1996 Annual report PDF 36.77MB - Cairn Energy PLC

Glossary of termsContents1 Highlights2 Chairman's Statement4 Chlef Executive's Report9 Operational Review7 Environmental Statem8 Financial Rev~ew21 Report of the Audltor22 Board of Direct26 Report of the29 Reserves30 Financial Sta32 Notes to the Ac46 Fwe Year Summa7 List of Licenc8 Notice of AGMinside back cover

January 1997Sgnahlm of Sangugas sales agreement...................................HighlightsDecember 1996Rawa field at 35,000 bopd (gross).............Signature of China PC3 for Blocks15/35 8 15/26.0 Sangu on track for April 1998 production.0 Leading strategic position in South Asia established.Exploration and acquisition successes increase reservesto 189 MMboe.0 25 well development and exploration programme.0 Operating profits up sevenfold to f7.3m and net assets upover fourfold to £31 8m.0 Discussions underway with Shell on Bangladesh joint venture.November 1696Command offer declared uncondiiional.October l9S3Public offer for Command...........July 1996Farmout of 25% of Sangu ......to HBR Energy Inc.1 for 5 rights issue...............February 1996Sangu gas discweiy ........£6 million market capitalisation £950 miReport 1

Chairman 's Statement"During 1996,Cairn continuedto transform thescale, spreadand quality ofits business."During 1996, Cairn continued to transform the scale, spread and quality ofits business. In a further period of intense activity, the Group made the majorSangu gas discovery offshore Bangladesh, expanded its operations in theFar East and South Asia through the successful £186 million acquisition ofCommand, and formed a strategic alliance with the Halliburton Group forthe development of the Sangu gas field.The Group strengthened its finances substantially through equity issues,to support both the Sangu development and the Command acquisition.On 11 January 1997, Caim signed a gas sales and purchase agreement forSangu with PetroBangla. Caim has now commenced development drilling,with first production targeted for April 1998.Discussions are underway with Shell with regard to future joint ventures inBangladesh. Further details are expected to be announced during April.ResultsIn the year to 31 December 1996, turnover increased by 68% to f36 million,and operating profit, before interest and last year's exceptional gain, rosefrom £1.0 million to £7.3 million. Gmup oil and gas resewes increased from22 MMboe to 189 MMboe, mainly from including reserves designated in theapproved development plan for Sangu and through the acquisition ofCommand, wbose main asset is the Rawa oil field, offshore India. Productionaveraged 8,127 bqxl for the year (1995: 5,843 boepd). Current Groupproduction is around 15,500 b od.South AsiaThe Group has a dominant position on both sides of the Bengal Basin and iswell advanced towards its objective of becoming one of the leading non-stateoil and gas companies in this rapidly developing region. In Bangladesh, thesuccess of the Sangu drilling prcqamme has demonstrated the prospectivityof the Group's large acreage position in Blocks 15 and 16. In addition, Cairnhas continued extensive additional seismic and interpretation work throughoutthe year, identifying a number of exciting structures and prospects.The Group is planning a 7-8 well development and exploration drillingprogramme in Bangladesh for 1997. Offshore Bangladesh, it has nowcommenced a four well development programme at Sangu using the Orizontrig. The rig is under an 18 month contract to Cairn, with a further 18 monthoption since Cairn expects to continue active offshore drilling for some time.Onshore Bangladesh, the Group intends to drill the Semutang prospectin AprilVMay, and follow up by drilling the Halda Valley prospect. Dependingon the results of the exploration drilling and seismic programmes. Cairnexpects further drilling onshore. Current seismic results indicate that thetransition zone between the offshore and onshore may contain the largeststructures on Blocks 15 and 16. The first of these structures will probablybe drilled in early 1998.In India, the Rawa field, which Cairn operates with a 22.5% interest, has nowsuccessfully reached the production sharing contract target of 35,000 bopdand 17.5 MMscfpd. This represents approximately 6% of India's current oiland gas production. In the extensive drilling programme within the Rawacontract area, the Gmup plans to drill 17 appraisal and development wellsand 8 exploration wells over the next eighteen months. The gross reserveson the Rawa field have increased from 189 MMboe, at the time of Cairn'sacquisition of Command, to 227 MMboe currently, following further drilling.Management and OrganisationThe year has seen a substantial increase in the size of the Group and itsassets, and a major acquisition which brought additional managementresources into the Group. As a result, we have reviewed and reorganisedthe way in which the Group is managed. We have created two OperatingBoards, one in Edinburgh and one in Sydney, focusing on the exploration.development and production activities of the Group's existing assets.In addition, we have established a separate Chief Executive's Committeeto concentrate on the rationalisation of existing non-core interests while

also focusing on the invastigation and pursuit of new opportunities.staffAll of the success of 1996 has been made possible by the talent andhard work of the management and staff throughout the Group. On behalfof shareholders, I would like to place on record their appreciation of eachindividual's contribution to an outstanding year.The BoardDuring the year, Hmish Grossart was appointed Deputy Chairman andkame a part-time executive of the Group. In addition, we were delightedto announce the appointment of Peter Fowler, previously Btitish HighCommissioner in Bangladesh, to the Board. His extensive political knowledgeand diplomatic experience in South Asia has already proved of major benefitto the Group./ Visit by HRH Prince Charl~ le Caim drilling rig "Cdzont' ?bnrary 1997. 'OutlookCaim is focused on organic growth from explwation and development,supplemented by carefully selected acquisitions. In 1996, we have seenthe benefits of this strategy flow through in dramatic fashion. The balanceof assets and opportunities, and Me operational and financial strength ofthe Group, have again improved greatly. The current year has started withthe same sense of optimism as last year. Production and cash inflows areset to increase, and exploration and developmnt activity will be intense.TO supplement this, and to seek further gain for shareholders, we shall pursuenew ventures, strategic alliances and, where appropriate, acquisitions. Weenter 1997, therefore, with the real prospect of substantial further growthbacked up by a committed and focused management team equipped anddetermined to deliver it.Nwman Lessels CBE Chairman19 March 1997

Chief Executive's Report"Today, Cairn'smarket capitalisationis overToday, Cairn's market capitalisation is over £950 million; less than fveyears ago it was only £6 million. In the same period, the share price hasincreased more than twenty fold. This increase has been achieved bycareful adherence to a clearly defined strategy for development and gmwth£950 million; lessCairn plans to continue its pursuit of growth through a combination ofthan five yearsago it was only£6 million." relative to the Group's size. This strategy offers the potential for furthercapital growth.acquisitions, active asset management and exploration. Central to thisstrategy is the measured assessment of the balance of exploration risk toreward and the focus on opportunities capable of providing material gainGrowth StrategyCairn seeks a competitive edge in every aspect of its business, whileassessing and protecting the downside through risk management.Cairn is committed to:adding and realising value for the benefit of its shareholdersmaximising its commercial and technical expertisebeing innovativefinding "ugly" opportunities which can be turned around andmade "beautiful"maintaining flexibilityactive asset managementprotecting the downsideseeking strategic alliancesapplying a 'go or grow" strategyIncreases in shareholder value can be achieved by increasing oil or gasprices, imaginative acquisition and exploration success. Cairn has littleor no inRuence on oil and gas prices and consequently directs its effortstowards organic gmwth from exploration and strategic acquisitions.Strategy in ActionOrganic GrowthThe outstanding resuit of the Sangu gas discovery, offshore Bangladesh,has demonstrated the impact of pursuing organic growth throughexploration success and Cairn continues to seek new opportunitiescapable of providing material gain to the Group.Cairn plans to build on its strategic position in Bangladesh through anapplication for new blocks, and is currently conducting a very active seismicand drilling programme in Bangladesh. In addition, Cairn is actively seekingnew blocks in lndia.AcquisitionsOn 22 November 1996, Cairn acquired a controlling interest in Command;by 30 January 1997, Cairn owned 1M)% of Command. The strategicrationale for the acquisition was Command's operating position over theRawa field, offshore lndia in the Bay of Bengal.In India, there is rapidly increasing demand for oil and natural gas and Cairnwishes to participate in the emerging opportunities within the Indian oil andgas sector. At the heart of this strategy is Cairn's belief that it will discoversubstantial quantities of gas in Bangladesh and that gas may be exportedto lndia, once current and future potential demand in Bangladesh has beensatisfied by adequate indigenous supplies.DisposalsCairn is currently conducting a strategic review of its portfolio of assets.Those which no longer have either strategic or material value to the Gmupwill be sold.New VenturesIn 1996, Cairn signed two further Petrdeum Contracts with the Chinese

Operational Review"The Group's strategy of focusingon material exploration opportunitiesin Asian and Pacific Rim countrieswas rewarded by the discovery ofa significant gas field at Sangu,offshore Bangladesh."Report 7 1

Operational ReviewSummaryGroup production averaged 8,127 hoe@ during 1996 (1995: 5.843 bcepd),comprising 6,201 bopd and 11.6 MMsdpd (1995: 4,856 bopd and 5.9MMscfpd). The increase over 1995 was attributable to a full year of theGryphon oil field and HSSH production and the consolidation of Command'sproduction from 22 November. Group production for the first two months of1997 averaged 15,500 bcepd.At the year end, the Group's gross proved and probable reserves were77 MMbbls and 673 Bscf, equivalent to 189 MMboe (1995: 14.4 MMbblsand 46.2 Bscf or 22.1 MMbce).The Group's strategy of focusing on material exploration opportunitiesin Asian and Pacific Rim countries was rewarded by the discovery of asignificant gas field at Sangu, offshore Bangladesh. For the optimumdevelopment of the Sangu field and to achieve the earliest productionstart up date, the Group concluded an innovative strategic alliance withHBR Energy, Inc; a subsidiary of the Halliburton Company. Under thealliance, HBR has taken a 25% equity stake in Sangu and will pay 50%of the field's development costs, whilst another wholly-owned subsidiaryof Halliburton. Brown & Root Bangladesh Limited, is to provide the bulk ofthe development engineering services. The establishment of a 50150 costsharing alliance between HBR and Cairn ensures that both companies arefully aligned to the most cost effective field development.HBR's exploration rights are confined to the Sangu fdd area only.In January 1997, PetroBangla and the Government of Bangladeshapproved the Sangu development plan, based on reserves of 798 Bscfand with the objective of producing first gas by the end of April 1998. "In January 1997,The associated gas purchase and sales agreement was similarly approvedand signed at a ceremony witnessed by the Prime Ministers of BangladeshPetroBangla andand the UK.the GovernmentThe Group continues to target selected opportunities in Asia and PacificRim countries. This was demonstrated by the acquisition of a 22.5%operated interest in the Rawa field, offshore India; the principal asset ofCommand. Rawa reached its target plateau gross production rate of 35,000bopd and 17.5 MMscfpd in December 1996. Appraisal and development ofthe field, as well as exploration of the rest of the Rawa contract area, isproceeding as part of a continuous drilling programme planned throughout1997 and 1998.South AsiaBangladeshProduction and DevelopmentThe Sangu discovery well tested and flowed at a cumulative rate in excessof 80 MMscfpd. To delineate the field, Cairn drilled an appraisal well andacquired and interpreted 650 km of marine 2D seismic.The fast track development plan for Sangu is based on supplying the portof Chiiagong with an initial 160 MMsdpd increasing to 200 MMscfpd.As part of the development plan, Cairn will initially drill four developmentwells. An offshore wellhead platform with minimal facilities processequipment will be installed at the Sangu 1 location. Gas will then betransported approximately 50 km via a 20 inch pipeline to an onshoreprocessing plant where the gas will be treated and sold to PetroBangla.of Bangladeshapproved theSangu developmentplan."Report 9 1

Operational Review (continued)All facilities and the offshore pipeline have been designed to accommodatethe predicted growth in demand for natural gas in Chittagong andsurrounding areas.Exploration and AppraisalBy the year end, the Group had acquired 884 km of onshore seismicdata out of a 2,500 km programme. Initial interpretation of this data hasconfirmed the existence of a number of potentially prospective structureson both Blocks 15 and 16.Caim will drill two onshore exploration wells, on the Semutang and HaldaValley prospects located in Block 15 commencing in late April.Cairn also intends to participate in the second exploration licensing roundin Bangladesh in 1997.Midlands has submitted detailed proposals to the Government ofBangladesh for the construction of a downstream gas-fuelled power projectfor the Dhaka area. In November 1995, Cairn had exercised its option toparticipate in this project. Discussions are continuing with Midlandsconcerning Cairn's possible participation in other gas-fired power projectswithin Bangladesh.lndiaProduction and DevelopmentAt present, Rawa has seven wellhead platforms (two installed by ONGCand five by Command), with a total of nine producing and three injectionwells. Current production is at the development plan target level of 35,000bopd; the field is capable of producing at higher rates, and the facilities canaccommodate more than 50.000 bopd. Oil is collected centrally, pipedonshore for processing and then sent to an offshore loading point via anexport pipeline. Associated gas is sold to Gas Authority of lndia Limited.The gross reserves on the Rawa field, estimated at 189 MMboe at the timeof the Command acquisition, have increased to 227 MMboe as a result ofrecent development drilling.Exploration and AppraisalThe Group has identified a number of other exploration prospects which itwill drill after completion of the development drilling programme. The RawaPSC permits the fast-track development of any additional discoveries.In 1997, Caim expects to be awarded two additional offhore blocks inlndia each with operatorship; the KG-OS16 block in the Bay of Bengal andthe CB-OSf2 block in the Gulf of Cambay, north-west lndia.Far East and Pacific RimThailandProduction and DevelopmentThe Group is negotiating the sale of its interest in Block SW1Exploration and AppraisalFollowing a deliberate change in strategy, to seek gas rather than oilopportunities in Thailand, the Group applied for and was awarded a 100%interest in onshore Concession 5643138 (Nong Han); this covers 2,941 krnzand is located approximately 485 km north-east of Bangkok.

Operational Review (continued)"Cairn also intends to participatein the second exploration licensinground in Bangladesh in 1997."

Operational Review (continued)In 1997, Cairn plans to drill an exploration well to test a 600 Bscf prospect,There are attractive market opportunities for gas-fired power generation inthe area.ChinaExploration and AppraisalCairn has a 100% interest in Block 23/10 located in the Beibu Gulf,offshore southern China. This block covers an area of 2,945 km2 andcontains the 16-1 -1 discovery well, which reportedly flowed at rates ofup to 4,000 bopd on test.In March 1997. Cairn started shooting a 1,500 km marine seismic surveyover the block and plans to drill an exploration well in late 1997 or early1998. Prospect sizes range from 50 to 100 MMbbls.In 1996, Cairn also acquired 100% interests in each of Blocks 15/35and 15/26, located in the Pearl River Basin, offshore southern China.Two exploration wells are planned for early 1998. Prospect sizes rangefrom 50 to 150 MMbbls.VietnamAn exploration well drilled on the Vai prospect in offshore Block 17discovered oil, but tested only at sub-commercial rates. The well wasplugged and abandoned and the block is expected to be relinquished.EuropeUnited KingdomProduction and DevelopmentThe Group's 1996 average UK offshore production increased to 3,773 bopd(1995: 2,531 bopd).In onshore Southern England, Cairn's producing oil fields are in naturaldecline. Average onshore production declined to approximately 1.820 bopd(1995: 2,325 bopd). Development of the onshore Storrington oil field awaitsfull approval from Government and planning authorities.Exploration and AppraisalDuring 1997, the Group expects to participate in two exploration wells inthe UK offshore.NetherlandsProduction and DevelopmentThe Group's 1996 Netherlands production averaged 2,031 boepd (1995:1,950 boepd). Gas prices increased by an average of 16% over 1995prices. During the year gas compression facilities were installed on theMarkham platform and these will permit considerable flexibility in processingthird party gas through Markham.Exploration and AppraisalIn 1996, the Operator drilled an unsuccessful exploration well on theJ/6 South prospect. A P/6 appraisal well, designed to test the deep gaspotential in the low permeable Rotliegendes reservoir, is currently drilling.This structure, based on the 1968 discovery well, is estimated to containup to 750 Bscf of gas in place (Group share 73 Bsct).European RussiaProduction and DevelopmentFollowing the Command acquisition, the Group increased its share inSOCO Perm to 21.16%. SOCO Perm owns a 50% interest in the Permtexjoint venture which produces and exports oil from the Perm area ofEuropean Russia.

North AfricatMiddle EastTunisiaCommand had two interests in Tunisia. The small offshore Didon and Zaratfield developments are proceeding. The Group intends to withdraw from theonshore Fejaj permit following the drilling of an unsuccessful exploration well.YemenThe Group holds an indirect 11.785% interest in the onshore East ShabwaContract Area, located in Southern Yemen approximately 370 km north-eastof Aden.USAA well drilled on Ship Shoal Block 251 in the Gulf of Mexico, in Febmary1996, was plugged and abandoned.i Signature of the Sangu gas contract. 11 January 1997. Those present includethe Prime Ministers of kladesh and the UK, the Banaladesh Minister ofi Energy, tne Seuetary of thE. Minmy of Energy, the Cnaman ofi PetroBangla, arc Ock Cneney, former JS Defence Secretary now Cnairmani and Chief Executive of HERAcreage rationalisation and disposalsThe rationalisation of the Group's UK North Sea acreage continued withthe withdrawal from Block 22113b and disposal of its 0.5% interest in theForties field. In Australia. Skua production ended early 1997.i Offices of Command in India, the base for the Rawa project team.Report 15 1

EnvironmentalStatementCompliance with best environmental practice has been an integral part of Cairn'sphilosophy since it became an Operator in 1988. its environmental policy isas follows:all Cairn's operations will be canied out in full compliance with applicableenvironmental laws and regulations0 Cairn will ensure that all employees, contractors and sub-contractors areaware of its environmental commitment0 Caim will provide appropriate training to keep employees aware of existingand new developments in environmental management techniquesEnvironmental Activities and ReviewCaim is in the process of integrating the environmental management systems ofCaim and Command in order to ensure that the best environmental techniquesare applied across the enlarged group. A comparison of the two systems hasbeen completed and the next phase, which will extract the best features of eachsystem, will begin shortly.During routine sampling in mid 1996, the UK Environment Agency found minutetraces of oil in groundwater near the Singleton oil field in Southern England.Since that date, Cairn has worked closely with the Environment Agency to carryout regular sampling of the groundwater in order to establish possible sourcesof this trace contamination and to determine what, if any, corrective action isrequired. On 4 February 1997, the UK Environment Agency issued anEnforcement Notice which formalised the work already begun.Report 17 1

Financial ReviewNet Asset Gmwth 1992 - 1996Accounting PoliciesCairn has adopted all relevant Financial Reporting Standards in force forthe current year.Command AcquisitionCairn acquired over 50% of Command's share capital on 22 November1996, and by 30 November had acceptances in excess of 90%. DuringDecember, Cairn started statutory proceedings to acquire the remainingshares compulsorily, and completed the buy out on 30 January 1997.0 100 200 300 400Net assets f millionThe Group balance sheet at 31 December includes the assets and liabilitiesof Command, and the Group profit and loss account includes the results ofCommand from 22 November.The Group balance sheet includes the net assets of Command at theirfair value, as assessed by the Directors of Cairn. Details of the fair valueexercise are set out in note 14 to the accounts. In summary, the Directorsattributed a fair value of £186 million to Command, equivalent to Cairn'sacquisition cost.Shareholder Value Created 1992 - 196,1% Market Capitaisation August 1992I83%16% Shares issuedValue created

Profit and Loss AccountKey Statistics1996 1995 %changeDividend PolicyCairn has paid no dividends to date. Until the Group generates sustained,positive cash flows, the Directors believe that shareholders' interests arebest sewed by reinvesting any retained earnings in the Group's operations.Turnover £36.5111 f21.7m 68Boepd 8.1 27 5,843 39Average Dollar selling price per boe $18.45 $1 5.49 19Average Sterling selling price per boe £1 1.80 £9.82 20Operating profit f7.3111 £1 .Om 630The increase in turnover and operating profit results from a full year'scontribution from HSSH and the Gryphon oil field, both of which wereacquired during 1995, as well as from the high oil prices sustained overthe second haw of the year.TaxationThere is no taxation payable for the current year, due to the availability ofcarried forward tax losses in the UK, The Netherlands and India. It is notanticipated that any Netherlands Corporate Income Tax will becomepayable in the foreseeable future. UK losses available for offset againstincome from the Gryphon oil field are expected to be utilised in the nextfew years, as are losses for offset against income from the Rawa oil field.As a result of the reversal of timing differences it is anticipated that taxcharges will arise in the UK and in lndia in the foreseeable future, and, inaccordance with generally accepted accounting practice, Cairn has madeprovision for such future tax liabilities. This resulted in a deferred taxationcharge of £2.7 million in the proft and loss account.Cash Flow and FinancingThe Group's net cash inflow from operations was £16.8 million (1 995:£9.0 million); the increase resulted principally from higher oil prices anda full year's contribution from HSSH and the Gryphon oil field. The othe~major cash inflow came from two rights issues.The major cash oumows related to capital expenditure on exploration inBangladesh and the acquisition of Command.On 25 July 1996, Cairn announced a 1 for 5 rights issue at 280p pershare. The purpose of this issue was to raise finance for the Group'sactive exploration and development drilling programme in Bangladesh.The issue was fully underwritten at the prevailing market price by theCompany's largest shareholder. The issue raised £50.3 million afterexpenses, with 98.6% taken up by existing shareholders.On 2 October 1996, Cairn announced a two-stage rights issue to fundthe acquisition of Command. This style of issue allowed the Companyto determine the appropriate level of funds to cover the cash elementof the acquisition. The issue was underwritten at a 2% discount to theprevailing market price. The issue documentation provided for a 1 for 3rights issue at a maximum of £3.60 per share; only £1.90 per share wasfinally called, raising a total of £66.2 million. The remaining shareholdersin Command twk Caim shares.

Financial Review (continued)Balance SheetOil and Gas AssetsIn 1996, addions and acquisitions of oil and gas assets amounted to£195.1 million (1995: £79.1 million), of which £95.7 million was explorationexpenditure and £99.4 million was development and production expenditure.Most of the 1996 expenditure related to acquiring Command's assets,particularly in lndia. In addition, approximately £10.5 million was spenton Sangu.The Group's two main oil and gas assets are the Sangu gas field, offshoreBangladesh, and the Rawa oil field, offshore lndia. At the year end, thecost of these assets were £1 7.1 million and £ 11 1.2 million respectively.Net Debt and GearingAt 31 December 1996, the Group had net funds of £35.9 million (1995:net debt of £23.2 million, adjusted for £4.9 million share issue proceedsreceived after the year end); there was no gearing (1995: 33%).Going ConcernThe Directors have considered the factors relevant to support a statementon going concern. They have a reasonable expectation that the Companywill continue in operational existence for the foreseeable future and havetherefore used the going concern basis in preparing the financial statements.Financial Risk ManagementCairn's policy is to limit risk associated with adverse movements in the$/£ foreign exchange rate and oil price. As appropriate, Cairn undeltakeslimited hedging of short-term $/£ exchange rate and oil price exposureswithin clearly defined limits, whilst retaining exposure to oil and gas pricesin the medium and long term. For specific capital projects, or acquisitionsdenominated in foreign cunencies, Cairn undertakes appropriate hedgingto limit its exposure to adverse currency movements.Net Assets and Shareholders' FundsNet assets and shareholders' funds were £318.4 million at 31 December1996 (1995: £69.6 million). The main movements in shareholders' fundscame from shares issued in the two rights issues and the new sharesissued as part of the consideration for the Command acquisition.

Report of the AuditorsTo the Members of Cairn Energy PLCWe have audited the accounts on pages 30 to 45 which have been preparedunder the historical cost convention and the accounting policies set outon page 32. We have also examined the amounts disclosed relating to theemduments, share options and long-term incentive scheme interests of theDirectors which form part of the report to Shareholders by the RemunerationCommittee on pages 26 to 28.Respective responsibilties of Directors and Auditors As described onpage 25 the Companyk Directors are responsible for the preparation of theaccounts. It is our responsibility to form an independent opinion, based onour audit, of those accounts and to report our opinion to you.Basis of Opinion We conducted our audt in accordance with AuditingStandards issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the accounts. It also includes an assessment of the signficantestimates and judgements made by the Directors in the preparation of theaccounts, and of whether the accounting policies are appropriate to theGroup's circumstances, consistently applied and adequately disclosed.We planned and performed our audt so as to obtain all the informationand explanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the accounts are freefrom material misstatement, whether caused by fraud or other irregularity orerror. In forming our opinion we also evaluated the overall adequacy of thepresentation of information in the accounts.Opinion In our opinion the accounts give a true and fair view of the state ofaffiirs of the Company and of the Group as at 31 December 1996 and of theproft of the Group for the year then ended and have been properly preparedin accordance with the Companies Act 1985.Emd & YoungChartered Accountants, Registered Auditor, Edinburgh 19 March 1997Report by the Auditors to Cairn Energy PLC on CorporateGovernance MattersIn addiiion to our audit of the accounts, we have reviewed the Directors'statements on pages 24 and 25 concerning the Company's compliancewith the paragraphs of the Code of Best Practice specified for ourreview by the London Stock Exchange and their adoption of thegoing concem basis in preparing the accounts. The objective of ourreview is to draw attention to any non-compliance with Listing Rules12.43(j) and 12.43(v).We carried out our review in accordance with guidance issued by theAuditing Practices Board, and assessed whether the Directors' statementson going concem and internal financial control are consistent with theinformation of which we are aware from our audit. That guidance doesnot require us to perform the additional work necessary to, and we do not,express any opinion on the effectiveness of either the Group's system ofinternal financial control or the Company's corporate governanceprocedures nor on the ability of the Group to continue in operationalexistence.Opinion With respect to the Directors' statements on internal financialcontrol on page 25 and going concern on page 20, in our opinion theDirectors have provided the disclosures required by the Listing Rulesreferred to above and such statements are consistent with the informationof which we are aware from our audit work on the accounts. Based onenquiry of certain Directors and officers of the company, and examinationof relevant documents, in our opinion the Directors' statement on page 24appropriately reflects the Company's compliance with the other paragraphsof the Code specfied for our review by Listing Rule 12.43h).Emst & YoungChartered Accountants, Edinburgh 19 March 1997

Norman Lessels CBE'ChairmanBill Gammell Sir David Thomson Bt* Hamish Gmssart Peter Fowler CMG'Chief ExecutiveDeputy ChairmanPhilip TracyTechnical DirectorAgnes MacleodFinance DimctwDirectors' ProfileNorman Lessels CBE' ChairmanAssociaticn MRed and Ptarmigan htsmatianai Capii ~wst plc.N a m L&s, aged 58, is senior p a of Chiene & Tait He is also a Director of James Rsher & Som plc, Kynoch Group pkChartered Accountants. He joined Board in 1988 and was and a number of other companies and financial institutions.appointed Chairman in May 1991. He is currmtly Chairmm dStandard life Assurance Company and Havelock Eumpa PLC. Hamish Gmssart Deputy ChairmanHe is also a direct^ of Bank d SmMd, ScotGsh Eastem I-bnentTRlSt PLC. Robert Wiseman Dairies PLC and a number of othercwnpanles. He is a past mident d the Institute of ChanersdAccountants of scotland.W B B Gammell BA Chief ExecutiveBill Gammell, aged 44, graduated from Stiding University in1974. He was one d the twa fwnder directors of Cairn EnergyManagement limited. He was appdnted to the Bmrd d Caimas Chiet in Wl1988.Sir David Thomson Bt*Sir David Thwnson, aged 57, jdned the Board in 1971.He is currently Chairman of Britannia Steam Ship insuranceASSOCiatim limned, T hwh TranspM MuW InsuranceHamish Gmssart, aged 40. jdned the Board in September 1994.He is wrrently Chairman of Eclipse Blinds PIC, EFT Grmp plc, HickingPentemst PIC and Smttish Highland Hotels PLC. He is also DeputyChairman of Scottish Radio Holdings pic.P 0 J Tracy BSc MSc CEng Technical DirectorPhilip Tracy, aged 46, h&k a BSc in chemical sngineering and anMSC in peimleurn engineering. He joined Cairn in August 1988 asGwfations Msnager wim particutar respasiblny for Cairn's owedonshwe dwe(opments. He was appMnted to me Board in June 1989and is now resp3nsiMetw dl o wed and nonwpzrated projects.Agnes Macleod MA (Hans) FCCA Finance DirectorAgnes Madsod, aged 37, graduated from Glasgwv Unlvetswin 1982 with an Honours degree. She jdned Caim in 1988 asCowrate kcountant and was appdnted to me Board of CairnPeter Fowler CMG'Pet- FOWIer, aged 69, was appointed a Director of Gairn in as Finance Director on 1 October 1993.September 1996. He retired fm the Civil SeMce & i in 1996,following a ddnguished in HM Foreign & Corn-hOfh culminating in his appainbnent as Bntish High CommissioninBangladesh in September 1993. Fior to this, he had been Ministerand Deputy High Commisskner in India. He is also Chairman of theCheh VVallace Bangladesh Trust and Vice Chairman of theDiplomatic SeNlce W d s Board.: Non Executive

Report of the DirectorsThe Directors present their report and the Group accounts for the year ended31 December 1996.Results and DividendThe Group made a proft of £3,246,000 which has been transferred to reserves.The Directors do not recommend the payment of a dividend for the year ended31 December 1996. A more detailed review of the results for the year is given inthe Financial Review on pages 18 to 20.Principal Activity and Review of the BusinessThe principal activity of the Company and its subsidiary undertakings is theexploration for and production of oil and gas, both internationally and in theUnited Kingdom.On 25 July 1996, the Company entered into an agreement with HBR Energy Inc.a wholly owned subsidiary of Halliburton Company, whereby HBR agreed to pay50% of the costs of development of the Sangu gas field in exchange for a 25%interest in the project.Also on that date, the Company announced a 1 for 5 rights issue, which raised£50.3 million after expenses.On 2 October 1996, the Company announced the proposed acquisition ofCommand Petroleum Limited, and the issue of up to 50,872,556 new Cairnshares, together with a rights issue of up to 36,887,690 units of non-interestbearing convertible unsecured loan stock, automatically convertible into newCaim shares, in order to finance the acquisition. A total of £66.2 million wasraised, net of expenses from this rights issue.On 29 November 1996, the Company announced that it had receivedacceptances in respect of over 90% of Command's issued share capital, andwould be implementing compulsory acquisition proceedings to acquire theremaining shares, once the offer had closed.A more detailed review of the business, and details of the exploration, developmentand production actiiies of the Group, are given in the Chairman's Statement,the Chief Executive's Report and the Operational Review on pages 2 to 15.Special Business at the Annual General MeetingAt the Annual General Meeting of the Company to be held on 6 May 1997, aresolution will be proposed as a Special Resolution to give the Directors limitedpower to allot shares in disapplication of statutory pre-emption rights.Resolution 5 contains a special resolution empowering the Directors to allotunissued ordinary shares for cash, otherwise than to existing ordinaryshareholders pro rata to their holdings, up to an amount equal to 5% of theissued share capital of the Company immediately following the Annual GeneralMeeting, or to disapply pre-emption rights in the context of the rights issue tothe extent necessary for fractional entitlements, or to deal with the laws offoreign jurisdictions.The Directors do not have any present intention of issuing any part of the unissuedshare capital, but consider it to be in shareholders' interests that the Directorsshould have the flexibility to do so when this is in the best interests of the Company.DirectorsThe present Directors, all of whom held office on 31 December 1996, areshown on page 22. In accordance with the Articles of Association, Sir DavidThomson Bt is retiring by rotation at the Annual General Meeting and offershimself for re-election.The Fit. Hon J Dickson Mabon PC retired as a Director of the Company on28 May 1996.P J Fowler CMG was appointed as a Director of the Company on 17 September1996 and, in accordance with the Articles of Association, offers himself forre-election.The interests of the Directors and persons connected with them within themeaning of section 346 of the Companies Act 1985 ("the Act") in the ordinaryits 23 1

Report of the Directors (continued)shares of the Company, which have been notified pursuant to section 324 orsection 328 of the Act, are as follows:lulll-b.rlpp6-PW-IWlord.*dWOmmnON Lessis CBE (Charman) mwal 15,527 14.033Sir Dabid Thornson Bt mwal 150,583 106,713H M Grassart !swdcial 24,527 13,333P J FderBenefldaiW B B Gammdl Benefldai 449,906 431,349P 0 J Tracy Benefidai 22d 11 12.mA Madeod Benefidai 12,699 9.mNote: The interpst of W B B Gammell includes 93,548 Cairn shares (1995: 118,024) which are hsldin discretianary trusts, where children d W B B Gammell are bndkll. Dutlng 1996, one of thesedscretionruy trusts was split into three separate funds, in two of which n&kr W B B Gamrndl mrhis children are wlentiai ben&iaisAs at 14 March 1997, there has been no change in the interests of any of theDirectors in the ordinary shares of the Company. Directors' interests in optionsover ordinary shares are set out on page 27.Substantial IntemstsThe following have reported interests of 3% or more of the ordinary shares ofthe Company under the terms of Section 199 of the Companies Act 1985 as at14 March 1997:Cm-prantq.diwd=-=m*rrmMmry Asset Management pk 21,720,195 12.85%Robert Fleming Hddngs Linifed 12,895,604 7.63%SOTX) Int6mknd Inc. 11,731,994 6.94%Gartmxe 1- Managwnent UrnM 6,099,603 3.61%Standard Life G w 5,322,829 3.15%Suppliers Payment PolicyIt is Cairn's payment policy to ensure settlement of suppliers' services inaccordance with the stated terms. In certain circumstances settlement terms areagreed prior to business taking place. It is Cairn's policy to abide by these terms.Corporate GovernanceThe Company has complied with the provisions of the Code of Best Practiceissued by the Cadbury Committee in its report on the Financial Aspects ofCorporate Governance, except where indicated below.Board of Directors (''the Board")At the start of 1996, the Board comprised four experienced Non-ExecutiveDirectors, and three Executive Directors, with a clear separation of the rolesof Chairman and Chief Executive. With effect from 1 August 1996, the DeputyChairman, H M Grossart, who had previously been a Non-Executive Director,became a part-time Executive Director, spending two and a half days per weekexclusively on the business of the Company. Duing the year, P J Fowler CMGreplaced The Rt Hon J Dickson Mabon PC as a Non-Executive Director.The Board meets on a monthly basis, and maintains overall control over financiai.strategic, budgetary and organisational issues. The appointment of directors is aformal process involving all members of the Board.Board CommitteesThe Board has established an Audit Committee and a Remuneration Committee.The membership of each Committee comprises solely Non-Executive Directors.The Audit Committee meets twice a year to review and report to the Boardon matters related to the published financial statements and internal financialcontrol systems.H M Grossart resigned from the Audit Committee and the Remuneration Committeeon 1 August 1996. As a result, in the period from 1 August 1996 to 9 January 1997,the Audit Committee comprised only two Non-Executive Directors. The Companydid not, therefore, comply with the Cadbury Code regarding Audit Committeesduring this period. P J Fowler CMG was appointed to the Audi Committee on9 January 1997, and will be appointed to the Remuneration Committee uponconclusion of the forthcoming Annual General Meeting.The Remuneration Committee meets when necessary and determines theremuneration of the Executive Directors and senior employees.

Internal Financial ControlThe Directors are responsible for establishing and maintaining the Company'ssystems of internal financial control to meet the particular needs of the Companyand the risks to which it is exposed, and thereby providing reasonable but notabsolute assurance against material misstatement or loss.The Directors have estabiished procedures with a view to providing effectiveinternal financiai control during 1996.These procedures include the following:a defined organisational structurerecruitment of appropriately qualified and experienced staffclose involvement of the executive directors in day to day operationsproduction of budgets and forecastsproduction of management informationBoard review of all key operating and functional activities, including healthand safetyBoard approval of all major investmentsAn Audit Committee of the Board has been established to oversee the financialreporting of the Group and to discuss with the external auditors any control issuesarising from the scope of their work.The Directors confirm that they have cwied out a review of the effectiveness of thesystems of internal financial control as they have operated since 1 January 1996.With the acquisition of Command in November 1996, coupled with significantgrowth in the size of the business, the Directors recognised that the existingstructure was no longer appropriate.In February 1997, a Group Executive Board was set up to provide the strategicforum for the Group. It is responsible for allocating resources and proposingstrategy, which will then be presented to the Board of Directors. The GroupExecutive Board will meet three times a year.Also in February, two new Operations Boards were established, located inEdinburgh and Sydney. These Boards have been charged with the managementof the day to day operations of the Group.As part of this revision in structure, a Chief Executive's Committee was estabiishedto concentrate on the rationalisation of existing non core interests, bile alsofocusing on the investigation and pursuit of new opportunities.The function of the Board of Directors remains unchanged.Diractors' Responsibility StatementUnder the Companies Act 1985, the Directors are required to prepare financialstatements for each financial period which give a true and fair view of the stateof affairs of the Company and the Group as at the end of the financial period,and of the profit or loss of the Group for that period. The financiai statements havebeen prepared on a going concern basis. The Directors consider that applicableaccounting standards have been followed, appropriate accounting policies havebeen used and applied consistently, and reasonable and prudent judgements andestimates have been made. The Directors have responsibility for ensuring thataccounting records are kept which disclose with reasonable accuracy the financialpition of the Group, and which enable them to ensure that the financialstatements comply with the Companies Act 1965. The Directors have generalresponsibility for taking such steps as are reasonably open to them to safeguardthe assets of the Group and to prevent and detect fraud and other irregularities.AuditorsErnst &Young are willing to continue as Auditors and a resolution to re-appointthem will be proposed at the Annual General Meeting.By order of the BoardHew R DundasCompany SecretaryCairn House61 Dublin StreetEdinburgh EH3 6NL19 March 1997

Report of the Remuneration CommitteeThe Remuneration Committee is chaired by Mr N Lessels CBE and comprisessolely Non-Executive Directors. H M Grossart resigned from the RemunerationCommittee on his appointment as a part-time Executive Director on 1 August1996. The terms of reference of the Committee are to determine the overallremuneration packages for Executive Directors and senior executives in order toattract, retain and motivate executives with the appropriate skills to manage anddevelop the business.The remuneration packages comprise basic salary, benefits, share options,petformance related bonuses, and pensions. It is the Remuneration Committee'sintention that the remuneration of Executive Directors and senior executivesprovides appropriate incentive for the further development of the Group. TheRemuneration Committee refers to publicly available information and informationprovided by independent remuneration consultants specifically for the oil and gasindustry. The Committee consults with the Chief Executive in relation to all matterssave for his own remuneration.ComplianceThe Company has complied with section A annexed to the Listing Rules regardingbest practice provisions for Directors' remuneration. The Remuneration Committeehas given full consideration to the provisions set out in section 6 annexed to theListing Rules in determining its remuneration policy.Share Option SchemesThe Company operates two share option schemes:The Share Option Scheme ('1988 Scheme')The 1988 Scheme was adopted by the Company in 1988. Under the schememles, no further options may be granted after 8 April 1998. Certain amendmentswere approved by shareholders at the Annual General Meeting on 28 April 1996,and Inland Revenue approval for these changes was received on 23 August 1996.The 19% Second Share Option Scheme ('19% Scheme')At an Extraordinary General Meeting of Cairn shareholders held on 28 May 1996,the Caim Energy PLC 1996 Second Share Option Scheme was approved.The principal differences between the 1996 Scheme, and the 1988 Scheme arethat the approval of the Inland Revenue was not sought for the 1996 Schemeand its administration; in particular the grant of options and the imposition ofperformance criteria will be at the discretion of the Board of Directors. (However,where any proposed grants of options under the scheme are to ExecutiveDirectors, this will be the exclusive responsibility of the Remuneration Committee.)The exercise of options will be subject to the attainment of performance criteria.Up to five per cent of the Company's issued ordinary share capital from time totime may be placed under option in any rolling ten year period under the 1996Scheme and the 1988 Scheme.Performance Related Bonus SchemePrior to 1996, the Remuneration Committee determined awards of bonus unitsto Executive Directors and senior executives under a performance related bonusscheme whereby the level of bonus payable was calculated with reference to theincrease in share price over a three year period. If there was no increase in theshare price from the date of award until vesting date, the bonus award lapsed.Bonus units awarded on or after 29 August 1995 are subject to a cap wherebythe curnulat've bonuses payable for any one year do not exceed 200% of basicsalary for the Chief Executive and 100% of basic salary for all other ExecutiveDirectors and senior executives. Bonus units awarded prior to 29 August 1995are uncapped. The cap does not apply in the event of transfer of control ofthe Company.No new awards have been made under the Performance Related Bonus Schemesince August 1995. This scheme has been replaced by the 1996 Share OptionScheme. The bonus units awarded to the Executive Directors which crystalliseduring the years 1997 to 1998, are as follows:Under the 1988 Scheme, options are exercisable between three and ten yearsof grant. No further exercise may be made within a three year period after aprevious exercise.

WBB Gammell 28.m 100,000 213.m 320.m 661.000 106,m 213.000 319,000POJTmy - 68.000 133,000 2W.000 399,wO 66.m 133.000 199.000A Maciend - 33,000 100,000 150,wO 283.033 50,000 100.000 150.000'Wee bonus uluts are capped and the fim tranh d bonus unlts granted a 92p vested in August1996 without paymant.The bonus units vest in equal amounts over a three year period commencingone year from the date of award. Bonuses paid to Executive Directors under thisscheme are shown in the Directors' Remuneration table. Bonus payments arenot pensionable.Pension SchemeIn the UK the Group operates two defined contribution pension schemes. UKemployees are eligible to partkipate in these schemes which are non-contributory.Contributiis on behall of Executive Directors have been established at 15% ofbasic salary. In 1996 no pension contributions were paid on behail of H M Grossart;instead these contributions were paid in the form of a cash bonus. In addition.Command operates a separate pension scheme for its employees.Dituctors' RemunerationThe remuneration of the Directors for the year ended 31 December 1996 wasas follows:Notes:1. The benehfs rewesent car and fuel benefits2. The muses represent m l s d.e uc4a me Wamance mated mnds scheme. apm hornme bonus payments made lo Mr rl M Grassart nhcn w e awardea at me awa an ot tneRemusealon Canmiltee, in respect of the acquiwn of Command.3. The Com68rly has an agreement with Ch'ene & Tdt to pmvide the sewices of Mr N le%s& asChairman. His fees m paid to Chi- & TaR.4. lhw fees payable to Mr H M Grossart fa his emices as a Nw-Executive Director of the Company to31 July 1996 wwe @d to his mmpany, Petronius Ltd. Wth effect f m 1 Must 1996, Mr Grosssrtwas DM directtv bv Corn-.5. Mr P J Fowler CMG jdned the Cbnpany as a Nw-Executive Director w 17 ssptmbet 1996.6. The Rt Hon Dr J 0 Mabon retired w 28 May 1996.Interests in optionsThe Company has two executive share option schemes by which ExecutiveDirectors and employees are able to subscribe for ordinary shares. The numberof options under these schemes held by Executive Directors are as follows:Options are exercisable between 3 and 10 years of grantOn 9 September 1996, Mr P 0 J Tracy exercised 115,000 options as follows:POJTmqA MadeodH M GmssartNon-ExautiveN ksds CBESir C&d Thorn BtPJWCMGF- DimctwThe Rt Hw, Dr JO Mabon PCThe market price on that date was 380pAccounts 27 1

Report of the Remuneration Committee (continued)An analysis of options held by Directors, where the exercise prices of the optionsare below the current market price at 14 March 1997, is as follows:1988 SchememEi*ur-E WBB-l P O J W &Yr*od H U M2.30 60.W2.08 40.W 5.W3.13 5.m3.08 30.m1.68 6.m1.50 20,0330.27 12.WO0.57 27.wO 30,WO 15.m0.66 50.W0.78 55,WO 50,WO 50.030Service contractsThe service contracts of the full time Executive Directors have an unexpired periouof two years. These service contracts were entered into in December 1993. It iscurrent practice to restrict notice periods to 12 months or less in all but the mostexceptional circumstances. H M Grossart has a service contract entered into on1 August 1996. The unexpired term of his contract is twelve months.None of the Non-Executive Directors has a service contract. The re-appointmentof any Non-Executive Director beyond a second term is subject to review bythe Board.N Lessels CBEChairman of theRemuneration Committee1996 SchemeAt 14 March 1997, there was no change in the number of options heldMr Gammdl holds 184,108 warrants to subscribe for ordinary shares at a priceof £2.355 per share. The warrants are exercisable in whole or in part during theperiod 1 April 1993 until 30 March 1998.The market price of one Caim share at 31 December 1996 was 417p. During 1996,the range of the high and low market price of Caim shares was 114p - 41 7p.

ReservesAs at 31 December 1996m is Med in Ue hast -nment. How-,under the terms of Me Pmduction Sharing Conbact,Cairn is anWed to mx4-a a share of he hydrocarbanGrmo emvm have Uw&m been oresented bdhd government share of paducfion cakulated inaccwdance with cartain price and -ndbmassumptions.- up ~IWA plvs pmbstbk oil and gss nanvssLRO.--At31 -1896 170.308 189dl9 130,408 149.219At 31 Decembet 1995 22,068 22.068 22,068 22,068~esbywionaressfdk h mc. YW hUK ORshae 5.922 5,922 5.922 5.922UK Onshae 6.763 6,763 6.763 6,763Eumpe 4.993 4,993 4.993 4.~333Bsns- 99.750 99,750 59.850 59,850India 49.575 49,575 49.575 49,575GUm imrnatiorw 3.305 22,116 3.305 22,116At 31 M b e r 1896 170,308 189,119 130,408 149,219Fa Me purposes of this taMe 6 Msd d gas has been mnvsrted to 1 boe.

Consolidated Profit and Loss AccountFor the year ended 31 December 1996Group Statement of Total Recognised Gains and LossesFor the vear ended 31 December 19961- 1 sem E'mProfn frx the year 3,246 8,889Realised faeign exchange diierences wiihin 370Unrealid 1-n exchange Mwwces 111,758) 436Reconciliation of Movements in Shareholders' FundsFor the year ended 31 December 1996PrnlW(l0ss) m di"ay activibefMB intweed (661) 1.040 6.926 7,305 9,980Interest w a n d simiw hxme 6 - 266 1.161 1,449 951Interest pap& and -ilar charges 7 - (2.827) (2827) (1,468)PmW(l-) on dinary activitiesbefore taxation (661) 1.328 5.m 5,627 9.463TBXBtion on pmRt onordinary adiviks 8 - (742) (1.9391 126811 1575)PmMIW) aflw taxation (661) 588 3,321 3.246 6,888Minolily sharsholtiss' equity ihlerasts 1hofitl(loss) for the year 9 (661) 586 3.3'21 3.246 8,669Net additions to sh-Omninu shamhold&fundsfundsEarnings pr ordinary share 10 3 . 1 ~ 11.70~ ~

Balance SheetsAs at 31 December 1996Group Statement of Cash FlowsFor the year ended 31 December 1996Rshlms on hasmmta and seNlclng ot RnanceInterest rec&edInterest wid(977) (878)ffl 14.545)mW ass& lap cum li.b(litier 340,002 98.686 310,787 90,OMCndnDnr (hcluding cm- debt):amourt.~ingduepftrmonthmoneyw 18 15.515 25.528 9+W 15,919Pmvidm fw ll.Mlh and dwges ZU 2,780 3,168 430 1,097cnfumdtuulion ZU 3,347 - 2.mM i w -dm' equily i- - 380Nsteasets 318,360 69,608 298,284 73,048cap4tai and --quny inters*rGdled-up share CWW 21 16,899 9,lW 16,899 9.193Share miurn 22 180,575 26.659 180,515 26.659Wal reserves 23 116,279 21.008 SZ,846 24.707RDfnandhamwnt 24 4,607 12.749 7,944 12.489Sharsholdenr' tunda 3l8.360 69,608 298,284 73.048N Lessels, ChsirmanW B B Gsmrnd. Directcf 19 March 1997Equity dividends paidNet cash wtfmv before use ot liquid reswrces and financingFinaningIssued sharesIssue of laen stockShsre issue costsDabfdrawdownsR - m Of debt

w zw1.mzLLL'L

2 Turnover and Segmental Analysis 3 Operating Profita) Operating profit is stated after charging/(crediiing):. "Continwng operationsAcxwwms: Command1- ,Gsrm sm,DepreClil60n - owned 394 175- leesed 1Cpmlilg lease wsts - lsnd and buildngs 336 287RM l m (90) (136)Auditas' mmumbbn in respect of audit work - UK 70 37-wmsea3 28 16Auditas' remm6on in respect of mn audt work - UK 24 120-mwseas 18 13In addh, during 1996 ths auditws me&& 'i397.WO in respect of pofeskd smba relating to thsamuisiiin d Cmand and o h cadtal omiects. These fees have been cadtali dh as Dart of theb) Recoxiliation of operating profit to operating cash flowT u r n by Win:Candnuing operatms 17.839 3,779 129 - 21.747operstins mm):Continuing aperations 1.904 182 (m) - 2.066Excapbbnal items (1OW - (1,050)854 182 120) - 1,016Turnover arisas hwn one class d businass, name+ oil, gas and cmdswale W. Turnover by destinationda%l mt d i i matmially from the shove.1- ,GsFmO rmoperating Prdll 7,305 1.016Wian 8 depreciatim 12.789 9,WlWrite4w.n of dl and gas assets rn 1.050AbandDnmem pmvision 707 516Debm movemwR 1,034 (3.667)Credifm movement (3,976) 848mp*s 124~weign exchange d m - om) 1%Net cash infiow horn owmlins activities 16,779 8.990

Notes to the Accounts (continued)For the year ended 31 December 19964 Staff Costs5 Directors' Emoluments4 Analysis of directors' emolumentsWaaes and salariesThe weighted average weekly number d employeas (including Executive Directors) during the year was:.*-*-,smUKIndiaAusbaliaThe NeUwWdsInteTakmFess 90 950 t h emduments:~M C Sdaries 338 265bsnems 24 24psrtamancs dated ban- 1,375 145pensm comributms 48 40Total munerabbn 1,873 569b) The emoluments (excluding pension contributions) of all the Directors fell wimin thefollowing rangas:-UK em- numb comprise 46 in me Head ORce in Edinburgh and 46 at Ih Gmup's productbn-tiins base in the Saulh d England. Em- numb fw Indim and Austtalia reflect th pedCOmMnd WBS mnsdbated in the Grw~ Accwnts. Actual emdw numbem in India and Australiaat 31 Decemb~ 1996 m 125 and 43 kpec~.

6 Interest Receivable and Similar Income1906 lss5Fm C.m8 Taxationa) Taxation chargeBank i m 1.184 716Lcm interest 37WsxchangeQ* 228 2351.449 951Cairn dbtes intersst reWvabk and similar in- in me pmM and loss m n l behmwn mtinuingoperatms ongolng and acquismbns based an actuai interast receipts and exchange gains arisng.7 Interest Payable and Similar Charges~ a x n e d ~ - ~ d p w r y e a r ~Prudm for US State TaxAchargehasOeEnmadefadetenralaxat~on ntneJKandlnaaasares,hdtmngwRerenceslnetof cssa) hen we exceded lo mmss n me Mwe Tax dlowancas awng horn expendLreincurred in olhw count^ cannot be offset mnst pmW in Um UK or IndiaThe taxatm dlarge for 1995 a6aes from Um gsin an sale d shares in CEUSA by Cairn Emgy PLCb) Tax lwseslosses arising.At 31 Decembet 1996. Cam md total losses of aDpoumately C39 8 melon (1995 - C35 rn8ll.onlBVmaDs fa dlw agmnst Mm proms taxable .~nder UK Caporahon TaxGairn also had losses of appmximateiy NLG 82 million (£27.7 million) avail& for OW againstfWhs&mds Cwpwate Income Tax and NLG 61 million (£20.6 million) avaiWe fa offset againstfWhs&mds State Pmfd Share in respect d its NeUmrlands residanl subsidiariesAt 31 December 1996 Cairn had revenue 1-dlwvable for AusWiar Income Tax d ammximatelv

Notes to the Accounts (continued)For the year ended 31 December 19969 ProfiV(Loss) Attributable to Members of the Holding CompanyThe loss &ah with in the amounts of the hdding cwnwny is £763,000 (1995 - haflt W.091.000).10 Earnings per Ordinary ShareThe earnings per ordinary share is calculated on a pmfR of W.246.000 (1995 - E8,669.000) on a weightedavwage of 104,027.1 17 onlinsry shares (1995 mstaied -weighted amage of 75,950,594 onlinaryshsres). The rmmbet of onlinary shares fw 1995 have been restated to rdect me bonus dement of therights issues, Them is no materid dilution of earnings w a diw share in spxt of warrants and shareoptions issued (see note 21).11 Oil and Gas Exploration Assets - Group11 Oil and Gas Exploration Assets - Company"I w -artan--pmo fmo rmwfmoCostAt 1 Janw 1996 852 5,418 16,913 23,183Wins 23 344 15,524 15,891Transfm between cat- (5) (2.172) - (2.177)Transfer to suMiary unddng (870) - (870)At 31 December 1996 - 3,590 32,437 36,027RmirionAt 1 January 1996 478 4,851 3,686 9,015Transfers between catego* - (1,891) (1.891)Transfer to wbvdiary unmng (478) - (478)At 31 December 1996 - 2,950 3,585 6,646Net book value at 31 December 1996 - 630 28,751 29,381NetWMlueal31 Decemtw19S5 374 567 13,227 34,166In 1995. Me canylng valued Us UK Otfshore @ration poal was written d- by £1.050,WO thmu()lan erceptii charge to Me prm and 1- acmunt.PmvirionAt 1 January 1996 2,690 4,851 605 - 3.686 11.832Transfers betwssn categories - (1,891)At31 December1996 2bs0 2,950 - 3,886 9.336Net book value at31 Decamberl996 2,712 530 613 - 107.298 111,253Durina 1996. Cam drilled a 6rv Mein the US Gull of Maim. As msre are no msws to iusMv Us

12 Oil and Gas DevelopmenVProducing Assets - Group12 Oil and Gas Developrnent/Producing Assets - CompanyAt3 DecemberlgsS 26,385 49.500 22,752 93m 1W.867CostAt 1 Janwy 1996 13,026 53,329 66,355Exchange -4Ustmt (8) (5.0171 (5,0251m i s (1161 826 noExcsptima write df (4,2161 - (4,218)Transfers be- cat- - 2,177 2,177Transfer to suWiw undenaklng (8,684) - (8,884)mW=ak - (1,815) (1,815)A131 DscemberlsoB 183W 21.532 4.W 437 42,329Net book Mue al 31 -her 16% 10.085 27,608 18.692 92,893 149,638Net book value at 31 December 1896Netbckvalueat31 Decemba1995 2,988 37.832 40.820During the year, the Company h s f d its pmdudng interests in the UK Onshore cast pwl to its whollyawned suMi, CEOL. As a 4, the Company no 1- Mans an intmin the UK Onshore pooland canssquentb has df remaining bdmces miatig to miiquished licences to the praflt and lossaccount. On mnsd'dabbn, the adjustment is reversed as the Gmup retains a UK Onshw paducing pool.Included in the mst d dl and gas assets is an mum d E1.252.WO (1995 - El ,196,000) for the Gmpand P80,WO (1995 - EB0.0001 fa the CMnpany in respect of interest capitalised on Mop?mnt pfojecta.The intwest CapRalised in the Year for the Gmup is f56,WO (1995 - E Nil) and for the Company E Nil(1995 - E NiO.Accounts 37 1

Notes to the Accounts (continued)For the year ended 31 December 199613 Other Fixed Assets - Group13 Other Fixed Assets - CompanyTnr*l ".ha."mm.mm=-s(.IC c m F m O e C wCostAt 1 January 1996 212 952 1.164Addiim 48 335 383Transfer from subFjliary undmg 11 11Disds 1.W 1561Dapm-At 1 January 1996Charge for lhe yzaDisweslsAt 31 December 1996 - 145 1166 1,311Net baok value at 31 Dscember 1996 746 123 gss 1,765DepeciationAt 1 Janu.vy 1996 117 760 87ICharge fw the year 26 277 903T m frwn wLMdii undsrtakjng 5 5W s - (54 (WAt31 DBCemberl996 143 gss 1,131Net book value at 31 December 1996 117 254 371Net bwk value at 31 Decemk 1955 95 192 287Included in vehicles and equpnent are assets purchased under financa leases at a ccst of C110,WO(1995 - C110.000). whlih are fulhld~rWalwJ (1995 -net bookveb ENiO.

~ 9 6 6 1 ~ ~ ~ ~ ~ ~ 1 3 a y e ~ ~ ~ p s u M o % ~ l e S e W l ~ W ~ q P ~ ' I m-KIT hmpdw qBmnU pueuruw lo m w ! W ! w all wmb 01 ~WAWww 40 u r n e Sv

~ --Notes to the Accounts (continued)For the year ended 31 December 199614 Fixed Asset Investments (continued)An matyals of the acquismn of Command is as fdlows:-Net assets at date of acquisitionCommand conbibuted £1.495.003 to the Grmp's net opsratlng cash flows.Command made a loss affw tax of fZ.093.033 in the pew han 1 July 1996 to Y2 Novemk 1996.Me date dacquiing a conbolling int-t. A summa~sed proM and lass acmum hrghuMing post andpre acquisitim resub is as MI-:-Exploration assetsO~pamntlproducing assetsOther fixed assetsInvestmentsDsbtoffiCash m d-itCashCreditors due within me yearBank loan wya!& wimin one yearCredii due after more man one yeaPrOViFjOn tor abandmmemDeferred taxatmNet assets acquired 51,533 134,590 186,123Discharged by:Cash rnnsicbmtbn pak.9 39,831Fair value of shares issued 125,332Casts assodated with the acquisition 4,216169,379Cash omsideratan accrued to discharge mmpulsay buy-out 1,483Fair value of sham required to discharge the wmpuisary buy-wt 14,561Costs a-iated vvlm the acquismbn accrued at the year end 7WTotal emsideration 1861 23Adjustments:(a) lncreass in valuatm of wlaatim and dwelopmenVproducing assets to aim's fair valuatim.(b) Increase in Miuatlon of investments in SOCO Perm and Comeco to current market values of$10.5 millon and $25 millan respecti.(c) Adiustment to reRect asts incurred during acquislion pew ramverable from Cajm and creatiand g e d bad debt pmvlsian.(dl Oiminabn of abandmmem povisim.Turnover ZaSl 5.192Cost d se!es (1,631) (3.352)Write-zown of dl and gas assets - (1.046)Adminismtbbe exzmses (1W (2.418)operatins Profit/ll~l 1,040 (1.634Int& recehbk and similar inmne 288 216Inteast payable and sinilar chargasThere were no recogntsed yens an0 losses n !he mod D m to acq.mn omer mar me bss dto 30 ~ ~ 1996 n e - lass of fZ.460.0031C2G93.003 abm VBBIC) ACquisitiMld HSSH and CENS in 1995At 31 Decembet 1995. the Comm had amuired 97.45% d me nomid issued share caoital~. . of HSSH.Im a consderabon lmuoing msls of C11.9 mihian. On 8 Mad' 1996. the Company acqured. Vlmgh acamplkcq OW-of, the maning 2.55% nominal lssuea sham capw m hSSh tar EO 5 mnl'm.On 8 August 1995, the Company acquired 6,003,003 &nay stram of El sach in CENS, being lW%of its ComiMl isued sham capitd, fa a &mbbn induding msts of £16.0 rmllm.Gmdwill arising MI the acquisiins of HSSH and CENS has been taken m resanss. The assets andliabilies of HSSH and CENS have been incarpwated in the Gmup a m , usiq the xquishbn methadof acmunting, at thdr fair dues at the dates of acqrisilm.

14 Fixed Asset Investments (continued)An amiws of me acquWion d interests in HSSH and CENS h a at 31 Decembet 1995 is as follows:-d) Disposal of TOL in 1995DU~M 1995. Qim sold Teredo Oils limited lTOLl and as a resuh was mt enti#& to anv imme framNet assets at date of acquisitionm CslsFUI*U Farm-emm-mNet aDsets d i i of:Exdm6an sssets 425LhdcpmenVpoducing assets 23.W 35,750mtwlbdassets 18Inv%mnents 1,891Debtoo 1,637 1647Cash 1,714Crednas (nduding mnvemNa debt): due *in we yea (3,527) (621)Creditas (nduding conwWe debt): due wtwnh one w (9.233)Loans - (21.196)Pmvish fw abandamnent (7.344)mtw pmhsims (167)Net ass& 15,058 15,580M i w &v&&~ss equty intsrests (384)GODdWil arising an acqumn 3.232 438TOW wmidmatbn 17.906 16,018Uscharged by:Cash casleeration 16.420 15.580Fdr value of shans isued 674COStS associated Wh me aquisitbn 812 43817.906 16.018SatiW by cash 2.38115 Debtors- G m v P ~ C a m p a *I M 1% 1- 1005E r n E.m m emTrade debtas 8.523 5.908 1.801 2,517hounts owed by subsjdiary undrxtsldngs - 16.409 10,316Omrx dRbtm 10,537 2,281 SSO 432Rwqmmls and accrued income 4,522 8.336 3.178 7,08423,582 16.525 22378 20,349Included wimin me Company fgum of 'Amwnts owed by subsidiary unMngsm is an amount of€1 .4 million due aner mote than one yea (1995- El .4 million). lnduded wimin Me 1995 Cmrp andCampmy fgures of 'Prepaym~nts and acaued i m ' is €4.9 million being proceeds of shares issuedon 22 Decembtx 1995 and M e d on 3 January 1996.Accounts 41 1

Notes to the Accounts (continuedFor the year ended 31 December 199616 Net Funds/(Debt)a) Analysis of Net Funds/(Debt)17 Creditors - Amounts Falling Due Wihin One Yearw3-Cash at bank 3,490 (1,111) 135) 2,344Cash on deposn - 57.190 5.986 - ein 62,961Debt due after ane year (25,5281 - 7,542 2,876 (15,110)DBbt due within one year 15,9971 6.024 18.663) (7,542) 1,919 (14.m)Lmn stock - (70.M) - 70,086Current insidmsnt due on secured bank bansCurrent insidment on 8% convettiffle debenturesTrade aedimmwms avea to shso~w "ndenaangsmwm ow to mwe corno~lsory oq-m d suosmlary 1.483OVvr taxes ana ma secuny 794b) Reconciliation of net cash flow to movement in net funds/(&bt)lop6 1885FOm PmO(Dgxeaseyincrease in cash in me year (1,111) @39Cash infiow from drawdown of debt financing (6,402) 113.734)Cash wflow fmm repayment of dabt finanang 12,426 21,078Cash mwement arising from irXXBBSB/(decrease) in liquid resources' 57,190 114,058)Cash infiow from issue d loan stock60.we)Chaw in net debt resuRing from cash Rows 6.983) (5.875)CawsTSOn of loan stock into shares 70,086Loans acqrired wim subsvHary (8.663) 132.689)Eepxits acquired with subsidiary 5,986exchangem movements 4,545 (264)Mowment in net funddldebt) in the year 63,971 138.828)18 Creditors - Amounts Falling Due After More Than One Yearw QwCmmCcnp,3- 1995 1% 1995rmO rm m E.WSecured bank loans8% mnvemt4e debenturesOVvr credim19 Loansa) Amounts due at 31 December are repayable as followsNet (debtb'hnds at 1 Januw 128.0351 10.793Net fundr/(d&ll at 31 December 35,936 128.035)Shwl term dewsits of less Uwn one year are dsclosed as lquid resources.Wihin one year

19 Loans (continued)b) HSSH Convertible 8% debenture loan 1988 - 1994198Duraliin at the loan The loan has an exphy date d 1 Jtiy 1998. The loan is repayable at par in th equdinstdm on 1 Juw each year from 1994. up to and induding 1998.Inkmslk laan bears interest at a fixsd rated 8% per annwn, payabb annudb on 1 Julycanmmlon CBim has reached agreement wim tk Tmstee representing tk &ble debenturehddm that each debEnhne d NLG 1000 will, on sunender of the Debenture, entice the hd* to 39 CamShm and an m n t in caph d NLG 410.Ttusbe SuPgWVYl of the fLMlmm d the terms d the l m agreement and care fw the interests dcanWibls debemure td&s is camW out by the Tmst oRce ' Ni' which was fwnded fw thisAt 1 JanuwAcquisition d subsidiary undertaking 654Chaw for the year 2,742 2,6474Ex- dMca arising (4s)Total pmviDi for d &d taxation at 31 December 3,347 2,600i) Defend taxation - UKT k esftmated liabihiy to UK Corporatlan Tax (at 33%) arising from timing differences is as fd1ows:-Sncu*The d t h debentve halders have a nght to ma procesds of and from 'cences ownedby HSSH. &the qxratws and any banks.20 Provisionsa) Pmvision fcf liabilitii and chargesAbandonmentAt 1 JanuaryCtwgefameyearDi& d aSFBt - M~~cB wntten OR 10 cost mdTransfer d asset to %ixjdii undmakngExdange difference arisingii) Deferred taxation - lndiiThe estimated liabilw to Mian taxation (at 50%) &ing fram timing differences is as follow:.At 31 DecemberAt 31 DecemberTotal pmvision far liabilities and chqes at 31 Decembsr 1996 2,760 430Fm&& 1,347The estimated liability to d M taxatian &fromd oil and gas assets.the dimamnting and tax wntten down valuesTotd pr-ion fa liabilidss ind charges at 31 Decembsr 1995 3.169 1.037

Notes to the Accounts (continuedlFor the year ended 31 December 199621 Share capitalth-sham were deemed alotted and issued at the year endAUmDMed oldinmy sharesAt 1 January 1996Irnr~a~~inyearShm optionsUnder the 1986 Exec& Share Optin Scheme the Company has granted certain Ex- Directorsand employees options to subsdbe for 3,130,500 ordinary shares, which are wx&abk between 1991and 2005, at prices between £0.27 and £3.13. A1 31 Decemk 1996,475,500 options had beenexercised (1995 - 164,WO) and 28,WO had been cancelled leaving a balance of 2,627.W.Undw lhe 1996 ExecuWe Share Optm Scheme the Compsny had granted main directm andemployees options to subsdbe for 1,055,WO ardinsry shares which are wwdd betweRl 1999and 2006, at £2.34 or £3.415.Allotted, iwed and fully paid oldinmy sharesAt 1 January 1996Issued during lhe year b cashissueddurimthevearfa~dloanstcch- ,' issued during lhe year as part cansidgatim fa the acqusitan of Cammand 3,195WarranlsThe Company has issued warrants to subscribe for ordinary shares. The warrant holders can subscribefor 640,WO ordinary shares in total at a price of U.355 per shsre. The warrants are exwdsabk in wholeor in part in a We year period which began on 1 Apil 1993.22 Share Premiumordinary shares of l0p.were alktted fully paid as folh-During the year 475.500 wdiw shares wwe issued at pices between 27p and 308p to current andformer Group employees pursuant to the exercise of share wtins.On 22 Aug~sl 1996. 18.421.796 ordnary shares were ssum at 2800 pu~anl to a ngnls u.e loSharehdders an a 1 frr 5 tlaslsOn 13 DecemW 1996. 19,468,328 oralnary snares w e iss~m at an effectwe pnce of w p~manllo a ngn& swz to Snarenddss The nghls ss~ewas effected inrough lne 8u.e of m&t& loan st&Hltn 008 slm unn ssugl la everv lnree Calm shares The stock ml had a firs nstamenl of 930 anaa variable semnd instaiment of up~to 270p. On 25 N m k 1996, Cairn anmuwed the semdihstalment as 1W. Fdlowing the secand instalment, lhe fdty paid up stock units wete converted intoaim shares. giving an M93b-a W s issue to sharehaklers d 19:108.AS at 31 DBCBmW 1%. 31,957,846 ordinary sham had been issued to Command sharehalh asm s m n fa lhe acquisitiar of meir Command shares. In additan. a further 6,931,363 ardinary sharesvrere issued aftw lhe year end to CMnmand sharehdders fa acceptance under the ORer and under theamputsoy buy-out. These ardinsry sham wwe dewned issued by Cairn at 3Wp.At 1 Janw 26859Ansing an shares issued fw cash 50,346Ansing an sham issued as part con&rauan far the acquisl6cn of Cwnmand 108,806share issue costs (nduding £2W,WO accrued at the year end) 15.236)At 31 December 180,57523 Capital R ese~eS4 G ~UP-ca&wF=-T=m csn*RmTmE m F m FmOAt 1 January 1996 21,884 (876) 21,008Arising an issue of codbk loan stock - 68.139 68,139Arising an shares issued as part considmtim for theacqu*on of Cammand - 27,ml 27,201Gmdwill written df in respect d buy-out of mimiiy inter& in H W - (68) 169)At 31 December 1996 21.884 94.395 116,279

~~ ~ ~~ ~23 Capital R ~s~N~s (continued)27 Other Financial Commitmentsa) Annual commitments under non-cancellable operating leases are as follows:Land and buildings expiring within:-The premium arising on the issue of wnvertiM loan stock has been credned to capM m. Legalapih has been M which slates that the pmium should remain in capM m inespective ofme subsequent m i o n to equiwThe caoital m arisino on the issue of shares as Dart wnslderation fw the amuisitm of CommandThe cumulative amount of goadwill Wen df at 31 December 1996 is W.768.WO (1995 - £3,699,033).24 Proft and Loss Account-b) The Gmup is contingently liable, in the event of default by assignees, for rentas-follows:-u*.pMT mc mPmww7 CIueen Street, Wr. London98/99 Jermvn Street. LondonAt 1 Janw 1996PmWlossl for the warExchaw diinces realisej on repaymml of debt and diisal of assetUnreelised exchmga d iAt 31 December 19% 4,607 7,94425 Capital CommitmentsOil and gas expenditure:Conbacted for26 Pension CommitmentsConbibutions to %m's defined mttibuton penson schemes are included in mte 4 under '0th-Dsrslon costs-.28 Contingent Gabilitiesa) Command Petmleum Limited~.~~ Dart msideratian for an interest in an embratian lime. Command has anreed that in the event01 a mmmai alscomy mng nedareo n r m of lnat expbralon lcme. t *.I w4e sx mil anordmary fu y paa Enares as adon ona consaeralm. S nce no wcn dedaramn nas oeen made at31 December 1996, there was no abliialkm at mat date to issue sharesb) Command Petmleum (India) Pty LimitedA subcontractw to the Rawa jdnt venture has made a contractual claim against Command as Owatwof Um jcint venture Commands share of the maximum amount of me claim is $3.94 million (U.3 million).T k Directm do not Mimat the claim has valid fwndation and intend to mist it, accordingiy noPmiSlon has bssn made.c) Cairn Energy Onshore UmltedU.nng rolm sampling n ma 1996 me JK Enrrmment Agemy lwnu nurlJte traces of 01 mgrandwater near me Swm a fdd n SmIhm Enqlam mcn s matea by CEOL S m mat nateCHX has worked w h h the ONnanment Agency to carry out reguk sampling of the gnxlndwatetin &to establish passible saurcas d mis t- wntamination. On 4 Feimwy 1997, UK Environmentissued an Olforrement No6ce to CEOL which Wsad the work already begun. Until thisprqlramme of work is wmplete, the Cimm are un& to detmine what, if any, addtianal cwrec6uem y be requied.

Five Year SummarvConsolidated pmm and lass accountT"m0Vetm i n g pmfltlW)RDfR on adinary &Mtb afW faxatbn1896 1% 1884 1893 188rcam E.aa E.m E.aa En,Consolidated balance sheetFixed assets 285.402 96.745 34,482 52.288 44,295Net c um assetsl(IiHics) 54.W 1941 11,710 6.265 (708)TOM assets less c um liabll'te 340.W 98,686 46,192 58.553 43,587Gttw h s b i ~ (21,642) (29.077) (4,730) (22.242) (15,695)Net assets 318,360 69,609 41,462 36.311 27,892Share capital 16,899 9,193 6,479 6,479 26,747w 301,461 60,416 34,983 29,832 1,145CapW and mrves 38,360 69.609 41.462 36.311 27.892Capita expenditure on ail and gas assets 195,061 79,070 17.017 11,309 8,370Net aswm par ordinary share 188p 76p Mp 56p 57pNet dewnet assetsDebt, net of rash t&~2es (35,936)' 23.154' (10,793)' 8,356 15.070Nst assets 318,360 69.W 41.462 36,311 27.892Geering (Net debt: net assets) nla 33% Ma 23% 54%' Net hnds balanceI w M £4.9 millm share issue proceeds included wmin 7++xyments and Accrued i m m

List of LicencesUK OnshoreInternationalcMqUIopnmrML18MU1Fl116 (HurntAy GroWerriard)FllW Wm6fS Wood)PL 205 (Stwringtan)Ft 21 1 (Handam1PL 235 (BmckhamlPL 240 (Singleton)PL 241CairnCairnCairnCairnCairnCairnCairnCairnCairnCairnBangladeshChinaBlock15 -Semutang2Cairn- Nan-Semutang CairnBlock16 -sangu3Cairn- Nan-Sangu CairnLUock 23/10. Wushi &sinGaimekck 15/26. Pearl Rim &sinC4rnBlock 15/35. Pearl Rim BasinCairnPermtex Mnbact AreaSOCOPermtex Contact Area 'SOCOSW1Block 5643138, (Nong Han)CairnCairnUSAylip Skd 251 (N&)UPRCUK OffshoreVemamBlock 1 7 ~WerPnSeP496 9/18bac (Gryphon)'P.736 1 W1 U CP.756 W23bAusbaliaIndiaAC/L4, lirnor Sea (ofhhae]Rawa Cmmact Area (ofbhore)KG-0% (dhhorel'CB-06/2 (dfshm)BHPCairnCairnCairnNetherlandscs-a- Exsb=nm -I"!& ,XII-.,.,=.@PradpmnLASMO 15.03 7.50MMO 15.00 7.50Premk 50.03Clyde 14.62 9.75Clyde 5.32Clyde 2.95Clyde 4.76Clyde 7.27Clyde 13.88 6.94WlYmnTunisiaEast Shabwa Lkdoprnem Area (onshore) T'Zarat Permit (offshwe)Fejai Permit (onshore and offihore]Blocks XIX, XXI and mi (onshae]FPL 82, Gulf of Papua (onshore)' Tmether wim assaciatsd 10% intersst in P1M -Area R Block 9118alTowMP ZaratCairnSOCOHBR dl, an the receipt of me appd of UBE Bangkdeshi autbiles, acquire from Cairn a 25.00%interest in Us sans" gas fidd area, but m in Ue remainder of Block 16 ('Non-Sangu).The Gmup owns, separateh,, 5.29% and 15.87% wuW i?lnteresfs in SOCO Perm whlch owns a 50%ipc' Rdwant ROdUC60n Sharing & reem are axpeaed to be qnad shdyThe Grmp owns 41 25% eqMy interest in Caneca which owns a 28.57% intwest in the East ShabwaCMlbaCt Area jdnt venture in Yemen.

Notice of Annual General Meeting!Notice is hereby given that the twenty-sixth Annual ~eneial Meeting of CairnEnergy PLC will be held at Cairn House, 61 Dublin Street. Edinburgh, EH3 6NLon 6 May 1997 at 12.30pm for the following purposes:.As Ordinary BusinessTo consider and, if thought fit, pass the following Ordinary Resolutions:.1. That the Report and Accounts for the year ended 31 December 1996 beapproved.2. That Ernst & Young, Chartered Accountants, be re-appointed as Auditors ofthe Company and that the Directors be authorised to fix their remuneration.3. That Peter J Fowler CMG be re-elected as a Director.4. That Sir David Thomson Bt be re-elected as a Director.As Special BusinessTo consider and, if thought ft, pass the following Special Resolution:-5. That the Directors be and are hereby empowered, in accordance with Section95(1) of the Companies Act 1985 ('the Act"), to allot equity secwities (asdefined by Section 94(2) of the Act) pursuant to the existing authority grantedby shareholders at the Extraordinary General Meeting on 18 October 1996, asif Section 89(1) of the Act did not apply to such allotment, provided that thisDower shall be limited:i. to the allotment or allotments (otherwise than pursuant to sub-paragraphbelow) of such equity securities for cash up to an aggregate nominal valueequal to 5% of the issued share capital of the Company as at the conclusionof the Annual General Meeting at which this Resolution is passed andshares being represented by depository receipts, the requirements of anyregulatory body or stock exchange, or any other matters; and provided furtherthat this authority shall expire at the conclusion of the next Annual GeneralMeeting of the Company after the passing of this Resolution (or, if earlier, on5 August 1998), save that the Company may, before this authority expires oris replaced, make an offer or agreement which would or might require relevantsecurities to be allotted after such expiry or rephcement, and the Directorsmay allot relevant securities in pursuance of such an offer or agreement asif the authority conferred hereby had not expired or, as the case may be,been replaced.By Order of the BoardHew R DundasCompany SecretaryCairn House61 Dublin StreetEdinburgh EH3 6NL14 April 1997Notes:1. A member enMled to attend and vote at the above meeting is enthled to appoint one or mare pmxiesto attend and, on a pdl, to vote instead of him. A pmxy need not be a member of UE Companyme insbument awolntino - a . omm. . twethw - wim the mwer of anamev M dhw authotitv . If an") ..~ndor wncn n s vgncd or a d ~ ccn y hod copy ot sucn porra ot amoq rnln bo b3gw wm tneCarnp~ny's Hcqstrar lkmn ot SooUand. Hogmar Ucplnmnl Apcx rlo&c 9 Hmdngton PactLomdrgh U17 4PL no1 css lnan 43 b.rs oclorc lnc hme h*m for lnc nodng d lhc mmng or anyadjournment M. Only holden of odinay shhares are entitled to attend (in pwsm or by poxy) andvote at UE meang.2. A summay of bansactions by Diredm (and their family inte-est) in the share capnal of the Campaml,and miss of their seMce contracts. All be mailable for insoection at me Camoanv's reoistered o bii. to the allotment of equity securities in connection with an offer (whether by wayof a rights issue, open offer or otherwise) to the holders of ordinary shares inproportion (as nearly as may be) to the respective number of ordinary sharesheld by them, subject only to such exclusions or other arrangements as theDirectors may deem necessary or expedient to deal with fractional entitlements,legal or practical problems arising in any overseas territory or by virtue of