Cairn India - No more exploration? :: Kotak Sec

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Cairn India (CAIR)
Energy
No more exploration? The recent decision of the Management Committee of Cairn’s
Rajasthan block to discontinue all exploration work in the block may affect the
valuation of Cairn’s Rajasthan block. We are not sure how this will affect the resource
potential and Cairn’s targeted plateau production of 240,000 bpd. We note that Cairn
had (1) included 250 mn boe of risked prospective resources in its overall reserves and
resources figure and (2) increased estimates of initial in-place volumes by 2.5 bn boe to
6.5 bn boe in March 2010.


Will the discontinuation of exploration work affect estimates of resources and production?
We note that Cairn had upgraded its estimate of gross initial in-place (GIIP) volumes in the
Rajasthan block to 6.5 bn boe in March 2010 from 3.7 bn boe previously and included 2.5 bn boe
of initial oil in-place from 35+ prospects, which are yet to be explored. We are not sure if the
decision to discontinue exploration work affects the entire 2.5 bn boe of prospective resources and
the 250 mn boe of gross risked prospective resources estimated by Cairn based on a study done
by DeGolyer and MacNaughton.

Government is enforcing regulations strictly in accordance with PSCs
Being a somewhat technical and legal matter, we cannot comment on the ban on exploration
work and its ramifications with complete confidence at the current juncture. The management has
clarified that the Management Committee has not approved the exploratory program for the next
year; however, it has not disclosed the reasons for the same. However, we would note that the
regulator has been very firm in (1) not granting extensions beyond the stipulated period of the
PSCs to various contractors or (2) recognizing discoveries if they do conform to standard practices.

We already model 1.42 bn boe of production from Rajasthan block

We model 1.42 bn boe of oil production from Cairn’s Rajasthan block over the life of the fields.
This compares with 1.4 bn boe of reserves, contingent resources and gross risked prospective
resources identified by Cairn. See our Exhibit 1 for a breakdown of Cairn’s reserves and resource
potential. As such, we are being quite generous in our assumptions — the exploration ban poses
large downside risks to our production estimates.

Enough problems in the Cairn-VED deal
We are not sure if the new development will affect the Cairn-VED deal. There are other issues
holding up the transaction including (1) legal status of ONGC’s pre-emptive rights in blocks where
it has a participating interest along with Cairn India and (2) payment of royalty by ONGC for the
entire production from the Rajasthan block despite a significant change in ownership of Cairn India.