Fire at Indian Oil Corporation's Fuel Depot Delays Cairn Energy's Heated Pipeline Project

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Researched by Industrial Info Resources (Sugar Land, Texas)--Cairn India Limited (BSE:532792) (Gurgaon, Haryana), a fully owned subsidiary of Cairn Energy plc (LSE:CNE) (Edinburgh, Scotland), has announced that the commissioning of its Barmer-Salaya heated pipeline project for transporting crude oil from its oil fields in Rajasthan will be delayed. The delay has been attributed to a fire outbreak at a fuel depot operated by Indian Oil Corporation Limited (BSE:530965) (IOCL) (Mumbai) in Jaipur in October 2009.

Cairn India constructed a 600-kilometer insulated and heated pipeline to transport crude oil from Barmer in Rajasthan to Salaya in Gujarat. Oil would then be pumped to IOCL's 1,174-kilometer Mundra-Panipat pipeline, which would carry the crude oil to IOCL's refinery at Panipat in Haryana.

The fire destroyed the fuel station that was to pump the crude oil to the Mundra-Panipat pipeline, thereby reducing the carrying capacity of the pipeline 33%. The pipeline had the capacity to carry 18,000 barrels per day (BBL/d) of crude, which was reduced to 13,000 BBL/d following the mishap. The pumping station is expected to resume operations by the end of March.

Cairn India has expressed doubts about safe transportation of crude through the Barmer-Salaya pipeline. The crude will have to be blended with up to 10% normal oil to facilitate transportation through non-heated and non-insulated pipelines.

Heated and insulated pipelines are critical for the transport of Cairn India's crude. The crude from its Mangala oil fields in Rajasthan is waxy and solidifies at room temperature. Cairn India said that until the repairs are completed, the crude will be transported via truck from Rajasthan to Panipat.

Any shortfall in off-take from IOCL is likely to be diverted to other consumers, including the Mangalore refinery, Petrochemicals Limited (BSE:500109) (MRPL) (Mangalore, Karnataka) and Reliance Industries Limited (BSE:500325) (RIL) (Mumbai). Currently, Cairn India produces 20,000 to 30,000 BBL/d of crude oil and has plans to augment its capacity to 130,000 BBL/d by mid-2010.

In October 2009, an accident occurred at the IOCL depot during a petrol transfer process to a storage facility operated by Bharat Petroleum Corporation Limited (BSE:500547) (BPCL) (Mumbai). A failed pipeline valve led to a series of explosions, with the first one measuring nearly 2.3 on the Richter scale. Petrol from tank 410A leaked for nearly 80 minutes before it caught fire. Suffocating vapors prevented site personnel from shutting off the tank valve. An alternate tank switch in the control room was not functioning properly. A report, submitted by the committee that was set up to probe the incident, cites negligence and lack of safety measures as the reasons for the mishap. The fire raged for more than 10 days, killing 11 people. IOCL incurred asset and infrastructure losses of about $60.3 million.

Cairn Energy is a leading oil and gas exploration and development company. The company has business interests in India, South Asia and Greenland. In August 2009, Cairn India began production at the Mangala oil fields. By 2011, the company is expected to begin commercial operations of its Aishwarya and Bhagyam oil fields. When fully operational, the three oil fields will have a combined production capacity of about 175,000 BBL/d.

In September 2009, as part of the second phase of development of the Mangala oil fields, Cairn India awarded a $22 million contract to Punj Lloyd Limited (BSE:532693) (Gurgaon, Haryana) for construction of an 8-inch-diameter gas line and a 24-inch-diameter heated and insulated crude oil pipeline. Fuel from the gas line will be used to operate heat generators, which will provide continuous heating for the crude oil pipeline.

During the third quarter of 2009-10, Cairn India's gross crude oil production was about 66,843 billion barrels of oil equivalent per day. The Mangala oil fields produced about 15,430 BBL/d. By the end of 2010, construction of the second and third trains of the processing terminal at Mangala is expected to increase Cairn India's total crude oil production capacity to 125,000 BBL/d.

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