Download - Cairn India Angel Broking research report
1January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1
Cairn IndiaInitiating Coverage
Amit Vora
Tel: 022 - 4040 3800 Ext: 322
E-mail: [email protected]
Stock Info
REDUCEPrice 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 overCairn India’s (CIL) stock price has spiked more than 2.5x its October 2008 lows driven by strongcrude prices and gradual de-risking of the Rajasthan project. However, given our subdued outlookon long-term oil prices, we believe that the stock will underperform the markets going ahead. Atcurrent levels, the stock is discounting long-term crude prices of US $85.1/bbl, which is high andleaves no margin of safety. We believe that our long-term crude oil price assumption of US $75/bblis sufficient to incentivise incremental production going ahead. We Initiate Coverage on CILwith a Reduce rating and SOTP-based Target Price of Rs253/share.
Rajasthan Reserve accretion story priced in: We believe that the Rajasthan Reserveaccretion story is far from over despite the significant reserve upgrades, however the same iscaptured in current valuations. Apart from STOIIP of 2.1bnboe at MBA fields (currently underdevelopment), CIL also has 1.7bnboe of additional gross STOIIP in other fields. However, the2P 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 of172mnboe from these fields (10.1% recovery factor). However, the stock is currently discountinga 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 currentReserve estimate from the block.
Attractive Exploratory portfolio albeit too early to factor in: Any success in CIL’sExploratory portfolio beyond Rajasthan is likely to re-rate the stock. The stock is currentlydiscounting high exploratory success rate of 34%. We, however, believe that any meaningfulexploratory success is sometime away, as CIL's Exploratory portfolio comprises assets atearly stages of exploration. For valuing the Exploratory upside, we have factored in a probabilisticsuccess 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 EORimplementation 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 registerlimited benefit due to the high costs involved and back-ended nature of EOR volumes.
Deepak Pareek
Tel: 022 - 4040 3800 Ext: 340
E-mail: [email protected]
Note: #Since listing on Jan. 9, 2007
2January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 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
3January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 3
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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 itsstock has seen a strong correlation with crude oil prices. Compared to the other majors in thesegment, viz. ONGC, OIL India and RIL, CIL has the highest leverage to crude oil prices. ONGCand OIL India have to bear the subsidy burden, which weakens their correlation with the crude oilprices. 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 thecommodities market in India does not provide long-term futures contract for crude oil. Thus, for aninvestor betting on increase/decrease in crude oil prices in the long run, CIL is an appropriateproxy play on the same.
On the bourses, the CIL stock demonstrated strong correlation of 0.88, 0.89 and 0.96 with crudein CY2007, CY2008 and CY2009 (till date), respectively. In fact, this correlation has onlystrengthened over the years. We believe this increasing correlation is largely a factor of reducingexecution risks associated with the Rajasthan project development. We believe that CIL's shareprice will continue to exhibit higher correlation with the crude oil prices over the near-to-mediumterm, barring any surprises in production schedules/newer discoveries.
Compared to other majors viz.ONGC, OIL India and RIL, CILhas the highest leverage tocrude oil prices
Source: Bloomberg, Angel Research
Exhibit 1: Correlation between Brent, CIL and ONGC
0
50
100
150
200
250
300
Jan
-07
Mar
-07
May
-07
Jul-
07
Sep
-07
Nov
-07
Jan
-08
Mar
-08
May
-08
Jul-
08
Sep
-08
Nov
-08
Jan
-09
Mar
-09
May
-09
Jul-
09
Sep
-09
Nov
-09
CIL ONGC BRENT
(Rs)
Since its October 2008 lows, the CIL stock has spiked more than 2.5x driven by strong crude oilprices and gradual de-risking of the Rajasthan project. Given our outlook of subdued oil pricesgoing 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 thatthis 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/sharediscounts crude oil price of US $85.1/bbl, which we believe is quite high and leaves no margin ofsafety for investors.
At Rs283, the CIL stockdiscounts crude oil price ofUS $85.1/bbl, which we believeis quite high and leaves nomargin of safety
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One such resource play in other Rajasthan fields is the Barmer Hill formation, a reservoir lyingabove the Fatehgarh reservoir. Barmer Hill is low permeability reservoir, which is likely to result inlower recovery rates. Technical studies (fracture stimulation) are currently underway to gauge therecovery potential of the Barmer Hill formation. CIL management has estimated the Barmer Hillformation to have around 400mn barrels of STOIIP reserves. We believe conversion of thesecontingent 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 significantreserve upgrades, however the same is captured in current valuations. CIL estimates an assetbase of 3.8bn barrels at the Rajasthan block, of which around 2.1bn barrels are currently underdevelopment, which has a total 2P + EOR resource base of 985mn barrels, translating into arecovery rate of 48%. Apart from core MBA currently under development, CIL has 1.7bnboe ofadditional gross STOIIP in small and other fields, with current 2P reserves of 86mnboe. Thistranslates into a recovery factor of 5% of the STOIIP, which is much lower than the 48% recoveryof core MBA fields at the Rajasthan block. Thus, there exists upside in terms of further reserveaddition at other Rajasthan fields. We believe leads from the developmental drilling could offerinteresting 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 RajasthanSmall Fields
OtherRajasthan Fields
TotalRajasthan
Likely to augmentReserve base infuture
Inm
nboe
CIL has 1.7bnboe of additionalgross STOIIP in small andother fields, with current 2Preserves for the same at84mnboe, translating into arecovery factor of 5% of theSTOIIP, which is much lowerthan the 48% recovery of coreMBA at the Rajasthan block
Source: Company, Angel Research
Exhibit 2: Sensitivity with Crude and Exchange RateCrude Prices (US$/bbl)
60.0 65.0 70.0 75.0 80.0 85.0 90.042.0 197 212 229 246 254 265 281
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
Exch
ange
Rat
e(R
s/U
S$)
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Source: Company
Exhibit 4: Barmer Hill formation
Reservoirs similar to Barmer Hill, across the world, have seen primary recoveries ranging between7-10%, while the secondary recovery has seen increase in output by 20%. Thus, cumulativerecovery from such fields has been close to 25-30%. For our valuation purposes, we have factoredin 10% recovery from the disclosed STOIIP for the Barmer Hill, which adds 40mmbl to recoverablereserves. 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 upsidesfrom future reserve accretion, we have assumed recovery rate of 4% from Southern fields andrecovery rate of 10% from other Rajasthan fields. Thus, we anticipate 172mnboe of recoverablereserves from these fields (Barmer Hill, Southern fields and Other Rajasthan fields). Our estimatecaptures a recovery rate at 10.1% of 3P STOIIP from these fields, which is fair considering thatreserves are yet to be validated and recoveries in these fields are likely to be much lower thancore MBA fields due to poor reservoir characteristics.
Ceteris paribus, CIL’s current market price of Rs283/share is discounting a high 18.5% recoveryrate 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 estimatefrom the block. Thus, any disappointment on further reserve accretion at Rajasthan would adverselyimpact CIL's stock price.
Our recovery estimates largelyreflect in the CIL stock price,which in turn means that anypositive newsflows from thesefields would lead to nomeaningful valuation upsides
We believe the current marketprice of Rs283/share isdiscounting 18.5% Recoveryrate from the other Rajasthanfields
6January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 6
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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 Rajasthanblock. This has resulted in it being viewed as a finite entity instead of a perpetual entity. Hence, wehave valued the company on asset-based NAV basis than on cash flow multiple. Nonetheless, webelieve that exploratory success in the newer geographies could change perception of CIL beinga 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 willalso change perception and the valuation methodology for CIL going ahead.
CIL estimates 1.4bnboe of net un-risked prospective resources in its Exploratory portfolio, whichhas increased significantly over the last couple of years. The risked estimate of the same standsat around 112mnboe, which reflects the probabilistic success ratio of 8.0%. The company's currentsuccess ratio is at a high 40%.
CIL's current success ratio isat a high 40%
We believe the lower success ratio for future discoveries is largely due to the fact that much of theun-risked prospective resources are situated in the frontier and emerging plays based on diversityof 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
imnboe
61% of CIL’s net un-riskedprospective resource issituated in the highlyprospective deepwater blocks
Further discoveries will add tothe valuation from the reservesperspective and changeperception and valuationmethodology for CIL goingahead
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We, however, believe that any meaningful exploratory success is sometime away as CIL’s assetportfolio comprises assets at early exploration stage. Hence, to factor in a meaningful exploratoryupside at the current juncture would be premature. In line with the same, we have factored in aprobabilistic success ratio of 8.0% for CIL’s 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.CILestimates possible approvals for an off-take rate based EOR by 2011E and field-wiseimplementation of the same from 2016E onwards. Successful implementation of EOR will alsoresult in extension of CIL's peak plateau production from the Rajasthan block to 8-9 years. CILplans to utilise polymer and alkaline-surfactant-polymer (ASP) flooding to enhance cruderecovery from the block. We, however, expect CIL to register limited benefits from EORimplementation 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-2002/1GV-ONN-2003/1VN-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-2004/1SL 2007 01 001
Seismic:5,000km 2D,
1,000km2 3D by 2010
Drilling 2011
SRI LANKA
PR-OSN-2004/1
800 km2, 2010
Drilling 2011NON-OPERATED
OPERATED
We believe that anymeaningful exploratorysuccess is sometime away asCIL’s asset portfoliocomprises assets at earlyexploration stage
We have factored in aprobabilistic success ratio of8.0% for CIL’sExploratory portfolio
Source: Company
Exhibit 8: EOR likely to extend plateau production period
S h ti
EORPotential to
175,000
b d
Initial targeted
plateau production
Schematic
Potential toextend andenhanceplateau
lR
ate
bopdp p
MBA Water flood
Oi
10 YearsQ3 2009
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Oil & Gas
Source: Company
Exhibit 10: Daqing - ASP Pilot performance
Application of EOR technique elsewhere in the world has also provided much higher yield than15%, as anticipated by CIL. Daqing and Shengli (the two large fields in China) produced close to100mnbbl 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-wiseimplementation of EOR across the globe. Consequently, we are currently factoring in incrementalrecovery rate of 15% from EOR as per company guidance. But, we believe EOR potential islargely factored in current valuations. Even if there is any improvement in EOR-based recoveryrate going ahead, we believe it will not add significantly to valuations, as EOR volumes are likelyto be back-ended.
CIL has conducted pilot and lab tests for implementation of EOR, which has yielded positiveresults (laboratory test indicate a 30-40% incremental recovery potential through EORtechniques). 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 floodingTime
Cum
ulativeO
il,%
Oil
Cut
, %
Cum Oil
Cum Cut
Currently, CIL claims EOR willapproximately add 15% to therecovery factor for the MBAfields
Even if there is anyimprovement in EOR-basedrecovery rate going ahead, webelieve it will not addsignificantly to valuations, asEOR volumes are likely to beback-ended
9January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 9
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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 scheduleddelivery of oil. Concerns/ lack of visibility in terms of discount on the quality of crude and timelycompletion 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.
Major concerns regardingtiming of the monetisation ofthe reserves have beenaddressed followingproduction of first oil and likelycompletion of pipeline by early2010
We believe that CIL has an upper hand on the Cess front. We have assumed cess of Rs927/tonneover 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) wouldincrease by Rs8/share, up 3.0% to Rs261/share. In case of adverse ruling (cess liabilitydetermined at Rs2,575/tonne), our Fair Value would reduce by Rs16/share, a decline of 6.3% toRs237/share. Thus, outcome of the cess issue will continue to be an overhang on stock valuationsin the medium term.
Outcome of the cess issue willcontinue to be an overhang onstock valuations in themedium term
Source: Company, Angel Research; Note: RoU - Right of Usage of land for building of pipeline
Exhibit 11: Key Concerns phasing outIssue Resolved Comments
Pipeline from MPT to Salaya Yes Construction of the pipleline from MPT to Salaya hasbeen completed (560km built out of total 590kmproposed to be built).
Crude off-take Yes CIL has been allowed to sell crude to multiplenominees by the government (public and privaterefiners) and sufficient allocation has been made fornear term in line with production levels. The exportoption has also been provided in the event ofinsufficient demand.
Pricing of crude Yes Pricing of crude oil has been fixed at a discount tothe bonny light prices based on the GWP of theproduct slate.
Execution Risk Partially Delivery of first oil in Rajasthan has led to lowerexecution risks.
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Technological prowess, excellent Management key positives
CIL is a proven explorer of hydrocarbon having achieved a good success ratio of 40%. CIL hasbeen involved in three of the seven major discoveries in India over the past decade. Much of thecredit for the company's superior exploration capabilities is attributed to its experiencedmanagement and application of best-in-class technology. CILs' exploratory prowess is wellexemplified by its historic success at the Rajasthan block. Notably, when Shell (original owner ofthe 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 fullinterest in the block in 2003. Post acquisition of the block, CIL reported major discoveries of theMangala, Bhagyam and Aishwariya (MBA) fields. Till date, CIL has made 25 discoveries in theblock. CIL’s exploratory success is attributed to application of superior technology such as soundpetroleum modeling system and seismic data application.
CILs' exploratory prowess iswell exemplified by its historicsuccess at the Rajasthan block
Adoption of advanced methods to enhance production coupled with excellent reservoirmanagement skills are evident from CIL's track record at the Ravva field, where it farmed-in asoperator in 1994 and has since significantly ramped up production from 4,500boepd to 50,000boepdover the next five years. Moreover, reserves in the block have doubled along with a recoveryfactor 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 despitehiccups, 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 ofthe largest projects undertaken by CIL and meeting the delivery schedule is a positive. CIL is alsobuilding a pipeline for crude evacuation from the block.
We believe that the key differentiating factors for players in the E&P industry are managementquality and technological prowess. Pertinently, CIL outshines its PSU peers on both these fronts.
The key differentiating factorsfor players in the E&Pindustry are managementquality and technologicalprowess
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
BasinsFully integrated Petroleum
systems modeling
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Risks to RecommendationOil price fluctuations
CIL’s Fair Value has high sensitivity to crude oil prices. We believe that CIL is a proxy play oncrude as demonstrated by the strong correlation of its stock price with crude of 0.88, 0.89 and 0.96in CY2007, CY2008 and CY2009, respectively. Thus, if oil prices were to continue trading stronggoing ahead, there exists high chance of CIL's stock price ruling at the higher than our Fair Valueestimate. A higher oil price environment and/or lower discount for Rajasthan crude, poses anupside risk to our estimate. However, the current stock price is discounting long-term crude oilprices 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 EORmay not be as effective as the company anticipates it to be. We have assumed polymer and ASPflooding 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 forsuccessful EOR execution by CIL, which constitutes almost 7.5% of our Fair Value. Thus, successfulimplementation of EOR is important for the company. We believe our estimates of EOR recoveryare quite fair in spite of the fact that similar fields, across the world, have yielded incrementalrecovery in the range of 20-25%. However, as EOR application at MBA is one of the largest onearound the globe, there exists a technical risk owing to which we have factored in lower recoveryrate, 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 inproduction from the MBA fields is contingent on allocation of further volumes to various refineriesby the government. Currently, the government has allocated volumes of 0.7MMTPA and 2.4MMTPAfor FY2010 and FY2011, respectively. However, we expect higher production forecasts for FY2010and FY2011 at 1.3MMTPA and 5.5MMTPA respectively. Thus, it would require further allocation of0.59MMTPA and 3.08MMTPA of crude oil to other refineries. However, following the recentagreement between CIL and RIL, un-allocated volumes from the MBA fields would be lower thanmentioned earlier(volumes tied-up not disclosed by CIL). Pertinently, the risks associated withslower ramp up in production have reduced considerably as the government recently has giventhe go ahead for sales of MBA crude to private refineries as well.
Volumes allocated to PSU Refineries (MMTPA) FY2010E FY2011EHPCL 0.3 0.5MRPL 0.2 0.4IOCL 0.2 1.5Total 0.7 2.4Production Forecast 1.3 5.5Balance Quantity 0.6 3.1as % of production forecast 45.7 56.2
Exhibit 13: Unallocated volumes of MBA production
Source: Infraline, Angel Research
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Oil & Gas
Similarly, any delays in commissioning of the crude oil pipeline would also lead to delays inramp 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 ofcontention beteween CIL and GoI is who is liable to pay the cess and at what rate. CIL believesthat 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 thePSC provisions does not mention the cess obligation, CIL is also liable to pay it. Secondly, theissue of rate of cess applicable also remains unresolved. CIL maintains that the cess payable isRs 927/tonne as the PSC states the fiscal liability clause and the rate of cess was Rs900/tonne atthe time of signing the contract. However, GoI has asked CIL to pay cess at the current rate. Whilethe matter is under arbitration, CIL is currently paying higher cess under protest at the rate ofRs2,575/tonne. We believe the matter would most likely be settled in favour of CIL and it would berequired to pay cess at the rate of Rs927/tonne. Higher cess payment than our estimate would bea negative for CIL by Rs16/share. Conversely, if CIL is exempt from paying the cess, it wouldincrease our Fair Value by Rs8/share.
Exchange rate fluctuations
Realisation from crude production from CIL's assets is US Dollar denominated. Therefore, anyappreciation/depreciation of the Rupee from our estimates would impact valuations. For everyRe1 appreciation in our long-term Rupee assumption (FY2012E onwards) of Rs/US $45, our FairValue 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&Pbusiness. The company may have to write off E&P expenditure on dry wells if it does not meet withcommensurate success on its E&P capex. This could in turn impact Profitability of the company.
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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 MBApeak production of 180,000bpd (Net working Interest 126,000bpd) from FY2013E, with the Mangalafield expected to achieve peak production of 125,000bpd (Net working Interest 87,500bpd) inFY2012E. The Bhagyam and Aishwariya fields are expected to achieve peak production of40,000bpd (Net working Interest 28,000bpd) and 15,000bpd (Net working Interest 10,500bpd) inFY2012E and FY2013E, respectively. In FY2009, Cairn's production from its extant (Ravva andCambay) fields stood at 66,146boepd (Net working Interest 17,264boepd). By FY2013E, we expecttotal production from all the fields at 244,932boepd (Net working Interest 143,912boepd), registeringa CAGR of 94.1% over FY2009-13E. Post this period, natural decline in production based onwater flooding will commence. However, with commencement of EOR, production at Rajasthanblock 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 MBAfields are likely to account for majority of the company's total production by FY2013E.
Exhibit 14: Key Operating AssumptionsParticulars FY2010E FY2011E FY2012E FY2013EProduction estimatesRajasthan Gross productionMangala 9.5 40.2 45.6 45.6Bhagyam - 0.9 12.8 14.6Aishwariya - - 3.7 5.5Total Rajasthan (mn barrels) 9.5 41.1 62.1 65.7Ravva Gross productionGas (bcm) 0.49 0.49 0.47 0.37Crude oil (MMTPA) 2.1 2.1 2.0 2.0Ravva O+OEG (MMTOE) 2.6 2.5 2.4 2.3Ravva O+OEG (mnboe) 19.0 18.5 17.9 16.8Cambay Gross productionGas (bcm) 0.49 0.49 0.49 0.49Crude oil (MMTPA) 0.5 0.5 0.5 0.5Cambay O+OEG (MMTOE) 0.9 0.9 0.9 0.9Cambay O+OEG (mnboe) 6.9 6.9 6.9 6.9Key Pricing assumptionsBrent Crude (US $) 67.0 70.0 75.0 75.0Discount for MBA crude (%) 15.0 15.0 15.0 15.0Opex Rajasthan (US $/bbl) 10.0 5.0 4.0 4.0
Source: Company, Angel Research
14January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 14
Cairn India
Oil & Gas
Source: Company, Angel Research
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
%Rs
cr
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% toarrive at the selling price for MBA crude (in line with the company guidance). Thus, on the back ofhigher 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
'000
boep
d(O
nW
Ibas
is)
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 theMBA fields. However, to sustain peak production over the life of the field, EOR will be employed inturn 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 atRs927/tonne for the Ravva block. With this, total direct Opex/bbl is expected to hover in the rangeof US $8-8.5/bbl in pre-EOR application phase.
15January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 15
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 depletionexpected to be a major cost head. Depletion cost is expected to be around US $5.5/bbl over thelife 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 innil Interest costs thereon. The company's effective Tax rate is also likely to be lower on account ofthe benefits arising from the seven-year tax holiday that the MBA fields would avail. We estimatethe 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.
Source: Company, Angel Research
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
%
Rs
cr
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 withincreasing cost pressures (on account of EOR application) and hover at 60-65% levels towardsthe later part of life of the field. On the back of OPM expansion and healthy Top-line growth, weestimate 82.2% CAGR in EBITDA over FY2009-13E.
Source: Company, Angel Research
Exhibit 17: OPM Trend
60.566.6
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
%
Rs
cr
EBITDA OPM (RHS)
16January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 16
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 thecommencement 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 goingahead. 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.
Source: Company, Angel Research
Exhibit 19: DuPont AnalysisParticulars (x) CY2007 FY2009 FY2010E FY2011E FY2012E FY2013EPAT / PBT (0.19) 0.81 0.73 0.80 0.81 0.81PBT / EBIT (25.86) 2.31 0.98 0.98 0.99 1.02EBIT / Sales (0.00) 0.30 0.48 0.69 0.72 0.67Sales / Total Assets 0.03 0.04 0.07 0.22 0.31 0.29Total Assets / Net worth 1.03 1.15 1.15 1.14 1.13 1.08RoE (%) (0.1) 2.4 2.9 13.3 20.5 17.7
17January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 17
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 oilprices and gradual de-risking of the Rajasthan project. In the past as well, CIL has demonstratedstrong 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 oilprices 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 trainhaving started, while production from Train-II is likely to commence in early 2010, followed byTrain-III in 1H2010 and Train-IV in 2012. Moreover, with recent approval of sales of crude oil to theprivate refineries, we believe production growth is unlikely to be constrained on account of allocationof sufficient volumes. Thus, we believe that the Rajasthan project will continue to further de-riskgoing ahead. However, the cess issue is likely to be a major overhang on the stock price over themedium term.
Valuation Methodology
We have valued CIL based on the asset-based NAV rather than perpetual going concern due to itspresent single-asset nature. This in turn implies that we value CIL as a finite entity, which willexhaust all its known reserves, and post which the company will cease its operations. Thus, theasset-based NAV calculation does not consider the reinvestment capability of the company resultingin lower valuations compared to valuation of a going concern entity. We believe exploratory successbeyond the Rajasthan block would likely change the perception and valuations methodology forCIL, 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 whichcannot be captured using the traditional near-term Earnings multiples. Also, the varying profitpetroleum component makes valuations possible only on NAV basis. Moreover, separate NAVmethodology for each asset is best suited for valuing CIL as these assets are at different stages inthe 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 anappropriate mechanism, as the timeline for monetisation of these assets are still not clear and noFDP has been prepared for these assets. We have valued Barmer Hill, Southern fields and otherfields 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 turnleads to FCF yields of around 10-15% for initial few years. However, the FCF yields are likely todecline with increase in the government share of profit petroleum. Moreover, the increasing costof production on account of incremental EOR barrels is likely to reduce the FCF going ahead. Webelieve, CIL is likely to generate FCF of US $33bn from its Rajasthan field, over the life, with largepart of the same likely to be generate in first ten year US$20bn (62% of the life of field FCF). Thus,
18January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 18
Cairn India
Oil & Gas
the valuations based on the FCF is inappropriate, till a clear re-investment plan is put in place bythe company, thus we believe NAV based valuation is best suited for valuing the company. CIL'smanagement has kept away from providing guidance on possible re-deployment of the huge cashflows generated by the company. CIL has a good exploration track record, but the large cash it willgenerate is unlikely to be consumed entirely by its exploration segment. In event of non-complianceof liberal dividend policy, we believe there is risk of deployment of free cash in lower returnbusinesses. 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 MBAfields, 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 oilrecovery from Rajasthan block separately. Thus, we have valued the MBA fields - base and EORproduction - 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 associatedassumptions for production profile, oil/gas pricing, royalty/cess, opex, and fiscal terms.
19January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 19
Cairn India
Oil & Gas
Source: Company, Angel Research
Exhibit 20: Summary of Sum-of-the-Parts Valuation (SOTP)Particulars (Rs cr) FY2010E FY2011ERajasthan BlockRJ-ON-90/1(MBA block) 29,945 35,380Value per share 158 187RJ-ON-90/1(MBA EOR) 3,282 3,676Value per share 17 19RJ-ON-90/1(Barmer Hill) 2,032 2,388Value per share 11 13RJ-ON-90/1(Southern fields) 406 478Value per share 2 3RJ-ON-90/1(Other fields) 3,414 4,012Value per share 18 21Total Value of Rajasthan Block 39,079 45,934Value per share 206 242CB-OS-2 729 575Value per share 4 3Ravva 2,010 1,828Value per share 11 10Upside potential (KG-DWN-98/2) 278 302Value per share 1 2Exploratory porfolio upsides 1,596 1,731Value per share 8 9Total Asset value 43,693 50,371Less: Corporate expenditure 2,487 2,414Value per share 13 13Less: Net debt (33) (120)Value per share (0) (1)Equity value 41,239 48,076Equity shares (cr) 190 190Equity value per share 217 253
Source: Angel Research
Exhibit 21: Fair Value break-up (FY2011E)
187
1913 3
21 242 310 2
9 1 (12.7)253
130
155
180
205
230
255
280
MB
A(b
ase
Pro
d.)
MB
AE
OR
Barm
er
Hill
South
ern
field
s
Oth
er
field
s
Tota
l Raja
sthan
Blo
ck
CB
-OS
-2
Ravv
a
KG
-DW
N-9
8/2
Exp
lora
tory
upsi
des
NetC
ash
Corp
ora
teexp
enditu
re
Valu
eper
share
Rs/
share
20January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 20
Cairn India
Oil & Gas
Asset-wise, CIL's Rajasthan block accounts for 96% (Rs242/share) of its value and is the biggestcontributor to our Target Valuation. This value is derived from the MBA fields and furtherdevelopmental upside from the Rajasthan block. Extant fields, viz. Ravva and Cambay form just5.0% of our estimated Fair Value as these assets are mature and are in decline phase. Exploratoryupsides form around 4.3% of our estimates. As we value CIL based on asset based NAV, weseperately deduct the value of Present value of future corporate expenditure, which impacts ourtarget 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 inreserve at the core MBA fields and developmental upsides from Barmer hill, Southern fields andother fields. We have valued the MBA fields (including EOR) at Rs206/share, while thedevelopmental upsides constitute Rs37/share. Our NAV for the MBA fields implies an EV/boe ofUS $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, Bhagyamin April 2010 and Aishwariya in April 2011.
Production profile includes EOR plateauing at 1,80,000bpd in FY2013E with a plateau productionperiod of eight years. Including EOR, we have assumed implied gross recovery of 981mnbblover FY2010-41E (proposed period under the FDP).
Total life of field development capex of US $3.4bn (net to CIL) including US $932mn to bespent on pipeline.
Crude realisation is based on 15% discount to Brent (in line with company's guidance, buthigher than the benchmark Duri-Widhuri crude).
Cash direct opex is assumed at US $4.0/boe (FY2012E onwards) and at US $11.0/boe forincremental barrels under EOR. Opex for FY2010E and FY2011E is assumed at US $10/bbland US $5/bbl, which is higher than normalised capex due to trucking. We estimate pipelineopex of US $1.5/bbl.
Profit Petroleum is calculated after recovering the cumulative F&D investment and Opex. Thegovernment's share of Profit Petroleum starts from FY2012E at 20% and remains at this leveltill FY2014E. However, the same increases to 30% in FY2015E and further to 50% in FY2016E.FY2017E onwards, the government share remains at 50% for the rest of the life of the field.
Tax holiday of seven years has been assumed on CIL's share of taxable profits. However, asper Indian Tax laws, MAT payable during the period will be eligible for set off against theapplicable tax liability (foreign company tax rate of 42%) beyond the tax holiday period.
There is no royalty on CIL for the Rajasthan block. However, there is lack of clarity on theliability of cess and the same is under dispute. Though the PSC does not specifically mentionthe cess, the government has asked CIL to pay cess at the current rate of 2,550/MT. We haveassumed cess of Rs927/MT as CIL should be able to invoke the fiscal stability provisions of thePSC, thus limiting the applicable rate of cess at Rs927/MT (at the time of execution of the PSCin 1995). Though it is a recoverable cost and results in reduction in Profit Petroleum, it reducesCIL's cash flows thus having a material impact on NAV.
Particulars FY2010E FY2011E
PV of free cash flow (Rs cr) 33,227 39,056
PV of free cash flow (US$ mn) 6,995 8,490
Implied share price (Rs) 175 206
Implied EV/boe US$ 10.2 12.4
21January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 21
Cairn India
Oil & GasEx
hibi
t 22:
NAV
Val
uatio
n of
MB
A fie
lds
(incl
udin
g EO
R) @
dis
coun
t rat
e of
12%
Part
icul
ars
(Rs
cr)
FY20
09FY
2010
EFY
2011
EFY
2012
EFY
2013
EFY
2014
EFY
2015
EFY
2016
EFY
2017
EFY
2018
EFY
2019
EFY
2020
EFY
2021
FY20
22FY
2023
FY20
24FY
2025
Ann
ual P
rodu
ctio
n (m
n bb
ls)
- 6
.6 2
8.7
43.
4 4
6.0
46.
0 4
6.0
46.
0 4
6.0
46.
0 4
6.0
46.
0 4
0.3
33.
6 2
7.9
23.
3 1
9.4
Cum
ulat
ive
prod
uctio
n (m
n bb
ls)
- 6
.6 3
5.4
78.
8 1
24.8
170
.8 2
16.8
262
.7 3
08.7
354
.7 4
00.7
446
.7 4
87.0
520
.6 5
48.5
571
.8 5
91.2
Rev
enue
s -
1,8
03 7
,833
12,
409
13,
139
13,
139
13,
139
13,
139
13,
139
13,
139
13,
139
13,
139
11,
524
9,5
86 7
,980
6,6
51 5
,549
Cos
t pet
role
um -
1,8
03 7
,833
11,
192
1,7
51 1
,751
1,7
51 1
,751
1,9
46 2
,187
2,3
81 2
,506
2,2
42 1
,877
1,5
72 1
,318
1,1
06
Pro
fit p
etro
leum
- -
- 9
74 9
,110
9,1
10 6
,833
5,6
94 5
,597
5,4
76 5
,379
5,3
17 4
,641
3,8
54 3
,204
2,6
66 2
,221
less
Pro
duct
ion
cost
s -
(314
) (7
93)
(1,0
75)
(1,1
38)
(1,1
38)
(1,1
38)
(1,1
38)
(1,3
33)
(1,5
73)
(1,7
67)
(1,9
24)
(1,7
32)
(1,4
53)
(1,2
19)
(1,0
24)
(861
)
less
Roy
alty
/ces
s -
(84)
(363
) (5
49)
(582
) (5
82)
(582
) (5
82)
(582
) (5
82)
(582
) (5
82)
(510
) (4
24)
(353
) (2
94)
(246
)
Pre
-tax
net c
ash
inco
me
- 1
,405
6,6
76 1
0,54
2 9
,142
9,1
42 6
,864
5,7
26 5
,628
5,5
08 5
,411
5,3
17 4
,641
3,8
54 3
,204
2,6
66 2
,221
less
tax
- (2
20)
(1,0
36)
(1,6
11)
(1,3
62)
(1,3
62)
(974
) (7
80)
- -
- (1
,718
) (1
,535
) (1
,275
) (1
,059
) (8
81)
(734
)
Net
cas
h in
com
e -
1,1
85 5
,641
8,9
31 7
,780
7,7
80 5
,890
4,9
45 5
,628
5,5
08 5
,411
3,5
99 3
,106
2,5
80 2
,145
1,7
85 1
,488
Exp
lora
tion
cost
s (2
,790
) -
- -
- -
- -
- -
- -
- -
- -
-
Dev
elop
men
t cos
ts (6
,300
) (2
,826
) (2
,898
) (2
,835
) (3
2) (3
2) (3
2) (3
2) (3
2) (3
2) (3
2) -
- -
- -
-
Inve
stm
ent
(9,0
90)
(2,8
26)
(2,8
98)
(2,8
35)
(32)
(32)
(32)
(32)
(32)
(32)
(32)
- -
- -
- -
Free
cas
h flo
w (9
,090
) (1
,641
) 2
,743
6,0
96 7
,748
7,7
49 5
,859
4,9
14 5
,597
5,4
76 5
,379
3,5
99 3
,106
2,5
80 2
,145
1,7
85 1
,488
DC
F -
(1,6
41)
2,4
49 4
,858
5,5
13 4
,923
3,3
23 2
,488
2,5
30 2
,210
1,9
39 1
,158
892
662
491
365
271
DC
F-1
year
forw
ard
- -
2,7
43 5
,442
6,1
75 5
,514
3,7
22 2
,787
2,8
34 2
,476
2,1
71 1
,297
999
741
550
409
304
Part
icul
ars
(Rs
cr)
FY20
26FY
2027
FY20
28FY
2029
FY20
30FY
2031
FY20
32FY
2033
FY20
34FY
2035
FY20
36E
FY20
37E
FY20
38E
FY20
39E
FY20
40E
FY20
41E
Ann
ual P
rodu
ctio
n (m
n bb
ls)
16.
2 1
3.6
11.
4 9
.5 8
.0 6
.7 5
.7 4
.8 4
.1 3
.4 2
.9 2
.5 2
.1 1
.8 1
.6 1
.3
Cum
ulat
ive
prod
uctio
n (m
n bb
ls)
607
.4 6
21.0
632
.4 6
41.9
649
.9 6
56.6
662
.3 6
67.1
671
.2 6
74.6
677
.5 6
80.0
682
.1 6
83.9
685
.5 6
86.8
Rev
enue
s 4
,635
3,8
76 3
,246
2,7
22 2
,286
1,9
23 1
,621
1,3
68 1
,158
981
833
709
605
517
443
381
Cos
t pet
role
um 9
30 7
82 6
58 5
55 4
69 3
97 3
36 2
85 2
43 2
07 1
77 1
51 1
29 1
11 9
6 8
3
Pro
fit p
etro
leum
1,8
53 1
,547
1,2
94 1
,083
909
763
642
542
457
387
328
279
238
203
174
149
less
Pro
duct
ion
cost
s (7
24)
(610
) (5
15)
(435
) (3
68)
(312
) (2
64)
(225
) (1
91)
(163
) (1
40)
(120
) (1
03)
(88)
(76)
(66)
less
Roy
alty
/ces
s (2
05)
(172
) (1
44)
(120
) (1
01)
(85)
(72)
(61)
(51)
(43)
(37)
(31)
(27)
(23)
(20)
(17)
Pre
-tax
net c
ash
inco
me
1,8
53 1
,547
1,2
94 1
,083
909
763
642
542
457
387
328
279
238
203
174
149
less
tax
(612
) (5
11)
(427
) (3
57)
(300
) (2
52)
(212
) (1
78)
(151
) (1
27)
(108
) (9
2) (7
8) (6
7) (5
7) (4
9)
Net
cas
h in
com
e 1
,241
1,0
37 8
67 7
26 6
09 5
12 4
31 3
63 3
07 2
60 2
20 1
87 1
60 1
36 1
17 1
00
Exp
lora
tion
cost
s -
- -
- -
- -
- -
- -
- -
- -
-
Dev
elop
men
t cos
ts -
- -
- -
- -
- -
- -
- -
- -
-
Inve
stm
ent
- -
- -
- -
- -
- -
- -
- -
- -
Free
cas
h flo
w 1
,241
1,0
37 8
67 7
26 6
09 5
12 4
31 3
63 3
07 2
60 2
20 1
87 1
60 1
36 1
17 1
00
DC
F 2
02 1
51 1
13 8
4 6
3 4
7 3
6 2
7 2
0 1
5 1
2 9
7 5
4 3
DC
F-1
year
forw
ard
226
169
126
94
71
53
40
30
23
17
13
10
7 6
4 3
22January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 22
Cairn India
Oil & Gas
Valuation of Barmer Hill
Barmer Hill formation holds around 400mnbbl of resource potential. However, the reservoir depictslow permeability nature, which would result in much lower recovery rate. Similar fields across theworld yield around 15-20% recovery. Thus, factoring in recovery of 15% and EV/boe ofUS $12.4/bbl (implied EV/boe of MBA's fields), we have arrived at Fair Value of Rs12.6/share forBarmer 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 resourcebase and EV/boe of US $12.4/bbl (implied EV/boe of MBA's fields). The recovery is in line with thereserve estimates at the fields.
Source: Company, Angel Research
Exhibit 23: Barmer Hill ValuationParticulars FY2010E FY2011EResources-mnboe 400.0 400.0Recovery factor (%) 15.0 15.0Recoverable reserves 60.0 60.0EV/boe 10.2 12.4CIL's Working interest (%) 70.0 70.0CIL's share of Enterprise value (US $mn) 428 519Enterprise value (Rs cr) 2,032 2,388Implied value per share (Rs) 10.7 12.6
Source: Company, Angel Research
Exhibit 24: Southern Fields ValuationParticulars FY2010E FY2011EResources-mnboe 300 300Recovery factor (%) 4.0 4.0Recoverable reserves 12 12EV/boe 10.2 12.4CIL's Working interest (%) 70.0 70.0CIL's share of Enterprise value(US $mn) 86 104Enterprise value (Rs cr) 406 478Implied value per share (Rs) 2.1 2.5
Valuation of other Rajasthan fields
We believe there exists upside reserve upsides from the other Rajasthan fields as well. To reflectthe same, we have factored in 10% recovery of the resource base and EV/boe of12.4/bbl (implied EV/boe of MBA's fields). Consequently, we have arrived at the Fair Value ofRs21.2/share for other Rajasthan fields.
23January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 23
Cairn India
Oil & Gas
Source: Company, Angel Research
Exhibit 26: KG-DWN-98/2 valuationParticulars FY2010E FY2011EResources-TCF 2.09 2.09Resources-mnboe 391 391Recovery factor (%) 50.0 50.0Recoverable reserves (mnboe) 195 195EV/boe 3.0 3.4CIL's Working interest (%) 10.0 10.0CIL's share of Enterprise value (US $mn) 59 66Enterprise value (Rs cr) 278 302Implied value per share (Rs) 1.5 1.6
Valuation of Ravva and Cambay fields
To value the Ravva and Cambay fields, we have assumed balance useful life at the term to expiryof the PSC as year 2014 for Cambay and year 2018 for Ravva. Our DCF-based Fair Value isRs9.5/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 initialassessment was 2-14TCF), but this is still relatively underexplored. With availability of deepwaterrig from RIL, ONGC is likely to drill further wells at the block in order to appraise the reserveestimates of the block. We have valued 2.09 TCF of reserves from the field, with a recovery of50% and EV/boe of US $3.0/bbl and 10% working interest of CIL in the field. We estimate theblock to contribute Rs 1.6/share to the valuations. However as CIL has only 10% stake in theblock, even significant increase reserves lead to limited valuation upside.
Source: Company, Angel Research
Exhibit 25: Other Rajasthan Fields ValuationParticulars FY2010E FY2011EResources-mnboe 1,008 1,008Recovery factor (%) 10 10Recoverable reserves 101 101EV/boe 10.2 12.4CIL's Working interest (%) 70.0 70.0CIL's share of Enterprise value (US $mn) 719 872Enterprise value (Rs cr) 3,414 4,012Implied value per share (Rs) 18.0 21.2
Value of Other Exploration upsides
CIL has a net unrisked exploratory potential of 1.4bn barrels of O+OEG, while recoverable reservesof the same is a mere 8% (Source Infraline, Company). It may be noted here that though webelieve that there exists immense exploratory upsides for CIL over medium to long term, we havefactored in exploratory upside of 8% due to limited near term expectations.
24January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 24
Cairn India
Oil & Gas
Source: Company, Angel Research
Exhibit 27: Value of Exploratory upsidesParticulars FY2010E FY2011ENet Unrisked Prospective resources-mnboe 1,400 1,400Risk weightage (%) 8 8Recoverable reserves 112 112EV/boe 3.0 3.4Enterprise value (US $mn) 336 376Enterprise value (Rs cr) 1,596 1,731Implied value per share (Rs) 8.4 9.1
Valuation based on Forward CurveIf 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 expectationand price derived from forward oil curve is the long-term crude oil prices. While we expectlong-term crude oil price to hover around US $75/bbl, forward curve reflects a price range ofUS $88-98/bbl.
Source: Company, Angel Research
WA
CC
(%)
Exhibit 29: Target Price Sensitivity with long-term Crude and WACCCrude Prices (US $/bbl)
60.0 65.0 70.0 75.0 80.0 85.0 90.09.0 233 253 274 285 299 318 338
10.0 224 243 263 274 287 305 32411.0 215 234 253 263 276 293 31112.0 207 225 243 253 265 282 29913.0 200 217 235 244 256 272 28814.0 193 210 227 236 247 263 27815.0 187 203 219 228 239 254 269
Source: Bloomberg, Angel Research, Note: As on November 19, 2009
Exhibit 28: Forward Oil Curve
65
70
75
80
85
90
95
100
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-11
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
US
$/b
bl
Brent forward price
Thus, our Fair Valuation for CIL based on the NAVs of its E&P assets (producing as well as underdevelopment) along with value of developmental and exploratory upsides works out to ofRs253/share. Of the same, development and exploratory upsides are valued at Rs48/share.We Initiate Coverage on CIL with a Reduce rating.
25January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 25
Cairn India
Oil & Gas
Importantly, post the stake increase, Petronas will hold 14.9% stake in CIL, slightly below theOpen Offer trigger of 15%. Thus, any further stake acquisition by Petronas would trigger an OpenOffer. As per SEBI regulations, if Petronas's stake were to exceed 15%, it would be required tomake an Open Offer for an additional 20%. As per the Open Offer guidelines, pricing of the OpenOffer would be done at a maximum of (a) 6 month's average price of CIL from the date of trigger ofthe Open Offer, (b) 2 week's average price from the date of trigger of the Open Offer, and (c) theDeal price.
We do not rule out further stake purchase by Petronas, which would trigger an Open Offer and inturn increase chances of CIL's stock trading at slight discount to the NAV based on the forwardcurve of crude oil prices. However, given that timing of the deal is unclear, we cannot ascribe valuebased on the forward curve.
Petronas stake hike in CIL unlikely to impact valuationThe 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 slightdiscount to the closing price of Rs263/share on the day. This is the second time that Petronas hasincreased its stake in CIL since its IPO, which reflects the former's commitment as a long-terminvestor in the project. CEP, on its part, will utilise the funds to accelerate the pace of explorationprojects 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) Second Tranche-(2QFY2009) Third Tranche-(3QFY2010)
At Rs 224/share
At Rs 260/share
(%)
At Rs 160/share
26January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 26
Cairn India
Oil & Gas
Exhibit 32: Peer ComparisonPeer 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 7.4Occidental Petroleum Corp 40,135 68,788 11,559 63.0 4,596 14.2 6.0EnCana Corp 41,157 54,347 7,517 44.1 2,398 19.7 7.2Canadian Natural Resources 36,943 46,807 8,264 60.4 3,220 13.2 5.7Woodside Petroleum 32,964 36,928 3,583 72.8 1,501 22.2 10.3Apache Corp 33,533 37,324 8,146 70.8 3,421 10.4 4.6Anadarko Petroleum Corp 31,132 40,691 6,612 62.6 681 42.6 6.2Devon Energy Corp 31,817 38,305 6,855 66.9 2,985 11.5 5.6EOG Resources Inc 22,394 24,583 3,751 68.0 984 22.0 6.6Talisman Energy Inc 18,136 19,836 4,604 56.1 752 23.9 4.3Chesapeake Energy Corp 15,597 28,467 4,423 58.3 1,566 9.9 6.4Southwestern Energy Co 14,551 15,510 1,922 72.0 819 18.0 8.1Nexen INC 13,333 18,494 4,336 58.0 1,119 11.8 4.3Murphy 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
Source: Company, Angel Research
Exhibit 31: Bear, Base and Bull Case
147
23
74 9 2538
79 340
100
150
200
250
300
350
Bear
Case
Cess
@R
s2,5
75/tonne
LTC
rude
atU
S$50/b
bl
No
Exp
lora
tory
succ
ess
Base
Case
No
Cess
LTC
rude
@U
S$100/b
bl
Bu
llC
ase
Rs/
Share
Target Price- Scenario analysisTo 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 rulingfor CIL on the cess front, lower long-term crude oil prices of US $50/bbl and no exploratorysuccesses. 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 throwsup a Fair Value of Rs253/share, which is our Target Price. In a bullish scenario, if we assumelong-term crude oil prices of US $100/bbl and no obligation on CIL to pay cess, our Fair Valueestimate increases to Rs340/share, translating into an upside of 20.1% from current levels.
27January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 27
Cairn India
Oil & Gas
Source: Company, Angel Research
Exhibit 34: Sensitivity with long-term Crude and Discount on CrudeCrude Prices (US $/bbl)
60.0 65.0 70.0 75.0 80.0 85.0 90.07.0 231 247 257 275 294 307 3259.0 225 244 251 269 287 305 317
11.0 219 238 249 262 280 297 30913.0 213 232 246 255 272 290 30715.0 207 225 243 253 265 282 29917.0 203 219 237 250 258 275 291D
isco
unt o
n C
rude
(%)
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 benchmarkBrent crude prices. CIL management has stated that the discount based on the GPW for the MBAcrude over the last six months has ranged between 10-15%. Thus, another critical factor, whichimpacts 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 oilassumption of US $75/bbl, 4% variability in the discount leads to 3.0-3.5% change in our FairValue estimates.
Target Price - Sensitivity AnalysisSensitivity 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 toproducers (Refer Crude Oil Prices - Outlook). Thus, we have arrived at a Target Price ofRs253/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 ourFair Value estimates. Ceteris paribus, CIL's current market price of Rs283/share discounts crudeoil price of US $85.1/bbl, which we believe is quite high and leaves no margin of safety for investors.
Source: Company, Angel Research
Exhibit 33: Sensitivity with long-term Crude and Exchange RateCrude Prices (US $/bbl)
60.0 65.0 70.0 75.0 80.0 85.0 90.042.0 197 212 229 246 254 265 281
43.0 201 216 234 247 255 271 287 44.0 203 221 238 248 260 277 293 45.0 207 225 243 253 265 282 299 46.0 211 230 248 258 271 288 305 47.0 215 234 249 258 276 294 306 48.0 219 239 254 263 281 299 312
Exch
ange
Rat
e(R
s/U
S$)
28January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 28
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 arenot liable to pay the same. However, even if they are liable to pay the same, it would be the cessrates applicable at the time of signing of PSC, as the PSC has an in-built fiscal stability clause. Thegovernment, 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 Arbitrationmechanism for resolution of the issue. We believe there exists strong possibility of CIL winning thecase. Hence, we have assumed cess of Rs927/tonne over the life of the field (cess at the time ofsigning of the PSC) for our valuation purposes. However, if CIL has to pay no cess on its share ofcrude production, our Target Price (ceteris paribus) would increase by Rs8/share (up 3.1% fromthe current Target Price) and giving a Fair Value of Rs261/share for the stock. If there is adverseruling, ie. if cess liability is determined at Rs2,575/tonne, our Fair Value for the stock would reduceby Rs16/share, a decline of 6.3% from current Target Price to Rs 237/share. Thus, outcome of thecess issue will continue to be an overhang on stock valuations in the medium term.
Source: Company, Angel Research
Exhibit 35: Sensitivity with Cess rate (Rs/tonne)
261
253
237
225
230
235
240
245
250
255
260
265
Nil 927 2,575
Rs/
Sh
are
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 linewith this, we have assumed Recovery rate of 15.0%, 4.0% and 10.0% for the Barmer Hill, RajasthanSouthern fields and Other Rajasthan fields, respectively. This implies a blended Recovery rate of10.1% for the fields. We are currently factoring in development upside of Rs37/share from thesefields at our recovery rate estimates. If we were to increase our Recovery estimates by 5% atthese fields, our Target Price would increase by Rs18/share, up 7.1% to Rs271/share. Thus, thereis a strong co-relation between the Recovery rate at other fields other than MBA and our Fair Valueestimates 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 rateof 18.5% reflects Recoverable reserve of 316mnboe, which would be an increase of 21.1% overthe current Reserve estimate from the block. Thus, any disappointment on further Reserve accretionat Rajasthan would adversely impact CIL's stock price.
29January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 29
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 resourcepotential, which translates into value of Rs9.1/share. We estimate lower success ratio as much ofthe resource potential is in the newer frontier play and requires further exploratory efforts beforededucing any meaningful exploratory success. However, ceteris paribus, current market price ofRs283/share reflects high exploratory success rate of 34%.
Source: Company, Angel Research
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%
Rs/
Sh
are
253
271
288
306
324
200
220
240
260
280
300
320
340
10.0% 15.0% 20.0% 25.0% 30.0%
Rs/S
ha
re
Source: Company, Angel Research
Exhibit 36: Sensitivity with Recovery rate at fields other than MBA
30January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 30
Cairn India
Oil & Gas
Source: Company, Angel Research
Exhibit 38: Relative performance with peers
Source: Company, Angel Research
Exhibit 39: Relative performance with Sensex and Oil & Gas
Source: Company, Angel Research
Exhibit 40: Out performance relative to Sensex
Source: Company, Angel Research
Exhibit 41: Out performance relative to BSE Oil & Gas
CIL ONGC RIL
0
50
100
150
200
250
300
Jan
-07
Ma
r-07
May-0
7
Jul-
07
Sep
-07
No
v-0
7
Jan
-08
Ma
r-08
Ma
y-0
8
Jul-
08
Sep
-08
No
v-0
8
Jan
-09
Mar-
09
Ma
y-0
9
Jul-
09
Sep
-09
Nov
-09
Rs
CIL Sensex BSE Oil & Gas
-
50
100
150
200
250
300
Jan
-07
Ma
r-0
7
May-
07
Jul-
07
Sep
-07
Nov
-07
Jan
-08
Mar-
08
May-
08
Jul-
08
Sep
-08
Nov
-08
Jan
-09
Mar-
09
May-
09
Jul-
09
Sep
-09
Nov
-09
Rs
(25)
-
25
50
75
Sensex CIL
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
%
BSE Oil & Gas CIL
(40)
(10)
20
50
Jan-0
7
Mar-
07
May-
07
Jul-
07
Sep
-07
Nov
-07
Jan-0
8
Mar-
08
May-
08
Jul-
08
Sep
-08
Nov
-08
Jan-0
9
Mar-
09
May-
09
Jul-
09
Sep
-09
Nov
-09
%
31January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 31
Cairn India
Oil & Gas
OPEC’s oilprice
management
GlobalEconomic
Growth
G liti l F tGeopolitical Factors
Energy Efficiency &Biofuel Markets
Oil Prices Financial SpeculationDollar x Euro
Brings Volatility to the ProcessNew
RefiningUnits
Crude Oil SpareCrude Oil SpareCapacity Levels
AggregateDemandOutlookOutlook
Interest Rates
Crude Oil Prices - OutlookIn the recent past, crude oil prices have been extremely volatile. However, over the last 20-25years, crude prices have been on an upward trend. Here we have tried to analyse the past trendof crude oil prices, while trying to estimate the medium-term trend based on near-term demandand supply estimates. We believe long-term prices will be driven by the economics of marginalsupplies.
Historical trend of Crude oil prices
Over 2000-2008, crude prices witnessed a significant surge from sub US $20/bbl (towards early2000) levels to US $147/bbl in 2008. The factors that contributed to this significant surge in crudeprices included strong growth in the global economy, under-investment in the Upstream Oil Segmentover the past few decades, refining capacity imbalances and bottlenecks. Moreover, lower OPECspare 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 ofslowdown in the global economy. Crude tumbled to lows of US $32/bbl in December 2008, acorrection of almost 78% from its peak. This fall in crude and gas prices came on the back of therecession in OECD economies, slowdown in demand for petroleum products across the globeand near evaporation of speculative capital from the financial system. Thus, on account of theslowdown in the global economy, there was a significant downgrade in the demand estimates forcrude oil.
Thereon however, crude oil has witnessed a significant rally with prices more than doubling toUS $75-80/bbl from the December 2008 lows of US $32/bbl. The crude prices surged due to thegreen-shoots in the global economy, strong equity markets and expectations of economic revival.Moreover, a weak Dollar and OPEC curbs helped prop the crude prices amidst sluggish OECDdemand, high inventories and widening OPEC spare capacity.
Key factors impacting Oil Prices
Crude oil prices are impacted by various factors, which could be clubbed as fundamental andnon-fundamental factors. Fundamental factors, which impact crude oil price, are stock levels andcrude oil spare capacity. On the other hand, non-fundamental factors, which impact the prices,are speculation, interest rates and currency movement (Change in dollar value with respect to Euro).
Source: Angel Research
Exhibit 42: Oil Market Structure - Key factors impacting Oil Prices
32January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 32
Cairn India
Oil & Gas
The Dollar effect - How does the value of US Dollar affect oil prices?
Crude oil is denominated in the US Dollar, thus changes in the price of Dollar affects the oil pricein other currencies. A weak Dollar means, for example, lower price in Euros translating into higheroil demand in the Euro zone, which with all other things being equal, would tighten the global oilsupply/demand balance.
Source: Bloomberg, Angel Research
Exhibit 43: Crude Oil Prices in US Dollar and Euro
0
20
40
60
80
100
120
140
160
Brent Crude (in US$/barrel) Brent Crude (in Euro/barrel)
Jan
-03
Ap
r-0
3
Jul-0
3
Oct
-03
Jan
-04
Ap
r-0
4
Jul-0
4
Oct
-04
Jan
-05
Ap
r-0
5
Jul-0
5
Oct
-05
Jan
-06
Ap
r-0
6
Jul-0
6
Oct
-06
Jan
-07
Ap
r-0
7
Jul-0
7
Oct
-07
Jan
-08
Ap
r-0
8
Jul-0
8
Oct
-08
Jan
-09
Ap
r-0
9
Jul-0
9
Oct
-09
The value of currency can therefore be a very strong driver of the oil price levels. The oil price mayrise by 25% in Dollar terms, but that does not automatically mean that the oil price has risen by25% in the consumer economies. The Euro or Yen value of crude oil, for instance, could movedifferently to the US Dollar denominated value, depending on the relative strength of the currencyin question.
Another effect which is not directly linked to oil market fundamentals is investors buy commoditiesfuture 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 byinvestors. As the US Dollar is the world's most widely adopted reserve currency, perceptions oranticipation of inflation and Dollar depreciation can prompt holders of US-based assets to seekexposure to other types of assets normally shielded from the impact of inflation in the US.
Source: Bloomberg, Angel Research
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
Ja
n-0
7
Mar-
07
May-0
7
Ju
l-0
7
Se
p-0
7
Nov-0
7
Ja
n-0
8
Mar-
08
May-0
8
Ju
l-0
8
Se
p-0
8
Nov-0
8
Ja
n-0
9
Mar-
09
May-0
9
Ju
l-0
9
Se
p-0
9
Nov-0
9
Dollar
Index
US
$/b
bl
Brent Crude Dollar Index (RHS)
60
65
70
75
80
85
90
95
200
250
300
350
400
450
500
Jan
-07
Mar-
07
May-0
7
Jul-
07
Se
p-0
7
No
v-0
7
Jan
-08
Mar-
08
May-0
8
Jul-
08
Se
p-0
8
No
v-0
8
Jan
-09
Mar-
09
May-0
9
Jul-
09
Se
p-0
9
No
v-0
9
Do
llar
Ind
ex
CR
BC
om
mo
dity
Ind
ex
CRB Index Dollar Index (RHS)
Dollar decline drivesCommodity prices
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Which way is Crude headed?
We believe that in the medium term (over FY2010 and FY2011) oil prices will be driven by thedemand 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. Overthe longer term (FY2012 onwards) however, we believe that the oil prices will be driven by theeconomics 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 themedium term. This implies that the direction of the stock draws will determine the direction andmagnitude 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 demandestimates for crude. In its recent monthly review (November 2009), IEA increased its crude oildemand 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 andis now seen averaging at 84.8mnbpd (a fall of 1.5mnbpd yoy) and 86.2mnbpd (a rise of 1.4mnbpdyoy) levels for 2009 and 2010, respectively.
EIA, on the other hand, has been relatively conservative in its demand outlook and anticipatesglobal crude oil demand at 84.1mnbpd and 85.4mnbpd in 2009 and 2010, respectively. EIA estimatesworld oil consumption to grow by 1.3mnbpd in 2010, with relatively strong growth in non-OECDcountries 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 onexpectations that world oil demand will be stronger than predicted in light of an improving economicoutlook. 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 (110,000bpdmore than its previous forecast a month ago). The group said in its latest monthly oil market reporton 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 demandfor OPEC crude next year was currently projected at minus 0.2mnbpd, with a decline of around400,000bpd in the first half, "the second half is expected to return to positive growth of about100,000 bpd, indicating a sign of recovery".
Exhibit 45: Demand estimates by various agencies (mnbpd)
Source: Industry, Angel Research
Agencies CY2009 CY2010IEA 84.80 86.20EIA 84.14 85.41OPEC 84.31 85.07
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On the Supply front, EIA estimates non-OPEC supplies to average at 50.2mnbpd in 2009, up0.54mnbpd. Similarly, for 2010, it estimates non-OPEC supplies to rise to 50.4mnbpd, up0.26mnbpd.
OPEC now expects oil demand to average 84.31mnbpd this year, 80,000 bpd more than previouslypredicted, largely due to the apparent recovery in the global economy. As per OPEC, "The worldeconomy now appears to be entering into a new phase, moving from a period of containing thecrisis to one of economic recovery". "OPEC has raised its estimate of demand for next year to85.07mnbpd, 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 fromthe fact that the general economic recovery is expected to be "slow and weak". Most of the expectedincrease 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 concurwith the fact that the worst is over on the demand front and is likely to pick up 2010 onwards.
OPEC has raised its estimateof demand for next year to85.07mnbpd, 130,000bpd morethan previously forecast andimplying yoy growth of760,000bpd, up from theprevious 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
mnb
pd
mnb
pd
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
US
$/bb
l
mnb
pd
World Oil Consumption Non-OPEC Production WTI Crude Oil Price (RHS)
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Oil prices to decline in Medium term
Despite the lower increase in the non-OPEC output, the 'Call on OPEC' is likely to decline largelyon account of higher output of natural gas liquids (NGL) from OPEC countries. Thus, lower 'Callon OPEC' coupled with surplus production capacity with OPEC are likely to keep OPEC productiontargets in focus. We believe that given declining OPEC compliance to production cuts, probabilityof oil prices increasing from current levels is limited. However, we believe that the current pricesdo 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 OECDcountries, higher NGL output by OPEC (thereby reducing ‘Call on OPEC’) and spare capacity withOPEC. For instance, during 2QCY2009, forward inventory cover stood at 61 days, well above theOECD commercial inventory average during that quarter. We believe that the current inventoryoverhang in the OECD countries is likely to persist in the current year and will witness a gradualdecline from 2010. EIA also estimates forward inventory cover to reduce from 61 days (at end ofSeptember 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
mnb
pd
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
Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010
Days
ofsu
pply
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 previousperiod. In conclusion, we maintain that the inventory overhang, strong output growth bynon-OPEC countries, lower ‘Call on OPEC’ along with spare capacity available with OPEC will
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We believe that long-term crude oil demand will continue to be a function of growth in populationand 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 than6.8 billion. Going ahead, with population growth likely to continue, energy requirements in generaland crude oil requirements in particular is likely to increase.
Source: EIA
Exhibit 50: World Energy Consumption by region
348
398
472508
596
678
0
200
400
600
800Quadrillion 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 inFY2010E and US $70/bbl in FY2011E. Currently, crude oil is hovering at around US $75-80/bbland 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 economicsof 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 atUS $75/bbl. This is based on the premise that the oil will continue to be the primary fuel goingahead as well.
Oil demand outlook
As per EIA's International Energy Outlook 2009, world energy consumption is set to increase from472 quadrillion BTU in 2006 to 552 quadrillion BTU in 2015 and 678 quadrillion BTU in 2030 - anincrease of 44% over the mentioned period. This would result in average annual energy consumptionof 1.5% over the period. A significant part of this increase would be contributed by higherconsumption by the non-OECD countries, which are expected to see an increase in their energyconsumption by 2.3% over the period as against the 0.6% growth in OECD countries. Among thenon-OECD economies, China and India are the fastest growing and would be key for world energyconsumers. Since 1990, energy consumption, as a share of total world energy use, has increasedsignificantly in both these countries. China and India together accounted for about 10% of theworld's total energy consumption in 1990. In 2006, their combined share stood at 19%. EIA estimatesthat strong economic growth in both countries would continue during the projected period, withtheir energy use increasing by nearly two-folds and constituting 28% of the world energyconsumption in 2030 as per EIA projections.
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Developing countries like China, India, Brazil and Russia are likely to witness accelerated pace ofdevelopment, which would in turn lead to increase in their GDP. Growth in GDP will result inimproving lifestyle in turn increasing the per capita oil consumption in these countries. Currently,per capita oil consumption in developing countries such as India, China, Brazil and Russia is quitelow compared to the developed countries.
Source: OPEC
Exhibit 53: GDP of Developing countries likely to increase significantly$(2005) trillion
0
2
4
6
8
10
12
14
16
18
2008
Ru
ssia
OP
EC
So
uth
ea
stA
sia
La
tin
Am
erica
South
Asia
OE
CD
Pa
cific
Ch
ina
We
ste
rnE
uro
pe
No
rth
Am
erica
Oth
er
tra
nsitio
ne
co
no
mie
s
Mid
dle
Ea
st
&A
fric
a
$(2005) trillion
0
5
10
15
20
25
30
2030
Russia
OP
EC
South
eastA
sia
Latin
Am
erica
South
Asia
OE
CD
Pacific
Chin
a
Weste
rnE
uro
pe
Nort
hA
merica
Oth
er
transitio
ne
co
no
mie
s
Mid
dle
East&
Afr
ica
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
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
oil d
eman
d(M
nb/
d)
world
popu
lat io
n (b i
l lion)
p o p ula tio n
o il d em and
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
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Thus, to conclude, oil demand is likely to be robust going ahead even amidst the high oil pricescenario driven by increasing global population and accelerated development in the developingcountries.
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 thelonger term. This is because dwindling production from the current ageing fields, increasing Findingand development (F&D) costs and increasing demand will lead to pricing based on marginaleconomics.
As per IHS-CERA, majority of the current oil fields have been under production for a long period oftime, and hence production has been declining at an annual rate of 4.5% pa. For instance, as perindustry estimates, non-OPEC fields (excluding former Soviet Union, FSU), which were producingin 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 developingcountries. Increase in per capita income is likely to lead to better standard of living, which in turn islikely 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
OECD countries400–700
Transition economies150–400
Developing countriestypically <200
4.3 billion people live incountries with <1 car per 20 people
Cumulativepopulation
Source: OPEC
Exhibit 55: Level of motorisation across economies
LuxembourgKuwait
Norway
Singapore
USA
CanadaSaudi Arabia
Mexico
455
Norway
UKGreece
Russia
IranJamaica
Mauritania
World
High IncomeNations
27
Equitorial GuineaChina
India
Nigeria
Madagascar
Liberia
World
Low IncomeNations
Middle IncomeNations
01
Cambodia
Chad
Burundi
Congo, DR
-2
ap
ita
mp
tio
np
er
Cs
of
Co
nsu
mB
arr
els
.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
Oil
co
ns
um
pti
on
pe
rc
ap
ita
(ga
llo
ns
pe
rd
ay
)
GDP per capita ('000 USD)
ChinaIndia
Brazil
US
UK
Canada
Sweden
Mexico Russia
Thailand
Indonesia
Venezuela
Japan
Italy
Australia
FranceGermany
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
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Source: IHS CERA
Exhibit 57: Existing oil fields to exert pressure on Oil prices
Existing production form the world’s oil field declinesat an annual average of 4.5 percent. Investment isneeded to replace the annual declineand to meet higher demand.
Amount of new oil productionrelative to 2008 needed to satisfylow and high case projectionsfor world oil demand in 2035
High case World Oil Demand
Low Case World Oil Demand
Depletion of 2008 Installed Oil Production Base
Mill
ion
Bar
rels
per D
ay
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 30Non-OPEC Middle East 40North Africa 40Non-OPEC West Africa 47Latin America 32US and Canada 33Asia-Pacific 35
The trend of declining production is not just restricted to the oil fields in the different regions, but isbeing witnessed by the major global oil companies as well. As per Douglas Westwood, 8 out of the10 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-OPECcountries registered a decline of 4.6% pa since 2000. The reduction came in in spite of adoption ofadvanced EOR techniques.
Source: Douglas Westwood
Exhibit 58: Major oil companies witnessing a decline in productionAnnual 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
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We believe that advanced technologies such as EOR and IOR (increased oil recovery) would onlysustain oil production at the ageing fields. However, nationalisation of the oil reserves has limitedthe use of technology to the international oil majors, which has escalated the cost of crude oilproduction. Thus, we believe that increasing demand coupled with dwindling production will bringinto 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 energyrequirements. Oil sands comprise a mix of sand, clays and bitumen in solid state at room temperateand an API gravity of 8. This is much heavier that the typical conventional oils, which are as heavywhen 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 SaudiArabia. 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 theideal reference point for gauging the importance of marginal source of supply.
Similarly, Douglas Westwood estimates that 52 countries have already surpassed the peakproduction, 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
mill
ion
barr
els
per
day
BIOFUELS
CTL
GTL
OIL SHALES
OIL SANDS
REFINERY GAIN
OFFSHORE DEEP
OFFSHORE SHALLOW
ONSHORE
<200252
countriespastpeak
by 200866
countriespastpeak
Source: Energyfiles
20
Source: Douglas Westwood
Exhibit 59: Global Cheap Oil Supplies likely to be constrained
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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 oilprice for an oil sand project ranged between US $60-85/bbl. Going ahead, IHS-CERA estimatesbreak-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 oilsands 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
402008 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 0.31Source: CERA, IEA; Note: Total Canadian oil production was 2.72mnbpd in 2000 and 3.41mnbpd in 2008
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Another important source of marginal oil supply will be the Deepwater Oil supply projects. Accordingto Douglas Westwood, the share of deepwater and offshore production, as a % of total crude oilsupplies, will continue to increase going ahead. Deepwater oil production, which was 2% of theglobal 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 Canadianoil 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 atmore difficult terrain such as the Arctic and deepwater oil sources. Exploration at these difficultplaces has in turn led to an increase in the finding and development cost of crude oil over theyears. F&D cost has consistently increased by almost over fives times in the last five years fromaround US $4/bbl (till 2002) to US $24/bbl in 2008.
Source: Douglas Westwood
Exhibit 63: Deepwater and Offshore production
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014
Milli
ons
ofBa
rrels
aD
ay
Source: Douglas Westwood
Exhibit 62: Break-even Crude prices for various supply sources
0 20 40 60 80 100 120 140 160
Onshore Wind
Offshore Wind
Nuclear
Traditional Coal
Coal with CCS
Brazilian Sugar Cane Ethanol
US Corn Ethanol
European Biodiesel
Oil Shale
Coal to Liquid
Candadian Oil Sands (new dev.)
Venezuela's Orinoco Belt
Deepwater
Other Conventional Oil
Middle East Oil
Ren
ew-
able
sC
oal
Biof
uels
Unc
onve
ntio
nal O
il
Con
vent
iona
l
Oil
$/bbl equivalent
Dependent on Subsidy
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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
095 96 97 98 99 00 01 02 03 04 05 06 07 08
Organic F&D CostsTotal F&D CostsObserved BrentBreak-Event
Part of the increase can be attributed to cost escalations due to under-investments in the UpstreamSector over the years. But, a major part of the increase could be attributed to exploration in difficultareas.
Adelman's approach towards crude oil pricing can be used to derive the correlation between thecrude prices and Upstream costs - F&D and Lifting costs and in turn determining the ideal crude oilprices. The approach increasingly finds favour amidst the scenario of declining production and risingcrude 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 Adelman’s 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 9.010 50.0 50.5 51.0 51.5 52.0 52.5 53.0 53.5 5411 54.5 55.0 55.5 56.0 56.5 57.0 57.5 58.0 58.512 59.0 59.5 60.0 60.5 61.0 61.5 62.0 62.5 6313 63.5 64.0 64.5 65.0 65.5 66.0 66.5 67.0 67.514 68.0 68.5 69.0 69.5 70.0 70.5 71.0 71.5 7215 72.5 73.0 73.5 74.0 74.5 75.0 75.5 76.0 76.516 77.0 77.5 78.0 78.5 79.0 79.5 80.0 80.5 8117 81.5 82.0 82.5 83.0 83.5 84.0 84.5 85.0 85.518 86.0 86.5 87.0 87.5 88.0 88.5 89.0 89.5 9019 90.5 91.0 91.5 92.0 92.5 93.0 93.5 94.0 94.520 95.0 95.5 96.0 96.5 97.0 97.5 98.0 98.5 99
F&D
Cos
t
(F&D Cost) * 4.5 + Lifting cost
(F&D Cost) * (Pre-tax Required rate of return/Depletion rate)) + Lifting cost
44January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 44
Cairn India
Oil & Gas
Adhering to Adelman's methodology, our crude oil price estimate of US $75 reflects F&D cost ofUS $15/bbl, required return of 14%, decline rate of 4% and Lifting cost of US $7.5/bbl. We believethat the assumption of F&D cost of US $15/bbl is fair as the correction in the benchmarkIHS-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 fromUS $147/bbl to US $32/bbl. Additionally, lower F&D costs capture the prospects of technologicaladvancements to a degree as we are building in F&D costs at US $15/bbl as againstUS $16-22/bbl over the last 2-3 years in non-OPEC countries. Similarly, the assumption of Liftingcost of US $7.5/bbl is also conservative considering that operating cost of production has seen asignificant increase since CY2000 as visible from the increase in the IHS-CERA UpstreamOperating Costs Index. Moreover, declining production from the current ageing fields requiredtechnologies such as IOR, EOR. These technologies in turn led to Operating costs ofUS $10-12/bbl.
Conclusion
In sum, we believe that the long-term crude oil prices will remain strong driven by economics ofmarginal supply, increasing F&D and Lifting costs and increase in crude oil demand. We estimatelong-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
CostIn
dex
(2000=
100)
80
100
120
140
160
180
200
220
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Co
st
Ind
ex
(20
00
=1
00
)
45January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 45
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 OverviewStrong growth in the domestic economy has resulted in accelerated domestic consumption ofpetroleum products, which registered a CAGR of 4.36% during the last five years ended March2009 (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 from5,431mnbbls to 5,314mnbbls. Thus, due to the increased differential between supply and demandfor crude has resulted in increased external dependence, which has risen from 59% in 1997 to73% in 2008 (Source: BP Statistical Review).
In order to improve the country's energy security, the government has taken measures toaccelerate the pace of exploration in the Indian Hydrocarbon Sector. NELP introduced by thegovernment in 1999, is one such effort. Till date, seven rounds of NELP allocation have takenplace, wherein the government has awarded 208 blocks. Of the total sedimentary area of 3,134,700square kilometer (sq km), till-date the government has awarded 1,060,295sq km. Overall, 34% ofthe exploration acreage has been awarded till date.
As the exploration acreage has been awarded to various players off-late, the level of exploration in theblocks awarded has been low. Thus, there exists immense potential in the Indian E&P Segment giventhat 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
46January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 46
Cairn India
Oil & Gas
Exhibit 69: PELs awarded till April 1, 2008Company/Operator Area (sq km) PercentageONGC 512,754 48.4Reliance Industries 341,359 32.2Oil India 39,326 3.7Cairn India 38,339 3.6HOEC 25,124 2.4FOCUS 21,000 2.0SANTOS 16,496 1.6ENI SpA 14,445 1.4Prize Petroleum 13,277 1.3GSPC 11,057 1.0OAO Gazprom 7,779 0.7Geo Global Resources Inc 5,804 0.5NAFTOGAZ 3,789 0.4Jubilant Oil and Gas 2,534 0.2Essar Oil 1,729 0.2Canoro Resources 1,445 0.1Tullow Oil Plc 1,277 0.1Niko Resources 957 0.1Hardy E&P (India) Inc 859 0.1PetroGas 741 0.1Geopetrol 295 0.0Total 1,060,295 100.0
Source: Oil RHP, Angel Research
47January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 47
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 CEPin India. CIL got listed on the Indian bourses on January 9, 2007 with the completion of its IPO postwhich CEP and Petronas emerged biggest stake holders in the company. Currently, their holdingin the company stands at 62.4% and 14.9%, respectively. CIL is currently the largest privateexploration 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 aswell as in development stage and eleven exploratory blocks). Moreover, CIL has also won bid for2 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. Thecompany has exploration blocks, fields under development and producing assets spread acrossIndia, Bangladesh and Nepal. CEP has extensive experience in South Asia with a strong trackrecord in exploration and development (especially in India, having made three of the seven majordiscoveries since 2000). CEP's association with India started in 1995-96 with the acquisition ofCommand Petroleum, an Australian listed company, which had signed a PSC for Ravva. Thecompany 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 Bangladeshoperations.
Exhibit 70: Shareholding Pattern (%)
Source: Company, Angel Research
Promoter62.4%
Petronas14.9%
Individuals2.4%
FI4.0%
MFs2.6%
FII10.8%
others2.9%
Institutions20.3%
Promoter Petronas Individuals FI MFs FII others
48January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 48
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 ablock in the Vindhya region) after re-organisation of CEP. CIL holds various oil and gas assetsthrough its wholly-owned subsidiary, viz. Cairn India Holdings Limited (UK), which in turn holdsstake in various blocks through various subsidiaries.
Source: Company, Angel Research
Exhibit 71: CIL - Over the years
Source: Company, Angel Research
Exhibit 72: Group Holding Structure
Rajasthan block(35% stake)
Cairn India Limited
Cairn India HoldingLimited(UK)
Cairn EnergyHydrocarbonsLimited (UK)
Cairn EnergyHoldings(UK)
Cairn EnergyNetherland Holding
B.V
Cairn Energy AustraliaPTY Ltd
Rajasthan (35%)
Ravva (22 .5%)
CB-OS/2 (6.7%)
CB-OS/2(33.3%)
Cairn EnergyIndiaHoldings 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.
49January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 49
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 ofoil and gas in the country. On the Exploration front, it has made three of the seven landmarkdiscoveries in India since 2000. The company has reported impressive success in the Rajasthanblock, post unsuccessful efforts by ONGC and Shell in the area. Thus, the company's exploratoryprowess is well established. Similarly, on the Production front, CIL has managed the Ravvareservoir 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 fasterpace (13 - 28 months).
Source: Company, Angel Research
Imported crude Cairn India Other domestic
Importedcrude,78.0%
Cairn India, 16.0%
Otherdomestic, 84.0%
Domesticproduction,
22%
Exhibit 74: CIL to produce 20% of domestic oil; to reduce import bill by 5%
Source: Company, Angel Research
Exhibit 73: CIL - key discoveries1998 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.
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Cairn India
Oil & Gas
Exhibit 75: Saving in Import bills for India due to CIL productionOil Price (US $/bbl) 50 55 60 65 70 75bpd 180,000 180,000 180,000 180,000 180,000 180,000days 365 365 365 365 365 365mnbbls pa 65.7 65.7 65.7 65.7 65.7 65.7US $ (bn) 3.3 3.6 3.9 4.3 4.6 4.9
Source: Company, Angel Research
India's import bill for the fiscal year ended March 31, 2009 stood at US $290.7bn, wherein Crudeand Petroleum products accounted for US $91.3bn (31.4% of total import bill). At peak productionof 180,000bpd from MBA fields and assuming Crude oil price of US $75/bbl, India's crude oilimport will come down by US $4.9bn (ie, a 5.4% reduction in Crude and Petroleum productsimport bill). This culminates into overall saving of 1.7% of India's total import bill.
51January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 51
Cairn India
Oil & Gas
Asset Profile
CIL has a varied and balanced asset portfolio comprising 13 blocks of which two are currentlyunder 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 exploratoryblocks. Additional it has also won 2 blocks in recent held NELP round. CIL has been following theplay-based approach to build its E&P portfolio, viz. a diverse portfolio based on basins, play andenvironment. CIL has been a drill bit explorer having drilled more than 180 exploratory wellsbeyond 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 coastof Andhra Pradesh. Ravva is a shallow water block with a depth of 8 to 50mtrs. Ravva fieldsaccount for 8% of India's total crude oil production. ONGC had discovered the field in 1987 andproduction at the field commenced in 1993. The PSC for the block was signed between theconsortium of ONGC (40% stake), Videocon Petroleum (25% stake), Ravva Oil (12.5% stake) andCommand Petroleum (22.5% stake) for a duration of 25 years extendable by an additional tenyears. CEP acquired Command Petroleum and became the operator of the field in 1997. CIL hasdemonstrated its superior reservoir management skills at the field with its recovery rate exceeding60% and production surpassing 200mnbbl from the block. Ravva (has around 96% uptime for itsequipment) 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 targetexpected ≥ 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 blocks2 Production Blocks
Operated gross field producti~59,461 boepd(net to Cairn ~15, 917
1 Development Block
Rajasthan block underdevelopment – MangalaBhagyam and Aishwawith a further 22 disco
10 Exploration Blocks
6 operated: 5 in India anSri Lanka4 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 fieldsveries
d 1 in
52January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 52
Cairn India
Oil & Gas
Ravva PSC highlights
PSC allows 100% recovery of the costs incurred in exploration and development before sharingprofit 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 ofreturn (PTRR) earned in the previous year.
Ravva has already achieved maximum PTRR of 35% as per the PSC, and the government'sshare in profit petroleum has risen to a maximum 60% and will remain at those levels duringthe remaining life of the field.
Exhibit 77: Ravva (PKGM-1)Year Key Milestones
1994 Production Sharing Agreement signed.
1995 Command Petroleum took over as JV 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 JV.
2005 & 2008 ISO 14001 & OSHAS 18001 certification. Installation of Additional compressors.
2005 Innovative Technology application of drag reducing additive for incremental oilproduction.
2008 First of its kind in India - Multi-phase pumps for incremental oil production.
2008 200mn barrels of oil production by JV.
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
53January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 53
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 mainlycomprises two fields Lakshmi and Gauri. CIL has 40% participating development interest in theLakshmi and Gauri fields. ONGC (50% stake) and Tata Petrodyne (10% stake) are the otherpartners in the fields. CIL and its JV partners signed a PSC with the GoI for the block in June 1998.Block CB-OS/2 has yielded natural gas discoveries in its offshore Lakshmi, Gauri and Ambe fieldsand 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 developmentbefore 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 fromthe block.
The government takes a share of profit from contractor based on the post tax rate of return(PTRR) earned in the previous year.
54January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 54
Cairn India
Oil & Gas
Cambay has already achieved maximum PTRR of 40% as per the PSC, and the governmentshare in profit petroleum has risen to a maximum of 60% and will remain at those levelsduring 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 northernextension of the well-established oil and gas producing Cambay basin. The main developmentarea (1,858km2) includes Mangala, Aishwariya, Raageshwari and Saraswati (MARS), is sharedbetween Cairn (70% holding) and ONGC, which has exercised their back in right for 30%. Afurther Development Area (430km2), including the Bhagyam and Shakti fields, is shared betweenCIL and ONGC in the same proportion. The government has also allocated to CIL a thirddevelopment area, viz. Kameshwari West Development Area of 822km2. Thus, CIL holds 3,111km2
of the total acreage under long-term contracts spread across the districts of Barmer and Jalore.
Source: Company
Exhibit 79: Rajasthan Block (RJ-ON-90/1)
RAAGESHWARI OIL
RAAGESHWARI GAS
RAAGESHWARI EAST
AISHWARIYA
Development Area-1Awarded: Oct 2004
Area: 1,859 km2
Development Area-2Awarded: Nov 2006
Area: 430 km2
Kameshwari WestDevelopment Area
Area: 822 km2
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 NEShakti
Kameshwari West
N-R
Original PSC for the Rajasthan blocks was signed between the GoI and Consortium of ONGC andShell India Production and Development in 1995. CIL initially acquired 10% stake in the block in1997. Thereafter, carrying through Shell in the exploration stage, CIL gradually increased its stakein the block to 50%. Towards end May 2002, CIL acquired Shell's balance 50% interest in theblock.
55January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 55
Cairn India
Oil & Gas
The basin is informally sub-divided into Northern and Southern fields. The Northern fields arerelatively simple large-scale tilted fault blocks, with stacked fluvial sandstones of the FatehgarhGroup as the principal reservoir rocks. The Southern fields comprise two principal plays, viz. ashallow crude oil accumulation (in fields such as Saraswati, Guda and Raageshwari oil) anddeeper 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 awardedto 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 inthe Kaameshari - West discoveries.
Thumbli: It is the youngest reservoir in the basin and is the primary reservoir for theRaageshwari field.
Till 2003, CIL's focus in the block was on the Southern part, which has resulted in smaller discoveriessuch as Guda (1998), Saraswati (2002) and Raageshwari (2003). However, with CIL's focus shiftingNorthwards in 2004, it made largest discoveries of the lot - Mangala, Bhagyam and Aishwariya.
Exhibit 80: Rajasthan Block (RJ-ON-90/1)Year Key Milestones1995 PSC signed1998 Cairn farmed-in for 27.5%1999 Guda discovery1999 Cairn Farmed-in for additional 22.5%2001 Saraswati discovery2003 Raageshwari discovery2003 Cairn Acquired 100% interest from Shell2003 Kaameshwari discovery2004 Mangala,Aishwariya,Bhagyam and Shakti discovery2005 Government (through ONGC) excercised 30% back-in interest in development area.2005 Vandana,N-I, NC West and Bhagyam South discovery2006 Rageshwari Deep gas N-E Discovery and Mangala Barmer Hill discoveries2007 Cairn India's IPO2007 NI North discovery, KW3, Saraswati Crest 1 and KW6 discovery2008 Raageshwari East 1-z discovery2009 Mangala Crude Oil production commenced
Source: Company
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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 isallowed to recover entire exploration and development capex plus cess & operating expenditureincurred 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 exemptfrom Income Tax for the first seven years of production. The company will only be liable to payminimum alternative tax (MAT) at the rate of 15%, which can be carried forward and utilisedto 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 thecountry, 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 atthe rate of 20% is applicable for the Rajasthan block, it would be paid by the governmentlicensee (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 ofprofit petroleum compared to the other blocks. The peak government share of profit petroleumis 50% compared to the other blocks where the government sharing is typically 60 to 85%.
57January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 57
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 thethe development process at the Rajasthan block. MBA accounts for 55% of the total 2P STOIIPand 92% of the 2P Reserves of the block. The MBA fields together are likely to register peakproduction of 180,000bopd (gross) and 126,000bopd (net to CIL). At its peak output, the fields areexpected 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 theFatehgarh Group comprising very good quality sands. It has a gross resource base (STOIIP) of1,293mnboe (63% of the total MBA STOIIP). The field has 2P reserves of 467mnboe, thus itimplying a recovery ratio of 36.1%. The reserve number is based on the assumption of extensionof 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 of202mnboe 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 125,000bpdof oil at its peak output, thereby contributing 69.4% of the total peak output estimates of the MBAfields. Original FDP for the field was submitted in May 2006, however, towards end 2007 CILsubmitted 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. Thefield lies north east to the Mangala field. It has a gross resource base (STOIIP) of 468mnboe ofreserves. The field has 2P reserves of 142mnboe, thus it implying a recovery ratio of 30.3%. Onapplication of EOR (based on polymer flooding and ASP flooding) is expected to result in additionalrecovery of 70mnboe of reserves (additional recovery of 15.0% of the STOIIP reserves). Peakproduction 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 (Jun 2004) DOC (Aug 2004) FDP (Oct 2005) IPO (Dec 2006) Dec 2007
mn
bo
e
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Oil & Gas
Aishwarya field
Aishwariya is the smallest of the three fields currently under development. It has a gross resourcebase (STOIIP) of 293mnboe of reserves. The field has 2P reserves of 64 mnboe additionally theEOR potential from the field stands at 46 mnboe, thus 2P+ EOR combined would form recoverablereserves 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 indicatedthat the peak production from the field could be revised upward to 20,000bpd, we are factoring inproduction 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 in6 blocks while the rest is in collaboration with its Consortium partners. Of these 10 blocks, 9 are inIndia, 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 ofKG-ONN-2003/1 during FY2010. Given the geological structure of the block, which is akin to RIL'sKG-D6 block, results of drilling would be a key factor to watch in the short term.
Exhibit 84: CIL's Exploratory PortfolioOperational Blocks CIL’s 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 40Source: Company, Angel Research
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Resource analysis
A major part of CIL's resources lie in the Rajasthan block, which has proven to be a world classasset with STOIIP of 3.8bnboe. Of this, 2.1bnboe is currently under development.
Source: Company
Exhibit 85: Resource and Reserves estimates of CILParticulars 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 480Rajasthan MBA - EOR 308 216RJ Small fields - Saraswati &Raageshwari oil 300 12 8Other Rajasthan 1,408 74 52Ravva (Main + Satellite gas) 625 72 16CB (Laxmi Gas,Lakshmi Oil,Gauri Gas, Gauri Oil, CB-X) 156 20 8KG-DWN-98/2 650 353 35Total 5,193 1,524 815
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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 majorachievement for the company considering that in spite of the various bottlenecks, it has developeda world class production base in Rajasthan. The Rajasthan block is by far the largest projectundertaken by the CIL management. This is also an achievement amidst a scenario where majorglobal projects have witnessed delays impacted by various issues. The Rajasthan block is a newhydrocarbon basin, which is not connected to any of the company's infrastructure. Hence, CIL hadto develop not just the production field, but also associated facilities for evacuation of the crude oilproduced from the field.
CIL is currently building facilities for production of crude oil from its Rajasthan block. First oil fromthe block commenced from 'Train-1' having capacity of 30,000bopd. Subsequent trains will seeincrease in production going ahead. 'Train-2' is likely to operate from 1QCY2010 in line with thepipeline commissioning. 'Train-3' will witness peak output from Mangala field. 'Train -4' is likely toincrease 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 secondaryrecovery from reservoirThumbli water field facilities
Water System
Raageshwari Gas piped to MPTCombined with Mangala associatedgas for power generation
MPT and Well Pads
Processing Capacity: 205 kbopd1 x 30 kbopd processing train: Completed & Ready2 x 50 kbopd processing trains:1st in Q4 2009 & 2nd in H1 20101 x 75 kbopd train, scope for further expansion: 2011Fluid handling capacity 1 mm bfpd>350 wells, >40 well pads
~700 km pipeline to Gujarat coastSkin Effect Heat Management Systems(SEHMS)Multiple oil delivery points
Export oil pipeline plus heating stations
Infrastructure
~500 km of intra and inter fieldpipelines~80 km of inter field roadsBuilt-in fire and safety systems
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
Source: Company
Source: Company, Angel Research
Exhibit 86: Production Ramp up schedule at Mangala field (in Kbpd)Period Production capacity Comment3QCY2009 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
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Mangala Processing Terminal (MPT) and allied facilities
To produce oil and the associated gas and water, the company has set up the Mangala ProcessingTerminal (MPT). MPT is spread over 1.6 sq km, or approximately 400 acres. MPT will have fourTrains, which will come up in a phased manner. The combined processing capacity of the terminalwill be 205,000bopd with scope for expansion. Production from 'Train - 1' (has a production capacityof 30,000bopd and is currently operational) will be evacuated by trucks at an estimated Opex ofUS $10/bbl. 'Train 2' will have capacity of 50,000bopd and will coincide with the pipelinecommissioning.
Processing of crude from MPT's four trains requires an extensive water heating, circulating andrecycling system. It also requires gas recovery and heat and power systems. MPT will have crudestorage capacity of 625,000bbl comprising 5 tanks of 125,000 each. This implies storage facilitieswith 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 FROMOIL WELLS
ASSOCIATED GAS RECOVERY
MAKEUP GAS FROM RAAGESHWARI
PRODUCED WATER TREATMENT
MAKEUP WATER FROM THUMBLI SALINE WELLS
Heater SeparatorSlug Catcher Settling Tank Dehydrator Export OilStorage Tank
OilPump
TO EXPORTPIPELINE
TO FUEL GASDISTRIBUTIONSYSTEM
INJECTEDBACK INTOOIL WELLS
FIRST STAGE PREPARATION SECOND STAGE PREPARATION STORAGE & EXPORT
D Overview of the Processing System at the MPTSCHEMATIC DIAGRAM
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For drilling purposes, CIL has already deployed two drilling rigs (sourced from Weatherford) at thesite, which can drill 60-70 wells per annum. These rigs are custom made for CIL to minimise traveltime between the two drilling locations. Average time for moving the rigs will be 6-8 hours asagainst 3-4 days for a normal rig. To achieve peak production at the Mangala field, CIL needs todrill 35-40 wells. During the life of the MBA fields, around 350 wells are likely to be drilled usingthese rigs.
Energy Infrastructure
Development of the Raageshwari gas field in the South of the development area will be critical forheating and power generation requirements of production. Gas from the Raageshwari gas fieldwill be transported to the northern fields through an 80km gas pipeline for meeting the energyrequirements for production and transportation purposes. The gas will in turn be used to generatesteam, which will be the main source of heat to help produce the Rajasthan crude. Steam generationwill be done using 5 x 115 metric tonne/hour boilers. All power requirements of MPT will be met bycaptive power plants comprising four 12MW steam turbine generators and three 2MW emergencydiesel 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 crudewill be produced from the Thumbli saline water aquifer, 20kms away from Mangala field. CIL hasdrilled five water wells, each with a capacity of 63,000bpd. The saline water will be transported tothe 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 SystemFuel Gas
Distribution
System
Export
Pipeline
Export
Oil Storage
Vertical
Well
ThumbliSaline Aquifer
Barmer HillFatehgarh
Oil
Water TableFresh Water
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Pipeline facility
As per the PSC, CIL is obliged to sell its output to the government nominee until India attainsself-sufficiency in its crude oil supply. Initially, IOC had evinced interest in the off-take of crudefrom the Rajasthan fields, however, on account of issues regarding refining of the heavy crude, itbacked 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 pointfor the crude was fixed at the field's storage facilities. Thus, the task of setting up evacuation ortransport infrastructure was the responsibility of MRPL. To utilise the crude, MRPL deliberated ontwo options, viz. evacuate the crude through a pipeline to the Mundra port and further to MRPL'srefinery at Mangalore through crude oil tankers. Second, there was deliberation over a well headrefinery of 7.5MMTPA. Utilisation of the Rajasthan crude at its current Mangalore refinery wasfound 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 investmentrequirements to build a pipeline and upgrade the refining infrastructure, MRPL refused to take fullvolumes.
The second option of a well head refinery was evaluated to be financially unviable by MRPL due topoor returns. Thus, MRPL has asked to de-nominate itself as the sole buyer of the crude oil fromCIL's Rajasthan block. Thus, post MRPL's refusal to take full volumes, the government had to findadditional buyers for the crude from the Rajasthan block and determine means of evacuation ofthe crude produced there. Thus, CIL and partner ONGC agreed to build a pipeline from MPT toSalaya.
At the end of April 2008, GoI gave its approval for shifting the crude oil delivery point as definedunder the PSC from MPT at Barmer to the Gujarat coast. Thus, shifting of the delivery pointresulted in inclusion of pipeline cost in the FDP for the project. Thereafter, 'in principle' approval forRoU 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 Barmerto 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 June 2008 in Gujarat, whilework on the Rajasthan section started in February 2009. The delay in commencement of work inthe 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 crudeoil pipelines and the private sector refineries of RIL and Essar. It would also provide reach to thecoastal refineries through the coastal route. The pipeline along with having marine facilities alsoopens up export potential for the company and help in better price discovery for its Rajasthancrude in the long term.
Along with the crude oil pipeline, a parallel pipeline of 8" will carry the Raageshwari gas that will beused for power generation, which will be needed to prevent the crude from solidification. Along thelength 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 toheat the pipeline for approximately 10km on either side to ensure that crude remains constantlyheated above 65OC.
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Oil & Gas
In addition, there is an intermediate terminal at Viramgam for storage and further pumping to thecoast. There will also be two pigging stations at Sanchore and Wankaner to insert 'Pigs' (basicallymetal cylinders) that are used to clean the pipeline and scour it of wax. Over and above the mainpipeline, there will be a 22km spur line at Radhanpur culminating into an export terminal havingtwo pre-heating tanks, with a capacity of 9,000 barrels.
COASTAL TERMINALSTORAGE AND EXPORT
Distributionto buyer
MANGALAPROCESSINGTERMINAL
SHEMS
RAAGESHWARIGAS SUPPLY
Distributionto Refiners
SanchorePigging Station
WankanerPigging Station
VIRAMGAMINTERMEDIATETERMINAL
Storage,Pumpingand Export
GAS PIPELINE
HEATED CRUDE OIL PIPELINE
Source: Company
Exhibit 92: Crude Pipeline - Schematic Diagram
Source: Company
Exhibit 91: Rajasthan crude oil pipelinep
DELHI
Panipat
Bhatinda
Mangala
Rajasthan
DELHI
Mathura
T kiTrucking
Route
Cairn Pipeline
Viramgam
Gujarat
Kandla
Radhanpur
Cairn Pipeline
Under
Construction
g
KoyaliJamnagar
/ Salaya
ƒ
Bhogat
Tankers to
Coastal
Refineries
Refinery
Existing Pipelines
Pipeline Route
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Refineries Refinery Location Capacity (kbpd)IOCPanipat Inland 240Mathura Inland 160Koyali Inland 274HPCLBhatinda Inland 180Mumbai Coastal 150BPCLMumbai Coastal 240Bina Inland 120MRPLMangalore Coastal 240PrivateReliance Coastal 660Reliance SEZ refinery Coastal 580Essar Coastal 240TOTAL 3,084
Exhibit 93: Refineries accessable to pipeline
Source: Company, Infraline, Angel Research
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Oil & Gas
Pricing of Rajasthan crude
Cairn's Rajasthan crude is sweet but waxy in nature with a higher pour point leading to higherviscosity. These characteristics would result in higher production of heavy-end distillates duringthe primary distillation of crude oil. This is because apart from being waxy, Rajasthan crude is alsoheavy (with specific gravity 0.89) and has high Conardson Carbon Residue (CCR) content of over10% by weight. This means most simple refiners will find it difficult to process the crude unlessthey 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 normalcase. Thus, the refineries handling the same would need to keep it at higher temperature to preventsolidification of the crude oil. On account of the above-mentioned factors, pricing of the Rajasthancrude 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 crudeParticulars Rajasthan Mumbai High Nile BlendAPI 27.06 39.20 35.10Pour point Deg c (max) 48.00 27.00 32.00Acid Number, mg KOH/gm 0.42 0.08 0.19Sulphur, % wt 0.14 0.15 0.04Conradson carbon residue, % wt 10.20 1.04 3.28
Source: Infraline, Angel Research
Exhibit 95: Crude: How Yields stack-up compared to other crudeParticulars Rajasthan Mumbai High Nile BlendLPG + Fuel Gas 0.02 2.91 0.17Naphtha 1.4 17.8 4.6Kerosene 4.1 26.5 14.7Diesel 17.1 20.3 17VGO 44.2 24.3 30.2Short Residue 33.0 8.1 33.7
Source: Infraline, Angel Research
The recently finalised crude pricing agreement would be applicable till March 2011. However, webelieve 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 discountover the benchmark for Rajasthan crude. On the contrary, we believe the export option and betterappetite could reduce the discount in the future.
To elucidate the same, we have considered the basket of Indonesian crude (Duri and Widuricrudes in equal proportions), which has similar properties like Rajasthan crude.
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Exhibit 96: Duri-Widuri mix: Closest proxy to Rajasthan CrudeParticulars Mangala Brent Duri Widuri Duri-Widuri
mix (50:50)API 27.4 38 21 32.6 26.8Sulphur 0.14 0.44 0.14 0.07 0.105Barrels/Tonne 7.1 7.5 6.8 7.3 7.05Pour point 42.0 3.0 21.0 42.0 31.5
Source: Company, Angel Research
Duri-Widuri mix (50:50 ratio) has been trading at an average discount of around 10% sinceJanuary 2004. However, currently the discount has reduced to around 1-3% following the declinein 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 linewith the recent announcement by management. However, the same is slightly than the averagediscount compared to Duri-Widuri mix.
Source: Bloomberg, Angel Research
Exhibit 97: Brent, Duri-Widuri mix and Discount over the years
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-00
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
-5
0
5
10
15
20
25
30
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Discount (RHS) Brent Dhuri -Widhuri
US
$/bb
l
US
$/bb
l
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Cairn India
Oil & Gas
Annexure I - Reserves, Resources and their RecoveryAssets of the Upstream companies include the oil and gas lying beneath the Earth’s surface. Thedynamics 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) isthat quantity of oil and natural gas (hydrocarbon), which is estimated to exist originally in naturallyoccurring accumulations. It is that quantity of oil and natural gas which is estimated, on a givendate, 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
UNDI
SCO
VERE
DPI
IP
TO
TAL
PE
TR
OL
EU
MIN
ITIA
LLY
-IN
-PL
AC
E(P
IIP
)
DIS
CO
VE
RE
DP
IIP
SUB-
CO
MM
ERC
IAL
CO
MM
ERC
IAL
PRODUCTION
RESERVES
Proved Probable Possible
1P 2P 3P
CONTINGENTRESOURCES
1C 2C 3C
UNRECOVERABLE
PROSPECTIVERESOURCES
LowEstimate
BestEstimate
HighEstimate
UNRECOVERABLE
Range of Uncertainty Not to scale
Incr
easi
ng
Ch
ance
of
Co
mm
erci
alit
y
What are Reserves?
Reserves are those quantities of petroleum anticipated to be commercially recoverable byapplication 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 theirdevelopment 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 berecoverable. It is likely that the actual remaining quantities recovered will exceed the estimatedproved reserves. At least 90% probability exists that quantities actually recovered will equal orexceed 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 engineeringdata are less likely to be recovered than proven reserves, but more certain to be recovered thanPossible Reserves. It is equally likely (50% probability) that actual remaining quantities will begreater than or less than the sum of the estimated 2P (Proved plus Probable) Reserves. Probable
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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
Incre
asin
gC
han
ce
of
Co
mm
erc
iality
RESERVES
CONTINGENTRESOURCES
UNRECOVERABLE
PROSPECTIVERESOURCES
UNRECOVERABLE
TOTA
LP
ET
RO
LE
UM
INIT
IAL
LY-I
N-P
LA
CE
(PIIP
)
DE
ISC
OV
ER
ED
PIIP
CO
MM
ER
CIA
LS
UB
-CO
MM
ER
CIA
LUN
DEIS
COVE
RED
PIIP
Project MaturitySub-classes
Approved forDevelopment
Justified forDevelopment
Development Pending
Development Unclarifiedor On Hold
Development not Viable
Prospect
Play
Lead
Reserves may be assigned to areas of a reservoir adjacent to Proved Reserves, where datacontrol 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 engineeringdata, less likely to be recoverable than Probable Reserves. Total quantities ultimately recoveredfrom the field have a low probability to exceed the sum of the estimated 3P (Proved plus Probableplus Possible) Reserves. Possible Reserves may be assigned to areas of a reservoir adjacent toProbable Reserves, where data control and interpretations of available data are progressively lesscertain. At least 10% probability exists that quantities actually recovered will equal or exceed the3P estimate.
Contingent Resources are those quantities of petroleum, which are potentially recoverable, butare currently not considered to be commercially recoverable due to one or more contingencies likeno 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 givendate, to be potentially recoverable from undiscovered accumulations where no drilling has takenplace. This undiscovered potential accumulation is evaluated according to their chance of discoveryand assuming a discovery at the place.
Oil Extraction and Recovery
Recovery of oil basically means production/extraction of oil reservoirs, which is dependent onfactors like reservoir characteristics, density of oil, etc. When the reservoir rocks are "tight" suchas shale, oil generally cannot flow through, but when they are permeable such as in sandstone, oilflows freely. Also, the flow of oil is often helped by natural pressures (due to water and gas presentin the reservoir) surrounding the reservoir rocks and gravity of the oil. Water (present below theoil) and gas (present above the oil) provide a natural recovery for the oil. Similarly, gravity of oilmeasuring its viscosity also tends to span in a large range from liquids as light as gasoline toheavy as tar. The lightest forms tend to result in higher production rates. Post extinguishment ofnatural reservoir energy, we resort to secondary and tertiary recovery to extract oil. Thus, to extractoptimum 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 recoveryrate of the reservoir. Each stage is explained briefly as below:
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Primary recovery
This is a natural recovery process of oil without applying any external pressure. If the undergroundpressure in the oil reservoir is sufficient, then this pressure will force the oil to the surface. Gaseousfuels, 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 beextracted using primary recovery methods. Similarly, the primary recovery also depends on thedensity 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 undergroundpressure to force the oil to the surface. Thus, if economical, as often is, the remaining oil in the wellis extracted using secondary oil recovery methods. Secondary oil recovery uses various techniquesto aid in recovering oil from depleted or low-pressure reservoirs. Sometimes pumps, such asbeam 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, naturalgas 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 andsecondary 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 andhelps to produce oil over and above the primary and secondary recovery methods. It also involvessophisticated techniques that alter the original properties of the oil. EOR generally happens alongwith 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 hasseen applicability of this method increasing in the recent past even though the operating costs arehigh.Also, the method generally increases oil recovery by around 15-20%.The major types ofEOR are chemical flooding (ASP flooding, micellar-polymer flooding), miscible displacement (carbondi-oxide injection or hydrocarbon injection) and thermal recovery (in-situ combustion).
Source: Company
Exhibit 100: Application of the EOR process
71January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 71
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 OilOriginal oil
Sand Grain Remaining oil Water
After ASP floodInitial After Waterflood
Source: Company
Exhibit 102: Result of Polymer flooding v/s Water flooding
Polymer Flooding
72January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 72
Cairn India
Oil & Gas
Key AcronymsAcronym Description1P Reserves Proved Reserves2P Reserves Proved and probable Reserves3P Reserves Proved + Probable + Possible ReservesAPI American Petroleum InstituteAPM Administered Pricing MechanismASP Alkali Surfactant Polymerbbl/bbls barrel/barrelsBCM Billion Cubic Metersboe barrel of oil equivalentboepd barrel of oil equivalent per dayBPCL Bharat Petroleum Corporation LimitedCBM Coal Bed MethaneCEP Cairn Energy PlcCIL Cairn India LtdDGH Directorate General of HydrocarbonsEOR Enhanced Oil RecoveryFDP Field Development PlanGoI Government of IndiaHPCL Hindustan Petroleum Corporation LtdIOC Indian Oil CorporationIM Investment MultipleKbpd Thousand barrels per dayMBA Mangala, Bhagyam and Aishwariyamnboe million barrels of oil equivalentmmbtu million British thermal unitsmmscmd million metric standard cubic meters per daymnbbls million barrelsMRPL Mangalore Refining and Petrochemical LtdMoPNG Ministry of Petroleum & Natural GasNELP New Exploration Licencing PolicyOGIP Original Gas In PlacePEL Petroleum Exploration LicensePMT Panna, Mukta and TaptiPSC Production Sharing ContractPTRR Post Tax Rate of ReturnSTOIIP Stock Tank Oil Initially In PlaceTCF Trillion Cubic FeetWI Working Interest
Source: Company, Angel Research
73January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 73
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Oil & Gas
Profit & Loss Statement (Consolidated) Rs croreY/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
Y/E March CY2007 FY2009* FY2010E FY2011E
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 croreY/E March CY2007 FY2009* FY2010E FY2011E
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 57Closing Cash balances 150 1,897 57 929
Key Ratios
Y/E March CY2007 FY2009* FY2010E FY2011E
Per Share Data (Rs)EPS (0.1) 4.2 5.2 25.2Cash EPS 0.9 5.7 6.6 29.6DPS - - - 12.6Book Value 155.2 172.9 178.2 188.6Operating RatiosInventory (days) 26.8 24.4 24.4 24.4Debtors (days) 29.7 22.0 22.0 22.0Creditors (days) 103.4 171.1 103.4 103.4Return Ratios (%)RoE (0.1) 2.4 2.9 13.3RoCE (0.0) 1.1 3.6 14.9RoIC (0.0) 1.4 4.1 17.3Dividend Payout (incl taxes) - - - 58.5Valuation Ratios (x)P/E - 66.8 54.2 11.2P/E (Cash EPS) 316.6 50.0 42.9 9.5P/BV 1.8 1.6 1.6 1.5EV/Sales 48.7 35.9 19.1 6.0EV/EBITDA 111.9 59.4 28.7 7.4
Note: * Performance for 15 months period
74January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 74
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) :
75January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 75
Cairn India
Oil & Gas
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