Cairn hit by Indian drilling troubles

In a drilling update, Cairn said the evaluation of its N-Cextension area in Rajasthan had been “disappointing,” eclipsing higher production and recoverable reserve targets at its two key oil fields.

Cairn also said the Indian government believed it was liable to pay cess, a tax on the production of crude oil, of around $3 per barrel or Rs 900 per tonne on production from Rajasthan. The company will defend itself against the tax, it said in a press release.

“Cairn refutes the government’s position,” Cairn Chief Executive Bill Gammell said. The notification “does not accord with Cairn’s interpretation” of its production-sharing contract with the government and it “has notified the government accordingly,” the company said.

The cess is not due and payable until the commencement of production.

Finance Director Kevin Hart told reporters the royalty payment could hit the value of its Rajasthan interests by about 5 per cent.

ABN AMRO, Cairn’s house broker, cut its investment rating on the firm’s shares to “add” from “buy” and also lowered its net asset value estimate to 15.19 pounds from 17.76 pounds.

However, some analysts thought the fall was overdone and reflected some over-optimistic expectations about Cairn’s drilling programme.

“I think people were slightly over-ambitious for how quickly Cairn would be able to develop and potentially offload these reserves. It (the stock) is beginning to look cheap at around 10 pounds,” Jason Kenney, analyst at ING, said.

Some in the market had hoped drilling in the N-C extension area could lead to a discovery of around 200 million barrels.

Cairn said it had raised its recoverable reserves and production targets at its key Mangala and Aishwariya oil fields.

Mangala and Aishwariya, formerly known as the N-A field, are now expected to produce between 80,000 and 100,000 barrels per day, up from an earlier estimate of 60,000 and 100,000 barrels per day, when they come on stream towards 2007-end.

Cairn said the current recovery factor estimates at Mangala and Aishwariya were between 22 and 32 per cent, based on water flooding, with up to 40 per cent recovery possible under certain circumstances. Oil in place at Mangala is estimated at 1 billion barrels.

“I am delighted with the increased confidence in the recovery potential of the Mangala field,” Chief Executive Bill Gammell said.

Cairn said it had also hit some small oil columns in the Barmer Hill formation and that the Raageshwari gas field was now considered to be a substantial gas find.