Oil’s well in Rajasthan

Cairn India (CIL) on Tuesday last issued an update on its main RJ-ON-90/1 block in Rajasthan. In-place oil and recoverable oil estimate in RJ-ON-90/1 is up by 5%. However, the big news was a big jump in prospective resources representing exploration upside in RJ-ON-90/1. Risked recoverable prospective resources are up 7x to 250mmboe—million barrels of oil equivalent—(unrisked up 20x to 2.5bn boe). Peak oil output is also now expected to be 240k barrel per day (b/d) up 37% over old guidance. CIL has also tied up sales volume of 143k b/d with four refiners and has guided ramp up to 125k b/d in 2H 2010. CIL’s PO is raised 11% to Rs 336 to factor upsides. We retain Buy on CIL.

Recoverable reserves up 5%; 7x jump in exploration upside: In-place oil estimate in RJ-ON-90/1 has been raised by 5% from 3.8 bn boe to 4 bn boe and 2P reserves and contingent resources by 5% to 1.14 bn boe. The rise is in the low permeability Barmer Hill formation, for which CIL has also submitted declaration of commerciality. However, the biggest surprise is the sharp jump in exploration upside potential in RJ-ON-90/1. Gross unrisked prospective resources are up 20x to 2.5bn boe from 125mmboe in June 2006 while risked recoverable prospective resources, which we value, are up 7x to 250mmboe.

Peak output up to 240k b/d;143k b/d sales volumes tied up: CIL has also raised the peak output estimate in RJ-ON-90/1 to 240k b/d from the earlier guided 175kb/d and the expected 190-2,000k b/d. Peak oil output in Mangala may now be 150k b/d vis-à-vis earlier estimated 125k b/d. CIL also announced that sale volume of 143k b/d have been tied up with four refiners. This includes only the old refinery of Reliance but not its new refinery.

PO up 11% to Rs 36 on higher output & exploration upside: CIL’s PO is raised 11% to Rs 336 to factor in higher output and exploration upside.

Rajasthan oil sales tie up update: CIL announced today that it had tied up sales arrangements with four refiners for 143k b/d of Rajasthan oil supply. The four refiners are IOC, MRPL, Essar and RIL. CIL management has confirmed that sales tie up with RIL is only for its old 660k b/d refinery currently. Rajasthan oil sales have not yet been tied up with RIL’s new refinery based in a special economic.

zone (SEZ). CIL has not disclosed refiner-wise break-up of 143k b/d of Rajasthan oil sales volume tied up. However we estimate the break-up as follows: MRPL 8k b/d; IOC 30k b/d; Essar Oil 30k b/d; RIL 75k b/d

We believe that there is enough demand for Rajasthan oil production to ramp up to revised peak of 240k b/d. 143k b/d of supply has already been tied up. The balance 97k b/d of oil demand is expected from Essar Oil, which is expanding refining capacity by March 2011. RIL’s 590k b/d new refinery based in the SEZ, which operated at 115% utilisation rate in July-December 2009 0.68-1.04m b/d of new refining capacity expected to be added by March 2013. Existing PSU refiners are upgrading their refineries to make them more complex.

Essar Oil has indicated that it would like to use 60k b/d of Rajasthan crude from April 2011 once it completes the ongoing expansion of its refining capacity. As discussed, no sale agreement has yet been tied up with RIL’s new refinery based in a SEZ. We believe it could use 0.5-0.55m b/d of Rajasthan crude.

In-place & recoverable oil estimate upgrade: In-place oil estimate in RJ-ON-90/1 block has been raised by 5% to 4 bn boe from 3.8 bn boe earlier. In-place oil estimate in MBA is unchanged at 2.1 bn boe. However, in-place oil estimate in small and low permeability fields in Rajasthan is up to 1.9 bn boe from 1.7 bn boe earlier.

2P reserves and contingent resource estimate in RJ-ON-90/1 has been raised by 5% to over 1.14 bn boe from 1.09 bn boe earlier. 2P reserves and resources in MBA are unchanged at over 1 bn boe. 2P reserves and resources in small and low permeability fields in Rajasthan are up to 140mmboe from 84mmboe earlier.

The rise in in-place and recoverable oil in RJ-ON-90/1 is mainly in Barmer Hill formation, a low permeability formation in Rajasthan. This is based on successful hydraulic simulation test in a gas well in Raageshwari. This has encouraged Cairn to replicate hydraulic fracturing in the Barmer Hill formation. A pilot hydraulic fracturing programme is planned in Barmer Hill in 2010. CIL has submitted declaration of commerciality for Barmer Hill.

Sharp jump in exploration upside: Estimate of gross unrisked prospective resources in RJ-ON-90/1 has jumped up to 2.5bn boe from June 2006 estimate of 125mmboe. The gross risked recoverable prospective resources in RJ-ON-90/1 have also jumped 7x to 250 mmboe from June 2006 estimate of 35 mmboe

Source: http://www.financialexpress.com

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