Cairn India Angel Broking research report

1January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539November 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1

Cairn IndiaInitiating Coverage

Amit Vora

Tel: 022 - 4040 3800 Ext: 322

E-mail: [email protected]

Stock Info

REDUCEPrice Rs283

Target Price Rs253

Investment Period 12 months

Sector Oil & Gas

Market Cap (Rs cr) 53,647

Beta 0.9

52 Week High / Low 301/129

Avg Daily Volume 949613

Face Value (Rs) 10

BSE Sensex 17,022

Nifty 5,052

Shareholding Pattern (%)

Promoters 62.4

MF / Banks / Indian FIs 6.6

FII / NRIs / OCBs 25.7

Indian Public / Others 5.3

Abs. 3m 1yr #3yr

Sensex (%) 13.4 101.4 25.5

Cairn India (%) 17.3 118.2 105.7

BSE Code 532792

NSE Code CAIRN

Reuters Code CAIL.BO

Bloomberg Code CAIR@IN

Source: Company, Angel Research, Note: * Performance for 15 months period

Key Financials (Consolidated)Y/E March (Rs cr) CY2007 FY2009* FY2010E FY2011E

Net Sales 1,012 1,433 2,786 8,796

% chg 41.5 94.5 215.7

Net Profit (25) 803 990 4,770

% chg - 23.2 381.8

OPM (%) 43.5 60.5 66.6 80.9

EPS (Rs) (0.1) 4.2 5.2 25.2

P/E (x) - 66.8 54.2 11.2

P/BV (x) 1.8 1.6 1.6 1.5

RoE (%) (0.1) 2.4 2.9 13.3

RoCE (%) (0.0) 1.1 3.6 14.9

EV/Sales (x) 48.7 35.9 19.1 6.0

EV/EBITDA (x) 111.9 59.4 28.7 7.4

Simmering overCairn India’s (CIL) stock price has spiked more than 2.5x its October 2008 lows driven by strongcrude prices and gradual de-risking of the Rajasthan project. However, given our subdued outlookon long-term oil prices, we believe that the stock will underperform the markets going ahead. Atcurrent levels, the stock is discounting long-term crude prices of US $85.1/bbl, which is high andleaves no margin of safety. We believe that our long-term crude oil price assumption of US $75/bblis sufficient to incentivise incremental production going ahead. We Initiate Coverage on CILwith a Reduce rating and SOTP-based Target Price of Rs253/share.

Rajasthan Reserve accretion story priced in: We believe that the Rajasthan Reserveaccretion story is far from over despite the significant reserve upgrades, however the same iscaptured in current valuations. Apart from STOIIP of 2.1bnboe at MBA fields (currently underdevelopment), CIL also has 1.7bnboe of additional gross STOIIP in other fields. However, the2P reserves estimates of the same stands at 86mnboe, translating into a recovery rate of 5%,which is much lower than the 48% recovery of MBA fields. We expect recoverable reserve of172mnboe from these fields (10.1% recovery factor). However, the stock is currently discountinga high 18.5% recovery rate from these fields. This is very high as the recovery rate of 18.5%reflects incremental recoverable reserves of 316mnboe, an increase of 21% over the currentReserve estimate from the block.

Attractive Exploratory portfolio albeit too early to factor in: Any success in CIL’sExploratory portfolio beyond Rajasthan is likely to re-rate the stock. The stock is currentlydiscounting high exploratory success rate of 34%. We, however, believe that any meaningfulexploratory success is sometime away, as CIL's Exploratory portfolio comprises assets atearly stages of exploration. For valuing the Exploratory upside, we have factored in a probabilisticsuccess ratio of 8.0% of CIL's net un-risked prospective resources of 1,400mnboe.

Enhanced Oil Recovery (EOR) opportunity captured in valuation: Given the scale,EOR at MBA fields could be a challenging task as it is one of the largest field-wise EORimplementation across the globe. We have factored in EOR rate of 15% for the MBA fields.However, even if there is any improvement in EOR rate going ahead, we expect CIL to registerlimited benefit due to the high costs involved and back-ended nature of EOR volumes.

Deepak Pareek

Tel: 022 - 4040 3800 Ext: 340

E-mail: [email protected]

Note: #Since listing on Jan. 9, 2007


Cairn India

Oil & Gas

Table of Contents

Recommendation Arguments 3

Subdued Outlook on Crude impinging Valuation 3

Rajasthan Reserve accretion story priced in 4

Attractive Exploratory portfolio, but too early to factor in 6

EOR opportunity captured in valuations 7

Receding Concerns; Cess overhang persists 9

Technological prowess, excellent Management key positives 10

Risks to Recommendation 11

Financial Analysis 13

Outlook and Valuation 17

Target Price - Scenario analysis 26

Target Price - Sensitivity Analysis 27

Crude Oil Prices - Outlook 31

Historical trend of crude oil prices 31

Oil prices to decline in medium term 35

Long-term crude oil prices expected to remain firm 36

Crude oil prices v/s Upstream cost - F&D and Lifting costs 42

Industry Overview 45

Company Background 47

Asset Profile 51

Rajasthan Block: Infrastructure and development status 60

Pricing of Rajasthan crude 66

Annexure I - Reserves, Resources and their Recovery 68

Key Acronyms 72


Cairn India

Oil & Gas

Recommendation Arguments

Subdued outlook on crude impinging valuation

CIL is the only proxy play on crude oil prices amongst the listed E&P companies in India and itsstock has seen a strong correlation with crude oil prices. Compared to the other majors in thesegment, viz. ONGC, OIL India and RIL, CIL has the highest leverage to crude oil prices. ONGCand OIL India have to bear the subsidy burden, which weakens their correlation with the crude oilprices. In case of RIL, its upstream Revenues would largely accrue from gas sales going ahead.Thus, CIL is a proxy play on medium-term crude oil prices, especially considering the fact that thecommodities market in India does not provide long-term futures contract for crude oil. Thus, for aninvestor betting on increase/decrease in crude oil prices in the long run, CIL is an appropriateproxy play on the same.

On the bourses, the CIL stock demonstrated strong correlation of 0.88, 0.89 and 0.96 with crudein CY2007, CY2008 and CY2009 (till date), respectively. In fact, this correlation has onlystrengthened over the years. We believe this increasing correlation is largely a factor of reducingexecution risks associated with the Rajasthan project development. We believe that CIL's shareprice will continue to exhibit higher correlation with the crude oil prices over the near-to-mediumterm, barring any surprises in production schedules/newer discoveries.

Compared to other majors viz.ONGC, OIL India and RIL, CILhas the highest leverage tocrude oil prices

Source: Bloomberg, Angel Research

Exhibit 1: Correlation between Brent, CIL and ONGC

0

50

100

150

200

250

300

Jan

-07

Mar

-07

May

-07

Jul-

07

Sep

-07

Nov

-07

Jan

-08

Mar

-08

May

-08

Jul-

08

Sep

-08

Nov

-08

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

Nov

-09

CIL ONGC BRENT

(Rs)

Since its October 2008 lows, the CIL stock has spiked more than 2.5x driven by strong crude oilprices and gradual de-risking of the Rajasthan project. Given our outlook of subdued oil pricesgoing ahead, we believe CIL's stock is likely to underperform the benchmark indices.Our long-term crude oil estimates are pegged at US $75/bbl (FY2012 onwards). We believe thatthis will be sufficient to incentivise production from costlier sources such as Deepwater fields(refer - Crude Oil Prices - Outlook). Ceteris paribus, CIL's current market price of Rs283/sharediscounts crude oil price of US $85.1/bbl, which we believe is quite high and leaves no margin ofsafety for investors.

At Rs283, the CIL stockdiscounts crude oil price ofUS $85.1/bbl, which we believeis quite high and leaves nomargin of safety


Cairn India

Oil & Gas

One such resource play in other Rajasthan fields is the Barmer Hill formation, a reservoir lyingabove the Fatehgarh reservoir. Barmer Hill is low permeability reservoir, which is likely to result inlower recovery rates. Technical studies (fracture stimulation) are currently underway to gauge therecovery potential of the Barmer Hill formation. CIL management has estimated the Barmer Hillformation to have around 400mn barrels of STOIIP reserves. We believe conversion of thesecontingent resources to reserves will further augment CIL's reserve base.

Rajasthan Reserve accretion story priced in

We believe that the Rajasthan Reserve accretion story is far from over despite the significantreserve upgrades, however the same is captured in current valuations. CIL estimates an assetbase of 3.8bn barrels at the Rajasthan block, of which around 2.1bn barrels are currently underdevelopment, which has a total 2P + EOR resource base of 985mn barrels, translating into arecovery rate of 48%. Apart from core MBA currently under development, CIL has 1.7bnboe ofadditional gross STOIIP in small and other fields, with current 2P reserves of 86mnboe. Thistranslates into a recovery factor of 5% of the STOIIP, which is much lower than the 48% recoveryof core MBA fields at the Rajasthan block. Thus, there exists upside in terms of further reserveaddition at other Rajasthan fields. We believe leads from the developmental drilling could offerinteresting insights regarding the same and expect reserve accretions over the next 6-8 months.

Source: Company

Exhibit 3: Rajasthan Asset Base

1,293

468

293

2,054

300

1,408

3,762

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Mangala (M) Bhagyam (B) Aishwariya (A) Total MBA RajasthanSmall Fields

OtherRajasthan Fields

TotalRajasthan

Likely to augmentReserve base infuture

Inm

nboe

CIL has 1.7bnboe of additionalgross STOIIP in small andother fields, with current 2Preserves for the same at84mnboe, translating into arecovery factor of 5% of theSTOIIP, which is much lowerthan the 48% recovery of coreMBA at the Rajasthan block

Source: Company, Angel Research

Exhibit 2: Sensitivity with Crude and Exchange RateCrude Prices (US$/bbl)

60.0 65.0 70.0 75.0 80.0 85.0 90.042.0 197 212 229 246 254 265 281

43.0 201 216 234 247 255 271 287 44.0 203 221 238 248 260 277 293 45.0 207 225 243 253 265 282 299 46.0 211 230 248 258 271 288 305 47.0 215 234 249 258 276 294 306 48.0 219 239 254 263 281 299 312

Exch

ange

Rat

e(R

s/U

S$)


Cairn India

Oil & Gas

Source: Company

Exhibit 4: Barmer Hill formation

Reservoirs similar to Barmer Hill, across the world, have seen primary recoveries ranging between7-10%, while the secondary recovery has seen increase in output by 20%. Thus, cumulativerecovery from such fields has been close to 25-30%. For our valuation purposes, we have factoredin 10% recovery from the disclosed STOIIP for the Barmer Hill, which adds 40mmbl to recoverablereserves. This in turn boosts the gross recoverable reserve base at the block by 3.7%.

Overall, there exists reserve accretion potential from other fields as well. To factor in the upsidesfrom future reserve accretion, we have assumed recovery rate of 4% from Southern fields andrecovery rate of 10% from other Rajasthan fields. Thus, we anticipate 172mnboe of recoverablereserves from these fields (Barmer Hill, Southern fields and Other Rajasthan fields). Our estimatecaptures a recovery rate at 10.1% of 3P STOIIP from these fields, which is fair considering thatreserves are yet to be validated and recoveries in these fields are likely to be much lower thancore MBA fields due to poor reservoir characteristics.

Ceteris paribus, CIL’s current market price of Rs283/share is discounting a high 18.5% recoveryrate from other Rajasthan fields. This is very high considering that the recovery rate of 18.5%reflects recoverable reserves of 316mnboe, an increase of 21.1% over the current reserve estimatefrom the block. Thus, any disappointment on further reserve accretion at Rajasthan would adverselyimpact CIL's stock price.

Our recovery estimates largelyreflect in the CIL stock price,which in turn means that anypositive newsflows from thesefields would lead to nomeaningful valuation upsides

We believe the current marketprice of Rs283/share isdiscounting 18.5% Recoveryrate from the other Rajasthanfields


Cairn India

Oil & Gas

Attractive Exploratory portfolio albeit too early to factor in

CIL is largely a single asset company with 92.3% of its net 2P reserves situated in Rajasthanblock. This has resulted in it being viewed as a finite entity instead of a perpetual entity. Hence, wehave valued the company on asset-based NAV basis than on cash flow multiple. Nonetheless, webelieve that exploratory success in the newer geographies could change perception of CIL beinga finite entity. Success in it exploratory portfolio beyond Rajasthan will also re-rate its valuation.Thus, further discoveries will not only add to the valuation from the reserves perspective, but willalso change perception and the valuation methodology for CIL going ahead.

CIL estimates 1.4bnboe of net un-risked prospective resources in its Exploratory portfolio, whichhas increased significantly over the last couple of years. The risked estimate of the same standsat around 112mnboe, which reflects the probabilistic success ratio of 8.0%. The company's currentsuccess ratio is at a high 40%.

CIL's current success ratio isat a high 40%

We believe the lower success ratio for future discoveries is largely due to the fact that much of theun-risked prospective resources are situated in the frontier and emerging plays based on diversityof the basins. However, 61% of the same is situated in the highly prospective deepwater blocks.

Source: Company

Exhibit 6: Composition of Exploratory blocks

Source: Company

Exhibit 5: Net Un-risked Prospective Resource

-

500

1,000

1,500

2007 2008 2009

imnboe

61% of CIL’s net un-riskedprospective resource issituated in the highlyprospective deepwater blocks

Further discoveries will add tothe valuation from the reservesperspective and changeperception and valuationmethodology for CIL goingahead


Cairn India

Oil & Gas

We, however, believe that any meaningful exploratory success is sometime away as CIL’s assetportfolio comprises assets at early exploration stage. Hence, to factor in a meaningful exploratoryupside at the current juncture would be premature. In line with the same, we have factored in aprobabilistic success ratio of 8.0% for CIL’s Exploratory portfolio. However, ceteris paribus,current market price of Rs283/share reflects high Exploratory success rate of 34%.

Enhanced Oil Recovery opportunity captured in valuation

In its bid to extend plateau production from the Rajasthan block, CIL is likely to undertake EOR.CILestimates possible approvals for an off-take rate based EOR by 2011E and field-wiseimplementation of the same from 2016E onwards. Successful implementation of EOR will alsoresult in extension of CIL's peak plateau production from the Rajasthan block to 8-9 years. CILplans to utilise polymer and alkaline-surfactant-polymer (ASP) flooding to enhance cruderecovery from the block. We, however, expect CIL to register limited benefits from EORimplementation due to high cost involved and back ended nature of EOR volumes.

Source: Company

Exhibit 7: Exploration - Ongoing Programme

RJ-ONN-2003/1 GV-ONN-2002/1GV-ONN-2003/1VN-ONN-2003/1

2 to 4 wells Complete drilling

operations, decision

on Phase II

Complete 550 km 2D

seismic; processing

and interpretation

Finish processing of

2D seismic. Decision

on Phase II

RJ-ON-90/1

Focus on material

resource additions

RAVVA

KG-ONN-2003/1

2 wells 2009

3 wells 2010

INDIA RAVVA

Planning appraisal &

exploration wells to

support production

KG DWN 98/2

INDIA

KK DWN 2004/1

GS-OSN-2003/1

1 well in 2010

KG-DWN-98/2

3 wells 2009; Ultra-

deep drilling 2010

SL-2007-01-001

KK-DWN-2004/1

Complete 3,800 km

2D. Processing and

Interpretation

PR-OSN-2004/1SL 2007 01 001

Seismic:5,000km 2D,

1,000km2 3D by 2010

Drilling 2011

SRI LANKA

PR-OSN-2004/1

800 km2, 2010

Drilling 2011NON-OPERATED

OPERATED

We believe that anymeaningful exploratorysuccess is sometime away asCIL’s asset portfoliocomprises assets at earlyexploration stage

We have factored in aprobabilistic success ratio of8.0% for CIL’sExploratory portfolio

Source: Company

Exhibit 8: EOR likely to extend plateau production period

S h ti

EORPotential to

175,000

b d

Initial targeted

plateau production

Schematic

Potential toextend andenhanceplateau

lR

ate

bopdp p

MBA Water flood

Oi

10 YearsQ3 2009


Cairn India

Oil & Gas

Source: Company

Exhibit 10: Daqing - ASP Pilot performance

Application of EOR technique elsewhere in the world has also provided much higher yield than15%, as anticipated by CIL. Daqing and Shengli (the two large fields in China) produced close to100mnbbl oil per annum through polymer flooding. At the Daqing field in China, ASP pilot(EOR method) is in application since 1994 and yielded incremental production of around 25%.Similarly, the ASP pilot at Shengli has yielded more than 20% recovery.

Given the scale, EOR at MBA could be a challenging task as it is one of the largest field-wiseimplementation of EOR across the globe. Consequently, we are currently factoring in incrementalrecovery rate of 15% from EOR as per company guidance. But, we believe EOR potential islargely factored in current valuations. Even if there is any improvement in EOR-based recoveryrate going ahead, we believe it will not add significantly to valuations, as EOR volumes are likelyto be back-ended.

CIL has conducted pilot and lab tests for implementation of EOR, which has yielded positiveresults (laboratory test indicate a 30-40% incremental recovery potential through EORtechniques). CIL claims EOR will approximately add 15% to the recovery factor for the MBA fields.

Source: Company

Exhibit 9: Laboratory test - Incremental ASP recovery post water floodingTime

Cum

ulativeO

il,%

Oil

Cut

, %

Cum Oil

Cum Cut

Currently, CIL claims EOR willapproximately add 15% to therecovery factor for the MBAfields

Even if there is anyimprovement in EOR-basedrecovery rate going ahead, webelieve it will not addsignificantly to valuations, asEOR volumes are likely to beback-ended


Cairn India

Oil & Gas

Receding concerns; Cess overhang persists

Since listing, the two major factors that have impacted CIL's stock price include crude oil prices(base price as well as discount on the same) and development updates relating to the scheduleddelivery of oil. Concerns/ lack of visibility in terms of discount on the quality of crude and timelycompletion of the pipeline had impacted the stock performance in the past.

Major issues and concerns regarding timing of the monetisation of the reserves have however,been addressed by production of first oil and likely completion of pipeline by early 2010. Also,concerns over the pricing of Rajasthan crude oil have also been resolved. Overall,commencement of oil production has resulted in gradual de-risking of the Rajasthan project. This,we believe, would cushion the stock from any significant correction in crude oil prices going ahead.

Major concerns regardingtiming of the monetisation ofthe reserves have beenaddressed followingproduction of first oil and likelycompletion of pipeline by early2010

We believe that CIL has an upper hand on the Cess front. We have assumed cess of Rs927/tonneover the life of the field (cess at the time of signing of the PSC) for valuation purposes. However,if CIL pays no cess on its share of crude production, our Target Price (ceteris paribus) wouldincrease by Rs8/share, up 3.0% to Rs261/share. In case of adverse ruling (cess liabilitydetermined at Rs2,575/tonne), our Fair Value would reduce by Rs16/share, a decline of 6.3% toRs237/share. Thus, outcome of the cess issue will continue to be an overhang on stock valuationsin the medium term.

Outcome of the cess issue willcontinue to be an overhang onstock valuations in themedium term

Source: Company, Angel Research; Note: RoU - Right of Usage of land for building of pipeline

Exhibit 11: Key Concerns phasing outIssue Resolved Comments

Pipeline from MPT to Salaya Yes Construction of the pipleline from MPT to Salaya hasbeen completed (560km built out of total 590kmproposed to be built).

Crude off-take Yes CIL has been allowed to sell crude to multiplenominees by the government (public and privaterefiners) and sufficient allocation has been made fornear term in line with production levels. The exportoption has also been provided in the event ofinsufficient demand.

Pricing of crude Yes Pricing of crude oil has been fixed at a discount tothe bonny light prices based on the GWP of theproduct slate.

Execution Risk Partially Delivery of first oil in Rajasthan has led to lowerexecution risks.


Cairn India

Oil & Gas

Technological prowess, excellent Management key positives

CIL is a proven explorer of hydrocarbon having achieved a good success ratio of 40%. CIL hasbeen involved in three of the seven major discoveries in India over the past decade. Much of thecredit for the company's superior exploration capabilities is attributed to its experiencedmanagement and application of best-in-class technology. CILs' exploratory prowess is wellexemplified by its historic success at the Rajasthan block. Notably, when Shell (original owner ofthe Rajasthan block) was reducing its stake in the block due to lack of exploratory success, CIL,based on feedback of its exploratory team, increased its stake in the block and acquired fullinterest in the block in 2003. Post acquisition of the block, CIL reported major discoveries of theMangala, Bhagyam and Aishwariya (MBA) fields. Till date, CIL has made 25 discoveries in theblock. CIL’s exploratory success is attributed to application of superior technology such as soundpetroleum modeling system and seismic data application.

CILs' exploratory prowess iswell exemplified by its historicsuccess at the Rajasthan block

Adoption of advanced methods to enhance production coupled with excellent reservoirmanagement skills are evident from CIL's track record at the Ravva field, where it farmed-in asoperator in 1994 and has since significantly ramped up production from 4,500boepd to 50,000boepdover the next five years. Moreover, reserves in the block have doubled along with a recoveryfactor of over 60% (which is at the higher end of the global standard).

Much credit for CIL's superior technology is attributed to excellent management, which despitehiccups, delivered the first oil in the Rajasthan block in line with its guidance. The Rajasthan block( new hydrocarbon basin), which is not connected to any existing industry infrastructure, is one ofthe largest projects undertaken by CIL and meeting the delivery schedule is a positive. CIL is alsobuilding a pipeline for crude evacuation from the block.

We believe that the key differentiating factors for players in the E&P industry are managementquality and technological prowess. Pertinently, CIL outshines its PSU peers on both these fronts.

The key differentiating factorsfor players in the E&Pindustry are managementquality and technologicalprowess

Source: Company

Exhibit 12: Advanced Technology in use

INDIA

OLD

Cairn reprocessed

Reprocessed and enhanced

regional gravity data used in

integrated basin modeling

Acquisition and

processing of “best

in class” seismic data

in KG and Palar

BasinsFully integrated Petroleum

systems modeling


Cairn India

Oil & Gas

Risks to RecommendationOil price fluctuations

CIL’s Fair Value has high sensitivity to crude oil prices. We believe that CIL is a proxy play oncrude as demonstrated by the strong correlation of its stock price with crude of 0.88, 0.89 and 0.96in CY2007, CY2008 and CY2009, respectively. Thus, if oil prices were to continue trading stronggoing ahead, there exists high chance of CIL's stock price ruling at the higher than our Fair Valueestimate. A higher oil price environment and/or lower discount for Rajasthan crude, poses anupside risk to our estimate. However, the current stock price is discounting long-term crude oilprices of US$85.1/bbl owing to which the risk-reward ratio of investing in the stock in not favourable.Thus, large upside to valuation from sustainable higher oil prices is unlikely.

Variability in recovery rates

CIL has conducted substantial investigations to employ EOR, but there remains a risk that EORmay not be as effective as the company anticipates it to be. We have assumed polymer and ASPflooding to lift incremental crude recovery at Rajasthan from 33.4% (water flooding) to 48.3%,translating into additional recovery of around 15.0%. We have ascribed a value of Rs19/share forsuccessful EOR execution by CIL, which constitutes almost 7.5% of our Fair Value. Thus, successfulimplementation of EOR is important for the company. We believe our estimates of EOR recoveryare quite fair in spite of the fact that similar fields, across the world, have yielded incrementalrecovery in the range of 20-25%. However, as EOR application at MBA is one of the largest onearound the globe, there exists a technical risk owing to which we have factored in lower recoveryrate, in line with the current management guidance.

Execution risk/delays in ramp up

Though production from the Mangala field has commenced, peak production and ramp up inproduction from the MBA fields is contingent on allocation of further volumes to various refineriesby the government. Currently, the government has allocated volumes of 0.7MMTPA and 2.4MMTPAfor FY2010 and FY2011, respectively. However, we expect higher production forecasts for FY2010and FY2011 at 1.3MMTPA and 5.5MMTPA respectively. Thus, it would require further allocation of0.59MMTPA and 3.08MMTPA of crude oil to other refineries. However, following the recentagreement between CIL and RIL, un-allocated volumes from the MBA fields would be lower thanmentioned earlier(volumes tied-up not disclosed by CIL). Pertinently, the risks associated withslower ramp up in production have reduced considerably as the government recently has giventhe go ahead for sales of MBA crude to private refineries as well.

Volumes allocated to PSU Refineries (MMTPA) FY2010E FY2011EHPCL 0.3 0.5MRPL 0.2 0.4IOCL 0.2 1.5Total 0.7 2.4Production Forecast 1.3 5.5Balance Quantity 0.6 3.1as % of production forecast 45.7 56.2

Exhibit 13: Unallocated volumes of MBA production

Source: Infraline, Angel Research


Cairn India

Oil & Gas

Similarly, any delays in commissioning of the crude oil pipeline would also lead to delays inramp up of production from the MBA fields.

Uncertainty over Cess /Regulatory issues

We do not see immediate resolution of the cess issue for the Rajasthan block. The key issue ofcontention beteween CIL and GoI is who is liable to pay the cess and at what rate. CIL believesthat the responsibility of payment of cess lies with the licensee of the block ie. ONGC in this case,and the joint venture partners are not liable to pay the cess. While the GoI believes that as thePSC provisions does not mention the cess obligation, CIL is also liable to pay it. Secondly, theissue of rate of cess applicable also remains unresolved. CIL maintains that the cess payable isRs 927/tonne as the PSC states the fiscal liability clause and the rate of cess was Rs900/tonne atthe time of signing the contract. However, GoI has asked CIL to pay cess at the current rate. Whilethe matter is under arbitration, CIL is currently paying higher cess under protest at the rate ofRs2,575/tonne. We believe the matter would most likely be settled in favour of CIL and it would berequired to pay cess at the rate of Rs927/tonne. Higher cess payment than our estimate would bea negative for CIL by Rs16/share. Conversely, if CIL is exempt from paying the cess, it wouldincrease our Fair Value by Rs8/share.

Exchange rate fluctuations

Realisation from crude production from CIL's assets is US Dollar denominated. Therefore, anyappreciation/depreciation of the Rupee from our estimates would impact valuations. For everyRe1 appreciation in our long-term Rupee assumption (FY2012E onwards) of Rs/US $45, our FairValue would be adversely impacted by 2.0%.

E&P write-off risk

Much alike other E&P companies, CIL faces the E&P write-off risk (exploratory risk) in its E&Pbusiness. The company may have to write off E&P expenditure on dry wells if it does not meet withcommensurate success on its E&P capex. This could in turn impact Profitability of the company.


Cairn India

Oil & Gas

Financial Analysis - Production to ramp up in FY2013E

Volume and Sales Outlook

We expect production from the MBA fields to fully ramp up in FY2013E. We have assumed MBApeak production of 180,000bpd (Net working Interest 126,000bpd) from FY2013E, with the Mangalafield expected to achieve peak production of 125,000bpd (Net working Interest 87,500bpd) inFY2012E. The Bhagyam and Aishwariya fields are expected to achieve peak production of40,000bpd (Net working Interest 28,000bpd) and 15,000bpd (Net working Interest 10,500bpd) inFY2012E and FY2013E, respectively. In FY2009, Cairn's production from its extant (Ravva andCambay) fields stood at 66,146boepd (Net working Interest 17,264boepd). By FY2013E, we expecttotal production from all the fields at 244,932boepd (Net working Interest 143,912boepd), registeringa CAGR of 94.1% over FY2009-13E. Post this period, natural decline in production based onwater flooding will commence. However, with commencement of EOR, production at Rajasthanblock is likely to sustain for the subsequent 4-5 years. We expect on a Net working interest basis,production is expected to increase 8.3x by FY2013E over FY2009 production levels. The MBAfields are likely to account for majority of the company's total production by FY2013E.

Exhibit 14: Key Operating AssumptionsParticulars FY2010E FY2011E FY2012E FY2013EProduction estimatesRajasthan Gross productionMangala 9.5 40.2 45.6 45.6Bhagyam - 0.9 12.8 14.6Aishwariya - - 3.7 5.5Total Rajasthan (mn barrels) 9.5 41.1 62.1 65.7Ravva Gross productionGas (bcm) 0.49 0.49 0.47 0.37Crude oil (MMTPA) 2.1 2.1 2.0 2.0Ravva O+OEG (MMTOE) 2.6 2.5 2.4 2.3Ravva O+OEG (mnboe) 19.0 18.5 17.9 16.8Cambay Gross productionGas (bcm) 0.49 0.49 0.49 0.49Crude oil (MMTPA) 0.5 0.5 0.5 0.5Cambay O+OEG (MMTOE) 0.9 0.9 0.9 0.9Cambay O+OEG (mnboe) 6.9 6.9 6.9 6.9Key Pricing assumptionsBrent Crude (US $) 67.0 70.0 75.0 75.0Discount for MBA crude (%) 15.0 15.0 15.0 15.0Opex Rajasthan (US $/bbl) 10.0 5.0 4.0 4.0



Cairn India

Oil & Gas


Exhibit 16: Sales Growth Trend

41.5

94.5

215.7

48.8

(9.9)

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY2009 FY2010E FY2011E FY2012E FY2013E

%Rs

cr

Total Reported Sales Sales growth (RHS)

On the Realisation front, we have assumed Brent crude price at US $67/bbl for FY2010E,US $70/bbl for FY2011E and US $75/bbl FY2012E onwards and applied a discount of 15% toarrive at the selling price for MBA crude (in line with the company guidance). Thus, on the back ofhigher Volume growth, we expect Top-line to register a CAGR of 69.4% over FY2009-13E.

Source: Company

Exhibit 15 : Rajasthan Monetisation to increase Production

0

20

40

60

80

100

120

140

160

FY2009 FY2010E FY2011E FY2012E FY2013E

'000

boep

d(O

nW

Ibas

is)

OPM to touch a high of 83.6% in FY2012E, decline thereafter

We have assumed US $4.0/bbl as cash Opex and US $1.5/bbl as pipeline expenditure for theMBA fields. However, to sustain peak production over the life of the field, EOR will be employed inturn increasing the cost of production. We have assumed (as per company guidance)US $11.0/bbl as cost of production for EOR volumes. There is no Royalty for the Rajasthan block,whereas we assume cess at Rs927/tonne for valuation purposes. Similarly, as per the PSC,Royalty and cess are nil for CB-OS-2 block, whereas Royalty stands at Rs481/tonne and cess atRs927/tonne for the Ravva block. With this, total direct Opex/bbl is expected to hover in the rangeof US $8-8.5/bbl in pre-EOR application phase.


Cairn India

Oil & Gas

Profits to grow eight-folds by FY2013 over FY2009

We estimate Total Recouped costs to increase by 38.3% CAGR over FY2009-13E, with depletionexpected to be a major cost head. Depletion cost is expected to be around US $5.5/bbl over thelife of the Rajasthan field. On the Borrowings front, on account of the significant cash generation,we expect Cairn to repay its entire debt in FY2013E and become a Debt-free company resulting innil Interest costs thereon. The company's effective Tax rate is also likely to be lower on account ofthe benefits arising from the seven-year tax holiday that the MBA fields would avail. We estimatethe company's effective Tax rate at around 18.6% in FY2013E. We expect CIL to register 69.2%CAGR in PAT over FY2009-13E, an eight-fold growth over FY2009 levels.


Exhibit 18: PAT Margin Trend

56.1

35.5

54.2

58.1 55.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY2009 FY2010E FY2011E FY2012E FY2013E

%

Rs

cr

PAT PAT Margin (RHS)

With ramp up of production at the MBA fields, OPM is expected to expand by 2,310bp from 60.5%in FY2009 to 83.6% in FY2012. However, these robust Margins will come off slowly withincreasing cost pressures (on account of EOR application) and hover at 60-65% levels towardsthe later part of life of the field. On the back of OPM expansion and healthy Top-line growth, weestimate 82.2% CAGR in EBITDA over FY2009-13E.


Exhibit 17: OPM Trend

60.566.6

80.9

83.6 81.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0

2,000

4,000

6,000

8,000

10,000

12,000

FY2009 FY2010E FY2011E FY2012E FY2013E

%

Rs

cr

EBITDA OPM (RHS)


Cairn India

Oil & Gas

RoE / RoCE to increase on commencement of production from MBA fields

In FY2009, CIL's RoCE and RoE stood at a low 1.1% and 2.4%, respectively. However, with thecommencement of production at the MBA fields, the company's Return Ratios are set to improve.Thus, we expect the MBA fields to be major Revenue and Profit drivers for the company goingahead. In FY2012E and FY2013E, we expect CIL to register RoCE of 22.4% and 19.9% respectively.During the mentioned years, we expect CIL to register RoE of 20.5% and 17.7%, respectively.


Exhibit 19: DuPont AnalysisParticulars (x) CY2007 FY2009 FY2010E FY2011E FY2012E FY2013EPAT / PBT (0.19) 0.81 0.73 0.80 0.81 0.81PBT / EBIT (25.86) 2.31 0.98 0.98 0.99 1.02EBIT / Sales (0.00) 0.30 0.48 0.69 0.72 0.67Sales / Total Assets 0.03 0.04 0.07 0.22 0.31 0.29Total Assets / Net worth 1.03 1.15 1.15 1.14 1.13 1.08RoE (%) (0.1) 2.4 2.9 13.3 20.5 17.7


Cairn India

Oil & Gas

Outlook and Valuation

Outlook

Since its October 2008 lows, the CIL stock has spiked more than 2.5x driven by strong crude oilprices and gradual de-risking of the Rajasthan project. In the past as well, CIL has demonstratedstrong correlation with the crude oil prices, which we expect will continue going ahead as well.Thus, we see CIL as a proxy play on crude oil prices. However, given our outlook of weaker oilprices going ahead, we believe CIL's stock is likely to underperform the benchmark indices.

Development work on the Rajasthan block is progressing well with production from the first trainhaving started, while production from Train-II is likely to commence in early 2010, followed byTrain-III in 1H2010 and Train-IV in 2012. Moreover, with recent approval of sales of crude oil to theprivate refineries, we believe production growth is unlikely to be constrained on account of allocationof sufficient volumes. Thus, we believe that the Rajasthan project will continue to further de-riskgoing ahead. However, the cess issue is likely to be a major overhang on the stock price over themedium term.

Valuation Methodology

We have valued CIL based on the asset-based NAV rather than perpetual going concern due to itspresent single-asset nature. This in turn implies that we value CIL as a finite entity, which willexhaust all its known reserves, and post which the company will cease its operations. Thus, theasset-based NAV calculation does not consider the reinvestment capability of the company resultingin lower valuations compared to valuation of a going concern entity. We believe exploratory successbeyond the Rajasthan block would likely change the perception and valuations methodology forCIL, though it could be some time away.

We prefer the NAV method to value CIL's assets (viz. MBA block, Ravva field and Cambay fields)as it has long-term visible cash flows arising out of its existing resource base, the value of whichcannot be captured using the traditional near-term Earnings multiples. Also, the varying profitpetroleum component makes valuations possible only on NAV basis. Moreover, separate NAVmethodology for each asset is best suited for valuing CIL as these assets are at different stages inthe sharing of government entitlement of the profit petroleum.

In order to value the development upsides from the Rajasthan field, we have used EV/boe as anappropriate mechanism, as the timeline for monetisation of these assets are still not clear and noFDP has been prepared for these assets. We have valued Barmer Hill, Southern fields and otherfields in Rajasthan based on implied EV/boe of core MBA fields(FY2011 - US $12.4/bbl).

At the plateau production rate, CIL will generate large amounts of Free Cash flows, which in turnleads to FCF yields of around 10-15% for initial few years. However, the FCF yields are likely todecline with increase in the government share of profit petroleum. Moreover, the increasing costof production on account of incremental EOR barrels is likely to reduce the FCF going ahead. Webelieve, CIL is likely to generate FCF of US $33bn from its Rajasthan field, over the life, with largepart of the same likely to be generate in first ten year US$20bn (62% of the life of field FCF). Thus,


Cairn India

Oil & Gas

the valuations based on the FCF is inappropriate, till a clear re-investment plan is put in place bythe company, thus we believe NAV based valuation is best suited for valuing the company. CIL'smanagement has kept away from providing guidance on possible re-deployment of the huge cashflows generated by the company. CIL has a good exploration track record, but the large cash it willgenerate is unlikely to be consumed entirely by its exploration segment. In event of non-complianceof liberal dividend policy, we believe there is risk of deployment of free cash in lower returnbusinesses. Another possible deployment of the cash would be an acquisition of producing property,however buying the same would lead to little value creation for the company.

Valuation

We have valued CIL on SOTP methodology including sum of NAV-based valuation of the MBAfields, Ravva and Cambay assets, while the others assets (developmental and Exploratory upsides)have been valued on EV/boe basis. We have valued potential EOR upside of 308mn barrels of oilrecovery from Rajasthan block separately. Thus, we have valued the MBA fields - base and EORproduction - separately. Our NAV calculation is based on long-term crude oil prices of US $75/bbl.We have calculated CIL's NAV by estimating cash flows on asset-by-asset basis with the associatedassumptions for production profile, oil/gas pricing, royalty/cess, opex, and fiscal terms.


Cairn India

Oil & Gas


Exhibit 20: Summary of Sum-of-the-Parts Valuation (SOTP)Particulars (Rs cr) FY2010E FY2011ERajasthan BlockRJ-ON-90/1(MBA block) 29,945 35,380Value per share 158 187RJ-ON-90/1(MBA EOR) 3,282 3,676Value per share 17 19RJ-ON-90/1(Barmer Hill) 2,032 2,388Value per share 11 13RJ-ON-90/1(Southern fields) 406 478Value per share 2 3RJ-ON-90/1(Other fields) 3,414 4,012Value per share 18 21Total Value of Rajasthan Block 39,079 45,934Value per share 206 242CB-OS-2 729 575Value per share 4 3Ravva 2,010 1,828Value per share 11 10Upside potential (KG-DWN-98/2) 278 302Value per share 1 2Exploratory porfolio upsides 1,596 1,731Value per share 8 9Total Asset value 43,693 50,371Less: Corporate expenditure 2,487 2,414Value per share 13 13Less: Net debt (33) (120)Value per share (0) (1)Equity value 41,239 48,076Equity shares (cr) 190 190Equity value per share 217 253

Source: Angel Research

Exhibit 21: Fair Value break-up (FY2011E)

187

1913 3

21 242 310 2

9 1 (12.7)253

130

155

180

205

230

255

280

MB

A(b

ase

Pro

d.)

MB

AE

OR

Barm

er

Hill

South

ern

field

s

Oth

er

field

s

Tota

l Raja

sthan

Blo

ck

CB

-OS

-2

Ravv

a

KG

-DW

N-9

8/2

Exp

lora

tory

upsi

des

NetC

ash

Corp

ora

teexp

enditu

re

Valu

eper

share

Rs/

share


Cairn India

Oil & Gas

Asset-wise, CIL's Rajasthan block accounts for 96% (Rs242/share) of its value and is the biggestcontributor to our Target Valuation. This value is derived from the MBA fields and furtherdevelopmental upside from the Rajasthan block. Extant fields, viz. Ravva and Cambay form just5.0% of our estimated Fair Value as these assets are mature and are in decline phase. Exploratoryupsides form around 4.3% of our estimates. As we value CIL based on asset based NAV, weseperately deduct the value of Present value of future corporate expenditure, which impacts ourtarget price by Rs13/share.

Valuation of Rajasthan Fields

Rajasthan field (RJ-ON-90/1) is the key asset of the CIL. We have valued the same factoring inreserve at the core MBA fields and developmental upsides from Barmer hill, Southern fields andother fields. We have valued the MBA fields (including EOR) at Rs206/share, while thedevelopmental upsides constitute Rs37/share. Our NAV for the MBA fields implies an EV/boe ofUS $12.4/bbl (end FY2011E, on 2P + EOR reserves) on CIL's Net Entitlement of crude.

Valuation of the MBA fields

Key assumptions for estimating cash flows from the MBA fields include:

We have assumed the Mangala field to commence production in September 2009, Bhagyamin April 2010 and Aishwariya in April 2011.

Production profile includes EOR plateauing at 1,80,000bpd in FY2013E with a plateau productionperiod of eight years. Including EOR, we have assumed implied gross recovery of 981mnbblover FY2010-41E (proposed period under the FDP).

Total life of field development capex of US $3.4bn (net to CIL) including US $932mn to bespent on pipeline.

Crude realisation is based on 15% discount to Brent (in line with company's guidance, buthigher than the benchmark Duri-Widhuri crude).

Cash direct opex is assumed at US $4.0/boe (FY2012E onwards) and at US $11.0/boe forincremental barrels under EOR. Opex for FY2010E and FY2011E is assumed at US $10/bbland US $5/bbl, which is higher than normalised capex due to trucking. We estimate pipelineopex of US $1.5/bbl.

Profit Petroleum is calculated after recovering the cumulative F&D investment and Opex. Thegovernment's share of Profit Petroleum starts from FY2012E at 20% and remains at this leveltill FY2014E. However, the same increases to 30% in FY2015E and further to 50% in FY2016E.FY2017E onwards, the government share remains at 50% for the rest of the life of the field.

Tax holiday of seven years has been assumed on CIL's share of taxable profits. However, asper Indian Tax laws, MAT payable during the period will be eligible for set off against theapplicable tax liability (foreign company tax rate of 42%) beyond the tax holiday period.

There is no royalty on CIL for the Rajasthan block. However, there is lack of clarity on theliability of cess and the same is under dispute. Though the PSC does not specifically mentionthe cess, the government has asked CIL to pay cess at the current rate of 2,550/MT. We haveassumed cess of Rs927/MT as CIL should be able to invoke the fiscal stability provisions of thePSC, thus limiting the applicable rate of cess at Rs927/MT (at the time of execution of the PSCin 1995). Though it is a recoverable cost and results in reduction in Profit Petroleum, it reducesCIL's cash flows thus having a material impact on NAV.

Particulars FY2010E FY2011E

PV of free cash flow (Rs cr) 33,227 39,056

PV of free cash flow (US$ mn) 6,995 8,490

Implied share price (Rs) 175 206

Implied EV/boe US$ 10.2 12.4


Cairn India

Oil & GasEx

hibi

t 22:

NAV

Val

uatio

n of

MB

A fie

lds

(incl

udin

g EO

R) @

dis

coun

t rat

e of

12%

Part

icul

ars

(Rs

cr)

FY20

09FY

2010

EFY

2011

EFY

2012

EFY

2013

EFY

2014

EFY

2015

EFY

2016

EFY

2017

EFY

2018

EFY

2019

EFY

2020

EFY

2021

FY20

22FY

2023

FY20

24FY

2025

Ann

ual P

rodu

ctio

n (m

n bb

ls)

- 6

.6 2

8.7

43.

4 4

6.0

46.

0 4

6.0

46.

0 4

6.0

46.

0 4

6.0

46.

0 4

0.3

33.

6 2

7.9

23.

3 1

9.4

Cum

ulat

ive

prod

uctio

n (m

n bb

ls)

- 6

.6 3

5.4

78.

8 1

24.8

170

.8 2

16.8

262

.7 3

08.7

354

.7 4

00.7

446

.7 4

87.0

520

.6 5

48.5

571

.8 5

91.2

Rev

enue

s -

1,8

03 7

,833

12,

409

13,

139

13,

139

13,

139

13,

139

13,

139

13,

139

13,

139

13,

139

11,

524

9,5

86 7

,980

6,6

51 5

,549

Cos

t pet

role

um -

1,8

03 7

,833

11,

192

1,7

51 1

,751

1,7

51 1

,751

1,9

46 2

,187

2,3

81 2

,506

2,2

42 1

,877

1,5

72 1

,318

1,1

06

Pro

fit p

etro

leum

- -

- 9

74 9

,110

9,1

10 6

,833

5,6

94 5

,597

5,4

76 5

,379

5,3

17 4

,641

3,8

54 3

,204

2,6

66 2

,221

less

Pro

duct

ion

cost

s -

(314

) (7

93)

(1,0

75)

(1,1

38)

(1,1

38)

(1,1

38)

(1,1

38)

(1,3

33)

(1,5

73)

(1,7

67)

(1,9

24)

(1,7

32)

(1,4

53)

(1,2

19)

(1,0

24)

(861

)

less

Roy

alty

/ces

s -

(84)

(363

) (5

49)

(582

) (5

82)

(582

) (5

82)

(582

) (5

82)

(582

) (5

82)

(510

) (4

24)

(353

) (2

94)

(246

)

Pre

-tax

net c

ash

inco

me

- 1

,405

6,6

76 1

0,54

2 9

,142

9,1

42 6

,864

5,7

26 5

,628

5,5

08 5

,411

5,3

17 4

,641

3,8

54 3

,204

2,6

66 2

,221

less

tax

- (2

20)

(1,0

36)

(1,6

11)

(1,3

62)

(1,3

62)

(974

) (7

80)

- -

- (1

,718

) (1

,535

) (1

,275

) (1

,059

) (8

81)

(734

)

Net

cas

h in

com

e -

1,1

85 5

,641

8,9

31 7

,780

7,7

80 5

,890

4,9

45 5

,628

5,5

08 5

,411

3,5

99 3

,106

2,5

80 2

,145

1,7

85 1

,488

Exp

lora

tion

cost

s (2

,790

) -

- -

- -

- -

- -

- -

- -

- -

-

Dev

elop

men

t cos

ts (6

,300

) (2

,826

) (2

,898

) (2

,835

) (3

2) (3

2) (3

2) (3

2) (3

2) (3

2) (3

2) -

- -

- -

-

Inve

stm

ent

(9,0

90)

(2,8

26)

(2,8

98)

(2,8

35)

(32)

(32)

(32)

(32)

(32)

(32)

(32)

- -

- -

- -

Free

cas

h flo

w (9

,090

) (1

,641

) 2

,743

6,0

96 7

,748

7,7

49 5

,859

4,9

14 5

,597

5,4

76 5

,379

3,5

99 3

,106

2,5

80 2

,145

1,7

85 1

,488

DC

F -

(1,6

41)

2,4

49 4

,858

5,5

13 4

,923

3,3

23 2

,488

2,5

30 2

,210

1,9

39 1

,158

892

662

491

365

271

DC

F-1

year

forw

ard

- -

2,7

43 5

,442

6,1

75 5

,514

3,7

22 2

,787

2,8

34 2

,476

2,1

71 1

,297

999

741

550

409

304

Part

icul

ars

(Rs

cr)

FY20

26FY

2027

FY20

28FY

2029

FY20

30FY

2031

FY20

32FY

2033

FY20

34FY

2035

FY20

36E

FY20

37E

FY20

38E

FY20

39E

FY20

40E

FY20

41E

Ann

ual P

rodu

ctio

n (m

n bb

ls)

16.

2 1

3.6

11.

4 9

.5 8

.0 6

.7 5

.7 4

.8 4

.1 3

.4 2

.9 2

.5 2

.1 1

.8 1

.6 1

.3

Cum

ulat

ive

prod

uctio

n (m

n bb

ls)

607

.4 6

21.0

632

.4 6

41.9

649

.9 6

56.6

662

.3 6

67.1

671

.2 6

74.6

677

.5 6

80.0

682

.1 6

83.9

685

.5 6

86.8

Rev

enue

s 4

,635

3,8

76 3

,246

2,7

22 2

,286

1,9

23 1

,621

1,3

68 1

,158

981

833

709

605

517

443

381

Cos

t pet

role

um 9

30 7

82 6

58 5

55 4

69 3

97 3

36 2

85 2

43 2

07 1

77 1

51 1

29 1

11 9

6 8

3

Pro

fit p

etro

leum

1,8

53 1

,547

1,2

94 1

,083

909

763

642

542

457

387

328

279

238

203

174

149

less

Pro

duct

ion

cost

s (7

24)

(610

) (5

15)

(435

) (3

68)

(312

) (2

64)

(225

) (1

91)

(163

) (1

40)

(120

) (1

03)

(88)

(76)

(66)

less

Roy

alty

/ces

s (2

05)

(172

) (1

44)

(120

) (1

01)

(85)

(72)

(61)

(51)

(43)

(37)

(31)

(27)

(23)

(20)

(17)

Pre

-tax

net c

ash

inco

me

1,8

53 1

,547

1,2

94 1

,083

909

763

642

542

457

387

328

279

238

203

174

149

less

tax

(612

) (5

11)

(427

) (3

57)

(300

) (2

52)

(212

) (1

78)

(151

) (1

27)

(108

) (9

2) (7

8) (6

7) (5

7) (4

9)

Net

cas

h in

com

e 1

,241

1,0

37 8

67 7

26 6

09 5

12 4

31 3

63 3

07 2

60 2

20 1

87 1

60 1

36 1

17 1

00

Exp

lora

tion

cost

s -

- -

- -

- -

- -

- -

- -

- -

-

Dev

elop

men

t cos

ts -

- -

- -

- -

- -

- -

- -

- -

-

Inve

stm

ent

- -

- -

- -

- -

- -

- -

- -

- -

Free

cas

h flo

w 1

,241

1,0

37 8

67 7

26 6

09 5

12 4

31 3

63 3

07 2

60 2

20 1

87 1

60 1

36 1

17 1

00

DC

F 2

02 1

51 1

13 8

4 6

3 4

7 3

6 2

7 2

0 1

5 1

2 9

7 5

4 3

DC

F-1

year

forw

ard

226

169

126

94

71

53

40

30

23

17

13

10

7 6

4 3


Cairn India

Oil & Gas

Valuation of Barmer Hill

Barmer Hill formation holds around 400mnbbl of resource potential. However, the reservoir depictslow permeability nature, which would result in much lower recovery rate. Similar fields across theworld yield around 15-20% recovery. Thus, factoring in recovery of 15% and EV/boe ofUS $12.4/bbl (implied EV/boe of MBA's fields), we have arrived at Fair Value of Rs12.6/share forBarmer Hill.

Valuation of Southern fields

The Southern fields (Saraswati and Raageshwari oil fields) have been valued on EV/boe basis.We have valued these fields at Rs2.5/share factoring in recovery of 4% of the potential resourcebase and EV/boe of US $12.4/bbl (implied EV/boe of MBA's fields). The recovery is in line with thereserve estimates at the fields.


Exhibit 23: Barmer Hill ValuationParticulars FY2010E FY2011EResources-mnboe 400.0 400.0Recovery factor (%) 15.0 15.0Recoverable reserves 60.0 60.0EV/boe 10.2 12.4CIL's Working interest (%) 70.0 70.0CIL's share of Enterprise value (US $mn) 428 519Enterprise value (Rs cr) 2,032 2,388Implied value per share (Rs) 10.7 12.6


Exhibit 24: Southern Fields ValuationParticulars FY2010E FY2011EResources-mnboe 300 300Recovery factor (%) 4.0 4.0Recoverable reserves 12 12EV/boe 10.2 12.4CIL's Working interest (%) 70.0 70.0CIL's share of Enterprise value(US $mn) 86 104Enterprise value (Rs cr) 406 478Implied value per share (Rs) 2.1 2.5

Valuation of other Rajasthan fields

We believe there exists upside reserve upsides from the other Rajasthan fields as well. To reflectthe same, we have factored in 10% recovery of the resource base and EV/boe of12.4/bbl (implied EV/boe of MBA's fields). Consequently, we have arrived at the Fair Value ofRs21.2/share for other Rajasthan fields.


Cairn India

Oil & Gas


Exhibit 26: KG-DWN-98/2 valuationParticulars FY2010E FY2011EResources-TCF 2.09 2.09Resources-mnboe 391 391Recovery factor (%) 50.0 50.0Recoverable reserves (mnboe) 195 195EV/boe 3.0 3.4CIL's Working interest (%) 10.0 10.0CIL's share of Enterprise value (US $mn) 59 66Enterprise value (Rs cr) 278 302Implied value per share (Rs) 1.5 1.6

Valuation of Ravva and Cambay fields

To value the Ravva and Cambay fields, we have assumed balance useful life at the term to expiryof the PSC as year 2014 for Cambay and year 2018 for Ravva. Our DCF-based Fair Value isRs9.5/share and Rs3/share for Ravva and Cambay, respectively.

Valuation of KG-DWN-98/2

We believe, ONGC's KG-DWN-98/2 deepwater block in the KG Basin (Cairn has a 10% stake)holds considerable promise. Current estimates put reserve potential at 2.09TCF (ONGC's initialassessment was 2-14TCF), but this is still relatively underexplored. With availability of deepwaterrig from RIL, ONGC is likely to drill further wells at the block in order to appraise the reserveestimates of the block. We have valued 2.09 TCF of reserves from the field, with a recovery of50% and EV/boe of US $3.0/bbl and 10% working interest of CIL in the field. We estimate theblock to contribute Rs 1.6/share to the valuations. However as CIL has only 10% stake in theblock, even significant increase reserves lead to limited valuation upside.


Exhibit 25: Other Rajasthan Fields ValuationParticulars FY2010E FY2011EResources-mnboe 1,008 1,008Recovery factor (%) 10 10Recoverable reserves 101 101EV/boe 10.2 12.4CIL's Working interest (%) 70.0 70.0CIL's share of Enterprise value (US $mn) 719 872Enterprise value (Rs cr) 3,414 4,012Implied value per share (Rs) 18.0 21.2

Value of Other Exploration upsides

CIL has a net unrisked exploratory potential of 1.4bn barrels of O+OEG, while recoverable reservesof the same is a mere 8% (Source Infraline, Company). It may be noted here that though webelieve that there exists immense exploratory upsides for CIL over medium to long term, we havefactored in exploratory upside of 8% due to limited near term expectations.


Cairn India

Oil & Gas


Exhibit 27: Value of Exploratory upsidesParticulars FY2010E FY2011ENet Unrisked Prospective resources-mnboe 1,400 1,400Risk weightage (%) 8 8Recoverable reserves 112 112EV/boe 3.0 3.4Enterprise value (US $mn) 336 376Enterprise value (Rs cr) 1,596 1,731Implied value per share (Rs) 8.4 9.1

Valuation based on Forward CurveIf we value CIL based on the forward curve of oil prices traded on the Intercontinental Exchange(ICE), we arrive at a Target Price of Rs312/share. The key difference between our oil expectationand price derived from forward oil curve is the long-term crude oil prices. While we expectlong-term crude oil price to hover around US $75/bbl, forward curve reflects a price range ofUS $88-98/bbl.


WA

CC

(%)

Exhibit 29: Target Price Sensitivity with long-term Crude and WACCCrude Prices (US $/bbl)

60.0 65.0 70.0 75.0 80.0 85.0 90.09.0 233 253 274 285 299 318 338

10.0 224 243 263 274 287 305 32411.0 215 234 253 263 276 293 31112.0 207 225 243 253 265 282 29913.0 200 217 235 244 256 272 28814.0 193 210 227 236 247 263 27815.0 187 203 219 228 239 254 269

Source: Bloomberg, Angel Research, Note: As on November 19, 2009

Exhibit 28: Forward Oil Curve

65

70

75

80

85

90

95

100

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

US

$/b

bl

Brent forward price

Thus, our Fair Valuation for CIL based on the NAVs of its E&P assets (producing as well as underdevelopment) along with value of developmental and exploratory upsides works out to ofRs253/share. Of the same, development and exploratory upsides are valued at Rs48/share.We Initiate Coverage on CIL with a Reduce rating.


Cairn India

Oil & Gas

Importantly, post the stake increase, Petronas will hold 14.9% stake in CIL, slightly below theOpen Offer trigger of 15%. Thus, any further stake acquisition by Petronas would trigger an OpenOffer. As per SEBI regulations, if Petronas's stake were to exceed 15%, it would be required tomake an Open Offer for an additional 20%. As per the Open Offer guidelines, pricing of the OpenOffer would be done at a maximum of (a) 6 month's average price of CIL from the date of trigger ofthe Open Offer, (b) 2 week's average price from the date of trigger of the Open Offer, and (c) theDeal price.

We do not rule out further stake purchase by Petronas, which would trigger an Open Offer and inturn increase chances of CIL's stock trading at slight discount to the NAV based on the forwardcurve of crude oil prices. However, given that timing of the deal is unclear, we cannot ascribe valuebased on the forward curve.

Petronas stake hike in CIL unlikely to impact valuationThe Malaysian state oil company, Petroliam Nasional Bhd (Petronas), acquired a further 2.3%stake in CIL for a sum of US $240mn on October, 14, 2009 from CEP at Rs260/share, a slightdiscount to the closing price of Rs263/share on the day. This is the second time that Petronas hasincreased its stake in CIL since its IPO, which reflects the former's commitment as a long-terminvestor in the project. CEP, on its part, will utilise the funds to accelerate the pace of explorationprojects in Greenland.

Source: BSE, Angel Research

Exhibit 30: Petronas's increasing stake in CIL

9.9%

12.6%

14.9%

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

First Tranche-IPO (Dec 2006) Second Tranche-(2QFY2009) Third Tranche-(3QFY2010)

At Rs 224/share

At Rs 260/share

(%)

At Rs 160/share


Cairn India

Oil & Gas

Exhibit 32: Peer ComparisonPeer Companies Mkt Cap EV EBITDA EBITDA PAT P/E EV/EBITDA

(US $ mn) (US $ mn) (US $ mn) Margin (%) (US $ mn) (x) (x)Rosneft Oil Co 95,350 115,733 15,632 28.7 8,808 10.3 7.4Occidental Petroleum Corp 40,135 68,788 11,559 63.0 4,596 14.2 6.0EnCana Corp 41,157 54,347 7,517 44.1 2,398 19.7 7.2Canadian Natural Resources 36,943 46,807 8,264 60.4 3,220 13.2 5.7Woodside Petroleum 32,964 36,928 3,583 72.8 1,501 22.2 10.3Apache Corp 33,533 37,324 8,146 70.8 3,421 10.4 4.6Anadarko Petroleum Corp 31,132 40,691 6,612 62.6 681 42.6 6.2Devon Energy Corp 31,817 38,305 6,855 66.9 2,985 11.5 5.6EOG Resources Inc 22,394 24,583 3,751 68.0 984 22.0 6.6Talisman Energy Inc 18,136 19,836 4,604 56.1 752 23.9 4.3Chesapeake Energy Corp 15,597 28,467 4,423 58.3 1,566 9.9 6.4Southwestern Energy Co 14,551 15,510 1,922 72.0 819 18.0 8.1Nexen INC 13,333 18,494 4,336 58.0 1,119 11.8 4.3Murphy Oil Corp 11,391 11,762 2,929 16.6 1,022 11.8 4.0

Source: Bloomberg, Angel Research, Note: As on November 19, 2009


Exhibit 31: Bear, Base and Bull Case

147

23

74 9 2538

79 340

100

150

200

250

300

350

Bear

Case

Cess

@R

s2,5

75/tonne

LTC

rude

atU

S$50/b

bl

No

Exp

lora

tory

succ

ess

Base

Case

No

Cess

LTC

rude

@U

S$100/b

bl

Bu

llC

ase

Rs/

Share

Target Price- Scenario analysisTo gauge potential value in different scenarios, we create three potential scenarios for CIL, viz.Bear case, Base case and Bull case. In a Bear case scenario, we have assumed adverse rulingfor CIL on the cess front, lower long-term crude oil prices of US $50/bbl and no exploratorysuccesses. The Value derived under the bear case scenario is Rs147/share, a mammoth 48%downside from the current market price. Our Base case scenario factors in crude oil prices of US$75/bbl, exploratory success rate of 8% and cess at Rs927/tonne. Our Base case scenario throwsup a Fair Value of Rs253/share, which is our Target Price. In a bullish scenario, if we assumelong-term crude oil prices of US $100/bbl and no obligation on CIL to pay cess, our Fair Valueestimate increases to Rs340/share, translating into an upside of 20.1% from current levels.


Cairn India

Oil & Gas


Exhibit 34: Sensitivity with long-term Crude and Discount on CrudeCrude Prices (US $/bbl)

60.0 65.0 70.0 75.0 80.0 85.0 90.07.0 231 247 257 275 294 307 3259.0 225 244 251 269 287 305 317

11.0 219 238 249 262 280 297 30913.0 213 232 246 255 272 290 30715.0 207 225 243 253 265 282 29917.0 203 219 237 250 258 275 291D

isco

unt o

n C

rude

(%)

Sensitivity with Crude and Discount offered to Refiners

Due to its inferior crude quality, CIL is likely to fetch a discount for MBA crude to the benchmarkBrent crude prices. CIL management has stated that the discount based on the GPW for the MBAcrude over the last six months has ranged between 10-15%. Thus, another critical factor, whichimpacts Target Price is variability in discount rate offered to refiners. We have factored in 15%discount to Brent crude in our base case scenario, in line with management's guidance. However,the same is higher than average discount compared to Duri-Widuri mix. At our long-term crude oilassumption of US $75/bbl, 4% variability in the discount leads to 3.0-3.5% change in our FairValue estimates.

Target Price - Sensitivity AnalysisSensitivity with long-term Crude oil prices and Exchange rate

The most crucial variable for determination of CIL's Fair Value is the long-term crude oil price(FY2012E onwards). We believe that the oil prices at US $75/bbl provide adequate incentives toproducers (Refer Crude Oil Prices - Outlook). Thus, we have arrived at a Target Price ofRs253/share for CIL benchmarking the same to our long-term crude oil assumption of US $75/bbl.A 5% change to our long-term crude oil price assumption would result in 4.0-5.0% change in ourFair Value estimates. Ceteris paribus, CIL's current market price of Rs283/share discounts crudeoil price of US $85.1/bbl, which we believe is quite high and leaves no margin of safety for investors.


Exhibit 33: Sensitivity with long-term Crude and Exchange RateCrude Prices (US $/bbl)

60.0 65.0 70.0 75.0 80.0 85.0 90.042.0 197 212 229 246 254 265 281

43.0 201 216 234 247 255 271 287 44.0 203 221 238 248 260 277 293 45.0 207 225 243 253 265 282 299 46.0 211 230 248 258 271 288 305 47.0 215 234 249 258 276 294 306 48.0 219 239 254 263 281 299 312

Exch

ange

Rat

e(R

s/U

S$)


Cairn India

Oil & Gas

Sensitivity with Cess rate

There is a dispute between the government and CIL over the liability and extent of liability on cess.CIL has maintained that there is no specific mention of cess in the PSC owing to which they arenot liable to pay the same. However, even if they are liable to pay the same, it would be the cessrates applicable at the time of signing of PSC, as the PSC has an in-built fiscal stability clause. Thegovernment, on the other hand, mandates payment of cess at current rates.

CIL has agreed to pay Rs2,575/tonne under protest. The company has approached the Arbitrationmechanism for resolution of the issue. We believe there exists strong possibility of CIL winning thecase. Hence, we have assumed cess of Rs927/tonne over the life of the field (cess at the time ofsigning of the PSC) for our valuation purposes. However, if CIL has to pay no cess on its share ofcrude production, our Target Price (ceteris paribus) would increase by Rs8/share (up 3.1% fromthe current Target Price) and giving a Fair Value of Rs261/share for the stock. If there is adverseruling, ie. if cess liability is determined at Rs2,575/tonne, our Fair Value for the stock would reduceby Rs16/share, a decline of 6.3% from current Target Price to Rs 237/share. Thus, outcome of thecess issue will continue to be an overhang on stock valuations in the medium term.


Exhibit 35: Sensitivity with Cess rate (Rs/tonne)

261

253

237

225

230

235

240

245

250

255

260

265

Nil 927 2,575

Rs/

Sh

are

Sensitivity with Recovery rate at fields other than MBA in RJ-ON90/1

We believe there exists upside to CIL's current Reserve estimates from the Rajasthan block. In linewith this, we have assumed Recovery rate of 15.0%, 4.0% and 10.0% for the Barmer Hill, RajasthanSouthern fields and Other Rajasthan fields, respectively. This implies a blended Recovery rate of10.1% for the fields. We are currently factoring in development upside of Rs37/share from thesefields at our recovery rate estimates. If we were to increase our Recovery estimates by 5% atthese fields, our Target Price would increase by Rs18/share, up 7.1% to Rs271/share. Thus, thereis a strong co-relation between the Recovery rate at other fields other than MBA and our Fair Valueestimates for the stock.

Ceteris paribus, we believe the current market price of Rs283/share is discounting around 18.5%Recovery rate from the other Rajasthan fields. This is very high considering that the Recovery rateof 18.5% reflects Recoverable reserve of 316mnboe, which would be an increase of 21.1% overthe current Reserve estimate from the block. Thus, any disappointment on further Reserve accretionat Rajasthan would adversely impact CIL's stock price.


Cairn India

Oil & Gas

Sensitivity with Exploratory success rate

We have assumed Exploratory success rate of 8.0% on CIL's 1,400mnboe of net un-risked resourcepotential, which translates into value of Rs9.1/share. We estimate lower success ratio as much ofthe resource potential is in the newer frontier play and requires further exploratory efforts beforededucing any meaningful exploratory success. However, ceteris paribus, current market price ofRs283/share reflects high exploratory success rate of 34%.


Exhibit 37: Sensitivity with Exploratory success rate

250

256

261

267

273

240

245

250

255

260

265

270

275

5% 10.0% 15.0% 20.0% 25.0%

Rs/

Sh

are

253

271

288

306

324

200

220

240

260

280

300

320

340

10.0% 15.0% 20.0% 25.0% 30.0%

Rs/S

ha

re


Exhibit 36: Sensitivity with Recovery rate at fields other than MBA


Cairn India

Oil & Gas


Exhibit 38: Relative performance with peers


Exhibit 39: Relative performance with Sensex and Oil & Gas


Exhibit 40: Out performance relative to Sensex


Exhibit 41: Out performance relative to BSE Oil & Gas

CIL ONGC RIL

0

50

100

150

200

250

300

Jan

-07

Ma

r-07

May-0

7

Jul-

07

Sep

-07

No

v-0

7

Jan

-08

Ma

r-08

Ma

y-0

8

Jul-

08

Sep

-08

No

v-0

8

Jan

-09

Mar-

09

Ma

y-0

9

Jul-

09

Sep

-09

Nov

-09

Rs

CIL Sensex BSE Oil & Gas

-

50

100

150

200

250

300

Jan

-07

Ma

r-0

7

May-

07

Jul-

07

Sep

-07

Nov

-07

Jan

-08

Mar-

08

May-

08

Jul-

08

Sep

-08

Nov

-08

Jan

-09

Mar-

09

May-

09

Jul-

09

Sep

-09

Nov

-09

Rs

(25)

-

25

50

75

Sensex CIL

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

%

BSE Oil & Gas CIL

(40)

(10)

20

50

Jan-0

7

Mar-

07

May-

07

Jul-

07

Sep

-07

Nov

-07

Jan-0

8

Mar-

08

May-

08

Jul-

08

Sep

-08

Nov

-08

Jan-0

9

Mar-

09

May-

09

Jul-

09

Sep

-09

Nov

-09

%


Cairn India

Oil & Gas

OPEC’s oilprice

management

GlobalEconomic

Growth

G liti l F tGeopolitical Factors

Energy Efficiency &Biofuel Markets

Oil Prices Financial SpeculationDollar x Euro

Brings Volatility to the ProcessNew

RefiningUnits

Crude Oil SpareCrude Oil SpareCapacity Levels

AggregateDemandOutlookOutlook

Interest Rates

Crude Oil Prices - OutlookIn the recent past, crude oil prices have been extremely volatile. However, over the last 20-25years, crude prices have been on an upward trend. Here we have tried to analyse the past trendof crude oil prices, while trying to estimate the medium-term trend based on near-term demandand supply estimates. We believe long-term prices will be driven by the economics of marginalsupplies.

Historical trend of Crude oil prices

Over 2000-2008, crude prices witnessed a significant surge from sub US $20/bbl (towards early2000) levels to US $147/bbl in 2008. The factors that contributed to this significant surge in crudeprices included strong growth in the global economy, under-investment in the Upstream Oil Segmentover the past few decades, refining capacity imbalances and bottlenecks. Moreover, lower OPECspare capacity and forward inventory cover increased geo-political risks embedded in the prices.

The latter half of 2008 however, witnessed substantial correction in crude oil prices on account ofslowdown in the global economy. Crude tumbled to lows of US $32/bbl in December 2008, acorrection of almost 78% from its peak. This fall in crude and gas prices came on the back of therecession in OECD economies, slowdown in demand for petroleum products across the globeand near evaporation of speculative capital from the financial system. Thus, on account of theslowdown in the global economy, there was a significant downgrade in the demand estimates forcrude oil.

Thereon however, crude oil has witnessed a significant rally with prices more than doubling toUS $75-80/bbl from the December 2008 lows of US $32/bbl. The crude prices surged due to thegreen-shoots in the global economy, strong equity markets and expectations of economic revival.Moreover, a weak Dollar and OPEC curbs helped prop the crude prices amidst sluggish OECDdemand, high inventories and widening OPEC spare capacity.

Key factors impacting Oil Prices

Crude oil prices are impacted by various factors, which could be clubbed as fundamental andnon-fundamental factors. Fundamental factors, which impact crude oil price, are stock levels andcrude oil spare capacity. On the other hand, non-fundamental factors, which impact the prices,are speculation, interest rates and currency movement (Change in dollar value with respect to Euro).

Source: Angel Research

Exhibit 42: Oil Market Structure - Key factors impacting Oil Prices


Cairn India

Oil & Gas

The Dollar effect - How does the value of US Dollar affect oil prices?

Crude oil is denominated in the US Dollar, thus changes in the price of Dollar affects the oil pricein other currencies. A weak Dollar means, for example, lower price in Euros translating into higheroil demand in the Euro zone, which with all other things being equal, would tighten the global oilsupply/demand balance.


Exhibit 43: Crude Oil Prices in US Dollar and Euro

0

20

40

60

80

100

120

140

160

Brent Crude (in US$/barrel) Brent Crude (in Euro/barrel)

Jan

-03

Ap

r-0

3

Jul-0

3

Oct

-03

Jan

-04

Ap

r-0

4

Jul-0

4

Oct

-04

Jan

-05

Ap

r-0

5

Jul-0

5

Oct

-05

Jan

-06

Ap

r-0

6

Jul-0

6

Oct

-06

Jan

-07

Ap

r-0

7

Jul-0

7

Oct

-07

Jan

-08

Ap

r-0

8

Jul-0

8

Oct

-08

Jan

-09

Ap

r-0

9

Jul-0

9

Oct

-09

The value of currency can therefore be a very strong driver of the oil price levels. The oil price mayrise by 25% in Dollar terms, but that does not automatically mean that the oil price has risen by25% in the consumer economies. The Euro or Yen value of crude oil, for instance, could movedifferently to the US Dollar denominated value, depending on the relative strength of the currencyin question.

Another effect which is not directly linked to oil market fundamentals is investors buy commoditiesfuture contracts as a hedge against inflation. Inflation in the US would imply a weaker US Dollar,and resultant inflationary trends or fears of inflation could encourage buying of crude oil futures byinvestors. As the US Dollar is the world's most widely adopted reserve currency, perceptions oranticipation of inflation and Dollar depreciation can prompt holders of US-based assets to seekexposure to other types of assets normally shielded from the impact of inflation in the US.


Exhibit 44: Brent Crude and Dollar Index; CRB Index and Dollar Index

60

65

70

75

80

85

90

95

0

20

40

60

80

100

120

140

160

Ja

n-0

7

Mar-

07

May-0

7

Ju

l-0

7

Se

p-0

7

Nov-0

7

Ja

n-0

8

Mar-

08

May-0

8

Ju

l-0

8

Se

p-0

8

Nov-0

8

Ja

n-0

9

Mar-

09

May-0

9

Ju

l-0

9

Se

p-0

9

Nov-0

9

Dollar

Index

US

$/b

bl

Brent Crude Dollar Index (RHS)

60

65

70

75

80

85

90

95

200

250

300

350

400

450

500

Jan

-07

Mar-

07

May-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Mar-

08

May-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Mar-

09

May-0

9

Jul-

09

Se

p-0

9

No

v-0

9

Do

llar

Ind

ex

CR

BC

om

mo

dity

Ind

ex

CRB Index Dollar Index (RHS)

Dollar decline drivesCommodity prices


Cairn India

Oil & Gas

Which way is Crude headed?

We believe that in the medium term (over FY2010 and FY2011) oil prices will be driven by thedemand and supply economics, which would track the inventory position in the OECD countries,OPEC's spare capacity, adherence to the production cuts and growth in non-Opec output. Overthe longer term (FY2012 onwards) however, we believe that the oil prices will be driven by theeconomics of marginal supplies and rate of decline from the current ageing fields.

Oil prices in Medium term

It is important to take stock of the inventory position in the OECD countries, OPEC's spare capacity,adherence to the production cuts and growth in non-Opec output while tracking crude prices in themedium term. This implies that the direction of the stock draws will determine the direction andmagnitude of the oil prices. Stock draws are in turn dependent on the demand outlook. Thus,future demand would be a key determinant of the global crude oil prices.

In the recent past, driven by the revival in the global economy, the IEA has upgraded the demandestimates for crude. In its recent monthly review (November 2009), IEA increased its crude oildemand estimates by 0.20mnbpd and 0.10mnbpd for 2009 and 2010, respectively. As per IEA,Global oil demand is on track for yoy growth in 4QCY2009 for the first time since 2QCY2008 andis now seen averaging at 84.8mnbpd (a fall of 1.5mnbpd yoy) and 86.2mnbpd (a rise of 1.4mnbpdyoy) levels for 2009 and 2010, respectively.

EIA, on the other hand, has been relatively conservative in its demand outlook and anticipatesglobal crude oil demand at 84.1mnbpd and 85.4mnbpd in 2009 and 2010, respectively. EIA estimatesworld oil consumption to grow by 1.3mnbpd in 2010, with relatively strong growth in non-OECDcountries being partially offset by a marginal decline in OECD consumption.

OPEC has also raised its estimates of demand for its own crude in both 2009 and 2010 onexpectations that world oil demand will be stronger than predicted in light of an improving economicoutlook. The oil exporter club now expects demand for its crude to average 28.7mnbpd in 2009(70,000bpd more than its previous forecast a month ago) and 28.5mnbpd in 2010 (110,000bpdmore than its previous forecast a month ago). The group said in its latest monthly oil market reporton November 11 that the higher projection for the current year nevertheless represented a"considerable" decline of 2.3mnbpd compared with 2008. It also said that while growth in demandfor OPEC crude next year was currently projected at minus 0.2mnbpd, with a decline of around400,000bpd in the first half, "the second half is expected to return to positive growth of about100,000 bpd, indicating a sign of recovery".

Exhibit 45: Demand estimates by various agencies (mnbpd)

Source: Industry, Angel Research

Agencies CY2009 CY2010IEA 84.80 86.20EIA 84.14 85.41OPEC 84.31 85.07


Cairn India

Oil & Gas

On the Supply front, EIA estimates non-OPEC supplies to average at 50.2mnbpd in 2009, up0.54mnbpd. Similarly, for 2010, it estimates non-OPEC supplies to rise to 50.4mnbpd, up0.26mnbpd.

OPEC now expects oil demand to average 84.31mnbpd this year, 80,000 bpd more than previouslypredicted, largely due to the apparent recovery in the global economy. As per OPEC, "The worldeconomy now appears to be entering into a new phase, moving from a period of containing thecrisis to one of economic recovery". "OPEC has raised its estimate of demand for next year to85.07mnbpd, 130,000bpd more than previously forecast and implying yoy growth of 760,000bpd,up from the previous figure of 690,000bpd. The relatively small increase in demand stems fromthe fact that the general economic recovery is expected to be "slow and weak". Most of the expectedincrease in world oil demand in 2010 comes from countries outside the OECD, in particular China,the Middle East, India and Latin America.

Thus, though there exists a difference over levels of expected demand for crude, agencies concurwith the fact that the worst is over on the demand front and is likely to pick up 2010 onwards.

OPEC has raised its estimateof demand for next year to85.07mnbpd, 130,000bpd morethan previously forecast andimplying yoy growth of760,000bpd, up from theprevious figure of 690,000bpd

Source: EIA

Exhibit 46: World liquid fuel consumption

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

30

35

40

45

50

55

60

65

70

75

80

85

90

95

2002 2003 2004 2005 2006 2007 2008 2009 2010

China United States Other Countries Consumption

Total Consumption

Annual Growth

mnb

pd

mnb

pd

Source: EIA

Exhibit 47: World Consumption, non-OPEC Production (change yoy)

(100)

(80)

(60)

(40)

(20)

0

20

40

60

80

100

(4)

(3)

(2)

(1)

0

1

2

3

4

2006-Q1 2007-Q1 2008-Q1 2009-Q1 2010-Q1

US

$/bb

l

mnb

pd

World Oil Consumption Non-OPEC Production WTI Crude Oil Price (RHS)


Cairn India

Oil & Gas

Oil prices to decline in Medium term

Despite the lower increase in the non-OPEC output, the 'Call on OPEC' is likely to decline largelyon account of higher output of natural gas liquids (NGL) from OPEC countries. Thus, lower 'Callon OPEC' coupled with surplus production capacity with OPEC are likely to keep OPEC productiontargets in focus. We believe that given declining OPEC compliance to production cuts, probabilityof oil prices increasing from current levels is limited. However, we believe that the current pricesdo not offer significant downside as OPEC's pricing policy pegs prices at US $60-70/bbl. Moreover,we expect oil prices to decline over the medium term owing to inventory overhang in the OECDcountries, higher NGL output by OPEC (thereby reducing ‘Call on OPEC’) and spare capacity withOPEC. For instance, during 2QCY2009, forward inventory cover stood at 61 days, well above theOECD commercial inventory average during that quarter. We believe that the current inventoryoverhang in the OECD countries is likely to persist in the current year and will witness a gradualdecline from 2010. EIA also estimates forward inventory cover to reduce from 61 days (at end ofSeptember 2009) to 59 days by end of 2010.

Exhibit 49: OPEC surplus production capacity

Source: EIA

0

1

2

3

4

5

6

7

1998 2000 2002 2004 2006 2008 2010

mnb

pd

Shaded area represents 1998-2008 average (2.8 million barrels per day)

Source: EIA

Exhibit 48: Days of Supply of OECD Comm. Oil Stocks

40

45

50

55

60

65

70

Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010

Days

ofsu

pply

Colored band represents the range between the minimum and maximum observed

Thus, inventory days would continue to be on the higher end of the band compared to the previousperiod. In conclusion, we maintain that the inventory overhang, strong output growth bynon-OPEC countries, lower ‘Call on OPEC’ along with spare capacity available with OPEC will


Cairn India

Oil & Gas

We believe that long-term crude oil demand will continue to be a function of growth in populationand GDP growth as has been the case in the past.

Since 1970, world population has risen by more than three billion to reach the current more than6.8 billion. Going ahead, with population growth likely to continue, energy requirements in generaland crude oil requirements in particular is likely to increase.

Source: EIA

Exhibit 50: World Energy Consumption by region

348

398

472508

596

678

0

200

400

600

800Quadrillion Btu

China and India

United States

Rest of World

History Projections

1990 2000 2006 2010 2020 2030

lead to decline oil prices in the medium term. Hence, we estimate crude to average US $67/bbl inFY2010E and US $70/bbl in FY2011E. Currently, crude oil is hovering at around US $75-80/bbland is expected to decline in near term.

Long-term Crude expected to remain firm

We believe that in the long term crude oil prices will continue to rule firm driven by the economicsof marginal oil supplies, decline in production from the current fields and increasing oil demand(particularly in the developing countries). In the long term, we estimate oil prices to average atUS $75/bbl. This is based on the premise that the oil will continue to be the primary fuel goingahead as well.

Oil demand outlook

As per EIA's International Energy Outlook 2009, world energy consumption is set to increase from472 quadrillion BTU in 2006 to 552 quadrillion BTU in 2015 and 678 quadrillion BTU in 2030 - anincrease of 44% over the mentioned period. This would result in average annual energy consumptionof 1.5% over the period. A significant part of this increase would be contributed by higherconsumption by the non-OECD countries, which are expected to see an increase in their energyconsumption by 2.3% over the period as against the 0.6% growth in OECD countries. Among thenon-OECD economies, China and India are the fastest growing and would be key for world energyconsumers. Since 1990, energy consumption, as a share of total world energy use, has increasedsignificantly in both these countries. China and India together accounted for about 10% of theworld's total energy consumption in 1990. In 2006, their combined share stood at 19%. EIA estimatesthat strong economic growth in both countries would continue during the projected period, withtheir energy use increasing by nearly two-folds and constituting 28% of the world energyconsumption in 2030 as per EIA projections.


Cairn India

Oil & Gas

Developing countries like China, India, Brazil and Russia are likely to witness accelerated pace ofdevelopment, which would in turn lead to increase in their GDP. Growth in GDP will result inimproving lifestyle in turn increasing the per capita oil consumption in these countries. Currently,per capita oil consumption in developing countries such as India, China, Brazil and Russia is quitelow compared to the developed countries.

Source: OPEC

Exhibit 53: GDP of Developing countries likely to increase significantly$(2005) trillion

0

2

4

6

8

10

12

14

16

18

2008

Ru

ssia

OP

EC

So

uth

ea

stA

sia

La

tin

Am

erica

South

Asia

OE

CD

Pa

cific

Ch

ina

We

ste

rnE

uro

pe

No

rth

Am

erica

Oth

er

tra

nsitio

ne

co

no

mie

s

Mid

dle

Ea

st

&A

fric

a

$(2005) trillion

0

5

10

15

20

25

30

2030

Russia

OP

EC

South

eastA

sia

Latin

Am

erica

South

Asia

OE

CD

Pacific

Chin

a

Weste

rnE

uro

pe

Nort

hA

merica

Oth

er

transitio

ne

co

no

mie

s

Mid

dle

East&

Afr

ica

Source: Douglas Westwood

Exhibit 52: World Population and Oil demand

10

30

50

70

90

110

130

1

2

3

4

5

6

7

8

9

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

oil d

eman

d(M

nb/

d)

world

popu

lat io

n (b i

l lion)

p o p ula tio n

o il d em and

Source: UNDESA, Population Division; Note: high, medium and low variants

0

2

4

6

8

10

12

1900 1925 1950 1975 2000 2025 2050

billions

Exhibit 51: UN - World Population estimates


Cairn India

Oil & Gas

Thus, to conclude, oil demand is likely to be robust going ahead even amidst the high oil pricescenario driven by increasing global population and accelerated development in the developingcountries.

Marginal economics to determine long-term Crude oil prices

Marginal economics of crude oil supply is expected to be the main driver of crude oil prices in thelonger term. This is because dwindling production from the current ageing fields, increasing Findingand development (F&D) costs and increasing demand will lead to pricing based on marginaleconomics.

As per IHS-CERA, majority of the current oil fields have been under production for a long period oftime, and hence production has been declining at an annual rate of 4.5% pa. For instance, as perindustry estimates, non-OPEC fields (excluding former Soviet Union, FSU), which were producingin 2000, have been witnessing a decline of 9.4% pa. Fields in the FSU countries have also witnessed

Prime driver of the oil demand is likely to be growth in demand of transportation fuel in developingcountries. Increase in per capita income is likely to lead to better standard of living, which in turn islikely to lead to increased level of motorization.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

100

200

300

400

500

600

700

population (millions)cars per 1,000

OECD countries400–700

Transition economies150–400

Developing countriestypically <200

4.3 billion people live incountries with <1 car per 20 people

Cumulativepopulation

Source: OPEC

Exhibit 55: Level of motorisation across economies

LuxembourgKuwait

Norway

Singapore

USA

CanadaSaudi Arabia

Mexico

455

Norway

UKGreece

Russia

IranJamaica

Mauritania

World

High IncomeNations

27

Equitorial GuineaChina

India

Nigeria

Madagascar

Liberia

World

Low IncomeNations

Middle IncomeNations

01

Cambodia

Chad

Burundi

Congo, DR

-2

ap

ita

mp

tio

np

er

Cs

of

Co

nsu

mB

arr

els

.14

02-4

5 6 7 8 9 10 11 12

GDP per Capita, Current US$

148 403 1,095 2,978 8,101 22,035 59,934

.02

6

Source: Company, OPEC, Valero Energy

Exhibit 54: Per Capita Oil Consumption across economies

Oil

co

ns

um

pti

on

pe

rc

ap

ita

(ga

llo

ns

pe

rd

ay

)

GDP per capita ('000 USD)

ChinaIndia

Brazil

US

UK

Canada

Sweden

Mexico Russia

Thailand

Indonesia

Venezuela

Japan

Italy

Australia

FranceGermany

South Korea Taiwan

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 5 10 15 20 25 30 35 40 45 50


Cairn India

Oil & Gas

Source: IHS CERA

Exhibit 57: Existing oil fields to exert pressure on Oil prices

Existing production form the world’s oil field declinesat an annual average of 4.5 percent. Investment isneeded to replace the annual declineand to meet higher demand.

Amount of new oil productionrelative to 2008 needed to satisfylow and high case projectionsfor world oil demand in 2035

High case World Oil Demand

Low Case World Oil Demand

Depletion of 2008 Installed Oil Production Base

Mill

ion

Bar

rels

per D

ay

90 mbd

76 mbd

2010 2015 2020 2025 2030 2035

0

20

40

60

80

100

120

Source: ONGC

Exhibit 56: Decling Production Rates (%, 2000-2008)Europe 30Non-OPEC Middle East 40North Africa 40Non-OPEC West Africa 47Latin America 32US and Canada 33Asia-Pacific 35

The trend of declining production is not just restricted to the oil fields in the different regions, but isbeing witnessed by the major global oil companies as well. As per Douglas Westwood, 8 out of the10 major oil companies have already registered a decline in production.

a decline in the production rate though at a lower pace of 6.6% pa. As per OPEC, non-OPECcountries registered a decline of 4.6% pa since 2000. The reduction came in in spite of adoption ofadvanced EOR techniques.


Exhibit 58: Major oil companies witnessing a decline in productionAnnual Prodn (mnboe) 2002 2003 2004 2005 2006 2007 2008

Exxon Mobil 2,496 2,516 2,571 2,523 2,681 2,616 2,404

BP 2,018 2,121 2,531 2,562 2,475 2,414 2,410

PetroChina 2,109 2,119 2,233 2,270 2,276 2,312 2,379

Shell 2,359 2,379 2,253 2,093 2,030 1,899 1,771

Petrobras 1,533 1,701 1,661 1,847 1,908 1,920 1,996

Chevron 1,897 1,823 1,737 1,701 1,759 1,783 1,676

Total 1,589 1,661 1,695 1,621 1,506 1,509 1,456

ConocoPhillips 891 1,237 1,242 1,447 1,698 1,644 1,367

ENI 921 981 1,034 1,111 1,079 1,020 1,026

StatoilHydro 1,112 1,132 1,135 1,102 1,058 1,074 1,056


Cairn India

Oil & Gas

We believe that advanced technologies such as EOR and IOR (increased oil recovery) would onlysustain oil production at the ageing fields. However, nationalisation of the oil reserves has limitedthe use of technology to the international oil majors, which has escalated the cost of crude oilproduction. Thus, we believe that increasing demand coupled with dwindling production will bringinto focus the economics of marginal supplies and crude oil pricing.

Oil sands are one such marginal supply, which has the potential to meet the growing energyrequirements. Oil sands comprise a mix of sand, clays and bitumen in solid state at room temperateand an API gravity of 8. This is much heavier that the typical conventional oils, which are as heavywhen API is less than 22. Light oils have gravity of more than 32.

Canadian oil sands are the second largest reserves of recoverable oil in the world after SaudiArabia. They are the key source of new supply additions in the world since 2000, ahead of Iran,Kuwait, and China. They are the sixth largest source of marginal supply since 2000 and act as theideal reference point for gauging the importance of marginal source of supply.

Similarly, Douglas Westwood estimates that 52 countries have already surpassed the peakproduction, and production from low-cost oil sources are likely to reduce going ahead.

0

40

60

80

100

120

1995 1999 2003 2007 2011 2015 2019 2023

mill

ion

barr

els

per

day

BIOFUELS

CTL

GTL

OIL SHALES

OIL SANDS

REFINERY GAIN

OFFSHORE DEEP

OFFSHORE SHALLOW

ONSHORE

<200252

countriespastpeak

by 200866

countriespastpeak

Source: Energyfiles

20


Exhibit 59: Global Cheap Oil Supplies likely to be constrained


Cairn India

Oil & Gas

Development of oil sand resources requires significantly higher crude oil prices. As per IHS- CERA,at the peak of the Oil Industry capital cost inflation in the summer of 2008, the threshold crude oilprice for an oil sand project ranged between US $60-85/bbl. Going ahead, IHS-CERA estimatesbreak-even crude oil prices at US $65-70/bbl to undertake development of the Canadian oil sands.

Similarly, Douglas Westwood also estimates higher break-even price for the development of oilsands at US $60-90/bbl going ahead.

Source: IHS CERA

Exhibit 61: Break-even WTI and Oil Sand project prices (US $/bbl)

WTI Price

Integrated Project (mine + upgraded)

Integrated Project (SAGD + upgraded)

Integrated Project (SAGD + Alberta up-grader with royalty-in-kind incentive)

Integrated Project (SAGD + US refinery include refinery purchase cost)

Integrated Project (SAGD + US refinery)

Standalone (SAGD)

110

100

90

80

70

60

50

402008 2010 2015 2020 2025 2030 2035

Exhibit 60: Top-15 Sources of Incremental World Oil Supply (2000-08, mnbpd)Country 2000 2008 Volume change

2000 to 2008

Russia 6.52 9.79 3.27

Saudi Arabia 9.07 10.45 1.38

Angola 0.75 1.89 1.14

Brazil 1.45 2.27 0.82

Algeria 1.44 2.21 0.77

Canadian Oil Sands 0.60 1.30 0.70

Kazakhstan 0.72 1.41 0.69

Azerbaijan 0.29 0.90 0.61

Kuwait 1.88 2.48 0.60

United Arab Emirates 2.62 3.21 0.59

China 3.23 3.81 0.58

Qatar 0.86 1.41 0.55

Iran 3.76 4.29 0.53

Libya 1.47 1.87 0.40

Sudan 0.18 0.49 0.31Source: CERA, IEA; Note: Total Canadian oil production was 2.72mnbpd in 2000 and 3.41mnbpd in 2008


Cairn India

Oil & Gas

Another important source of marginal oil supply will be the Deepwater Oil supply projects. Accordingto Douglas Westwood, the share of deepwater and offshore production, as a % of total crude oilsupplies, will continue to increase going ahead. Deepwater oil production, which was 2% of theglobal oil production in 2000 increased to 8% in 2009 and is expected to further rise to 15%by 2015.

Thus, going ahead, with increased production from the costlier marginal sources such as Canadianoil sands, deepwater oil and offshore projects, crude oil prices should remain firm.

Crude oil prices v/s Upstream cost - F&D and Lifting costs

Declining production from easily available sources of crude oil has resulted in oil exploration atmore difficult terrain such as the Arctic and deepwater oil sources. Exploration at these difficultplaces has in turn led to an increase in the finding and development cost of crude oil over theyears. F&D cost has consistently increased by almost over fives times in the last five years fromaround US $4/bbl (till 2002) to US $24/bbl in 2008.


Exhibit 63: Deepwater and Offshore production

0

2

4

6

8

10

12

2000 2002 2004 2006 2008 2010 2012 2014

Milli

ons

ofBa

rrels

aD

ay


Exhibit 62: Break-even Crude prices for various supply sources

0 20 40 60 80 100 120 140 160

Onshore Wind

Offshore Wind

Nuclear

Traditional Coal

Coal with CCS

Brazilian Sugar Cane Ethanol

US Corn Ethanol

European Biodiesel

Oil Shale

Coal to Liquid

Candadian Oil Sands (new dev.)

Venezuela's Orinoco Belt

Deepwater

Other Conventional Oil

Middle East Oil

Ren

ew-

able

sC

oal

Biof

uels

Unc

onve

ntio

nal O

il

Con

vent

iona

l

Oil

$/bbl equivalent

Dependent on Subsidy


Cairn India

Oil & Gas

Source: IAEE

Exhibit 64: Estimated non-OPEC Finding and Development costs (US $/bbl)26

24

22

20

18

16

14

12

10

8

6

4

2

0

130

120

110

100

90

80

70

60

50

40

30

20

10

095 96 97 98 99 00 01 02 03 04 05 06 07 08

Organic F&D CostsTotal F&D CostsObserved BrentBreak-Event

Part of the increase can be attributed to cost escalations due to under-investments in the UpstreamSector over the years. But, a major part of the increase could be attributed to exploration in difficultareas.

Adelman's approach towards crude oil pricing can be used to derive the correlation between thecrude prices and Upstream costs - F&D and Lifting costs and in turn determining the ideal crude oilprices. The approach increasingly finds favour amidst the scenario of declining production and risingcrude oil demand. According to Adelman's approach, the minimum required crude oil prices are:

Rough approximation of the same based on the required rate of 14.0% and depletion rate of 4.0%(in line with OPEC's estimate of global depletion rate) gives us.

Source: Angel Research; Note: Based on Adelman’s Methodology

Exhibit 65: Minimum required crude prices at various F&D and Lifting costs (US $/bbl)

Lifting Cost

5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.010 50.0 50.5 51.0 51.5 52.0 52.5 53.0 53.5 5411 54.5 55.0 55.5 56.0 56.5 57.0 57.5 58.0 58.512 59.0 59.5 60.0 60.5 61.0 61.5 62.0 62.5 6313 63.5 64.0 64.5 65.0 65.5 66.0 66.5 67.0 67.514 68.0 68.5 69.0 69.5 70.0 70.5 71.0 71.5 7215 72.5 73.0 73.5 74.0 74.5 75.0 75.5 76.0 76.516 77.0 77.5 78.0 78.5 79.0 79.5 80.0 80.5 8117 81.5 82.0 82.5 83.0 83.5 84.0 84.5 85.0 85.518 86.0 86.5 87.0 87.5 88.0 88.5 89.0 89.5 9019 90.5 91.0 91.5 92.0 92.5 93.0 93.5 94.0 94.520 95.0 95.5 96.0 96.5 97.0 97.5 98.0 98.5 99

F&D

Cos

t

(F&D Cost) * 4.5 + Lifting cost

(F&D Cost) * (Pre-tax Required rate of return/Depletion rate)) + Lifting cost


Cairn India

Oil & Gas

Adhering to Adelman's methodology, our crude oil price estimate of US $75 reflects F&D cost ofUS $15/bbl, required return of 14%, decline rate of 4% and Lifting cost of US $7.5/bbl. We believethat the assumption of F&D cost of US $15/bbl is fair as the correction in the benchmarkIHS-CERA Upstream Capital Cost Index was lower at 8.5% between 3QCY2008 and 1QCY2009.This reduction was much lower than the significant correction in the crude oil prices fromUS $147/bbl to US $32/bbl. Additionally, lower F&D costs capture the prospects of technologicaladvancements to a degree as we are building in F&D costs at US $15/bbl as againstUS $16-22/bbl over the last 2-3 years in non-OPEC countries. Similarly, the assumption of Liftingcost of US $7.5/bbl is also conservative considering that operating cost of production has seen asignificant increase since CY2000 as visible from the increase in the IHS-CERA UpstreamOperating Costs Index. Moreover, declining production from the current ageing fields requiredtechnologies such as IOR, EOR. These technologies in turn led to Operating costs ofUS $10-12/bbl.

Conclusion

In sum, we believe that the long-term crude oil prices will remain strong driven by economics ofmarginal supply, increasing F&D and Lifting costs and increase in crude oil demand. We estimatelong-term crude oil prices to average at around US $75/bbl (FY2012 onwards).

Source: IHS CERA

Exhibit 66: Upstream Capital Costs Index and Operating Costs Index

80

100

120

140

160

180

200

220

240

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CostIn

dex

(2000=

100)

80

100

120

140

160

180

200

220

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Co

st

Ind

ex

(20

00

=1

00

)


Cairn India

Oil & Gas

50.0%

18.8%

15.6%

15.6%

Unexplored Exploration Initiated

Poorly Explored Moderate to well Explored

15.6%

43.8%

18.8%

21.9%

Unexplored Exploration Initiated

Poorly Explored Moderate to well Explored

Industry OverviewStrong growth in the domestic economy has resulted in accelerated domestic consumption ofpetroleum products, which registered a CAGR of 4.36% during the last five years ended March2009 (Source: PPAC). However, indigenous production of crude oil has not grown at similar pace.In fact, domestic crude oil reserves have seen a decline over the last five year period from5,431mnbbls to 5,314mnbbls. Thus, due to the increased differential between supply and demandfor crude has resulted in increased external dependence, which has risen from 59% in 1997 to73% in 2008 (Source: BP Statistical Review).

In order to improve the country's energy security, the government has taken measures toaccelerate the pace of exploration in the Indian Hydrocarbon Sector. NELP introduced by thegovernment in 1999, is one such effort. Till date, seven rounds of NELP allocation have takenplace, wherein the government has awarded 208 blocks. Of the total sedimentary area of 3,134,700square kilometer (sq km), till-date the government has awarded 1,060,295sq km. Overall, 34% ofthe exploration acreage has been awarded till date.

As the exploration acreage has been awarded to various players off-late, the level of exploration in theblocks awarded has been low. Thus, there exists immense potential in the Indian E&P Segment giventhat large acreage is yet to be explored.

Source: Oil India RHP, Angel Research

Exhibit 67: Increasing Oil and Gas deficits in India

92%

83%79%

75% 74%

8%

17% 21%25% 26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008

Domestic production Deficit Consumption

Source: DGH, Angel Research

Exhibit 68: Level of Exploration in Sedimentary Basin areas (FY1996-FY2008)

FY1996 FY2008

30% 29% 30% 28% 27%

70% 71% 70% 72% 73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008

Domestic production Deficit Total consumption

30% 29% 30% 28% 27%

70% 71% 70% 72% 73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008

Domestic production Deficit Total consumption


Cairn India

Oil & Gas

Exhibit 69: PELs awarded till April 1, 2008Company/Operator Area (sq km) PercentageONGC 512,754 48.4Reliance Industries 341,359 32.2Oil India 39,326 3.7Cairn India 38,339 3.6HOEC 25,124 2.4FOCUS 21,000 2.0SANTOS 16,496 1.6ENI SpA 14,445 1.4Prize Petroleum 13,277 1.3GSPC 11,057 1.0OAO Gazprom 7,779 0.7Geo Global Resources Inc 5,804 0.5NAFTOGAZ 3,789 0.4Jubilant Oil and Gas 2,534 0.2Essar Oil 1,729 0.2Canoro Resources 1,445 0.1Tullow Oil Plc 1,277 0.1Niko Resources 957 0.1Hardy E&P (India) Inc 859 0.1PetroGas 741 0.1Geopetrol 295 0.0Total 1,060,295 100.0

Source: Oil RHP, Angel Research


Cairn India

Oil & Gas

Company Background

Cairn India

Cairn India (CIL) is an oil and gas exploration company promoted by Cairn Energy PLC, UK(CEP). CIL was formed in August 2006, to take control of major part of oil and gas assets of CEPin India. CIL got listed on the Indian bourses on January 9, 2007 with the completion of its IPO postwhich CEP and Petronas emerged biggest stake holders in the company. Currently, their holdingin the company stands at 62.4% and 14.9%, respectively. CIL is currently the largest privateexploration and production (E&P) focused player in India with presence across sedimentary basins.CIL's current asset portfolio comprises 14 blocks (two producing blocks, one block in producing aswell as in development stage and eleven exploratory blocks). Moreover, CIL has also won bid for2 block in recent held NELP round.

Cairn Energy PLC

CEP is a Scotland-based oil and gas E&P company with activities focused on South Asia. Thecompany has exploration blocks, fields under development and producing assets spread acrossIndia, Bangladesh and Nepal. CEP has extensive experience in South Asia with a strong trackrecord in exploration and development (especially in India, having made three of the seven majordiscoveries since 2000). CEP's association with India started in 1995-96 with the acquisition ofCommand Petroleum, an Australian listed company, which had signed a PSC for Ravva. Thecompany enhanced its presence in the Indian E&P space in 1998, when it acquired 10% stake(with the option to increase it to 40%) in RJ-ON-90/1 from Shell as part of restructuring its Bangladeshoperations.

Exhibit 70: Shareholding Pattern (%)


Promoter62.4%

Petronas14.9%

Individuals2.4%

FI4.0%

MFs2.6%

FII10.8%

others2.9%

Institutions20.3%

Promoter Petronas Individuals FI MFs FII others


Cairn India

Oil & Gas

Group and Asset holding structure

CIL acquired majority of its Indian oil and gas assets (barring few blocks in Ganga Valley and ablock in the Vindhya region) after re-organisation of CEP. CIL holds various oil and gas assetsthrough its wholly-owned subsidiary, viz. Cairn India Holdings Limited (UK), which in turn holdsstake in various blocks through various subsidiaries.


Exhibit 71: CIL - Over the years


Exhibit 72: Group Holding Structure

Rajasthan block(35% stake)

Cairn India Limited

Cairn India HoldingLimited(UK)

Cairn EnergyHydrocarbonsLimited (UK)

Cairn EnergyHoldings(UK)

Cairn EnergyNetherland Holding

B.V

Cairn Energy AustraliaPTY Ltd

Rajasthan (35%)

Ravva (22 .5%)

CB-OS/2 (6.7%)

CB-OS/2(33.3%)

Cairn EnergyIndiaHoldings B.V

1995 Original PSC signed between GoI and Consortium of Shell and ONGC for Rajasthan block.1996 CEP acquired Command Petroleum, an Australian listed company with interests in Indian

oil and gas fields ( Ravva).1998 CEP acquires 10% stake (with the option to increase to 40%) in RJ-ON-90/1.1998 Became operator of CB-OS/2 block.1999 CEP increases its stake in Rajasthan block to 50% and becomes operator of the block.2000 Discovery of the Lakshmi gas field (CB-OS/2) in Cambay basin.2002 Production from Lakshmi gas field.2002 CEP increases its stake in Rajasthan block to 100% in three stages.2004 Largest oil discovery in India since 1985 in the Rajasthan block, viz. Mangala, Bhagyam and

Aishwarya (MBA).2004 Production from Gauri field (CB-OS/2).2005 Submission of FDP for four fields, viz. Mangala, Aishwarya, Raageshwari and Saraswati.2005 ONGC (government nominee) exercises 30% 'Back-in' right in development area.2006 Receives FDP approval for the Rajasthan block.2006 Made IPO following formation of Cairn India with 100% stake in Cairn India Holdings, which

holds all oil and gas assets of CEP in India.2007 GoI grants six months extension for exploration in Northern appraisal areas in Rajasthan

block.2009 CIL starts monetising its mammoth Rajasthan discoveries.


Cairn India

Oil & Gas

CIL - Proven Explorer

CIL is one of the largest private explorers in the country and has a proven track record in E&P ofoil and gas in the country. On the Exploration front, it has made three of the seven landmarkdiscoveries in India since 2000. The company has reported impressive success in the Rajasthanblock, post unsuccessful efforts by ONGC and Shell in the area. Thus, the company's exploratoryprowess is well established. Similarly, on the Production front, CIL has managed the Ravvareservoir in an excellent manner, in turn leading to recovery of around 60% of IIP reserves. Moreover,CIL has also developed its oil and gas discoveries in the Ravva and Cambay blocks at a fasterpace (13 - 28 months).


Imported crude Cairn India Other domestic

Importedcrude,78.0%

Cairn India, 16.0%

Otherdomestic, 84.0%

Domesticproduction,

22%

Exhibit 74: CIL to produce 20% of domestic oil; to reduce import bill by 5%


Exhibit 73: CIL - key discoveries1998 Ravva Satellite gas discoveries - RD5, RG and RH.1999 Rajasthan - Guda.2000 Cambay discoveries - Lakshmi, Gauri, Ambe.2001 KG Deepwater discoveries - Annapurna, Padmavati, Kanaka Durga and 'DWN-N' & Rajasthan

- Saraswati.2002 Rajasthan - Guda extension, Raageshwari.2003 Rajasthan - Kameshwari, Cambay - CB-X.2004 Rajasthan - Mangala, Aishwariya, Shakti, Bhagyam.2005 Rajasthan - NI, Vijaya & Vandana, NC-West, GSV-1, Bhagyam South and NR4.

KG Deepwater: U-1, A-1 and D-1.2006 Rajasthan - NE, NI-north, NP, Shakti North East, Kameshwari West-2 & -3, Barmer Hill

reservoir in Mangala & Aishwariya. KG Deepwater - W-1, E-1 and ultra-deepwater UD-1.2007 Rajasthan - Saraswati Crest-1, Kameshwari West-6; Ravva -RX-10 and RX-8.


Cairn India

Oil & Gas

Exhibit 75: Saving in Import bills for India due to CIL productionOil Price (US $/bbl) 50 55 60 65 70 75bpd 180,000 180,000 180,000 180,000 180,000 180,000days 365 365 365 365 365 365mnbbls pa 65.7 65.7 65.7 65.7 65.7 65.7US $ (bn) 3.3 3.6 3.9 4.3 4.6 4.9


India's import bill for the fiscal year ended March 31, 2009 stood at US $290.7bn, wherein Crudeand Petroleum products accounted for US $91.3bn (31.4% of total import bill). At peak productionof 180,000bpd from MBA fields and assuming Crude oil price of US $75/bbl, India's crude oilimport will come down by US $4.9bn (ie, a 5.4% reduction in Crude and Petroleum productsimport bill). This culminates into overall saving of 1.7% of India's total import bill.


Cairn India

Oil & Gas

Asset Profile

CIL has a varied and balanced asset portfolio comprising 13 blocks of which two are currentlyunder production (Ravva and Cambay), one is a development block (Rajasthan block,RJ-ON-90/1) where initial production has commenced and 10 are highly prospective exploratoryblocks. Additional it has also won 2 blocks in recent held NELP round. CIL has been following theplay-based approach to build its E&P portfolio, viz. a diverse portfolio based on basins, play andenvironment. CIL has been a drill bit explorer having drilled more than 180 exploratory wellsbeyond 56 obligatory wells. A large proprietary database differentiates the company from its peers.

Producing fields

Ravva Block (PKGM-1)

CIL is the operator of the Ravva field in Block PKGM-1. The field lies in the KG basin, off the coastof Andhra Pradesh. Ravva is a shallow water block with a depth of 8 to 50mtrs. Ravva fieldsaccount for 8% of India's total crude oil production. ONGC had discovered the field in 1987 andproduction at the field commenced in 1993. The PSC for the block was signed between theconsortium of ONGC (40% stake), Videocon Petroleum (25% stake), Ravva Oil (12.5% stake) andCommand Petroleum (22.5% stake) for a duration of 25 years extendable by an additional tenyears. CEP acquired Command Petroleum and became the operator of the field in 1997. CIL hasdemonstrated its superior reservoir management skills at the field with its recovery rate exceeding60% and production surpassing 200mnbbl from the block. Ravva (has around 96% uptime for itsequipment) is one of the lowest operating expenditure fields in India.

Source: Company

Exhibit 76: CIL Assets - An Overview

RJ-ON-90/1

CB/OS-2

RAVVA

Gross Production*

~44,954 boepd

Gross Production*

~14,506 boepd

ss production targetexpected ≥ 175,000 bopd

(CB/OS-2)

50%

ator) 40%

10%

Rajasthan – Exploration (RJ-ON-90/1)

ator) 100%

Rajasthan – Development

ator) 70%

30%

Ravva

ONGC

Videocon

Cairn (Operator)

Ravva Oil

Total 13 blocks2 Production Blocks

Operated gross field producti~59,461 boepd(net to Cairn ~15, 917

1 Development Block

Rajasthan block underdevelopment – MangalaBhagyam and Aishwawith a further 22 disco

10 Exploration Blocks

6 operated: 5 in India anSri Lanka4 non-operated

*Q1 FY 2009-10 figures

�

�

�

�

Gro

Cambay

ONGC

Cairn (Oper

Tata

Cairn (Oper

Cairn (Oper

ONGC

40%

25%

22.5%

12.5%

on

boepd)

,riya fieldsveries

d 1 in


Cairn India

Oil & Gas

Ravva PSC highlights

PSC allows 100% recovery of the costs incurred in exploration and development before sharingprofit petroleum with the Government of India. Moreover, 100% of operating expenditure(excluding depreciation, interest and tax paid) is allowed to be recovered.

There is no relinquishment obligation for the block.

Royalty for the block is very attractive at Rs481/tonne.

Cess is fixed at Rs927/tonne.

This translates into total tax of around US $4.25/bbl.

The government takes a share of profits from the contractor based on the post tax rate ofreturn (PTRR) earned in the previous year.

Ravva has already achieved maximum PTRR of 35% as per the PSC, and the government'sshare in profit petroleum has risen to a maximum 60% and will remain at those levels duringthe remaining life of the field.

Exhibit 77: Ravva (PKGM-1)Year Key Milestones

1994 Production Sharing Agreement signed.

1995 Command Petroleum took over as JV operator.

1996 Phase-II of development commissioned.

1997 CEP took over Command Petroleum.

1998 Ravva field doubles its oil reserves.

1999 Production ramped up to 50,000bpd of oil.

2000 Water Injection up-gradation.

2001 Additional sub-sea lines for Ravva satellite gas project.

2001 Achieves zero Gas Flaring.

2001 Third Associate gas recovery compressor.

2001 Ravva Satellite Gas development project.

2002 Additional crude oil storage tank installed.

2002 Ramps up Gas production from 30mmscfd to 70mmscfd.

2003 100mn barrels of oil production by JV.

2005 & 2008 ISO 14001 & OSHAS 18001 certification. Installation of Additional compressors.

2005 Innovative Technology application of drag reducing additive for incremental oilproduction.

2008 First of its kind in India - Multi-phase pumps for incremental oil production.

2008 200mn barrels of oil production by JV.

2008 Completion of Infill drilling programme in 17 months.

2008 Commissioned Water Re - Injection project making Ravva eco - friendly.

2008-2009 Additional sub-sea lines planned for Ravva.Source: Company


Cairn India

Oil & Gas

Cambay Block (CB-OS/2)

The Cambay Block situated in Gujarat in West India is mainly an offshore block. CB-OS/2 mainlycomprises two fields Lakshmi and Gauri. CIL has 40% participating development interest in theLakshmi and Gauri fields. ONGC (50% stake) and Tata Petrodyne (10% stake) are the otherpartners in the fields. CIL and its JV partners signed a PSC with the GoI for the block in June 1998.Block CB-OS/2 has yielded natural gas discoveries in its offshore Lakshmi, Gauri and Ambe fieldsand in its onshore CB-X field. Current production from the field is around 14,500bpd of OEG.

Exhibit 78: Cambay Block (CB-OS/2)Year Key Milestones

1998 Production sharing contract signed.2000 Lakshmi oil & gas field discovery, fastest development in India - discovery to

production in only 28 months.2001 Gauri oil & gas discovery.2001 Ambe oil & gas field discovery.2002 Safety case developed for the first time in India.2002 Lakshmi gas field developed and Gas production commenced.2003 Lakshmi field ramped up gas production to 130mmscfd.2004 CB-X onshore discovery.2004 Gauri field developed and Gas production commenced.2004 Hydrocarbon Dew Point Project completed to meet sales gas specifications.2005 Lakshmi field Phase II development - 5 new wells drilled.2005 CB-OS/2 onshore & offshore facilities certified for ISO 14001:2004 standards.2005 Gauri Oil development - First oil from Gauri.2006 Oil Production up to 3,000bopd.2006 Ambe field commerciality declared.2006 Reverse osmosis plant installed at Suvali village.2007 CB-X field development completed & Gas sales commenced.2008 Oil Production up to 6,000bopd.2009 Upgraded oil processing capacity to 10,000bopd.

Source: Company

Cambay PSC highlights

As per PSC, CIL is allowed to collect 100% of costs incurred in exploration and developmentbefore sharing any profit with government.

The costs that can be recovered include operating and capital costs but exclude depreciation(non-cash cost), interest and tax paid.

There is no royalty or cess to be paid by contractor on either oil or gas being produced fromthe block.

The government takes a share of profit from contractor based on the post tax rate of return(PTRR) earned in the previous year.


Cairn India

Oil & Gas

Cambay has already achieved maximum PTRR of 40% as per the PSC, and the governmentshare in profit petroleum has risen to a maximum of 60% and will remain at those levelsduring the remaining life of the field.

Rajasthan Block (RJ-ON-90/1)

A pre-NELP block, the Rajasthan block (RJ-ON-90/1) lies in Barmer basin, which is a northernextension of the well-established oil and gas producing Cambay basin. The main developmentarea (1,858km2) includes Mangala, Aishwariya, Raageshwari and Saraswati (MARS), is sharedbetween Cairn (70% holding) and ONGC, which has exercised their back in right for 30%. Afurther Development Area (430km2), including the Bhagyam and Shakti fields, is shared betweenCIL and ONGC in the same proportion. The government has also allocated to CIL a thirddevelopment area, viz. Kameshwari West Development Area of 822km2. Thus, CIL holds 3,111km2

of the total acreage under long-term contracts spread across the districts of Barmer and Jalore.

Source: Company

Exhibit 79: Rajasthan Block (RJ-ON-90/1)

RAAGESHWARI OIL

RAAGESHWARI GAS

RAAGESHWARI EAST

AISHWARIYA

Development Area-1Awarded: Oct 2004

Area: 1,859 km2

Development Area-2Awarded: Nov 2006

Area: 430 km2

Kameshwari WestDevelopment Area

Area: 822 km2

BHAGYAM

MANGALA

NC West Oil and Gas

Saraswati

Kameshwari

Guda

Bhagyam

South

N-I

Mangala Barmer Hill

Vijaya and Vandana

GS-V

N-P

N-E

N-I-North Shakti NEShakti

Kameshwari West

N-R

Original PSC for the Rajasthan blocks was signed between the GoI and Consortium of ONGC andShell India Production and Development in 1995. CIL initially acquired 10% stake in the block in1997. Thereafter, carrying through Shell in the exploration stage, CIL gradually increased its stakein the block to 50%. Towards end May 2002, CIL acquired Shell's balance 50% interest in theblock.


Cairn India

Oil & Gas

The basin is informally sub-divided into Northern and Southern fields. The Northern fields arerelatively simple large-scale tilted fault blocks, with stacked fluvial sandstones of the FatehgarhGroup as the principal reservoir rocks. The Southern fields comprise two principal plays, viz. ashallow crude oil accumulation (in fields such as Saraswati, Guda and Raageshwari oil) anddeeper gas accumulation (beneath these fields, such as in the Raageshwari Deep gas field).

Thus, the Rajasthan Block accumulation falls into three groups:

Main Northern fields - Mangala, Bhagyam and Aishwariya (MBA). This area was awardedto CIL in October 2004 and is currently under development.

Small Southern fields - Saraswati, Raageshwari oil and deep gas.

Other Accumulations - GS-V, Guda, N-E, Kameshwari, Shakti, N-I, N-P, Bhaygam South,NI-North, NC West, Vijaya & Vandana, NR, Mangala Barmer Hill and Aishwariya Barmer Hill.

From the reservoir perspective, the basin is sub-divided into four separate sub-heads:

Fatehgarh: It is the primary reservoir rock of the Northern Rajasthan fields of Mangala,Bhagyam and Aishwariya.

Barmer Hill: This is the lower permeability reservoir that overlays Fatehgarh.

Dharvi Dungar: It is the secondary reservoirs in the Guda field and is reservoir rock seen inthe Kaameshari - West discoveries.

Thumbli: It is the youngest reservoir in the basin and is the primary reservoir for theRaageshwari field.

Till 2003, CIL's focus in the block was on the Southern part, which has resulted in smaller discoveriessuch as Guda (1998), Saraswati (2002) and Raageshwari (2003). However, with CIL's focus shiftingNorthwards in 2004, it made largest discoveries of the lot - Mangala, Bhagyam and Aishwariya.

Exhibit 80: Rajasthan Block (RJ-ON-90/1)Year Key Milestones1995 PSC signed1998 Cairn farmed-in for 27.5%1999 Guda discovery1999 Cairn Farmed-in for additional 22.5%2001 Saraswati discovery2003 Raageshwari discovery2003 Cairn Acquired 100% interest from Shell2003 Kaameshwari discovery2004 Mangala,Aishwariya,Bhagyam and Shakti discovery2005 Government (through ONGC) excercised 30% back-in interest in development area.2005 Vandana,N-I, NC West and Bhagyam South discovery2006 Rageshwari Deep gas N-E Discovery and Mangala Barmer Hill discoveries2007 Cairn India's IPO2007 NI North discovery, KW3, Saraswati Crest 1 and KW6 discovery2008 Raageshwari East 1-z discovery2009 Mangala Crude Oil production commenced

Source: Company


Cairn India

Oil & Gas

Source: Company

Exhibit 82: Investment multiple caps maximum government share at 50%Investment Multiple (x) Profit share

0 < 1.5 20

1.5 < 2.0 30

2.0 < 2.5 40

> = 2.5 50

Full Cost recovery: PSC allows 100% cost recovery for CIL before profit petroleum. CIL isallowed to recover entire exploration and development capex plus cess & operating expenditureincurred before any profit petroleum is shared with the government.

Seven-year Tax Holiday: Profit from sale of crude oil produced from the MBA fields is exemptfrom Income Tax for the first seven years of production. The company will only be liable to payminimum alternative tax (MAT) at the rate of 15%, which can be carried forward and utilisedto set off the tax liability in later years.

Source: Company

Exhibit 81: RJ-ON-90/1 enjoys favourable profit sharing contract

30%

40%

50%

60%

70%

80%

90%

50%

60% 60%

85% 85% 85%

RJ -ON -90/1 Ravva CB -OS/2 KG D6 KG D3 KG D9

RJ-ON-90/1 PSC highlights

CIL enjoys favourable fiscal terms for its Rajasthan blocks compared to other E&P blocks in thecountry, which increases the attractiveness of its large reserve base in the block.

No Royalty for CIL: Though according to the production sharing contract (PSC), Royalty atthe rate of 20% is applicable for the Rajasthan block, it would be paid by the governmentlicensee (ONGC) for the entire production (ie. including CIL's share of 70%).

Low government profit petroleum: The block also enjoys favourable fiscal terms by way ofprofit petroleum compared to the other blocks. The peak government share of profit petroleumis 50% compared to the other blocks where the government sharing is typically 60 to 85%.


Cairn India

Oil & Gas

MBA fields - To transform growth orbit for CIL

Mangala, Bhagyam and Aishwariya, collectively known as the MBA fields are currently under thethe development process at the Rajasthan block. MBA accounts for 55% of the total 2P STOIIPand 92% of the 2P Reserves of the block. The MBA fields together are likely to register peakproduction of 180,000bopd (gross) and 126,000bopd (net to CIL). At its peak output, the fields areexpected to account for 20% of the domestic oil production of the country.

Mangala field

Mangala is the principal field in the Rajasthan block. The main reservoir unit of the field is theFatehgarh Group comprising very good quality sands. It has a gross resource base (STOIIP) of1,293mnboe (63% of the total MBA STOIIP). The field has 2P reserves of 467mnboe, thus itimplying a recovery ratio of 36.1%. The reserve number is based on the assumption of extensionof the Rajasthan block PSC to 2041 (economic life) from 2020. However, application of EOR(based on polymer flooding and ASP flooding) is expected to result in additional recovery of202mnboe of reserves (additional recovery of 15.6% of the STOIIP). Thus, on an overall basis,recovery from the field is likely to be around 51.7%. The field is estimated to produce 125,000bpdof oil at its peak output, thereby contributing 69.4% of the total peak output estimates of the MBAfields. Original FDP for the field was submitted in May 2006, however, towards end 2007 CILsubmitted a plan regarding upgrade of Mangala STOIIP estimates of reserves and resources,thus revised its FDP.

Bhagyam field

Bhagyam is the second largest field in the Rajasthan block situated in the Northern fields. Thefield lies north east to the Mangala field. It has a gross resource base (STOIIP) of 468mnboe ofreserves. The field has 2P reserves of 142mnboe, thus it implying a recovery ratio of 30.3%. Onapplication of EOR (based on polymer flooding and ASP flooding) is expected to result in additionalrecovery of 70mnboe of reserves (additional recovery of 15.0% of the STOIIP reserves). Peakproduction from the block is estimated to be 40,000bpd as per the FDP plan filed with the DGH.

Source: Company

Exhibit 83: Mangala STOIIP over the years

829

956

1,071

1,202

1,293

400

600

800

1,000

1,200

1,400

DOC (Jun 2004) DOC (Aug 2004) FDP (Oct 2005) IPO (Dec 2006) Dec 2007

mn

bo

e


Cairn India

Oil & Gas

Aishwarya field

Aishwariya is the smallest of the three fields currently under development. It has a gross resourcebase (STOIIP) of 293mnboe of reserves. The field has 2P reserves of 64 mnboe additionally theEOR potential from the field stands at 46 mnboe, thus 2P+ EOR combined would form recoverablereserves of 110mnboe. Currently, the production plateau from the field is estimated to be 10,000bpd.However, due to increase in the reserve base of field post previous FDP, management has indicatedthat the peak production from the field could be revised upward to 20,000bpd, we are factoring inproduction of 15,000bpd from the field.

Exploratory Blocks - Offers lot of promise

CIL has a bouquet of well- diversified Exploratory portfolio of 10 blocks of which CIL is operator in6 blocks while the rest is in collaboration with its Consortium partners. Of these 10 blocks, 9 are inIndia, while one block is in Sri Lanka. CIL has had a success ratio of 40% over the last 10 years.CIL has also won two blocks in recent NELP round.

The key near term exploratory activity to watch out for will be drilling results of KG-DWN-98/2.Also, the ONGC-CIL Consortium plans to drill five exploratory wells in the onshore block ofKG-ONN-2003/1 during FY2010. Given the geological structure of the block, which is akin to RIL'sKG-D6 block, results of drilling would be a key factor to watch in the short term.

Exhibit 84: CIL's Exploratory PortfolioOperational Blocks CIL’s Interest (%)

GV-ONN-2003/1 24

VN-ONN-2003/1 49

PR-OSN-2004/1 35

SL-2007-01-001 100

KG-ONN-2003/1 49

GV-ONN-2002/1 50

Non-Operational Blocks

KG-DWN-98/2 10

RJ-ONN-2003/1 30

GS-OSN-2003/1 49

KK-DWN-2004/1 40Source: Company, Angel Research


Cairn India

Oil & Gas

Resource analysis

A major part of CIL's resources lie in the Rajasthan block, which has proven to be a world classasset with STOIIP of 3.8bnboe. Of this, 2.1bnboe is currently under development.

Source: Company

Exhibit 85: Resource and Reserves estimates of CILParticulars Gross Proved and Gross Proved and Net Proved and

Probable Hydrocarbons Probable reserves Probable reserves intially in Place (mnboe) and resources (mnboe) and resources (mnboe)

Rajasthan MBA 2,054 685 480Rajasthan MBA - EOR 308 216RJ Small fields - Saraswati &Raageshwari oil 300 12 8Other Rajasthan 1,408 74 52Ravva (Main + Satellite gas) 625 72 16CB (Laxmi Gas,Lakshmi Oil,Gauri Gas, Gauri Oil, CB-X) 156 20 8KG-DWN-98/2 650 353 35Total 5,193 1,524 815


Cairn India

Oil & Gas

Rajasthan Block: Infrastructure and development status

CIL in line with its guidance has delivered the first oil from the block in 2HCY2009. This is a majorachievement for the company considering that in spite of the various bottlenecks, it has developeda world class production base in Rajasthan. The Rajasthan block is by far the largest projectundertaken by the CIL management. This is also an achievement amidst a scenario where majorglobal projects have witnessed delays impacted by various issues. The Rajasthan block is a newhydrocarbon basin, which is not connected to any of the company's infrastructure. Hence, CIL hadto develop not just the production field, but also associated facilities for evacuation of the crude oilproduced from the field.

CIL is currently building facilities for production of crude oil from its Rajasthan block. First oil fromthe block commenced from 'Train-1' having capacity of 30,000bopd. Subsequent trains will seeincrease in production going ahead. 'Train-2' is likely to operate from 1QCY2010 in line with thepipeline commissioning. 'Train-3' will witness peak output from Mangala field. 'Train -4' is likely toincrease the processing capacity of the field to 205,000bopd.

Exhibit 87: Rajasthan integrated evacuation facilities

Aishwariya

Bhagyam

Intra-field

Pipelines

and Crossings

Mangala

Raageshwari Gas Terminal (RGT)and Well Pads

Saline water for MPT and secondaryrecovery from reservoirThumbli water field facilities

Water System

Raageshwari Gas piped to MPTCombined with Mangala associatedgas for power generation

MPT and Well Pads

Processing Capacity: 205 kbopd1 x 30 kbopd processing train: Completed & Ready2 x 50 kbopd processing trains:1st in Q4 2009 & 2nd in H1 20101 x 75 kbopd train, scope for further expansion: 2011Fluid handling capacity 1 mm bfpd>350 wells, >40 well pads

~700 km pipeline to Gujarat coastSkin Effect Heat Management Systems(SEHMS)Multiple oil delivery points

Export oil pipeline plus heating stations

Infrastructure

~500 km of intra and inter fieldpipelines~80 km of inter field roadsBuilt-in fire and safety systems

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�

�

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Source: Company


Exhibit 86: Production Ramp up schedule at Mangala field (in Kbpd)Period Production capacity Comment3QCY2009 30 (First Train) Evacuation through Trucking

1QCY2010 80 (First & Second Train) Evacuation starts from Pipeline;Rampup of Mangala production

2QCY2010 130 (First, Second and Third train) Further rampup of Mangala production

3QCY2010 130 (First, Second and Third train) Full rampup of Mangala production


Cairn India

Oil & Gas

Mangala Processing Terminal (MPT) and allied facilities

To produce oil and the associated gas and water, the company has set up the Mangala ProcessingTerminal (MPT). MPT is spread over 1.6 sq km, or approximately 400 acres. MPT will have fourTrains, which will come up in a phased manner. The combined processing capacity of the terminalwill be 205,000bopd with scope for expansion. Production from 'Train - 1' (has a production capacityof 30,000bopd and is currently operational) will be evacuated by trucks at an estimated Opex ofUS $10/bbl. 'Train 2' will have capacity of 50,000bopd and will coincide with the pipelinecommissioning.

Processing of crude from MPT's four trains requires an extensive water heating, circulating andrecycling system. It also requires gas recovery and heat and power systems. MPT will have crudestorage capacity of 625,000bbl comprising 5 tanks of 125,000 each. This implies storage facilitieswith storage capacity of 4 days of peak oil production from the MBA fields.

Source: Company

Exhibit 88: Mangala Processing Terminal

Source: Company

Exhibit 89: Overview of Processing System at MPT

FLUIDS FROMOIL WELLS

ASSOCIATED GAS RECOVERY

MAKEUP GAS FROM RAAGESHWARI

PRODUCED WATER TREATMENT

MAKEUP WATER FROM THUMBLI SALINE WELLS

Heater SeparatorSlug Catcher Settling Tank Dehydrator Export OilStorage Tank

OilPump

TO EXPORTPIPELINE

TO FUEL GASDISTRIBUTIONSYSTEM

INJECTEDBACK INTOOIL WELLS

FIRST STAGE PREPARATION SECOND STAGE PREPARATION STORAGE & EXPORT

D Overview of the Processing System at the MPTSCHEMATIC DIAGRAM


Cairn India

Oil & Gas

For drilling purposes, CIL has already deployed two drilling rigs (sourced from Weatherford) at thesite, which can drill 60-70 wells per annum. These rigs are custom made for CIL to minimise traveltime between the two drilling locations. Average time for moving the rigs will be 6-8 hours asagainst 3-4 days for a normal rig. To achieve peak production at the Mangala field, CIL needs todrill 35-40 wells. During the life of the MBA fields, around 350 wells are likely to be drilled usingthese rigs.

Energy Infrastructure

Development of the Raageshwari gas field in the South of the development area will be critical forheating and power generation requirements of production. Gas from the Raageshwari gas fieldwill be transported to the northern fields through an 80km gas pipeline for meeting the energyrequirements for production and transportation purposes. The gas will in turn be used to generatesteam, which will be the main source of heat to help produce the Rajasthan crude. Steam generationwill be done using 5 x 115 metric tonne/hour boilers. All power requirements of MPT will be met bycaptive power plants comprising four 12MW steam turbine generators and three 2MW emergencydiesel generators. There will be 20 water and oil storage tanks.

Water source: Water to create steam and for flooding the oil reservoirs to help extract the crudewill be produced from the Thumbli saline water aquifer, 20kms away from Mangala field. CIL hasdrilled five water wells, each with a capacity of 63,000bpd. The saline water will be transported tothe MPT by a pipeline.

Source: Company

Exhibit 90: Rajasthan Block - Oil Recovery System

Horizontal

Well

Water

Injector

Saline Water

Abstraction

Separator + Heat

Heat

Gas Recovery SystemFuel Gas

Distribution

System

Export

Pipeline

Export

Oil Storage

Vertical

Well

ThumbliSaline Aquifer

Barmer HillFatehgarh

Oil

Water TableFresh Water


Cairn India

Oil & Gas

Pipeline facility

As per the PSC, CIL is obliged to sell its output to the government nominee until India attainsself-sufficiency in its crude oil supply. Initially, IOC had evinced interest in the off-take of crudefrom the Rajasthan fields, however, on account of issues regarding refining of the heavy crude, itbacked out. Thereafter, as part of the process, in September 2005, the government chose MRPL(ONGC's 72% subsidiary) as a nominee to buy the crude from the Rajasthan block. Delivery pointfor the crude was fixed at the field's storage facilities. Thus, the task of setting up evacuation ortransport infrastructure was the responsibility of MRPL. To utilise the crude, MRPL deliberated ontwo options, viz. evacuate the crude through a pipeline to the Mundra port and further to MRPL'srefinery at Mangalore through crude oil tankers. Second, there was deliberation over a well headrefinery of 7.5MMTPA. Utilisation of the Rajasthan crude at its current Mangalore refinery wasfound unfeasible by MRPL due to its refining configuration (Nelson's complexity Index of 7.5)wherein its current configuration allows it to lift only 1.2MMTPA of the crude oil. For higher off-take,it would have to upgrade the current complexity and crude handling facilities. Due to high investmentrequirements to build a pipeline and upgrade the refining infrastructure, MRPL refused to take fullvolumes.

The second option of a well head refinery was evaluated to be financially unviable by MRPL due topoor returns. Thus, MRPL has asked to de-nominate itself as the sole buyer of the crude oil fromCIL's Rajasthan block. Thus, post MRPL's refusal to take full volumes, the government had to findadditional buyers for the crude from the Rajasthan block and determine means of evacuation ofthe crude produced there. Thus, CIL and partner ONGC agreed to build a pipeline from MPT toSalaya.

At the end of April 2008, GoI gave its approval for shifting the crude oil delivery point as definedunder the PSC from MPT at Barmer to the Gujarat coast. Thus, shifting of the delivery pointresulted in inclusion of pipeline cost in the FDP for the project. Thereafter, 'in principle' approval forRoU was granted to lay the pipeline up to the marine terminal on the Gujarat coast.

The 24" heated and insulated pipeline is approximately 700km long connecting from MPT at Barmerto a marine terminal on Gujarat coast. Of the 700km, 154km of pipeline is situated in Rajasthan,while the rest is in Gujarat. Construction work of the pipeline began in June 2008 in Gujarat, whilework on the Rajasthan section started in February 2009. The delay in commencement of work inthe Rajasthan section was on account of the levy of State Sales Tax.

The pipeline will provide CIL access to multiple refineries as it would get connected to IOC's crudeoil pipelines and the private sector refineries of RIL and Essar. It would also provide reach to thecoastal refineries through the coastal route. The pipeline along with having marine facilities alsoopens up export potential for the company and help in better price discovery for its Rajasthancrude in the long term.

Along with the crude oil pipeline, a parallel pipeline of 8" will carry the Raageshwari gas that will beused for power generation, which will be needed to prevent the crude from solidification. Along thelength of the pipeline, there will be more than 35 skin effect heat induction management system(SEHMS) heating stations. Gas will be supplied at each station to generate the power required toheat the pipeline for approximately 10km on either side to ensure that crude remains constantlyheated above 65OC.


Cairn India

Oil & Gas

In addition, there is an intermediate terminal at Viramgam for storage and further pumping to thecoast. There will also be two pigging stations at Sanchore and Wankaner to insert 'Pigs' (basicallymetal cylinders) that are used to clean the pipeline and scour it of wax. Over and above the mainpipeline, there will be a 22km spur line at Radhanpur culminating into an export terminal havingtwo pre-heating tanks, with a capacity of 9,000 barrels.

COASTAL TERMINALSTORAGE AND EXPORT

Distributionto buyer

MANGALAPROCESSINGTERMINAL

SHEMS

RAAGESHWARIGAS SUPPLY

Distributionto Refiners

SanchorePigging Station

WankanerPigging Station

VIRAMGAMINTERMEDIATETERMINAL

Storage,Pumpingand Export

GAS PIPELINE

HEATED CRUDE OIL PIPELINE

Source: Company

Exhibit 92: Crude Pipeline - Schematic Diagram

Source: Company

Exhibit 91: Rajasthan crude oil pipelinep

DELHI

Panipat

Bhatinda

Mangala

Rajasthan

DELHI

Mathura

T kiTrucking

Route

Cairn Pipeline

Viramgam

Gujarat

Kandla

Radhanpur

Cairn Pipeline

Under

Construction

g

KoyaliJamnagar

/ Salaya

ƒ

Bhogat

Tankers to

Coastal

Refineries

Refinery

Existing Pipelines

Pipeline Route


Cairn India

Oil & Gas

Refineries Refinery Location Capacity (kbpd)IOCPanipat Inland 240Mathura Inland 160Koyali Inland 274HPCLBhatinda Inland 180Mumbai Coastal 150BPCLMumbai Coastal 240Bina Inland 120MRPLMangalore Coastal 240PrivateReliance Coastal 660Reliance SEZ refinery Coastal 580Essar Coastal 240TOTAL 3,084

Exhibit 93: Refineries accessable to pipeline

Source: Company, Infraline, Angel Research


Cairn India

Oil & Gas

Pricing of Rajasthan crude

Cairn's Rajasthan crude is sweet but waxy in nature with a higher pour point leading to higherviscosity. These characteristics would result in higher production of heavy-end distillates duringthe primary distillation of crude oil. This is because apart from being waxy, Rajasthan crude is alsoheavy (with specific gravity 0.89) and has high Conardson Carbon Residue (CCR) content of over10% by weight. This means most simple refiners will find it difficult to process the crude unlessthey have substantial secondary processing capabilities. Additionally, due to higher viscosity,Rajasthan crude oil has the propensity to solidify at much lower temperature than in the normalcase. Thus, the refineries handling the same would need to keep it at higher temperature to preventsolidification of the crude oil. On account of the above-mentioned factors, pricing of the Rajasthancrude will be at a discount to the Brent oil prices. The discount is anticipated to be around 10-15%as per the recent management commentary.

Exhibit 94: Rajasthan crude characteristics v/s other crudeParticulars Rajasthan Mumbai High Nile BlendAPI 27.06 39.20 35.10Pour point Deg c (max) 48.00 27.00 32.00Acid Number, mg KOH/gm 0.42 0.08 0.19Sulphur, % wt 0.14 0.15 0.04Conradson carbon residue, % wt 10.20 1.04 3.28


Exhibit 95: Crude: How Yields stack-up compared to other crudeParticulars Rajasthan Mumbai High Nile BlendLPG + Fuel Gas 0.02 2.91 0.17Naphtha 1.4 17.8 4.6Kerosene 4.1 26.5 14.7Diesel 17.1 20.3 17VGO 44.2 24.3 30.2Short Residue 33.0 8.1 33.7


The recently finalised crude pricing agreement would be applicable till March 2011. However, webelieve with opening up of the export option and with refineries likely to adjust to Rajasthan crude,better pricing discovery would be witnessed going ahead. We do not expect increase in the discountover the benchmark for Rajasthan crude. On the contrary, we believe the export option and betterappetite could reduce the discount in the future.

To elucidate the same, we have considered the basket of Indonesian crude (Duri and Widuricrudes in equal proportions), which has similar properties like Rajasthan crude.


Cairn India

Oil & Gas

Exhibit 96: Duri-Widuri mix: Closest proxy to Rajasthan CrudeParticulars Mangala Brent Duri Widuri Duri-Widuri

mix (50:50)API 27.4 38 21 32.6 26.8Sulphur 0.14 0.44 0.14 0.07 0.105Barrels/Tonne 7.1 7.5 6.8 7.3 7.05Pour point 42.0 3.0 21.0 42.0 31.5


Duri-Widuri mix (50:50 ratio) has been trading at an average discount of around 10% sinceJanuary 2004. However, currently the discount has reduced to around 1-3% following the declinein production of heavy crude oil by OPEC countries.

We have factored in a discount of 15.0% over the Brent prices for Rajasthan crude, which is in linewith the recent announcement by management. However, the same is slightly than the averagediscount compared to Duri-Widuri mix.


Exhibit 97: Brent, Duri-Widuri mix and Discount over the years

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-00

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

-5

0

5

10

15

20

25

30

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Discount (RHS) Brent Dhuri -Widhuri

US

$/bb

l

US

$/bb

l


Cairn India

Oil & Gas

Annexure I - Reserves, Resources and their RecoveryAssets of the Upstream companies include the oil and gas lying beneath the Earth’s surface. Thedynamics of the Sector is elucidated here for a better understanding of the Upstream companies.

What is Total Petroleum Initially-in-place?

Total Petroleum Initially-in-place (PIIP) or the Original Hydrocarbon-Initially-In-Place (OHIIP) isthat quantity of oil and natural gas (hydrocarbon), which is estimated to exist originally in naturallyoccurring accumulations. It is that quantity of oil and natural gas which is estimated, on a givendate, to be contained in known accumulations, plus those quantities already produced there-from,plus those estimated quantities in accumulations yet to be discovered.

Source: Society of Petroleum Engineers

Exhibit 98: Petroleum Reserves and Resources

UNDI

SCO

VERE

DPI

IP

TO

TAL

PE

TR

OL

EU

MIN

ITIA

LLY

-IN

-PL

AC

E(P

IIP

)

DIS

CO

VE

RE

DP

IIP

SUB-

CO

MM

ERC

IAL

CO

MM

ERC

IAL

PRODUCTION

RESERVES

Proved Probable Possible

1P 2P 3P

CONTINGENTRESOURCES

1C 2C 3C

UNRECOVERABLE

PROSPECTIVERESOURCES

LowEstimate

BestEstimate

HighEstimate

UNRECOVERABLE

Range of Uncertainty Not to scale

Incr

easi

ng

Ch

ance

of

Co

mm

erci

alit

y

What are Reserves?

Reserves are those quantities of petroleum anticipated to be commercially recoverable byapplication of development projects to known accumulations. Reserves must satisfy four criteria:(a) they must be discovered, (b) they must be recoverable, (c) they must be commercial,(d) remaining based on the development projects applied.

Reserve classification

Reserves are further sub-divided based on the project maturity and/or characterised by theirdevelopment and production status.

Proved Reserves (1P Reserves): 90% probability of recovery of all or more reserves

Proved reserves are those reserves that can be estimated with a high degree of certainty to berecoverable. It is likely that the actual remaining quantities recovered will exceed the estimatedproved reserves. At least 90% probability exists that quantities actually recovered will equal orexceed the estimate.

Probable Reserves (2P Reserves): 50% probability of recovery of all or more reserves

Probable Reserves are additional reserves, which by analysis of geo-science and engineeringdata are less likely to be recovered than proven reserves, but more certain to be recovered thanPossible Reserves. It is equally likely (50% probability) that actual remaining quantities will begreater than or less than the sum of the estimated 2P (Proved plus Probable) Reserves. Probable


Cairn India

Oil & Gas

Source: Society of Petroleum Engineers

Exhibit 99: Reserves and Resource based on Project Maturity

PRODUCTION

On Production

Range of Uncertainty Not to scale

Incre

asin

gC

han

ce

of

Co

mm

erc

iality

RESERVES

CONTINGENTRESOURCES

UNRECOVERABLE

PROSPECTIVERESOURCES

UNRECOVERABLE

TOTA

LP

ET

RO

LE

UM

INIT

IAL

LY-I

N-P

LA

CE

(PIIP

)

DE

ISC

OV

ER

ED

PIIP

CO

MM

ER

CIA

LS

UB

-CO

MM

ER

CIA

LUN

DEIS

COVE

RED

PIIP

Project MaturitySub-classes

Approved forDevelopment

Justified forDevelopment

Development Pending

Development Unclarifiedor On Hold

Development not Viable

Prospect

Play

Lead

Reserves may be assigned to areas of a reservoir adjacent to Proved Reserves, where datacontrol or interpretations of available data are less certain.

Possible Reserves (3P Reserves): 10% probability of recovery of all or more reserves

Possible Reserves are additional reserves, which by analysis of geo-science and engineeringdata, less likely to be recoverable than Probable Reserves. Total quantities ultimately recoveredfrom the field have a low probability to exceed the sum of the estimated 3P (Proved plus Probableplus Possible) Reserves. Possible Reserves may be assigned to areas of a reservoir adjacent toProbable Reserves, where data control and interpretations of available data are progressively lesscertain. At least 10% probability exists that quantities actually recovered will equal or exceed the3P estimate.

Contingent Resources are those quantities of petroleum, which are potentially recoverable, butare currently not considered to be commercially recoverable due to one or more contingencies likeno viable market for the produce, dependency on technology for commercial recovery, etc.

Prospective Resources are those quantities of petroleum, which are estimated, as of a givendate, to be potentially recoverable from undiscovered accumulations where no drilling has takenplace. This undiscovered potential accumulation is evaluated according to their chance of discoveryand assuming a discovery at the place.

Oil Extraction and Recovery

Recovery of oil basically means production/extraction of oil reservoirs, which is dependent onfactors like reservoir characteristics, density of oil, etc. When the reservoir rocks are "tight" suchas shale, oil generally cannot flow through, but when they are permeable such as in sandstone, oilflows freely. Also, the flow of oil is often helped by natural pressures (due to water and gas presentin the reservoir) surrounding the reservoir rocks and gravity of the oil. Water (present below theoil) and gas (present above the oil) provide a natural recovery for the oil. Similarly, gravity of oilmeasuring its viscosity also tends to span in a large range from liquids as light as gasoline toheavy as tar. The lightest forms tend to result in higher production rates. Post extinguishment ofnatural reservoir energy, we resort to secondary and tertiary recovery to extract oil. Thus, to extractoptimum oil from a reservoir, 3-stage recovery process is applied by oil extraction companies.Each stage helps recovering more oil than the previous one, thus enhancing the overall recoveryrate of the reservoir. Each stage is explained briefly as below:


Cairn India

Oil & Gas

Primary recovery

This is a natural recovery process of oil without applying any external pressure. If the undergroundpressure in the oil reservoir is sufficient, then this pressure will force the oil to the surface. Gaseousfuels, natural gas or water are usually present, which also supply the needed underground pressure.While the exact recovery based on primary recovery is dependent on the reservoir characteristics(porosity of the rock and viscosity of the oil), usually, about 15- 20% of the oil in a reservoir can beextracted using primary recovery methods. Similarly, the primary recovery also depends on thedensity of the oil, wherein lighter oil has higher recovery compared to heavier oil.

Secondary recovery

Over the lifetime of the well as pressure falls, at some point there is insufficient undergroundpressure to force the oil to the surface. Thus, if economical, as often is, the remaining oil in the wellis extracted using secondary oil recovery methods. Secondary oil recovery uses various techniquesto aid in recovering oil from depleted or low-pressure reservoirs. Sometimes pumps, such asbeam pumps and electrical submersible pumps (ESPs), are used to bring the oil to the surface.Other secondary recovery techniques increase the reservoir's pressure by water injection, naturalgas re-injection and gas lift, which inject air, carbon dioxide or some other gas into the reservoir.For this purpose, injection wells are drilled besides the producing wells. Together, primary andsecondary recovery generally allows 25% to 35% of the reservoir's oil to be recovered.

Tertiary recovery (Enhanced Oil Recovery; EOR)

Tertiary recovery method, generally referred to as EOR, provides artificial lift to the reservoir andhelps to produce oil over and above the primary and secondary recovery methods. It also involvessophisticated techniques that alter the original properties of the oil. EOR generally happens alongwith the secondary recovery process. EOR's purpose is not only to restore formation pressure,but also to improve oil displacement or fluid flow in the reservoir. Increase in crude oil prices hasseen applicability of this method increasing in the recent past even though the operating costs arehigh.Also, the method generally increases oil recovery by around 15-20%.The major types ofEOR are chemical flooding (ASP flooding, micellar-polymer flooding), miscible displacement (carbondi-oxide injection or hydrocarbon injection) and thermal recovery (in-situ combustion).

Source: Company

Exhibit 100: Application of the EOR process


Cairn India

Oil & Gas

Source: Company

Exhibit 101: Result of ASP flooding on the recoverable reserves

Alkaline-Surfactant-Polymer (ASP) Flooding Oil Saturation Display at Pore

Level Reduction in Trapped OilOriginal oil

Sand Grain Remaining oil Water

After ASP floodInitial After Waterflood

Source: Company

Exhibit 102: Result of Polymer flooding v/s Water flooding

Polymer Flooding


Cairn India

Oil & Gas

Key AcronymsAcronym Description1P Reserves Proved Reserves2P Reserves Proved and probable Reserves3P Reserves Proved + Probable + Possible ReservesAPI American Petroleum InstituteAPM Administered Pricing MechanismASP Alkali Surfactant Polymerbbl/bbls barrel/barrelsBCM Billion Cubic Metersboe barrel of oil equivalentboepd barrel of oil equivalent per dayBPCL Bharat Petroleum Corporation LimitedCBM Coal Bed MethaneCEP Cairn Energy PlcCIL Cairn India LtdDGH Directorate General of HydrocarbonsEOR Enhanced Oil RecoveryFDP Field Development PlanGoI Government of IndiaHPCL Hindustan Petroleum Corporation LtdIOC Indian Oil CorporationIM Investment MultipleKbpd Thousand barrels per dayMBA Mangala, Bhagyam and Aishwariyamnboe million barrels of oil equivalentmmbtu million British thermal unitsmmscmd million metric standard cubic meters per daymnbbls million barrelsMRPL Mangalore Refining and Petrochemical LtdMoPNG Ministry of Petroleum & Natural GasNELP New Exploration Licencing PolicyOGIP Original Gas In PlacePEL Petroleum Exploration LicensePMT Panna, Mukta and TaptiPSC Production Sharing ContractPTRR Post Tax Rate of ReturnSTOIIP Stock Tank Oil Initially In PlaceTCF Trillion Cubic FeetWI Working Interest



Cairn India

Oil & Gas

Profit & Loss Statement (Consolidated) Rs croreY/E March CY2007 FY2009* FY2010E FY2011E

Net Sales 1,012 1,433 2,786 8,796% chg 41.5 94.5 215.7

Operating expenditure 195 213 599 1,351

Administrative expenditure 388 331 331 331

Inc/dec in stock (11) 22 - -

EBIDTA 440 866 1,856 7,113

(% of Net Sales) 43.5 60.5 66.6 80.9

Total Recouped cost 445 438 476 1,066

Interest 2 6 152 305

Other Income 132 594 126 208

Extraordinary items - 28 - -

PBT 126 988 1,354 5,950

(% of Net Sales) 12.4 69.0 48.6 67.6

Total Tax 150 184 364 1,180

(% of PBT) 119.5 18.7 26.9 19.8

Reported PAT (25) 803 990 4,770

% chg - 23.2 381.8

(% of Net Sales) (2.4) 56.1 35.5 54.2

Y/E March CY2007 FY2009* FY2010E FY2011E

SOURCES OF FUNDS

Equity Share Capital 1,873 1,936 1,936 1,936

Reserves & Surplus 27,563 30,867 31,857 33,837

Shareholders Funds 29,436 32,802 33,792 35,772

Total Loans 312 4,356 4,356 4,356

Deferred Tax Liability (net) 492 554 561 585

Total Liabilities 30,240 37,713 38,710 40,713

APPLICATION OF FUNDS

Net Fixed Assets 488 1,365 7,324 9,293

Capital Work-in-Progress 2,467 5,203 1,829 1,927

Goodwill 25,319 25,319 25,319 25,319

Investments 713 171 171 171

Current Assets 2,088 7,268 5,603 7,237

Current liabilities 835 1,613 1,537 3,233

Net Current Assets 1,253 5,655 4,067 4,003

Total Assets 30,240 37,713 38,710 40,713

Balance Sheet (Consolidated) Rs crore

Cash Flow Statement (Consolidated) Rs croreY/E March CY2007 FY2009* FY2010E FY2011E

Profit before tax 126 988 1,354 5,950

DD&A 459 463 261 851

(Inc)/Dec in Working Capital (91) 121 (252) 935

Interest 1 82 152 305

Direct taxes paid (82) (146) (357) (1,156)

Others 267 (321) - -

Cash Flow from Operations 680 1,188 1,159 6,885(Inc)/Dec in Fixed Assets (1,174) (3,161) (2,846) (2,918)

Free Cash Flow (494) (1,974) (1,688) 3,967(Inc)/Dec in Investments (2,110) (2,506) - -

Payment for Acquisition (3,276) - - -

Issue of Equity 67 2,532 - -

Inc./(Dec.) in loans (169) 3,767 - -

Dividend Paid (Incl. Tax) - - - (2,790)

Interest (2) (72) (152) (305)

Cash Flow from Financing (104) 6,226 (152) (3,095)Inc./(Dec.) in Cash (5,984) 1,746 (1,840) 872

Opening Cash balances 6,135 150 1,897 57Closing Cash balances 150 1,897 57 929

Key Ratios

Y/E March CY2007 FY2009* FY2010E FY2011E

Per Share Data (Rs)EPS (0.1) 4.2 5.2 25.2Cash EPS 0.9 5.7 6.6 29.6DPS - - - 12.6Book Value 155.2 172.9 178.2 188.6Operating RatiosInventory (days) 26.8 24.4 24.4 24.4Debtors (days) 29.7 22.0 22.0 22.0Creditors (days) 103.4 171.1 103.4 103.4Return Ratios (%)RoE (0.1) 2.4 2.9 13.3RoCE (0.0) 1.1 3.6 14.9RoIC (0.0) 1.4 4.1 17.3Dividend Payout (incl taxes) - - - 58.5Valuation Ratios (x)P/E - 66.8 54.2 11.2P/E (Cash EPS) 316.6 50.0 42.9 9.5P/BV 1.8 1.6 1.6 1.5EV/Sales 48.7 35.9 19.1 6.0EV/EBITDA 111.9 59.4 28.7 7.4

Note: * Performance for 15 months period


Cairn India

Oil & Gas

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Fund Management & Investment Advisory ( 022 - 3952 4568)P. Phani Sekhar Fund Manager - (PMS) [email protected] Bhamre Head - Derivatives and Investment Advisory [email protected] Mehta AVP - Investment Advisory [email protected] Team ( 022 - 3952 4568)Hitesh Agrawal Head - Research [email protected] Kour Nangra VP-Research, Pharmaceutical [email protected] Agrawal VP-Research, Banking [email protected] Jajoo Automobile [email protected] Kanani Infrastructure, Real Estate [email protected] Shah FMCG , Media [email protected] Pareek Oil & Gas [email protected] Bambha Capital Goods, Engineering [email protected] Dalmia Pharmaceutical [email protected] Sankhe Cement, Power [email protected] Desai Real Estate, Logistics, Shipping [email protected] Bariya Fertiliser, Mid-cap [email protected] Nadkarni Retail, Hotels, Mid-cap [email protected] Jain Metals & Mining [email protected] Rane Banking [email protected] Sharda Mid-cap [email protected] Vora Research Associate (Oil & Gas) [email protected] Srinivasan Research Associate (Cement, Power) [email protected] Mate Research Associate (Infra, Real Estate) [email protected] Gaunekar Research Associate (Automobile) [email protected] Salot Research Associate (Logistics, Shipping) [email protected] Kapur Research Associate (FMCG, Media) [email protected] Salvi Research Associate (IT, Telecom) [email protected] Agrawal Jr. Derivative Analyst [email protected] Bagaria PMS [email protected] Wagle Chief Technical Analyst [email protected] Joshi AVP Technical Advisory Services [email protected] Ail Manager - Technical Advisory Services [email protected] Jagtap Sr. Technical Analyst [email protected] Sanghvi Sr. Technical Analyst [email protected] Vasudeo Technical Analyst [email protected] Dayma Technical Analyst [email protected] Padhye AVP Mutual Fund [email protected] Rathod Research Associate (MF) [email protected] Jangid Research Associate (MF) [email protected] Research TeamAmar Singh Research Head (Commodities) [email protected] P Sr. Technical Analyst [email protected] Gupta Sr. Technical Analyst [email protected] Patki Sr. Technical Analyst [email protected] Chauhan Technical Analyst abhishek [email protected] Research Team (Fundamentals)Badruddin Sr. Research Analyst (Agri) [email protected] Walia Research Analyst ( Base Metals, Energy Complex) [email protected] Narvekar Research Analyst ( Agri) vedika.narvekar @angeltrade.comNalini Rao Research Analyst (Agri) [email protected] Shetty Research Editor [email protected] Adhyaru Assistant Research Editor [email protected] Patil Production [email protected] Patel Production [email protected]

Research & Investment Advisory: Acme Plaza, 3rd Floor ‘A’ wing, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Ratings (Returns) :


Cairn India

Oil & Gas

Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700

Regional Offices:

Sub - Broker Marketing:

Branch Offices:

Corporate & Marketing Office : 612, Acme Plaza, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059 Tel : (022) 3941 3940 / 4000 3600NRI Helpdesk : e-mail : [email protected] Tel : (022) 4000 3622 / 4026 2700Investment Advisory Helpdesk : e-mail : [email protected] Tel : (022) 3958 4000Commodities : e-mail : [email protected] Tel : (022) 3081 7400PMS : e-mail : [email protected] Tel : (022) 3953 2800Feedback : e-mail : [email protected] Tel : (022) 2835 5000

Ahmedabad - Tel: (079) 3941 3940

Bengaluru - Tel: (080) 3941 3940

Chennai - Tel: (044) 3941 3940

Hyderabad - Tel: (040) 3941 3940

Coimbatore - Tel: (0422) 3941 394

Cochin - Tel: (0484) 3941 394

Surat - Tel: (0261) 3941 394

Rajkot - Tel :(0281) 3941 394

Visakhapatnam - Tel : (0891) 3941 394

Mumbai (Powai) - Tel: (022)3952 6500

Pune - Tel: (020) 3941 3940

New Delhi - Tel: (011) 3941 3940

Mumbai (Goregoan) Tel: (022) 2879 0411-15

Nagpur - Tel: (0712) 3941 394

Nashik - Tel: (0253) 3011 500 / 1 / 11

Indore - Tel: (0731) 3941 394

Jaipur - Tel: (0141) 3941 394

Kanpur - Tel: (0512) 3941 394

Kolkata - Tel: (033) 3941 3940

Lucknow - Tel: (0522) 3941 394

Ludhiana - Tel: (0161) 3941 394

Andheri (E) - Acme - Tel: (022) 3941 3940 / 4000 3600

Andheri (W) - Tel: (022) 2635 2345 / 6668 0021

Bandra (W) - Tel: (022) 2655 5560 / 70

Andheri (Lokhandwala) - Tel: (022) 2639 2626

Bandra (W) - Tel: (022) 6643 2694 - 99

Borivali (W) - Tel: (022) 3952 4787

Borivali (Punjabi Lane) - Tel: (022) 3951 5700

Chembur - (Basant) - Tel:(022) 022) 6156 1111 / 01

Kalbadevi - Tel: (022) 2243 5599 / 2242 5599

Kandivali (W) - Tel: (022) 2867 3800/2867 7032

Chembur (Swastik) - Tel: (022) 6703 0210 / 11 /12

Fort - Tel: (022) 3958 1887

Ghatkopar (E) - Tel: (022) 3955 8400/2510 1525

Malad (E) - Tel: (022) 2880 4440

Kandivali - Tel: (022) 4245 1300

Malad (Natraj Market) - Tel:(022) 28803453 / 24

Masjid Bander - Tel: (022) 2345 5130 /1 / 8 / 42 /28

Mulund (W) - Tel: (022) 2562 2282

Nerul - Tel: (022) 2771 9012 - 17

Sion - Tel: (022) 3952 7891

Powai (E) - Tel: (022) 3952 5887

Thane (W) - Tel: (022) 2539 0786 / 0650 / 1

Vashi - Tel: (022) 2765 4749 / 2251

Vile Parle (W) - Tel: (022) 2610 2894 / 95

Wadala - Tel: (022) 2414 0607 / 08

Agra - Tel: (0562) 4037200

Ahmedabad (Kalupur) - Tel: (079) 3041 4000 / 01

Ahmedabad (Maninagar) - Tel: (079) 3981 7430 / 1

Ahmeda. (Bapu Nagar) - Tel : (079) 3091 6900 - 02

Ahmeda. (Gurukul) - Tel: (079) 3011 0800 / 01

Ahmedabad (C. G. Road) - Tel: (079) 4021 4023

Ahmeda. (Ramdevnagar) - Tel : (079) 4024 3842 / 43

Ahmedabad (Odhav) Tel: (079) 2289 2869/98989 95031

Ahmedabad (Sabarmati) - Tel : (079) 3091 6100 / 01

Ahmedabad (Satellite) - Tel: (079) 4000 1000

Mahim - Tel: (022) 2444 6425 / 2444 9031

Pune (Kothrud) Tel: (020) 4104 5400

Rajamundhry - Tel: (0883) 3941 394

Rajkot (Ardella) Tel.: (0281) 2926 568

Rajkot (University Rd.) - Tel: (0281) 2331 418

Rajkot - (Bhakti Nagar) Tel: (0281) 2361 935

Rajkot - (Indira circle) Tel : 99258 84848

Rajkot (Orbit Plaza) - Tel: (0281) 3983 485

Rajkot (Pedak Rd) - Tel: (0281) 3985 100

Rajkot (Ring Road)- Mobile: 99245 99393

Rajkot (Star Chambers) - Tel : (0281)3981 200

Rajkot - (Star Chambers) - Tel : (0281) 2225 401-3

Salem - Tel: (0427) 3941 394

Surat (Ring Road) - Tel : (0261) 3071 600

Surendranagar - Tel : (02752) 223305

Secunderabad - Tel : (040) 3093 2600

Surat (Mahidharpura) - Tel: (0261) 3092 900

Surat - (Parle Point) - Tel : (0261) 3091 400

Udaipur - Tel : (0294) 3941 394

Valsad - Tel : (02632) 645 344 / 45

Vapi - Tel: (0260) 3941 394

Varachha - (0261) 3091 500

Vijayawada - Tel :(0866) 3984 600

Warangal - Tel: (0870) 3982 200

Varanasi - Tel: (0542) 2221 129, 3058 066

Tirupur - Tel : (0421) 4302 800

Rajkot - PCG - Tel: (0281) 2490 847

Jalgaon - Tel: (0257) 2234 832

Kolkata (P. A. Shah Rd) - Tel: (033) 3001 5100

Mangalore - Tel: (0824) 3982 140

Kota - Tel : (0744) 3941 394

Madurai Tel: (0452) 3941 394

Jamnagar (Cross Word) - Tel: (0288) 2751 118

Jamnagar(Indraprashta) - Tel: (0288) 3941 394

Jodhpur - Tel: (0291) 3941 394 / 99280 24321

Junagadh - Tel : (0285) 3941 3940

Keshod - Tel: (02871) 234 027 / 233 967

Kolkata (N. S. Rd) - Tel: (033) 3982 5050

Jamnagar (Moti Khawdi) - Tel: (0288) 2846 026

Jamnagar(Madhav Plaza) - Tel: (0288) 2665 708

Kolhapur - Tel: (0231) 6632 000

Mansarovar - Tel:(0141) 3057 700/99836 74600

Mehsana - Tel: (02762) 645 291 / 92

Mysore - Tel: (0821) 4004 200 - 30

Nadiad - Tel : (0268) - 2527 230 / 34

New Delhi (Pitampura) - Tel: (011) 4751 8100

New Delhi (Nehru Place) - Tel: (011) 3982 0900

Noida - Tel : (0120) 4639 900 / 1 / 9

Palanpur - Tel: (02742) 308 060 - 63

New Delhi (Preet Vihar) - Tel: (011) 4310 6400

Nashik - (K C Complex) Tel: (0253) 3941 394

New Delhi (Bhikaji Cama) - Tel: (011) 41659711

New Delhi (Lawrence Rd.) - Tel: (011) 3262 8699 / 8799

Nagaur - Tel: (01582) 244 648

Meerut - Tel:(0121) 4015 400

Patan - Tel: (02766) 222 306

Porbandar - Tel : (0286) 3941 394

Porbandar (Kuber Life Style) - Mob.-98242 53737

Pune (Aundh) - Tel: (020) 4104 1900

Pune (Camp) - Tel: (020) 3092 1800

Pune - (kalyani Nagar) Tel: (020) 6620 6591 / 6620 6595

Pune - (Pentagon) Tel : (020) 3093 4400 / 3052 3217

Indore - Tel: (0731) 4238 600

Jaipur - (Rajapark) Tel: (0141) 3057 900 / 99833 40004

Hyderabad - A S Rao Nagar Tel: (040) 4222 2070-5

Hubli - Tel: (0836) 4267 500 - 22

Indore - Tel: (0731) 3049 400

Ajmer - Tel: (0145) 3941 394

Alwar - Tel: (0144) 3941 394 / 99833 60006

Ahmedabad (Shahibaug) -Tel: (079)3091 6800 / 01

Amreli - Tel: (02792) 228 800/231039-42

Anand - Tel : (02692) 398 400 / 3

Amritsar - Tel: (0183) 3941 394

Ankleshwar - Tel: (02646) 398 200

Baroda - Tel: (0265) 6635 100 / 2226 103

Baroda (Akota) - Tel: (0265) 2355 258 / 6499 286

Baroda (Manjalpur) - Tel: (0265) 6454280-3

Bhavnagar - Tel: (0278) 3941 394

Bengaluru - Tel: (080) 4072 0800 - 29

Bhavnagar (Shastrinagar)- Mobile: 92275 32302

Gandhinagar - Tel: (079) 4010 1010 - 31

Gajuwaka - Tel: (0891) 3987 100 - 30

Faridabad - Tel: (0129) 3984 000

Gandhidham - Tel: (02836) 237 135

Gondal - Tel: (02825) 398 200

Ghaziabad - Tel: (0120) 3980 800

Gurgaon - Tel: (0124) 3050 700

Himatnagar - Tel: (02772) 241 008 / 241 346

Bhopal - Tel :(0755) 3941 394

Bikaner - Tel: (0151) 3941 394 / 98281 03988

Chandigarh - Tel: (0172) 3092 700

Deesa - Mobile: 97250 01160

Erode - Tel: (0424) 3982 600

Bhilwara - (01482) 398 350

Ahmedabad (C. G Road) - PCG Tel: (079)39829934

Ambala - Tel: (0171) 4091 400

Dehradun - (0135): 3058 500

Cairn India Angel Broking research report

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