Cairn regains sparkle as it raises forecasts for Rajasthan oilfields

The independent oil explorer Cairn Energy regained a little of its stock-market sparkle yesterday after the group raised production forecasts for its key Rajasthan fields in India by 50 per cent.

The independent oil explorer Cairn Energy regained a little of its stock-market sparkle yesterday after the group raised production forecasts for its key Rajasthan fields in India by 50 per cent.

Cairn was dumped from the FTSE 100 index in March after a disappointing exploration update at the end of last year prompted a 25 per cent fall in its stock-market value.

But shares in the company climbed 5 per cent yesterday on the news that Cairn now expected production from its three northern fields in Rajasthan to peak at between 120,000 and 150,000 barrels a day, compared with a previous forecast of 80,000 to 100,000.

Cairn also estimated the amount of recoverable reserves in the Mangala, Bhagyam and Aishwariya fields at 500 million barrels - almost double its initial estimate. An independent assessment of the three fields made by the engineering consultancy DeGolyer and MacNaughton has calculated there are 1.64 billion barrels of oil in place.

At the same time Cairn said it had applied to the Indian government for the right to double the development area in which it is drilling in Rajasthan to nearly 5,000 sq km - the equivalent of 20 North Sea blocks. It expects the government to respond next month.

The upbeat news on oil reserves took attention away from a 60 per cent fall in pre-tax, pre-exceptional profits last year and Cairn shares ended the day 52p higher at 1152p, valuing the company at £1.83bn.

Bill Gammell, the chief executive of Cairn, said that based on $40-a-barrel oil, production of 100,000 barrels a day could add $1bn to its cash flows. "When we made the first discovery at Mangala in January last year, it was transformational for us. What we are saying today is confirmational. Good fields get better," said Mr Gammell.

Mangala is the largest oil discovery in India for 22 years, and will add significantly to the country's production capacity. Last year it produced 650,000 barrels a day, but imported 2 million barrels.

Cairn's own estimate of the total reserves it has so far discovered in Rajasthan is put at more than two billion barrels - half of which lies in the Mangala field. It has drilled 77 wells to date, of which 11 have resulted in discoveries. Cairn estimates full development costs of $3 to $3.5 a barrel, the bulk of which will be incurred after Mangala production begins in late 2007.

Mr Gammell, a personal acquaintance of both Tony Blair and George Bush, owns 1 million shares in Cairn, worth £11.5m. He said the company had enough cash to do further appraisal work without returning to shareholders for more capital. He also ruled out a sale of any of its Rajasthan interests but conceded that the group itself could become a bid target at some point. "India is starting to get on the radar screen so I'm sure there are a lot of people with a lot of ideas about getting involved."

Cairn attributed the fall in profits to a decline in its share of production from two gas fields, Sangu in Bangladesh and Ravva in India, and interruptions in output. Under the terms of its production sharing agreements, the Indian government takes an increasing proportion of profits from fields once Cairn's development costs have been repaid. So far it has invested $300m in Rajasthan.