After cuts in staff and spending, Cairn India looks to rework contracts

Mumbai:Cairn India Ltd, which has cut spending and fired staff this year, has approached rig suppliers and oil field service providers to rework contracts as it fights to offset the impact of low energy prices.
Two top Cairn India executives, who confirmed the plans, said the oil and gas subsidiary of Anil Agarwal’s Vedanta Ltd hopes to save 15-20% by reworking these contracts, many of which were awarded last year. Both executives refused to be identified.
“We are actively renegotiating contracts for various drilling equipment and services that are a large component of our projects. Through this exercise, we are aiming at ensuring maximum value returns and increase the project viability by driving the best negotiation arrangements,” said the first of the two executives cited above.
Cairn India had not answered an email sent on Tuesday till press time.
In the last few years, Cairn India has awarded several contracts for oil rigs, well finishing services and construction of pipelines and a gas terminal.
The executive said these savings are not part of Cairn’s planned 58% capital expenditure cut for 2015-16, though they could help offset the capex cut by that amount.
He did not disclose the total value of the contracts being renegotiated.
On 23 April, Cairn India cut its capex for the current financial year by 58% from $1.2 billion projected earlier to $500 million.
Of the capex, 45% was meant for enhanced oil recovery (EOR) from its flagship Mangala oil field followed by similar exercise at the Bhagyam and Aishwarya fields; 40% for developing gas resources at the Raageshwari, Barmer Hill and satellite fields; and 15% for exploration activities.
“We are not sacrificing the three main projects that we had embarked on due to the capex cut. What we are looking at is saving costs wherever possible, which can then help us in diverting more money for the capex that is imperative. The renegotiation of the contracts is a part of the exercise,” said the second executive.
This person claimed that with all its recent measures enhancing and adding value to projects and businesses, Cairn is “weathering the storm” better than its global peers even in the low-price regime.
Unlike many other crude oil explorers, which are also involved in refining and marketing, Cairn is a pure-play oil producer with no other business lines.
Like every other exploration firm, Cairn India was hit by the 47% fall in crude oil price from $105.62 per barrel on 1 April 2014 to $56.21 per barrel on 31 March 2015.
During the period, its share price fell 35.74% from `321.68 to `213.85, while the benchmark BSE Sensex gained 24.89% from 22,386.27 points to 27,957.49 points and the BSE Oil & Gas Index lost 1.83% from 9,485.72 points to 9,311.95 points.
The vice-president of institutional equity research at a domestic brokerage house called Cairn’s contract renegotiation a “logical and predictable move”, since others were also working on similar plans.
“With the fall in crude price, drilling rates, the rate for hiring of rigs and oil and gas services have also come down; therefore, many contractors are under pressure to renegotiate their contracts,” he explained.
He asked not to be named due to his company policy.
He said Cairn India will find it difficult to renegotiate all contracts as the discussions also depend on the stage of implementation of projects under the contracts.
Also, with the recent uptick in crude oil price, the renegotiation power is also slipping out of the company’s hands, he said.
After touching $56.21 per barrel at the end of the last financial year, the price of benchmark Brent crude oil has since risen to $67.75 on 14 May, according to Bloomberg.
Cairn India is still India’s lowest-cost crude producer, but it may soon lose this edge. The company is working to double output at its Mangala, Bhagyam and Aishwarya fields in a costly exercise and the additional oil that flows this year from these fields will carry a higher cost of production.
“The EOR schemes that we are implementing are expensive as it requires injection of polymers. This will definitely increase our cost of production for the incremental production from $5-6 per barrel to $11-12 per barrel,” said the first executive.
Therefore, he said, it is important to keep the costs under check and renegotiation is one of the many ways that the company is looking at.
The second executive said the company will not be downsizing its employee base any further if crude price stays at $60 per barrel level. Cairn India had laid off 250 people in February.
Source: Mint; 15 May 2015

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