Cairn India II

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26763
Company name	Cairn India Limited
Country	India
Sector	Oil, Gas and Mining
Environmental category	A
Department	Oil, Gas, Mining And Chemicals
Status	Pending Signing

Date SPI disclosed	March 31, 2008
Projected board date	May 30, 2008
Previous Events	Approved: June 24, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

In 2004 Cairn India Limited and its subsidiaries (Cairn or the company) made a world-class discovery in its Rajasthan Block RJ-ON-90/1 in northwest India (the Rajasthan Block). Cairn is currently focused on the development of the Rajasthan Block.

The proposed project will consist of:

- the development of Cairn’s discoveries in the Rajasthan Block including the construction of an oil processing facility; and,
- the development of an approximately 600km crude oil pipeline to transport oil from the Rajasthan Block to Gujarat’s western coast.

The development of discoveries in the Rajasthan Block was previously disclosed in connection with the debt facility IFC provided to Cairn in 2006. Since then, the company (as operator of the Rajasthan Block) has now taken on the responsibility to construct the pipeline. Private investment and operation of the pipeline are seen by IFC as a positive step forward in the project, but requires additional financing.

Project sponsor and major shareholders of project company

Cairn is a rapidly growing independent Indian oil and gas company focused on India. The company has two producing assets in shallow offshore Eastern and Western India and a number of other exploration assets across India. Once developed, production from the Rajasthan Block would position Cairn as a sizeable regional player.

The company is listed and publicly traded on the Indian stock exchanges. The principal shareholders are Cairn Energy PLC (69%) – a UK-based publicly-traded independent company, and Petronas (10%) – the Malaysian state-owned hydrocarbon company. The remaining shares are publicly owned. IFC owns approximately 0.4% of Cairn’s shares.

Total project cost and amount and nature of IFC's investment

The total project cost until end-2009 is estimated at approximately $2.9 billion, of which approximately $2.0 billion is Cairn’s portion of the project’s cost with the remaining 30% to be paid by Cairn’s partner in the Rajasthan Block, the mainly state-owned Oil and Natural Gas Corporation (ONGC).

IFC proposes to provide a debt facility of up to $250 million. The company plans to finance the remainder of the funding requirements through commercial banks and internal cash generation. The new financing is to replace an existing facility that was limited to finance the upstream development.

Location of project and description of site

The Rajasthan Block covers an area of approximately 3,467 square kilometers, close to Barmer in northwest Rajasthan. The proposed pipeline, starting from a processing facility within the Rajasthan Block, extends to Viramgam and continues to Salaya in Gujarat’s western coast. The project will have storage facilities and potential offtake points at both Viramgam and Salaya.

The 600km pipeline route will pass mostly flat terrain of desert and farm land and will avoid any heritage or protected areas. The company maintains corporate offices in Gurgaon, India, as well as project offices at its exploration and production sites.

Anticipated development impact of the project

Fit with World Bank Group’s Strategy:

The proposed IFC investment is consistent with the WBG’s strategic priorities in India.

The current World Bank Group Country Assistance Strategy (CAS) for India focuses on improving government effectiveness; investing in people and empowering communities; and promoting private sector-led growth. The strategy for promoting private-sector led growth is further elaborated in the World Bank Group’s Private Sector Development Strategy, appended to the CAS, which proposes that the World Bank and IFC work closely together to:

- facilitate greater competitiveness;
- improve the quantity and quality of infrastructure through greater private participation;
- promote the provision of private health services; and
- improve rural productivity and growth through greater private investment.

IFC will focus on providing firms with long-term debt and equity which may not be available from domestic financial markets; and on adding value in the areas of global best practices, creating international partnerships, entering new markets, environmental and social sustainability and corporate governance.

- Development Impact:
Since the mid-1990s, India has implemented policy changes to encourage private investment in its upstream oil and gas sector. Although success remains modest, a number of foreign companies, such as Cairn, have successfully entered the sector. IFC’s proposed investment reflects its continuing commitment to enhance the role of the private sector in the upstream hydrocarbons sector in India and help private companies meet the infrastructure challenges related to their activities. The proposed transaction will therefore build on the development impacts envisaged during our previous engagements with Cairn:

- Development of Fuel Transportation Infrastructure:
Cairn’s construction of an approximately 600 km crude oil transportation pipeline will help bring the fuel from the large Rajasthan discoveries to market hubs where it can be refined and further distributed to meet India’s growing energy demand. The potential use of this pipeline can later extend beyond Cairn’s Rajasthan Block to other blocks in Rajasthan where exploration activities are ongoing.

- Enhancing Availability of Higher-Quality, Domestic Fuel:
The Project is expected to reduce the reliance of India’s power sector and small industry on supplies of relatively inferior coal and more expensive naphtha, respectively.

- Benefits to Government:
It is expected that the governments of India will receive substantial fiscal receipts from royalties, production sharing and corporate taxes, generated by the oil production from the Project. A sizeable portion of these fiscal payments will accrue to the state government of Rajasthan in the form of royalties.

- Import Substitution:
At its currently projected production rate of more than 150,000 barrels per day, oil production from the Project would equate to approximately 18% of India’s indigenous oil production and 6% of India’s oil import volumes (both as of 2005/2006 fiscal year).

- Creation and Preservation of Direct and Indirect Employment:
The Project is expected to generate 450-500 jobs during peak operations (approximately 2,500 during the construction period), benefiting the local community through increased employment opportunities both directly and indirectly. The Company encourages local hiring in its areas of operations to the extent possible.

- Supporting Growth of an Indian Private Oil & Gas Company:
Following Cairn’s discovery of oil in Rajasthan, Cairn took the decision to introduce local shareholding to its Indian operations. The outcome was the creation of a publicly traded Indian company that has Indian ownership and Indian management.

- Supporting Local Communities:
Cairn supports a wide range of community development activities in all its operations. Its work is concentrated in five main areas – health, education, local entrepreneurship development, environment and infrastructure – and benefits from effective co-ordination with local government, NGOs and media. Cairn is currently placing significant emphasis on meeting local community expectations for value-added employment opportunities, as well as further improvements of water infrastructure, medical services, health education, etc.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- annual production of hydrocarbons,
- direct employment levels,
- production sharing and fiscal payments accruing to the governments of Rajasthan and India, and
- implementation of community development programs.

Governance risks assessment

An important benefit of the investments supported by the proposed financing is revenue flows to governments in the form of taxes, royalties and other payments, especially in the case of prospective oil projects in India. The World Bank has very active programs in India which is one of its largest borrowers and is generally seen, based on available indicators such as Transparency International’s Corruption Perceptions Index and the World Bank Institute’s Governance Indicators, as having adequate governance capacity. Accountability for collection and use of revenues at the national level is not seen as a significant risk. The company has agreed to disclose publicly its payments to governments (including production sharing) at the state and national level. On balance, given the governance context, the expected development impact and the projected benefits, including to communities and local government, IFC believes that this is a project which it should support.

IFC's expected development contribution

The proposed investment will build on IFC’s existing partnership with Cairn. As Cairn expands its Rajasthan development scope to include a crude oil pipeline, IFC will play a key role in supporting the implementation of the Project as well as sharing its benefits with the communities. IFC’s key roles will include:

- Environmental and Social Risk Mitigation:
Through IFC’s previous engagements with Cairn, Cairn has built a comprehensive Environmental and Social Management System (ESMS) for its upstream activities. Under this project, IFC will assist Cairn extend this ESMS to address potential issues related to the development of a large crude oil pipeline including land acquisition and compensation, public consultation, and acquiring rights of use.

- Funding Mobilization:
IFC’s continued support to the project, both financial and through technical assistance on environmental and social issues and community development, will provide comfort to other potential lenders from a project risk perspective with regards to the completion of the upstream project as well as the implementation of the pipeline in accordance with international best practices.

- Community Development and Cairn-IFC Linkages Program:
Through IFC’s existing engagement with Cairn, a Cairn-IFC Linkage Program has commenced to deliver a sustainable community development program to Rajasthan communities in close proximity to the project. This linkage program has three components:

- an Enterprise Center (for local supplier development, skills development, business development services, information dissemination, etc);
- a Rural Dairy Development Project; and
- a Child, Maternal and Sexual Health Awareness Initiative.

Managed by a full-time IFC staff with a local NGO as an implementation partner for each component, the initiatives are in various stages of development with some already delivering tangible and measurable results. IFC and Cairn’s continued collaboration over the next two years will be critical for these programs to achieve a sustainable level of operation and to meet the programs objectives in full.

Environmental and social issues - Category A

The review of the project consisted of appraising technical, environmental and social information, appraising the operations of the company including the field development areas and the entire route of the proposed oil pipeline. The project sponsor is an existing IFC client, and previous supervision missions have been undertaken to assess the implementation and compliance with Cairn's environmental and social management systems.

Performance standards applicable to this investment include:

- PS1: Social and Environmental Assessment and Management Systems
- PS2: Labor and Working Conditions
- PS3: Pollution Prevention and Abatement
- PS4: Community Health, Safety and Security
- PS5: Land Acquisition and Involuntary Resettlement
- PS8: Cultural Heritage

The following corporate systems and potential environment, health, safety and social impacts of the project were analyzed:

- implementation of an integrated Environmental, Health, Safety and Social Management System at the corporate level;
- the company’s capacity to manage multiple projects and implement the Integrated Management System;
- impacts from construction, including transportation of materials;
- air emissions;
- greenhouse gas emissions;
- water supply and disposal;
- liquid and solid waste disposal;
- noise from drilling operations;
- contamination from past or present operations;
- employment and working conditions;
- public and worker safety;
- emergency response plans including oil spill response;
- land acquisition, including right-of-use for the pipeline, and compensation;
- cultural property;
- community development; and
- public consultation.

IFC’s due diligence findings and application of IFC’s Environmental and Social Review Procedures to this suite of aspects and issues resulted in this Project being classified as Category A.

The company has presented plans to address potential environmental and social impacts to ensure that the proposed project will upon implementation of the specific agreed measures, comply with all relevant environmental and social requirements, namely the Indian laws and regulations, and the IFC's Performance Standards on Social and Environmental Sustainability and environmental, health and safety guidelines. The information about how these potential impacts will be addressed by the company is detailed in the Environmental and Social Review Summary disclosed in the World Bank Infoshop.

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