The Business: Buccaneer who struck black gold: “Two years ago, Cairn bought out Shell completely for £4m and kept drilling.”: “Cairn kept going where the mighty Shell gave up”: “Cairn has a market capitalisation of £2bn, compared with £6m when Gammell founded the company in 1980.” (ShellNews.net)

12 Sept 04

The former Scottish rugby star who founded Cairn Energy is now in the scrum with oil giants

NOW here's a question. Which British businessman is a close friend of Tony Blair and President Bush? Here's a clue. Blair opened his company's new head office in Edinburgh, and Bush, as a young boy, used to holiday on the family's Scottish farm. Time's up.

It's Bill Gammell, founder and chairman of Cairn Energy, the new hotshot of the oil industry. It is said that when the oil markets descend into crisis - as they have recently- Blair and Bush ring Gammell's office, with its glorious views of Edinburgh Castle, where labouring inside is the tall, thin figure of Gammell, a former Scotland rugby international.

Last week, Gammell had cause to celebrate. Independent analysts, called in by the cautious Scottish oilman, estimated that Cairn had up to Ibn barrels of oil in place in India's Rajasthan oilfield and recoverable reserves of between 700m and l.lbn barrels in the Mangala oilfield.

Another reason to roll out the barrel was that the company Gammell founded 24 years ago had joined the FTSE100. The 51-year-old Gammell could, justifiably claim Cairn Energy has come of age and no longer is an oil tiddler in a world of big fish. Since January this year, Cairn Energy has released a string of optimistic announcements - five decent-sized oil strikes in Rajasthan, north-west India, alone. And now Mangala.

But the City of London can be a unforgiving place, as Gammell knows. Last week Cairn's shares fell 24p to £14.50 (€21.46, $26.10) as it also reported a 40% drop in interim profits, blaming the "huge currency impact" of the weak US dollar against sterling.

Even so, Gammell has delivered so far what every investor dreams of: huge rewards - Cairn's share price is up round 265% this year- with limited risk.

Gammell has also defied initial industry scepticism by transforming a once tiny group with roots in the North Sea and Texan oilfields into the UK's leading oil exploration companies. Cairn has a market capitalisation of £2bn, compared with £6m when Gammell founded the company in 1980. Cairn floated on the stock market in 1989 when its shares were valued at 192p.

Before the discoveries in Rajasthan, the shares were 401p.

Few companies have come from obscure mid-cap status to potential blue chip in under two years. Gammell's own stake in the company is worth around £30m.

Gammell was born in Edinburgh, the middle son of six children. As a pupil of Fettes College, Edinburgh, he was a classmate of the young Blair, the two starring in debating competitions. Since age 11, he has also enjoyed a close friendship with President Bush, then six years old, who was sent over to the Gammell family farm in Perthshire for a summer holiday.

Gammell's father, Jim, knew Bush senior. Jim was the founding partner at Edinburgh fund manager Ivory & Sime that funded George Bush senior's Zapata Petroleum in 1952. Gammell senior joined the board of Bush's company and the families became firm friends. Gammell is not somebody who boasts about these relationships, but accepts that being close friends with two schoolboys who became US president and UK prime minister is unusual. "I suppose it is a bizarre coincidence," he says. The friendships have lasted.

When Gammell moved into Cairn Energy's new office in Edinburgh's Lothian Road in 1997, the newly elected Blair opened it. Stories abound of Gammell's receptionist taking calls from "the President". Scotland's former first minister, Henry McLeish, recalls in his memoirs how, when he visited the Oval Office in 2000, Bush was quick to ask after his friend.

But Gammell has never been someone who needs a leg up. His success is of his own making. He went from Fettes to Scotland's Stirling University where, despite spending student holidays on oilrigs in the North Sea and with the Bushes in Texas, rugby became his main focus. He rose from university to dub teams and was soon playing for Scotland. "I remember having the choice between going for my first Scotland cap or passing my accountancy exams," he has said. "I went for the cap."

After leaving university, Gammell joined a small Edinburgh insurance broking company, a period of his early business life he describes as boring. It was during this stage that he first established a company called Cairn, the Scots name for a pile of stones found on the top of hills to guide walkers or commemorate historical events. Cairn Insurance Brokers became Cairn Financial Services, which gave way to Cairn Fund Management, where Gammell's interest in oil developed.

He spent the 1980s investing cash in oil fields in north America-with mixed results. Like other investors, he put most of the cash into exploration of known sites and only about 20% into higher-risk areas. "I found that the safer wells rarely produced enough oil to make a difference," he says. "With the higher-risk ones, once you had found a decent well, there often wasn't enough cash to buy the land around it and so benefit from the bigger area."

Gammell views current worries about the continuity of supplies from Iraq and Russia as just another turbulent moment in this most risky of businesses. "I’ve been in the business since 1980 and I was told then that in 30 years' time there would be no oil and gas. It is a shocking business for hype, overstatement and difficulty of interpretation," he told Scotland on Sunday, a sister paper of The Business.

But although the current crisis appears to be abating, Gammell has a warning for the longer term. There can be little doubt that the days of limitless oil from the ground are over. Pressure on oil prices is likely to increase from several sources - not least from the oil-guzzling economies of China and India, and while Gammell's most recent find in India will ease the pressure, it is a pinprick in terms of global consumption.

Cairn owes its sudden rise to a decision made seven years ago, when Gammell shunned the oil fields already in production in Gujarat for an area a few hundred kilometres to the north in Rajasthan. Shell owned rights there but was not convinced the fields had potential. Cairn started buying Shell's stake, going from 10% to about 50% by 1998. Two years ago, Cairn bought out Shell completely for £4m and kept drilling.

But there were tense times for Gammell: by Christmas 2004, Cairn had spent $100m - a fifth of the value of the company - drilling wells and did not have a decent sized find. But Gammell had been taught well in Texas where they always say buy up as much of the land around a strike as possible. A series of small strikes means a big one is somewhere near.

Gammell's "yippee!" moment came at 5.30am on 15 January last year after he crept out of bed with the anticipation of a five-year-old on Christmas morning. He switched on his mobile phone to hear the message he had been hoping for Cairn Energy had struck oil in India. Lots of it For Gammell it was justification of his decision to put a considerable number of the company's eggs in the Rajasthan Basin - a 5,000 square kilometre expanse of desert in western India.

Critics say that because all Cairn's operations are on the Indian subcontinent, Cairn has higher risk profile than other exploration companies. The social, geological and political conditions in India add to the risk "Look, we have not come from nowhere, despite what some people in the City might think," says Gammell. "We have been public for 15 years. I have been chief executive for 15 years."

Cairn's story is one of an old-fashioned, buccaneering oil explorer. It attempts to create value through the drill bit, and doesn't want to get bogged down in the day-today activities of producing and selling oil. But Cairn kept going where the mighty Shell gave up.

Gammell is a risk-taker. That is what characterises the company he runs as chief executive. He spent 10 times the money paid for the Indian desert fields which Shell didn't want and had drilled 15 holes costing the best part of £100m and found nothing. Then bang! Hole number 16, called Mangala, was found to be vast. Cairn's production is now around 25,000 barrels per day (bpd), a figure that will rise rapidly to 175,00bpd as the new Indian finds come on stream.

Few expected this: before Cairn's Indian finds, oil exploration firms were out of fashion. Gammell's strikes have set other oil exploration companies shares soaring. Paladin Resources, which buys unwanted scraps of assets from major oil companies, produces around 42,000 bpd. Tullow Oil, produces some 50,000 bpd after buying Energy Africa, and Premier Oil, has some 36,000 bpd.

In Gammell's office there is a small rugby ball which says on it "pick up the ball and run with it". That's what Gammell and Cairn have done.