Cairn bought the Rajasthan field from Shell for only £7 million in January and since then has added more than 1 billion in reserves through successful exploration.

The firm reported “disappointing” results from its “N-C” block which is adjacent to the main Mangala field. With six out of nine test wells proving dry (although three wells indicated the presence of “relatively viscous oil”), Cairn was forced to cut its estimate of potential reserves from 400 million barrels to somewhere between 30 million and 80 million barrels.

Cairn Energy chief executive Bill Gammell admitted he found market reaction to what he called “a well-rounded announcement” as surprising.

“Let’s see where the share price is in a month’s time. I don’t believe there is anything materially different about the company today compared to yesterday other than we have had one disappointing drilling report, but we are drilling lots of different things,” Gammell said.

While N-C may have proven to be disappointing, Cairn was able to announce an increase in production targets for its Mangala and Aishwariya fields, which are due to come onstream in 2007, from 60,000-100,000 bpd to 80,000-100,000 bpd. Mangala itself could produce up to 500 million barrels.

In related news, Cairn announced there was a tax dispute between itself and the Indian government.

The government has said Cairn is liable for a “royalty tax” of US$3 per barrel. Cairn has argued the tax was supposed to have been paid by the state-owned Oil and Natural Gas Co (ONGC) under an agreement signed between the two firms which will see the Indian company become a 30% investor in the Rajasthan developments.

According to Gammell, the Indian government's stance did not tally with “the wording or the intent” of the original production agreement but declared it was a “minor issue”. Gammell said even if Cairn had to pay the money, it would reduce the value of the Rajasthan fields by only 5%.