Cairn should consider producing less crude for longer

Vol 10, PW 21 (22 Feb 07) Midstream & Downstream

Fresh thinking by Cairn could resolve the long-pending problem of finding a buyer and transporting crude from the Mangala and other fields in Rajasthan.

One suggestion is that Cairn should sharply lower its production rate from the planned 150,000 b/d or 7.5m t/y. “At a 3m t/y reserves to production ratio, production can continue for 23 years,â€‌ we are told.

“This longer plateau could make it viable to set up a refinery in Rajasthan itself or transport it by pipeline outside to IOC.â€‌ Of these two options, the pipeline option may be more feasible as the refinery may find it difficult to get crude once Cairn production dries up.

“The economic life of a pipeline is taken as 25 years,â€‌ we are told, “and a lower and longer plateau production rate could be ideal for IOC or even HPCL’s proposed Bhatinda refinery.â€‌ Can the production profile be modified now “Cairn can modify it any time,â€‌ we hear.

“All they have to do is go to the management committee and outline a case for a longer plateau with low peak production.â€‌ Approval should not be an issue, “as the government is also keen to see the oil flow as early as possible.

â€‌ Cairn should also remember that, “interest cannot be charged on cost recovery if it is done earlier or over a longer period.â€‌ What about the seven-year tax holiday “They can simply follow the current practice by many operators (in India) now,â€‌ we are told.

What is that Every cluster of wells is declared as a separate industrial unit from the day it comes on production. “For each cluster or even single wells you get a seven-year tax holiday.

This can go on for ever, till the end of production.â€‌ Adds our source: “Cairn’s present plan is to produce at a high rate early, get all the benefits early and improve the internal rate of return.

â€‌ Even though the PSC says that finding a buyer is the government’s job, “no government refinery can buy crude at a loss. Unless they (Cairn) accept this reality and move on, the deadlock will continue.