17th Jan 2006 07:00
Cairn Energy PLC17 January 2006 EMBARGOED FOR RELEASE AT 07:00 17 January 2006 CAIRN ENERGY PLC Operational and Trading Update Cairn Energy intends to announce its preliminary results for the year to 31December 2005 on Tuesday 14 March 2006. In advance of these results, Cairn isproviding information on recent operations since the last update on 10 November2005 and guidance in respect of the Group's trading performance in 2005. Thisinformation is unaudited and is subject to further review. Operational Update • First stage of Mangala Field Development Plan approval completed in December 2005• Evaluation of new appraisal wells and cores is ongoing and is expected to increase oil in place estimates from current values of 377 million barrels (mmbbls) in Bhagyam and 1071 mmbbls in Mangala• Mangala Detailed Design and Engineering commenced with Mustang Engineering in Houston, a subsidiary of Wood Group• Commencement of test oil production from one well in the Gauri field, Gujarat Sir Bill Gammell, Chief Executive said: "Cairn continues to build on the world class Rajasthan discoveries and I remainconfident that the oil and gas resource base will grow through furtherexploration and appraisal. "In the first half of 2006 the Company expects to produce the first oil from thesouthern Rajasthan fields and give project sanction for the main Mangala field." Enquiries to: Cairn Energy PLC: Analysts/InvestorsBill Gammell Chief Executive Tel: 0131 475 3000Kevin Hart Finance DirectorMike Watts Exploration Director MediaDavid Nisbet, Head of Group Communications Brunswick Group LLP:Patrick Handley, Mark Antelme Tel: 0207 404 5959 Rajasthan RJ-ON-90/1 Overview Development The Cairn November 2005 update highlighted a programme of further evaluation ofthe Rajasthan northern fields, Mangala, Bhagyam and Aishwariya which is nowunderway. This work has moved to a phase of detailed analysis of the potentialfor any additions to the volumetric and reserve base. Evaluation of recentappraisal drilling at the two biggest fields, Mangala and Bhagyam, is on goingand the certified results should be available in March 2006. Current indicationsare that oil-in-place estimates will be increased on Mangala, Bhagyam andAishwariya. A key milestone was reached in December 2005 when the Field Development Plans(FDPs) for Mangala, Aishwariya, Raageshwari oil and Saraswati were approved bythe Rajasthan RJ/ON-90/1 Licence ("the Licence") Operating Committee whichconsists of ONGC and Cairn. The FDPs are currently being reviewed by the LicenceManagement Committee (Directorate General Hydrocarbons, ONGC and Cairn) forfinal approval. Cairn continues to make good progress on the development of the Mangala fieldand work has begun on the detailed design and engineering contract for theMangala production and treatment facilities. The contract for this work wasawarded to Mustang Engineering in Houston, a subsidiary of Wood Group. Another important milestone in the Rajasthan development has been achieved inJanuary 2006. The Rajasthan State Government gave permission to Cairn to locallyextract saline groundwater as part of the Field Developments. This salinegroundwater will be injected into the oil producing reservoirs for pressuremaintenance and reservoir management purposes. Other pre-sanction critical pathactivities, including Environmental Clearance and Land Acquisition, are alsowell advanced. The recent hurricanes in the Gulf of Mexico have had a substantial impact on thelocal oil and gas infrastructure which has led to increases in the cost andavailability of equipment and services globally. Cairn is assessing the effectsof these changes on its current project cost and schedule estimates. The Government of India has appointed MRPL, a subsidiary of ONGC, as its nomineefor the purposes of purchasing any crude oil produced from the Rajasthandiscoveries. Discussions are continuing with MRPL on the transportation andcrude oil sales agreements. The Declaration of Commerciality for the Bhagyam and Shakti fields has beensubmitted and the FDPs are scheduled to be submitted in the first half of thisyear. It is currently planned to commence initial production from the southernRajasthan fields in April 2006 from Saraswati. The aim is to achieve productionof approximately two thousand barrels a day by trucking from Saraswati andRaageshwari by the end of the year. Exploration and Appraisal In the last few weeks two small exploration discoveries have been made in theFatehgarh formation at Bhagyam south, three kilometres (km) south of Bhagyam andN-E, 13 km south of Bhagyam. A third well, at N-H, eight km east of Bhagyam,encountered hydrocarbons in the tight Barmer Hill formation and will requirefraccing before further evaluation. A fourth well is currently operating on aprospect 3.5 km north-west of Mangala. A programme of hydraulic fracture stimulation on the Raageshwari Deep Gasaccumulation will commence in February 2006. Preliminary post-fracture wellresults are expected to be available in March, although full evaluation of thesewell stimulation treatments could take several months. Gas from Raageshwari willbe utilised as fuel for the Mangala development and subsequent Northern AreaDevelopments. The stimulation programme will continue with fracture stimulation of the BarmerHill formation in two wells at Mangala and Aishwariya, with the objective ofunlocking the additional resource potential of this formation. Several appraisal wells in the Guda South field area have been successfullytested with typically low pre-fracture oil rates from the Thumbli sands. ADeclaration of Commerciality for the Guda field (including Guda South) is inpreparation. Cambay BasinCB/OS-2 - Gauri Oil The G-A-3 Gauri oil well has been commissioned and has produced first oil. Oilis evacuated through the gas system at the Suvali plant in Gujarat, where thereare limited storage facilities, from where it is sold and trucked by roadtanker. The offtake from the well has been variable while testing the ability ofthe gas processing plant to handle different volumes of oil production, butaverage production over the first 39 days has been 1,017 bopd with a peakproduction of 3,409 bopd. Studies have begun to review alternative ways ofexporting the produced oil from the oil storage facilities. The future performance of this well under depletion will be important inassessing the recoverable oil potential in Gauri and in similar more extensivechannel reservoirs at Lakshmi. CambayBasin CB-ONN-2001/1 - Vanthvali -1 The ONGC operated Vanthvali-1 exploration well was plugged and abandoned as adry hole. KG Basin - Ravva The Ravva field is expected to come off the plateau production rate of 50,000bopd in first half of 2006. An in-fill drilling programme to extend the plateaurate was planned for Q4 2005. Delays in obtaining the required drillingapprovals combined with the reduced availability of offshore drilling rigs willresult in this in-fill drilling campaign being planned to begin later this year. KG Basin - KG-DWN-98/2 Following the drilling of the "D" discovery well in August 2005, drillingrecommenced on this ONGC-operated, deep water block in November. Two wells arecurrently operating on the "A" and "U" prospects. Indian Head Office A new head office for Cairn's Indian operations was opened in December 2005 inGurgaon on the outskirts of Delhi to provide improved support for the Rajasthanproject team and better manage Cairn's business interests in India. Bangladesh The infill drilling programme in the 2004/2005 drilling season was successful inincreasing the field deliverability but also indicated that the Sangu field isstructurally more complex than previously thought. Cairn is seeking approvalfrom its Joint Venture partners and PetroBangla to begin an offshore drillingprogramme at the end of 2006. Subject to receiving the required regulatory andjoint venture permissions, it is currently planned to drill a Sangu infill well,a South Sangu appraisal well and an exploration well on the Hatia prospect inthe next phase of exploration and appraisal. The future development of South Sangu will depend on the results of theappraisal well. Group Production Following successful in-fill drilling campaigns on the Lakshmi (offshorenorth-west India) and Sangu (offshore Bangladesh) gas fields, the group'sentitlement production for 2005 was 28,300 barrels of oil equivalent per day(boepd) net to Cairn compared to 22,789 boepd in 2004. Current production is inline with the company's expectations. Production boepd Ravva Sangu Lakshmi & Gauri Total(approximate)Gross field 64,300 24,700 16,800 105,800Working interest 14,500 18,500 7,100 40,100Entitlement interest 6,800 13,800 7,700 28,300 Due to Cairn's heavily gas biased production mix and the existence ofcontractual caps on the gas price received, the average price realised for 2005is expected to be approximately $25 per boe (2004:$24.06) Group Reserves The Field Development Plans for Mangala, Aishwariya, Saraswati and Raageshwarifields have been submitted for final approval by the RJ-ON-90/1 ManagementCommittee. Once approval has been obtained the associated reserves from thesefields will be booked. The results of the recent appraisal drilling programme, analysis of the Sangufield performance in 2005 and the decision to further appraise the South Sangudiscovery prior to a decision whether to proceed with a development will lead toa significant reduction in the current Sangu proved plus probable (2P) gasreserves. The work required to determine the size of this reduction will becompleted by March 2006. The impact on the Group's financial results is covered within the followingfinancial update. FINANCIAL UPDATE International Accounting Standards In accordance with European legislation, Cairn has adopted InternationalFinancial Reporting Standards (IFRS) as the basis for preparation of itsfinancial statements from 1 January 2005, with a date of transition to IFRS of 1January 2004. Interim results to 30 June 2005 and associated audited restatedfinancial information were prepared and issued on this revised basis during2005. These financial documents highlighted that the Group was continuing toapply its existing full cost accounting policy for oil and gas assets to bothexploration and appraisal activity and in the development and production phase,pending receipt of any guidance or clarification from either the InternationalFinancial Reporting Interpretations Committee (IFRIC) Agenda Committee or IFRIC. Following the subsequent publication of IFRIC guidance in November 2005, whichnoted the limited scope of IFRS 6 "Exploration for and Evaluation of MineralResources", Cairn has updated its oil and gas accounting policy and consequentlyhas decided to adopt a successful efforts based accounting policy for itsfinancial statements. Cairn is in the process of updating all comparative information to reflectchanges arising from the implementation of this revised methodology. A revisedaudited restatement document is scheduled to be issued in February, prior to theannouncement of the 2005 results in March 2006. Under the successful efforts based approach all exploration and evaluationexpenditure is initially capitalised. It is then expensed through the IncomeStatement in the period it is incurred unless the exploration and evaluationprocess remains ongoing, or there is a reasonable prospect of a commercialdevelopment. Consequently, all costs directly related to the drilling ofunsuccessful exploration wells are expensed through the Income Statement. Inaddition, the geographic cost pool basis is no longer applicable in accountingfor depletion and impairment in the financial statements, which will now be doneon development area basis. These accounting changes have no impact on any of the fundamentals of thebusiness including strategy, economic value or cash flow. Cash from operationswill be unaffected although there is a potentially significant impact on theIncome Statement and Balance Sheet as a consequence of these changes. The combination of the development area basis for depletion and impairment andthe reserves adjustment proposed for Sangu (noted in the reserves section above)results in an increase in the changes for both depletion and impairment. US Dollar reporting Cairn is also adopting the US dollar as the reporting currency of the Groupsince this is the principal functional currency of the business. Althoughheadquartered in the UK, the majority of Cairn's income and expenditure istransacted in US dollars. By adopting the US dollar for reporting purposes,Cairn believes the financial statements will give a clearer picture of theperformance of Cairn's business, minimising the impact of US dollar/Sterlingexchange rate fluctuations. This change is to be implemented for the results forthe year ended 31 December 2005. Financing At the year end the Group had no gearing and net funds of circa $95m togetherwith undrawn unsecured revolving credit facilities of $240m (comprising $200mthree and $40m seven year facilities put in place in January 2004). Followingthe significant 2004/5 Rajasthan discoveries and the associated developmentrequirements, the Group is in the process of refinancing its debt facilities. 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. •Cairn has now made 17 oil and gas discoveries on Rajasthan block RJ-ON-90 /1. •Working interests of Rajasthan block RJ-ON-90/1 development area: Cairn 70% ONGC 30%. •India currently imports approximately 2 mmbbls of oil per day. Domestic production is approximately 650,000 bopd of which approximately 50,000 bopd comes from the Cairn operated Ravva field. •Mustang Engineering is a subsidiary of the John Wood Group PLC ("Wood Group"), a leading international energy services company with extensive experience in the design, project management and construction management of different projects in various areas of the world. For further information on Cairn see www.cairn-energy.plc.uk This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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