Cairn Connect Dec 2011


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Cairn Connect is an internally created publication for all employees and stakeholders. It aims to create a common thread of communication and provide a vision to work together towards creating energy security for the nation.

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Cairn Connect Dec 2011

  2. 2. Editor’’s NoteDear Readers,refuses to translate into production!to explore and discover and the endless meetings atbarriers associated with the remoteness of location andis our endeavour to reach out to people working acrossmore shall follow, we have kept the focus on macrotrends of the sector and then relating the same to ourdiscoveries would be favourable!Do write back to us with articles/views, critical orotherwise at corporate.communication@cairnindia.comrespective individuals and these views do not consult to
  3. 3. CONTENTS2 COVER STORY 18 H NA L T N VSI A F ENTM E N T E A D E H RO Y Y FET EN SA VI RO N MENT ALTH HE AS SUR ANCECairn India: Creating Wealth for theNation and Securing Energy People, Process, 12 H U M A N RESOURCES Environment6 PERSPECTIVE 20 S O C I A L MEDIA Drive to create O&GCairn India and Vedanta workforce of the futureResources: FacingChallenges of the Oil and Gas Companies: Socially ConnectedFuture 14 C E SRPPO NRSAITBEI LS O C I A L R O O TY10 C R EMNM O D I T Y T O DSVolatile Oil Markets:Securing the Future Quantifying Social Investments: IFC Financial Valuation Tool and Cairn India 1
  4. 4. C O V E R S T O R Y Cairn India: Creating Wealth for the Nation and Securing Energy It is a classic story of the David and Mangala in 2004, the largest onshore bill this year could reach $100 billion if the Goliath. A young E&P company hydrocarbon discovery in India since crude prices hover in the range of $100-­ daring to dream, having the vision 1985, changed the scope and the nature $120/barrel with uncertainties in supply and perseverance, was set to alter the of the business. The enormity of the from the Middle East. This would not only balance of domestic energy production discovery, the largest in that year globally for India, the largest democracy in the world. Cairn has been unlocking value the league of organisations having a key through discovery and development role in the energy security hence future the country has experienced double of hydrocarbons in the sub-­continent growth trajectory of India. Three out digit growth in crude oil production for for more than 15 years. We pioneered of the seven landmark oil discoveries deepwater drilling in India through made in India between 2000 and 2005 2006-­2007 the crude production growth Annapurna. Cairn also developed one have been by Cairn and the joint venture was 5.6% which dipped to 0.4%,-­1.8% partners. and 0.5% respectively in the last few auction –– Ravva, off the coast of Andhra Pradesh. Currently we are contributing 2011, the production by Cairn India and resource nationalisation amongst Reliance led to a double digit growth in domestic crude production through our countries and the emergence of the new domestic crude oil production for the ““Seven Sisters”” –– the state run oil and to the 12th plan projects a growth rate approximately 7%. The discovery of the of 7% for commercial energy demand22
  5. 5. RJ-­ON-­90/1 RAVVA PR-­OSN-­2004/1For more than a decade, Cairn has been undertaking pioneering activities 3
  6. 6. Currently we are contributing more than a fifth of the country’’s domestic crude production through our Rajasthan fields. This is helping offset India’’s crude oil import dependency by approximately 7%. for a GDP growth of 9%. This is only executing projects with the scale of our have been in the top quartile against possible through a major supply side Rajasthan development, maximise the global benchmarks. Our terminal in management. assets like Ravva (Andhra Pradesh), hydrocarbon facility, before connecting applying technology to transform from with the market through our pipeline is a Cairn India has been a trailblazer in a gas to oil in Suvali, Gujarat and design lot of areas in the oil and gas sector. to implementation of new lines of maintained at half the global average Over the years the organisation has last year. Responsibility and concern for built an indigenous team with the continuously heated and insulated the environment has been integrated in capability to execute projects across the pipeline from Rajasthan to Gujarat. In our operation strategy be it the usage whole spectrum of the business -­ be it our stage of transformational growth of environment friendly completion exploration, discovery, development with the pipeline operations bringing in and production. The team is capable of the desired scale, our safety standards environmental footprint or our well pad4
  7. 7. design with horizontal deviated drillingto optimise usage of land and minimisedisruption. We have been creating value 30th Aug 2011 Price % chg sincethrough substantial contribution to thegovernment exchequer with royaltiespaid more than USD 1 billion, direct andindirect taxes of more than USD 1 billion, NIFTY 5,001 28government of greater than USD 5 billionin foreign exchange due to reduced *Cairn India IPO on 9th Jan 2007imports. making the dream of India, an energyThe continuous growth in production independent country -­ a reality. As weand its asset base has led to increasingvaluation of the company, which has the organisation will keep working closelyultimately enhanced shareholders wealth. with governments and communitiesThe investor community and the markets across the globe to develop faster, betterhave also endorsed our initiatives to and more cost effective solutions for thecreate value for our shareholders as a energy needs of growing economies thusresult of which the market cap of the enriching lives of the local has nearly doubled from USD6bn to USD 12bn since IPO.Cairn India with the help of its jointventure partners including ONGCcontinues to create value and wealthfor the nation and strive towards 5
  8. 8. PERSPECTIVE Cairn India and Vedanta Resources: Facing Challenges of the Future The world of extractive industries has continue to be stoked from emerging business. While a lot of the public oil been under a variety of pressures with a markets in the east rather than the and gas majors, even the big guns, seismic shift in terms of the way various western countries while the supply side have been vertically integrated with sectors like mining and oil & gas function. has been constrained due to multiple their presence across the chain from The hard-­hat world of oil, gas and mining reasons of geopolitical risks, resource upstream to downstream and/or has become intrinsically linked to the nationalism, complexity of development retailing, independent O&Gs have always projects and location of resources across preferred a particular segment for their has helped democratise the sector in increasingly remote and unfamiliar territory. on a global scale, competition is actually increasing with the appearance of new markets post the 2008 downturn, companies from emerging economies. traditional instruments of trading and transformation in terms of cost pressures, hedging used by organisations have to consolidations, and nature of business be conducted in a different light. On the as well as vertical integration, bringing commercial manner, along with further other hand, demand in both the sectors about a change in the way we do privatisations in OECD countries such66
  9. 9. Sectors like oil and gas and mining are continuing to climb up the political priority list and according to a recent poll of global CEOs by PwC. cost pressures, while many end users of global CEOs by PwC –– stakeholderevery step of the value chain (particularly mining products have also gained control management, sustainability issues, the U.S.) have also added to global of upstream assets. Companies are also are the key concerns of managementcompetitive pressure. To differentiate looking at other ways of achieving theirfrom new competition, international integration objectives, such as combining changing economic and social priorities, strategic investment and off-­take or governments across the globe are partnership agreements to lower the tightening their grip on national resourcesmarketing, technological capabilities risk associated with integration, but still and are revisiting royalties and taxationto explore and produce on the most policies. It is common knowledge thatchallenging frontiers and scale and scope investment in African Minerals with 20 Sovereign Wealth Funds (SWFs), initiallyto invest in new forms of energy. In the year off-­take arrangement. set up with oil money, heavily invests inmining industry, there is the scramble the sector but non-­commodity basedto secure supplies of scarce resources Sectors like oil and gas and mining SWFs are gradually increasing theirand to gain greater control over prices of continue to climb up the political priority exposure in the mining industry in a bidproduction units in an age of increasing list and according to a recent poll of to diversify their investment portfolio. 7
  10. 10. They also look for and leverage on the In Cairn India, Vedanta Resources has under-­valued resources. A key shift gained exposure to a new sector with Vedanta is not the has been the political overtones behind a top 20 non OECD E&P organisation. SWF investments, with SWF route being Cairn India brings to the Vedanta stable -­ often used to lead the charge by foreign more than a decade of credibility with government to secure national resources. pioneering efforts in the sector in the sub-­continent, landmark discoveries, In such evolving times for both the reputation for technological adaptability sectors, the acquisition of a majority stake and innovation, exploration success in Cairn India by Vedanta Resources plc provides the perfect platform to build records, appetite for growth and new the natural resource champion of the avenues of business (midstream) with gas, received in inher-­ a measured risk approach, which has resource champion”” are some of the more often than not borne fruits, project execution and delivery skills, and sound energy philosophy and aspirations. corporate responsibility practices with major to foray into oil and gas, while this In Vedanta Resources, Cairn India has acquisition puzzled many. While about a majority shareholder and owner, who gas, received in inheritance and built over ambitions across various segments of the oil and gas business, spanning multiple ore miner, inked a deal with Petrobras geographies and helping leverage and entered oil sector in 2007 to reduce mining costs and currently holds stake in international markets. more than 20 exploration blocks. Vedanta has always shown an appetite top global oil and gas entity, offering for strategic inorganic growth -­ acquiring unique value added solutions to cater an asset and then scaling it up for to energy requirements of emerging better returns, tending mostly towards economies across the globe with a deep vertical integration in terms of taking footprint in only select markets -­ and supply leadership to optimise the performance of existing assets. Their million tonne plus annual production focus is on leveraging the low cost of business in copper and zinc and more production, and in a lot of the acquired than 2.6 million tone for aluminum while assets, infusing them with new energy to more than doubling its iron ore output in increase production by many multiples. excess of 50 million tone -­ underscores the growth momentum, which can be achieved despite economic pressures and years and jump in revenue by 100 per geopolitical risks, hence being targeted cent, while in Sesa Goa, the production for the next couple of years. Stakeholder has gone up post acquisition by Vedanta, management, corporate reputation, by 115 per cent and the reserves by 75 and the ability to deliver in challenging per cent in three years. Its focus is on times will be the key to synergising and organic and inorganic growth strategy for creating a natural resources champion bulk commodities and base metals. entity for the future.8
  11. 11. 9
  12. 12. COMMODITY TRENDS Volatile Oil Markets: Securing the Future Energy is pivotal to economic growth and as India, country with GDP of over economy and the fourth largest energy consumer, marches into the league of top economies in the world, the need for energy, to secure the needs of current as well as future generation, would grow exponentially. As compared to US & 22 barrels & 9 barrels of oil a year, an average Indian burns close to 1 barrel a year –– representing the fact that there is substantial upside for improvement economy expands. Securing energy is perhaps the security. Compounding the above geo-­politics;; weather to dynamics of most critical challenge for India in fundamentals supply/demand. maintaining its economic growth rate. It encompasses both physical supply and stability of the country with oil import After recovering from the global bill rising to approx. USD 100 billion in recessions, recent months have (International Energy Agency) four major 2010-­11. witnessed several events like French concerns -­ Availability;; Deliverability;; Strike;; Middle East North Africa (MENA) Affordability and Sustainability. The globalisation of economy in the recent years has brought new Japanese Earthquake & Sovereign credit opportunities, more interdependence crisis in US & Europe impacting the dependence which was about 50% in the along with larger group of risks. international oil prices. International oil market in the current over 75% of its crude oil requirements –– world is affected by events ranging from Oil prices rose to $125/bbl plus in April, creating serious concerns on the supply broad based macroeconomic picture;; however receded subsequently due to10
  13. 13. have a pro-­founding impact on the economy and energy sector. In this situation, increasing the domestic production and reducing the import reliance is an important element for ensuring supply security. which is now accounting for more crude production, has contributed security and bringing economic to savings of foreign exchange andthe double dip recession fear looming crude prices in 2012 due to tight supply is now responsible for the delivery demand fundamentals, Citibank in crudeReduction in growth forecast of US, its latest forecast has predicted $86/ production from itsEurope & China (contributing 50% of operated assets year placing importance on the credit across thewith high unemployment & weak events. Uncertainty & volatility of this country.economic data is forcing authorities to magnitude creates further challengescome up with more income generating in ensuring a stable and secure energypolicies and get economies on a atmosphere.meaningful growth trajectory. Ensuring supply security remains an -­ Varun GujaralMarket uncertainty is evident from extremely challenging task for the Commercial and New Businessthe wide forecast of oil prices by Government as dynamicInternational participant going into next global environmentyear. While most research divisions 11
  14. 14. Drive to create O&G workforce of the future12
  15. 15. In recent days, the markets have deploy, and connect employees throughsignalled concern about the economy.and lagging economic indicators, This issue has become particularlyconsumers, investors and businessesare searching for some bright spot in workforce, combined with a diminishingthe market. Many believe that the oil pipeline of new and experienced talent.and gas industry, which has consistently To guard against corporate brain drain,shown strength during this lengthy companies need to formulate effective requires commitment,economic downturn, has the potential strategies to attract and engage the cooperation, investmentto help lift the economy if the rightenergy policies are in place. generation is not all. It is also aboutThe industry, while shows promise, managing existing talent and developingis faced with its own challenges and the periodic table of talent.uncertainty. In addition to the existingchallenges relating to global energysecurity, long term sustainability and the International Oil Companies (IOCs) areuncertainty surrounding the investment facing a real challenge that may have anframework, the oil and gas industry impact on expansion and growth plans,will face ““new”” challenges. Future a challenge that requires commitment,energy demand is expected to grow cooperation, investment and newsubstantially and the sector is in need of approaches in developing, managing andmassive investment –– not just capital. retaining the talent pool. Collective collaboration and coordinatedIn order to meet the demand, the There are many issues that call for an cooperation between government,industry will explore, develop and academic and industry on the variousproduce oil and gas in increasingly their strategies in the face of slowing issues related to curricula, employmentsevere conditions. The ability to plan and social policies, and programmeand execute large-­scale, complex NOCs and IOCs avoid ranging back anddevelopment projects requires a highly forth between skill shortage and skill term than isolated initiatives.yet professionals with the required skill-­ and IOCs joining forces, learning lessonsset are a scarce commodity. environment operational challenges willOver the last few decades, average age The challenge facing NOCs and IOCs to develop skilled personnel, manageof workforce in Indian upstream oil and costs and develop new technology. This sustainable long-­term solutions to situation creates new challenges and newWhether one believes it is the result manage workforce demographics, both uncertainty, but also new opportunitiesof normally occurring competition, in boom and bust times. for cooperation and partnership betweenattrition, aging or restructuring, one NOCs, IOCs and services companies, Partnership between NOCs and IOCstheme permeates the current discussion to share risks, technology advances and can contribute to addressing thearound human capital: how to develop, invest in R&D. 13
  16. 16. Quantifying Social Investments IFC Financial Valuation Tool and Cairn India Discovering the past to create a better portion in distributing the fruits of implementing programmes in remote hydrocarbon development to the resident regions, to the oil trader surrounded business for extractive industry including communities, trying again to balance this oil and gas. It is this dichotomy of need for developing energy resources attendant –– seemingly diverse persons synergising the past with the future, with the pace of development of the united by the same product. The same by adhering to regulatory frameworks, local communities. paradoxes are also prevalent in costs. balancing investor expectations While most are aware of the almost and striving to create value for all perpetual windfall gains in the oil stakeholders, dealing with the sentiments of community engagement initiatives business, one overlooks the risk capital which surround ““national resource””, is not often appreciated or understood deployed during exploration time running all this while operating in the most remote by companies. Oil and gas is a sector into hundreds of thousands of dollars per of regions across countries with state of which offers a myriad range of activities, day in remote onshore or offshore areas! the art technology. all seemingly disconnected but bound around a common product –– the crude oil Fraught with such inherent Gaining the trust, cooperation and or the gas! contradictions, it is imperative to have partnerships of communities in these a strategic approach for designing and frontier regions often becomes a business The range of activities range from the implementing community development necessity to ensure uninterrupted programmes in order to ensure that they operations and business activities. Since or oil services company person on the rig deliver the desired results of community the riches of the subsurface are often support, mitigate risks, and help in the found in the poorest and most remote of of summer, to a community engagement unhindered growth of business. regions, organisations invest a sizeable or social responsibility specialist14
  17. 17. up with the Sustainability Planning andthe absence of any standardised Financial Valuation Tool. The model wasmeasurement matrix entails that the piloted on a couple of projects like theimpact of the social, environmental SMS programme initiated for farmersand community investments cannot be in partnership with Reuters alongtangibly measured in business language. longest heated and insulated pipeline in the world) and the mobile health vaninvestment for social initiatives also posed programme in Rajasthan.various problems like:-­ ““Through this tool companies can Not being able to maximise the full develop metrics to guide their community potential/impact of the investment investments and translate community Not being able to compare the program outcomes into company value, in terms that are understood by the investments market –– risk reduction, productivity Not being able to advocate, gains, savings, return on investment, communicate, support and justify the and enhanced reputation. An additional investments incentive is that high-­performing Not being able to prioritise environmental and social programs investment options are increasingly seen as a proxy for effective business management. initiatives According to Multilateral Investment Awareness about such investments Guarantee Agency (MIGA), a World Bank within organisation and cross-­ political risk insurer, they would reduce functional collaboration insurance premiums for an operation that demonstrates rigorous risk management.””Cairn along with Newmont and RioTinto are the organisations with whom –– Excerpt from IFC article on ValuingIFC collaborated extensively to come Returns on Sustainability Investments. 15
  18. 18. The tool has been designed in a way to supplement the traditional discounted cost of manpower, etc.) while the latter the quality of social investments in the organisation but also contributions investments through community risk mitigation which involved steering clear simulation (algorithms which utilise of risks which could result in delay of repeated random samplings to compute etc. to wholly participate in the construction, production postponement, results) to arrive at a net value accrued implementation of the tool. planning, legal action, etc. to the company. The two basic concepts comprising the The process involves rigorous tool are direct value creation and indirect stakeholder analysis, traditional with Reuters involved providing crop1616
  19. 19. Traditional Value Creation + + + Stakeholder Investment Value Protection (Cost benefit Analysis Analysis (MPV) (Indirect benefit) analysis) 1 2 3 4 Quality of Net Value to Risk Monte Carlo Quantification + Sustainability Investment + Simulation = Company From Sustainability 5 7 6 InvestmentsSource: IFC Article advisory and marketing information van. The van operated and traveled through the mobile phone for 10,000 to 64 villages in and around the Cairn farmers along the Cairn India pipeline project area in Rajasthan. The FV tool was in Gujarat. This programme not only able to calculate and ascertain that this helped maintain a continued relationship with the farmers but ensured that the the company as the alternative to setting communication was two way. up 15 clinics to provide similar services to the concerned population. The farmers could also through their mobile phones inform the organisation Another key saving was in terms of about breaches in pipeline security mandays for workers from the village. with pilferage, leakage, sabotage or With the van servicing the local village other maintenance issues. So while the populace, loss of manhours/days due to SMS programme helped increase the illness of village workers were minimised income of farmers through the price and made negligible. advisory, the farmers were also able to act as the pipeline reporting contact for The same FV tool could be applied the company. So both the modes of holistically to quantify the returns of value creation and value protection was various other CSR programmes and provide a direction to implement future it also helped the company by providing an effective replacement for pipeline security personnel. management support and commitment, an attitude for cross-­functional support cases of pipeline security were reported management, etc.) and developing by farmers, thus preventing sabotage, requisite expertise like value drive leak, and damage to the pipeline, cost of $2 million for the company. The second project studied was one which involved access to preventive and curative healthcare –– the mobile health 17
  20. 20. People, Process, Environment Oil & Gas is considered to be an unsafe Respect: for people, communities, the the way he/she arrives at the work in the environment, the rule of morning. Our goal is to create a healthy, at various stages can be a threat to the law and human rights;; supportive working environment that can health and wellbeing of not just people help reduce absenteeism due to fatalities. working on site, but also the communities Relationships: we believe that building strong, open and lasting relationships with our stakeholders is not merely comprehensive one, wherein all the Good governance is the only way one a social responsibility but is vital to process and procedures, to effectively can ensure an economic climate which achieving our business goals;; and is favourable not only to investments, laid down. This system ensures that Responsibility: We recognise our the policies are implemented across but also well being and sustainability responsibility to ensure our actions do various activities through design, of people and environment that we not harm people, the environment or implementation, operations, monitoring come in contact with. We, at Cairn, are society. and reporting as it is based on the committed to protecting the health, safety and wellbeing of people working While we follow the highest level of on our sites, people who come in contact international codes and standards in our with our operations and the health and sustainability of environment that we implementation in progress for the upgrade them. Rajasthan operations. operate in. ‘‘ We take precautions to avoid accidents or Our Corporate Responsibility pollution incidents, and all our operations Management System (CRMS) lays down have rigorous procedures, equipment The nature of the work involves some detailed guidelines and procedures that and emergency teams in place to inherent risks and facing challenging support the delivery of our commitment environments. We strive to make sure that everyone associated with our work training is mandatory for all visitors to the goes back home in the evening exactly site to ensure their safety. values and our approach to business.18
  21. 21. Companies are increasingly becomingrecognition from time to time. This cautious about the issues concerningyear, the Rajasthan operations won nine environmental protecting, including air, ET Y ENsafety awards in the 24th Mine Safety land and water quality. SAF VIAwards organised under the aegis of the RODGMS, Rajasthan. Most of it is due to the heavy regulations N MENT and compliances. These regulations ALTHEnvironment continue to evolve. For example, the HE (EPA) greenhouse gas reporting rule wasAccording to the ‘‘Ernst & Young SUR AS ANCE and production sector on November 8, 2010 and requires companies to reportthe climate debate will continue to their 2011 greenhouse gas emissionscomplicate the strategic decision-­ beginning in March 2012.making of oil and gas companies acrossthe industry.”” We at Cairn have been committed to Our approach to each new project minimising the impact of our business includes undertaking PreliminaryToday, climate change and sustainability Environmental Impact Assessments on the environment. We introducedissues are a key component of corporate (PEIAs), Environmental Impact stringent measures, from initial impactagenda. The stakeholders are as Assessments (EIAs) and Social Impact assessments to waste management, and,much interested and passionate about Assessments (SIAs), to minimise any in the event of any unplanned incident,these issues as they are about the potential impacts of its activities have put in place comprehensive emergency response and oil spillcompensation. contingency plans. 19
  22. 22. Oil and Gas Companies: Socially Connected Social networking is booming. Facebook communications, including knowledge has become the most visited website on and information management for 20 percent of business users. Internet population visit social networking According to a study by Microsoft and or blogging sites. Accenture, nearly 75% of oil and gas professionals see value in using social Social networking is facilitating business media and collaboration tools at and personal relationships, with communications, individual sectors now starting to cotton on to the potential of information sharing via these channels. technology at a corporate level. The study which surveyed 275 professionals within Gartner predicts that by 2014, social international, national and independent networking services will replace e-­mail oil and gas and related companies, found as the primary vehicle for interpersonal that social media and collaboration20
  23. 23. technology adoption is primarily a companies that are using social mediathe same time, half of those surveyed said tools for other purposes. Chesapeaketheir companies prohibit or restrict the Energy has successfully implementeduse of many of these publicly availabletools, such as photo-­sharing and social stream that posts current job openings,networking sites. interacts with followers and offers career advice to nearly 2000 people.On the other hand, the oil and gasindustry itself boasts of various socialnetworking sites, such as­ opportunity to communicate via, www.oilandgascommunity. networks to media, Gulf Coast residentscom, and www.oilpals. and businesses affected by the spill,com. These are facilitating knowledge concerned citizens, and employees.and information management.Energy is a highly regulated industry, industry from social media is most likelyand its companies are required to make the increased productivity, thanks toinformation available to their work forces improved collaboration and knowledge-­ sharing between workers. Thesemanner. Cloud computing, public elements are important for drivinginstant messaging systems and internal revenue, cutting costs and contributingsocial networks allow for more cross-­ to the health and safety of workers (Oil and Gas Collaboration Survey 2009)barriers while keeping up with thechanging face of technology. industry. 21