developing countries likely to increase significantly
$(2005) trillion
0
2
4
6
8
10
12
14
16
18
2008
R
u
s
s
i
a
O
P
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$(2005) trillion
0
5
10
15
20
25
30
2030
R
u
s
s
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C
S
o
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a
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A
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C
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s
M
i
d
d
l
e
E
a
s
t
&
A
f
r
i
c
a
Source: Douglas Westwood
Exhibit 52: World Population and Oil demand
10
30
50
70
90
110
130
1
2
3
4
5
6
7
8
9
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
2
0
2
0
2
0
2
5
2
0
3
0
o
i
l
d
e
m
a
n
d
(
M
n
b
/
d
)
w
o
r
l
d
p
o
p
u
l
a
t
i
o
n
(
b
i
l
l
i
o
n
)
population
oil demand
Source: UNDESA, Population Division; Note: high, medium and low variants
0
2
4
6
8
10
12
1900 1925 1950 1975 2000 2025 2050
billions
Exhibit 51: UN - World Population estimates
Cairn India
Oil & Gas
Thus, to conclude, oil demand is likely to be robust going ahead even amidst the high oil price
scenario driven by increasing global population and accelerated development in the developing
countries.
Marginal economics to determine long-term Crude oil prices
Marginal economics of crude oil supply is expected to be the main driver of crude oil prices in the
longer term. This is because dwindling production from the current ageing fields, increasing Finding
and development (F&D) costs and increasing demand will lead to pricing based on marginal
economics.
As per IHS-CERA, majority of the current oil fields have been under production for a long period of
time, and hence production has been declining at an annual rate of 4.5% pa. For instance, as per
industry estimates, non-OPEC fields (excluding former Soviet Union, FSU), which were producing
in 2000, have been witnessing a decline of 9.4% pa. Fields in the FSU countries have also witnessed
Prime driver of the oil demand is likely to be growth in demand of transportation fuel in developing
countries. Increase in per capita income is likely to lead to better standard of living, which in turn is
likely to lead to increased level of motorization.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
0
100
200
300
400
500
600
700
population (millions) cars per 1,000
OECDcountries
400700
Transition economies
150400
Developing countries
typically <200
4.3 billion people live in
countries with <1 car per 20 people
Cumulative
population
Source: OPEC
Exhibit 55: Level of motorisation across economies
Luxembourg
Kuwait
Norway
Singapore
USA
Canada
Saudi Arabia
Mexico
4 55
Norway
UK
Greece
Russia
Iran J amaica
Mauritania
World
High Income
Nations
2
7
Equitorial Guinea
China
India
Nigeria
Madagascar
Liberia
World
LowIncome
Nations
Middle Income
Nations
0 1
Cambodia
Chad
Burundi
Congo, DR
-2
a
p
i
t
a
m
p
t
i
o
n
p
e
r
C
s
o
f
C
o
n
s
u
m
B
a
r
r
e
l
s
.14
02
-4
5 6 7 8 9 10 11 12
GDP per Capita, Current US$
148 403 1,095 2,978 8,101 22,035 59,934
.02
6
Source: Company, OPEC, Valero Energy
Exhibit 54: Per Capita Oil Consumption across economies
O
i
l
c
o
n
s
u
m
p
t
i
o
n
p
e
r
c
a
p
i
t
a
(
g
a
l
l
o
n
s
p
e
r
d
a
y
)
GDP per capita ('000 USD)
China
India
Brazil
US
UK
Canada
Sweden
Mexico
Russia
Thailand
Indonesia
Venezuela
J apan
Italy
Australia
France
Germany
South Korea
Taiwan
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 5 10 15 20 25 30 35 40 45 50
Cairn India
Oil & Gas
Source: IHS CERA
Exhibit 57: Existing oil fields to exert pressure on Oil prices
Existing production formthe worlds oil field declines
at an annual average of 4.5 percent. Investment is
needed to replace the annual decline
and to meet higher demand.
Amount of newoil production
relative to 2008 needed to satisfy
lowand high case projections
for world oil demand in 2035
High case World Oil Demand
LowCase World Oil Demand
Depletion of 2008 Installed Oil Production Base
M
i
l
l
i
o
n
B
a
r
r
e
l
s
p
e
r
D
a
y
90 mbd
76 mbd
2010 2015 2020 2025 2030 2035
0
20
40
60
80
100
120
Source: ONGC
Exhibit 56: Decling Production Rates (%, 2000-2008)
Europe 30
Non-OPEC Middle East 40
North Africa 40
Non-OPEC West Africa 47
Latin America 32
US and Canada 33
Asia-Pacific 35
The trend of declining production is not just restricted to the oil fields in the different regions, but is
being witnessed by the major global oil companies as well. As per Douglas Westwood, 8 out of the
10 major oil companies have already registered a decline in production.
a decline in the production rate though at a lower pace of 6.6% pa. As per OPEC, non-OPEC
countries registered a decline of 4.6% pa since 2000. The reduction came in in spite of adoption of
advanced EOR techniques.
Exhibit 58: Major oil companies witnessing a decline in production
Annual Prodn (mnboe) 2002 2003 2004 2005 2006 2007 2008
Exxon Mobil 2,496 2,516 2,571 2,523 2,681 2,616 2,404
BP 2,018 2,121 2,531 2,562 2,475 2,414 2,410
PetroChina 2,109 2,119 2,233 2,270 2,276 2,312 2,379
Shell 2,359 2,379 2,253 2,093 2,030 1,899 1,771
Petrobras 1,533 1,701 1,661 1,847 1,908 1,920 1,996
Chevron 1,897 1,823 1,737 1,701 1,759 1,783 1,676
Total 1,589 1,661 1,695 1,621 1,506 1,509 1,456
ConocoPhillips 891 1,237 1,242 1,447 1,698 1,644 1,367
ENI 921 981 1,034 1,111 1,079 1,020 1,026
StatoilHydro 1,112 1,132 1,135 1,102 1,058 1,074 1,056
Cairn India
Oil & Gas
We believe that advanced technologies such as EOR and IOR (increased oil recovery) would only
sustain oil production at the ageing fields. However, nationalisation of the oil reserves has limited
the use of technology to the international oil majors, which has escalated the cost of crude oil
production. Thus, we believe that increasing demand coupled with dwindling production will bring
into focus the economics of marginal supplies and crude oil pricing.
Oil sands are one such marginal supply, which has the potential to meet the growing energy
requirements. Oil sands comprise a mix of sand, clays and bitumen in solid state at room temperate
and an API gravity of 8. This is much heavier that the typical conventional oils, which are as heavy
when API is less than 22. Light oils have gravity of more than 32.
Canadian oil sands are the second largest reserves of recoverable oil in the world after Saudi
Arabia. They are the key source of new supply additions in the world since 2000, ahead of Iran,
Kuwait, and China. They are the sixth largest source of marginal supply since 2000 and act as the
ideal reference point for gauging the importance of marginal source of supply.
Similarly, Douglas Westwood estimates that 52 countries have already surpassed the peak
production, and production from low-cost oil sources are likely to reduce going ahead.
0
40
60
80
100
120
1995 1999 2003 2007 2011 2015 2019 2023
m
i
l
l
i
o
n
b
a
r
r
e
l
s
p
e
r
d
a
y
BIOFUELS
CTL
GTL
OILSHALES
OILSANDS
REFINERY GAIN
OFFSHORE DEEP
OFFSHORE SHALLOW
ONSHORE
<2002
52
countries
past
peak
by2008
66
countries
past
peak
Source: Energyfiles
20
Exhibit 59: Global Cheap Oil Supplies likely to be constrained
Cairn India
Oil & Gas
Development of oil sand resources requires significantly higher crude oil prices. As per IHS- CERA,
at the peak of the Oil Industry capital cost inflation in the summer of 2008, the threshold crude oil
price for an oil sand project ranged between US $60-85/bbl. Going ahead, IHS-CERA estimates
break-even crude oil prices at US $65-70/bbl to undertake development of the Canadian oil sands.
Similarly, Douglas Westwood also estimates higher break-even price for the development of oil
sands at US $60-90/bbl going ahead.
Source: IHS CERA
Exhibit 61: Break-even WTI and Oil Sand project prices (US $/bbl)
WTI Price
Integrated Project (mine +upgraded)
Integrated Project (SAGD+upgraded)
Integrated Project (SAGD+Alberta up-grader with royalty-in-kind incentive)
Integrated Project (SAGD+US refinery include refinery purchase cost)
Integrated Project (SAGD+US refinery)
Standalone (SAGD)
110
100
90
80
70
60
50
40
2008 2010 2015 2020 2025 2030 2035
Exhibit 60: Top-15 Sources of Incremental World Oil Supply (2000-08, mnbpd)
Country 2000 2008 Volume change
2000 to 2008
Russia 6.52 9.79 3.27
Saudi Arabia 9.07 10.45 1.38
Angola 0.75 1.89 1.14
Brazil 1.45 2.27 0.82
Algeria 1.44 2.21 0.77
Canadian Oil Sands 0.60 1.30 0.70
Kazakhstan 0.72 1.41 0.69
Azerbaijan 0.29 0.90 0.61
Kuwait 1.88 2.48 0.60
United Arab Emirates 2.62 3.21 0.59
China 3.23 3.81 0.58
Qatar 0.86 1.41 0.55
Iran 3.76 4.29 0.53
Libya 1.47 1.87 0.40
Sudan 0.18 0.49 0.31
Source: CERA, IEA; Note: Total Canadian oil production was 2.72mnbpd in 2000 and 3.41mnbpd in 2008
Cairn India
Oil & Gas
Another important source of marginal oil supply will be the Deepwater Oil supply projects. According
to Douglas Westwood, the share of deepwater and offshore production, as a % of total crude oil
supplies, will continue to increase going ahead. Deepwater oil production, which was 2% of the
global oil production in 2000 increased to 8% in 2009 and is expected to further rise to 15%
by 2015.
Thus, going ahead, with increased production from the costlier marginal sources such as Canadian
oil sands, deepwater oil and offshore projects, crude oil prices should remain firm.
Crude oil prices v/s Upstream cost - F&D and Lifting costs
Declining production from easily available sources of crude oil has resulted in oil exploration at
more difficult terrain such as the Arctic and deepwater oil sources. Exploration at these difficult
places has in turn led to an increase in the finding and development cost of crude oil over the
years. F&D cost has consistently increased by almost over fives times in the last five years from
around US $4/bbl (till 2002) to US $24/bbl in 2008.
Exhibit 63: Deepwater and Offshore production
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014
M
i
l
l
i
o
n
s
o
f
B
a
r
r
e
l
s
a
D
a
y
Exhibit 62: Break-even Crude prices for various supply sources
0 20 40 60 80 100 120 140 160
OnshoreWind
OffshoreWind
Nuclear
Traditional Coal
Coal withCCS
BrazilianSugarCaneEthanol
US CornEthanol
EuropeanBiodiesel
Oil Shale
Coal toLiquid
CandadianOil Sands (newdev.)
Venezuela's OrinocoBelt
Deepwater
OtherConventional Oil
MiddleEastOil
R
e
n
e
w
-
a
b
l
e
s
C
o
a
l
B
i
o
f
u
e
ls
U
n
c
o
n
v
e
n
t
io
n
a
l
O
il
C
o
n
v
e
n
tio
n
a
l
O
i
l
$/bbl equivalent
Dependent on Subsidy
Cairn India
Oil & Gas
Source: IAEE
Exhibit 64: Estimated non-OPEC Finding and Development costs (US $/bbl)
26
24
22
20
18
16
14
12
10
8
6
4
2
0
130
120
110
100
90
80
70
60
50
40
30
20
10
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Organic F&DCosts
Total F&DCosts
Observed Brent
Break-Event
Part of the increase can be attributed to cost escalations due to under-investments in the Upstream
Sector over the years. But, a major part of the increase could be attributed to exploration in difficult
areas.
Adelman's approach towards crude oil pricing can be used to derive the correlation between the
crude prices and Upstream costs - F&D and Lifting costs and in turn determining the ideal crude oil
prices. The approach increasingly finds favour amidst the scenario of declining production and rising
crude oil demand. According to Adelman's approach, the minimum required crude oil prices are:
Rough approximation of the same based on the required rate of 14.0% and depletion rate of 4.0%
(in line with OPEC's estimate of global depletion rate) gives us.
Source: Angel Research; Note: Based on Adelmans Methodology
Exhibit 65: Minimum required crude prices at various F&D and Lifting costs (US $/bbl)
Lifting Cost
5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0
10 50.0 50.5 51.0 51.5 52.0 52.5 53.0 53.5 54
11 54.5 55.0 55.5 56.0 56.5 57.0 57.5 58.0 58.5
12 59.0 59.5 60.0 60.5 61.0 61.5 62.0 62.5 63
13 63.5 64.0 64.5 65.0 65.5 66.0 66.5 67.0 67.5
14 68.0 68.5 69.0 69.5 70.0 70.5 71.0 71.5 72
15 72.5 73.0 73.5 74.0 74.5 75.0 75.5 76.0 76.5
16 77.0 77.5 78.0 78.5 79.0 79.5 80.0 80.5 81
17 81.5 82.0 82.5 83.0 83.5 84.0 84.5 85.0 85.5
18 86.0 86.5 87.0 87.5 88.0 88.5 89.0 89.5 90
19 90.5 91.0 91.5 92.0 92.5 93.0 93.5 94.0 94.5
20 95.0 95.5 96.0 96.5 97.0 97.5 98.0 98.5 99
F
&
D

C
o
s
t
(F&D Cost) * 4.5 +Lifting cost
(F&D Cost) * (Pre-tax Required rate of return/Depletion rate)) +Lifting cost
Cairn India
Oil & Gas
Adhering to Adelman's methodology, our crude oil price estimate of US $75 reflects F&D cost of
US $15/bbl, required return of 14%, decline rate of 4% and Lifting cost of US $7.5/bbl. We believe
that the assumption of F&D cost of US $15/bbl is fair as the correction in the benchmark
IHS-CERA Upstream Capital Cost Index was lower at 8.5% between 3QCY2008 and 1QCY2009.
This reduction was much lower than the significant correction in the crude oil prices from
US $147/bbl to US $32/bbl. Additionally, lower F&D costs capture the prospects of technological
advancements to a degree as we are building in F&D costs at US $15/bbl as against
US $16-22/bbl over the last 2-3 years in non-OPEC countries. Similarly, the assumption of Lifting
cost of US $7.5/bbl is also conservative considering that operating cost of production has seen a
significant increase since CY2000 as visible from the increase in the IHS-CERA Upstream
Operating Costs Index. Moreover, declining production from the current ageing fields required
technologies such as IOR, EOR. These technologies in turn led to Operating costs of
US $10-12/bbl.
Conclusion
In sum, we believe that the long-term crude oil prices will remain strong driven by economics of
marginal supply, increasing F&D and Lifting costs and increase in crude oil demand. We estimate
long-term crude oil prices to average at around US $75/bbl (FY2012 onwards).
Source: IHS CERA
Exhibit 66: Upstream Capital Costs Index and Operating Costs Index
80
100
120
140
160
180
200
220
240
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
C
o
s
t
I
n
d
e
x
(
2
0
0
0
=
1
0
0
)
80
100
120
140
160
180
200
220
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
C
o
s
t
I
n
d
e
x
(
2
0
0
0
=
1
0
0
)
Cairn India
Oil & Gas
50.0%
18.8%
15.6%
15.6%
Unexplored Exploration Initiated
Poorly Explored Moderate to well Explored
15.6%
43.8%
18.8%
21.9%
Unexplored Exploration Initiated
Poorly Explored Moderate to well Explored
Industry Overview
Strong growth in the domestic economy has resulted in accelerated domestic consumption of
petroleum products, which registered a CAGR of 4.36% during the last five years ended March
2009 (Source: PPAC). However, indigenous production of crude oil has not grown at similar pace.
In fact, domestic crude oil reserves have seen a decline over the last five year period from
5,431mnbbls to 5,314mnbbls. Thus, due to the increased differential between supply and demand
for crude has resulted in increased external dependence, which has risen from 59% in 1997 to
73% in 2008 (Source: BP Statistical Review).
In order to improve the country's energy security, the government has taken measures to
accelerate the pace of exploration in the Indian Hydrocarbon Sector. NELP introduced by the
government in 1999, is one such effort. Till date, seven rounds of NELP allocation have taken
place, wherein the government has awarded 208 blocks. Of the total sedimentary area of 3,134,700
square kilometer (sq km), till-date the government has awarded 1,060,295sq km. Overall, 34% of
the exploration acreage has been awarded till date.
As the exploration acreage has been awarded to various players off-late, the level of exploration in the
blocks awarded has been low. Thus, there exists immense potential in the Indian E&P Segment given
that large acreage is yet to be explored.
Source: Oil India RHP, Angel Research
Exhibit 67: Increasing Oil and Gas deficits in India
92%
83%
79%
75%
74%
8%
17%
21%
25%
26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008
Domestic production Deficit Consumption
Source: DGH, Angel Research
Exhibit 68: Level of Exploration in Sedimentary Basin areas (FY1996-FY2008)
FY1996 FY2008
30%
29%
30%
28%
27%
70%
71% 70%
72%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008
Domestic production Deficit Total consumption
30%
29%
30%
28%
27%
70%
71% 70%
72%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008
Domestic production Deficit Total consumption
Cairn India
Oil & Gas
Exhibit 69: PELs awarded till April 1, 2008
Company/Operator Area (sq km) Percentage
ONGC 512,754 48.4
Reliance Industries 341,359 32.2
Oil India 39,326 3.7
Cairn India 38,339 3.6
HOEC 25,124 2.4
FOCUS 21,000 2.0
SANTOS 16,496 1.6
ENI SpA 14,445 1.4
Prize Petroleum 13,277 1.3
GSPC 11,057 1.0
OAO Gazprom 7,779 0.7
Geo Global Resources Inc 5,804 0.5
NAFTOGAZ 3,789 0.4
J ubilant Oil and Gas 2,534 0.2
Essar Oil 1,729 0.2
Canoro Resources 1,445 0.1
Tullow Oil Plc 1,277 0.1
Niko Resources 957 0.1
Hardy E&P (India) Inc 859 0.1
PetroGas 741 0.1
Geopetrol 295 0.0
Total 1,060,295 100.0
Source: Oil RHP, Angel Research
Cairn India
Oil & Gas
Company Background
Cairn India
Cairn India (CIL) is an oil and gas exploration company promoted by Cairn Energy PLC, UK
(CEP). CIL was formed in August 2006, to take control of major part of oil and gas assets of CEP
in India. CIL got listed on the Indian bourses on J anuary 9, 2007 with the completion of its IPO post
which CEP and Petronas emerged biggest stake holders in the company. Currently, their holding
in the company stands at 62.4% and 14.9%, respectively. CIL is currently the largest private
exploration and production (E&P) focused player in India with presence across sedimentary basins.
CIL's current asset portfolio comprises 14 blocks (two producing blocks, one block in producing as
well as in development stage and eleven exploratory blocks). Moreover, CIL has also won bid for
2 block in recent held NELP round.
Cairn Energy PLC
CEP is a Scotland-based oil and gas E&P company with activities focused on South Asia. The
company has exploration blocks, fields under development and producing assets spread across
India, Bangladesh and Nepal. CEP has extensive experience in South Asia with a strong track
record in exploration and development (especially in India, having made three of the seven major
discoveries since 2000). CEP's association with India started in 1995-96 with the acquisition of
Command Petroleum, an Australian listed company, which had signed a PSC for Ravva. The
company enhanced its presence in the Indian E&P space in 1998, when it acquired 10% stake
(with the option to increase it to 40%) in RJ -ON-90/1 from Shell as part of restructuring its Bangladesh
operations.
Exhibit 70: Shareholding Pattern (%)
Promoter
62.4%
Petronas
14.9%
Individuals
2.4%
FI
4.0%
MFs
2.6%
FII
10.8%
others
2.9%
Institutions
20.3%
Promoter Petronas Individuals FI MFs FII others
Cairn India
Oil & Gas
Group and Asset holding structure
CIL acquired majority of its Indian oil and gas assets (barring few blocks in Ganga Valley and a
block in the Vindhya region) after re-organisation of CEP. CIL holds various oil and gas assets
through its wholly-owned subsidiary, viz. Cairn India Holdings Limited (UK), which in turn holds
stake in various blocks through various subsidiaries.
Exhibit 71: CIL - Over the years
Exhibit 72: Group Holding Structure
Rajasthanblock
(35%stake)
Cairn India Limited
Cairn India Holding
Limited(UK)
Cairn Energy
Hydrocarbons
Limited(UK)
Cairn Energy
Holdings(UK)
Cairn Energy
Netherland Holding
B.V
Cairn EnergyAustralia
PTY Ltd
Rajasthan (35%)
Ravva (22.5%)
CB-OS/2(6.7%)
CB-OS/2(33.3%)
Cairn EnergyIndia
Holdings B.V
1995 Original PSC signed between GoI and Consortium of Shell and ONGC for Rajasthan block.
1996 CEP acquired Command Petroleum, an Australian listed company with interests in Indian
oil and gas fields ( Ravva).
1998 CEP acquires 10% stake (with the option to increase to 40%) in RJ -ON-90/1.
1998 Became operator of CB-OS/2 block.
1999 CEP increases its stake in Rajasthan block to 50% and becomes operator of the block.
2000 Discovery of the Lakshmi gas field (CB-OS/2) in Cambay basin.
2002 Production from Lakshmi gas field.
2002 CEP increases its stake in Rajasthan block to 100% in three stages.
2004 Largest oil discovery in India since 1985 in the Rajasthan block, viz. Mangala, Bhagyam and
Aishwarya (MBA).
2004 Production from Gauri field (CB-OS/2).
2005 Submission of FDP for four fields, viz. Mangala, Aishwarya, Raageshwari and Saraswati.
2005 ONGC (government nominee) exercises 30% 'Back-in' right in development area.
2006 Receives FDP approval for the Rajasthan block.
2006 Made IPO following formation of Cairn India with 100% stake in Cairn India Holdings, which
holds all oil and gas assets of CEP in India.
2007 GoI grants six months extension for exploration in Northern appraisal areas in Rajasthan
block.
2009 CIL starts monetising its mammoth Rajasthan discoveries.
Cairn India
Oil & Gas
CIL - Proven Explorer
CIL is one of the largest private explorers in the country and has a proven track record in E&P of
oil and gas in the country. On the Exploration front, it has made three of the seven landmark
discoveries in India since 2000. The company has reported impressive success in the Rajasthan
block, post unsuccessful efforts by ONGC and Shell in the area. Thus, the company's exploratory
prowess is well established. Similarly, on the Production front, CIL has managed the Ravva
reservoir in an excellent manner, in turn leading to recovery of around 60% of IIP reserves. Moreover,
CIL has also developed its oil and gas discoveries in the Ravva and Cambay blocks at a faster
pace (13 - 28 months).
Imported crude Cairn India Other domestic
Imported
crude,
78.0%
Cairn India, 16.0%
Other
domestic, 84.0%
Domestic
production,
22%
Exhibit 74: CIL to produce 20% of domestic oil; to reduce import bill by 5%
Exhibit 73: CIL - key discoveries
1998 Ravva Satellite gas discoveries - RD5, RG and RH.
1999 Rajasthan - Guda.
2000 Cambay discoveries - Lakshmi, Gauri, Ambe.
2001 KG Deepwater discoveries - Annapurna, Padmavati, Kanaka Durga and 'DWN-N' & Rajasthan
- Saraswati.
2002 Rajasthan - Guda extension, Raageshwari.
2003 Rajasthan - Kameshwari, Cambay - CB-X.
2004 Rajasthan - Mangala, Aishwariya, Shakti, Bhagyam.
2005 Rajasthan - NI, Vijaya & Vandana, NC-West, GSV-1, Bhagyam South and NR4.
KG Deepwater: U-1, A-1 and D-1.
2006 Rajasthan - NE, NI-north, NP, Shakti North East, Kameshwari West-2 & -3, Barmer Hill
reservoir in Mangala & Aishwariya. KG Deepwater - W-1, E-1 and ultra-deepwater UD-1.
2007 Rajasthan - Saraswati Crest-1, Kameshwari West-6; Ravva -RX-10 and RX-8.
Cairn India
Oil & Gas
Exhibit 75: Saving in Import bills for India due to CIL production
Oil Price (US $/bbl) 50 55 60 65 70 75
bpd 180,000 180,000 180,000 180,000 180,000 180,000
days 365 365 365 365 365 365
mnbbls pa 65.7 65.7 65.7 65.7 65.7 65.7
US $ (bn) 3.3 3.6 3.9 4.3 4.6 4.9
India's import bill for the fiscal year ended March 31, 2009 stood at US $290.7bn, wherein Crude
and Petroleum products accounted for US $91.3bn (31.4% of total import bill). At peak production
of 180,000bpd from MBA fields and assuming Crude oil price of US $75/bbl, India's crude oil
import will come down by US $4.9bn (ie, a 5.4% reduction in Crude and Petroleum products
import bill). This culminates into overall saving of 1.7% of India's total import bill.
Cairn India
Oil & Gas
Asset Profile
CIL has a varied and balanced asset portfolio comprising 13 blocks of which two are currently
under production (Ravva and Cambay), one is a development block (Rajasthan block,
RJ -ON-90/1) where initial production has commenced and 10 are highly prospective exploratory
blocks. Additional it has also won 2 blocks in recent held NELP round. CIL has been following the
play-based approach to build its E&P portfolio, viz. a diverse portfolio based on basins, play and
environment. CIL has been a drill bit explorer having drilled more than 180 exploratory wells
beyond 56 obligatory wells. A large proprietary database differentiates the company from its peers.
Producing fields
Ravva Block (PKGM-1)
CIL is the operator of the Ravva field in Block PKGM-1. The field lies in the KG basin, off the coast
of Andhra Pradesh. Ravva is a shallow water block with a depth of 8 to 50mtrs. Ravva fields
account for 8% of India's total crude oil production. ONGC had discovered the field in 1987 and
production at the field commenced in 1993. The PSC for the block was signed between the
consortium of ONGC (40% stake), Videocon Petroleum (25% stake), Ravva Oil (12.5% stake) and
Command Petroleum (22.5% stake) for a duration of 25 years extendable by an additional ten
years. CEP acquired Command Petroleum and became the operator of the field in 1997. CIL has
demonstrated its superior reservoir management skills at the field with its recovery rate exceeding
60% and production surpassing 200mnbbl from the block. Ravva (has around 96% uptime for its
equipment) is one of the lowest operating expenditure fields in India.
Source: Company
Exhibit 76: CIL Assets - An Overview
RJ-ON-90/1
CB/OS-2
RAVVA
Gross Production*
~44,954 boepd
Gross Production*
~14,506 boepd
ss production target
expected 175,000 bopd
(CB/OS-2)
50%
ator) 40%
10%
Rajasthan Exploration (RJ-ON-90/1)
ator) 100%
Rajasthan Development
ator) 70%
30%
Ravva
ONGC
Videocon
Cairn (Operator)
Ravva Oil
Total 13 blocks
2 Production Blocks
Operated gross field producti
~59,461 boepd
(net to Cairn ~15, 917
1 Development Block
Rajasthan block under
development Mangala
BhagyamandAishwa
with a further 22 disco
10 Exploration Blocks
6 operated: 5 in India an
Sri Lanka
4 non-operated
*Q1 FY 2009-10 figures
Gro
Cambay
ONGC
Cairn (Oper
Tata
Cairn (Oper
Cairn (Oper
ONGC
40%
25%
22.5%
12.5%
on
boepd)
,
riya fields
veries
d 1 in
Cairn India
Oil & Gas
Ravva PSC highlights
PSC allows 100% recovery of the costs incurred in exploration and development before sharing
profit petroleum with the Government of India. Moreover, 100% of operating expenditure
(excluding depreciation, interest and tax paid) is allowed to be recovered.
There is no relinquishment obligation for the block.
Royalty for the block is very attractive at Rs481/tonne.
Cess is fixed at Rs927/tonne.
This translates into total tax of around US $4.25/bbl.
The government takes a share of profits from the contractor based on the post tax rate of
return (PTRR) earned in the previous year.
Ravva has already achieved maximum PTRR of 35% as per the PSC, and the government's
share in profit petroleum has risen to a maximum 60% and will remain at those levels during
the remaining life of the field.
Exhibit 77: Ravva (PKGM-1)
Year Key Milestones
1994 Production Sharing Agreement signed.
1995 Command Petroleum took over as J V operator.
1996 Phase-II of development commissioned.
1997 CEP took over Command Petroleum.
1998 Ravva field doubles its oil reserves.
1999 Production ramped up to 50,000bpd of oil.
2000 Water Injection up-gradation.
2001 Additional sub-sea lines for Ravva satellite gas project.
2001 Achieves zero Gas Flaring.
2001 Third Associate gas recovery compressor.
2001 Ravva Satellite Gas development project.
2002 Additional crude oil storage tank installed.
2002 Ramps up Gas production from 30mmscfd to 70mmscfd.
2003 100mn barrels of oil production by J V.
2005 & 2008 ISO 14001 & OSHAS 18001 certification. Installation of Additional compressors.
2005 Innovative Technology application of drag reducing additive for incremental oil
production.
2008 First of its kind in India - Multi-phase pumps for incremental oil production.
2008 200mn barrels of oil production by J V.
2008 Completion of Infill drilling programme in 17 months.
2008 Commissioned Water Re - Injection project making Ravva eco - friendly.
2008-2009 Additional sub-sea lines planned for Ravva.
Source: Company
Cairn India
Oil & Gas
Cambay Block (CB-OS/2)
The Cambay Block situated in Gujarat in West India is mainly an offshore block. CB-OS/2 mainly
comprises two fields Lakshmi and Gauri. CIL has 40% participating development interest in the
Lakshmi and Gauri fields. ONGC (50% stake) and Tata Petrodyne (10% stake) are the other
partners in the fields. CIL and its J V partners signed a PSC with the GoI for the block in J une 1998.
Block CB-OS/2 has yielded natural gas discoveries in its offshore Lakshmi, Gauri and Ambe fields
and in its onshore CB-X field. Current production from the field is around 14,500bpd of OEG.
Exhibit 78: Cambay Block (CB-OS/2)
Year Key Milestones
1998 Production sharing contract signed.
2000 Lakshmi oil & gas field discovery, fastest development in India - discovery to
production in only 28 months.
2001 Gauri oil & gas discovery.
2001 Ambe oil & gas field discovery.
2002 Safety case developed for the first time in India.
2002 Lakshmi gas field developed and Gas production commenced.
2003 Lakshmi field ramped up gas production to 130mmscfd.
2004 CB-X onshore discovery.
2004 Gauri field developed and Gas production commenced.
2004 Hydrocarbon Dew Point Project completed to meet sales gas specifications.
2005 Lakshmi field Phase II development - 5 new wells drilled.
2005 CB-OS/2 onshore & offshore facilities certified for ISO 14001:2004 standards.
2005 Gauri Oil development - First oil from Gauri.
2006 Oil Production up to 3,000bopd.
2006 Ambe field commerciality declared.
2006 Reverse osmosis plant installed at Suvali village.
2007 CB-X field development completed & Gas sales commenced.
2008 Oil Production up to 6,000bopd.
2009 Upgraded oil processing capacity to 10,000bopd.
Source: Company
Cambay PSC highlights
As per PSC, CIL is allowed to collect 100% of costs incurred in exploration and development
before sharing any profit with government.
The costs that can be recovered include operating and capital costs but exclude depreciation
(non-cash cost), interest and tax paid.
There is no royalty or cess to be paid by contractor on either oil or gas being produced from
the block.
The government takes a share of profit from contractor based on the post tax rate of return
(PTRR) earned in the previous year.
Cairn India
Oil & Gas
Cambay has already achieved maximum PTRR of 40% as per the PSC, and the government
share in profit petroleum has risen to a maximum of 60% and will remain at those levels
during the remaining life of the field.
Rajasthan Block (RJ-ON-90/1)
A pre-NELP block, the Rajasthan block (RJ -ON-90/1) lies in Barmer basin, which is a northern
extension of the well-established oil and gas producing Cambay basin. The main development
area (1,858km
2
) includes Mangala, Aishwariya, Raageshwari and Saraswati (MARS), is shared
between Cairn (70% holding) and ONGC, which has exercised their back in right for 30%. A
further Development Area (430km
2
), including the Bhagyam and Shakti fields, is shared between
CIL and ONGC in the same proportion. The government has also allocated to CIL a third
development area, viz. Kameshwari West Development Area of 822km
2
. Thus, CIL holds 3,111km
2
of the total acreage under long-term contracts spread across the districts of Barmer and J alore.
Source: Company
Exhibit 79: Rajasthan Block (RJ-ON-90/1)
RAAGESHWARI OIL
RAAGESHWARI GAS
RAAGESHWARI EAST
AISHWARIYA
DevelopmentArea-1
Awarded: Oct 2004
Area: 1,859km
2
DevelopmentArea-2
Awarded: Nov 2006
Area: 430km
2
Kameshwari West
DevelopmentArea
Area: 822km
2
BHAGYAM
MANGALA
NC West Oil and Gas
Saraswati
Kameshwari
Guda
Bhagyam
South
N-I
Mangala Barmer Hill
Vijaya and Vandana
GS-V
N-P
N-E
N-I-North
Shakti NE
Shakti
Kameshwari West
N-R
Original PSC for the Rajasthan blocks was signed between the GoI and Consortium of ONGC and
Shell India Production and Development in 1995. CIL initially acquired 10% stake in the block in
1997. Thereafter, carrying through Shell in the exploration stage, CIL gradually increased its stake
in the block to 50%. Towards end May 2002, CIL acquired Shell's balance 50% interest in the
block.
Cairn India
Oil & Gas
The basin is informally sub-divided into Northern and Southern fields. The Northern fields are
relatively simple large-scale tilted fault blocks, with stacked fluvial sandstones of the Fatehgarh
Group as the principal reservoir rocks. The Southern fields comprise two principal plays, viz. a
shallow crude oil accumulation (in fields such as Saraswati, Guda and Raageshwari oil) and
deeper gas accumulation (beneath these fields, such as in the Raageshwari Deep gas field).
Thus, the Rajasthan Block accumulation falls into three groups:
Main Northern fields - Mangala, Bhagyam and Aishwariya (MBA). This area was awarded
to CIL in October 2004 and is currently under development.
Small Southern fields - Saraswati, Raageshwari oil and deep gas.
Other Accumulations - GS-V, Guda, N-E, Kameshwari, Shakti, N-I, N-P, Bhaygam South,
NI-North, NC West, Vijaya & Vandana, NR, Mangala Barmer Hill and Aishwariya Barmer Hill.
From the reservoir perspective, the basin is sub-divided into four separate sub-heads:
Fatehgarh: It is the primary reservoir rock of the Northern Rajasthan fields of Mangala,
Bhagyam and Aishwariya.
Barmer Hill: This is the lower permeability reservoir that overlays Fatehgarh.
Dharvi Dungar: It is the secondary reservoirs in the Guda field and is reservoir rock seen in
the Kaameshari - West discoveries.
Thumbl i : It is the youngest reservoir in the basin and is the primary reservoir for the
Raageshwari field.
Till 2003, CIL's focus in the block was on the Southern part, which has resulted in smaller discoveries
such as Guda (1998), Saraswati (2002) and Raageshwari (2003). However, with CIL's focus shifting
Northwards in 2004, it made largest discoveries of the lot - Mangala, Bhagyam and Aishwariya.
Exhibit 80: Rajasthan Block (RJ-ON-90/1)
Year Key Milestones
1995 PSC signed
1998 Cairn farmed-in for 27.5%
1999 Guda discovery
1999 Cairn Farmed-in for additional 22.5%
2001 Saraswati discovery
2003 Raageshwari discovery
2003 Cairn Acquired 100% interest from Shell
2003 Kaameshwari discovery
2004 Mangala,Aishwariya,Bhagyam and Shakti discovery
2005 Government (through ONGC) excercised 30% back-in interest in development area.
2005 Vandana,N-I, NC West and Bhagyam South discovery
2006 Rageshwari Deep gas N-E Discovery and Mangala Barmer Hill discoveries
2007 Cairn India's IPO
2007 NI North discovery, KW3, Saraswati Crest 1 and KW6 discovery
2008 Raageshwari East 1-z discovery
2009 Mangala Crude Oil production commenced
Source: Company
Cairn India
Oil & Gas
Source: Company
Exhibit 82: Investment multiple caps maximum government share at 50%
Investment Multiple (x) Profit share
0 <1.5 20
1.5 <2.0 30
2.0 <2.5 40
>=2.5 50
Full Cost recovery: PSC allows 100% cost recovery for CIL before profit petroleum. CIL is
allowed to recover entire exploration and development capex plus cess & operating expenditure
incurred before any profit petroleum is shared with the government.
Seven-year Tax Holiday: Profit from sale of crude oil produced from the MBA fields is exempt
from Income Tax for the first seven years of production. The company will only be liable to pay
minimum alternative tax (MAT) at the rate of 15%, which can be carried forward and utilised
to set off the tax liability in later years.
Source: Company
Exhibit 81: RJ-ON-90/1 enjoys favourable profit sharing contract
30%
40%
50%
60%
70%
80%
90%
50%
60% 60%
85% 85% 85%
RJ -ON -90/1 Ravva CB -OS/2 KG D6 KG D3 KG D9
RJ-ON-90/1 PSC highlights
CIL enjoys favourable fiscal terms for its Rajasthan blocks compared to other E&P blocks in the
country, which increases the attractiveness of its large reserve base in the block.
No Royalty for CIL: Though according to the production sharing contract (PSC), Royalty at
the rate of 20% is applicable for the Rajasthan block, it would be paid by the government
licensee (ONGC) for the entire production (ie. including CIL's share of 70%).
Low government profit petroleum: The block also enjoys favourable fiscal terms by way of
profit petroleum compared to the other blocks. The peak government share of profit petroleum
is 50% compared to the other blocks where the government sharing is typically 60 to 85%.
Cairn India
Oil & Gas
MBA fields - To transform growth orbit for CIL
Mangala, Bhagyam and Aishwariya, collectively known as the MBA fields are currently under the
the development process at the Rajasthan block. MBA accounts for 55% of the total 2P STOIIP
and 92% of the 2P Reserves of the block. The MBA fields together are likely to register peak
production of 180,000bopd (gross) and 126,000bopd (net to CIL). At its peak output, the fields are
expected to account for 20% of the domestic oil production of the country.
Mangala field
Mangala is the principal field in the Rajasthan block. The main reservoir unit of the field is the
Fatehgarh Group comprising very good quality sands. It has a gross resource base (STOIIP) of
1,293mnboe (63% of the total MBA STOIIP). The field has 2P reserves of 467mnboe, thus it
implying a recovery ratio of 36.1%. The reserve number is based on the assumption of extension
of the Rajasthan block PSC to 2041 (economic life) from 2020. However, application of EOR
(based on polymer flooding and ASP flooding) is expected to result in additional recovery of
202mnboe of reserves (additional recovery of 15.6% of the STOIIP). Thus, on an overall basis,
recovery from the field is likely to be around 51.7%. The field is estimated to produce 125,000bpd
of oil at its peak output, thereby contributing 69.4% of the total peak output estimates of the MBA
fields. Original FDP for the field was submitted in May 2006, however, towards end 2007 CIL
submitted a plan regarding upgrade of Mangala STOIIP estimates of reserves and resources,
thus revised its FDP.
Bhagyam field
Bhagyam is the second largest field in the Rajasthan block situated in the Northern fields. The
field lies north east to the Mangala field. It has a gross resource base (STOIIP) of 468mnboe of
reserves. The field has 2P reserves of 142mnboe, thus it implying a recovery ratio of 30.3%. On
application of EOR (based on polymer flooding and ASP flooding) is expected to result in additional
recovery of 70mnboe of reserves (additional recovery of 15.0% of the STOIIP reserves). Peak
production from the block is estimated to be 40,000bpd as per the FDP plan filed with the DGH.
Source: Company
Exhibit 83: Mangala STOIIP over the years
829
956
1,071
1,202
1,293
400
600
800
1,000
1,200
1,400
DOC (J un 2004) DOC (Aug 2004) FDP (Oct 2005) IPO (Dec 2006) Dec 2007
m
n
b
o
e
Cairn India
Oil & Gas
Aishwarya field
Aishwariya is the smallest of the three fields currently under development. It has a gross resource
base (STOIIP) of 293mnboe of reserves. The field has 2P reserves of 64 mnboe additionally the
EOR potential from the field stands at 46 mnboe, thus 2P+EOR combined would form recoverable
reserves of 110mnboe. Currently, the production plateau from the field is estimated to be 10,000bpd.
However, due to increase in the reserve base of field post previous FDP, management has indicated
that the peak production from the field could be revised upward to 20,000bpd, we are factoring in
production of 15,000bpd from the field.
Exploratory Blocks - Offers lot of promise
CIL has a bouquet of well- diversified Exploratory portfolio of 10 blocks of which CIL is operator in
6 blocks while the rest is in collaboration with its Consortium partners. Of these 10 blocks, 9 are in
India, while one block is in Sri Lanka. CIL has had a success ratio of 40% over the last 10 years.
CIL has also won two blocks in recent NELP round.
The key near term exploratory activity to watch out for will be drilling results of KG-DWN-98/2.
Also, the ONGC-CIL Consortium plans to drill five exploratory wells in the onshore block of
KG-ONN-2003/1 during FY2010. Given the geological structure of the block, which is akin to RIL's
KG-D6 block, results of drilling would be a key factor to watch in the short term.
Exhibit 84: CIL's Exploratory Portfolio
Operational Blocks CILs Interest (%)
GV-ONN-2003/1 24
VN-ONN-2003/1 49
PR-OSN-2004/1 35
SL-2007-01-001 100
KG-ONN-2003/1 49
GV-ONN-2002/1 50
Non-Operational Blocks
KG-DWN-98/2 10
RJ -ONN-2003/1 30
GS-OSN-2003/1 49
KK-DWN-2004/1 40
Cairn India
Oil & Gas
Resource analysis
A major part of CIL's resources lie in the Rajasthan block, which has proven to be a world class
asset with STOIIP of 3.8bnboe. Of this, 2.1bnboe is currently under development.
Source: Company
Exhibit 85: Resource and Reserves estimates of CIL
Particulars Gross Proved and Gross Proved and Net Proved and
Probable Hydrocarbons Probable reserves Probable reserves
intially in Place (mnboe) and resources (mnboe) and resources (mnboe)
Rajasthan MBA 2,054 685 480
Rajasthan MBA - EOR 308 216
RJ Small fields - Saraswati &
Raageshwari oil 300 12 8
Other Rajasthan 1,408 74 52
Ravva (Main +Satellite gas) 625 72 16
CB (Laxmi Gas,Lakshmi Oil,
Gauri Gas, Gauri Oil, CB-X) 156 20 8
KG-DWN-98/2 650 353 35
Total 5,193 1,524 815
Cairn India
Oil & Gas
Rajasthan Block: Infrastructure and development status
CIL in line with its guidance has delivered the first oil from the block in 2HCY2009. This is a major
achievement for the company considering that in spite of the various bottlenecks, it has developed
a world class production base in Rajasthan. The Rajasthan block is by far the largest project
undertaken by the CIL management. This is also an achievement amidst a scenario where major
global projects have witnessed delays impacted by various issues. The Rajasthan block is a new
hydrocarbon basin, which is not connected to any of the company's infrastructure. Hence, CIL had
to develop not just the production field, but also associated facilities for evacuation of the crude oil
produced from the field.
CIL is currently building facilities for production of crude oil from its Rajasthan block. First oil from
the block commenced from 'Train-1' having capacity of 30,000bopd. Subsequent trains will see
increase in production going ahead. 'Train-2' is likely to operate from 1QCY2010 in line with the
pipeline commissioning. 'Train-3' will witness peak output from Mangala field. 'Train -4' is likely to
increase the processing capacity of the field to 205,000bopd.
Exhibit 87: Rajasthan integrated evacuation facilities
Aishwariya
Bhagyam
Intra-field
Pipelines
and Crossings
Mangala
Raageshwari Gas Terminal (RGT)
and Well Pads
Saline water for MPT and secondary
recovery fromreservoir
Thumbli water field facilities
Water System
Raageshwari Gas piped to MPT
Combined with Mangala associated
gas for power generation
MPT and Well Pads
Processing Capacity: 205 kbopd
1 x 30 kbopd processing train: Completed &Ready
2 x 50 kbopd processing trains:
1
st
in Q4 2009 &2
nd
in H1 2010
1 x 75 kbopd train, scope for further expansion: 2011
Fluid handling capacity 1 mmbfpd
>350 wells, >40 well pads
~700 kmpipeline to Gujarat coast
Skin Effect Heat Management Systems
(SEHMS)
Multiple oil delivery points
Export oil pipeline plus heating stations
Infrastructure
~500 kmof intra and inter field
pipelines
~80 kmof inter field roads
Built-in fire and safety systems
Source: Company
Exhibit 86: Production Ramp up schedule at Mangala field (in Kbpd)
Period Production capacity Comment
3QCY2009 30 (First Train) Evacuation through Trucking
1QCY2010 80 (First & Second Train) Evacuation starts from Pipeline;
Rampup of Mangala production
2QCY2010 130 (First, Second and Third train) Further rampup of Mangala production
3QCY2010 130 (First, Second and Third train) Full rampup of Mangala production
Cairn India
Oil & Gas
Mangala Processing Terminal (MPT) and allied facilities
To produce oil and the associated gas and water, the company has set up the Mangala Processing
Terminal (MPT). MPT is spread over 1.6 sq km, or approximately 400 acres. MPT will have four
Trains, which will come up in a phased manner. The combined processing capacity of the terminal
will be 205,000bopd with scope for expansion. Production from 'Train - 1' (has a production capacity
of 30,000bopd and is currently operational) will be evacuated by trucks at an estimated Opex of
US $10/bbl. 'Train 2' will have capacity of 50,000bopd and will coincide with the pipeline
commissioning.
Processing of crude from MPT's four trains requires an extensive water heating, circulating and
recycling system. It also requires gas recovery and heat and power systems. MPT will have crude
storage capacity of 625,000bbl comprising 5 tanks of 125,000 each. This implies storage facilities
with storage capacity of 4 days of peak oil production from the MBA fields.
Source: Company
Exhibit 88: Mangala Processing Terminal
Source: Company
Exhibit 89: Overview of Processing System at MPT
FLUIDS FROM
OIL WELLS
ASSOCIATEDGAS RECOVERY
MAKEUP GAS FROMRAAGESHWARI
PRODUCEDWATER TREATMENT
MAKEUP WATER FROMTHUMBLI SALINE WELLS
Heater Separator Slug Catcher SettlingTank Dehydrator Export Oil
Storage Tank
Oil
Pump
TO EXPORT
PIPELINE
TO FUEL GAS
DISTRIBUTION
SYSTEM
INJ ECTED
BACK INTO
OIL WELLS
FIRST STAGE PREPARATION SECONDSTAGE PREPARATION STORAGE &EXPORT
D
Overviewof the Processing Systemat the MPT
SCHEMATIC DIAGRAM
Cairn India
Oil & Gas
For drilling purposes, CIL has already deployed two drilling rigs (sourced from Weatherford) at the
site, which can drill 60-70 wells per annum. These rigs are custom made for CIL to minimise travel
time between the two drilling locations. Average time for moving the rigs will be 6-8 hours as
against 3-4 days for a normal rig. To achieve peak production at the Mangala field, CIL needs to
drill 35-40 wells. During the life of the MBA fields, around 350 wells are likely to be drilled using
these rigs.
Energy Infrastructure
Development of the Raageshwari gas field in the South of the development area will be critical for
heating and power generation requirements of production. Gas from the Raageshwari gas field
will be transported to the northern fields through an 80km gas pipeline for meeting the energy
requirements for production and transportation purposes. The gas will in turn be used to generate
steam, which will be the main source of heat to help produce the Rajasthan crude. Steam generation
will be done using 5 x 115 metric tonne/hour boilers. All power requirements of MPT will be met by
captive power plants comprising four 12MW steam turbine generators and three 2MW emergency
diesel generators. There will be 20 water and oil storage tanks.
Water source: Water to create steam and for flooding the oil reservoirs to help extract the crude
will be produced from the Thumbli saline water aquifer, 20kms away from Mangala field. CIL has
drilled five water wells, each with a capacity of 63,000bpd. The saline water will be transported to
the MPT by a pipeline.
Source: Company
Exhibit 90: Rajasthan Block - Oil Recovery System
Horizontal
Well
Water
Injector
Saline Water
Abstraction
Separator + Heat
Heat
Gas Recovery System
Fuel Gas
Distribution
System
Export
Pipeline
Export
Oil Storage
Vertical
Well
T
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b
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A
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B
a
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r
H
ill
F
a
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g
a
rh
Oil
Water Table
Fresh Water
Cairn India
Oil & Gas
Pipeline facility
As per the PSC, CIL is obliged to sell its output to the government nominee until India attains
self-sufficiency in its crude oil supply. Initially, IOC had evinced interest in the off-take of crude
from the Rajasthan fields, however, on account of issues regarding refining of the heavy crude, it
backed out. Thereafter, as part of the process, in September 2005, the government chose MRPL
(ONGC's 72% subsidiary) as a nominee to buy the crude from the Rajasthan block. Delivery point
for the crude was fixed at the field's storage facilities. Thus, the task of setting up evacuation or
transport infrastructure was the responsibility of MRPL. To utilise the crude, MRPL deliberated on
two options, viz. evacuate the crude through a pipeline to the Mundra port and further to MRPL's
refinery at Mangalore through crude oil tankers. Second, there was deliberation over a well head
refinery of 7.5MMTPA. Utilisation of the Rajasthan crude at its current Mangalore refinery was
found unfeasible by MRPL due to its refining configuration (Nelson's complexity Index of 7.5)
wherein its current configuration allows it to lift only 1.2MMTPA of the crude oil. For higher off-take,
it would have to upgrade the current complexity and crude handling facilities. Due to high investment
requirements to build a pipeline and upgrade the refining infrastructure, MRPL refused to take full
volumes.
The second option of a well head refinery was evaluated to be financially unviable by MRPL due to
poor returns. Thus, MRPL has asked to de-nominate itself as the sole buyer of the crude oil from
CIL's Rajasthan block. Thus, post MRPL's refusal to take full volumes, the government had to find
additional buyers for the crude from the Rajasthan block and determine means of evacuation of
the crude produced there. Thus, CIL and partner ONGC agreed to build a pipeline from MPT to
Salaya.
At the end of April 2008, GoI gave its approval for shifting the crude oil delivery point as defined
under the PSC from MPT at Barmer to the Gujarat coast. Thus, shifting of the delivery point
resulted in inclusion of pipeline cost in the FDP for the project. Thereafter, 'in principle' approval for
RoU was granted to lay the pipeline up to the marine terminal on the Gujarat coast.
The 24" heated and insulated pipeline is approximately 700km long connecting from MPT at Barmer
to a marine terminal on Gujarat coast. Of the 700km, 154km of pipeline is situated in Rajasthan,
while the rest is in Gujarat. Construction work of the pipeline began in J une 2008 in Gujarat, while
work on the Rajasthan section started in February 2009. The delay in commencement of work in
the Rajasthan section was on account of the levy of State Sales Tax.
The pipeline will provide CIL access to multiple refineries as it would get connected to IOC's crude
oil pipelines and the private sector refineries of RIL and Essar. It would also provide reach to the
coastal refineries through the coastal route. The pipeline along with having marine facilities also
opens up export potential for the company and help in better price discovery for its Rajasthan
crude in the long term.
Along with the crude oil pipeline, a parallel pipeline of 8" will carry the Raageshwari gas that will be
used for power generation, which will be needed to prevent the crude from solidification. Along the
length of the pipeline, there will be more than 35 skin effect heat induction management system
(SEHMS) heating stations. Gas will be supplied at each station to generate the power required to
heat the pipeline for approximately 10km on either side to ensure that crude remains constantly
heated above 65
O
C.
Cairn India
Oil & Gas
In addition, there is an intermediate terminal at Viramgam for storage and further pumping to the
coast. There will also be two pigging stations at Sanchore and Wankaner to insert 'Pigs' (basically
metal cylinders) that are used to clean the pipeline and scour it of wax. Over and above the main
pipeline, there will be a 22km spur line at Radhanpur culminating into an export terminal having
two pre-heating tanks, with a capacity of 9,000 barrels.
COASTAL TERMINAL
STORAGE ANDEXPORT
Distribution
to buyer
MANGALA
PROCESSING
TERMINAL
SHEMS
RAAGESHWARI
GAS SUPPLY
Distribution
to Refiners
Sanchore
Pigging Station
Wankaner
Pigging Station
VIRAMGAM
INTERMEDIATE
TERMINAL
Storage,
Pumping
and Export
GAS PIPELINE
HEATEDCRUDE OIL PIPELINE
Source: Company
Exhibit 92: Crude Pipeline - Schematic Diagram
Source: Company
Exhibit 91: Rajasthan crude oil pipeline
p
DELHI
Panipat
Bhatinda
Mangala
Rajasthan
DELHI
Mathura
T ki Trucking
Route
Cairn Pipeline
Viramgam
Gujarat
Kandla
Radhanpur
Cairn Pipeline
Under
Construction
g
Koyali Jamnagar
/ Salaya

Bhogat
Tankers to
Coastal
Refineries
Refinery
Existing Pipelines
Pipeline Route
Cairn India
Oil & Gas
Refineries Refinery Location Capacity (kbpd)
IOC
Panipat Inland 240
Mathura Inland 160
Koyali Inland 274
HPCL
Bhatinda Inland 180
Mumbai Coastal 150
BPCL
Mumbai Coastal 240
Bina Inland 120
MRPL
Mangalore Coastal 240
Private
Reliance Coastal 660
Reliance SEZ refinery Coastal 580
Essar Coastal 240
TOTAL 3,084
Exhibit 93: Refineries accessable to pipeline
Source: Company, Infraline, Angel Research
Cairn India
Oil & Gas
Pricing of Rajasthan crude
Cairn's Rajasthan crude is sweet but waxy in nature with a higher pour point leading to higher
viscosity. These characteristics would result in higher production of heavy-end distillates during
the primary distillation of crude oil. This is because apart from being waxy, Rajasthan crude is also
heavy (with specific gravity 0.89) and has high Conardson Carbon Residue (CCR) content of over
10% by weight. This means most simple refiners will find it difficult to process the crude unless
they have substantial secondary processing capabilities. Additionally, due to higher viscosity,
Rajasthan crude oil has the propensity to solidify at much lower temperature than in the normal
case. Thus, the refineries handling the same would need to keep it at higher temperature to prevent
solidification of the crude oil. On account of the above-mentioned factors, pricing of the Rajasthan
crude will be at a discount to the Brent oil prices. The discount is anticipated to be around 10-15%
as per the recent management commentary.
Exhibit 94: Rajasthan crude characteristics v/s other crude
Particulars Rajasthan Mumbai High Nile Blend
API 27.06 39.20 35.10
Pour point Deg c (max) 48.00 27.00 32.00
Acid Number, mg KOH/gm 0.42 0.08 0.19
Sulphur, % wt 0.14 0.15 0.04
Conradson carbon residue, % wt 10.20 1.04 3.28
Exhibit 95: Crude: How Yields stack-up compared to other crude
Particulars Rajasthan Mumbai High Nile Blend
LPG +Fuel Gas 0.02 2.91 0.17
Naphtha 1.4 17.8 4.6
Kerosene 4.1 26.5 14.7
Diesel 17.1 20.3 17
VGO 44.2 24.3 30.2
Short Residue 33.0 8.1 33.7
The recently finalised crude pricing agreement would be applicable till March 2011. However, we
believe with opening up of the export option and with refineries likely to adjust to Rajasthan crude,
better pricing discovery would be witnessed going ahead. We do not expect increase in the discount
over the benchmark for Rajasthan crude. On the contrary, we believe the export option and better
appetite could reduce the discount in the future.
To elucidate the same, we have considered the basket of Indonesian crude (Duri and Widuri
crudes in equal proportions), which has similar properties like Rajasthan crude.
Cairn India
Oil & Gas
Exhibit 96: Duri-Widuri mix: Closest proxy to Rajasthan Crude
Particulars Mangala Brent Duri Widuri Duri-Widuri
mix (50:50)
API 27.4 38 21 32.6 26.8
Sulphur 0.14 0.44 0.14 0.07 0.105
Barrels/Tonne 7.1 7.5 6.8 7.3 7.05
Pour point 42.0 3.0 21.0 42.0 31.5
Duri-Widuri mix (50:50 ratio) has been trading at an average discount of around 10% since
J anuary 2004. However, currently the discount has reduced to around 1-3% following the decline
in production of heavy crude oil by OPEC countries.
We have factored in a discount of 15.0% over the Brent prices for Rajasthan crude, which is in line
with the recent announcement by management. However, the same is slightly than the average
discount compared to Duri-Widuri mix.
Exhibit 97: Brent, Duri-Widuri mix and Discount over the years
J
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Discount (RHS) Brent Dhuri-Widhuri
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$
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Cairn India
Oil & Gas
Annexure I - Reserves, Resources and their Recovery
Assets of the Upstream companies include the oil and gas lying beneath the Earths surface. The
dynamics of the Sector is elucidated here for a better understanding of the Upstream companies.
What is Total Petroleum Initially-in-place?
Total Petroleum Initially-in-place (PIIP) or the Original Hydrocarbon-Initially-In-Place (OHIIP) is
that quantity of oil and natural gas (hydrocarbon), which is estimated to exist originally in naturally
occurring accumulations. It is that quantity of oil and natural gas which is estimated, on a given
date, to be contained in known accumulations, plus those quantities already produced there-from,
plus those estimated quantities in accumulations yet to be discovered.
Source: Society of Petroleum Engineers
Exhibit 98: Petroleum Reserves and Resources
U
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PRODUCTION
RESERVES
Proved Probable Possible
1P 2P 3P
CONTINGENT
RESOURCES
1C 2C 3C
UNRECOVERABLE
PROSPECTIVE
RESOURCES
Low
Estimate
Best
Estimate
High
Estimate
UNRECOVERABLE
Range of Uncertainty Not to scale
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What are Reserves?
Reserves are those quantities of petroleum anticipated to be commercially recoverable by
application of development projects to known accumulations. Reserves must satisfy four criteria:
(a) they must be discovered, (b) they must be recoverable, (c) they must be commercial,
(d) remaining based on the development projects applied.
Reserve classification
Reserves are further sub-divided based on the project maturity and/or characterised by their
development and production status.
Proved Reserves (1P Reserves): 90% probability of recovery of all or more reserves
Proved reserves are those reserves that can be estimated with a high degree of certainty to be
recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated
proved reserves. At least 90% probability exists that quantities actually recovered will equal or
exceed the estimate.
Probable Reserves (2P Reserves): 50% probability of recovery of all or more reserves
Probable Reserves are additional reserves, which by analysis of geo-science and engineering
data are less likely to be recovered than proven reserves, but more certain to be recovered than
Possible Reserves. It is equally likely (50% probability) that actual remaining quantities will be
greater than or less than the sum of the estimated 2P (Proved plus Probable) Reserves. Probable
Cairn India
Oil & Gas
Source: Society of Petroleum Engineers
Exhibit 99: Reserves and Resource based on Project Maturity
PRODUCTION
On Production
Range of Uncertainty
Not to scale
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RESERVES
CONTINGENT
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UNRECOVERABLE
PROSPECTIVE
RESOURCES
UNRECOVERABLE
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Project Maturity
Sub-classes
Approved for
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J ustified for
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Development Pending
Development Unclarified
or On Hold
Development not Viable
Prospect
Play
Lead
Reserves may be assigned to areas of a reservoir adjacent to Proved Reserves, where data
control or interpretations of available data are less certain.
Possible Reserves (3P Reserves): 10% probability of recovery of all or more reserves
Possible Reserves are additional reserves, which by analysis of geo-science and engineering
data, less likely to be recoverable than Probable Reserves. Total quantities ultimately recovered
from the field have a low probability to exceed the sum of the estimated 3P (Proved plus Probable
plus Possible) Reserves. Possible Reserves may be assigned to areas of a reservoir adjacent to
Probable Reserves, where data control and interpretations of available data are progressively less
certain. At least 10% probability exists that quantities actually recovered will equal or exceed the
3P estimate.
Contingent Resources are those quantities of petroleum, which are potentially recoverable, but
are currently not considered to be commercially recoverable due to one or more contingencies like
no viable market for the produce, dependency on technology for commercial recovery, etc.
Prospective Resources are those quantities of petroleum, which are estimated, as of a given
date, to be potentially recoverable from undiscovered accumulations where no drilling has taken
place. This undiscovered potential accumulation is evaluated according to their chance of discovery
and assuming a discovery at the place.
Oil Extraction and Recovery
Recovery of oil basically means production/extraction of oil reservoirs, which is dependent on
factors like reservoir characteristics, density of oil, etc. When the reservoir rocks are "tight" such
as shale, oil generally cannot flow through, but when they are permeable such as in sandstone, oil
flows freely. Also, the flow of oil is often helped by natural pressures (due to water and gas present
in the reservoir) surrounding the reservoir rocks and gravity of the oil. Water (present below the
oil) and gas (present above the oil) provide a natural recovery for the oil. Similarly, gravity of oil
measuring its viscosity also tends to span in a large range from liquids as light as gasoline to
heavy as tar. The lightest forms tend to result in higher production rates. Post extinguishment of
natural reservoir energy, we resort to secondary and tertiary recovery to extract oil. Thus, to extract
optimum oil from a reservoir, 3-stage recovery process is applied by oil extraction companies.
Each stage helps recovering more oil than the previous one, thus enhancing the overall recovery
rate of the reservoir. Each stage is explained briefly as below:
Cairn India
Oil & Gas
Primary recovery
This is a natural recovery process of oil without applying any external pressure. If the underground
pressure in the oil reservoir is sufficient, then this pressure will force the oil to the surface. Gaseous
fuels, natural gas or water are usually present, which also supply the needed underground pressure.
While the exact recovery based on primary recovery is dependent on the reservoir characteristics
(porosity of the rock and viscosity of the oil), usually, about 15- 20% of the oil in a reservoir can be
extracted using primary recovery methods. Similarly, the primary recovery also depends on the
density of the oil, wherein lighter oil has higher recovery compared to heavier oil.
Secondary recovery
Over the lifetime of the well as pressure falls, at some point there is insufficient underground
pressure to force the oil to the surface. Thus, if economical, as often is, the remaining oil in the well
is extracted using secondary oil recovery methods. Secondary oil recovery uses various techniques
to aid in recovering oil from depleted or low-pressure reservoirs. Sometimes pumps, such as
beam pumps and electrical submersible pumps (ESPs), are used to bring the oil to the surface.
Other secondary recovery techniques increase the reservoir's pressure by water injection, natural
gas re-injection and gas lift, which inject air, carbon dioxide or some other gas into the reservoir.
For this purpose, injection wells are drilled besides the producing wells. Together, primary and
secondary recovery generally allows 25% to 35% of the reservoir's oil to be recovered.
Tertiary recovery (Enhanced Oil Recovery; EOR)
Tertiary recovery method, generally referred to as EOR, provides artificial lift to the reservoir and
helps to produce oil over and above the primary and secondary recovery methods. It also involves
sophisticated techniques that alter the original properties of the oil. EOR generally happens along
with the secondary recovery process. EOR's purpose is not only to restore formation pressure,
but also to improve oil displacement or fluid flow in the reservoir. Increase in crude oil prices has
seen applicability of this method increasing in the recent past even though the operating costs are
high.Also, the method generally increases oil recovery by around 15-20%.The major types of
EOR are chemical flooding (ASP flooding, micellar-polymer flooding), miscible displacement (carbon
di-oxide injection or hydrocarbon injection) and thermal recovery (in-situ combustion).
Source: Company
Exhibit 100: Application of the EOR process
Cairn India
Oil & Gas
Source: Company
Exhibit 101: Result of ASP flooding on the recoverable reserves
Alkaline-Surfactant-Polymer (ASP) Flooding Oil Saturation Display at Pore
Level Reduction in Trapped Oil
Original oil
Sand Grain
Remaining oil Water
After ASP flood Initial After Waterflood
Source: Company
Exhibit 102: Result of Polymer flooding v/s Water flooding
Polymer Flooding
Cairn India
Oil & Gas
Key Acronyms
Acronym Description
1P Reserves Proved Reserves
2P Reserves Proved and probable Reserves
3P Reserves Proved +Probable +Possible Reserves
API American Petroleum Institute
APM Administered Pricing Mechanism
ASP Alkali Surfactant Polymer
bbl/bbls barrel/barrels
BCM Billion Cubic Meters
boe barrel of oil equivalent
boepd barrel of oil equivalent per day
BPCL Bharat Petroleum Corporation Limited
CBM Coal Bed Methane
CEP Cairn Energy Plc
CIL Cairn India Ltd
DGH Directorate General of Hydrocarbons
EOR Enhanced Oil Recovery
FDP Field Development Plan
GoI Government of India
HPCL Hindustan Petroleum Corporation Ltd
IOC Indian Oil Corporation
IM Investment Multiple
Kbpd Thousand barrels per day
MBA Mangala, Bhagyam and Aishwariya
mnboe million barrels of oil equivalent
mmbtu million British thermal units
mmscmd million metric standard cubic meters per day
mnbbls million barrels
MRPL Mangalore Refining and Petrochemical Ltd
MoPNG Ministry of Petroleum & Natural Gas
NELP New Exploration Licencing Policy
OGIP Original Gas In Place
PEL Petroleum Exploration License
PMT Panna, Mukta and Tapti
PSC Production Sharing Contract
PTRR Post Tax Rate of Return
STOIIP Stock Tank Oil Initially In Place
TCF Trillion Cubic Feet
WI Working Interest
Cairn India
Oil & Gas
Profit & Loss Statement (Consolidated) Rs crore
Y/E March CY2007 FY2009* FY2010E FY2011E
Net Sales 1,012 1,433 2,786 8,796
% chg 41.5 94.5 215.7
Operating expenditure 195 213 599 1,351
Administrative expenditure 388 331 331 331
Inc/dec in stock (11) 22 - -
EBIDTA 440 866 1,856 7,113
(% of Net Sales) 43.5 60.5 66.6 80.9
Total Recouped cost 445 438 476 1,066
Interest 2 6 152 305
Other Income 132 594 126 208
Extraordinary items - 28 - -
PBT 126 988 1,354 5,950
(% of Net Sales) 12.4 69.0 48.6 67.6
Total Tax 150 184 364 1,180
(% of PBT) 119.5 18.7 26.9 19.8
Reported PAT (25) 803 990 4,770
% chg - 23.2 381.8
(% of Net Sales) (2.4) 56.1 35.5 54.2
SOURCES OF FUNDS
Equity Share Capital 1,873 1,936 1,936 1,936
Reserves & Surplus 27,563 30,867 31,857 33,837
Shareholders Funds 29,436 32,802 33,792 35,772
Total Loans 312 4,356 4,356 4,356
Deferred Tax Liability (net) 492 554 561 585
Total Liabilities 30,240 37,713 38,710 40,713
APPLICATION OF FUNDS
Net Fixed Assets 488 1,365 7,324 9,293
Capital Work-in-Progress 2,467 5,203 1,829 1,927
Goodwill 25,319 25,319 25,319 25,319
Investments 713 171 171 171
Current Assets 2,088 7,268 5,603 7,237
Current liabilities 835 1,613 1,537 3,233
Net Current Assets 1,253 5,655 4,067 4,003
Total Assets 30,240 37,713 38,710 40,713
Balance Sheet (Consolidated) Rs crore
Cash Flow Statement (Consolidated) Rs crore
Profit before tax 126 988 1,354 5,950
DD&A 459 463 261 851
(Inc)/Dec in Working Capital (91) 121 (252) 935
Interest 1 82 152 305
Direct taxes paid (82) (146) (357) (1,156)
Others 267 (321) - -
Cash Flow from Operations 680 1,188 1,159 6,885
(Inc)/Dec in Fixed Assets (1,174) (3,161) (2,846) (2,918)
Free Cash Flow (494) (1,974) (1,688) 3,967
(Inc)/Dec in Investments (2,110) (2,506) - -
Payment for Acquisition (3,276) - - -
Issue of Equity 67 2,532 - -
Inc./(Dec.) in loans (169) 3,767 - -
Dividend Paid (Incl. Tax) - - - (2,790)
Interest (2) (72) (152) (305)
Cash Flow from Financing (104) 6,226 (152) (3,095)
Inc./(Dec.) in Cash (5,984) 1,746 (1,840) 872
Opening Cash balances 6,135 150 1,897 57
Closing Cash balances 150 1,897 57 929
Key Ratios
Per Share Data (Rs)
EPS (0.1) 4.2 5.2 25.2
Cash EPS 0.9 5.7 6.6 29.6
DPS - - - 12.6
Book Value 155.2 172.9 178.2 188.6
Operating Ratios
Inventory (days) 26.8 24.4 24.4 24.4
Debtors (days) 29.7 22.0 22.0 22.0
Creditors (days) 103.4 171.1 103.4 103.4
Return Ratios (%)
RoE (0.1) 2.4 2.9 13.3
RoCE (0.0) 1.1 3.6 14.9
RoIC (0.0) 1.4 4.1 17.3
Dividend Payout (incl taxes) - - - 58.5
Valuation Ratios (x)
P/E - 66.8 54.2 11.2
P/E (Cash EPS) 316.6 50.0 42.9 9.5
P/BV 1.8 1.6 1.6 1.5
EV/Sales 48.7 35.9 19.1 6.0
EV/EBITDA 111.9 59.4 28.7 7.4
Note: * Performance for 15 months period
Cairn India
Oil & Gas
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Research & Investment Advisory: Acme Plaza, 3rd Floor A wing, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059
Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
Ratings (Returns) :
Cairn India
Oil & Gas
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1 January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 November 20, 2009 For

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