Energy Security – Oil is Well

CAIRN INDIA
Energy Security – Oil is Well
19 January 2010
Energy Security – Oil is Well 2

What is a Cairn?

A Cairn is a collection of stones marking the

way to the top of a Scottish mountain or
hill.

The placing of a stone on the Cairn serves

dual purpose; it marks the path for others
to reach the top and it also records the
achievement of the individual.

Each stone becomes integral to the

structure and strength of the Cairn which
continuously evolves and expands.

The Group’s name originated from this

vision.
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Energy consumption in India

Comparison of primary energy Primary energy fuel mix

consumption 100%
(2008)
2000
90%
1600 80%
70%
1200 Hydro electric
60%
Nuclear Energy
800
50%
Coal
40%
Natural Gas
q
u
a
vn M
ilo
te

400 30%
20% Oil
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 10%
Year 0%

China India
Rest of the World India
Source: BP Statistical Review,
India is one of the fastest growing economies of the world : GDP growth - ~6%
2009

CAGR (1995 to 2009)

Primary energy consumption growth in India over last two decades: ~5%
(CAGR) VS ~2% World
India produces 36.1 MMT of crude but consumes 135 MMT - high consumption
but low domestic resources - greater import dependence!
Balanced coal supply / demand vs. skewed oil supply / demand
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India – growing refining hub

Crude pipeline
Planned crude pipeline

Major existing sites which don’t expand

Bhatinda +180kbd Expansion sites
(2011)
Greenfield sites

Panipat +60kbd P etro-chem Plants

(2009) Numaligarh
Gauhati

Essar +120kbd Mathura

Bongaigion Digboi
+330kbd (2012)
Bina +120kbd
(2010) Barauni
Barauni
Koyali +40kbd Refinery Capacity Growth 2007-12
Reliance +580kbd India IOC Haldia
En d 2007 2007-12 2007-12 2012
(2008) Spice/Cals +100 kbd 2011
Mumbai Paradip +300kbd (2012) (m b d ) Ex p a n sio n sG re e n fie ld s
C apac ity 3.0 1.1 1.1 5.2
Vizag +124kbd (2011)
% G row th 37 36
Chennai +60kbd (2008)

Nagarjuna +125kbd
(2011) Crude Balance2007-12 ProductBalance 2007-12
Mangalore +106kbd
(2009) (mbd) 2007 2010 2012 (mbd) 2007 2010 2012
Production 0.7 0.9 0.8 Domestic Output 3.0 4.1 5.2

Throughputs 3.0 4.1 5.2 Demand 2.5 2.8 3.0

Kochi +50kbd
(2009) Imports 2.3 3.2 4.4 Net Exports 0.5 1.3 2.2
Energy Security – Oil is Well 6

International Market

 Crude & products are traded across the world and certain regions have
emerged as pricing hubs with their representative pricing indices
 Western Texas Intermediate (WTI) in the US
 Brent North Sea Europe
 Arab Gulf Middle East

 Prices from these hubs are often utilised as independent indices

 Though prices in these hubs move hand-in-hand there are also affected by
 Crude specifications
• Heavy crude oils (containing wax) are priced lower as compared to lighter crude
• Sour crude (containing Sulphur) is priced lower as compared to sweet crude
 Regional demand – supply conditions and other dynamics

As India becomes a refinery hub and a major consumption centre,

international oil prices would play a more prominent role
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What is energy security?

Energy security is essentially encapsulated in the following 3 elements –

Availability
Availability on
on demand,
demand, when
when aa country
country wants
wants
Availability
energy,
energy, it
it should
should be
be available
available

Accessibility The
The nation
nation should
should be
be able
able to
to access
access energy
energy
sources
sources globally
globally to
to ensure
ensure uninterrupted
uninterrupted growth
growth

Affordability
Affordability of
of the
the energy
energy being
being procured
procured to
to
Affordability ensure
ensure that
that the
the growth
growth engine
engine is
is not
not impacted
impacted by
by
the
the price
price impact
impact

While rich countries are able to find willing sellers, the issue of energy
security gains importance for developing countries which have invested
billions of dollars in infrastructure but still face issues in securing energy at
high costs.

India has moved in steps – create refining capacity to refine crude -

Energy Security – Oil is Well 9

Some of the market distortions

Geographic distribution of resources

 In the case of oil and gas, the top 10 countries account for over 70%.
 In fact, in natural gas, the top 5 countries account for close to 60%.
Indian economy shows high level of geographic concentration (>50%
from Middle east) in the import of the energy requirements

Who owns the resources ?

Twenty five years ago, nearly 80% of the reserves were with International
Oil Companies (IOCs), which invested heavily in technology and production
Today, the ratio is just the reverse with 80% of the resources being
owned by the respective countries and only 20% under the control of IOCs

Striking the right balance would help increase productivity

Energy Security – Oil is Well 10

Need for the country to act NOW – import

dependence to grow to more than 90% by 2030
 India's oil import bill has grown tremendously with a strong growth in the Indian
economy (total crude oil import grew from 74.09 million tonne at a total cost of $ 12.9 billion in 2000-
2001 to 124 million tonne at the cost of US$ 77 billion in 2008-2009. In addition, the government
incurred a subsidy of US$18 billion on supply of petroleum products in the country)
 To deliver a sustained growth rate of 8% through 2031-32, India needs to
 increase its primary energy supply by 3 to 4 times and,
 its electricity generation capacity/supply by 5 to 6 times of their present levels - increase
to nearly 800,000 MW from the current capacity of around 160,000 MW inclusive of all
captive plants
 the requirement of coal to expand to over 2 billion tonnes/annum based on domestic
quality of coal
 The International Energy Outlook (IEO) has projected that India will consume over 5
million barrels of oil a day by 2030; more than double its current consumption.
 As per investment projections, India requires $120 to $150 billion in the energy
sector in the course of the next five years.
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Steps to achieve energy security

 Actions to improve energy security can be classified broadly into two groups,
one that reduces risks and another that deals with the risks after they occur.
The major policy options are:

 Reducing Risks
 Reduce the requirement of energy by increasing efficiency in production
and use of energy – Govt. plans of introducing CFLs in the market;
 Look at global sources to stake equity – OVL pursuits in Africa, Russia, etc.
 Alternate energy
 
 Dealing with Risks Other risks
• Supply risks from domestic sources, such as
 Strategic storage from a strike in coal mines or the Railways need
 Infrastructure to be addressed
 Technology • Even if there is no disruption of supply, there can
be the market risk of a sudden increase in
 Having resources in place energy price.
• Even when the country has adequate energy
resources, technical failures may disrupt the
supply of energy to some people
Energy Security – Oil is Well 13

Price Risk Management

140
Brent
120
Crude prices have
100 moved to a USD 50+
80 per bbl level and the
risk of high crude
/b
l$

60
prices is now more
40
imminent than before.
20

The movement in crude prices has significant impact on the India economy
Close to 117 million barrels of oil gets traded every day and less than 15% of
that is actually accounted for by the producer and the seller both together –
denotes significant presence of funds and financial players.
Managing these risks is possible with alternatives and required for producers,
refineries and consumers
Energy Security – Oil is Well 14

Strengthening relationships

 India’s dependence on energy imports have also led to shift in the geopolitics of
energy in the region, leading to a possibility of the nation exerting greater influence
on oil exporting economies.

 Ensure safe passage in the region for sustained trade flows

 India’s has invested in strengthening its naval fleet to secure its energy sea
lanes to the Gulf regions.
 India has entered into defense pacts with a number of nations in the Middle East
 In recent past deployed warships in the Gulf of Aden in late 2008 to protect
Indian commercial shipping from pirates operating off the coast of Somalia.

 Advantage of trading this off for some concessions / preferences over resources in
the neighbouring countries
Energy Security – Oil is Well 15

To summarise –
Energy Security is achievable with focused
efforts!

Energy Policy directives on

requirements all fronts – difficult
of the and complex but
country possible with
persistence!
Energy Security – Oil is Well 16

Energy Security – a top priority for GoI

According to Prime Minister Manmohan Singh,

“The quest for energy security is second only in
[India’s] scheme of things to food security.´ the
quest for energy security had “become an
important element of Indian diplomacy and…
[was] shaping…[India’s] relations with a range of
countries across the globe.”

With such a strong commitment being shown by GoI, it is likely that policy
initiatives will be taken which will take the country towards energy
security !

Source: In an interview to a business magazine in

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Cairn India – A Journey of Growth

An Indian Energy
Company
• Listed on BSE & NSE Sustainability & Growth
• Part of NIFTY index
• Over 250,000 Indian
retail shareholders Exploration Success  World class resource base –
>1bn bbls reserves + resources
and growing
 Discovered Lakshmi,  $4.5bn Rajasthan development
Gauri including pipeline to Gujarat
Development Success 
Annapurna – India’s First coast
 Ravva deep-water discovery in
 Ravva – >200mmbbls
KG basin
Redevelopment produced; >50% ultimate
 Mangala – Largest recovery; $4bn to GOI
 3,500 to 50,000
onshore discovery in
bopd in 26 months
India since 1985

*Market
*Market Cap
Cap of
of Cairn
Cairn Energy
Energy PLC
PLC end
end 1999
1999
**Market
**Market Cap as
as of
of 18
18 January
January 2010
2010
Energy Security – Oil is Well 19

Existing Operations

Rajasthan (RJ-ON-90/1) Total 11 blocks

Cairn (Operator) 70% 2 Production Blocks

 Gross operated
ONGC 30%
Cambay (CB/OS-2) production 60,480
boepd (net to Cairn
Cairn 40% 18,638 boepd) *
(Operator) (Ravva, Cambay & RJ)
ONGC 50%
1 Production &
Tata Petrodyne 10%
Development Block
Ravva  Rajasthan block under
development – Mangala
Cairn 22.5%
(commenced production
(Operator)
in Aug’09), Bhagyam
ONGC 40% and Aishwariya
Videocon 25% fields(MBA)
 22 other discoveries
Ravva Oil 12.5%
8 Exploration Blocks
 4 operated – 3 in India
and 1 in Sri Lanka
*Q2
 4FY
*Q2 FY 2009-10
2009-10
non-operated
Provisional award of KG-OSN-2009/3 and MB-DWN-2009/1 blocks in NELP VIII bidding round; subject to GoI
 Energy for India

Queries to:
 
Karunakaran Hari - GM (International Trade)
Mobile: +919650698289
Email: karunkaran.hari@cairnindia.com
Energy Security – Oil is Well 21

Strategic storage being developed to mitigate oil

price volatility and availability risk
 On the same lines as the SPR of the IEA countries India plans to develop
crude oil storage capacity
 In 2004 GoI decided to develop strategic crude storage of 5 MTPA at three
locations
 Vizag (1 MTPA)
 Mangalore (1.5 MTPA)
 Padur (2.5 MTPA)
 Storage proposed to be developed by SPVs promoted by oil PSUs
 To be funded through the OIDB
 Projects which were earlier put on the back burner due to rising crude
prices, have been revived considering their strategic nature
Energy Security – Oil is Well 22

To summarise –
Energy Security is achievable with focused
efforts!
Crude
Imports – Natural Gas Renewable forms
increase Imports of energy
equity oil

Policy directives
on all fronts –
Energy Requirements of difficult and
the country complex but
possible with
persistence!

Increased E&P Reduce energy

– boost oil and Coal mining to consumption
gas production be given thrust through increase
in efficiency