Cairn India's production worries continue

FY13 production target likely to be met but output from Bhagyam field remains a challenge

Although the market does not dispute that Cairn India is the best play in the upstream oil and gas sector, it is becoming apparent that getting the requisite regulatory approvals might not happen. And, as a result, production ramp-up could also be delayed. Cairn India’s management has recently conveyed to analysts that it is producing 173,000-175,000 barrels per day (bpd) from its oil fields. However, from here, growth in production would be slower, as the Bhagyam field’s production of 23,000 bpd is lower than expected and more wells need to be drilled.

With Mangala field producing 150,000/bpd and Aishwarya, another field, slated to start production from the fourth quarter of FY13, Cairn India is expected to exit the year with a total production of 183,000-185,000 bpd, which is lower than estimates. IDFC has adjusted its earnings for FY13/14 downwards by four and three per cent, respectively, to reflect lower production.

For long, the market has been worried over slower than anticipated production at the Bhagyam field. Religare Institutional Research says: “Bhagyam’s reservoir is shallower than Mangla’s, Cairn’s management now expects to reach the peak production of 40,000 bpd with more than the 80 wells initially planned as per the field development plan delaying the ramp-up to that extent. Further clarity on the ramp-up programme is awaited.”

However, drilling more wells might not be the solution. Drilling more would increase production immediately, but it will lower the lifespan of the well, according to analysts. “The company will have to drill more wells (contingent on DGH approval) to achieve peak production levels as the productivity of wells is lower than that envisaged in the field development plan. In our view, lower well productivity may be an indication of lower eventual recoverability from the reservoir; drilling more wells now to increase production may simply reduce the period of production,” said Kotak Institutional Equities in a note.

There have been reports that the ministry of petroleum and natural gas has decided to allow exploration in producing fields beyond the seven-year period mentioned in the production-sharing contract. Allowing the company to continue exploring the same field essentially means the field’s production can go up if further resources are discovered. According to analysts, this policy can help take the company’s production to 300,000 bpd.