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Cairn Energy’s $8.5 billion Mid-Life Crisis

Cairn bought the exploration licenses in Rajasthan from Royal Dutch Shell, who believed the properties contained no oil, in 1997 for just $7 million.


By James Herron

Instead of settling into the respectable middle tier of global oil producers as its major oil discoveries in Rajasthan, India, gradually come onstream, the U.K.-listed Cairn Energy has decided to do the oil industry equivalent of selling the Volvo, buying a Harley and cruising off into the sunset.

Cairn Energy will sell the bulk of its stake in Cairn India, which owns and operates the Rajasthan fields, to metals and mining company Vedanta Resources. Cairn Chief Executive Sir Bill Gammell leaves behind dreary subjects like pipeline maintenance and enhanced oil recovery and will instead focus his company’s resources on the exciting business of exploring for new fields.

Whether this decision has a happier outcome than the typical mid-life crisis will  depend on wildcat drilling in the oil industry’s newest frontier – Greenland.

Many industry analysts, most of whom have a weakness for the thrill of a whirring drill bit themselves, applauded Cairn’s decision.

“Cairn Energy’s decision to sell…is a smart move,” said Evolution Securities analyst Richard Griffith. “Capturing value now and sidestepping the technical risks shows Sir Bill hasn’t forgotten some of his old skills.”

“Cairn are going back to their exploration roots,” said analysts at Bernstein Research. “(Investors) now become much more exposed to the exploration potential associated with Cairn’s drilling program.”

Just in case they harbor any doubts, those investors will also get a hefty sweetener in the form of a special dividend from the deal’s proceeds, which could be as high as $7 billion, Bernstein said.

There is perhaps no area in the world of oil and gas that is generating more pent-up excitement than Greenland. Earlier this summer Cairn began to drill four wells there that are targeting an eye-watering total resource potential of 16 billion barrels of oil equivalent.

Of course, there is no guarantee Cairn will find oil. Earlier this year the company gave the wells just a 10% chance of success. However, Cairn’s track record gives analysts good reason to put their faith in the company.

Cairn bought the exploration licenses in Rajasthan from Royal Dutch Shell, who believed the properties contained no oil, in 1997 for just $7 million. Having just agreed to sell half of those same licenses for more than a thousand times the original purchase price, Cairn has generated some goodwill.

Many investors have seen a presentation given by Cairn’s highly-respected exploration chief Mike Watts, which shows how oil seeps from spots on Greenland’s shoreline and how rocks that make up the rugged coastline are so rich in chemical precursors to oil that landslides sometimes spontaneously catch fire.

The excitement will reach fever pitch next Tuesday, when Cairn publishes its results for the first half of 2010 and is widely expected to reveal some results from its early Greenland drilling.

However, just as Cairn’s move was applauded, analysts expressed doubts about the merits for Vedanta.

“This acquisition will heap more leverage on (Vedanta) and soak up a lot of its excess cash reserves at a time when the market looks shaky and may be poised for a correction,” said Matt Fernley, an analyst at GMP Securities Europe LLP.

Husbandry of the Rajasthan oil fields will be no simple matter, especially for a company with no prior oil industry experience. “It’s easily forgotten that the Rajasthan field has a 20 to 30 year life requiring both water injection and enhanced oil recovery,” said Evolution’s Griffith.

If Cairn’s mid-life crisis is shaping up nicely, Vedanta’s may just have got itself more than it bargained for–an expensive and high maintenance trophy wife.


Comment from a former employee of Shell Oil USA: This is the sort of bad judgment and fiduciary malfeasance that eventually brings companies down. Obviously, the ‘best and brightest’ were not in charge of this property sale. Did Shell management consult with their technical folks before moving ahead with the sale? Shell really got its ‘pockets picked’ on this one. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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