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Lumbering, floundering Shell Special report: King at Cairn: It’s the tale of David and Goliath, the fleet-footed, smart Cairn against the lumbering, floundering Shell…”: “…he has to say only one word to his critics who want him to play this more cautious, stay-at-home, game. The word is Shell.”

Chris Blackhurst, City Editor, Evening Standard

Posted 10 September 2004

HERE’S a point in the life of any stock market star when they leave the City and enter the pub or golf club bar. It’s when they cease to be a hot topic for a select few in the Square Mile and start to attract wider interest.

These things have a momentum of their own. One or two savvy specialists get in there first, the company continues to prosper, the shares climb, the institutions* take an interest, the price lifts, the wider City audience clambers aboard, the stock keeps on going, then anyone with money to invest decides to have a dabble.

Sometimes the speed of the ascent can gather so quickly that it’s as if the business has come from nowhere. So it is with Cairn Energy, the story of the summer, the undoubted share of the year so far.

Cairn floated on the stock market in 1989, when its shares were worth 192p. For years, the oil explorer bumbled along, seemingly confined to obscure mid-cap status. Then, last January, bang. Bill Gammell, the company’s founder, revealed a major find in India and the shares rose, and carried on rising. Before the discovery in Rajasthan, in north-west India, they were 401p. Now they are 1450p. Today Cairn’s promotion to the FTSE 100 index is confirmed, with a value of £2.3bn.

In record time, the company has gone from not much to potential blue-chip superstar. Doubts over the final amount of crude that can be recovered from India gave the shares a bit of a knock yesterday but the trend remains upward.(Cairn was quick to counter with production plans highlighting how the business will be transformed once Rajasthan comes on stream.)

Fleet of foot

FOR the City, there has been something delicious and almost faith-restoring about Cairn’s success. Just as Shell was rocking the sector with its reserves downgrade, along came this upstart to put the oomph back into oil.

In a nice twist, Cairn bought the India licence from Shell for just £11m. It’s the tale of David and Goliath, the fleet-footed, smart Cairn against the lumbering, floundering Shell – the company that likes to break new ground in far-flung corners of the globe against one that seemingly has forgotten the thrill of the chase. The City loves it.

And so to Gammell, who has seen the value of his own holding in the company catapult to more than £30m and is on course – according to Dr Philip Beresford, the Sunday Times Rich List compiler – to overhaul Sir Ian Wood, head of North Sea services company Wood Group, as Britain’s richest oil man.

Even if he hadn’t enjoyed his recent glory, Gammell would have a certain fame – he was a childhood friend of both George W Bush and Tony Blair.

It happened like this: Gammell’s father, Jimmy, who founded Edinburgh fund manager* Ivory & Sime, backed George Bush Snr when he started his oil business. The two families became close and Bush Jnr spent a summer at the Gammell holiday home in northern Scotland when he was 13. As Bill was six at the time, it was more a case of the younger boy being starstruck at the older Texan than them being equals. Later, when he was at Stirling University, Gammell spent time in Texas with the Bush family.

They really became friends in 1980 when Gammell based himself in the US. It was George W who taught him the knack – once oil is found – of buying up as much land around the find as possible. It is a tactic that has served him and Cairn well and he means it when he says: ‘I learned a lot about the oil business from George W Bush.’

Classmate Blair

THE future President attended his wedding and also appeared on an early Cairn promotional video as an experienced American oil hand endorsing Gammell and his venture.

The relationship with Blair was different. Born into Edinburgh money, Gammell went to Fettes College, the local public school, where a classmate was Tony Blair. They took part in school debates together and kept in touch.

One of Blair’s early acts as Prime Minister was to keep an appointment to open Cairn’s new head offices in Edinburgh. According to legend, Bush Jnr’s first words to Blair were that he understood the Prime Minister knew his old friend Bill Gammell.

Not surprisingly, Gammell is coy about his chums. He is acutely aware of where questioners are coming from and how what he says could be open to misinterpretation. The likelihood is that neither of them has given him any particular advantage. Bush showed him the ropes of oil exploration, but Cairn isn’t big in the US; Blair became Prime Minister only in 1997, by which time Cairn had been in existence for eight years.

To suggest to Gammell that any advantage may have been gained is to risk incurring his wrath – he knows what you’re thinking and you’re wrong. He comes across as an intensely driven, fiercely ambitious type who doesn’t require leg-ups from friends in high places to help him on his way, thank you. Tall, with swept-back hair, he’s an imposing figure. Charming too, with a soft, Edinburgh burr.

Quit accountancy

HE could have done nothing, swanning through school, settling down to a cosy existence around Edinburgh’s Charlotte Square. Instead he drove himself on, playing rugby for Scotland as a winger. He still has an athlete’s build, the result of staying fit by playing squash. It’s funny how, physically, he’s not unlike that other rugby international winger who went on to make his fortune in business, Tony O’Reilly.

Gammell adored his father and for a while toyed with following him into finance. He began to train as an accountant after university but abandoned the course. Then he went into insurance broking, followed by financial services, and then fund management. All the time he found the work dull and uninteresting. It was only when he was able to invest his clients’ money in oil in the US that he began to properly enjoy himself.

He likes to claim he’s no intellectual, deliberately hiring people who are brighter than him. What he is, is a risk-taker, one who is prepared to commit enormous sums of money to a hunch. He is not, though, a fly-by-night who, once oil isn’t discovered, will pack his kit and move on. He is always keen, for instance, to stress that the rewards that Cairn is experiencing now are the results of a patiently followed strategy.

Take Rajasthan. Cairn bought the rights to 5,000 square kilometres of the Indian desert from Shell. It spent 10 times the amount it paid drilling 15 test wells, all of which came up with nothing. Then it drilled a 16th and found what is now a vast field called Mangala. Other major discoveries have followed.

Brave Pills

THE point is that Cairn kept going where Shell gave up. Cairn is also working in Bangladesh and hopes to find oil in nearby Nepal. Gammell, you sense, sees himself as an Indiana Jones, blazing a trail where the majors don’t tread. He delights in Cairn’s risk-taking – one of his latest wheezes is sweets for his staff emblazoned with messages encouraging them to go further, and he has called them Brave Pills.

From today, however, Cairn has moved into a different league. No longer a speculative stock beloved of some daring funds and private investors, it is now confirmed as a member of the FTSE 100, and as such will be held by pension funds and the most staid of institutions.

Test drilling and discovering nothing but sand; trumpeting a find, then realising it may not be so big after all or may be difficult to exploit; the dangers posed by environmental groups (Cairn has already attracted the ire of conservationists in Nepal) and volatile local politics (all its operations are in the far-from-stable Indian subcontinent) – none of these is likely to endear the company to its new would-be shareholders. Gammell may have to be more cautious from now on.

It would be a pity, though, if he took the company’s new-found loftiness too seriously. Stand still and it will not progress; worry too much about what investors might think, and the company will wither.

He has to carry on exploring, has to – as he is fond of putting it – keep running with the ball. He could look to other ways of boosting profits, but then he has to say only one word to his critics who want him to play this more cautious, stay-at-home, game. The word is Shell.

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