19th Apr 2005 07:01
Cairn Energy PLC19 April 2005 EMBARGOED FOR RELEASE AT 07.00 19 April 2005CAIRN ENERGY PLC PRELIMINARY RESULTS ANNOUNCEMENT Operational - Rajasthan (Block RJ/ON-90/1) •World class Mangala oil discovery •Mangala development plan targets life of field Proven and Probable (2P) reserves of 376 million barrels (mmbbls) based on secondary recovery by water flood •Bhagyam (N-V) and Aishwariya significant oil discoveries with a further three discoveries in 2004 bringing the total Cairn discovered fields in Rajasthan to 11 •Current life of field reserve estimate of 500 mmbbls based on secondary recovery only for Mangala, Bhagyam and Aishwariya - the three northern fields •Northern fields peak production target 120,000 to 150,000 bopd •Independent assessment of the three northern fields, assigns 1.64 billion barrels of oil in place •Development plans to be submitted to Government of India in May 2005 •Application to more than double the Development Area from 1,858km2 to 4,743 km2 includes Bhagyam and Shakti (N-C) fields •Active programme with 77 wells drilled to date including 51 wells in 2004 Operational - Rest of South Asia •Successful infill development campaigns in both Sangu and Lakshmi fields •Exploration drilling programme planned in Bangladesh for winter 2005/2006 •Additional exploration acreage acquired through ONGC transaction Financial• Turnover before exceptional items £110.2m (2003: £155.8m)• Profit before tax and exceptional items £29.4m (2003: £69.0m)• Operating cash flow £77.5m (2003: £122.2m)• No gearing and net funds of £72.0m at the year end (2003: net funds £17.8m)• $135m pre tax received March 2005 following completion of ONGC transaction Bill Gammell, Chief Executive said: "2004 was an exceptional year for Cairn and our operational success hascontinued in 2005. To have discovered, appraised and evaluated half a billionbarrels of oil reserves in Rajasthan within 15 months is a tremendousachievement by the Cairn team. With the start up of Mangala aimed for the end of 2007 and a peak productiontarget from the three northern fields of 120,000 to 150,000 bopd, this projectis not only material to Cairn and its partner ONGC but to the Rajasthan Stateand the Indian Government. Cairn remains excited by the growth opportunities within its existing portfolioand the prospects for growth across South Asia." Enquiries to: Cairn Energy PLC:Analysts Tel: 0131 475 3000Bill Gammell, Chief ExecutiveMike Watts, Exploration DirectorKevin Hart, Finance DirectorMediaDavid Nisbet, Head of Group Communications Brunswick Group Limited: Tel: 0207 404 5959Patrick Handley, Mark Antelme Cairn Energy Live Audio Webcast The webcast of the 2004 Results presentation will be available at 09:00hrs (UKtime) on Tuesday 19 April, 2005. This will be available on the Cairn Energy PLC website:www.cairn-energy.plc.uk http://www.cairn-energy.plc.uk An archived version of the webcast will be available in the afternoon. CHAIRMAN'S STATEMENT Cairn has a clear strategy to create value through exploration. It has focusedits exploration and development activities on South Asia for more than ten yearsand has opened up an important new hydrocarbon basin in Rajasthan. By developingand producing its own discoveries across the region Cairn has grown organicallycreating a robust and material business presently operating more than 100,000boepd on behalf of its joint venture partners. Cairn has a clear competitiveedge for the future in this part of Asia. India is one of the fastest growing economies in the world. It currently importsthe bulk of its oil needs which explains the importance it places on newindigenous oil discoveries. Our relationship and partnership with ONGC, India'slargest oil and gas company which took a 30% stake in the Rajasthan DevelopmentArea earlier this year along with an alignment of needs with the Rajasthan StateGovernment and Government of India, leaves Cairn well placed to maximize thevalue of the Rajasthan discoveries. The Mangala oil discovery in the Rajasthan desert in January 2004 highlights thevision and perseverance with which this South Asian strategy has been pursued.Mangala is the largest oil discovery by any company in India within the last 22years. Cairn has made a total of 11 discoveries on the Rajasthan block. Each discoveryis at a different stage of appraisal and evaluation. It is currently estimatedthat the total volume of oil in place found so far is more than two billionbbls. During 2004, six discoveries were made, including the three northernfields Mangala, Aishwariya (March) and Bhagyam (August). The Mangala andAishwariya fields have both been fully appraised by six and five appraisal wellsrespectively and 3D seismic data. Appraisal of Bhagyam had to be delayed untilthe award of the north-west extension acreage in January 2005. Four successfulBhagyam appraisal wells have since been drilled between February and April 2005and two more appraisal wells are planned. A 3D seismic survey over Bhagyam iscommencing shortly. Mangala is the largest of these discoveries and it will form the core of thefuture developments. Cairn's proven plus probable (2P) oil in place estimate forthe Mangala field is 1,071 mmbbls. The 2P reserves estimate has been revised byCairn to 376 mmbbls, based on secondary recovery by water flood until 2041. Cairn estimates the total 2P reserves for the three northern fields to be 500mmbbls. There is scope to add further reserves to this figure by applyingEnhanced Oil Recovery (EOR) techniques, early in the production life of thefields. In the case of Mangala this could be more than 100 mmbbls. An independent review by the international firm of reservoir engineeringconsultants, DeGolyer and MacNaughton (D&M), conducted in April 2005 hasassigned a 2P oil-in-place volume estimate of 1.64 billion bbls for the threenorthern fields comprising Mangala 1,067 mmbbls, Bhagyam 355 mmbbls and 219mmbbls at Aishwariya. Peak production targets for the three northern fields are in the 120,000 to150,000 bopd range with Mangala planned to come on stream at the end of 2007. Cairn currently estimates full field development costs of $3 - $3.50 per barrel(bbl). The majority of expenditure is expected to be incurred after thecommencement of Mangala production. The other discoveries made in 2004 were Shakti (June), Vijaya ( N-R-1,September) and Vandana (N-R-2, November). A total of 77 wells have now been drilled by Cairn in Rajasthan, 51 of them in2004 and 10 in 2005 to date. This is a strong achievement when the logisticalrequirements for land acquisition, well site preparation, road building as wellforging relationships with the local community are considered. A further 20 to30 wells are presently planned in 2005. This pace of activity can only besustained in an onshore environment where the costs of each well are relativelylow compared to offshore drilling. It is Cairn's belief that there is potential to add further oil in placevolumes, elsewhere in the basin, through the continuing exploration andappraisal programme. Financial Results Average daily production for 2004 was 22,789 boepd (2003: 30,214 boepd). Thereduced rate reflects an increase in Government entitlement pursuant to theSangu and Ravva Production Sharing Contracts ("PSCs") and a temporary reductionin field deliverability from Sangu and Lakshmi as a result of well interventionand infill drilling programmes. This activity to increase delivery capacity atboth these gas fields commenced in the latter part of the year. As aconsequence, 2005 production is currently forecast to exceed 2004 levels. Due to the Group's current production mix being heavily gas biased and theexistence of contractual caps on the price received for this gas, the averageprice realised for 2004 was $24.06 (2003: $22.86). Group turnover, preexceptionals items, was £110.2m (2003: £155.8m). Operating profit preexceptional items and operating cashflow were £31.5m and £77.5m respectively(2003: £73.1m and £122.2m). Profit after tax before exceptional items was £19.6mcompared to £46.2m in 2003. Exceptional items mainly comprise a provision madefollowing the recent Ravva arbitration award. Profit after tax and exceptionalitems was £10.8m (2003: £46.2m). The financial statements presented have been impacted by the weakening of theUS$ against Sterling during the year as although principally a US$underlying business the Group reports in Sterling. Cairn will implementInternational Financial Reporting Standards in 2005. The Group is alsoconsidering a transition to US$ for future currency reporting. The Group had net funds of £72m at the year end (2003: net funds £17.8m) andunutilised unsecured credit facilities of $240m. $135m proceeds were received inMarch 2005 following completion of the ONGC transaction. Directors and Employees A key asset of a business is its people. The attitude, common sense andjudgement of the Cairn team is critical to our business culture. Operating inany foreign country is only sustainable when values are shared. The appointment of Andrew Shilston, the finance director of Rolls-Royce plc, asa non-executive director during 2004 has added considerable industry knowledgeand financial expertise to the Board. I would like to thank and congratulate all employees for their tremendousefforts in what has been a very special year for the Company. The scale of thediscoveries in Rajasthan meant that extra staff were needed and increaseddemands were placed on those already in place. The continued success of Cairn isvery much a team effort, based on the energy, expertise, enterprise, enthusiasmand commitment of every one of its employees in Bangladesh, India and Edinburgh. Outlook Our explorational and operational strengths continue to be underpinned by asolid financial base, which gives us maximum flexibility to capitalise on themany opportunities in South Asia. Having already built a material business,Cairn is well positioned to use its competitive edge to participate in theeconomic and energy growth of the region. Cairn will submit development plans for its commercial discoveries for thefields within the original Development Area in May 2005, with the aim ofobtaining all of the required approvals by the end of the year. An application has been made to the Government of India to enlarge the existingDevelopment Area to include the Bhagyam and Shakti discoveries. If granted, thesize of the Development Area will increase from 1,858 km2 to 4,743 km2. It is Cairn's belief that significant exploration potential remains in SouthAsia. Commitment to this belief combined with the application of state of theart exploration technology in both mature and frontier areas, offers the bestchance for continued success. As evidence of this belief Cairn will beparticipating in the Government of India's next exploration licensing round(NELP V) which closes at the end of May 2005. The challenge for Cairn in 2005 is to grow and augment the world class positionit has created in Rajasthan, taking the projects through appraisal, developmentand on to production. Norman MurrayChairman, 19 April 2005 OPERATIONAL REVIEW The majority of Cairn's operational activity during 2004 and to date in 2005 hasbeen focused on Rajasthan and the infill development drilling at Sangu andLakshmi. In Rajasthan this has resulted in the discovery and appraisal of anumber of fields, including the world class Mangala field and two othersignificant discoveries Bhagyam and Aishwariya in the north of the block. WESTERN INDIA - RAJASTHAN The Rajasthan block, RJ-ON-90/1, comprises 6,688 km2 of semi desert terrain. Itlies in the Barmer Basin, which is a northern extension of the well establishedoil and gas producing Cambay Basin. Exploration successes by Cairn in 2004confirmed the oil and gas potential of the Barmer Basin. While hydrocarbons hadpreviously been found at a number of stratigraphic levels throughout the block,a key to the major success was finding high quality oil bearing reservoirs inthe Fatehgarh formation in the north. The high oil flow rates and good reservoirinterconnectivity seen on well tests are indicative that excellent recoveryrates may be expected from these Fatehgarh sands. Cairn drilled a total of 51 exploration and appraisal wells in Rajasthan during2004, bringing the total number of wells drilled to 77 as of 1st April 2005.These wells can be drilled very cost effectively because of the shallowreservoir depths and being onshore. It also acquired 2,306 km of 2D seismic and468 km2 of 3D seismic. Cairn holds a 100% equity interest in block wideexploration and in January 2005 ONGC exercised its rights to take a 30% equityinterest in the Development Area associated with the commercial discoveries. Cairn estimates the total oil in place discovered to date on the block to bemore than 2 billion bbls. For the northern fields a combination of high anglewells, high density well spacing, secondary recovery as well as the applicationof EOR techniques means that oil recovery will be optimized. The current grosslife of field 2P reserves estimate for these fields based on primary andsecondary recovery only is 500 mmbbls. The development plans for the northern fields envisage a phased development withproduction start up at Mangala at the end of 2007 followed by the subsequentproduction start up of Bhagyam and Aishwariya. The Government of India hasinstructed various of its oil Public Sector Undertakings to propose export andpurchase plans for the increased volumes of crude in order to meet thedevelopment schedule. As part of this overall process, various pipeline exportoptions are being investigated including a dedicated pipeline to the coast. The smaller southern fields in Rajasthan are being reviewed for possible earlyproduction and evacuation of crude by trucking. Exploration The main oil discoveries made by Cairn during 2004 were: •NB-1 (Mangala Field) in mid January •NA-1 (Aishwariya Field) in March •NC-1 (Shakti Field) in April •NV-1 (Bhagyam Field) in August •NR-1 (Vijaya Field) in September •NR-2 (Vandana Field) in November. In addition, the Raageshwari-4, 5 and 6 appraisal wells drilled through theshallow Thumbli oil reservoir, have confirmed the deep gas bearing volcanicsseen in the E-1 discovery well of 2003. They have also established a Fatehgarhdeep gas play in the centre of the basin. The NC-1 (Shakti Field) and NV-1 (Bhagyam Field) wells discovered hydrocarbonson the very northern edge of the contract area. Under the terms of the PSC, thisenabled the granting of two acreage extensions, totalling an additional 1,708 km2, to appraise the extent of these discoveries. The Mangala and Aishwariya Fields, together with the Saraswati and RaageshwariFields, were declared commercial by the Government of India in October 2004.These fields were included in a 1,858 sq km Development Area. This areaincorporates other discoveries, which at the time were unappraised, includingGuda, Kameshwari (Q-1) and GR-F. The granting of the Development Area securesrights until at least 2020 and the Joint Venture will be seeking to extend thisperiod to 2041 when it submits its development plans. An additional or extendedDevelopment Area to secure the Shakti and Bhagyam Fields as well as a number ofsmall Barmer Hill discoveries has been applied for. The ongoing drilling campaign in Rajasthan will focus on the further appraisalof existing discoveries as well as on exploration prospects in the north andsouth. Oil Appraisal and Development Mangala Field Mangala was fully appraised by wells between March and July and a 3D seismicsurvey acquired between May and December in 2004. A range of technical studiesto characterise the geological, geophysical and geochemical nature anddisposition of the reservoirs and fluids is being undertaken. These studies havebeen integrated with both subsurface and facilities engineering studies in aFront End Engineering and Design (FEED) study that forms the basis of the FieldDevelopment Plan which is to be submitted to the Indian Government in May 2005. The development plan for Mangala will target a 35% recovery factor assuming asecondary water flood. Ongoing studies, including water injectivity testing, areaimed at supporting this objective. To combat the high pour point and waxynature of the crude, injected water is likely to be heated. Cairn is working closely with the local water authorities to ensure asustainable water extraction and re-injection process. Extensive deep saline(non drinking water) aquifers have been discovered which can be utilised as asource of water for injection purposes. Extraction will be monitored to ensureminimal impact on the water table. Tertiary and enhanced oil recovery techniques, such as polymer flooding or theuse of surfactants, are under investigation. Such techniques may further raisethe recovery factors in addition to the conventional water flood scheme.Analogous fields worldwide, including some in the neighbouring Cambay Basin inGujarat, are being reviewed to determine the optimum secondary and tertiaryrecovery methods. An ultimate recovery factor of more than 40% of oil in placeis possible. The current internal Mangala life of field 2P gross reserve estimate is 376mmbbls, based on secondary recovery by water flood and production to 2041. Peakproduction is envisaged to be between 100,000 and 110,000 bopd with field startup planned for Q4 2007. Prior to the 3D seismic survey over Mangala being completed, an independentanalysis of the data by D&M (July 2004) confirmed a 2P oil in place volume of1,005 million barrels. After incorporating the 3D seismic data in April 2005 D&Mhas revised its estimate to 1,067 million barrels. The D&M 2P current reserveestimate for Mangala is 256 mmbbls based on secondary recovery only assuming theproduction contract term runs until only 2025. D&M estimate that an additional108 mmbbls of reserves could be added with a successful EOR programme. Aishwariya Field The Aishwariya Field was fully appraised between April and September 2004. A 3Dseismic survey has been acquired over the field and is being interpreted. As aresult of the early 3D interpretation, an additional appraisal well was drilledto test the crest of the structure. The field is slightly deeper than Mangala and the oil quality, whilst similarlywaxy and of high pour point, is less variable than at Mangala, with a mean APIgravity of 29 degrees. Despite being smaller than the Mangala Field and having aslightly different reservoir configuration, the proposed techniques of densedrilling, secondary recovery via waterflooding and enhanced/tertiary oilrecovery techniques introduced early in field life are equally applicable to theAishwariya Field. Reserve estimates will be revised once these studies arecomplete. In April 2005 D&M estimated the 2P oil in place volume for Aishwariya to be 219mmbbls. The D&M current 2P reserve estimate for Aishwariya is 41 mmbbls based onsecondary recovery only and assuming the production contract term runs untilonly 2025. Bhagyam Field The Bhagyam Field has been appraised between January and April 2005 and two moreappraisal wells are planned. A cased hole test in Bhagyam 1-ST established aflow rate of 1,050 bopd of 26 degree API oil from one zone. Two cased hole testsin Bhagyam-4 established a flow rate of 660 bopd of 24.5 degree API oil and1,700 bopd of 30 degree API oil from two separate zones. The field is slightly shallower than the Mangala field and the oil quality,whilst similarly waxy and of high pour point, is more viscous than at Mangala.Despite being smaller than the Mangala Field, the proposed techniques of densedrilling, secondary recovery via waterflooding and enhanced/tertiary oilrecovery techniques introduced early in field life are equally applicable to theBhagyam field. Reserve estimates may change once the final appraisal wells havebeen drilled and studies are complete. In April 2005 D&M estimates the 2P oil in place volume for Bhagyam to be 355mmbbls. The D&M 2P reserve estimate for Bhagyam is 85 mmbbls based on primaryand secondary recovery only and production until 2025. D&M estimate that anadditional 48 mmbbls of reserves could be added with a successful EOR programme. Shakti Field The Shakti Field was partially appraised between September and December 2004.The Shakti-2 and Shakti-3 well were put on pumped test for a four day period inJanuary 2005 to assess recovery of this relatively viscous 19 degree API oil.Shakti-2 flowed at a sustained rate of 50 bopd and Shakti-3 at a rate of 60 bopdfrom selected intervals. Guda and GR-F Field The Guda discovery well was drilled in 1999 and encountered oil in the DharviDungar Formation. The GR-F-1 discovery well drilled 9km to the south in 2003encountered oil in the Thumbli Formation. Subsequent appraisal of these two fields by the Guda-3 and GR-F-2 wells drilledearly in 2005, when combined with remapping of the 3D seismic, has establishedthat they are in fact one field at the Thumbli level. Re-examination of theoriginal Guda well has confirmed that the Thumbli reservoir, which was nottested at the time, was oil bearing in these wells. The combined field is to becalled Guda. Cairn currently estimates that the range of oil in place volumes for Guda isbetween 40 and 400 mmbbls. Further appraisal of the Guda Field, comprising aneight well programme, is planned to commence later this year to delineate thepotential field size. Saraswati and Raageshwari Fields The Saraswati Field was discovered in late 2001. It has been covered by 3Dseismic and 2 appraisal wells were drilled in 2003. The field is complexlyfaulted and has oil in Barmer Hill and Fatehgarh reservoirs. In 2004, theSaraswati-4 crestal well successfully established significant oil flows from thefractured basement. Although the reservoir quality in the Barmer Hill andFatehgarh formations gave somewhat low initial flow rates, subsequent fracturestimulation has been more successful in increasing rates. Oil was discovered in Thumbli reservoirs at Raageshwari in early 2003. TheRaageshwari -2 and Raageshwari -3 appraisal wells drilled in 2003-2004 haveconfirmed the presence of oil and gas down dip of the discovery well in separatefault blocks and with slightly differing pressures and oil water contacts. The Declaration of Commerciality submitted to the Government of India in May2004 included the Saraswati and Raageshwari oil fields. The development plansbased on current data will be submitted to the Government of India in May 2005,however a full evaluation programme on these fields is yet to be carried out.Initial fracture stimulation studies have highlighted the potential forproductivity increases from the reservoirs in these southern fields. The southern fields, Saraswati, Raageshwari oil and Guda are all candidates forearly production and evacuation of crude by trucking. Other Potentially Significant Oil Fields Further evaluation and appraisal of oil discoveries at Kameshwari, Vijaya (NR-1)and Vandana (NR-2) is ongoing. The Vijaya and Vandana discoveries are the firststratigraphic traps to be tested on the block. Both fields have been covered bya 3D seismic survey which is currently being evaluated. The combined oil inplace estimates for the Vijaya and Vandana discoveries range between 50 and 500mmbbls. The Raageshwari Gas Field and Deep Gas Exploration Potential The Raageshwari gas field and the deep gas exploration potential within thesouthern area is a potential important new resource. Gas has value as animportant component of the development plan for the Mangala and northern fields,which will have their own power requirements. The Raageshwari -4 well was drilled in 2004 and confirmed the extension of thedeep gas potential proven in the volcanic section at the base of the Raageshwari-1 well. This well also encountered gas in Fatehgarh sands. In 2005, theRaageshwari -5 and -6 wells were drilled to appraise these deep gas reservoirs.The proven mobile gas column established at Raageshwari is 500m. However, thelow permeability of both the volcanic and Fatehgarh reservoirs has producedmixed results on test. A further two Raageshwari appraisal wells are plannedthis year to further delineate this gas field. The Raageshwari - 4 well is currently being tested across the volcanic andFatehgarh reservoirs. The maximum stable rate achieved has been 3.3 mmsfcd. Astimulation programme is planned to be carried out in the second half of 2005which is expected to improve productivity. An exploration review of the Central Basin High prospects on trend withRaageshwari, has highlighted potentially significant additional unrisked gasvolumes. An exploration well is planned for this year. WESTERN INDIA - CAMBAY BASIN Block CB/OS-2Lakshmi & Gauri Gas Fields;(Cairn interest: 40%; Cairn Operator) The average gas production from the Lakshmi and Gauri fields in 2004 was 78mmscfpd (2003: 109 mmscfpd). During the year, an additional offshore gas platform was installed as part ofthe Gauri development and the Gauri field was brought on stream in April 2004. Production rates from the Lakshmi field were adversely affected byproduction-related issues on a number of Lakshmi wells, which resulted in thesewells being shut-in. The second phase of Lakshmi development drilling, whichinvolved the drilling of five additional production wells, started in November2004 and was completed in March 2005. In addition, the installation of onshorebooster compression is underway. The combined Lakshmi and Gauri gas production can now exceed 100 mmscfd and iscurrently meeting buyers nominations. As part of the contractual specifications relating to the transmission of salesgas, additional gas dehydration equipment was installed and commissioned at theSuvali gas processing plant during 2004. The potential phased oil development programme for Lakshmi and Gauri, which wasscheduled to start with initial test production from the Gauri development wellGA-3, has been delayed until Q3 2005 when the results of Phase II of the Lakshmigas project are expected to have been fully evaluated. Cairn's equity interest in the Lakshmi and Gauri developments has been reducedto 40% following completion of the ONGC deep-water transaction. Exploration(Cairn interest: 60%; Cairn Operator) The CB-X-1 exploration well drilled in January 2004 discovered modest volumes ofgas in the Tarkeshwar formation in a structure that is along trend from theproducing Olpad Field in an adjacent block. A Declaration of Commerciality hasbeen submitted to the Government of India and a development plan is inpreparation to bring the gas to the Suvali processing facility by pipeline atthe earliest opportunity. Other Cambay Basin Exploration(Cairn interest: 30%; non operator) The first 3 year exploration phase on block CB-ONN 2002/1 will involve theacquisition of 120 sq km of seismic data and the drilling of three wells. A 3Dseismic survey is nearing completion on block CB-ONN 2001/1 and explorationdrilling is anticipated in 2005. EASTERN INDIA - KRISHNA - GODAVARI BASIN Ravva Field; (Cairn interest: 22.5%; Cairn Operator) The Ravva Field continued to perform well with average 2004 gross dailyproduction of 53,521 bopd and 87 mmscfpd (2003: 53,463 bopd and 74 mmscfpd).Cairn's average 2004 net entitlement production was 7,516 boepd (2003:10,562boepd). Under the terms of the Ravva PSC, the Government of India's share ofproduction increased to 60% during 2004, which has resulted in a reduction inCairn's net entitlement interest. The estimated ultimate reserves (EUR) of both oil and gas have been revised from279 mmboe to 298 mmboe. An infill development drilling campaign is planned forthe field later this year to extend the plateau. A number of explorationprospects have been identified on the Ravva block and it is envisaged that anexploration drilling campaign maybe carried out in the next one to three years. Exploration A 90% interest in the KG-DWN-98/2 deepwater block has been farmed out to ONGC,which becomes operator. A multi-well appraisal of the discoveries made by Cairnin 2001 is expected to commence in 2005. Cairn's interest in the KG-OS/6 block was relinquished in May 2004. NORTHERN INDIA AND NEPAL ExplorationGanga Basin Exploration - India Cairn was awarded a 100% interest in the large 15,500 km2 GV-ONN-2002/1 block inFebruary, as part of its exploration strategy for the lightly explored GangaBasin in northern India and Nepal. Exploration activity will begin with someaerial geophysical surveys and soil sampling once the Petroleum ExplorationLicense has been finalised. Cairn acquired a 30% interest from ONGC in block GV-ONN 97/1 which is operatedby ONGC. A 2D seismic survey has been acquired during 2004 and the prospectivityis being evaluated prior to any drilling. Ganga Basin Exploration - Nepal In August 2004, Cairn signed agreements with the government of Nepal for twoPetroleum Agreements covering five large blocks. These blocks lie adjascent toIndia in the Ganges flood plain and foothills of the Himalaiyas. The first fouryear exploration commitment is in respect of seismic data only. Work in 2005 will focus largely on environmental, operational and social impactstudies which will be crucial to the successful implementation of any operationsprogramme. Cairn is alert to the sensitivities of operating in Nepal and isactively engaging with the authorities and Non Governmental Officers, includingthe World Wildlife Fund for Nature, to ensure a viable programme. Upon signatureof the agreements, Cairn relinquished 2,704 km2 that were designated areas ofscientific and environmental importance. Cairn is also monitoring developmentsand security within the country as a result of recent political events. BANGLADESH Cairn discovered the Sangu gas field in 1996 and took over operatorship of Sangufollowing the acquisition of Shell's interests in Bangladesh in July 2004. Sangu Development Area; Block 16(Cairn interest: 75%; Cairn Operator) During 2004, gross offtake from the Sangu field averaged 132 mmscfpd (2003: 141mmscfpd). The dip in production was partly attributable to production-relatedissues and the subsequent shut-in of one of the Sangu wells. The averagerealised gas price for 2004 was $2.904/mcf (2003: $2.921/mcf). Three additional Sangu development wells were drilled and completed betweenNovember 2004 and April 2005. Current Sangu production is in excess of 150mmscfpd. It is expected that production will further increase to assist inmeeting the increased gas demand in southern Bangladesh. Production performance in conjunction with the three new development wellsidentified a difference between the volumetrically-derived estimates andmaterial-balance derived estimates of gas-in-place for two of the main producingreservoirs. Cairn is adopting the lower material-balance derived estimates andre-categorising the difference in the "possible" reserve category. This reviewhas resulted in a revision of EUR for the field from 1,205 bcf to 950 bcf.During 2004, a significant milestone was achieved, with the Sangu work-forcereaching 5 million working hours without a lost time incident. Exploration Seismic data acquisition began on Block 10 in April 2004 and continued until theend of the year. A total of 1,244 km of seismic data was acquired in Block 10and 70 km in Block 5. This data is currently being interpreted. The nextcontract phase, which includes drilling commitments, begins in June 2005. Cairn has reached agreement, subject to requisite Government and partnerapprovals, to extend the term of the PSC in respect of certain parts of Block 16where a number of material exploration prospects have been mapped. In view of the improved business climate in Bangladesh, Cairn is currentlyreviewing its options for investment in exploration. Subject to government andpartner approvals, Cairn plans to drill some of these exploration prospectsduring the winter of 2005/2006. NORTH SEA Cairn disposed of its 10% interest in the Gryphon field in May 2004. RESERVES The table below shows reserves information at the end of 2004 on an entitlementbasis for the Group. Reserves at Produced Acquisitions Disposals Revisions Reserves at 31/12/03 in 2004 in 2004 in 2004 in 2004 31/12/04 mmboe mmboe mmboe mmboe mmboeNorth 1.5 (0.1) - (1.4) - -SeaSouth 75.1 (8.2) 35.5 - (21.0) 81.4AsiaTotal 76.6 (8.3) 35.5 (1.4) (21.0) 81.4 On a direct working interest basis, reserves at 31 December 2004 totalled 123.9mmboe (2003: 113.4 mmboe). FINANCIAL REVIEW Cairn enters 2005 with a strong balance sheet and net funds which will enable itto pursue the financially transforming developments in Rajasthan. Key Statistics 2004 2003 % Increase/ (Decrease)Production (boepd)* 22,789 30,214 (25)Average price per boe ($) 24.06 22.86 5Turnover before exceptionals (£m) 110.2 155.8 (29)Average cost of sales per boe ($) 13.29 10.49 27Profit before tax and exceptionals (£m) 29.4 69.0 (57)Profit after tax and exceptionals (£m) 10.8 46.2 (77)Operating cashflow (£m) 77.5 122.2 (37)Net funds (£m) 72.0 17.8 304*on an entitlement interest basis PROFIT AND LOSS Turnover Average production on a working interest basis remains relatively unchanged yearon year at 34,276 boepd (2003: 34,342 boepd). On an entitlement basis,production for the year was 22,789 boepd compared to 30,214 boepd in 2003. Production acquired with the acquisition of Shell's interests in Bangladesh hasbeen recognised from the transaction completion date (30 June 2004). Productionrelating to the 10% interest in the Gryphon field has been included up to thedisposal completion date (26 May 2004). Field production in 2004 has also beenimpacted by well intervention and infill drilling programmes undertaken toenhance production in the latter part of the year on both the Sangu and Lakshmigas fields. In accordance with the terms of the respective PSCs, Cairn's productionentitlement from both the Ravva and Sangu fields decreased in 2004. Followingthe Arbitration Hearing award in relation to the interpretation of the Ravva PSCin October, first quarter 2004 entitlement production from the field has beenrevised to reflect a higher Government profit share during this period. The average price realised by the Group for the year was $24.06 per boe (2003:$22.86 per boe). Turnover, pre exceptional items, which has been impacted by theweakening of the US$ against Sterling during the year, was £110.2m (2003:£155.8m). Gross Profit The Group generated a gross profit before exceptional items of £49.7m (2003:£85.4m). Total cost of sales for the year was £60.5m (2003: £70.5m). Cost ofsales per barrel were $13.29 (£7.25) compared to $10.49 (£6.39) in 2003. The Group depletion charge has reduced by 2% to £3.79 per boe in comparison to£3.87 in the previous year. The completion of the Bangladesh acquisition hasreduced the depletion charge for the South Asia cost pool, but this has beenoffset by a revision to the remaining entitlement reserves. This revision wasdue to a reduction in the calculation of gross remaining proved plus probablereserves, primarily from the Sangu field, and the impact of an increase in theGroup's base oil price assumption from $15/bbl to $20/bbl used in calculatingCairn's share of future production. The development plans for Mangala and Aishwariya have yet to be finalised and sothe associated Rajasthan reserves have been disclosed but not been booked in theyear end financial statements. As a consequence of lower net entitlement, production costs averaged £3.32 perboe for the year compared with £2.41 per boe in 2003. These costs includecharges for litigation, arbitration and stock adjustments. Profit for the Year Administrative expenses for the year were £18.2m (2003: £12.3m). This includes acharge of £6.2m (2003: £0.9m) for LTIP amortisation and associated NIC. Netinterest payable before exceptional items was £2.1m (2003: £4.1m), including aforeign currency exchange loss of £2.0m (2003: loss £2.7m). The majority of the £9.8m pre exceptional tax charge (2003: £22.8m) arises onprofits in India. Profit after tax before exceptional items was £19.6m (2003:£46.2m). Exceptional items/Discontinued operations Following the Arbitration award given on the interpretation of the Ravva PSC,the Group has reviewed its provisioning for this liability and has recognised anadditional exceptional charge net of tax of £9.6m. Cairn completed the disposal of its 10% interest in the Gryphon field in the UKNorth Sea (the Group's only remaining interest in its North Sea cost pool)during the first half of 2004. Following completion of this transaction and theGroup's exit from the North Sea, a £0.8m post tax gain has been recognised inthe profit and loss account in respect of discontinued activities. Profit after tax and exceptional items was £10.8m (2003: £46.2m). BALANCE SHEET Capital expenditure Capital expenditure during 2004 was £124.8m (2003: £82.8m), made up of £90.9m onexploration/appraisal activities, £32.4m on development activities and £1.5m onother fixed assets. Exploration/appraisal expenditure during the year wasincurred largely on the drilling programme in Rajasthan. The majority ofdevelopment expenditure is in respect of the infill campaigns on both Lakshmiand Sangu gas fields. In addition, £16.9m has been capitalised in respect of theBangladesh acquisition. Net Assets Net assets at 31 December 2004 were £431.1m (2003: £337.8m). Net assets havebeen reduced by the weakening of the US$ against Sterling from $1.79 to $1.92 inthe period. Payments for Sangu Gas Payments for Sangu Gas have continued to improve during 2004. There arecurrently no payment arrears (31 December 2003: three months in arrears). Accounting Developments & PoliciesAdoption of International Financial Reporting Standards (IFRSs)In accordance with European legislation, Cairn will adopt IFRSs in preparing itsFinancial Statements from 1 January 2005. The project team, established tomanage the transition from UK GAAP to IFRS, has completed the majority of itswork, with the standards which affect Cairn now identified and their impactsinterpreted. Cairn is currently finalising revised accounting policies to comply with IFRSsthrough discussions with the Group's auditors and industry peers. The major areas of impact on Cairn's net profit and shareholders' funds have been identifiedas IFRS 2 which requires a change to be made for all employee share incentives,and IAS 21 which changes the treatment of exchange differences on consolidationof certain group subsidiaries. In accordance with IFRS 6 Exploration for and evaluation of Mineral resources,Cairn will also be required to expense pre-licence exploration costs, currentlycapitalised in the Balance Sheet. As part of the transition to IFRS, a re-statement of Cairn's 2004 UK GAAPresults is also being undertaken. The reconciliations from UK GAAP to IFRS willbe published on the Group's website prior to the 2005 interims. Other issues UITF 38 Accounting for ESOP Trusts became effective for accounting periodsending on or after 22 June 2004 and has therefore been applied to the currentyear, increasing the charge to the profit and loss account by £2.3m. A prioryear adjustment has arisen from this change in accounting policy and prior yearcomparatives have been restated to reflect the required changes. Cairn is considering reporting its future financial results in US$ which wouldmatch the functional currency of the business. The Group currently reports inSterling, although both income and expenditure are mainly in US$. CASHFLOW Net Cash Inflow, Tax and Interest Group net cash inflow from operations was £77.5m (2003: £122.2m). Tax paymentsduring 2004 were £4.7m (2003: £4.4m). Net interest received was £0.5m (2003:paid £0.6m). Capital Expenditure/Financial Investment Cash outflow from capital expenditure during 2004 was £96.2m, made up of £76.5mexploration/appraisal expenditure, £18.3m development expenditure and £1.4mother expenditure. This differs from balance sheet capital expenditure due tothe timing of this expenditure (2003: £75.8m - £55.9m exploration, £18.7mdevelopment and £1.2m other). In addition there is an outflow on completion ofthe Bangladesh acquisition (£23.8m) and a £7.3m inflow on completion of theGryphon disposal (2003: £10.4m inflow on sale of Dutch assets). Net Funds/Debt and Financing The Group had a net cash outflow before use of liquid resources and financing of£39.4m during 2004 (2003: inflow £51.9m). The Group's financial position was improved by the £102m raised by the placingof 7.5 million new shares in July 2004. At the year end the Group had no gearing and net funds of £72m (2003: net funds£17.8m). In addition, pre tax proceeds of approximately $135m from thepreviously announced ONGC transaction were received in March 2005. The Groupcurrently has $240m of unutilised unsecured revolving credit facilities.Following the significant discoveries made in Rajasthan during 2004, the Groupis currently undertaking a review of its financing requirements andarrangements. Kevin Hart Finance Director, 19 April 2005 Cairn Energy PLC Group Profit and Loss Account For the year ended 31 December 2004 --------------------- --------- --------- ---------- ------ -------- Continuing Continuing Discontinued Total Total operations operations operations 2004 2003 £'000 exceptional £'000 £'000 (Restated) items £'000 £'000--------------------- --------- --------- ---------- ------ -------- Turnover 108,269 (14,730) 1,910 95,449 155,814 Cost of salesProduction costs (27,210) - (479) (27,689) (26,498)Depletion (30,913) - (695) (31,608) (42,731)Decommissioningcharge (1,102) - (81) (1,183) (1,231)--------------------- --------- --------- ---------- ------ --------Gross profit/(loss) 49,044 (14,730) 655 34,969 85,354 Administrative expenses (18,200) - - (18,200) (12,268)--------------------- --------- --------- ---------- ------ --------Operating profit/(loss) 30,844 (14,730) 655 16,769 73,086Exceptional gain on saleof oil and gas assets - - 2,206 2,206 ---------------------- --------- --------- ---------- ------ -------- Profit/(loss) on ordinaryactivities beforeinterest 30,844 (14,730) 2,861 18,975 73,086 Interest receivable andsimilar income 1,811 - - 1,811 475Interest payable andsimilar charges (3,872) (1,017) - (4,889) (4,548)--------------------- --------- --------- ---------- ------ -------- Profit/(loss) on ordinaryactivities beforetaxation 28,783 (15,747) 2,861 15,897 69,013--------------------- --------- --------- ---------- ------ --------Taxation on profit onordinary activities (825) - (1,421) (2,246) (5,583)- current (8,981) 6,172 - (2,809) (17,201)- deferred--------------------- --------- --------- ---------- ------ -------- (9,806) 6,172 (1,421) (5,055) (22,784) Profit/(loss)for the year 18,977 (9,575) 1,440 10,842 46,229--------------------- --------- --------- ---------- ------ --------Earnings per ordinary share- basic 7.11p 31.47pEarnings perordinary share- diluted 7.05p 31.38p--------------------- --------- --------- ---------- ------ -------- Cairn Energy PLC Group Statement of Total Recognised Gains and Losses For the year ended 31 December 2004 2004 2003 £'000 (Restated) £'000 Profit for the year 10,842 46,229 Unrealised foreign exchange differences (19,555) (32,854)------------------------------ ---------- ---------- Total recognised gains and losses relating to the year (8,713) 13,375------------------------------ ---------- ----------Prior year adjustment* (83)------------------------------ ----------Total gains and losses recognised since last annualreport (8,796)------------------------------ ---------- Reconciliation of Movements in Shareholders' Funds For the year ended 31 December 2004 2004 2003 £'000 (Restated) £'000 Total recognised gains and losses for the year (8,713) 13,375Redemption of non-equity shares - (50)New shares issued for cash 101,889 -New shares issued in respect of employee share options 4,559 1,840Cost of shares purchased by ESOP Trust (9,329) -LTIP charge 4,956 864------------------------------- --------- ----------Net additions to shareholders' funds 93,362 16,029Opening shareholders' funds (after prior year adjustment)* 337,778 321,749------------------------------- --------- ---------- Closing shareholders' funds 431,140 337,778------------------------------- --------- ---------- Note: * The prior year adjustment relates to the change in accounting policy arisingfrom the implementation of UITF 38 Accounting for ESOP Trusts. The openingshareholders' funds at 1 January 2004, before deducting Own shares held of£4,293,000 (cost less amortisation under previous UK GAAP) were £342,071,000. Cairn Energy PLC Balance Sheets As at 31 December 2004 Group Group Company Company 2004 2003 2004 2003 £'000 (Restated) £'000 (Restated) £'000 £'000 Fixed assetsExploration assets 235,503 155,046 - -Development/producing assets 232,415 236,749 - -Other fixed assets 1,628 1,546 815 703Investments 50 54 15,437 14,891--------------------------- -------- ------- ------- -------- 469,596 393,395 16,252 15,594 Current assetsDebtors 69,934 56,866 110,553 54,934Cash at bank 72,042 17,766 34,409 917--------------------------- -------- ------- ------- -------- 141,976 74,632 144,962 55,851Creditors: amounts falling duewithin one year 81,656 42,396 3,811 2,209--------------------------- -------- ------- ------- --------Net current assets 60,320 32,236 141,151 53,642--------------------------- -------- ------- ------- --------Total assets less currentliabilities 529,916 425,631 157,403 69,236Provisions for liabilities andcharges 30,628 16,082 - -Deferred taxation 68,148 71,771 - ---------------------------- -------- ------- ------- --------Net assets 431,140 337,778 157,403 69,236--------------------------- -------- ------- ------- -------- Capital and reservesCalled-up share capital - equity 15,901 15,010 15,901 15,010Share premium 107,278 1,721 107,278 1,721Other reserves 24,256 24,256 - -Shares held by ESOP trust (14,031) (4,702) (14,031) (4,702)Capital reserves - non 26,281 26,281 50 50distributableCapital reserves - distributable 109,635 109,635 - -Profit and loss account 161,820 165,577 48,205 57,157--------------------------- -------- ------- ------- --------Shareholders' funds 431,140 337,778 157,403 69,236--------------------------- -------- ------- ------- -------- N L Murray, ChairmanW B B Gammell, Chief Executive19 April 2005 Cairn Energy PLC Group Statement of Cash FlowsFor the year ended 31 December 2004 2004 2003 £'000 £'000 Net cash inflow from operating activities 77,549 122,177--------------------------------- ----------- ----------- Returns on investments and servicing of financeInterest received 1,711 475Interest paid (1,220) (1,027)--------------------------------- ----------- ----------- 491 (552) Taxation (4,678) (4,425) Capital expenditure and financial investmentExpenditure on exploration assets (76,492) (55,902)Expenditure on development/producing assets (18,252) (18,670)Acquisition of Bangladesh assets (23,843) -Purchase of other fixed assets (1,459) (1,192)Sale of development/producing assets 7,305 10,368Sale of other fixed assets 44 73--------------------------------- ----------- ----------- (112,697) (65,323)Equity dividends paid - ---------------------------------- ----------- ----------- Net cash (outflow)/inflow before use of liquid resourcesand financing (39,335) 51,877 Management of liquid resources*Cash on short term deposit (55,392) (9,755) FinancingIssue of shares - equity share options 4,559 1,840- equity share placing 101,889 -- non equity - 37Redemption of non equity shares - (50)Purchase of own shares (9,329) -Repayment of debt - (47,918)--------------------------------- ----------- ----------- 97,119 (46,091)--------------------------------- ----------- -----------Increase/(decrease) in cash in the year 2,392 (3,969)================================= =========== =========== * Short term deposits of less than one year are disclosed as liquid resources. Cairn Energy PLC Reconciliation of operating profit to operating cash flows 2004 2003 £'000 (Restated) £'000 Operating profit 16,769 73,086 Depletion and depreciation 32,971 44,151Decommissioning charge 1,183 1,231Amortisation of LTIP/provision against investment 4,956 948Debtors movement 8,122 2,871Creditors movement 145 2,665Other provisions 16,234 1,339Gain on sale of other fixed assets (41) (4)Foreign exchange differences (2,790) (4,110)-------------------------------- ---------- -------- Net cash inflow from operating activities 77,549 122,177-------------------------------- ---------- -------- Net Funds/(Debt) At Cash Exchange At 31 1 January flow movements December 2004 £'000 £'000 2004 £'000 £'000 Cash at bank 5,678 2,392 (91) 7,979Short term deposits 12,088 55,392 (3,417) 64,063------------------ ----------- --------- ---------- --------- 17,766 57,784 (3,508) 72,042------------------ ----------- --------- ---------- --------- Accounting Policies Accounting policies are the same as those applied in the previous year'sfinancial statements other than the amendments arising from the implementationof UITF 38 and the subsequent changes to UITF 17. UITF 38 Accounting for ESOP Trusts became effective for accounting periodsending on or after 22 June 2004. Amendments to UITF 17 following theintroduction of UITF 38 requires the recognition of the charge in the profit andloss account for shares held in trust to satisfy awards made under the LTIP tobe on the basis of the fair value of the awards at the time they were made.Previously, UK Accounting Standards required the release to be made on the basisof the cost of any shares purchased by the ESOP Trust. In addition, followingthe implementation of UITF 38, shares in the ESOP trust have been reclassifiedfrom "Investments" to "Shares held by ESOP trust" within shareholders' funds.The effect of reclassifying the shares from investment in own shares toshareholders' funds is to reduce the Group's net assets by £4.3m at 31 December2003. A prior year adjustment to the Profit and Loss Account of £83,000 hasarisen from this change in accounting policy and prior year comparatives havebeen restated to reflect the changes required pursuant to UITF 38. As a resultof the change to accounting treatment, the profit for the period under review is£2.3m greater than had there been no revision to policies. NOTES: 1. No dividend has been declared (2003: nil). 2. The earnings per ordinary share is calculated on a profit of£10,842,000 (2003: £46,229,000 restated) and on a weighted average of152,522,282 ordinary shares (2003: 146,888,766). The weighted average ofordinary shares excludes shares held under the LTIP - the shares are held by theCairn Energy PLC Employees' Share Trust.The diluted earnings per ordinary share is calculated on a profit of £10,842,000(2003: £46,229,000 restated) and on 153,713,739 ordinary shares (2003:147,335,237) being the basic weighted average of 152,522,282 ordinary shares(2003: 146,888,766) and the dilutive potential ordinary shares of 1,191,457ordinary shares (2003: 446,471) relating to share options. 3. Cairn follows the full cost method of accounting for oil and gasassets. Under this method, all expenditure incurred in connection with anddirectly attributable to the acquisition, exploration, appraisal and developmentof oil and gas assets, including interest payable and exchange differencesincurred on borrowings directly attributable to development projects, iscapitalised in two geographical cost pools: North Sea and South Asia. Ondisposing of the Group's North Sea interest during the year only one cost poolremains at the year end. 4. The financial information contained in this announcement doesnot constitute statutory accounts as defined in Section 240 of the Companies Act1985. However, the financial statements contained in this announcement areextracted from the audited statutory accounts for the financial year ended 31December 2004, which will be delivered to the Registrar and Companies. Statutoryaccounts for the year ended 31 December 2003, on which the auditors issued anunqualified opinion, have been delivered to the Registrar of Companies. 5. The directors have considered the factors relevant to support astatement on going concern. They have a reasonable expectation that the Groupwill continue in operational existence for the foreseeable future and havetherefore used the going concern basis in preparing the financial statements. 6. Full accounts are due to be posted to shareholders on 04 May2005 and will be available at the Company's registered office, 50 Lothian Road,Edinburgh, EH3 9BY, from that date. 7. The Annual General Meeting is due to held at the Company'sregistered office, 50 Lothian Road, Edinburgh, EH3 9BY on Friday 03 June 2005 at12.00pm. Notes to Editors: • Cairn focuses its activities on the geographic region of South Asia. The Group holds material exploration and production positions in west India,Related Shares:
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