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They thought it was a mirage, but black gold is gushing in the Indian desert

The Times
August 29, 2009

By Rhys Blakely in Mumbai

The oil refineries of Rajasthan are about to benefit from Cairn?s big gamble

Thousands of villagers will trek across the Rajasthan desert of northwestern India today to be present at a little piece of history, each of them hoping to glimpse Manmohan Singh as he becomes the first Indian Prime Minister to visit the remote region. They will also be celebrating a triumphant business gamble taken 12 years ago by a former Scotland rugby international.

As Dr Singh flags off the first lorryload of oil from the giant Mangala field, the largest of its type to be discovered in India in decades, looking on a short distance away and from the same podium will be Sir Bill Gammell. It was the chief executive of the Edinburgh-based Cairn Energy, who staked his reputation by opting to drill here in the first place.

Sir Bill has enjoyed memorable days in front of big crowds before. Indeed, this is likely to be one his best since he scored two tries on his debut on the wing for Scotland, against Ireland, at Murrayfield in 1977.

And there is no mistaking his pride on this occasion: “This is our coming of age,” he said this week, “our 21st birthday. I am absolutely delighted that we as a team are delivering first production in Rajasthan. From a Cairn perspective and from an Edinburgh perspective, it’s a massive achievement.”

Rajasthan, best known in the West for its lavish royal palaces and Mogul forts, had not produced a gusher in years when Sir Bill sold Cairn’s North Sea assets in the late 1990s and settled — to the bemusement of many — on the desert state. The decision to begin buying Shell’s exploration rights in the region in 1997 was a bold one. The Anglo-Dutch group had drilled ten wells but had little to show for them. The price reflected as much: Shell sold its final 50 per cent stake in its Rajasthan blocs to the Scottish company for only £4.4 million in 2002 and the total sale price was less than $20 million. The deal will go down as one of the canniest in hydrocarbon history: in January 2004, Cairn struck oil — at least one billion barrels of it.

“Let’s say it was an educated gamble,” said Rick Bott, the chief operating officer of Cairn India, the Mumbai-listed division that was set up to work the find.

Yet in retrospect finding the oil was the easy part. Cairn has spent $2 billion (£1.2 billion) developing the fields since the discovery five years ago and expects to spend another $2.5 billion by 2011. The costs reflect the complex work needed to get the oil to market.

The Rajasthan crude is “waxy”, which means that it is solid at room temperature. As a result, a 670km heated pipeline — the longest in the world — is being constructed to keep it fluid as it makes its way to India’s western shore. The pipeline is not yet complete, which has worried some investors, but Mr Bott believes that it can be built by the end of the year.

The Indian Government will be among those hoping he is right. The country is struggling to find enough energy to fuel a growing economy and the Rajasthan fields are set to play a key role in ensuring its future energy security. When they achieve an expected peak production rate of 175,000 barrels a day in 2011 — enough to fuel about 3.4 million cars a day — the Cairn finds will count for more than a fifth of India’s domestic crude output.

The state coffers of India, which imports 70 per cent of the crude that it uses, will also benefit. The country will gain an estimated $1.5 billion a year in foreign exchange reserves over the next decade through the find. The Indian Government will also benefit from a 50 per cent profit share, with revenues to the State projected at more than $30 billion over the life of the field, which may extend to 40 years.

Sir Bill, meanwhile, already has his next target lined up. Greenland’s frozen tundra may be about as far removed from the scorching sands of Rajasthan as it is possible to get, but Cairn is exploring an area that could produce several billion barrels of oil.

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