August 24, 2010 / 9:22 AM / 7 years ago

UPDATE 3-Cairn encouraged by Greenland well despite no oil

5 Min Read

* First well in decade fails to strike oil

* Cairn sees gas and a "working hydrocarbon system"

* Expresses confidence on approval for India unit sale

* Shares recover after early drop (Recasts lead, Adds analyst comments, updates shares)

By Tom Bergin

LONDON, Aug 24 (Reuters) - Oil explorer Cairn Energy (CNE.L) said it was encouraged by drilling results in Greenland, despite failing to find oil, and expressed confidence a planned sale of a majority stake in its India unit to Vedanta Resources (VED.L) would proceed.

Edinburgh-based Cairn said in a statement on Tuesday its T8-1 well in the Baffin Sea between Greenland and Canada -- one of only seven ever drilled in Greenland -- found small quantities of gas.

The news disappointed investors who had hoped for a major oil find. Consultancy Wood Mackenzie previously said Greenland could have reserves of over 20 billion barrels of oil equivalent.

However, analysts said the initial 4 percent drop in the stock was "harsh" and noted Cairn's comments that the gas find proved the existence of a "working hydrocarbon system".

"We believe that this is exciting," said Peter Hitchens at Panmure Gordon.

Cairn's shares recovered to trade down 1.2 percent at 1047 GMT, outperforming a 1.6 percent drop in the STOXX Europe 600 Oil and Gas index .SXEP.

Rivals including the two largest U.S. oil companies by market value, Exxon Mobil (XOM.N) and Chevron (CVX.N), and Canada's Husky Energy (HSE.TO) have snapped up offshore licences in Greenland, in the hope of discovering a major new oil producing basin.

Exploration Director Mike Watts told reporters on a conference call that the gas Cairn struck was of a type that is sometimes found in association with oil, holding out the prospect that material finds could yet be made.

The T8-1 well has yet to hit target depth, while another well, the Alpha-1, is being drilled at another site. Cairn plans to drill one or possibly two other wells this summer.

Environmental Risks

Cairn's Greenland drilling campaign has drawn the ire of environmentalists who oppose exploration in the pristine Arctic area.

Green groups say a blow out like that at BP's Macondo well in the Gulf of Mexico in April could cause even more damage in Greenland. Cold conditions would mean limited evaporation of the oil and the icing up of seas could trap crude under water.

Also, Greenland, a self-governing territory of Denmark, has limited facilities for dealing with a major spill.

A Greenpeace vessel travelled to the area around Cairn's rig earlier this month and said it had been confronted by a Danish naval destroyer.

Cairn said it was taking precautions, such as choosing a safe well design, to ensure a BP-style blowout did not occur.

Fears about oil spills are growing around the world after the BP disaster. A study released by UK regulator the Health and Safety Executive on Tuesday said major oil and gas leaks offshore Britain rose 39 percent last year. [ID:nLDE67M111]

The inclement conditions in Greenland mean Cairn needs to find large volumes of oil to make a project commercial - around 250 million barrels.

Much larger volumes of gas would be required as, given Greenland's distance from a major gas market, a liquefied natural gas facility would need to be constructed, likely at a cost of billions of dollars.

Confident on India Approvals

Gammell said he was not troubled by the "noise" in media reports and elsewhere suggesting there could be a challenge to his plan to sell a majority stake in Cairn's Indian unit, Cairn India (CAIL.BO), to Vedanta Resources (VED.L) for up to $8.5 billion. [ID:nDEL003330]

"The government needs to endorse the overall transaction, I'm very conscious of that," he told reporters.

But he added that Cairn had a strong track record in achieving government approvals in the past.

"From a practical point of view just look at what we've achieved over the last 15 years working in partnership with the government, with the state government of Rajasthan and with ONGC," he said.

An oil ministry source told Reuters on Monday that state energy firms Oil and Natural Gas Corp (ONGC.BO) (ONGC), GAIL GAIL.BO and Oil India OILI.BO could make a counterbid, something media reports said the companies were plotting.

India's Trade Minister Anand Sharma said on Tuesday ONGC should have the last word on Vedanta's proposed acquisition.

Cairn said it had swung to a net profit of $57 million in the first half of 2010, from a loss of $21 million in the same period last year, as Cairn India's Rajasthan fields came on stream.

For an examination of the potential scenarios facing Cairn's India unit sale please click on [ID:nSGE67N0DT]

Editing by David Cowell

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