20th Sep 2005 07:03
Cairn Energy PLC20 September 2005 EMBARGOED FOR RELEASE AT 07:00 20th September 2005 CAIRN ENERGY PLC INTERIM RESULTS ANNOUNCEMENT Operational - Rajasthan (Block RJ-ON-90/1) Development • Independently certified Mangala, Bhagyam and Aishwariya 2P oil inplace increased to 1.7 billion barrels • Cairn estimated gross life of field 2P reserves and 2P reserves plusEOR resource for Mangala, Bhagyam and Aishwariya upgraded to 514 and 685 mmbbls • Current discoveries potential production now in excess of 150,000 bopd • Finalised Field Development Plan for Mangala to be submitted inOctober 2005 • Declaration of Commerciality submitted for Bhagyam, N-I and Shaktifields • Rajasthan crude to be purchased by appointed nominee MRPL, an ONGCsubsidiary • Early oil production from Raageshwari and Saraswati scheduled for mid2006 Exploration and Appraisal • Guda upgraded, highlighting potential of Southern area: Guda-7 tests2,150 bopd • Encouraging ongoing Vijaya and Vandana appraisal programme • Exploration 3D seismic acquired between Bhagyam and Mangala fields Operational - Rest of South Asia • Five new exploration blocks awarded to Cairn and partners in Indianlicensing round • Potentially significant deepwater Krishna-Godavari Basin gas discovery(Cairn 10%) • Preparations underway to drill first Cairn exploration well in GangaBasin • Successful infill development wells drilled on Sangu and Lakshmi Financial • Average production of 27,909 boepd (H1 2004: 24,799 boepd) • Average price received per boe $24.39 (H1 2004: $24.61 per boe) • 2005 Interims prepared under IFRS and comparatives restated • Profit after tax of £24.0m (H1 2004: £23.6m) • Net funds at 30 June 2005 £85.1m (H1 2004: £3.2m) Bill Gammell, Chief Executive said: "Rajasthan remains the catalyst for Cairn's continued growth in South Asia. We have to date found more than 2.5 billion barrels of oil in place in Rajasthan. While we move from discovery towards development and future production on thecore fields we are still exploring and appraising key parts of the block thatshow clear growth potential. Cairn has created a world class strategic position in South Asia and looksforward to an increasing resource and production base at a time when oil pricesand interest in India have never been higher." Enquiries to: Cairn Energy PLC: Tel: 0131 475 3000 Analysts Bill Gammell, Chief Executive Mike Watts, Exploration Director Kevin Hart, Finance Director Media David Nisbet, Head of Group Communications Brunswick Group LLP: Tel: 0207 404 5959 Patrick Handley, Catherine Hicks, Mark Antelme Cairn Energy Live Audio Webcast There will be an audio webcast of the 2005 Interim Results presentation at 9:00am(GMT+1) on Tuesday 20 September 2005. This will be available on the Cairn Energy PLC website:http://www.cairn-energy.plc.uk An archived version of the webcast will be available in the afternoon. CHAIRMAN'S STATEMENT From Discovery to Development and Production Cairn has been active for more than a decade in South Asia, where it hasconsistently created and delivered value. The Company has built and grown a substantial strategic business that helps meetthe growing energy needs of India and Bangladesh. To date investment in theregion by Cairn and its partners has exceeded two billion dollars. This hasresulted in numerous significant oil and gas discoveries and the development ofseveral large-scale producing properties. Cairn has a strong financial base fromwhich to accelerate investment as the Rajasthan fields are developed. The major thrust of Cairn's exploration, appraisal and development activitieshas been focused on Rajasthan in India, where further seismic operations,drilling and testing have continued to add to Cairn's resource base. Mangala is the biggest oil find in India for 22 years and among 12 discoveriesmade by Cairn in Rajasthan. Since the Mangala discovery 18 months ago theCompany's focus has been on establishing and then appraising all of the existingdiscoveries on the block. The combined 2P (proved plus probable) oil in placefor Mangala, Bhagyam and Aishwariya, currently the three largest fields, hasbeen independently certified to be 1.7 billion barrels. Cairn estimates theassociated gross potential resource for these three fields to be between 514 and685 million barrels of oil (mmbbls). The Field Development Plan (FDP) for Mangala, Aishwariya, Saraswati andRaageshwari has been completed and will be submitted to the Government of India(GoI) by October 2005. Cairn continues to target first oil from Mangala at theend of 2007, although the integration of Bhagyam and the other discoveries intothe overall northern fields development may require a modification to theschedule in order that the development is undertaken in an optimal manner. The Bhagyam field, which is the second largest on the Rajasthan block, has beenupgraded following appraisal and the interpretation of 3D seismic and evaluationwork is still on going. Cairn currently estimates that the field has around 100mmbbls of gross 2P life of field reserves. An additional contingent resource of49 mmbbls is thought to be achievable through the application of Enhanced OilRecovery (EOR) techniques. Adjacent to Bhagyam is the small N-I field; thisdiscovery and similar sized exploration prospects identified on the Bhagyam 3Dseismic demonstrate the potential for satellite fields close to the largerfields. An application to extend the present Development Area has been submittedto the GoI to include the Bhagyam, N-I and Shakti discoveries. The potential of the other nine discoveries in Rajasthan and specifically thosein the central and southern fields is still being evaluated. In particular therecent drilling and testing results at Guda in the southern area are veryencouraging and indicate the potential for further upside. Production from theSaraswati and Raageshwari fields, which are also in the southern part of theblock, is scheduled to start in the middle of next year. In line with the Company's objectives, progress has been made on variouscommunity projects in the vicinity of operations in Rajasthan, which have beenachieved with the full support of the local communities. These have includedimprovements to school buildings and supporting water projects. Cairn has alsoentered into a programme with the International Finance Corporation (IFC)through which technical and financial assistance will be provided in the designof plans for community and local economic development in connection with theRajasthan Development Project. Elsewhere in Cairn's South Asian portfolio, there has also been significantinfill development drilling campaigns on the Lakshmi and Sangu producing gasfields. This drilling has been successful in restoring deliverability from thesefields. There have also been a number of production initiatives on the Ravva oilfield, which have resulted in improved reservoir performance. Earlier this month what appears to be a significant gas discovery in theKrishna-Godavari deepwater offshore basin was made with our Joint Venturepartner ONGC. Despite increasing international and domestic competition, Cairnwas successful in the latest bidding round of blocks on offer from the GoI inIndia's fifth New Exploration Licensing Policy (NELP-V). Cairn was awarded fivenew blocks with ONGC, our main partner in India, and was partnered in a JointVenture for the first time by the Italian group ENI in a new block in Rajasthan. RESULTS AND FINANCIAL PERFORMANCE Cairn's underlying financial position, including a strong balance sheet and netfunds, provide the flexibility that enables it to pursue thecompany-transforming developments in Rajasthan. Key Statistics H1 2005 H1 2004* % Increase/ (Decrease) Production (boepd)*** 27,909 24,799** 13Average price per boe ($) 24.39 24.61 (1)Turnover (£ million) 65.7 61.1 8Average cost of sales per boe (£) 5.89 5.79 2Profit before tax (£ million) 31.3 30.9 1Profit after tax (£ million) 24.0 23.6 2Earnings per share (pence) 15.3 15.9 (4)Operating cash flow (£ million) 34.3 45.5 (25)Net funds 85.1 3.2 - *restated as a result of the mandatory implementation of IFRS in 2005 **the figures given are those of last year's Interim Results. The first quarter2004 entitlement production was revised in the full year results to reflect ahigher Government profit share during this period, calculated following theOctober 2004 Ravva arbitration hearing award. The restated H1 2004 productionin the full year results was 23,157 boepd. ***figures stated on an entitlement basis Profit and Loss Account Average daily production was 27,909 barrels of oil equivalent per day (boepd)(H1 2004: 24,799 boepd). The increased Cairn share of Sangu production, as aresult of the acquisition of Shell's 37.5% interest, has been recognised fromthe transaction completion date of 30 June 2004. Following completion of theONGC transaction in March 2005, Cairn's working interest in CB/OS-2 productionhas reduced from 50% to 40%. Both Sangu and Lakshmi field deliverability havebeen enhanced following successful infill drilling campaigns which commenced inthe latter part of 2004. The Group's current production mix remains heavily gas biased (circa 80%). This,combined with the existence of contractual caps on the price received for thisgas, results in an average price realised for the first half of 2005 of $24.39per boe (H1 2004: $24.61 per boe). The Group's financial gearing to world oilprices will increase significantly once Rajasthan production comes on stream. Turnover during the period has increased by 8% to £65.7m (H1 2004: £61.1m). Average cost of sales per barrel of oil equivalent (boe) for the first half of2005 remained relatively unchanged from the equivalent period last year at £5.89(H1 2004: £5.79). Underlying this however, is a 19% decrease in production costsper boe, principally as a result of movements in stock balances (H1 2005: £2.49;H1 2004: £3.07). This has been offset by a 27% increase in depletion charge perboe (H1 2005: £3.27; H1 2004: £2.58) as a consequence of 2004 year end reservesrevisions. Rajasthan reserves have been disclosed, but have not been booked in the 2005Interim Financial Statements, pending finalisation of Field Development Plans. Administrative expenses for the period were £10.0m (H1 2004: £7.7m). Thisincludes a charge of £2.1m for share based payments and associated NIC (H1 2004£1.6m). Net interest receivable was £5.4m (H1 2004: £1.5m), including a foreigncurrency exchange gain of £4.4m (H1 2004: £2.2m). Realised exchange movementsarose principally due to the weakening of Sterling against the US$ in the periodand were also impacted by the adoption of IFRS. The Group generated a profit before tax of £31.3m (H1 2004: £30.9m). Themajority of the £7.3m tax charge (H1 2004: £7.3m) arises on profits in India.Profit after tax for the period was £24.0m (H1 2004: £23.6m). Balance Sheet Capital expenditure during the first half of 2005 was £68.2m (H1 2004: £43.8m),comprising £44.6m on exploration/appraisal activities, £22.4m on developmentactivities and £1.2m on other fixed assets. The exploration/appraisalexpenditure during the period was incurred largely on the continuing Rajasthandrilling campaign. The majority of the development expenditure was for thecompletion of the infill campaigns on Lakshmi and Sangu. Cashflow and Financing The Group's operating cash flow over the period, after deduction of tax paymentsof £1.9m, was £34.3m (H1 2004: £45.5 million). Net cash outflows from capitalexpenditure during the first half comprised £53.4m exploration/appraisalexpenditure, £37.9m development expenditure and £1.2m other fixed assets. Thedifference arising between capitalisation of expenditure and cashflow isprincipally due to the infill campaigns and Rajasthan drilling programmeactivity that was incurred in 2004 but paid in 2005. There was a pre tax cashinflow of $135m (£72.0m) on completion of the ONGC transaction from the sale ofexploration and development assets (£45.3m and £26.7m respectively). Cash payments are being made during the second half of 2005 in settlement ofamounts due following the previously announced Ravva arbitration proceedings.These amounts have already been fully provided for in the accounts. The Group had net funds of £85.1m at the balance sheet date (H1 2004: net funds£3.2m) together with undrawn unsecured committed revolving credit facilities of$240m (comprising $200m three and $40m seven year facilities put in place inJanuary 2004). Following the significant 2004 Rajasthan discoveries, the Groupis undertaking a review of its financing requirements and arrangements with theintention of refinancing its debt facilities. Transactions The previously announced ONGC transaction for the farm out of 90% of KG-DWN-98/2, 10% of the CB/OS-2 development area (including the Lakshmi and Gauri fields)and 15% of the CB/OS-2 exploration area, and the farm-in to two blocks inNorthern India, was completed in March 2005. The $135m pre tax proceeds receivedwere credited against the relevant exploration and development cost pool. Accounting Developments In accordance with European legislation, Cairn has adopted IFRS as the basis forpreparation of its financial statements from 1 January 2005. Interim results to30 June 2005 have therefore been reported on this basis with all comparativeinformation restated to comply with IFRS requirements. Audited restatedfinancial information was published on 8 September 2005 and is available on theGroup's website. This included reconciliations from UK GAAP to IFRS and revisedaccounting policies which were both agreed with the Group's auditors. Therestatement document highlights that the Group continues to apply its existingfull cost accounting policy for oil and gas assets pending receipt of anyguidance or clarification received from either the IFRIC Agenda Committee orIFRIC. Following the implementation of IFRS by the Group, Cairn is consideringreporting its future financial results in US$ since this is the principalfunctional currency of the business. The Group currently reports in Sterlingalthough both income and expenditure are mainly in US$. OPERATIONS RAJASTHAN: Block RJ-ON-90/1, Rajasthan Basin Rajasthan Overview Cairn operates Block RJ-ON-90/1 under a Production Sharing Contract (PSC) signedon 15 May 1995. The original seven year exploration period of the PSC, which hadbeen extended for a further three year period, expired in May 2005. Since May2002, Cairn has conducted a very aggressive exploration campaign and by the endof the extended exploration period in mid-May 2005 had acquired 4,100 kilometresof 2D seismic, 750 square kilometres of 3D seismic and had drilled 83exploration and appraisal wells, resulting in a total of 12 discoveries. Thetotal number of wells drilled is now 100. Cairn estimates that more than 2.5billion bbls of oil in place have so far been established and believes thatsignificant further upside remains on the block. The discoveries to date in Rajasthan are at differing stages of appraisal andevaluation. The seven fields for which appraisal has already been undertaken andfor which Field Development Plans are variously progressed; namely Mangala,Aishwariya, Bhagyam, Shakti, Saraswati, Raageshwari oil and Raageshwari gas;Cairn estimates 2P (proven plus probable) oil in place volumes to be 1.85billion bbls. The associated gross 2P reserves to 2041 for these seven fieldsare currently estimated as 541 mmbbls. The total resource estimate for thesethree fields may exceed 700 mmbbls if enhanced oil recovery (EOR) techniques canbe succesfully employed. In October 2004, Cairn was granted a single Development Area of 1,859 squarekilometres covering nine of the discoveries made to date. The Development Areais secured until at least 2020 and, in line with PSC provisions, the JointVenture will be seeking to extend this period to 2041 when it submits itsdevelopment plans. In January 2005, the GoI exercised its right under the PSC to back-in for 30% ofthe Development Area and it appointed ONGC as its equity nominee. Cairn has set up two dedicated development teams, one focused on the largefields in the north and one focused on the smaller fields in the south. Thefinalised Field Development Plans for Mangala and Aishwariya, in the north, andSaraswati and Raageshwari in the south, are planned to be submitted to the GoIin October 2005. In June 2005, Cairn was granted an 18 month extension period to complete itsappraisal activities in an area covering 2,891 square kilometres which lies tothe north and west of the Development Area. This area contains the Bhagyam, N-Iand Shakti fields, for which Declarations of Commericality have been submitted,as well as various wells with strong residual hydrocarbon indications thatconfirm their presence on the oil migration pathway. An application to extendthe Development Area by 1,141 square kilometres to include these fields andsurrounding areas of significant appraisal potential has been submitted to theGoI. A 320 square kilometres 3D seismic programme covering part of this area hasjust been completed and initial interpretation is underway. Work on the other five discoveries, Guda, Vijaya, Vandana, Kameshwari and N-I,is either ongoing or will commence in the near term. Exploration efforts acrossthe acreage still continue with the present focus on the northern Fatehgarhplay, the stratigraphic potential of the Vijaya/Vandana area and prospects onthe flanks of the Central Basin High. Three drilling rigs and one work-over rig have been retained to continueexploration, appraisal and pre-development drilling activities. Rajasthan Development Area - Northern Fields (Cairn 70% (Operator); ONGC 30%) The development concept for the Mangala field involves the construction of acentral processing facility (CPF) and group gathering station, with oilproduction and water injection wells being drilled from a number of well pads.The CPF and associated facilities have currently been sized to handle an initialproduction rate of 100,000 bopd with the ability to expand the processingcapacity up to 150,000 bopd or more if required. The required expansion isdependent on the start up timings and plateau production rates of the otherfields. The produced hydrocarbons will be treated at this facility, with anytreated water produced being re-injected. Field saline water production and injection trials are on going for the purposesof gathering data for optimising secondary recovery by water flooding thereservoirs. Results of this work are very encouraging. Water extraction testsfrom the Fatehgarh reservoirs in the Vijaya area, 20 kilometres south east ofMangala, have established the required volumes of producible water fromindividual wells. An injection test at Mangala has recently been completed inwhich up to 12,000 barrels per day of heated water was successfully injectedinto a 13 metre interval in the Fatehgarh reservoir. Initially it was planned to develop the Aishwariya field concurrently with theMangala field, but following the discovery of the Bhagyam and N-I fields, Cairnhas been reviewing the optimal development schedule. It is expected that thisreview will be completed in Q4 2005. The current fast-track development schedulefor the Mangala field is targeted at achieving first oil at the end of 2007 withproduction from the other northern discoveries being brought on line as soon aspossible thereafter. The development schedule will be finalised once the resultsof this review are known. In order to meet the current fast-track development schedule, various studieshave already been started. Front-End Engineering Design (FEED) studies for theMangala development are largely complete and selected engineering companies havebeen asked to tender for the detailed design work. An Environmental ImpactAssessment has been completed and the application for an Environmental Consentfor the project will be submitted to the relevant authorities. Rajasthan Development Area - Southern Fields (Cairn 70% (Operator); ONGC 30%) Several oil discoveries have been made in the central and southern part of theRajasthan block. These include the Saraswati, Raageshwari and Guda fields.Development Plans for Guda will be submitted to the GoI in early 2006.Thevarious oil bearing reservoirs in the central and southern area are not of ashigh a quality as the Fatehgarh reservoirs in the north. Nevertheless attractivecommercial rates are achievable, for example the Raageshwari-6 well drilledrecently flowed at 550 bopd of 38 degree API oil on test. The Company believesthat these discoveries have good commercial potential. The first commercial production from the Saraswati and Raageshwari fields iscurrently scheduled for mid 2006, depending on the required approvals. Theinitial target plateau rate is between 2,000 and 3,000 bopd, and is constrainedby exporting the produced oil via road tanker. Once the Mangala exportinfrastructure is installed, the option of exporting higher production volumesfrom the southern fields via pipeline to the processing facilities in the northwill be reviewed. Rajasthan Development Area - Oil Sales (Cairn 70% (Operator); ONGC 30%) Under the terms of the PSC, the GoI appoints a nominee to purchase and takedelivery of the oil. Indian Oil Corporation (IOC) was initially selected as thenominee; however following expressions of interest, the GoI recently asked twoother public sector undertakings, Mangalore Refinery & Petrochemicals Ltd(MRPL), an ONGC subsidiary, and the Hindustan Petroleum Corporation Ltd (HPCL)to submit proposals for consideration as nominee. In September 2005, MRPL wasnominated by the GoI to purchase the entire crude in compliance with the PSC.Discussions have commenced with MRPL in respect of a detailed Crude Oil SalesAgreement. The export route favoured by MRPL is to take the produced oil via a pipeline tothe coast, where it will be dispatched to a selected Indian refinery. MRPL isalso considering the feasibility of constructing a refinery in Rajasthan. Rajasthan Development Area - Appraisal Recent appraisal drilling has confirmed that there is considerable potential inthe area surrounding the Guda discovery. This appraisal drilling suggests thatthe Guda and GR-F discoveries are part of the same overall structure at theThumbli and Dharvi Dungar reservoir levels. The Guda field, located on the Central Basin High (CBH), comprises a shallowThumbli oil reservoir and a deeper Dharvi Dungar oil reservoir. The field wasdiscovered by the Guda-2 exploration well in July 1999, which tested 2,070 bopdfrom 10.6 metres of hydrocarbon-bearing sands in the Dharvi Dungar formation. InFebruary 2003 the Raageshwari-1 exploration well, located 15 kilometres to thenorth of Guda, encountered hydrocarbons in the stratigraphically younger Thumbliformation. The Thumbli was preferentially targeted in the central basin areaprior to the May 2005 deadline for the extended exploration term. An analysis of the Guda Thumbli field was undertaken in July 2005 prior toembarking on the present eight well appraisal programme. There is considerablereservoir variability across the field and preliminary indications are thatbetween 50 and 100 wells may be required to optimise recovery. A draft FieldDevelopment Plan is being prepared for anticipated submission to the GoI inJanuary 2006. The Guda-7 well drilled in September 2005 encountered 14.3 metres of net pay inthe Dharvi Dungar formation. A five metre test zone flowed 2,150 bopd of 38degree API oil. The Dharvi Dungar reservoir occurs in channels which, cannot bemapped on seismic, but the geological model suggests may extend over a widearea. Presently there are no volume estimates associated with the Dharvi Dungarin the Guda area but conceptually the volumes could be significant. As part of its evaluation of the Guda field, Cairn has recently recommenced along-term production test programme. Initial estimates indicate that the Guda field could contain around 180 mmbblsof oil in place at the 2P level for the Thumbli and has the potential tosignificantly increase once the Dharvi Dungar is included. Work is continuing onthe reservoir management plan which is aimed at optimising the potentialrecovery. Other appraisal activity within the existing Development Area is currentlyfocused on the Vijaya and Vandana discoveries. These are the first stratigraphicoil traps to be found in the basin. Vijaya-1 and Vandana-1 have both been testedon pump at rates between 25 and 38 bopd. There is a wide range of oil in placeestimates for these discoveries however recovery factors will be low and thesereservoirs are candidates for stimulation. Rajasthan Development Area - Exploration (Cairn 100% (Operator)) Exploration efforts within the Development Area presently concentrate on threemain areas: i) prospects in the vicinity of Vijaya and Vandana; ii) flank plays along the CBH; iii) the widespread Barmer Hill play (which has encounteredrelatively tight oil bearing reservoirs in many wells and is also a candidatefor stimulation). Activities Outwith the Development Area (Cairn 100% (Operator)) A successful appraisal campaign was carried out on the Bhagyam field between Q1and Q3 2005. Seven appraisal wells were drilled in which 475 metres of coreswere taken, and the field was covered by 3D seismic. The Fatehgarh reservoir inthe Bhagyam field is of a high quality and intra-field connectivity has beensuccessfully established. Following the 3D seismic and appraisal of Bhagyam, an independent assessment hasrecently been conducted with an estimated 2P oil in place of approximately 400mmbbls, 2P reserves of 96 mmbbls and an additional gross contingent resource of52 mmbbls assuming the successful application of EOR techniques. Immediately to the east of Bhagyam lies the N-I field which has recently beenappraised and is also covered by 3D seismic. Two Fatehgarh oil zones tested inthe N-I-3 well flowed at 480 and 750 bopd respectively during September 2005.The Fategarh also has a small gas cap. A gas column of approximately 80 metreswas encountered within poor quality reservoirs in the Barmer Hill and tested inthe Fatehgarh reservoir at 4 million standard cubic feet of gas per day(mmscfd). The Barmer Hill section will be separately tested shortly. The acquisition of a 300 square kilometres 3D exploration seismic survey betweenBhagyam and Mangala was completed in September 2005. This survey is designed toevaluate the potential of the northern Fatehgarh play where prospects similar tothe satellite N-I field are known to exist. This area has at least fiveFatehgarh prospects. Interpretation of the 3D is expected to commence inOctober with the first exploration wells planned at the year end. An application for an 18 month extension to allow proper evaluation of the 1,935square kilometre Southern Area is pending with the GoI. WESTERN INDIA - Cambay Basin Development and Production Block CB/OS-2: Lakshmi and Gauri Gas Fields (Cairn 40% (Operator)) In the first half of 2005, the second phase of Lakshmi development drilling andthe installation of booster compression were completed, successfully restoringfield deliverability. There are undeveloped oil-bearing reservoirs beneath these producing gasreservoirs at both Lakshmi and Gauri. The CB/OS-2 Joint Venture has now approveda Declaration of Commerciality, allowing an oil production test from the Gauri-3well. A Development Plan has been prepared and submitted to the GoI forapproval. Currently it is anticipated that oil production will begin at the endof this year with anticipated initial rates of between 2,000 and 3,000 bopd. The onshore CB-X gas discovery made in January 2005 has been declared commercialand the single well Development Plan has been submitted for approval. Fieldactivities to lay a short pipeline from the plant to connect the CB-X-1 well areplanned to commence in the first half of 2006 at expected rates of between 5 and10 mmscfd. Exploration CB-ONN-2001/1 (Cairn 30%; ONGC (Operator)) Detailed well proposals have been received from ONGC for the drilling of threeof the four wells which form part of the minimum work commitment for the firstphase of the Exploration Period as specified under the PSC. One well was drilledby ONGC is 2004, before Cairn joined the block, which was a minor oil discovery.A declaration of commerciality has not been made. A second exploration well,Vanth Vali-1, is currently operating. Planning is underway for the drilling oftwo of the remaining wells, with drilling operations expected to begin in 2005/2006. CB-ONN-2002/1 (Cairn 30%; ONGC (Operator)) The 2D and 3D seismic reprocessing programmes are currently underway. These formpart of the minimum work commitment for the first phase of the ExplorationPeriod as specified under the PSC. EASTERN INDIA Development and Production Ravva (Cairn 22.5 % (Operator)) The Ravva oil and gas field continues to perform well and has remained onplateau, with average gross production for the first half of 2005 being 50,484bopd and 86 mmscfd. A number of production and injection enhancement activitieswere undertaken in 2005 and water injection rates have been increased to 90,000barrels of water per day. This improved water injection rate is expected toenhance recovery sweep efficiencies. The planned infill drilling programme of five development wells and oneappraisal well has now been approved by the Ravva Joint Venture. The timing ofdrilling operations is dependent on rig availability. Exploration KG-DWN-98/2 (Cairn 10%; ONGC (Operator)) The KG-DWN-98/2 Joint Venture has approved a three well drilling programme usingtwo of the drilling rigs currently contracted to ONGC. The prospects to bedrilled were among those previously identified by Cairn in deep-water drillingoperations on this block. Drilling operations on the first of these wellscommenced in August 2005. The first exploration well has resulted in whatappears to be a significant gas discovery in water depths of 600 metres, twokilometres from the Cairn N-1 gas discovery made in 2001. Operational problemsprevented the well from being tested. NELP Blocks Cairn has been awarded five new exploration blocks in India. The blocks wereawarded to Cairn and its Joint Venture partners under the fifth New ExplorationLicensing Policy round (NELP-V). There was an unprecedented level of international interest for this latest roundof licences. In competitive bidding there were a total of 69 bids for 20exploration blocks with bids from 26 foreign companies including Cairn. Cairn has been awarded four onshore and one offshore blocks, including twoblocks in Rajasthan. The blocks are as follows: •RJ-ONN-2003/1 Onshore Western Rajasthan, Rajasthan Basin Cairn (30%), ONGC (36%) and ENI (34%, Operator) •VN-ONN-2003/1 Onshore Eastern Rajasthan, Vindhyan Basin Cairn (49%, Operator) and ONGC (51%) •KG-ONN-2003/1 Onshore Andhra-Pradesh, Krishna-Godavari Basin Cairn (49%, Operator) and ONGC (51%) •GV-ONN-2003/1 Onshore Uttar Pradesh, Ganga Valley Basin Cairn (49%, Operator) and ONGC (51%) •GS-OSN-2003/1 Offshore Gujarat, Saurashtra Basin Cairn (49%) and ONGC (51%, Operator) The GoI has indicated that the signing of the PSCs for these blocks will takeplace on 23 September 2005, enabling initial work to commence in 2006. BANGLADESH Development and Production Sangu (Cairn 75% (Operator)) As part of the second phase of Sangu development drilling, three additionalwells have been drilled, completed and put on production at different stagesduring the first half of 2005. The Sangu gas plant continues to perform well andthe plateau production from the field has been restored to 154 mmscfd, with peakoff take rates being as high as 180 mmscfd. The demand pattern is variable sinceit is largely dependent on the power and fertiliser sector but overall, demandcontinues to increase steadily. Exploration Cairn is in discussions with the Government of Bangladesh and its Joint Venturepartners with a view to securing the right to drill exploration prospects inparts of Block 16 outwith the Sangu Development Area. In Blocks 5 and 10 a 1,250 kilometre seismic survey was completed in Q2 2005. NEPAL AND NORTHERN INDIA Exploration In August, as a result of the current security situation, Cairn informed theGovernment of Nepal that it had declared contractual force majeure. This defersthe start of Cairn's field operations in Nepal, where it holds licences for fiveexploration blocks. Notwithstanding this declaration, Cairn will continue withits current technical and environmental evaluation activities. The Companycontinues to closely monitoring security developments with a view to commencingfield operations at the earliest opportunity. GV-ONN-2002/1 (Cairn 100% (Operator)) The Petroleum Exploration Licence for this block was issued by the Bihariauthorities in June 2005. It is intended to carry out aero-magnetic and otherstudies as part of the minimum work commitment for the first phase of theExploration Period. GV-ONN-97/1 (Cairn 30%; Oil India 30%; ONGC 40% (Operator)) Detailed prospect reviews are continuing on this block. The drilling of theTisua prospect which is a large folded anticline with fracture potentialrepresents the first of a Cairn supported drilling campaign across the whole ofthe Ganga Valley basin. The importance of this well is that if it encountershydrocarbons in any quantity then a working petroleum system, of potentiallyregional significance, will have been established, in an area where Cairn has aleading acreage position. PRODUCTION SUMMARY Following successful infill drilling campaigns on the Lakshmi (offshore northwest India) and Sangu (offshore Bangladesh) gas fields, the Group's entitlementproduction for the first six months of 2005 was 27,909 boepd net to Cairn. Fullyear entitlement production for 2004 was 22,789 boepd. Current production is inline with the Company's expectations. Production Lakshmi (approximate) Ravva Sangu and Gauri Total boepd boepd boepd boepd Gross field 65,000 23,000 15,000 103,000Working interest 14,625 17,250 6,750 38,625Entitlement interest 6,900 13,500 7,500 27,900 RESERVES The table below shows booked reserves information on an entitlement basis forthe Group. It is current Cairn practice to conduct independent assessment ofCompany reserves on a regular basis. As at 30 June 2005, no reserves had beenbooked in respect of the Rajasthan discoveries. Acquisitions/ Reserves Reserves at Produced in Disposals in Revisions in at 31.12.04 H1 2005 H1 2005 H1 2005 30.06.05 mmboe mmboe mmboe mmboe mmboeSouth Asia 81.4 (5.0) (2.2) (0.6) 73.6Total 81.4 (5.0) (2.2) (0.6) 73.6 On a direct working interest basis, reserves as at 30 June 2005 totalled 115.3million barrels of oil equivalent (mmboe) (31 December 2004: 123.9 mmboe). OUTLOOK The increasing international interest in India as an investment destination,combined with an exciting unfolding exploration story across the sub-continenthas confirmed Cairn's early vision. The unprecedented interest in NELP-V andrecent significant exploration successes by Cairn and others has highlighted thefact that India and the South Asia region have significant hydrocarbonpotential. With its experience in this part of the world, an enviable acreageposition and excellent relationships with local oil companies such as ONGC,Cairn is ideally positioned to maximise potential opportunities. The discovery of substantial oil resources in Rajasthan means that for theforeseeable future the Company's organic growth potential will continue to bedominated by its development and exploration activities in North West India.Cairn has built a strong strategic position in South Asia at a time ofhistorically high global oil prices when the interest in India as ahydrocarbon-rich destination has never been greater. Norman Murray Chairman, 20 September 2005 CONSOLIDATED INCOME STATEMENT For the six months to 30 June 2005 Six months Six months Year ended to 30 June to 30 June 31 Dec 2005 2004 2004 (unaudited) (unaudited) (audited) Notes £'000 £'000 £'000 ------ -------- -------- --------- Revenue 65,658 61,055 95,449 Cost of salesProduction costs (12,595) (13,866) (27,726)Depletion (16,530) (11,636) (28,236)Decommissioning charge (647) (654) (1,183)----------------------- ------ -------- -------- --------- Gross profit 35,886 34,899 38,304----------------------- ------ -------- -------- --------- Administrative expenses (10,011) (7,665) (14,539) Operating profit 25,875 27,234 23,765 Exceptional gain on sale of - 2,147 2,206oil and gas assets ------ -------- -------- --------- Profit on ordinary activities 25,875 29,381 25,971before interestInterest income 5,994 2,477 1,811Finance costs (618) (987) (6,234)----------------------- ------ -------- -------- --------- Profit on ordinary activities 31,251 30,871 21,548before taxation ------ -------- -------- -------------------------------- Taxation on profit on ordinary activities- UK (270) (746) 1,805- Overseas (7,004) (6,520) (5,171)----------------------- ------ -------- -------- --------- Profit for the period 23,977 23,605 18,182attributable to equity ------ -------- -------- ---------holders----------------------- Earnings per ordinary share - 1 15.29p 15.86p 11.92pbasic Earnings per ordinary share - 2 15.21p 15.75p 11.83pdiluted ------ -------- -------- -------------------------------- Notes: 1. The basic earnings per ordinary share is calculated on a profit of£23,977,000 (H1 2004: £23,605,000) on a weighted average of 156,806,174 (H12004: 148,837,342) ordinary shares. 2. The diluted earnings per ordinary share is calculated on a profit of£23,977,000 (H1 2004: £23,605,000) on 157,628,121 (H1 2004: 149,867,522)ordinary shares, being the basic weighted average of 156,806,174 (H1 2004:148,837,342) ordinary shares and the dilutive potential ordinary shares of821,947 (H1 2004: 1,030,180) ordinary shares relating to share options. 3. No dividend has been declared. 4. Comparative figures throughout this document have been adjusted as aresult of the change in accounting policies arising from the implementation ofInternational Financial Reporting Standards. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months to 30 June 2005 Six months Six months Year ended 31 to 30 June to 30 June December 2005 2004 2004 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Opening equity 405,996 309,389 309,389 Currency translation differences 23,078 (4,081) (19,985)--------------------------- --------- --------- --------- Total income/(expense) recognised 23,078 (4,081) (19,985)direct in equity Profit for the period 23,977 23,605 18,182--------------------------- --------- --------- --------- Total recognised income for the 23,977 23,605 18,182period --------------------------- --------- --------- --------- Total recognised income and 47,055 19,524 (1,803)expense for the year New shares issued for cash - - 101,889New shares issued in respect of 1,354 4,349 4,559employee share optionsCost of shares purchased by ESOP (8,981) (9,329) (9,329)TrustShare based payments charges 1,020 552 1,291--------------------------- --------- --------- --------- Closing equity attributable to the 446,444 324,485 405,996Company's equity holders --------- --------- ------------------------------------ CONSOLIDATED BALANCE SHEET As at 30 June 2005 As at 30 As at 30 As at 31 June June December 2005 2004 2004 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Non-current assetsIntangible exploration assets 247,012 187,723 232,926Tangible development/producing 221,116 230,735 226,316assetsProperty, plant and equipment 1,332 1,313 1,456Intangible assets 1,180 664 724Investments 54 53 50-------------------------- --------- --------- -------- 470,694 420,488 461,472-------------------------- --------- --------- -------- Current assetsInventory 2,814 1,517 1,125Trade and other receivables 78,152 57,381 68,282Bank deposits 11,154 - 8,000Cash and cash equivalents 73,975 16,438 64,042-------------------------- --------- --------- -------- 166,095 75,336 141,449-------------------------- --------- --------- --------Total assets 636,789 495,824 602,921-------------------------- --------- --------- -------- Current liabilitiesTrade and other payables 83,020 43,482 78,830Income tax liabilities 7,071 8,693 2,930-------------------------- --------- --------- -------- 90,091 52,175 81,760 Non-current liabilitiesDeferred tax liabilities 89,977 90,764 84,537Bank loans - 13,230 -Provisions 10,277 15,170 30,628-------------------------- --------- --------- -------- 100,254 119,164 115,165-------------------------- --------- --------- -------- Total liabilities 190,345 171,339 196,925-------------------------- --------- --------- -------- Net assets 446,444 324,485 405,996-------------------------- --------- --------- -------- EquityCalled-up share capital 15,952 15,142 15,901Share premium 108,581 5,938 107,278Shares held by the ESOP Trust (20,886) (14,031) (14,031)Foreign currency translation 3,093 (4,081) (19,985)Other reserves 24,256 24,256 24,256Capital reserves - non 26,281 26,281 26,281distributableCapital reserves - distributable 109,635 109,635 109,635Retained earnings 179,532 161,345 156,661-------------------------- --------- --------- -------- Total equity attributable to the 446,444 324,485 405,996Company's equity holders --------- --------- ---------------------------------- Notes: 1. The disclosed figures are not statutory accounts in terms of section240 of the Companies Act 1985. Statutory accounts for the year ended 31 December2004, on which the auditors gave an unqualified report, have been filed with theRegistrar of Companies. 2. Bank deposits with a maturity of greater than three months at thebalance sheet date are classified as bank deposits. Those with a maturity ofless than three months at the balance sheet date are included in "cash and cashequivalents". CONSOLIDATED STATEMENT OF CASH FLOWS For the six months to 30 June 2005 Six months Six months Year ended to 30 June to 30 June 31 December 2005 2004 2004 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Cash flows from operatingactivitiesCash generated from operations 36,542 47,420 78,205Interest paid (331) (576) (1,220)Income tax paid (1,895) (1,357) (4,678)------------------------ --------- -------- -------- 34,316 45,487 72,307Net cash generated from operatingactivities --------- -------- -------------------------------- Cash flows from investingactivitiesExpenditure on exploration assets (53,420) (24,825) (76,455)Expenditure on development/producing (37,847) (11,517) (18,252)assetsAcquisition of Bangladesh assets - (24,213) (23,843)Purchase of property, plant and (368) (277) (1,146)equipmentPurchase of intangible assets (858) (577) (1,006)Proceeds on disposal of exploration 45,362 - -assetsProceeds on disposal of development/ 26,684 7,277 7,305producing assetsProceeds on disposal of property, 3 7 44plant and equipmentMovement on long term deposits (3,154) - (8,000)Interest received 821 182 1,711------------------------ --------- -------- -------- (22,777) (53,943) (119,642)Net cash used in investingactivities --------- -------- -------------------------------- Cash flows from financingactivitiesProceeds from issue of shares - 1,354 4,349 4,559equity share optionsProceeds from issue of shares - - - 101,889equity share placingPurchase of own shares (8,981) (9,329) (9,329)Drawdown of loan facilities - 13,088 ------------------------- --------- -------- -------- Net cash flows from financing (7,627) 8,108 97,119activities --------- -------- -------------------------------- 3,912 (348) 49,784Net increase/(decrease) in cash andcash equivalentsOpening cash and cash equivalents 64,042 17,766 17,766Exchange gains/(losses) on cash and 6,021 (980) (3,508)cash equivalents --------- -------- --------------------------------Closing cash and cash equivalents 73,975 16,438 64,042------------------------ --------- -------- -------- RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS For the six months to 30 June 2005 Six months Six months Year ended to 30 June to 30 June 31 December 2005 2004 2004 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Operating profit 25,875 27,234 23,765 Depletion, depreciation and 17,522 12,161 29,644amortisationDecommissioning charge 647 654 1,183Share based payments 1,020 552 1,291Working capital movement 13,225 5,518 8,960Other provisions (21,430) 753 16,234Gain on sale of other fixed assets (3) (6) (41)Foreign exchange differences (314) 554 (2,831)-------------------- ---------- ----------- ----------- Net cash inflow from operating 36,542 47,420 78,205activities ---------- ----------- ------------------------------- NET FUNDS As at 30 June 2005 At 1 January Cash Exchange At 30 June 2005 flow movements 2005 £'000 £'000 £'000 £'000 Cash at bank 7,979 (2,120) 1,113 6,972Short term deposits 56,063 6,032 4,908 67,003--------------- ---------- --------- --------- --------- 64,042 3,912 6,021 73,975------------------ ---------- --------- --------- ---------Cash on long term deposit 8,000 3,154 - 11,154 ---------- --------- --------- --------- 72,042 7,066 6,021 85,129--------------------- ---------- --------- --------- --------- NOTES TO THE ACCOUNTS For the six months to 30 June 2005 1. Accounting Policies Basis of Preparation This Interim Report has been prepared on a basis consistent with the Group'santicipated 2005 IFRS accounting policies. Comparative information has also beenrestated under IFRS. Change of accounting policies On 1 January 2005 it became mandatory for the Group to comply with InternationalFinancial Reporting Standards. The Interim Results for the six months to 30 June 2005 have been prepared on thebasis of all IFRS and interpretations issued by the International AccountingStandards Board ("IASB") effective for the Group's reporting year ending 31December 2005, on the assumption that they will be fully endorsed by theEuropean Commission ("EC"). Should the EC fail to endorse some of thesestandards and interpretations in full this could result in the need to changethe basis of accounting or presentation of certain financial information in the2005 Annual Report and Accounts. Revised accounting policies under IFRS can be found in the 'Restatement of 2004Results from UK GAAP to IFRS' document published on the Group's website on 8September 2005. This document also includes reconciliations of comparativeinformation from UK GAAP to IFRS. These accounts are also prepared in accordance with IFRS 6 "Exploration for andevaluation of mineral resources" following early adoption by Cairn of thisstandard. The Group has continued to apply its existing full cost accounting policy foroil and gas assets to both exploration and appraisal activity and in thedevelopment and production phase. However, as at the date these accounts areauthorised for issue, the Board are aware that, owing to a lack of clarity inthe authoritative literature, agreement has not been reached amongst the UK oilindustry and the accounting profession on the acceptability of applying fullcost policies under IFRS beyond the exploration and appraisal phase. As aresult, the matter has been referred to the Agenda Committee of theInternational Financial Reporting Interpretations Committee ("IFRIC") to requestconsideration of the matter by IFRIC. The timing and outcome of the AgendaCommittee discussions and any referral to IFRIC are currently uncertain.Consequently, for the purposes of these accounts, the Company has continued toapply the UK GAAP full cost accounting policies that were in effect immediatelyprior to the Group's transition to IFRS, subject to changes in accounting policyspecifically required under IFRS 6. The Board will reconsider the appropriateness of the full cost accounting policyfor the Group's Annual Report and Accounts and take into account any guidance orclarification received from either the Agenda Committee or IFRIC. INDEPENDENT REVIEW REPORT TO CAIRN ENERGY PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2005 which comprises the Group Income Statement,Group Balance Sheet, Group Cash Flow Statement, Group Statement of Changes inEquity, and the related note 1. We have read the other information contained inthe Interim Report and considered whether it contains any apparent misstatementsor material inconsistencies with the financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' Responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the Interim Report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of Cairn Energy PLCwill be prepared in accordance with those IFRS adopted for use by the EuropeanUnion. This Interim Report has been prepared in accordance with the requirementsof IFRS 1, "First Time Adoption of International Financial Reporting Standards"relevant to interim reports. The accounting policies are consistent with those that the directors intend touse in the next financial statements. There is, however, a possibility that thedirectors may determine that some changes to these policies are necessary whenpreparing the full annual financial statements for the first time in accordancewith those IFRS adopted for use by the European Union. In particular, as notedin note 1 we highlight that the Directors are aware that the application of fullcost accounting under IFRS has been referred to the IFRIC Agenda Committee forconsideration. Review Work Performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data, and based thereon,assessing whether the accounting policies have been applied. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with United Kingdom Auditing Standards and thereforeprovides a lower level of assurance than an audit. Accordingly we do notexpress an audit opinion on the financial information. Review Conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. Ernst & Young LLP London September 2005 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, east India and Bangladesh along with new exploration rights in northern India and Nepal. •This focus on South Asia has already resulted in a significant number of oil and gas discoveries. In particular, the Company made a major oil discovery (Mangala) in Rajasthan in the north west of India at the beginning of 2004. •India currently imports 2 million barrels of oil a day. It produces 650,000 barrels a day itself of which 50,000 bopd comes from the Cairn operated Ravva field. For further information on Cairn see www.cairn-energy.plc.uk GLOSSARY OF TERMS The following are the main terms and abbreviations used in this announcement:Corporate 2P proved plus probable 3P proved plus probable and possibleBoard the Board of Directors of Cairn Energy PLCCairn the Company and/or its subsidiaries as appropriateCompany Cairn Energy PLCD&M DeGolyer & MacNaughtonENI Eni SpA and/or its subsidiaries as appropriateGoI Government of IndiaGroup the Company and/or its subsidiaries as appropriateHPLC Hindustan Petroleum Corporation Ltd and/or its subsidiaries as appropriateIFC International Finance CorporationIOC Indian Oil Corporation and/or its subsidiaries as appropriateMRPL Mangalore Refinery & Petrochemicals Ltd and/or its subsidiaries as appropriateNELP-V India's fifth New Exploration Licensing PolicyONGC Oil and Natural Gas Corporation Ltd and/or its subsidiaries as appropriateShell Royal Dutch Petroleum Company and/or Shell Transport and Trading Company and/or their subsidiaries as appropriateTechnical2D / 3D two dimensional / three dimensionalbbls barrels of oilboe barrels of oil equivalentboepd barrels of oil equivalent per daybopd barrels of oil per dayCPF central processing facilitydegree American Petroleum Institute units as a measure of oil specificAPI gravityEOR enhanced oil recoveryFDP field development planFEED front-end engineering designmmbbls million barrels of oilmmscfd million standard cubic feet of gas per dayPSC production sharing contractResource quantities of hydrocarbons which are estimated on a given date to be recoverable AccountingESOP Trust Employee Share Ownership Plan TrustIFRIC International Financial Reporting Interpretations CommitteeIFRS International Financial Reporting StandardsNIC National Insurance ContributionsUK GAAP Generally Accepted Accounting Practice in the United Kingdom Note: There are matters discussed in this Chairman's Statement that are forwardlooking statements. All such forward-looking statements are based on ourmanagement's assumptions and beliefs in light of information available to themat this time. These forward-looking statements are, by their nature, subject tosignificant risks and uncertainties and actual results, performance orachievements may be materially different from those expressed in suchstatements. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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