Lower taxes, levies on oil and gas sector can unlock substantial investment: Cairn Oil & Gas CEO Prachur Sah

Cairn Oil & Gas deputy chief executive officer Prachur Sah.

The oil exploration and production industry has been seeking lower taxes and levies, which can boost investment and help India produce oil at almost one-fourth the price of imported crude, said Prachur Sah, Deputy Chief Executive Officer, Cairn Oil & Gas. The oil and gas exploration arm of billionaire Anil Agrawal-led Vedanta Ltd announced on October 27 that the petroleum and natural gas ministry had extended to May 2030 the production sharing contract for its prolific Rajasthan block.

In an exclusive interview with Moneycontrol’s Rachita Prasad and Shubhangi Mathur, Sah said that the company plans to invest $5 billion by FY26, of which $3 billion would be in the Rajasthan block.

Edited excerpts

Now that you have an extension for the production sharing contract (PSC) for the Rajasthan block, what is the future plan?

The Rajasthan block is actually significant, not just for Cairn, but also for the overall country, because it is the largest onshore producing block in the country. The block is giving almost 25-26 percent of India's production and there is a lot more to be done in this block.

So, the 10 years give us an opportunity to start these projects, whether it's exploration, enhanced recovery, and even the shale program at a much wider scale. With 10 years, we can do our investment planning for that time horizon, and of course, we will work with the government to see how we can plan for even longer, because typically for oil and gas, you want to have blocks for the life of the field.

But these 10 years at least unshackles our investment decisions in this block, and we can make that decision regarding exploration and conventional shale and in-house recovery projects, which can be done and which we are actually ready to do because we already have projects lined up. So, this will unlock a significant amount of investment in this block for us.

The previous contract for this asset expired in May 2020 and getting the extension took time and the company even moved court. Has the delay set you back in terms of investment plans?

That is water under the bridge. We want to focus on the way forward. It may have impacted us, but we remain very confident and bullish for this block, going forward.

Now that we have got the extension, we are undertaking the exploration project, shale and in-house recovery projects. As we take it forward, I'm sure the government will look at it that the life of the field is beyond the 10 years, how we can extend it better, so that these investments can continue. I remain very confident and bullish about this block. Now that we've got the extension, we want to go full steam ahead on these activities and take it forward in terms of what impact it can make for us and for the country in general.

Your company has an overall plan of investing $5 billion on oil and gas. What are the investment and output targets for the Rajasthan block?

The majority of our investment goes into this block because this has the largest potential. Of course, we are investing in our existing offshore blocks and the new Open Acreage Licensing Policy (OALP) blocks as well. But the majority of investment is going to be in this block.

In terms of investment, even though for the last two years, we did not have the extension and we were working on ad hoc extension, we continued to invest. We have a plan to invest over the next two to three years at least $3 billion on different programs at this asset.

In terms of output, if I look at shale, enhanced recovery, and exploration, this block has a potential of close to one million barrels of resources.

As exploration and shale succeeds, these numbers will firm up, once the drilling happens. But the potential could be up to one billion barrels of oil from this particular block itself. So, it's a large play. It's quite a prolific basin.

Is this investment for FY26?

In oil and gas, when we look at two, three horizons, we look at the investment planning. But as we drill more, and we find results, we fine-tune that one. This year, the board approved numbers close to a billion dollars in terms of oil and gas investment. So, I expect the next two to three years should be this number.

Of course, the plans may alter depending on how or what we find when we drill. So, it may be a larger investment or it may be a smaller investment, depending on the drilling process. But the broad outlook is $3 billion over the next two to three years.

International Energy Agency (IEA) has said that the current global energy crisis has “unprecedented depth and complexity”. What is your view of the current macro situation?

The macro situation is as dynamic as it has ever been before, and I don't think anybody has a crystal ball on this matter.

One thing is for sure, as far as all of us are concerned, we are in a country which is very energy-hungry and it is going to continue to be energy-hungry. So, I think, with the growth path that India has, the energy transition and energy security, both have to be looked at, at the same time.

We can't isolate energy transition and energy security. So, the oil and gas industry will continue to play a very important part, both in energy security and energy transition, because a lot of the energy transition technologies will come out of the oil and gas companies.

I think, the investment in oil and gas, especially for us in India, remains very critical for our energy security and for the exponential demand growth. And as the situation becomes more volatile outside, our self-sufficiency needs to improve. So, from that point of view, oil and gas investment in India will, and should, remain robust.

However, at the same time, the alternate sources of energy ― hydrogen, ethanol, biogas, biofuel ― will remain critical because today we have a gap as we are importing 85 percent (of our oil demand).

My view is that it remains critical to invest in all forms of energy and continue playing an important part in energy transition. If you can crack something through technology, for sure it is going to be a great turn of events.

Vedanta head Anil Agrawal has earlier said that India can produce oil at almost one-fourth the price of imported crude. What are the challenges for that?

We are a country which has no choice and we have to make it successful. We need to be upbeat and we need to get more private investment in this sector. The government is trying to do this through policies in the right framework. I think, it's the speed that probably can be enhanced further.

India can produce oil at a cost which is one-fourth of the import, and it is not something far-fetched. It's actually happening.

In the Barmer block of Rajasthan, the total cost of production is less than $30 a barrel, even if you include capex (capital expenditure) and opex (operating expenses). The remaining money is for the government taxes and levies. Without capex investment, total operations are at $10-12 a barrel. Including the capex project, we can grow the production within $30 a barrel, and we can sustain the production. So, I think, it is not very far-fetched. It's a fact.

Mr Agrawal and the rest of the industry have been talking about the high taxes and levies in India and the need to bring it down to spur private investment. Do you see any changes happening anytime soon?

I have seen a very positive change in the mindset of the government. In fact, Honourable Prime Minister Narendra Modi said in one of his addresses that the government is becoming more and more production-minded rather than revenue-minded.

The government is thinking about making it work for investments like this, because it's a very capex-hungry industry. So, there is a good vibe and good discussion that we are having with the government. And we are looking forward to some of the changes to materialise soon.

At the end of the day, if I'm producing at $20 to $30 a barrel, the government, through this levy reduction will encourage more and more investment. So, that remains our ask as an industry. I'm not just talking about Vedanta; I am talking in general.

If we can bring down the levies to the international level, which is about 30 percent to 40 percent, it can unlock substantial investment in the oil and gas space. And that remains our ask to the government, and I believe they are listening to it, and they are trying to come up with schemes and policies that can enable that. We are looking forward in a very positive way for these changes to happen.

What are your views about windfall tax and do you expect it will be removed soon?

We have given our representations about windfall tax to the government on why we believe windfall tax should be reconsidered to encourage more investment. I am sure the government will look at it and make the right decision. We remain engaged with the government on this matter…the windfall tax brings to almost 80 percent levies on us.

In the long run, more investment will increase the revenue to the government if the levies are brought down to international standards of 30 percent to 40 percent. These discussions are ongoing with the government and I am very positive the government will look at it from that view soon.

What is your outlook on crude prices and demand globally?

Given the geopolitical situation, I think oil prices will remain at the levels that they are now till the geopolitical situation has some predictability. A level of $100 per barrel for crude price is detrimental for economic growth because it tends to put inflationary pressure across all the economies. China is experiencing lower demand due to its zero COVID-19 policy, whereas in India, demand continues to grow. So, the demand outlook, in my view, will remain quite aggressive.

Let's say in the next three months, China relaxes its COVID-19 policy, (then) demand will substantially grow. So, I think, the demand will continue to grow, the amount of growth will depend on certain geopolitical situations, which I don't think anyone can predict.

As far as crude prices are concerned, I think, the ideal crude price for both investment and economic factors is close to $70 to $80 a barrel. If it comes down to that level on a sustainable basis, we can plan our investments, and the economy can potentially do better rather than where it is today. My outlook is that volatility will remain till the geopolitical situation gets resolved. But demand will rise as the China situation changes.

What is the big picture plan for Cairn Oil and Gas in the next five years?

There are three buckets where we're going to invest. First, we are going to invest in exploration in our Rajasthan block and all our new blocks as well. Second, we're going to invest in shale, primarily in the Rajasthan block. Third, we are going to invest in enhanced recovery, primarily in the Rajasthan block, and potentially in offshore as well. So, these are the three main buckets, which will drive the investment for our entire portfolio while we continue to produce from our existing assets through our operations.