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The Independent: Cairn caps FTSE 100 entry with oil find

The Independent: Cairn caps FTSE 100 entry with oil find

“Mr Gammell refused to comment on Shell’s decision to sell the exploration block to Cairn for a pittance,…”

By Michael Harrison, Business Editor

08 September 2004

Cairn Energy, the independent oil exploration group, yesterday celebrated its entry into the FTSE 100 index of leading companies by reporting its fifth oil discovery this year in the north-west Indian region of Rajasthan and announcing that the field could contain up to 1.2 billion barrels of recoverable reserves.

The upbeat news was not enough to prevent Cairn shares slipping slightly as investors expressed mild disappointment that the company had not announced another blockbuster find. However, despite the 2.5 per cent dip in its price, Cairn still eased its way into the blue-chip index with a market valuation of £2.28bn, displacing Bradford & Bingley.

Cairn bought control of the Rajasthan block from Shell two years ago for £4m. Four major discoveries since January this year have quadrupled the stock market value of the company, which was formed in 1980 by the former Scotland international rugby player Bill Gammell. Cairn said a fifth exploration well had also struck oil but it was unable to put an estimate on the reserves contained because of mechanical problems.

An independent audit of Cairn’s discoveries in the Mangala field in Rajasthan, carried out by the external consultants DeGolyer and MacNaughton, has confirmed that it contains about 1 billion barrels, of which 110 million to 320 million are recoverable.

Cairn said that together with other successful exploration wells elsewhere in the region, its total discoveries in Rajasthan now stood at 2 billion barrels while total reserves could be as high as 6 billion, of which a fifth could be recoverable, based on conservative estimates.

Mr Gammell refused to comment on Shell’s decision to sell the exploration block to Cairn for a pittance, other than to observe: “Beauty is in the eye of the beholder. We have some very bright technical people and we are strong on vision. We take a very contrarian view. When received wisdom is going in one direction, we go in the other.”

Production from Rajasthan is due to begin in 2007 and is expected to hit 100,000 barrels a day compared with the 25,000 barrels a day Cairn pumped in total from existing fields in the first half of the year. However, there are some technical challenges. Cairn may have to pump water into the field to enhance secondary oil recovery and heat the pipes carrying the oil otherwise its waxy consistency could result in it solidifying.

Pre-tax profits for the six-month period were down 40 per cent to £22.9m thanks to adverse currency movements and an increased government share of production. The Indian government will take 30 per cent of the output from Rajasthan once production begins under the original exploration licence granted in 1995.

Along with entry into the FTSE 100, the surge in the share price has brought a bonanza for Cairn’s directors with a further 9 million shares bought this year to top up their stock option plans. Mr Gammell pledged, however, that membership of the index would make no difference. “We may have a little extra accountability and visibility, but hopefully we will have the same level of humility,” he added.

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