Battle over Cairn India looms

Cairn India's storage facility for crude oil at the Mangala oil field in the Indian state of Rajasthan.

A takeover battle for the oil and gas explorer Cairn India is on the cards after Indian officials declined to rule out a bid by state-owned companies. The government-owned Oil and Natural Gas Corporation (ONGC) should have the last word on Vedanta Resources' proposed US$9.6 billion (Dh35.25bn) acquisition of a controlling stake in Cairn India, Anand Sharma, the Indian trade minister, said yesterday.

"It is a major decision. These are national resources," he said in New Delhi. Cairn India, a unit of Scotland's Cairn Energy, pumps about 125,000 barrels per day of crude from India's biggest onshore oilfield, Mangala in Rajasthan. That is equal to 16.5 per cent of India's average oil output last year. Last week, Cairn Energy entered an agreement to sell up to 51 per cent of its subsidiary to the UK-registered Vedanta, an India-focused mining company controlled by the billionaire Anil Agarwal.

That was before Cairn India announced on Monday that it had struck oil and gas in eastern India's Krishna-Godavari basin. The company is in a joint venture with ONGC to develop an onshore exploration block in the region. It said the commercial potential of the discovery was being ascertained. The Press Trust of India reported on Monday that ONGC and two other state-run companies, Oil India and the gas transmission company GAIL (India), had lined up $10bn of loan commitments from international banks for a counter-offer.

The three firms had held informal talks as India's oil ministry examined legal options for withholding approval for Cairn's deal with Vedanta, the news agency said, citing sources close to the case. Murli Deora, the oil minister, said he had not decided whether to push for the nationalisation of Cairn India's assets. "From India's energy security point of view, this doesn't help India much as the money would [be better] invested in overseas acquisitions," Deepak Pareek, an analyst with Angel Broking in Mumbai, told Bloomberg. "This oil will, anyway, be used within India."

Nevertheless, the speculation over a counter-bid lifted Cairn India's stock yesterday. It closed in Mumbai at 354.2 rupees, up 3.2 per cent. In London yesterday, Cairn Energy's share price fell as much as 4.4 per cent in afternoon trading after the company announced it had struck gas, not oil, off the west coast of Greenland. The company said it encountered gas in "thin sands" in the Baffin Bay basin.

"I am encouraged that we have early indications of a working hydrocarbon system with our first well in Greenland, confirming our belief in the exploration potential," said Sir Bill Gammell, the chief executive. Peter Hitchens, an analyst at Panmure Gordon, said there was no local market for Greenland gas. But the gas could turn out to be associated with oil, he said. Cairn Energy said its first well had not yet reached its target depth. The company is drilling a second well in the iceberg-laden waters between Greenland and Canada and plans two more in an exploration program to cost about $400 million this year.

The US Geological Survey estimates that about 50 billion barrels of oil equivalent and gas could lie beneath Greenland's territorial waters. Oil is already being pumped from large discoveries in Canadian waters near Cairn's current drilling location. In another development yesterday, the environmental group Greenpeace said a Danish warship prevented it from approaching Cairn's platform. Greenland is a Danish territory and Copenhagen has undertaken to protect installations that could be targeted by protesters opposed to oil and gas development in Arctic waters.

"Companies like Cairn need to leave the Arctic alone and instead work quickly to develop safe and clean alternatives that will actually help us get off fossil fuels for good," said Leila Deen, a Greenpeace activist. Sir Bill said Cairn had extensive well-control and risk-management measures in place that would enable it to cap any blowout that occurred before the end of the summer drilling season.

The company reported yesterday it had swung to a first-half net profit of $27.7m from a $76.1m loss for the first six months of last year. "The transaction with Vedanta will result in a substantial return of cash to shareholders whilst ensuring the company has the financial flexibility to pursue its multi-basin exploration strategy in Greenland," Sir Bill said. [e-mail]