Cairn India steps up offshore activity as costs fall

Mumbai: Cairn India Ltd is stepping up activity across its four offshore oil and gas assets to take advantage of low exploration costs, a consequence of falling crude oil prices.

On 1 September, the oil and gas arm of billionaire Anil Agarwal-controlled Vedanta Ltd, along with its joint venture partner in three of the assets, Oil and Natural Gas Corp. Ltd (ONGC), floated 10 tenders to shortlist firms that can offer a host of services to one block along the western coast and three along the eastern coast.

Of the blocks, CB-OS/2 located in the Cambay basin off the coast of Gujarat and Ravva located off the coast of Andhra Pradesh are producing blocks. Two others, located in the Krishna-Godavari (KG) basin and Pennar-Palar basin in Tamil Nadu, are under development.

ONGC is Cairn India’s partner in three of the blocks. In the K-G basin, Cairn India has 100% stake.

“Cairn and its JV (joint venture) partner have initiated the planning process for a multi-well drilling campaign in Pennar-Palar and KG offshore blocks. An international competitive bidding process has been initiated by the partners as part of the process of seeking expressions of interest to provide rigs, tangibles (ancillary equipment for oil and gas development) and services in support of the drilling campaign in all these blocks,” said a company executive on condition of anonymity.

The tenders have been floated at a time when the global slump in crude oil prices has seen the company post its first ever loss in 7 years of ₹ 1,044 crore in the fourth quarter of the last fiscal year, followed by a profit of ₹ 322 crore in the first quarter of 2015-16, and cut its capital expenditure programme for 2015-16 by almost 60% to ₹ 3,000 crore approximately.

However, the drop in crude oil prices has also brought down the cost of goods and services, especially for high-cost offshore assets.

“As part of its cost optimization programme initiated in February, the company has been trying to re-negotiate old contracts for its Rajasthan block and sign new contracts for upcoming activities in the blocks yet to be developed. The (latest) contracts are part of the same exercise and include a contract for engineering services for the onshore Rajasthan block as well,” said another company executive, also on condition of anonymity.

He said the company wants to shortlist contractors and lock in contracts at current prices for the drilling programme scheduled to begin in 2016.

A mail sent to Cairn India on Monday remained unanswered.

Between June 2014 and May 2015, when oil and gas prices fell by 49%, the rates for drilling activities, which primarily represent fees for contractors to drill oil and gas wells, declined by 19.6%. Also, the rates for support activities, which include surveying, cementing, etc., have fallen by 1.4% and the price of various kinds of sand used for extracting crude oil and gas from tight reservoirs has declined by 12.5%, said a June report by Energy Information Administration, a US-based statistical body for the oil and gas sector.

Larsen and Toubro Ltd (L&T), which is one of India’s biggest oil and gas service providers, admitted that the cost of services has come down and activities are picking up in some areas.

“Obviously there is a slowdown in the sector and companies are not investing in newer fields. But development contracts for the projects that are already announced are being signed at much faster rates. Old contracts, too, are being re-validated,” said R. Shankar Raman, chief financial officer and whole-time director, L&T.

The drop in crude oil prices forced Cairn India to cut its capex for the current year from $1.2 billion to $500 million. Seventy per cent of this is targeted at the Rajasthan block; the rest, the firm said in April, will be earmarked for exploration activities.