Cairn India Limited - Cairn Connect Dec 2011

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COVER STORY
CREATING WEALTH FOR THE NATION
CHALLENGES OF THE FUTURE
QUANTIFYING SOCIAL INVESTMENTS
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Editors Note
Dear Readers,
refuses to translate into production!
to explore and discover and the endless meetings
at
barriers associated with the remoteness of
location and
is our endeavour to reach out to people working
across
more shall follow, we have kept the focus on
macro trends of the sector and then relating the
same to our
discoveries would be favourable!
Do write back to us with articles/views, critical
or
otherwise at corporate.communication_at_cairnindia.co
m
respective individuals and these views do not
consult to
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CONTENTS
18 H AND EN HV SIA RO FE NM YENT
2 COVER
EALT T
STORY
Y
FET
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SA
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ALTH
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Cairn India Creating Wealth for the Nation and
Securing Energy
People, Process, Environment 20 SOCIAL MEDIA
12 H U MAN
RESOURCES
6 PERSPECTIVE
Drive to create OG
workforce of the future
Cairn India and Vedanta
Resources Facing Challenges of the Future
Oil and Gas Companies Socially Connected
14 C R ES RP PO ON RS AIB IL E S TY OCIAL
O T
O Volatile Oil Markets Securing the
Future Quantifying Social Investments
IFC Financial Valuation Tool and Cairn
India 1
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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 the
Goliath. A young EP company daring to dream,
having the vision and perseverance, was set to
alter the balance of domestic energy
production for India, the largest democracy in
the world. Cairn has been unlocking value through
discovery and development of hydrocarbons in the
sub-continent for more than 15 years. We
pioneered deepwater drilling in India
through Annapurna. Cairn also developed
one auction Ravva, off the coast of Andhra
Mangala in 2004, the largest onshore hydrocarbon
discovery in India since 1985, changed the scope
and the nature of the business. The enormity of
the discovery, the largest in that year
globally the league of organisations having a
key role in the energy security hence
future growth trajectory of India. Three out of
the seven landmark oil discoveries made in India
between 2000 and 2005 have been by Cairn and the
joint venture partners.
bill this year could reach 100 billion if crude
prices hover in the range of 100- 120/barrel
with uncertainties in supply from the Middle
East. This would not only the country has
experienced double digit growth in crude oil
production for 2006-2007 the crude production
growth was 5.6 which dipped to 0.4,-1.8 and
0.5 respectively in the last few
Pradesh. Currently we are contributing
2011, the production by Cairn India and Reliance
led to a double digit growth in
resource nationalisation amongst
countries and the emergence of the new
domestic crude production through our
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 demand
2 2
5
RJ-ON-90/1
RAVVA
PR-OSN-2004/1
For more than a decade, Cairn has been
undertaking pioneering activities
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6
Currently we are contributing more than a fifth
of the countrys domestic crude
production through our Rajasthan fields. This is
helping offset Indias crude oil import
dependency by approximately 7.
for a GDP growth of 9. This is only possible
through a major supply side management. Cairn
India has been a trailblazer in a lot of areas in
the oil and gas sector. Over the years the
organisation has built an indigenous team with
the capability to execute projects across
the whole spectrum of the business - be
it exploration, discovery, development and
production. The team is capable of
executing projects with the scale of
our Rajasthan development, maximise the assets
like Ravva (Andhra Pradesh), applying technology
to transform from gas to oil in Suvali, Gujarat
and design to implementation of new lines
of continuously heated and insulated pipeline
from Rajasthan to Gujarat. In our stage of
transformational growth with the pipeline
operations bringing in the desired scale, our
safety standards
have been in the top quartile against global
benchmarks. Our terminal in hydrocarbon
facility, before connecting with the market
through our pipeline is a maintained at half the
global average last year. Responsibility and
concern for the environment has been integrated
in our operation strategy be it the usage of
environment friendly completion environmental
footprint or our well pad
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design with horizontal deviated drilling to
optimise usage of land and minimise
disruption. We have been creating value through
substantial contribution to the
30th Aug 2011
Price
chg since
government exchequer with royalties paid more
than USD 1 billion, direct and indirect taxes of
more than USD 1 billion,
NIFTY
5,001
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government of greater than USD 5 billion
in foreign exchange due to reduced
Cairn India IPO on 9th Jan 2007
imports. making the dream of India, an energy
independent country - a reality. As we the
organisation will keep working closely with
governments and communities across the globe to
develop faster, better and more cost effective
solutions for the energy needs of growing
economies thus enriching lives of the local
populace.
The continuous growth in production and its
asset base has led to increasing valuation of
the company, which has ultimately enhanced
shareholders wealth. The investor community and
the markets have also endorsed our initiatives
to create value for our shareholders as a result
of which the market cap of the
company has nearly doubled from USD 6bn to USD
12bn since IPO. Cairn India with the help of its
joint venture partners including ONGC continues
to create value and wealth for the nation and
strive towards 5
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PERSPECTIVE Cairn India and Vedanta
Resources Facing Challenges of the Future
The world of extractive industries has been under
a variety of pressures with a seismic shift in
terms of the way various sectors like mining and
oil gas function. The hard-hat world of oil,
gas and mining has become intrinsically linked to
the has helped democratise the sector in
continue to be stoked from emerging markets in
the east rather than the western countries while
the supply side has been constrained due to
multiple reasons of geopolitical risks,
resource nationalism, complexity of
development projects and location of resources
across increasingly remote and unfamiliar territor
y.
business. While a lot of the public oil and gas
majors, even the big guns, have been vertically
integrated with their presence across the chain
from upstream to downstream and/or retailing,
independent OGs have always preferred a
particular segment for their on a global scale,
competition is actually increasing with the
appearance of new
markets post the 2008 downturn, traditional
instruments of trading and hedging used by
organisations have to
companies from emerging economies.
transformation in terms of cost
pressures, consolidations, and nature of business
as well as vertical integration, bringing about a
change in the way we do
be conducted in a different light. On the other
hand, demand in both the sectors
commercial manner, along with further privatisatio
ns in OECD countries such
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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 stakeholder
every step of the value chain (particularly in
the U.S.) have also added to global competitive
pressure. To differentiate from new competition,
international marketing, technological
capabilities to explore and produce on the
most challenging frontiers and scale and scope to
invest in new forms of energy. In the mining
industry, there is the scramble to secure
supplies of scarce resources and to gain greater
control over prices of production units in an age
of increasing
mining products have also gained control of
upstream assets. Companies are also looking at
other ways of achieving their integration
objectives, such as combining strategic
investment and off-take or partnership
agreements to lower the risk associated with
integration, but still investment in African
Minerals with 20 year off-take
arrangement. Sectors like oil and gas and
mining continue to climb up the political
priority list and according to a recent poll of
management, sustainability issues, etc. are the
key concerns of management changing economic and
social priorities, governments across the globe
are tightening their grip on national
resources and are revisiting royalties and
taxation policies. It is common knowledge
that Sovereign Wealth Funds (SWFs), initially set
up with oil money, heavily invests in the sector
but non-commodity based SWFs are gradually
increasing their exposure in the mining industry
in a bid to diversify their investment portfolio.
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They also look for and leverage on the
In Cairn India, Vedanta Resources has
under-valued resources. A key shift has been the
political overtones behind SWF investments, with
SWF route being often used to lead the charge by
foreign government to secure national resources.
gained exposure to a new sector with a top 20 non
OECD EP organisation. Cairn India brings to the
Vedanta stable more than a decade of credibility
with pioneering efforts in the sector in the
Vedanta is not the
-
sub-continent, landmark discoveries,
In such evolving times for both the sectors, the
acquisition of a majority stake in Cairn India by
Vedanta Resources plc provides the perfect
platform to build
reputation for technological adaptability and
innovation, exploration success records,
appetite for growth and new
the natural resource champion of the resource
champion are some of the energy philosophy and
aspirations. major to foray into oil and gas,
while this acquisition puzzled many. While
about gas, received in inheritance and built
over ore miner, inked a deal with Petrobras and
entered oil sector in 2007 to reduce mining costs
and currently holds stake in more than 20
exploration blocks. Vedanta has always shown an
appetite for strategic inorganic growth -
acquiring an asset and then scaling it up
for better returns, tending mostly
towards vertical integration in terms of
taking supply leadership to optimise
the performance of existing assets. Their focus
is on leveraging the low cost of production, and
in a lot of the acquired assets, infusing them
with new energy to increase production by many
multiples. years and jump in revenue by 100
per cent, while in Sesa Goa, the production has
gone up post acquisition by Vedanta, by 115 per
cent and the reserves by 75 per cent in three
years. Its focus is on organic and inorganic
growth strategy for bulk commodities and base
metals.
avenues of business (midstream) with a measured
risk approach, which has more often than not
borne fruits, project execution and delivery
skills, and sound corporate responsibility
practices with In Vedanta Resources, Cairn India
has a majority shareholder and owner,
who ambitions across various segments of the oil
and gas business, spanning multiple geographies
and helping leverage international
markets. top global oil and gas entity,
offering unique value added solutions to cater to
energy requirements of emerging economies across
the globe with a deep footprint in only select
markets - and million tonne plus annual
production business in copper and zinc and
more than 2.6 million tone for aluminum
while more than doubling its iron ore output
in excess of 50 million tone - underscores the
growth momentum, which can be achieved despite
economic pressures and geopolitical risks, hence
being targeted for the next couple of years.
Stakeholder management, corporate reputation, and
the ability to deliver in challenging times will
be the key to synergising and creating a natural
resources champion entity for the future.
gas, received in inher-
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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 most critical
challenge for India in maintaining its economic
growth rate. It encompasses both physical supply
and (International Energy Agency) four major
security. Compounding the above stability of
the country with oil import bill rising to
approx. USD 100 billion in 2010-11.
geo-politics weather to dynamics
of fundamentals supply/demand. After recovering
from the global recessions, recent months
have witnessed several events like French
concerns - Availability Deliverability Afford
ability and Sustainability.
Strike Middle East North Africa (MENA)
The globalisation of economy in
the recent years has brought new opportunities,
more interdependence
Japanese Earthquake Sovereign credit crisis in
US Europe impacting the
dependence which was about 50 in the over 75
of its crude oil requirements creating serious
concerns on the supply
along with larger group of risks. International
oil market in the current world is affected by
events ranging from broad based macroeconomic
picture
international oil prices. Oil prices rose to
125/bbl plus in April, however receded
subsequently due to
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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 and
the double dip recession fear looming Reduction
in growth forecast of US,
crude prices in 2012 due to tight supply demand
fundamentals, Citibank in its latest forecast has
predicted 86/
is now responsible for the delivery crude product
ion from its
Europe China (contributing 50 of
operated assets across the
year placing importance on the credit
with high unemployment weak economic data is
forcing authorities to come up with more income
generating policies and get economies on
a meaningful growth trajectory. Market
uncertainty is evident from the wide forecast of
oil prices by International participant going
into next year. While most research divisions
events. Uncertainty volatility of
this magnitude creates further challenges in
ensuring a stable and secure energy atmosphere. E
nsuring supply security remains an extremely
challenging task for the Government as
dynamic global environment
country.
- Varun Gujaral Commercial and New Business
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Drive to create OG
workforce of the future
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In recent days, the markets have signalled
concern about the economy. and lagging economic
indicators, consumers, investors and
businesses are searching for some bright spot
in the market. Many believe that the oil and gas
industry, which has consistently
deploy, and connect employees through This
issue has become particularly workforce,
combined with a diminishing pipeline of new and
experienced talent. To guard against corporate
brain drain,
companies need to formulate effective strategies
to attract and engage the
requires commitment, cooperation, investment
shown strength during this lengthy economic
downturn, has the potential
to help lift the economy if the right energy
policies are in place. generation is not all. It
is also about
The industry, while shows promise, is faced with
its own challenges and uncertainty. In addition
to the existing challenges relating to global
energy security, long term sustainability and
the uncertainty surrounding the
investment framework, the oil and gas
industry will face new challenges.
Future energy demand is expected to
grow substantially and the sector is in need
of massive investment not just capital.
managing existing talent and developing the
periodic table of talent. International Oil
Companies (IOCs) are facing a real challenge that
may have an impact on expansion and growth
plans, a challenge that requires
commitment, cooperation, investment and
new approaches in developing, managing
and retaining the talent pool.
Collective collaboration and coordinated
There are many issues that call for an their
strategies in the face of slowing
In order to meet the demand, the industry will
explore, develop and produce oil and gas in
increasingly
cooperation between government, academic and
industry on the various issues related to
curricula, employment
severe conditions. The ability to plan and
execute large-scale, complex
and social policies, and programme
NOCs and IOCs avoid ranging back and
forth between skill shortage and skill
development projects requires a highly
term than isolated initiatives.
and IOCs joining forces, learning lessons
yet professionals with the required skill- set
are a scarce commodity.
environment operational challenges will
The challenge facing NOCs and IOCs
Over the last few decades, average age
to develop skilled personnel, manage
of workforce in Indian upstream oil and
costs and develop new technology. This situation
creates new challenges and new
sustainable long-term solutions to
manage workforce demographics, both in boom and
bust times.
Whether one believes it is the result of normally
occurring competition,
uncertainty, but also new opportunities for
cooperation and partnership between
attrition, aging or restructuring, one theme
permeates the current discussion around human
capital how to develop,
NOCs, IOCs and services companies, to share
risks, technology advances and invest in RD.
Partnership between NOCs and IOCs can contribute
to addressing the
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Quantifying Social Investments IFC Financial
Valuation Tool and Cairn India
Discovering the past to create a better business
for extractive industry including oil and gas. It
is this dichotomy of synergising the past with
the future, by adhering to regulatory
frameworks, balancing investor expectations and
striving to create value for all stakeholders,
dealing with the sentiments which surround
national resource, all this while operating
in the most remote of regions across countries
with state of the art technology. Gaining the
trust, cooperation and partnerships of
communities in these frontier regions often
becomes a business necessity to ensure
uninterrupted operations and business activities.
Since the riches of the subsurface are
often found in the poorest and most remote
of regions, organisations invest a sizeable
portion in distributing the fruits of hydrocarbon
development to the resident communities, trying
again to balance this need for developing energy
resources with the pace of development of
the local communities. of community engagement
initiatives is not often appreciated or
understood by companies. Oil and gas is a
sector which offers a myriad range of
activities, all seemingly disconnected but
bound around a common product the crude oil or
the gas! The range of activities range from
the or oil services company person on the
rig of summer, to a community engagement or
social responsibility specialist
implementing programmes in remote regions, to the
oil trader surrounded attendant seemingly
diverse persons united by the same product. The
same paradoxes are also prevalent in costs. While
most are aware of the almost perpetual windfall
gains in the oil business, one overlooks the risk
capital deployed during exploration time
running into hundreds of thousands of dollars
per day in remote onshore or offshore
areas! Fraught with such inherent contradictions,
it is imperative to have a strategic approach
for designing and implementing community
development programmes in order to ensure that
they deliver the desired results of
community support, mitigate risks, and help in
the unhindered growth of business.
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up with the Sustainability Planning and
the absence of any standardised measurement
matrix entails that the impact of the social,
environmental and community investments cannot be
Financial Valuation Tool. The model was piloted
on a couple of projects like the SMS programme
initiated for farmers in partnership with Reuters
along
tangibly measured in business language. longest
heated and insulated pipeline in the world) and
the mobile health van
investment for social initiatives also posed
programme in Rajasthan.
various problems like- Through this tool
companies can
Not being able to maximise the full potential/impa
ct of the investment Not being able to compare
the investments Not being able to
advocate, communicate, support and justify
the investments Not being able to
prioritise investment options initiatives Awarene
ss about such investments within organisation and
cross- functional collaboration
develop metrics to guide their community investmen
ts and translate community program outcomes into
company value, in terms that are understood by
the market risk reduction, productivity gains,
savings, return on investment, and enhanced
reputation. An additional incentive is that
high-performing environmental and social
programs are increasingly seen as a proxy
for effective business management. According to
Multilateral Investment Guarantee Agency (MIGA),
a World Bank political risk insurer, they would
reduce insurance premiums for an operation that
demonstrates rigorous risk management. Cairn
along with Newmont and Rio
Tinto are the organisations with whom IFC
collaborated extensively to come
Excerpt from IFC article on Valuing Returns on
Sustainability Investments.
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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 of risks
which could result in delay of
simulation (algorithms which utilise repeated
random samplings to compute
etc. to wholly participate in the implementation
of the tool. The two basic concepts comprising
the tool are direct value creation and indirect
construction, production postponement, planning,
legal action, etc. The process involves
rigorous stakeholder analysis, traditional
results) to arrive at a net value accrued to the
company. with Reuters involved providing crop
1616
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Traditional Investment Analysis
(MPV) 2 Quality of Sustainability In
vestment 6
Value Creation (Cost benefit analysis)
4 Net Value to Company
From Sustainability Investments



Stakeholder Analysis 1 Risk Quantific
ation 5
Value Protection (Indirect benefit) 3 Mo
nte Carlo Simulation 7
Source IFC Article
advisory and marketing information through the
mobile phone for 10,000 farmers along the Cairn
India pipeline in Gujarat. This programme not
only helped maintain a continued
relationship with the farmers but ensured that
the communication was two way.
van. The van operated and traveled to 64 villages
in and around the Cairn project area in
Rajasthan. The FV tool was able to calculate and
ascertain that this the company as the
alternative to setting up 15 clinics to provide
similar services to
the concerned population. The farmers could also
through their
mobile phones inform the organisation about
breaches in pipeline security with pilferage,
leakage, sabotage or other maintenance issues. So
while the SMS programme helped increase
the income of farmers through the price advisory,
the farmers were also able to act as the pipeline
reporting contact for the company. So both the
modes of value creation and value protection was
Another key saving was in terms of mandays for
workers from the village. With the van servicing
the local village populace, loss of manhours/days
due to illness of village workers were
minimised and made negligible. The same FV tool
could be applied holistically to quantify the
returns of 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. cases of pipeline security
were reported by farmers, thus preventing
sabotage,
management support and commitment, an attitude
for cross-functional support management, etc.)
and developing 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
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People, Process, Environment
Oil Gas is considered to be an unsafe at
various stages can be a threat to the health and
wellbeing of not just people working on site, but
also the communities Good governance is the
only way one can ensure an economic climate
which is favourable not only to investments, but
also well being and sustainability of people and
environment that we come in contact with. We, at
Cairn, are committed to protecting the
health, safety and wellbeing of people working on
our sites, people who come in contact with our
operations and the health and sustainability of
environment that we operate in. Our Corporate
Responsibility Management System (CRMS) lays
down detailed guidelines and procedures
that support the delivery of our
commitment values and our approach to business.
the way he/she arrives at the work in
the morning. Our goal is to create a
healthy, supportive working environment that
can help reduce absenteeism due to
fatalities. comprehensive one, wherein all
the process and procedures, to effectively laid
down. This system ensures that the policies are
implemented across various activities through
design, implementation, operations,
monitoring and reporting as it is based on
the implementation in progress for
the Rajasthan operations. We take precautions to
avoid accidents or pollution incidents, and all
our operations have rigorous procedures,
equipment and emergency teams in place
to training is mandatory for all visitors to
the site to ensure their safety.
Respect for people, communities,
the environment, the rule of law and human
rights Relationships we believe that
building strong, open and lasting
relationships with our stakeholders is not
merely a social responsibility but is vital
to achieving our business goals
and Responsibility We recognise
our responsibility to ensure our actions do not
harm people, the environment or society. While we
follow the highest level of international codes
and standards in our upgrade them. The
nature of the work involves some inherent risks
and facing challenging environments. We strive to
make sure that everyone associated with our
work goes back home in the evening exactly
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Companies are increasingly becoming
cautious about the issues concerning environmental
protecting, including air, land and water
quality. Most of it is due to the heavy
regulations and compliances. These
regulations continue to evolve. For example,
the (EPA) greenhouse gas reporting rule was
recognition from time to time. This year, the
Rajasthan operations won nine safety awards in
the 24th Mine Safety Awards organised under the
aegis of the DGMS, Rajasthan. Environment Accord
ing to the Ernst Young
ETY
EN
AF
S
VI
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N
MENT
ALTH
HE
AS
SUR
ANCE
and production sector on November 8,
2010 and requires companies to report their 2011
greenhouse gas emissions beginning in March 2012.
the climate debate will continue to complicate
the strategic decision- making of oil and gas
companies across
the industry. Today, climate change and
sustainability issues are a key component of
corporate agenda. The stakeholders are as much
interested and passionate about these issues as
they are about the compensation.
Our approach to each new project includes
undertaking Preliminary Environmental Impact
Assessments (PEIAs), Environmental
Impact Assessments (EIAs) and Social
Impact Assessments (SIAs), to minimise
any potential impacts of its activities
We at Cairn have been committed to minimising the
impact of our business on the environment. We
introduced stringent measures, from initial
impact assessments to waste management, and, in
the event of any unplanned incident, have put in
place comprehensive emergency response and oil
spill contingency plans.
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Oil and Gas Companies Socially Connected
communications, including knowledge and
information management for 20 percent of business
users. AccordingtoastudybyMicrosoftand Accenture,
nearly75ofoilandgas professionalsseevalueinusings
ocial mediaandcollaborationtoolsat technologya
tacorporatelevel.Thestudy whichsurveyed275professi
onalswithin international,nationalandindependent o
ilandgasandrelatedcompanies,found thatsocialmediaa
ndcollaboration
Social networking is booming. Facebook has become
the most visited website on Internet
population visit social networking or blogging
sites. Social networking is facilitating
business and personal relationships,
with individual sectors now starting to cotton on
to the potential of information sharing via these
channels. Gartner predicts that by 2014,
social networking services will replace
e-mail as the primary vehicle for interpersonal
communications,
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technologyadoptionisprimarilya companies that
are using social media
thesametime,halfofthosesurveyedsaid theircompanies
prohibitorrestrictthe useofmanyofthesepubliclyavai
lable tools,suchasphoto-sharingandsocial networki
ngsites.
tools for other purposes. Chesapeake Energy has
successfully implemented stream that posts
current job openings, interacts with followers
and offers
career advice to nearly 2000 people. On the
other hand, the oil and gas industry itself
boasts of various social
networking sites, such as www.energy- networks.ne
t, www.oilandgascommunity. com, www.hsee.co.uk
and www.oilpals. com. These are facilitating
knowledge and information management. Energy is
a highly regulated industry, and its companies
are required to make information available to
their work forces manner. Cloud computing,
public instant messaging systems and
internal social networks allow for more cross-
opportunity to communicate via social networks to
media, Gulf Coast residents and businesses
affected by the spill, concerned citizens, and
employees. industry from social media is most
likely the increased productivity, thanks
to improved collaboration and knowledge- sharing
between workers. These elements are important for
driving revenue, cutting costs and
contributing to the health and safety of workers
(Oil
and Gas Collaboration Survey 2009) barriers
while keeping up with the
changing face of technology.
industry.
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