Although the recent plunge in crude prices gives an impetus to India as a whole, P Elango, former whole time director and interim CEO of Cairn India believes the fall does not have much of an impact on companies that have colossal onshore exposure.
Cairn has a very strong onshore asset, which are very low cost both in terms of capex and opex. Even at current price levels, the company should be able to plough its way very well with a huge resource base with its operating cost for onshore field standing at USD 3.50/bbl, he says in an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy.
Below is the verbatim transcript of the interview:
Q: If you could start of by telling us what ballpark fall in realisations could be for a company like Cairn because of the severe fall that we have seen in crude prices in the last couple of weeks?
A: First of all, I would take a look at what is the impact of falling crude oil prices to India as a whole. Being a major oil importing country, the fall in crude oil prices is good for India. It is going to help in reducing the import cost as well as closing down the gap on fiscal deficit. It is a great time to step up the exploration activities in the country - using the fall in crude oil prices always follows by the fall in crude oil price services as such. So it is a great time to step up the exploration activities in the country. Specifically Cairn has a very strong onshore asset, which are very low cost both in terms of capex and opex and even at this price level, Cairn should be able to plough its way very well with a huge resource base it has in Rajasthan.
Q: What kind of a crude price would frighten you and secondly, you spoke about therefore because of the overall fall in crude related services, we are already seeing the falling prices of oil rig company shares, what are the exploration and reserve recognition upsides that we can expect over the next year or two?
A: When you look at the crude oil companies, the company which has got a large exposure to onshore assets will be able to withstand a low crude oil prices pretty well.
Q: Even USD 60 per barrel?
A: Yes because the operating cost of onshore field is pretty low at USD 3.5 per barrel. The operating cost is very low for asset like Rajasthan and the cost of drilling a well for an onshore well is roughly about USD 3-4 million against an offshore well which should cost something like USD 25 million if it is a shallow water or even up to USD 80 million if it is a deep water. So the issue is going to be that at low oil prices, exploration in deep water areas globally would take a beating but generally company, which has got a huge onshore exposure should be able to survive pretty well.
Q: The production for the company has been trending lower if you look at an average in FY15 and the company itself has talked about just 7-10 percent production growth over the next two-three years. Some analysts believe even that may not fructify, what is the sense you are getting about whether the company will be able to meet its production targets or not?
A: I think it will be inappropriate for me to make a comment about that but Cairn has certainly a track record of meeting its commitment to the market and it is guiding the market as it believes.
Q: When crude prices fall, is there any change in the royalty and the total impact on profit petroleum, what will those numbers look?
A: The royalty is fixed as a percentage of the crude price realised so there is no impact on that. So it is a pro-rata fixed percentage of the realised crude oil prices. So it will have no impact.
Similarly, the profit petroleum sharing is also on a percentage basis, there are no absolute sums as such.
Q: Just wanted your understanding of what the renegotiation of the production-sharing contract could mean for a company like Cairn. Does this open the possibility of the government to raise its share of profit petroleum, there are some talks that beyond the current peak of 50 percent, the government could raise its own share, what would the impact be on a company like Cairn?
A: I think government has gone on record that it would always maintain the sanctity of contracts and it is very important for government to maintain that, not from the point of view of just the current operators but to send a message to global investors that the contract and its terms would always be honoured, and I think India has a track record of honouring the contract terms. So I don’t see any change in the terms coming under the current regime.
Q: What is your guess of the average crude price in 2015?
A: One of the things we learn in oil and gas industry is never ever to make guess because you will always prove to be wrong.
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