Cairn energy wants India identity as a part of their marketing strategy


India currently has more refining capacity than it requires, the business is on an upswing with refining margins going through the roof. The scenario presents a good business opportunity for Cairn.

The first step in the $6.5 billion Cairn’s strategy to become Indian is an initial public offer that is likely to open sometime late this year or early next. One of the company’s directors said that 90% of their assets are in India as such they are keen that the Indian public should have a share in their company. The idea is essentially to become an Indian company.

Cairn, which has its largest block acreage of nearly 8,000 sq km in Rajasthan, made India’s biggest oil discovery in 22 years there. The wells in the field are expected to pump 1 to 1.1 lakh barrels of oil per day when production begins and the well is named ‘Mangala’.

The company found recoverable oil reserves in 17 different locations in the desert. The fields are estimated to contain a total of 3.5 billion barrels of crude oil and are expected to yield 1.5 lakh barrels of oil per day for at least 25 years. Cairn is producing oil from its Ravva fields and gas in the Krishna-Godavari basin both off the Andhra Pradesh coast and Cambay basin on the western coast of Gujarat.

The Indian assets have burnished the company’s blue-chip status in the FTSE 100 in London. The company spokesman did not reveal how much of the company’s equity will be offered to investors in India. Investment banking sources say that the equity offer could be one of the largest ever in India-something upwards of Rs. 15,000 crore or $3.5 billion.

Cairn did not confirmed or denied the figure but indicated they are yet to work out all those details, said a director of communications at Cairn.

The company also does not share how the money raised would be used. They recently tied up a $ 1 billion credit from a group of banks in London. Their cash flows from oil fields are strong and if equity money is available then the company may not draw down from the credit lines indicated an advisor to oil companies .

Cairn, however, may have some reason to worry about its Rajasthan fields. India’s biggest oil explorer, state-owned ONGC, has shelved plans for a wellhead refinery, with a likely equity participation of Cairn, in Rajasthan after the government discouraged it from going into down stream oil businesses of refining and retailing.

The decision not to set up the refineries was taken at a business planning meeting a couple of months ago. The other option is that the oil producer has is to pipe the oil to its refinery at Mangalore. Even that is now seen as unviable unless cairn too participates in building the pipeline or sells oil at a discount. The .low-grade, waxy crude in the Rajasthan fields does not flow easily and the pipelines have to be jacketed with special material to raise the temperature. That would, however, increase the cost substantially.

While India currently has more refining capacity than it required, business is on an upswing withstanding margins. Reliance Industries refinery at Jamnagar, India had reported mark of over $13 in the first quarterly. Their refineries are capable of cracking grade crude. They are relatively few in number and requirement increases as most new finds have oil deposit have a high Sulphur content. The Scenario presents a good business opportunity for Cairn if it were to build a complex refinery as it has lasting reserves.