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In a scenario of low crude oil prices, Cairn India has been able to bring down its cost of operations by 10-15%, thanks to efficiency-induced cuts in drilling time, renegotiation of contracts and optimising spend on maintenance of wells and other facilities
Cairn India, which operates the biggest onshore block in the country, Barmer in Rajasthan, has brought down its operating cost to $5.2/barrel during April-June 2015 from $5.8/barrel in the same months in the previous year. This was because of a reduction in well and facility maintenance costs and MG&A (marketing, general and administrative) expenses, Nomura observed in a July 22 note.
In FY15, Cairn India made investments of $1.1 billion, of which around 60% was in development projects, and 40% in exploration and appraisal. The explorer, which is being proposed to be merged with its parent Vedanta, has revised the capex for FY16 from the projected $1.2 billion to $500 million. Of this, 45% would be spent on core fields, 40% on growth projects and 15% on exploration.
“The management focus on re-engineering projects and re-negotiating contracts has resulted in improvement of project economics,” said a senior Cairn India official. Cairn has been focusing on two drivers – internal and external — to bring in cost savings which are sustainable in the long run and drive operational efficiencies, the official added.
The internal drivers include focus on harnessing efficiencies of equipment, processes, systems and controls. In the long term this initiative will help in bringing gains across the organisation. On the other hand, external drivers encompass strategies around contract renegotiation, alternate vendor, bundling of services or items to bring in economics of scale. “Cost savings initiative on both fronts have resulted in the desired outcome which is reflected in reduced operating costs and making capital projects viable at lower oil prices,” the official said.
Cairn India has achieved 10% efficiency on drilling time which results in substantial savings in terms of costs. In addition, as the company moves to commercialise its tight oil prospects, this efficiency improvement will help achieve commerciality at lower prices.
Edelweiss Securities in a July 22 note said Cairn is able to maintain overall opex, which is driven by 10% reduction in water-flood opex in Rajasthan as well as 15% savings in key high-value contracts through enhanced re-negotiations.
In Q1FY16, output from the Rajasthan block dropped 6% y-o-y to 179,683 barrels of oil equivalent per day (boepd) against 190,879 boepd in the same months the previous year. The benchmark brent crude oil that averaged $108.7/barrel in 2013 fell to $99.45/barrel in 2014. The commodity started a sharp decline in prices since June 2014 and touched a new low of $46.59/barrel on January 13, 2015. Last week, crude oil futures hit four-month lows after a steep drop in China’s stock markets sparked concern about the economic health of the world’s biggest energy consumer. Brent fell to $52.90/barrel, its lowest since mid-March last Monday.
* Barmer block operating cost down to $5.2/barrel in April-June 2015 against $5.8/barrel a year ago
* Management focus is on re-engineering projects and re-negotiating contracts
* Lower cost due to reduction in well and facility maintenance costs and MG&A
* Achieved 10% efficiency on drilling time, 10% reduction in water-flood opex in Rajasthan
* 15% savings in key high-value contracts through enhanced re-negotiation
* In Q1FY16, output dropped 6% y-o-y to 179,683 boepd
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