Cairn shares slump on oil setback

Shares in Cairn Energy, a UK oil firm, have closed down 18% after a disappointing drilling update and a warning over possible tax demands.

The company said tests had shown no significant finds in one of its Indian oil fields, but was upbeat about the potential of other areas. It also said the Indian government had told it to pay a production tax, for which Cairn argues it is not liable. Cairn's shares have jumped by almost 400% this year. Investors had piled into Cairn after the company announced significant oil finds in India this year. Chief executive Bill Gammell said on Friday he was "disappointed" with exploration in the so-called N-C extension area in Rajasthan. Investors had held high hopes of major oil finds in this area. But Cairn said estimates had been revised in what was a "significant downgrade of the initial expectation".

Cairn also said that the government believed the company was liable to pay taxes under its production-sharing contract. The company said the rate would be about 900 rupees ($20.40; £10.50) per tonne, or seven barrels, of oil. A spokesman for the firm said that the tax would wipe 5% of the field's current value.

"Cairn refutes the government's position," Mr Gammell said. He insisted that the contract made it clear that the tax should be shouldered by the licensee - India's state-run Oil & Natural Gas Corp (ONGC) - and not the contractor. "We have a pretty strong legal case here," he added, saying it would only become an issue once the firm started production. Investors took a dim view of the statements though. The shares closed down 247p, or 18%, at 1115 pence. "I think people were slightly over-ambitious for how quickly Cairn would be able to develop and potentially offload these reserves," said analyst Jason Kenney at ING.

The disappointments overshadowed increased production targets for Cairn's existing oilfields. The company raised targets for its Mangala and Aishwariya fields in India from 60,000 barrels a day to between 80,000 and 100,000 barrels a day. Its Mangala field, thought to contain a billion barrels, is its biggest find to date. "These two fields will provide the core of the future developments in Rajasthan," Mr Gammell said. Cairn added that it would be appraising another field early next year. Mr Gammell set up the company in the 1980s and has successfully switched its focus to South Asia from interests in the US and Europe. Cairn, which also operates in Nepal and Bangladesh, was catapulted into the FTSE 100 index of leading UK shares earlier this year after the sharp rise in its share price.