Cairn India, which cut its three-year, $3-billion capex plan by half amid a falling crude price, is back to the drawing board to redo its exploration programme, including renegotiation of contracts for various drilling equipment and services. In FY15, the company made investments of $1.1 billion, of which around 60% was in development projects and the rest in exploration and appraisal.
The company has adopted a two-pronged strategy: first, being more selective about projects and, second, actively renegotiating contracts.
“The management’s focus is on reengineering projects and renegotiating contracts to improve project economics,” said a source, adding, “We will be focusing on core fields while taking a balanced approach to growth projects and exploration. This is reflected in 45% of FY16 capital expenditure being allocated to core fields, 40% to growth projects and 15% to exploration.”
The Vedanta group company said that while FY16 production would likely be higher than FY15 (but well below 200,000 barrels per day), production growth over FY15-17 would now be lower than the earlier guidance of 7-10% compounded annual growth rate (CAGR), corresponding to production of 220,000-240,000 bopd by FY17. However, it refrained from specifying a new number, said Jefferies India.
Cairn says that the savings from renegotiating contracts, once realised, will improve project economics and the optimised rates will define a new baseline for project economics. Additionally, significant operational expenditure (opex) optimisation efforts undertaken will lead to 10% lower Rajasthan water flood opex of $5 per barrel targeted for FY16. This will be achieved despite an increase in the number of average wells on line, from 465 in FY15 to 535 in FY16.
The private explorer, which operates India’s largest onshore field, is taking a balanced approach to capital allocation and, of the $500-million capital expenditure for FY16, around 45% has been allocated to core fields, 40% to growth projects and remaining 15% to exploration.
Another source told FE that Cairn would seek revised deals from contractors for its proposed $200- million project for the expansion of the Raageshwari gas terminal (RGT).
“We cut FY15 and FY16 production estimates by 7% and 12%, respectively, which would result in 16% and 21% earnings reduction,” said Harshad Borawake of Motilal Oswal.
At present, five oil fields — Mangala, Bhagyam, Aishwariya, Raageshwari and Saraswati — produce about 180,000 barrels of oil per day. Also, in March 2013, Cairn India commenced commercial sale of gas. The Rajasthan block, which contributes about 25% of the country’s crude production, marked its peak production of 200,000 barrels of oil equivalent per day (boepd) in March 2014. So far, the block has produced over 250 million barrel of oil equivalent (boe) since start of production in 2009.
The company received environmental clearance to augment production from the Rajasthan block to 300,000 boepd. Cairn India reported an Ebitda of Rs 13,900 crore on revenues of Rs 18,800 crore in FY14. It reported a net profit of Rs 12,400 in FY14, roughly 3% higher than Rs 12,100 crore in FY13.