In an interview with Aveek Datta, Albanese, who was appointed to the top job in March 2014, elaborates on how he plans to leverage the current weakness in the global oil market to permanently improve the cost economics of key projects being undertaken by Cairn India. Excerpts
Many of the challenges faced by the sector seem to be getting addressed. When do you expect to resume operations at your mines in Karnataka and Goa?
Karnataka and Goa present two different sets of issues. We will probably see an earlier resumption of mining activities in Karnataka. We hope to see mining begin in Karnataka in the next couple of weeks and, definitely, by the end of February.
The Goa government has renewed our mining leases but we are awaiting some environmental clearances from the Centre. Ideally, we should be in a position to begin mining in Goa before the monsoon season.
During the Goa ban, many key export markets have been occupied by producers from other countries. How do you plan to regain the lost market?
We lost a huge market share with the shutdown in Goa and that encouraged other entrants. that said, globally, there is still an increase in demand, albeit at a lower growth rate. I don’t want to give up and not try to regain some of that market. We are working on finding ways to rebuild those export markets and our brand position there, and get back in touch with existing customers.
With prices falling drastically, would you look to sell Goan iron ore to Indian steelmakers with plants near the coast, for whom it is economically viable to do so?
I can tell you that a lot of Australian iron ore is being sold to those steel mills in India. Certainly, if we can sell at competitive terms to steel plants in coastal India, it would be a win-win for everyone. We’d like to be in a position to sell wherever we can.
While announcing your third quarter earnings, you mentioned that Sesa Sterlite will defer some of its investment plans in the wake of declining commodity prices. Can you elaborate?
We have flagged to the market that we are looking at what we can do to balance the need to keep production going while being sensible about the environment of weaker commodity prices, particularly at a time when crude oil prices are soft. We’re working with our individual businesses on this and many of them have their joint venture partners and other stakeholders. We are not yet being prescriptive on a number (regarding reduction in capital expenditure), but there will be more clarity in coming months. What I can say at the moment is that it will be a very meaningful deferral in capital costs from what we would have otherwise expected to incur.
Also, in companies like Cairn India (Sesa Sterlite’s oil and gas subsidiary), we are looking at ways to re-engineer processes and find more competitive service providers who can help reduce costs. I have myself joined the Cairn team in Calgary (Canada) and Houston (US) to find ways of reducing the costs of horizontal drilling and other technically complicated work that costs quite a bit more in India, sometimes 50-100% more.
When the crude market was strong, a lot of service providers in North America didn’t even think of coming to India because they had all the work they wanted in their part of the world. But with a slump in the industry, a lot of them are quite receptive to the idea of working in India. We want to take advantage of these weak market conditions and permanently improve the cost basis of drilling oil and gas in India.
How much cost advantage do you expect to achieve at Cairn India through these steps?
I would love it if the cost of drilling a well in India comes down by half. If it costs twice as much to drill a well in India than in Oklahoma, I think achieving such a cost reduction is realistic.
With declining commodity prices, what is your outlook on Sesa Sterlite’s earnings?
In our oil business, we want to be in a position where we can survive the trough in pricing and generate positive cash flows after capital expenditure even when oil is trading at around $40 a barrel. If we can stay resilient at these low prices, we will be well-positioned when prices rise again.
In the next couple of quarters, we expect to see robust growth in our aluminium business and the market sees it as a near-term catalyst for our volumes and earnings growth. So, if the London Metal Exchange price and physical premium on aluminium prices stay where they are, it will mitigate the impact of soft market conditions at some of our other verticals. We have also increased the production of zinc and the performance of this business is expected to be strong in the coming quarter. We are seeing higher zinc production in an environment of higher pricing.
What is the rationale for the merger of Sesa Sterlite, Hindustan Zinc and Cairn India, which is being contemplated? When is the blueprint likely to be ready?
People have been speculating on this for quite a while. It was a natural progression from the successful Sesa Sterlite merger that happened a couple of years ago. The government of India itself is saying that it is looking to do something with its stake in Hindustan Zinc. That itself has created a lot of speculation and people are pitching ideas on how to go about it. But,at this moment, it is strictly exploratory and speculative. The government hasn’t yet said what they are going to do with their stake in Hindustan Zinc.
The Sesa Sterlite merger has helped us manage the company better by exploring synergies on the marketing and procurement side. We have seen tangible benefits. But as we meet prospective investors, they appear wary of investing in the company as the structure is too complicated. In that sense, to some extent, the complex structure has compartmentalised us away from some of the capital that would have been available to us. But that’s not necessarily the immediate order of the day. The order is to increase production and get our investments on the ground, especially in sectors like aluminium.