Has Anil Agarwal overpaid for a controlling stake in Cairn India? The almost $10-billion offer should have had domestic industry and the government excited that an Indian company could fetch such high valuations.
If the waxy crude oil from Cairn's Mangala field in Rajasthan's Barmer area could get the company such high valuations, the prospects of other companies producing higher-grade crude oil or natural gas certainly brighten.
Cairn executives claim that private refiners Reliance Industries Ltd and Essar Oil process the Mangala crude without having to blend it, since they have more modern refineries.
But the fact is that the crude produced from one of the country's biggest onshore discoveries is not rated high by Indian refiners due to its high viscosity.
In fact, Mangalore Refinery and Petrochemicals Ltd and Indian Oil Corporation process the crude in a blend with others at their refineries.
An IOC executive said the Mangala crude is bought at a discount to that of Bonny Light (a highly desired variety, due to low corrosiveness).
The discount is higher than what Oil and Natural Gas Corporation crude invites from Indian refiners, though both are low-sulphur (sweet) crudes.
Transportation of the crude itself involved putting up an insulated pipeline at a cost of about $1 billion (Rs 4,700 crore) after initially being moved through trucks.
When IOC takes the crude into its own pipeline for transportation to Panipat, it needs to blend it with 90 per cent other crude.
Mangala crude has about 600 centi stoker viscosity at 25 degrees Celsius compared to 40 CST of the IOC pipeline, said the executive.
Cairn India has two more producing assets in Andhra Pradesh and Gujarat, with better quality oil.
However, with the volume from these being just 30 per cent of the company's daily total production of about 175,000 barrels of oil equivalent (boe), it is Mangala with its 125,000 barrels a day production that has boosted the company's valuations.
The Vedanta decision to bet on Barmer for a substantial stake in the company from the parent Cairn Energy Plc at Rs 405 a share, inclusive of a Rs 50 no-compete fee, therefore, looked odd.
All the same, many wonder if Indian companies were correct in their assessment that Edinburgh-based Cairn Energy was asking for too much when it reportedly offered to sell stake to ONGC and RIL.
Even when the market was rife with rumours of ONGC making a counter-bid for controlling stake in Cairn India, a senior executive in the company ruled it out, saying the perception that the deal was overvalued was correct.
In the case of Vedanta, it is making a debut in the oil and gas business. No business house sinks money into a deal if it does not see good returns.
P K Mukherjee, managing director of Vedanta group company Sesa Goa, recently said the company would get 15 per cent annual return on the cash it was going to put into Cairn, higher than what it earns currently on its cash reserves.
It remains to be seen if the assessment of Rahul Dhir, chief executive officer of Cairn India, was correct when he recently told Business Standard that Cairn, with its expertise in oil and gas, was probably more valuable for Vedanta than ONGC, which is already an oil exploration major.
Image: Anil Agarwal
