IN the 40degrees mid-day heat of the Indian desert, Mike Watts stands in a featureless patch of sand admiring a seven-foot high maze of blue piping.

This might best be described as unprepossessing. However, Watts, who heads Cairn Energy's exploration effort, regards it with a combination of professorial enthusiasm and reverence.

And well he might. For one January morning in 2004, Watts received confirmation that beneath those sands lay the kind of oil discovery about which geologists dream.

"John McNeil (a field engineer) rang up at 4.00 and said 'This is the real deal, Mike', and said he'd not seen anything like it."

Watts gave himself five minutes to gather his thoughts before calling Bill Gammell, the chief executive of Cairn, to pass on the glad tidings.

By 7.30am, he and Gammell were in Cairn's Edinburgh headquarters examining electronic copies of the logs of the well in question, dubbed Mangala, and contemplating a radical change in the company's fortunes.

Cairn had been criticised for persevering with a drilling programme onshore Rajasthan in western India, the results of which could be described as moderately interesting at best.

However, the logs indicated Cairn had struck a huge column of oil-bearing sand and subsequent analysis has confirmed that the reservoir concerned is of huge proportions. By the latest reckoning, one billion barrels oil are in place, of which Cairn has said between 13per cent and 35per cent might be recoverable.

"If you really opened this up it could be the same as Spindletop for a while, " says Watts, referring to the giant gusher that started the 20th century Texan oil rush.

Much of Watts' pleasure derives from the fact that Mangala provided vindication of his quixotic conviction that the Rajasthani soil could cover world-class oil and gas fields.

This dated from when he first saw gravity data gathered by Shell in 1996, six years before the colossus quit the state and unloaded its stake in Rajasthan to Cairn for dollars7.25m (GBP4.2m).

While Cairn executives steadfastly refuse to enjoy their giant rival's discomfort, the implications of the deal are enormous for the Edinburgh-based company and India alike. Followed by a series of other discoveries, Mangala sits at the heart of a major petroleum system. If all goes to plan, Cairn and its partners, including stateowned ONGC, will be producing more than 100,000 barrels of oil daily from this in 2008.

At current oil prices of around dollars60 a barrel, that would be worth GBP1bn plus in cash annually. Should Cairn escape the attentions of predators until then, its market valuation would increase by several billion pounds in one fell swoop, from around GBP2.9bn currently.

For India, which imports 70per cent of the hydrocarbons it needs to fuel its booming economy, the prospect of a substantial boost to domestic production combined with huge tax revenues is one to savour.

However, before any coffers start swelling there is much to be done in Rajasthan. Cairn holds a vast acreage of desert about the size of Belgium. This may be the most populous desert in the world but desert it is, meaning there are few roads to be found on its vast tracts of sand.

As the Scottish company has to install kit to pump oil and gas from the ground and a huge plant to process it, the logistical challenges of starting production will be enormous. At the same time, Cairn wants to continue exploration in an area in which Watts says it has hardly scratched the surface.

It intends to drill more than 100 wells over the next two years on sites scattered across Rajasthan. The work will be done by teams of specialists, dwelling in portable cabins shipped from Mumbai, under drilling manager John Dwyer.

A 27-year industry veteran, Dwyer laughs at the recollection of being hired on the basis of a personal philosophy that he told Gammell and Watts could be summarised as "proceed until apprehended".

He revels in being encouraged to go f lat out and take risks at Cairn that might take ages to be authorised by a bigger corporation.

After studying best practice in places like Texas and experimenting in the field, Cairn now takes just six to eight weeks to complete a well, from identifying the right location and buying the land to getting the hole drilled.

The company can drill the same depth in metres with three rigs as it did with five last year. The average well cost has been cut from between GBP2.3m and GBP3m to GBP580,000, compared with GBP6m-plus for wells offshore.

Thanks to regular video conferences with Dwyer, directors in Edinburgh can easily monitor progress.

While some in the City have wondered if Cairn, which is known as an explorer, should take on such a huge production operation, Watts admits to no doubts about the wisdom of the exercise.

For proof that Cairn can deliver he points to the Suvali plant, south of Rajasthan, in Gujarat on the Cam bay.

There, on a patch of government land which until recently was a bog, Cairn has assembled pipes and tanks to process 110 million cubic feet of gas daily from the Lakshmi and Gauri fields 35 kilometres offshore.

The first discovery was made in 2000 and brought on stream quickly in 2002, before Shell could open a liquid natural gas importation facility to serve the industrial plants which dominate the skyline.

"Not bad for an exploration company. It's not a bad piece of kit, " says Watts, stressing that the 40-strong workforce at the plant is managed by an all-Indian team.

Such investment in developing local capacities helps to build goodwill for Cairn, encouraging perceptions that it is in for the long haul rather than a fast buck.

Still, developing Rajasthan assets will not be without risks and potential complications facing Cairn include the fact that ONGC wants to build a refinery to process Mangala output to boost its returns from the project. Cairn does not want the start of production, and cash generating sales, to be delayed by such a huge undertaking.

However, Subir Raha, chairman of ONGC, told The Herald at a briefing in New Delhi last month that the company wanted to start production from Mangala at the earliest opportunity.

Gammell, who has been helping negotiate contracts for the sale of the Rajasthan output, will also be aware that bidders may be lurking. Ironically, he addressed executives from giants including BP and ENI at a congress in the Rajasthani capital, Jaipur, last Friday.

These have been attracted to India at least partly as a result of Cairn's success.

Watts, however, appears blissfully unconcerned. Ever the geologist, he is delighted to have so much land to explore in India, where Cairn also has acreage in the east and north of the country.

"This is a dynamic, evolving story that's going to take years to unravel."

HARVESTING THE RAJASTHAN RAIN

WHILE Cairn's discoveries in Rajasthan in western India have propelled the firm into the FTSE elite with a market value of GBP3bn compared with GBP560m in January 2004, they also promise to have a profound impact on the huge state's finances.

Bordering Pakistan, much of Rajasthan is covered by arid desert posing challenges for development in an area in which per capita gross domestic product was just dollars280 (GBP163) in 2003.

The north benefits from being home to tourist havens such as the fort city of Jaisalmer and industries like handicrafts but the south, where Cairn's exploration is concentrated, relies mostly on whatever can be eked from the ground.

A land where turbaned men lead goods-laden camels past compounds of thatched huts, this is a world away from the modernity of the West.

Bare-footed women and children lug hefty jars of drinking water for miles in the searing heat.

Cairn has started making a difference by funding the installation of 300 concrete tanks to "harvest" limited rainwater for people chosen by a local charity.

The company has built 300 kilometre roads to help speed access to its well sites.

So far around 130,000 landowners have shared access and crop compensation payments totalling around GBP600,000.

The biggest impact on the local employment market will be felt when production starts from the giant Mangala fields complex, scheduled for late in 2007.

When the oil starts flowing the onus will be on Indian politicians to ensure Rajasthanis benefit from the huge tax revenues that will result.