Annual Report 2007 in PDF - Cairn Energy PLC
Annual Report 2007 in PDF - Cairn Energy PLC
Annual Report 2007 in PDF - Cairn Energy PLC
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
ANNUAL REPORT & ACCOUNTS <strong>2007</strong><br />
CAIRN ENERGY <strong>PLC</strong><br />
YEARS OF EXPLORATION, DISCOVERY & PRODUCTION
BUSINESS REVIEW<br />
<strong>2007</strong> Highlights 2<br />
20 Years of Growth 4<br />
Chairman’s Statement 6<br />
Chief Executive’s Review 8<br />
<strong>Cairn</strong> India Assets 12<br />
Operat<strong>in</strong>g and Exploration Review 14<br />
Capricorn Assets 18<br />
Group Productions and Reserves 22<br />
Corporate Responsibility 24<br />
F<strong>in</strong>ancial Review 28<br />
Board of Directors 32<br />
GOVERNANCE AND ACCOUNTS<br />
Risk Factors 36<br />
Corporate Governance Statement 40<br />
Directors’ <strong>Report</strong> 50<br />
Directors’ Remuneration <strong>Report</strong> 57<br />
Independent Auditor’s <strong>Report</strong> to the Members<br />
of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> 69<br />
Pr<strong>in</strong>cipal Licence Interests 71<br />
Group Income Statement 73<br />
Statements of Recognised Income and Expense 74<br />
Balance Sheets 75<br />
Statements of Cash Flows 76<br />
Notes to the Accounts 77<br />
Reserves 129<br />
Notice of <strong>Annual</strong> General Meet<strong>in</strong>g 131<br />
Glossary of Terms 134<br />
Company Information 136
CAIRN<br />
is an ed<strong>in</strong>burgh based oil and<br />
gas exploration and production<br />
company listed on the london stock<br />
exchange s<strong>in</strong>ce 1988. there are two<br />
separate arms to the bus<strong>in</strong>ess:<br />
cairn <strong>in</strong>dia and capricorn.<br />
CAIRN INDIA<br />
is now firmly established<br />
as an autonomous bus<strong>in</strong>ess listed<br />
on the bombay stock exchange and<br />
the national stock exchange of<br />
<strong>in</strong>dia and has <strong>in</strong>terests <strong>in</strong> a total<br />
of 14 <strong>in</strong>dian acreage blocks. on<br />
approval of the private placement<br />
announced on 17 march 2008,<br />
cairn will have a 65% <strong>in</strong>terest <strong>in</strong><br />
cairn <strong>in</strong>dia. cairn <strong>in</strong>dia is a listed<br />
subsidiary of cairn.<br />
CAPRICORN<br />
is an exploration led bus<strong>in</strong>ess with<br />
a strategy of organic growth<br />
and value enhanc<strong>in</strong>g acquisition.<br />
capricorn’s core assets are <strong>in</strong><br />
south asia, the mediterranean and<br />
greenland and it has licence awards<br />
pend<strong>in</strong>g for blocks <strong>in</strong> spa<strong>in</strong> and<br />
siciliy. capricorn is a non-listed<br />
90% subsidiary of cairn.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 1
<strong>2007</strong> HIGHLIGHTS<br />
“ the group has the capacity<br />
to drive forward the<br />
rajasthan development<br />
and the f<strong>in</strong>ancial flexibility<br />
to pursue opportunities<br />
for growth.”<br />
2 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
CAIRN (GROUP)<br />
performance<br />
Cambay Bas<strong>in</strong>, India<br />
f<strong>in</strong>ancial and operational<br />
flexibility<br />
long-term growth potential<br />
Operational<br />
Gross operated production 87,031 boepd<br />
(2006: 105,028 boepd)<br />
Average net entitlement production 19,809 boepd<br />
(2006: 24,523 boepd)<br />
F<strong>in</strong>ancial<br />
Profit after tax of $1,527.8m (2006 restated loss:<br />
$97.1m) <strong>in</strong>clud<strong>in</strong>g $1,537.0m exceptional ga<strong>in</strong> on<br />
IPO of <strong>Cairn</strong> India<br />
Cash flow from operat<strong>in</strong>g activities $155.3m<br />
(2006: $189.4m)<br />
Group net cash at 31 December <strong>2007</strong> of $827.3m<br />
(2006: $701.3m)<br />
<strong>Cairn</strong> India $625m placement
CAIRN INDIA<br />
performance<br />
First commercial oil from Mangala field <strong>in</strong> Rajasthan<br />
on target for H2 2009<br />
Rajasthan grow<strong>in</strong>g resource base, current estimates:<br />
gross 3.75 billion boe <strong>in</strong> place with 2P reserves,<br />
2C resources and 2C EOR potential <strong>in</strong>creased 19%<br />
to 1.08 billion boe<br />
Mangala, Bhagyam and Aishwariya (MBA) gross<br />
2P reserves and resources (2041) <strong>in</strong>creased by 9%<br />
to 685 mmbbls (net 479 mmbbls)<br />
MBA Enhanced Oil Recovery (EOR) 2C resource<br />
potential 308 mmbbls (net 216 mmbbls)<br />
EOR field pilot planned for 2009<br />
MBA potential plateau production of ≥175,000 bopd<br />
Rajasthan small and tight fields potential – 1.7 billion<br />
boe <strong>in</strong> place<br />
Rajasthan upstream and midstream development<br />
estimated costs from 2008 to end 2009 $1.8 billion<br />
net<br />
Bids submitted for offshore acreage <strong>in</strong> Sri Lanka<br />
Fifteen exploration/appraisal wells planned <strong>in</strong><br />
2008 plus six seismic surveys<br />
CAPRICORN<br />
performance<br />
Rajasthan, India Qaqortoq, Greenland<br />
≥ 175,000 bopd rajasthan<br />
fields planned target plateau<br />
gross production<br />
rajasthan grow<strong>in</strong>g resource<br />
base <strong>in</strong>creased 19% to 1.08bn boe<br />
acquisition of plectrum<br />
and medoil<br />
6 exploration blocks acquired<br />
offshore greenland<br />
Magnama gas discovery <strong>in</strong> Bangladesh pend<strong>in</strong>g<br />
further appraisal<br />
Exploration position established <strong>in</strong> Tunisia, through<br />
acquisition of Plectrum and medOil – drill<strong>in</strong>g planned<br />
for Q4 2008<br />
Six exploration blocks acquired offshore Greenland<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 3
20 YEARS OF GROwTH...<br />
1988<br />
<strong>Cairn</strong> energy PlC listed on<br />
london stoCk exChange<br />
1993<br />
Bangladesh<br />
jo<strong>in</strong>t venture with holland<br />
sea search (hssh)<br />
1994<br />
PsC signed for BloCk 16<br />
offshore bangladesh<br />
1994<br />
ravva field develoPment CommenCed<br />
lead<strong>in</strong>g to significant oil production<br />
1995<br />
aCQUired hssh<br />
amsterdam listed company<br />
4 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
1996<br />
aCQUired Command PetroleUm<br />
sydney listed company<br />
1996<br />
sangU gas field<br />
discovered <strong>in</strong> the bay of bengal<br />
1997<br />
Bangladesh<br />
transaCtion With shell<br />
<strong>in</strong>clud<strong>in</strong>g rajasthan<br />
block <strong>in</strong>terest<br />
1998<br />
first gas from sangU<br />
1999<br />
first rajasthan disCovery (gUda)
2000<br />
lakshmi disCovery<br />
2001<br />
sarasWati disCovery<br />
2002<br />
first gas from lakshmi<br />
2003<br />
raageshWari disCovery<br />
2004<br />
first gas from gaUri<br />
2004<br />
major disCovery<br />
of the mangala,<br />
Bhagyam and<br />
aishWariya fields<br />
<strong>2007</strong><br />
<strong>in</strong>vestment By<br />
dyas Bv<br />
aCQUisition of<br />
PleCtrUm, medoil<br />
& greenland<br />
BloCks<br />
<strong>2007</strong><br />
iPo<br />
CAPRICORN CAIRN INDIA<br />
2008<br />
20 years of <strong>Cairn</strong><br />
energy PlC<br />
<strong>2007</strong><br />
...wITH LONG-<br />
TERm GROwTH<br />
POTENTIAL.<br />
list<strong>in</strong>g of<br />
<strong>Cairn</strong> <strong>in</strong>dia on<br />
Bse and nse
CHAIRmAN’S STATEmENT<br />
Norman Murray, Chairman<br />
h2 2009<br />
On traCk fOr fIrst COmmerCIal<br />
prOduCtIOn In rajasthan<br />
$827m<br />
GrOup net Cash<br />
net Cash $m<br />
0 100 200 300 400 500 600 700 800 900<br />
<strong>2007</strong><br />
2006<br />
2005<br />
group net assets $m<br />
0 500 1000 1500 2000<br />
<strong>2007</strong><br />
2006<br />
2005<br />
6 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Corporate Overview<br />
cairn energy restructured its operations<br />
<strong>in</strong> <strong>2007</strong> by splitt<strong>in</strong>g <strong>in</strong>to two separate<br />
bus<strong>in</strong>esses.<br />
the <strong>in</strong>itial public offer<strong>in</strong>g (ipo) of<br />
cairn <strong>in</strong>dia <strong>in</strong> january established it<br />
as an autonomously-run subsidiary<br />
listed on the bombay stock exchange<br />
and the national stock exchange of<br />
<strong>in</strong>dia allow<strong>in</strong>g the return of $936 million<br />
to cairn shareholders <strong>in</strong> april. the<br />
rema<strong>in</strong><strong>in</strong>g group assets have been<br />
placed with<strong>in</strong> a separate exploration-led<br />
subsidiary called capricorn.<br />
this restructur<strong>in</strong>g has enabled each<br />
entity to focus on its respective strengths<br />
and long-term growth potential.<br />
Cambay Bas<strong>in</strong>, India<br />
<strong>Cairn</strong> India<br />
<strong>in</strong> its first year of list<strong>in</strong>g on the bombay<br />
and national stock exchanges, cairn<br />
<strong>in</strong>dia has been confirmed as one of the<br />
key oil and gas exploration companies <strong>in</strong><br />
<strong>in</strong>dia. across all assets <strong>in</strong> <strong>in</strong>dia the total<br />
reserves and resources net to cairn <strong>in</strong>dia<br />
is more than 800 million barrels of oil<br />
equivalent (mmboe).<br />
<strong>in</strong> rajasthan, construction activities<br />
have started on both the upstream and<br />
midstream projects with first commercial<br />
production from mangala planned to<br />
commence <strong>in</strong> the second half of 2009.<br />
rajasthan is a major resource base<br />
and the jo<strong>in</strong>t venture (jv) partners are<br />
focused on realis<strong>in</strong>g the full potential<br />
through conventional and enhanced oil<br />
recovery techniques. the size and scale<br />
of the overall potential value opportunity<br />
<strong>in</strong> the bas<strong>in</strong> cont<strong>in</strong>ues to grow, offer<strong>in</strong>g<br />
scope for further significant optimisation.<br />
this would also translate <strong>in</strong>to a<br />
significant growth <strong>in</strong> operat<strong>in</strong>g cash<br />
flows, thereby demonstrat<strong>in</strong>g value<br />
for all cairn <strong>in</strong>dia stakeholders.
THE RESTRUCTURING OF<br />
THE GROUP INTO TwO<br />
SEPARATE BUSINESSES<br />
has enabled each<br />
entity to focus on its<br />
respective strengths<br />
and long-term<br />
growth potential.<br />
while cairn <strong>in</strong>dia rema<strong>in</strong>s focused<br />
on deliver<strong>in</strong>g the rajasthan project,<br />
and grow<strong>in</strong>g its core upstream bus<strong>in</strong>ess,<br />
there are significant opportunities <strong>in</strong><br />
other areas <strong>in</strong> the oil and gas value<br />
cha<strong>in</strong>, where it can leverage its exist<strong>in</strong>g<br />
strengths and skill base. the energy<br />
sector <strong>in</strong> <strong>in</strong>dia offers tremendous value<br />
creation potential and cairn <strong>in</strong>dia has<br />
an active new bus<strong>in</strong>ess unit which is<br />
currently evaluat<strong>in</strong>g a number of these<br />
excit<strong>in</strong>g opportunities.<br />
Capricorn<br />
capricorn’s aim is to create value for<br />
shareholders <strong>in</strong> the future by seek<strong>in</strong>g<br />
to grow an exploration-led, balanced<br />
exploration and production bus<strong>in</strong>ess.<br />
the corporate acquisition of two aim<br />
listed companies, plectrum petroleum<br />
plc and medoil plc, <strong>in</strong> <strong>2007</strong>, has given<br />
capricorn a material exploration<br />
position offshore tunisia. <strong>in</strong> january<br />
2008, capricorn made a significant<br />
exploration entry <strong>in</strong>to greenland by<br />
acquir<strong>in</strong>g <strong>in</strong>terests <strong>in</strong> six acreage blocks.<br />
capricorn cont<strong>in</strong>ues to evaluate new<br />
venture opportunities where it believes<br />
there may be potential to discover<br />
hidden value.<br />
Outlook<br />
the com<strong>in</strong>g 18 months are a<br />
transformational period for cairn <strong>in</strong>dia<br />
as it looks to significantly grow its<br />
production which will be fundamental<br />
to the future of the company and its<br />
shareholders.<br />
capricorn is plann<strong>in</strong>g its first exploration<br />
drill<strong>in</strong>g <strong>in</strong> tunisia at the end of the year<br />
and is actively pursu<strong>in</strong>g the longer-term<br />
growth potential of its position <strong>in</strong><br />
greenland.<br />
the group is well placed to deliver the<br />
rajasthan development and to cont<strong>in</strong>ue<br />
pursu<strong>in</strong>g potential growth opportunities<br />
<strong>in</strong> other bus<strong>in</strong>ess areas.<br />
<strong>in</strong> summary, the respective strategies<br />
of the two arms of the cairn bus<strong>in</strong>ess are<br />
now well def<strong>in</strong>ed and both are mak<strong>in</strong>g<br />
significant progress <strong>in</strong> achiev<strong>in</strong>g their<br />
objectives for growth and creat<strong>in</strong>g value<br />
for shareholders.<br />
norman murray<br />
chairman<br />
11 april 2008<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 7
CHIEF EXECUTIVE’S REVIEw<br />
Sir Bill Gammell, Chief Executive<br />
“ ALL OF THE mAjOR CONTRACTS FOR THE<br />
mIDSTREAm AND UPSTREAm DEVELOPmENTS<br />
IN RAjASTHAN HAVE BEEN AwARDED AND<br />
wORk IS PROGRESSING wELL TOwARDS FIRST<br />
mANGALA OIL IN H2 2009.<br />
we are <strong>in</strong>creas<strong>in</strong>gly confident about the<br />
scale of the resource base <strong>in</strong> rajasthan.<br />
we firmly believe that a plateau production<br />
of 175,000 bopd is now achievable with the<br />
potential for higher rates and more value<br />
optimisation should the encourag<strong>in</strong>g tests<br />
on enhanced oil recovery be confirmed <strong>in</strong><br />
the field trials.<br />
capricorn cont<strong>in</strong>ues to build new acreage<br />
positions, <strong>in</strong>clud<strong>in</strong>g greenland where<br />
exploration is at an embryonic stage.<br />
the group has the capacity to drive<br />
forward the rajasthan development<br />
and the f<strong>in</strong>ancial flexibility to pursue<br />
opportunities for growth.”<br />
sIr bIll Gammell, ChIef exeCutIve<br />
8 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Rajasthan, India<br />
CaIrn IndIa<br />
rajasthan upstream<br />
the <strong>in</strong>tegrated upstream and midstream<br />
development is on course to produce<br />
first oil from mangala <strong>in</strong> the second half<br />
of 2009. cairn <strong>in</strong>dia is totally focused on<br />
deliver<strong>in</strong>g this goal.<br />
all major civil and construction contracts<br />
have been awarded, long lead time<br />
items have been procured and work<br />
on both the upstream and midstream<br />
are well under way.<br />
our confidence <strong>in</strong> the ability of the<br />
rajasthan fields to produce more than<br />
<strong>in</strong>itially anticipated has grown as the<br />
reserves base has <strong>in</strong>creased. the proven<br />
plus probable (2p) gross reserves and<br />
resources from the three ma<strong>in</strong> mba fields<br />
have <strong>in</strong>creased 9% to 685 million barrels<br />
of oil (mmbbls) (479 mmbbls net).<br />
the other rajasthan fields and the low<br />
permeability barmer hill fields have a<br />
gross 2p <strong>in</strong> place estimate of 1.7 billion<br />
barrels of oil equivalent (boe), re<strong>in</strong>forc<strong>in</strong>g<br />
the scope for cont<strong>in</strong>ued resource growth.<br />
the mangala stock tank oil <strong>in</strong>itially <strong>in</strong><br />
place (stoiip), reserves and resources<br />
have been upgraded. the <strong>in</strong>crease <strong>in</strong> the<br />
2p stoiip and 2p reserves and resources<br />
is 21% and 29% respectively over the<br />
orig<strong>in</strong>al field development plan (fdp).<br />
subject to regulatory approval, the latest<br />
field development plans for the three<br />
ma<strong>in</strong> fields assume a susta<strong>in</strong>able peak<br />
plateau production of 175,000 barrels of<br />
oil per day (bopd): mangala 125,000<br />
bopd, bhagyam 40,000 bopd and<br />
aishwariya 10,000 bopd.<br />
laboratory trials have been very<br />
encourag<strong>in</strong>g and have confirmed the<br />
further potential of chemical eor<br />
techniques. the current assessment of<br />
the eor resource base is more than<br />
300 mmbbls of <strong>in</strong>cremental recoverable<br />
oil from mangala, bhagyam and<br />
aishwariya. the first eor field trials<br />
will take place <strong>in</strong> 2009.
ajasthan midstream<br />
the government of <strong>in</strong>dia (goi) has<br />
agreed to grant rights of use (rou)<br />
for the pipel<strong>in</strong>e <strong>in</strong> order to meet the<br />
planned schedule. the front end<br />
eng<strong>in</strong>eer<strong>in</strong>g and design (feed) has<br />
already been completed as has the<br />
procurement process for most of the<br />
long lead items.<br />
pipel<strong>in</strong>e construction work will<br />
commence on site <strong>in</strong> h2 2008, with the<br />
completion of phase i of the pipel<strong>in</strong>e<br />
from barmer to the <strong>in</strong>termediate<br />
pump<strong>in</strong>g station at viramgam scheduled<br />
for early 2009.<br />
the proposed rout<strong>in</strong>g of the pipel<strong>in</strong>e<br />
will allow access to an extensive exist<strong>in</strong>g<br />
pipel<strong>in</strong>e <strong>in</strong>frastructure and ref<strong>in</strong>ery<br />
network, with a f<strong>in</strong>al coastal delivery<br />
po<strong>in</strong>t that also affords access to the<br />
majority of <strong>in</strong>dia’s ref<strong>in</strong><strong>in</strong>g capacity.<br />
rajasthan Costs<br />
the <strong>in</strong>crease <strong>in</strong> the mangala resource<br />
potential has <strong>in</strong>stigated an ongo<strong>in</strong>g<br />
review to optimise the scale and<br />
schedule of the rajasthan development<br />
with a view to achiev<strong>in</strong>g higher levels<br />
of production. this review is also<br />
address<strong>in</strong>g ways of mitigat<strong>in</strong>g the<br />
impact of the <strong>in</strong>creas<strong>in</strong>g cost challenges<br />
on the project, which have been driven<br />
by the general demand for eng<strong>in</strong>eer<strong>in</strong>g<br />
resources and materials <strong>in</strong> the <strong>in</strong>dustry.<br />
at this stage, all major civil and<br />
construction contracts have been<br />
awarded and long lead time items<br />
ordered provid<strong>in</strong>g market <strong>in</strong>formation<br />
on costs. based on this <strong>in</strong>formation,<br />
the estimated cost of the upstream<br />
development to the end of 2009 is<br />
approximately $1.8 billion gross of which<br />
cairn <strong>in</strong>dia’s share is 70%. the current<br />
estimated pipel<strong>in</strong>e cost is approximately<br />
$800 million gross. revised cost<br />
estimates will be available by mid 2008,<br />
by which time the majority of contracts<br />
for the development will be <strong>in</strong> place.<br />
ravva and Cb/Os-2<br />
the development drill<strong>in</strong>g campaigns<br />
<strong>in</strong> ravva and cb/os-2 have been<br />
successful with production on stream<br />
from the new wells. these two assets<br />
have been and cont<strong>in</strong>ue to be the<br />
bedrock of the development of cairn <strong>in</strong><br />
<strong>in</strong>dia – it is especially important <strong>in</strong> a time<br />
of high oil prices that we maximise the<br />
value that these assets generate.<br />
CaprICOrn<br />
capricorn cont<strong>in</strong>ues to build an asset<br />
base for exploration-led growth.<br />
subsequent to the successful<br />
acquisitions of plectrum and medoil<br />
<strong>in</strong> <strong>2007</strong>, capricorn has recently further<br />
strengthened its exploration portfolio<br />
by acquir<strong>in</strong>g a new acreage position <strong>in</strong><br />
greenland.<br />
a two-well exploration drill<strong>in</strong>g<br />
programme <strong>in</strong> bangladesh has resulted<br />
<strong>in</strong> one discovery on the magnama<br />
prospect over which further appraisal<br />
will be required before commerciality<br />
can be established. a farm-out of a 50%<br />
<strong>in</strong>terest <strong>in</strong> capricorn’s bangladesh assets<br />
to santos <strong>in</strong> october <strong>2007</strong> raised cash<br />
and reduced capricorn’s exposure to<br />
forward work programme expenditure<br />
whilst still allow<strong>in</strong>g the company to<br />
reta<strong>in</strong> a material position. recent well<br />
<strong>in</strong>tervention work <strong>in</strong> three wells at the<br />
sangu field has bolstered production<br />
levels <strong>in</strong> the near term.<br />
capricorn now has assets <strong>in</strong> south asia<br />
(northern <strong>in</strong>dia, bangladesh and nepal),<br />
the mediterranean (tunisia, albania and,<br />
pend<strong>in</strong>g licence awards, <strong>in</strong> spa<strong>in</strong> and<br />
sicily), peru, papua new gu<strong>in</strong>ea and<br />
greenland.<br />
oil and gas Capital expenditure $m<br />
0 100 200 300 400 500 600<br />
<strong>2007</strong><br />
2006<br />
2005<br />
~1bn boe<br />
GrOss 2p reserves and 2C resOurCes<br />
In rajasthan mba fIelds<br />
1.7bn boe<br />
In plaCe In rajasthan small<br />
and tIGht fIelds<br />
>1bn boe<br />
net unrIsked reCOverable<br />
resOurCes In explOratIOn<br />
pOrtfOlIO<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 9
chief executive’s review<br />
cont<strong>in</strong>ued<br />
results and f<strong>in</strong>ancial performance<br />
<strong>in</strong> january <strong>2007</strong>, cairn <strong>in</strong>dia was floated<br />
on the bombay stock exchange and<br />
the national stock exchange of <strong>in</strong>dia,<br />
realis<strong>in</strong>g a ga<strong>in</strong> of $1,537.0m. the total<br />
proceeds (before expenses) raised <strong>in</strong> the<br />
flotation were $1,984.1m ($751.8m was<br />
received <strong>in</strong> 2006 with the balance of<br />
$1,232.3m be<strong>in</strong>g received <strong>in</strong> <strong>2007</strong>).<br />
of these proceeds $935.7m (<strong>in</strong>clud<strong>in</strong>g<br />
expenses) was returned to shareholders<br />
<strong>in</strong> <strong>2007</strong> (equivalent to £3 per share).<br />
<strong>in</strong> september <strong>2007</strong>, dyas bv acquired<br />
a 10% hold<strong>in</strong>g <strong>in</strong> capricorn for a total<br />
consideration of $91.0m (before<br />
expenses). <strong>in</strong> addition, the group<br />
announced two recommended cash<br />
offers totall<strong>in</strong>g $76.2m (before expenses)<br />
for plectrum petroleum plc and medoil<br />
plc which were declared unconditional<br />
<strong>in</strong> october <strong>2007</strong>. also <strong>in</strong> october <strong>2007</strong>,<br />
santos <strong>in</strong>ternational hold<strong>in</strong>gs pty<br />
limited acquired 100% of cairn energy<br />
bangladesh limited from the group<br />
(50% of cairn’s bangladesh position) for<br />
a total cash consideration of $55.8m.<br />
production for the year, on an<br />
entitlement <strong>in</strong>terest basis, has decreased<br />
by 19% to 19,809 barrels of oil equivalent<br />
per day (boepd) (2006: 24,523 boepd).<br />
this is primarily due to reduced field<br />
production at both sangu and cb/os-2.<br />
10 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
the group’s production cont<strong>in</strong>ues to<br />
be predom<strong>in</strong>antly gas (circa 63% on an<br />
entitlement basis). this production mix,<br />
together with price caps <strong>in</strong> the gas<br />
contracts, results <strong>in</strong> an average price<br />
realised by the group for the year of<br />
$39.70 per boe (2006: $31.84 per boe).<br />
the <strong>in</strong>crease is due primarily to the<br />
higher oil price environment <strong>in</strong> <strong>2007</strong>.<br />
revenue for the year was $287.7m<br />
(2006: $286.3m).<br />
the group made an operat<strong>in</strong>g loss of<br />
$76.3m (2006: $64.6m) and generated<br />
an operat<strong>in</strong>g cash flow of $155.3m<br />
(2006: $189.4m). the group made<br />
a loss after tax (pre the cairn <strong>in</strong>dia<br />
and capricorn ga<strong>in</strong>s on disposal)<br />
of $49.4m (2006 restated: $97.1m).<br />
cairn entered 2008 with net cash of<br />
$827.3m, positive operat<strong>in</strong>g cash flows<br />
and total facilities of $910m. cairn will<br />
receive approximately $625m follow<strong>in</strong>g<br />
formal approval of the private placement<br />
of shares to petronas and orient global<br />
and is <strong>in</strong> advanced discussions with its<br />
bankers to extend the credit available.<br />
with this strong base, the group has<br />
the capacity to drive forward the<br />
rajasthan development and provide<br />
f<strong>in</strong>ancial flexibility to pursue<br />
opportunities for growth.<br />
sir bill Gammell<br />
chief executive<br />
11 april 2008
Cambay Bas<strong>in</strong>, India<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 11
CAIRN INDIA<br />
is committed to cont<strong>in</strong>u<strong>in</strong>g<br />
<strong>in</strong>vestment <strong>in</strong> <strong>in</strong>dia and<br />
is very much focused on<br />
creat<strong>in</strong>g shareholder value<br />
by develop<strong>in</strong>g its world-class<br />
resource base <strong>in</strong> rajasthan.<br />
INDIAN HIGHLIGHTS<br />
• 14 blocks <strong>in</strong> India <strong>in</strong>clud<strong>in</strong>g two recently<br />
awarded Nelp VI blocks<br />
• Two produc<strong>in</strong>g blocks: Ravva and CB/OS-2<br />
• Operated Gross Production of 74,830 boepd<br />
(work<strong>in</strong>g 19,811 boepd)<br />
• 11 offshore platforms and two process<strong>in</strong>g facilities<br />
• Rajasthan block under development<br />
• 11 exploration blocks<br />
RAjASTHAN HIGHLIGHTS<br />
• World class oil discoveries <strong>in</strong> Rajasthan –<br />
first oil <strong>in</strong> 2009<br />
• 146 wells drilled<br />
• 24 discoveries to date<br />
• Four fields currently under development:<br />
Mangala, Aishwariya, Raageshwari<br />
and Saraswati<br />
• Resource base >3.75 billion boe <strong>in</strong> place<br />
• Target production ≥175,000 bopd<br />
12 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Cambay Bas<strong>in</strong>, India
<strong>Cairn</strong> <strong>in</strong>dia assets<br />
30%<br />
30%<br />
49%<br />
40%<br />
RJ-ON-90/1 (Rajasthan)<br />
Development Area<br />
Exploration<br />
rj-Onn-2003/1<br />
Cb-Onn-2002/1<br />
Gs-Osn-2003/1<br />
ambe<br />
kk-dWn-2004/1<br />
mUmBAI<br />
Cb-x<br />
jAIPUR<br />
GaurI<br />
GaurI<br />
lakshmI<br />
70%<br />
100%<br />
Gross Production Target: ≥175,000 bopd<br />
DELHI<br />
vn-Onn-2003/1<br />
Gv-Onn-97/1<br />
Gv-Onn-2003/1<br />
Gv-Onn-2002/1<br />
CB/OS-2 (Cambay Bas<strong>in</strong>)<br />
49%<br />
15%<br />
24%<br />
50%<br />
40%<br />
Oil & Gas produc<strong>in</strong>g<br />
Current Gross Production: 12,746 boepd<br />
Map Key<br />
Oil Production<br />
Gas Production<br />
ravva<br />
ravva<br />
kG-dWn-98/2<br />
kG-Onn-2003/1 49%<br />
pr-Osn-2004/1<br />
10%<br />
35%<br />
kATHmANDU<br />
PKGM-1 (Ravva)<br />
22.5%<br />
Oil & Gas produc<strong>in</strong>g<br />
Gross Production: 60,441 boepd<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 13
OPERATING AND EXPLORATION REVIEw<br />
Dr Mike Watts, Exploration & New Bus<strong>in</strong>ess Director<br />
Phil Tracy, Eng<strong>in</strong>eer<strong>in</strong>g & Operations Director<br />
25% <strong>in</strong>crease<br />
In manGala planned plateau<br />
prOduCtIOn tarGet tO 125,000 bOpd<br />
40,000 bopd<br />
peak prOduCtIOn In bhaGyam fdp<br />
eor Pilot<br />
start up In 2009<br />
14 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
GOOD PROGRESS IS BEING mADE ON THE CIVIL<br />
wORkS AND PROCESS FACILITIES CONSTRUCTION<br />
CONTRACTS which have been awarded for the<br />
rajasthan upstream project. all access roads<br />
to the four hundred acre site have been built<br />
and work on the civil works on the mangala<br />
term<strong>in</strong>al has started.<br />
rajasthan<br />
(block rj-On-90/1) (<strong>Cairn</strong> India 70%<br />
(Operator), OnGC 30%)<br />
development – upstream<br />
good progress is be<strong>in</strong>g made on the civil<br />
works and process facilities construction<br />
contracts which have been awarded for<br />
the rajasthan upstream project. all<br />
access roads to the 400-acre site have<br />
been built and work on the civil works<br />
on the mangala term<strong>in</strong>al has started.<br />
mangala will be brought on stream <strong>in</strong><br />
phases with production commenc<strong>in</strong>g <strong>in</strong><br />
h2 2009. the transportation of the crude<br />
will be via pipel<strong>in</strong>e to the coast for which<br />
the feed are complete. the long lead<br />
procurement process is under way and<br />
construction is due to commence <strong>in</strong><br />
h2 2008.<br />
the construction of two purpose-built<br />
rigs which will be used to drill the<br />
development wells is near<strong>in</strong>g completion<br />
and these rigs will be available <strong>in</strong> <strong>in</strong>dia <strong>in</strong><br />
the second half of the year.<br />
these state-of-the-art rigs will allow the<br />
drill<strong>in</strong>g and complet<strong>in</strong>g of the mangala<br />
wells (some of which will be horizontal),<br />
which cairn <strong>in</strong>dia <strong>in</strong>tends to use to<br />
deliver the first phase of production<br />
from the rajasthan fields.<br />
a 120 km 2 high def<strong>in</strong>ition 3d seismic<br />
survey was completed over the mangala<br />
field and process<strong>in</strong>g of the data is<br />
expected to be complete dur<strong>in</strong>g 2008.<br />
this data will be used for more detailed<br />
reservoir characterisation for<br />
development drill<strong>in</strong>g and for the<br />
application of future time lapse<br />
monitor<strong>in</strong>g techniques.<br />
an upgrade of the mangala stoiip<br />
and reserves and resources has been<br />
submitted to the jv partners and the<br />
goi. the <strong>in</strong>crease <strong>in</strong> the 2p stoiip and 2p<br />
reserves and resources is 21% and 29%<br />
respectively over the orig<strong>in</strong>al fdp. this<br />
represents an <strong>in</strong>crease of 8% and 11%<br />
over the figures provided at the time of<br />
the ipo of the <strong>in</strong>dian bus<strong>in</strong>ess.<br />
Gross stOIIp 2p Gross reserves/ 2p net reserves/<br />
2C resources resources<br />
(mmboe) <strong>Cairn</strong> d&m <strong>Cairn</strong> d&m <strong>Cairn</strong> d&m<br />
rajasthan mba fields<br />
rajasthan mba eor<br />
rj small fields: saraswati<br />
2,054 2,118<br />
685<br />
308<br />
701<br />
308<br />
479<br />
216<br />
491<br />
216<br />
& raageshwari oil/gas 300 144 12 39 9 27<br />
rj other fields 1,397 1,216 72 54 51 38<br />
Total 3,751 3,478 1,077 1,102 755 772<br />
notes:<br />
1. cairn holds a 70% net work<strong>in</strong>g <strong>in</strong>terest <strong>in</strong> rj-on-90/1.<br />
2. the gross proven plus probable and possible (3p) <strong>in</strong>itially <strong>in</strong> place cairn estimate for mangala<br />
is approximately 1,600 mmboe <strong>in</strong>dicat<strong>in</strong>g the potential for further volumetric upside.<br />
3. 2p reserves <strong>in</strong>clude estimates of expected production dur<strong>in</strong>g the current production shar<strong>in</strong>g<br />
contract (psc) term (14 may 2020 for rajasthan). 2c resources are those volumes expected to<br />
be produced outside the current psc term (end of field life) or where development plann<strong>in</strong>g or<br />
approval is pend<strong>in</strong>g.<br />
4. these are current estimates which have not been booked. for booked net entitlement reserves<br />
please see the entitlement reserves section on page 129.
Rajasthan, India<br />
the <strong>in</strong>creased resource <strong>in</strong> the mangala<br />
field provides a commensurate <strong>in</strong>crease<br />
<strong>in</strong> the production potential of the<br />
mangala field. the mangala field is<br />
capable of produc<strong>in</strong>g at plateau rates<br />
of up to 125,000 bopd. this represents<br />
an <strong>in</strong>crease of up to 25% on the mangala<br />
production rate conta<strong>in</strong>ed <strong>in</strong> the orig<strong>in</strong>al<br />
fdp submitted <strong>in</strong> 2005.<br />
the fdp for bhagyam, the second<br />
largest field <strong>in</strong> the block, is pend<strong>in</strong>g f<strong>in</strong>al<br />
approval on the basis of a planned<br />
plateau production rate of 40,000 bopd.<br />
the bhagyam and shakti fields are<br />
conta<strong>in</strong>ed with<strong>in</strong> a second development<br />
area of 430 km 2 .<br />
the aishwariya fdp, which has already<br />
received government of <strong>in</strong>dia (goi)<br />
approval, has a planned plateau<br />
production rate of 10,000 bopd. an<br />
upgrade of the aishwariya 2p stoiip has<br />
been submitted to the jv partners and<br />
the goi <strong>in</strong> january 2008. this represents<br />
an <strong>in</strong>crease of 37% and 17% over the<br />
figures provided at the time of the fdp<br />
and ipo respectively. it is expected that<br />
this upgrade <strong>in</strong> stoiip will also result <strong>in</strong> a<br />
commensurate <strong>in</strong>crease <strong>in</strong> the field<br />
reserves.<br />
enhanced Oil recovery (eOr)<br />
cairn is currently study<strong>in</strong>g the staged<br />
and early application of aqueous-based<br />
chemical flood<strong>in</strong>g eor techniques for<br />
the mba fields. early application of<br />
eor <strong>in</strong> these fields would be designed<br />
to extend their crude oil production<br />
plateau periods, reduce water<br />
production, mitigate future decl<strong>in</strong>e<br />
rates and potentially accelerate crude<br />
oil production.<br />
the first phase of laboratory studies for<br />
the mangala field was successfully<br />
concluded <strong>in</strong> january <strong>2007</strong>. the<br />
coreflood data has been successfully<br />
matched <strong>in</strong> a reservoir simulator allow<strong>in</strong>g<br />
full field simulation of polymer and<br />
alkal<strong>in</strong>e-surfactant-polymer (asp)<br />
flood<strong>in</strong>g. a pilot for polymer and asp<br />
flood<strong>in</strong>g for the mangala field has also<br />
been conceptualised and approvals will<br />
be sought <strong>in</strong> 2008 from the jv partners<br />
and the goi to commence the pilot<br />
follow<strong>in</strong>g commencement of production<br />
from the field <strong>in</strong> 2009.<br />
the current assessment of the eor<br />
resource base is more than 300 mmbbls<br />
of <strong>in</strong>cremental recoverable oil from<br />
mangala, bhagyam and aishwariya.<br />
if the mangala field pilot is successful<br />
it is envisaged that eor could be<br />
<strong>in</strong>troduced at a field scale <strong>in</strong> rajasthan<br />
<strong>in</strong> 2013 or even earlier, commenc<strong>in</strong>g <strong>in</strong><br />
mangala and that an <strong>in</strong>crease <strong>in</strong> plateau<br />
offtake will be considered on a field by<br />
field basis.<br />
the first phase of laboratory work for the<br />
bhagyam field has also been successfully<br />
completed.<br />
the second phase of laboratory work<br />
for the mangala field has commenced;<br />
this is designed to confirm and ref<strong>in</strong>e<br />
chemical selection for the pilot project.<br />
nOrthern appraIsal area<br />
(<strong>Cairn</strong> India 100%)<br />
a declaration of commerciality (doc) for<br />
the three discoveries made <strong>in</strong> this area<br />
(kameshwari west 2, 3 and 6) has been<br />
approved by the jv partners, along with<br />
a proposed new development area of<br />
1,178 km 2 . the doc is now await<strong>in</strong>g<br />
approval from the goi.<br />
these three discoveries have opened up<br />
a new play <strong>in</strong> the barmer hill/lower<br />
dharvi dungar sands on the western<br />
marg<strong>in</strong> of the rajasthan bas<strong>in</strong>.<br />
development – midstream<br />
work on the midstream is progress<strong>in</strong>g<br />
well with key orders placed.<br />
the contracts to ensure timely<br />
construction of the pipel<strong>in</strong>e <strong>in</strong> 2009 have<br />
been placed. the contracts for the l<strong>in</strong>e<br />
pipe, with tracer tube and <strong>in</strong>sulation and<br />
for the sk<strong>in</strong> effect heat management<br />
system have been awarded. the orders<br />
for gas eng<strong>in</strong>es for the heat<strong>in</strong>g stations,<br />
export pumps and drivers and ma<strong>in</strong><br />
block valves have also been awarded.<br />
the eng<strong>in</strong>eer<strong>in</strong>g procurement contract<br />
(epc) for the pipel<strong>in</strong>e has been issued,<br />
as has the epc for land development of<br />
the viramgam term<strong>in</strong>al. site preparation<br />
work commenced at the viramgam<br />
term<strong>in</strong>al site <strong>in</strong> mid february 2008.<br />
the process of obta<strong>in</strong><strong>in</strong>g access to the<br />
land on which the pipel<strong>in</strong>e will be built is<br />
well advanced under the rou process <strong>in</strong><br />
gujarat and rajasthan.<br />
the land for all eight heat<strong>in</strong>g stations <strong>in</strong><br />
rajasthan and ten stations <strong>in</strong> gujarat<br />
along the route of the pipel<strong>in</strong>e has been<br />
purchased, as well as land for the<br />
viramgam term<strong>in</strong>al.<br />
discussions are ongo<strong>in</strong>g with the goi<br />
regard<strong>in</strong>g the potential <strong>in</strong>clusion of the<br />
midstream <strong>in</strong>frastructure with<strong>in</strong> the fdp<br />
for cost recovery purposes.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 15
operat<strong>in</strong>g and exploration review<br />
cont<strong>in</strong>ued<br />
major Contracts<br />
awarded for:<br />
– pIpelIne<br />
– enGIneerInG prOCurement<br />
COntraCt<br />
– heat manaGement system<br />
Construction of<br />
heat<strong>in</strong>g station<br />
sites underway<br />
Pipel<strong>in</strong>e<br />
construction<br />
scheduled to<br />
commence <strong>in</strong><br />
h2 2008<br />
16 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
explOratIOn OvervIeW<br />
rajasthan and other assets<br />
exploration and appraisal activity <strong>in</strong><br />
<strong>2007</strong> <strong>in</strong>cluded the drill<strong>in</strong>g of 13 wells<br />
and acquisition of 1,345 km 2 3d and<br />
588 km 2d seismic data. prelim<strong>in</strong>ary<br />
estimates of successful 2p reserve and<br />
resource additions are 6.9 mmboe on<br />
a work<strong>in</strong>g <strong>in</strong>terest basis and represent<br />
approximately 101% of <strong>2007</strong> work<strong>in</strong>g<br />
<strong>in</strong>terest production. constant<br />
re-evaluation of cairn <strong>in</strong>dia’s prospects<br />
and leads portfolio, plus the addition<br />
of nelp vi blocks, pr-osn-2004/1<br />
and kk-dwn-2004/1, has resulted<br />
<strong>in</strong> a cumulative unrisked prospective<br />
resource of 1,033 mmboe, exclud<strong>in</strong>g<br />
the prospects drilled <strong>in</strong> <strong>2007</strong>.<br />
oil and gas discoveries were made <strong>in</strong><br />
the northern appraisal area (naa) <strong>in</strong><br />
rajasthan and <strong>in</strong> both the ravva and<br />
lakshmi fields.<br />
the 2008 exploration programme<br />
<strong>in</strong>cludes the drill<strong>in</strong>g of 15 wells, seven<br />
of which will be operated by cairn <strong>in</strong>dia,<br />
and the acquisition of three onshore<br />
2d seismic surveys, a 200 km 2 onshore<br />
3d survey and two offshore 2d surveys<br />
compris<strong>in</strong>g 6,150 km, all but one of<br />
which will be operated by cairn <strong>in</strong>dia.<br />
the 2008 seismic acquisition will position<br />
cairn <strong>in</strong>dia for an extensive drill<strong>in</strong>g<br />
programme <strong>in</strong> 2009.<br />
five wells are expected to be drilled <strong>in</strong><br />
rj-on-90/1 from the third quarter of<br />
2008, <strong>in</strong>clud<strong>in</strong>g appraisal of the 2003<br />
kameshwari discovery and drill<strong>in</strong>g of<br />
under-explored plays with<strong>in</strong> the bas<strong>in</strong>.<br />
an important well <strong>in</strong> gv-onn-2002/1,<br />
<strong>in</strong> the state of bihar, will test the potential<br />
of this part of the frontier ganga bas<strong>in</strong>.<br />
cairn <strong>in</strong>dia cont<strong>in</strong>ues to <strong>in</strong>vest a<br />
substantial amount of effort <strong>in</strong>to new<br />
exploration ventures.<br />
Detail head<strong>in</strong>g here<br />
relore m<strong>in</strong> ullum ilit, quis adiam num num ncil irit<br />
vel ut dipit ut nibh ercidui bla aliquis c<strong>in</strong>cipis<br />
augait dit velesenis<br />
Cambay Bas<strong>in</strong>, India<br />
two bid applications for blocks <strong>in</strong> the<br />
sri lanka bid round have been<br />
submitted. the company is also actively<br />
evaluat<strong>in</strong>g the blocks available <strong>in</strong> <strong>in</strong>dia<br />
as part of the nelp vii round, which is<br />
expected to close <strong>in</strong> april 2008.<br />
Cambay Bas<strong>in</strong> – Western <strong>in</strong>dia<br />
block Cb/Os-2<br />
(<strong>Cairn</strong> India 40% (Operator))<br />
<strong>in</strong> the cb/os-2 block the lakshmi,<br />
gauri and cb-x fields are primarily<br />
gas produc<strong>in</strong>g, averag<strong>in</strong>g a comb<strong>in</strong>ed<br />
50.0 million standard cubic feet of<br />
gas per day (mmscfd) sales rate.<br />
oil/condensate production averaged<br />
4,407 bopd dur<strong>in</strong>g <strong>2007</strong> – this comb<strong>in</strong>es<br />
to total average field production of<br />
12,746 boepd. cb/os-2 oil production<br />
reached a daily record of more than<br />
10,000 bopd gross <strong>in</strong> february 2008.<br />
<strong>in</strong> september <strong>2007</strong>, a drill<strong>in</strong>g campaign<br />
began <strong>in</strong> cb/os-2 with four wells<br />
successfully drilled and completed as<br />
part of the further development of the<br />
lakshmi and gauri fields. by february<br />
2008, all of these wells have been placed<br />
on production. three well workovers<br />
aimed at restor<strong>in</strong>g production <strong>in</strong> wells<br />
with mechanical problems or allow<strong>in</strong>g<br />
access to other hydrocarbon pools were<br />
also successfully completed.<br />
the oil potential of the lakshmi and<br />
gauri fields was recognised dur<strong>in</strong>g their<br />
appraisal and earlier development<br />
phases, with several wells encounter<strong>in</strong>g<br />
and test<strong>in</strong>g oil columns. an appraisal<br />
well la east south-1 was drilled.<br />
the well, which <strong>in</strong>tersected waterbear<strong>in</strong>g<br />
sands with traces of oil,<br />
was plugged and abandoned.<br />
Cb-Onn-2002/1<br />
(<strong>Cairn</strong> India 30% (OnGC Operator))<br />
a three-well drill<strong>in</strong>g programme is<br />
expected to commence <strong>in</strong> 2008.
Detail head<strong>in</strong>g here<br />
relore m<strong>in</strong> ullum ilit, quis adiam num num ncil irit vel<br />
ut dipit ut nibh ercidui bla aliquis c<strong>in</strong>cipis augait dit<br />
velesenis<br />
Cambay Bas<strong>in</strong>, India<br />
krishna-godavari Bas<strong>in</strong><br />
– eastern <strong>in</strong>dia<br />
ravva (<strong>Cairn</strong> India 22.5% (Operator))<br />
average gross production from the<br />
ravva field for <strong>2007</strong> was 60,441 boepd<br />
(compris<strong>in</strong>g average oil production of<br />
48,078 bopd and average gas<br />
production of 74.18 mmscfd).<br />
the ravva field now has a history of<br />
production of more than 14 years.<br />
an <strong>in</strong>fill drill<strong>in</strong>g campaign commenced<br />
<strong>in</strong> the field <strong>in</strong> october 2006, which was<br />
aimed at extend<strong>in</strong>g the plateau and<br />
add<strong>in</strong>g reserves. the ravva field has<br />
been produc<strong>in</strong>g at its plateau rate of<br />
approximately 50,000 bopd for eight<br />
years and it is anticipated that the <strong>in</strong>fill<br />
development will help to ma<strong>in</strong>ta<strong>in</strong> the<br />
plateau and/or m<strong>in</strong>imise decl<strong>in</strong>e. the<br />
recent <strong>in</strong>fill campaign, <strong>in</strong> which four new<br />
producers and three new <strong>in</strong>jectors have<br />
been drilled, has been successful <strong>in</strong><br />
meet<strong>in</strong>g the desired objectives.<br />
production has now commenced<br />
from the four new <strong>in</strong>fill wells. <strong>in</strong> addition,<br />
two water <strong>in</strong>jection wells have been put<br />
<strong>in</strong>to service to enhance the reservoir<br />
water-flood scheme, while the third is<br />
planned to start <strong>in</strong>jection <strong>in</strong> march<br />
2008. two well workovers were also<br />
completed.<br />
based on the results of three<br />
exploration/appraisal wells, two<br />
discovery notifications were issued<br />
to the goi. the first well, rx-10,<br />
encountered gas but <strong>in</strong> sub-commerical<br />
quantities. the rx-8 exploration well<br />
found oil and gas <strong>in</strong> four miocene<br />
reservoirs. the total hydrocarbonbear<strong>in</strong>g<br />
sands <strong>in</strong>tersected <strong>in</strong> four pay<br />
zones extend to 44 metres net. a further<br />
well, rb-4, was drilled to appraise the<br />
extent of this discovery and a series of<br />
th<strong>in</strong> sands were completed <strong>in</strong> this well<br />
for future production.<br />
kG-Onn-2003/1<br />
(<strong>Cairn</strong> India 49%<br />
(Operator – exploration phase))<br />
the acquisition of a 500 km 2d seismic<br />
programme commenced <strong>in</strong> january<br />
2008 to be followed by the acquisition<br />
of a 200 km 2 3d programme. plann<strong>in</strong>g<br />
has commenced <strong>in</strong> support of drill<strong>in</strong>g<br />
between three and five exploration<br />
wells from the beg<strong>in</strong>n<strong>in</strong>g of 2009.<br />
kG-dWn-98/2<br />
(<strong>Cairn</strong> India 10% (OnGC Operator))<br />
the jv has approved a three-well<br />
appraisal programme for 2008, together<br />
with additional 3d seismic acquisition.<br />
discussions with the goi cont<strong>in</strong>ue with<br />
respect to approval of an appraisal<br />
period under the psc for appraisal of the<br />
discoveries made <strong>in</strong> the block to date.<br />
pr-Osn-2004/1<br />
(<strong>Cairn</strong> India 35% (Operator))<br />
the acquisition of an offshore 3,100 km<br />
2d seismic programme commenced <strong>in</strong><br />
march 2008.<br />
ganga Bas<strong>in</strong> – northern <strong>in</strong>dia<br />
Gv-Onn-2002/1<br />
(<strong>Cairn</strong> India 50% (Operator),<br />
Capricorn 50%)<br />
an exploration well on this psc will be<br />
drilled <strong>in</strong> 2009. full environmental<br />
approvals are expected shortly and<br />
site construction is expected to be<br />
completed early <strong>in</strong> the third<br />
quarter 2008.<br />
Gv-Onn-97/1<br />
(<strong>Cairn</strong> India 15%, Capricorn 15%<br />
(OnGC Operator))<br />
a well, banda-1, was spudded at the<br />
end of <strong>2007</strong> and was still operat<strong>in</strong>g at<br />
31 march 2008.<br />
Gv-Onn-2003/1<br />
(<strong>Cairn</strong> India 24% (Operator – exploration<br />
phase), Capricorn 25%)<br />
the acquisition of a 550 km 2d seismic<br />
programme is expected to commence<br />
<strong>in</strong> 2008.<br />
rest of <strong>in</strong>dia<br />
vn-Onn-2003/1 (<strong>Cairn</strong> India 49%<br />
(Operator – exploration phase))<br />
the acquisition of a 500 km 2d seismic<br />
programme is expected to commence<br />
<strong>in</strong> 2008.<br />
rj-Onn-2003/1<br />
(<strong>Cairn</strong> India 30% (enI Operator))<br />
at least one well is expected to be<br />
drilled <strong>in</strong> 2008.<br />
kk-dWn-2004/1<br />
(<strong>Cairn</strong> India 40% (OnGC Operator))<br />
a 3,500 km 2d seismic programme is<br />
expected to be acquired <strong>in</strong> 2008.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 17
CAPRICORN ASSETS<br />
after the IpO of <strong>Cairn</strong> India,<br />
the production asset of sangu <strong>in</strong><br />
bangladesh was reta<strong>in</strong>ed with<strong>in</strong><br />
Capricorn together with exploration<br />
acreage <strong>in</strong> bangladesh, nepal,<br />
India and papua new Gu<strong>in</strong>ea.<br />
through the acquisition of plectrum<br />
and medoil <strong>in</strong> <strong>2007</strong>, capricorn added<br />
exploration assets <strong>in</strong> tunisia and, <strong>in</strong><br />
addition, further assets <strong>in</strong> peru, albania,<br />
australia and the uk (west of shetland).<br />
<strong>in</strong> january 2008, capricorn announced<br />
that it had acquired operatorship of four<br />
hydrocarbon licences for offshore west<br />
greenland and <strong>in</strong>terests <strong>in</strong> a further two<br />
blocks operated by encana. further<br />
licenc<strong>in</strong>g awards are pend<strong>in</strong>g <strong>in</strong> spa<strong>in</strong><br />
and sicily.<br />
18 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
peru<br />
Greenland<br />
Offshore exploration acreage<br />
Disko West Licens<strong>in</strong>g Round<br />
1. Exclusive Licence 2008/10 (Sigguk) 87.5%<br />
2. Exclusive Licence 2008/11 (Eqqua) 87.5%<br />
Open door area<br />
3. Exclusive Licence 2008/13 (Saqqamuit) 92%<br />
4. Exclusive Licence 2008/14 (K<strong>in</strong>gittoq) 92%<br />
West Greenland<br />
5. Exclusive Licence 2002/15 (Atammik) 40%<br />
6. Exclusive Licence 2005/06 (Lady Frankl<strong>in</strong>) 40%<br />
1<br />
2<br />
6<br />
5<br />
4<br />
3<br />
Block Z-34 50%
uk (West Of shetland)<br />
Block 214/19 100%<br />
Block 214/20 100%<br />
tunIsIa<br />
spaIn<br />
Offshore exploration acreage<br />
Licence applications submitted<br />
sICIly<br />
albanIa<br />
Licence applications submitted<br />
1. Nabeul Permit 50%<br />
2. Louza Permit 100%<br />
Offshore exploration acreage<br />
banGladesh<br />
papua neW GuInea<br />
nepal<br />
Block Joni-5 100%<br />
1<br />
2<br />
Currently <strong>in</strong> force majeure<br />
Blocks 1 & 2 100%<br />
Blocks 4, 6 & 7 100%<br />
Blocks 3 & 5**<br />
**await<strong>in</strong>g government approval<br />
100%<br />
Offshore gas and condensate production<br />
Onshore and offshore exploration<br />
Gross Production: 82.9mmscfd<br />
Block 5* 45%<br />
Block 7 45%<br />
Block 10* 45%<br />
Block 16 - Development Area 37.5%<br />
Block 16 - Exploration<br />
*see note <strong>in</strong> Pr<strong>in</strong>cipal Licence Interests page 71<br />
37.5%<br />
10*<br />
5*<br />
7<br />
manpura<br />
haIta<br />
Block PRL-1 12.73%<br />
australIa<br />
1 2 3* 4 5* 6 7<br />
nOrthern IndIa<br />
Block GV-ONN-97/1 15%<br />
Block GV-ONN-2002/1 50%<br />
Block GV-ONN-2003/1 25%<br />
16<br />
maGnama<br />
sanGu<br />
Exploration Permit WA-379-P 100%<br />
Exploration Permit WA-380-P 100%<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 19
CAPRICORN<br />
seeks to discover hidden value<br />
through entrepreneurial<br />
exploration and establish<strong>in</strong>g<br />
strategic positions <strong>in</strong><br />
frontier locations with<br />
high potential.<br />
<strong>in</strong> addition to its positions <strong>in</strong> bangladesh<br />
and nepal, the ma<strong>in</strong> strategic objective<br />
for capricorn <strong>in</strong> <strong>2007</strong> was to secure new<br />
acreage opportunities offer<strong>in</strong>g longterm<br />
organic growth potential. the<br />
successful implementation of this<br />
strategy is evidenced by the entry <strong>in</strong>to<br />
tunisia, as a result of the corporate<br />
takeovers of plectrum and medoil,<br />
and the acquisition of new acreage <strong>in</strong><br />
greenland. capricorn cont<strong>in</strong>ues to<br />
evaluate further potential growth<br />
opportunities.<br />
capricorn now has assets <strong>in</strong> south asia<br />
(northern <strong>in</strong>dia, bangladesh and nepal),<br />
the mediterranean (tunisia, albania and,<br />
pend<strong>in</strong>g licence awards, <strong>in</strong> spa<strong>in</strong> and<br />
sicily), peru, papua new gu<strong>in</strong>ea and<br />
greenland. as a result of an ongo<strong>in</strong>g<br />
rationalisation programme, the<br />
exploration <strong>in</strong>terests <strong>in</strong>herited from<br />
plectrum <strong>in</strong> australia (bremer bas<strong>in</strong>)<br />
and <strong>in</strong> the uk (west of the shetlands)<br />
are considered to be non-core assets.<br />
20 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Bangladesh<br />
production and development<br />
an offshore drill<strong>in</strong>g campaign <strong>in</strong> block 16<br />
commenced <strong>in</strong> january <strong>2007</strong> dur<strong>in</strong>g<br />
which two wells (south sangu-3 and<br />
sangu-10) were drilled. the appraisal<br />
well, south sangu-3, was drilled to<br />
evaluate the earlier south sangu<br />
discovery and encountered subcommercial<br />
quantities of gas.<br />
the development well, sangu-10,<br />
was drilled as an extended reach<br />
del<strong>in</strong>eation well <strong>in</strong> the ma<strong>in</strong> sangu field<br />
and encountered gas <strong>in</strong> new sand above<br />
the ma<strong>in</strong> produc<strong>in</strong>g <strong>in</strong>tervals conta<strong>in</strong>ed<br />
<strong>in</strong> what is considered to be a small,<br />
isolated gas-bear<strong>in</strong>g reservoir.<br />
production from the sangu field is<br />
decl<strong>in</strong><strong>in</strong>g and efforts are be<strong>in</strong>g focused<br />
on extend<strong>in</strong>g the economic life of the<br />
field. the separate shallower reservoir <strong>in</strong><br />
sangu-10 was brought on production <strong>in</strong><br />
march 2008 as part of an ongo<strong>in</strong>g well<br />
<strong>in</strong>tervention programme at an <strong>in</strong>itial rate<br />
of 20 mmscfd.<br />
exploration<br />
a two-well exploration drill<strong>in</strong>g<br />
programme over the <strong>2007</strong>/08 w<strong>in</strong>ter has<br />
resulted <strong>in</strong> a gas discovery <strong>in</strong> normallypressured<br />
reservoirs <strong>in</strong> the magnama 1<br />
well, while gas shows were encountered<br />
<strong>in</strong> the hatia 1 well. further appraisal work<br />
will be required over magnama before<br />
commerciality can be established and<br />
consideration is be<strong>in</strong>g given to<br />
evaluat<strong>in</strong>g the updip potential at hatia.<br />
greenland<br />
capricorn announced on 10 january<br />
2008 that it has an <strong>in</strong>terest <strong>in</strong> six<br />
hydrocarbon licences offshore of<br />
west greenland, hav<strong>in</strong>g recently been<br />
awarded four blocks and acquired an<br />
<strong>in</strong>terest <strong>in</strong> a further two blocks <strong>in</strong> a<br />
transaction with encana corporation.<br />
the six exploration blocks cover a<br />
comb<strong>in</strong>ed total area of approximately<br />
52,000 km 2 . capricorn’s <strong>in</strong>terests are<br />
as follows:<br />
• an 87.5% operated <strong>in</strong>terest <strong>in</strong> two<br />
blocks (sigguk and eqqua) awarded<br />
<strong>in</strong> the disko west licenc<strong>in</strong>g round;<br />
• a 92% operated <strong>in</strong>terest <strong>in</strong> two<br />
blocks (saqqamiut and k<strong>in</strong>gittoq)<br />
awarded <strong>in</strong> the open door area; and<br />
• a 40% non-operated <strong>in</strong>terest <strong>in</strong> two<br />
blocks (atammik and lady frankl<strong>in</strong>)<br />
acquired from encana.<br />
it is the <strong>in</strong>tention to acquire 8,000 km<br />
of 2d seismic over the operated blocks<br />
<strong>in</strong> 2008/09. an electromagnetic survey<br />
is be<strong>in</strong>g planned over the atammik and<br />
lady frankl<strong>in</strong> blocks dur<strong>in</strong>g 2008 by<br />
encana, the operator.<br />
<strong>in</strong> l<strong>in</strong>e with its licence agreements,<br />
capricorn is work<strong>in</strong>g with the national<br />
oil company, nunaoil a/s and the<br />
greenlandic and danish authorities<br />
to ensure compliance with the<br />
environmental regulations and<br />
procedures cover<strong>in</strong>g exploration<br />
activities offshore of greenland.
nePal<br />
the security situation <strong>in</strong> nepal cont<strong>in</strong>ues<br />
to be monitored closely. contractual<br />
force majeure rema<strong>in</strong>s <strong>in</strong> place <strong>in</strong><br />
capricorn’s acreage <strong>in</strong> nepal preclud<strong>in</strong>g<br />
new seismic acquisition. as soon as the<br />
security situation permits, f<strong>in</strong>al plann<strong>in</strong>g<br />
for seismic field operations will<br />
recommence.<br />
tUnisia<br />
the key objective of the plectrum and<br />
medoil acquisitions was to acquire a<br />
material acreage position <strong>in</strong> tunisia and<br />
capricorn now has a 50% <strong>in</strong>terest <strong>in</strong> the<br />
nabeul permit and a 100% <strong>in</strong>terest <strong>in</strong> the<br />
louza permit, both of which are<br />
operated by capricorn and are located<br />
offshore of tunisia. it is currently planned<br />
to drill two to four exploration wells <strong>in</strong><br />
tunisia between q4 2008 and q4 2009<br />
with first activity commenc<strong>in</strong>g on the<br />
louza permit.<br />
other assets<br />
seismic surveys are be<strong>in</strong>g planned for<br />
offshore blocks <strong>in</strong> albania and peru for<br />
2008/09. licence applications have<br />
been made <strong>in</strong> sicily and spa<strong>in</strong>. blocks <strong>in</strong><br />
the bremer bas<strong>in</strong> (australia) and west<br />
of the shetlands are considered<br />
non-core assets.<br />
talisman, the operator for block prl-1 <strong>in</strong><br />
papua new gu<strong>in</strong>ea, is seek<strong>in</strong>g a licence<br />
extension and, if that is granted by the<br />
government, is plann<strong>in</strong>g to acquire a<br />
3d seismic survey <strong>in</strong> 2009 over the<br />
pandora gas field and other prospects.<br />
Qaqortoq, Greenland<br />
Cambay Bas<strong>in</strong>, India<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 21
operat<strong>in</strong>g and exploration review<br />
cont<strong>in</strong>ued<br />
group production<br />
and reserves<br />
Hatia, Bangladesh<br />
Hatia, Bangladesh<br />
22 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
production (boepd) ravva Cb/Os-2 sangu total<br />
gross field 60,441 12,746 13,844 87,031<br />
work<strong>in</strong>g <strong>in</strong>terest 13,599 5,098 9,765 28,462<br />
entitlement <strong>in</strong>terest 7,124 4,878 7,807 19,809<br />
GrOup prOduCtIOn<br />
the group’s entitlement production for<br />
<strong>2007</strong> was 19,809 boepd net to cairn,<br />
compared to 24,523 boepd <strong>in</strong> 2006.<br />
cairn’s current entitlement <strong>in</strong>terest<br />
production is 63% gas, 37% oil.<br />
the average price per boe realised <strong>in</strong><br />
<strong>2007</strong> was $39.70, compared with<br />
$31.84 <strong>in</strong> 2006. the average price<br />
realised by cairn <strong>in</strong>dia for oil was<br />
$73.56/bbl (2006: $66.32/bbl) and that<br />
for gas was $23.39/boe (2006: $21.03/<br />
boe). the average realised price for<br />
gas <strong>in</strong> capricorn was $17.60/boe<br />
(2006: $17.59/boe).<br />
on commencement of oil production<br />
from rajasthan, the vast majority of<br />
group production will be oil and, as a<br />
consequence, the group will become<br />
much more highly geared to prevail<strong>in</strong>g<br />
oil prices.<br />
Group entitlement reserves<br />
the table above shows reserves<br />
<strong>in</strong>formation at the end of <strong>2007</strong> on an<br />
entitlement basis for the group<br />
(<strong>in</strong>clud<strong>in</strong>g 100% of cairn <strong>in</strong>dia reserves).<br />
for account<strong>in</strong>g and reserves purposes,<br />
the group has used an oil price of $60<br />
per bbl (real) (2006: $30 per bbl (real)).<br />
reserves produced additions revisions reserves<br />
31.12.06 <strong>in</strong> <strong>2007</strong> <strong>in</strong> <strong>2007</strong> <strong>in</strong> <strong>2007</strong> 31.12.07<br />
mmboe mmboe mmboe mmboe mmboe<br />
<strong>in</strong>dia 185.7 (4.4) 1.5 * (13.4) 169.4<br />
bangladesh 10.3 (2.8) – ** (6.7) 0.8<br />
Total 196.0 (7.2) 1.5 (20.1) 170.2<br />
* the revision is made up of an <strong>in</strong>crease of 29.2 mmboe (primarily mangala gross reserves revision)<br />
offset by a decrease of 42.6 mmboe (due solely to the <strong>in</strong>crease <strong>in</strong> the oil price assumption from<br />
$30/bbl to $60/bbl).<br />
** the downward revision <strong>in</strong>cludes a write-down of sangu reserves of 3.5 mmboe and the sale of<br />
50% of our share of sangu to santos amount<strong>in</strong>g to 3.2 mmboe.<br />
on a direct work<strong>in</strong>g <strong>in</strong>terest basis,<br />
booked reserves as at 31 december<br />
<strong>2007</strong> totalled 255.3 mmboe (2006: 230.5<br />
mmboe), compris<strong>in</strong>g 254.3 mmboe <strong>in</strong><br />
<strong>in</strong>dia and 1.0 mmboe <strong>in</strong> bangladesh.<br />
India reserves<br />
the net entitlement 2p reserves for<br />
mangala, saraswati and raageshwari<br />
were booked <strong>in</strong> 2005 follow<strong>in</strong>g the<br />
approval by the goi of the fdps.<br />
s<strong>in</strong>ce submission of the orig<strong>in</strong>al mangala<br />
fdp, two additional wells have been<br />
drilled and extensive reservoir studies<br />
completed. dur<strong>in</strong>g <strong>2007</strong>, the stoiip<br />
volumes <strong>in</strong> mangala and aishwariya have<br />
been updated based on the results of<br />
remapp<strong>in</strong>g, more accurate water<br />
saturation determ<strong>in</strong>ation and a<br />
comprehensive petrophysical review.<br />
eor studies establish<strong>in</strong>g its feasibility to<br />
augment secondary recovery have also<br />
been undertaken. a reserves report was<br />
submitted to the goi <strong>in</strong> december <strong>2007</strong><br />
with the higher stoiip estimate of just<br />
under 1.3 billion boe and recommend<strong>in</strong>g<br />
an <strong>in</strong>crease <strong>in</strong> the mangala field plateau<br />
production rate to 125,000 bopd and<br />
implementation of an eor pilot.<br />
the proposed development sequence<br />
for the rajasthan northern fields rema<strong>in</strong>s<br />
mangala, bhagyam and aishwariya.<br />
the bhagyam fdp was submitted to<br />
the jv and the goi <strong>in</strong> may <strong>2007</strong>. as at<br />
the <strong>2007</strong> year end, the goi approval<br />
for bhagyam was outstand<strong>in</strong>g and the<br />
associated reserves were therefore not<br />
booked. fdps for other fields <strong>in</strong>clud<strong>in</strong>g<br />
shakti and guda are currently <strong>in</strong><br />
preparation.
angladesh reserves<br />
sangu gross 2p rema<strong>in</strong><strong>in</strong>g reserves have<br />
been reduced by 70.1 billion standard<br />
cubic feet of gas (bscf) to 15.6 bscf.<br />
this reduction is attributable to the<br />
disappo<strong>in</strong>t<strong>in</strong>g results from the sangu-10<br />
<strong>in</strong>fill development well drilled <strong>in</strong> <strong>2007</strong>,<br />
despite gas be<strong>in</strong>g found <strong>in</strong> a shallower<br />
reservoir and poorer than predicted<br />
performance from exist<strong>in</strong>g production<br />
wells. well <strong>in</strong>tervention work has been<br />
completed dur<strong>in</strong>g q1 2008 as a result<br />
of which production has been recovered<br />
to 75 mmscfd thus ameliorat<strong>in</strong>g the<br />
production decl<strong>in</strong>e. sangu net<br />
entitlement 2p reserves are now<br />
0.8 mmboe, which represents less than<br />
0.5% of total booked group reserves.<br />
dr mike Watts<br />
exploration & new bus<strong>in</strong>ess director<br />
11 april 2008<br />
phil tracy<br />
eng<strong>in</strong>eer<strong>in</strong>g & operations director<br />
11 april 2008<br />
Cambay Bas<strong>in</strong>, India<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 23
CORPORATE RESPONSIBILITY<br />
OUR <strong>2007</strong> HIGHLIGHTS<br />
• ImplementatIon of new CR<br />
management system<br />
• InteRnatIonal fInanCe CoRpoRatIon<br />
(ifc) – cairn <strong>in</strong>dia l<strong>in</strong>kage programme<br />
launched <strong>in</strong> barmer<br />
• 9 yeaRs wIthout a lost tIme InCIdent<br />
(lti) at sangu<br />
• Iso14001 CeRtIfICatIon maIntaIned at<br />
all produc<strong>in</strong>g sites<br />
• new stRategIC allIanCe agReement<br />
with heriot watt university<br />
• ltIfR and tRIf down aCRoss the busIness<br />
Corporate responsibility – What does<br />
it mean to <strong>Cairn</strong>?<br />
for cairn, <strong>2007</strong> was a period of major<br />
transformation through which we have<br />
rema<strong>in</strong>ed as committed as ever to our<br />
corporate responsibility (cr) guid<strong>in</strong>g<br />
pr<strong>in</strong>ciples. we aim to make a positive<br />
difference wherever we work. cairn<br />
has a vision of its broad corporate<br />
responsibility best encapsulated <strong>in</strong> the<br />
three rs – respect, relationships and<br />
responsibility. put simply, people are<br />
at the heart of everyth<strong>in</strong>g we do.<br />
the commitment of our people to<br />
apply<strong>in</strong>g our cr guid<strong>in</strong>g pr<strong>in</strong>ciples<br />
will be our strength.<br />
as cairn cont<strong>in</strong>ues to grow, so our<br />
activities on the ground become<br />
ever more visible and we become<br />
accountable to a grow<strong>in</strong>g number of<br />
<strong>in</strong>terested parties who rightly have a<br />
voice and to whom we must listen.<br />
<strong>in</strong> do<strong>in</strong>g so, we must have a vision<br />
ourselves of the way the bus<strong>in</strong>ess<br />
should operate <strong>in</strong> the face of<br />
cr challenges.<br />
24 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
key Cr Challenges<br />
as an oil and gas exploration and<br />
production company with operations <strong>in</strong><br />
many parts of the world, cairn is, by<br />
virtue of the nature of its bus<strong>in</strong>ess and<br />
the countries <strong>in</strong> which it operates,<br />
subject to a wide variety of cr<br />
challenges and risks <strong>in</strong> our bus<strong>in</strong>ess<br />
activities. we recognise that apply<strong>in</strong>g<br />
our cr guid<strong>in</strong>g pr<strong>in</strong>ciples <strong>in</strong> all activities<br />
is essential to ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g our ‘licence to<br />
operate’ and bus<strong>in</strong>ess reputation. cr<br />
risks occur when any part of the bus<strong>in</strong>ess<br />
fails to implement these cr guid<strong>in</strong>g<br />
pr<strong>in</strong>ciples and can affect the group’s<br />
ability to deliver bus<strong>in</strong>ess performance.<br />
our key cr challenges and approach<br />
to deal<strong>in</strong>g with them are more<br />
fully discussed <strong>in</strong> the corporate<br />
responsibility report <strong>2007</strong> and<br />
are summarised here.<br />
dur<strong>in</strong>g <strong>2007</strong>, the ma<strong>in</strong> challenge was<br />
manag<strong>in</strong>g the major reorganisation<br />
of our company <strong>in</strong>to cairn <strong>in</strong>dia and<br />
capricorn. dur<strong>in</strong>g this process, a priority<br />
was to ensure that the group’s exist<strong>in</strong>g<br />
cr programme would be ma<strong>in</strong>ta<strong>in</strong>ed<br />
and strengthened across the two new<br />
bodies. we believe this has been<br />
achieved.<br />
with<strong>in</strong> cairn <strong>in</strong>dia’s produc<strong>in</strong>g fields,<br />
the key cr challenges cont<strong>in</strong>ue to be<br />
protect<strong>in</strong>g people’s health and safety,<br />
m<strong>in</strong>imis<strong>in</strong>g environmental impact and<br />
ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g positive relations with local<br />
communities.<br />
Cambay Bas<strong>in</strong>, India<br />
<strong>in</strong> rajasthan, our development activities<br />
are located <strong>in</strong> arid and semi-arid areas of<br />
the thar dessert and the cr challenges<br />
fac<strong>in</strong>g cairn <strong>in</strong>dia’s activities are centred<br />
on manag<strong>in</strong>g community expectations<br />
for employment and local development<br />
along with use of water resources.<br />
<strong>in</strong> northern <strong>in</strong>dia, ensur<strong>in</strong>g the security<br />
of staff and contractors and m<strong>in</strong>imis<strong>in</strong>g<br />
the potential for issues between security<br />
staff and local people are the pr<strong>in</strong>cipal<br />
cr challenges dur<strong>in</strong>g operations.<br />
<strong>in</strong> bangladesh, key cr risks <strong>in</strong> <strong>2007</strong><br />
have centred on m<strong>in</strong>imis<strong>in</strong>g the<br />
potential safety and environmental<br />
risks associated with our sangu<br />
production facilities and the offshore<br />
drill<strong>in</strong>g campaign.<br />
the political and security situation<br />
<strong>in</strong> nepal has rema<strong>in</strong>ed sensitive<br />
throughout <strong>2007</strong> and there were no<br />
activities on the ground dur<strong>in</strong>g the<br />
year. we cont<strong>in</strong>ue to monitor the<br />
situation <strong>in</strong> the hope that we can<br />
start seismic operations dur<strong>in</strong>g 2008.<br />
a prelim<strong>in</strong>ary environmental & social<br />
impact assessment (esia) has been<br />
completed for seismic field operations<br />
should operations restart.<br />
<strong>in</strong> january 2008, capricorn secured<br />
<strong>in</strong>terests <strong>in</strong> six hydrocarbon licences <strong>in</strong><br />
offshore west greenland, prior to award,<br />
the authorities completed an assessment<br />
of cairn’s cr management system and<br />
performance record for operat<strong>in</strong>g <strong>in</strong><br />
sensitive environments. an offshore<br />
seismic survey is proposed to <strong>in</strong>itiate
activities <strong>in</strong> all operated blocks. as such,<br />
there are significant cr challenges to be<br />
addressed. these range from health and<br />
safety issues, due to climatic extremes,<br />
to meet<strong>in</strong>g the expectations of local<br />
people through to the potential<br />
environmental impact. <strong>in</strong> close<br />
partnership with the greenlandic<br />
authorities, rigorous stakeholder<br />
consultation and cr management<br />
plann<strong>in</strong>g is already underway to<br />
m<strong>in</strong>imise the risks <strong>in</strong>volved.<br />
Our approach to manag<strong>in</strong>g Cr<br />
cr has long been an essential part of<br />
the way we do bus<strong>in</strong>ess. cairn has an<br />
<strong>in</strong>tegrated <strong>in</strong>ternal control and assurance<br />
framework <strong>in</strong> place that is overseen by<br />
the board. this is described <strong>in</strong> more<br />
detail <strong>in</strong> the corporate governance<br />
statement on pages 40 to 49.<br />
while ultimate responsibility for cr lies<br />
with the board, day-to-day responsibility<br />
and accountability has been delegated<br />
to specific executive directors who are<br />
supported by group functional<br />
managers with <strong>in</strong>-depth expertise <strong>in</strong><br />
each of the areas covered by cr.<br />
the board is provided with regular<br />
updates on cr matters and<br />
performance. a group cr committee,<br />
compris<strong>in</strong>g both executive directors,<br />
refer to page 34 and group functional<br />
managers, has also been <strong>in</strong> place s<strong>in</strong>ce<br />
2003 and meets regularly to <strong>in</strong>form the<br />
board and management on strategic<br />
direction, oversight and sett<strong>in</strong>g policies<br />
on cr matters with<strong>in</strong> the group.<br />
the potential impact of cr risks and the<br />
progress of our cr programmes are also<br />
reviewed on a regular basis by the group<br />
cr committee.<br />
cairn <strong>in</strong>dia has an <strong>in</strong>tegrated <strong>in</strong>ternal<br />
control and assurance framework <strong>in</strong><br />
place that is overseen by the cairn <strong>in</strong>dia<br />
board. the cairn <strong>in</strong>dia board <strong>in</strong>cludes<br />
three nom<strong>in</strong>ee directors from cairn.<br />
the cairn <strong>in</strong>dia board is provided with<br />
regular updates on cr matters and<br />
performance through the cairn <strong>in</strong>dia<br />
corporate advisory board (cab).<br />
Cr policies and Guid<strong>in</strong>g pr<strong>in</strong>ciples<br />
we have had group health, safety and<br />
environment (hse), security and csr<br />
policies <strong>in</strong> place for many years. our<br />
group cr guid<strong>in</strong>g pr<strong>in</strong>ciples describe<br />
our fundamental values, identify the<br />
<strong>in</strong>ternational standards we seek to apply<br />
<strong>in</strong> our operations and expla<strong>in</strong> our<br />
approach to manag<strong>in</strong>g all aspects of<br />
csr <strong>in</strong> our bus<strong>in</strong>ess activities.<br />
risk management<br />
bus<strong>in</strong>ess risks, <strong>in</strong>clud<strong>in</strong>g cr risks, are<br />
managed through implementation<br />
of our risk management strategy.<br />
the risk management organisation<br />
and processes have been <strong>in</strong> place<br />
throughout <strong>2007</strong> and have regularly and<br />
systematically identified, analysed,<br />
assessed and, work<strong>in</strong>g with those<br />
responsible for specific activities, agreed<br />
plans to mitigate bus<strong>in</strong>ess risks faced at<br />
cairn <strong>in</strong>dia, capricorn and group levels.<br />
see also the risk factors section on<br />
pages 36 to 39.<br />
manag<strong>in</strong>g stakeholder expectations<br />
our success has only been possible<br />
through build<strong>in</strong>g effective external<br />
relationships and partnerships that can<br />
drive the bus<strong>in</strong>ess forward. work<strong>in</strong>g with<br />
national and state governments and our<br />
jv partners helps us develop a better<br />
understand<strong>in</strong>g of the regulatory<br />
environment <strong>in</strong> our areas of operation<br />
and, more importantly, has laid the<br />
foundation for strong relationships.<br />
it is vital <strong>in</strong> build<strong>in</strong>g these relationships<br />
that we also understand the needs and<br />
aspirations of the people liv<strong>in</strong>g <strong>in</strong> the<br />
vic<strong>in</strong>ity of our operations, appreciate<br />
issues raised by the relevant authorities<br />
and are able to talk and listen to other<br />
concerned parties <strong>in</strong> order to both<br />
address their concerns and create value<br />
for our shareholders.<br />
a group ‘public consultation and<br />
disclosure plan’ (pcdp) is <strong>in</strong> place<br />
which provides a framework for<br />
develop<strong>in</strong>g stakeholder engagement<br />
plans for <strong>in</strong>form<strong>in</strong>g and consult<strong>in</strong>g<br />
with those peoples affected by our<br />
<strong>in</strong>vestment projects.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 25
operat<strong>in</strong>g and exploration review<br />
cont<strong>in</strong>ued<br />
Work<strong>in</strong>g with our suppliers and<br />
Contractors<br />
<strong>in</strong> conduct<strong>in</strong>g our bus<strong>in</strong>ess activities,<br />
we are committed to behav<strong>in</strong>g with<br />
honesty and <strong>in</strong>tegrity and seek to treat<br />
our suppliers and contractors with<br />
fairness and encourage them to work<br />
to our standards.<br />
our suppliers and contractors come<br />
from both local and <strong>in</strong>ternational<br />
companies and we aim to build<br />
relationships with them and <strong>in</strong>fluence<br />
them towards achiev<strong>in</strong>g cr performance<br />
consistent with our cr policies and<br />
guid<strong>in</strong>g pr<strong>in</strong>ciples.<br />
Work<strong>in</strong>g with our Investors<br />
we look to engage proactively with our<br />
<strong>in</strong>vestors and f<strong>in</strong>ancial agencies on our<br />
approach to cr and respond to specific<br />
<strong>in</strong>vestor queries when they arise.<br />
bus<strong>in</strong>ess ethics<br />
cairn employs staff who come<br />
from a number of countries, cultures<br />
and backgrounds br<strong>in</strong>g<strong>in</strong>g with<br />
them different personal values.<br />
our stakeholders expect consistency<br />
<strong>in</strong> the way we work. our group<br />
cr guid<strong>in</strong>g pr<strong>in</strong>ciples and group<br />
code of bus<strong>in</strong>ess ethics provide<br />
guidance to employees on relations<br />
and deal<strong>in</strong>gs with third parties and<br />
public <strong>in</strong>terest disclosures.<br />
Climate Change<br />
we recognise that climate change is an<br />
important <strong>in</strong>ternational issue. as part<br />
of our climate change strategy, we have<br />
been monitor<strong>in</strong>g and sett<strong>in</strong>g targets<br />
for both methane (ch 4 ) and greenhouse<br />
gases (ghg) emissions from our<br />
production facilities s<strong>in</strong>ce 2000.<br />
we have implemented several <strong>in</strong>itiatives<br />
to reduce emissions, <strong>in</strong>clud<strong>in</strong>g the<br />
<strong>in</strong>stallation of high efficiency flares,<br />
third stage compression facilities and<br />
improv<strong>in</strong>g plant operations to m<strong>in</strong>imise<br />
the emission to air.<br />
26 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Rajasthan, India<br />
keep<strong>in</strong>g Our people safe<br />
cairn recognises that explor<strong>in</strong>g for and<br />
produc<strong>in</strong>g hydrocarbons carries <strong>in</strong>herent<br />
potential hazards. we are committed<br />
to protect<strong>in</strong>g the health and safety of<br />
employees and contractors work<strong>in</strong>g<br />
on our sites, the people who come <strong>in</strong>to<br />
contact with our operations and the<br />
health and susta<strong>in</strong>ability of the<br />
environments <strong>in</strong> which we work.<br />
throughout the group, it is our aim to<br />
elim<strong>in</strong>ate all work-related <strong>in</strong>juries and<br />
illnesses.<br />
regrettably, three third party<br />
fatalities occurred <strong>in</strong> <strong>2007</strong> as a result<br />
of driv<strong>in</strong>g accidents <strong>in</strong>volv<strong>in</strong>g vehicles<br />
operated by contractors work<strong>in</strong>g<br />
across our operations. <strong>in</strong> all cases,<br />
cairn immediately launched<br />
<strong>in</strong>vestigations to determ<strong>in</strong>e the lessons<br />
to be learned with the aim of prevent<strong>in</strong>g<br />
any further fatalities and reduc<strong>in</strong>g the<br />
<strong>in</strong>cidence of vehicle related accidents.<br />
revenue transparency<br />
an important benefit of our activities is<br />
the revenue that flows to governments<br />
<strong>in</strong> the form of taxes and royalties.<br />
the extractive <strong>in</strong>dustries transparency<br />
<strong>in</strong>itiative (eiti) is a uk government<br />
sponsored <strong>in</strong>itiative aimed at promot<strong>in</strong>g<br />
transparent report<strong>in</strong>g of these revenues<br />
by governments <strong>in</strong> the m<strong>in</strong>eral resource<br />
extraction sector. a partnership<br />
between <strong>in</strong>dustry, governments and<br />
other stakeholders is critical to the<br />
success of this <strong>in</strong>itiative. cairn supports<br />
the pr<strong>in</strong>ciples of the eiti and for the third<br />
year <strong>in</strong> a row, has <strong>in</strong>cluded figures for tax<br />
and royalty payments <strong>in</strong> our corporate<br />
responsibility report <strong>2007</strong>.<br />
performance monitor<strong>in</strong>g and report<strong>in</strong>g<br />
we measure our cr performance us<strong>in</strong>g a<br />
number of key performance <strong>in</strong>dicators<br />
(kpis) some of which are presented <strong>in</strong><br />
the graphs on these pages and are<br />
presented more fully <strong>in</strong> the corporate<br />
responsibility report <strong>2007</strong>.<br />
external assurance<br />
external assurance over our cr<br />
approach and performance is achieved<br />
both through reviews by <strong>in</strong>dependent<br />
external parties and through<br />
benchmark<strong>in</strong>g with other <strong>in</strong>dustry<br />
peers. environmental resource<br />
management (erm) has also verified<br />
the contents of the corporate<br />
responsibility report <strong>2007</strong>.<br />
<strong>2007</strong> Cr performance<br />
there were a number of notable<br />
cr achievements dur<strong>in</strong>g <strong>2007</strong>.<br />
<strong>in</strong> <strong>2007</strong>, a new cr management system<br />
(crms) was rolled out by bangladesh<br />
and <strong>in</strong>dia. the new crms adopts a<br />
gated process which identifies cr<br />
requirements at key milestones across<br />
the field life cycle, from first entry to<br />
decommission<strong>in</strong>g. the updated crms<br />
has been utilised to manage cr<br />
performance through the bangladesh<br />
drill<strong>in</strong>g programme <strong>in</strong> <strong>2007</strong>.<br />
<strong>in</strong> july <strong>2007</strong>, cairn energy plc formed<br />
a new long-term strategic alliance with<br />
heriot watt university which <strong>in</strong>cluded a<br />
donation towards the new postgraduate<br />
centre and the nam<strong>in</strong>g of a lead<strong>in</strong>g<br />
professor <strong>in</strong> the university’s <strong>in</strong>stitute<br />
of petroleum eng<strong>in</strong>eer<strong>in</strong>g as the cairn<br />
professor of petroleum eng<strong>in</strong>eer<strong>in</strong>g.
<strong>2007</strong> marked the beg<strong>in</strong>n<strong>in</strong>g of a new<br />
partnership between cairn <strong>in</strong>dia and<br />
the world bank’s <strong>in</strong>ternational f<strong>in</strong>ance<br />
corporation. the two parties signed<br />
a cooperation and adm<strong>in</strong>istration<br />
agreement for the jo<strong>in</strong>t design,<br />
fund<strong>in</strong>g and implementation of<br />
susta<strong>in</strong>able socio-economic<br />
development programmes <strong>in</strong><br />
barmer, rajasthan.<br />
the programme <strong>in</strong>cludes:<br />
• an enterprise Centre to promote local<br />
economic development;<br />
• a Rural dairy development project<br />
to provide rural families with an<br />
alternative source of <strong>in</strong>come<br />
;generation by support<strong>in</strong>g traditional<br />
dairy activities; and<br />
• a Child and maternal health<br />
awareness <strong>in</strong>itiative.<br />
the programmes build on cairn <strong>in</strong>dia’s<br />
csr portfolio, built over the last decade,<br />
support<strong>in</strong>g community development <strong>in</strong><br />
the areas of education, <strong>in</strong>frastructure,<br />
health and economic development.<br />
many of these programmes also address<br />
the millennium development goals<br />
concern<strong>in</strong>g improvement <strong>in</strong> women’s<br />
health, empowerment of women and<br />
universal access to water. outside of the<br />
ifc - cairn programmes <strong>in</strong> rajasthan,<br />
cairn <strong>in</strong>dia also supports programmes<br />
to support micro vendors <strong>in</strong> andhra<br />
pradesh, health camps that reach out<br />
to rural communities around cairn’s<br />
operat<strong>in</strong>g assets and the ra<strong>in</strong>water<br />
harvest<strong>in</strong>g structures project that has<br />
made access to water easier for 1,300<br />
households <strong>in</strong> rajasthan.<br />
at an operat<strong>in</strong>g level, sangu operations<br />
<strong>in</strong> bangladesh recorded n<strong>in</strong>e years<br />
without a lost time <strong>in</strong>jury. the lost time<br />
<strong>in</strong>jury frequency rate (ltifr) and the<br />
total recordable <strong>in</strong>cident frequency<br />
(trif - is a comb<strong>in</strong>ed <strong>in</strong>dicator that<br />
<strong>in</strong>cludes fatalities, lost work day cases,<br />
restricted work day cases and medical<br />
treatment cases) have fallen <strong>in</strong> <strong>2007</strong><br />
both for cairn <strong>in</strong>dia and capricorn and<br />
performance is well with<strong>in</strong> the <strong>in</strong>dustry<br />
averages last published by the<br />
<strong>in</strong>ternational association of oil and gas<br />
producers (ogp) for 2006.<br />
all of our produc<strong>in</strong>g sites have<br />
ma<strong>in</strong>ta<strong>in</strong>ed their iso14001 certification<br />
dur<strong>in</strong>g <strong>2007</strong>. cairn <strong>in</strong>dia met all its<br />
targets for ch 4 , ghg and oil <strong>in</strong> water<br />
effluent. <strong>in</strong> bangladesh, flar<strong>in</strong>g dur<strong>in</strong>g<br />
well <strong>in</strong>tervention activities on the sangu<br />
4 well resulted <strong>in</strong> ch 4 and ghg<br />
emissions exceed<strong>in</strong>g <strong>2007</strong> targets.<br />
however, the sangu plant still operates<br />
very efficiently and produces low levels<br />
of emissions to air, as is evidenced by<br />
comparison with the ogp benchmarks.<br />
targets for oil <strong>in</strong> water effluent at sangu<br />
were not met <strong>in</strong> <strong>2007</strong> as a result of the<br />
failure of pilot effluent management<br />
schemes. <strong>in</strong> 2008, the feasibility of<br />
re<strong>in</strong>jection of effluent water <strong>in</strong>to an<br />
unused well will be evaluated and<br />
piloted. our environmental performance<br />
rema<strong>in</strong>s well with<strong>in</strong> <strong>in</strong>dustry averages as<br />
reported by the ogp.<br />
Rajasthan, India<br />
lost time <strong>in</strong>jury frequency rate<br />
lost time <strong>in</strong>jury per one million man hours<br />
0 0.2 0.4 0.6 0.8 1.0 1.2<br />
<strong>2007</strong><br />
2006<br />
2005<br />
<strong>2007</strong><br />
2005<br />
capricorn<br />
cairn <strong>in</strong>dia<br />
ogp benchmark<br />
total recordable <strong>in</strong>cident frequency<br />
recordable <strong>in</strong>cident per one million man hours<br />
0 0.5 1.0 1.5 2.0 2.5 3.0 3.5<br />
2006<br />
<strong>2007</strong><br />
2005<br />
capricorn<br />
cairn <strong>in</strong>dia<br />
ogp benchmark<br />
ghg emissions<br />
tonnes CO 2 e/1,000 tonnes of hydrocarbons<br />
0 50 100 150 200<br />
2006<br />
capricorn<br />
cairn <strong>in</strong>dia<br />
ogp benchmark<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 27
FINANCIAL REVIEw<br />
Jann Brown, F<strong>in</strong>ance Director<br />
$827m<br />
net Cash<br />
$910m<br />
tOtal CredIt faCIlItIes avaIlable<br />
$625m<br />
due In aprIl, fOllOWInG fOrmal<br />
apprOval Of the prIvate plaCement<br />
Of shares tO petrOnas and<br />
OrIent GlObal<br />
28 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
CAIRN ENTERS 2008 wITH THE FINANCIAL<br />
FLEXIBILITY TO DRIVE FORwARD THE RAjASTHAN<br />
DEVELOPmENT AND TO PURSUE OPPORTUNITIES<br />
FOR GROwTH.<br />
cairn has net cash of $827m, positive<br />
operat<strong>in</strong>g cash flows and total facilities<br />
of $910m. <strong>in</strong> addition, cairn will receive<br />
approximately $625m <strong>in</strong> april, follow<strong>in</strong>g<br />
formal approval of the private placement<br />
of shares to petronas and orient global.<br />
account<strong>in</strong>g Overview<br />
on 9 january <strong>2007</strong>, cairn <strong>in</strong>dia was<br />
floated on the bombay stock exchange<br />
and the national stock exchange of<br />
<strong>in</strong>dia. the total proceeds (before<br />
expenses) raised <strong>in</strong> the flotation were<br />
$1,984.1m, with $935.7m (<strong>in</strong>clud<strong>in</strong>g<br />
expenses) returned to shareholders<br />
<strong>in</strong> <strong>2007</strong>, a return of £3 per share.<br />
cairn <strong>in</strong>dia reta<strong>in</strong>ed $600m, with the<br />
rema<strong>in</strong>der of the proceeds held to<br />
fund cairn’s exploration-led subsidiary,<br />
capricorn.<br />
on 7 september <strong>2007</strong>, dyas bv acquired<br />
a 10% hold<strong>in</strong>g <strong>in</strong> capricorn for a total<br />
consideration, before expenses,<br />
of $91.0m.<br />
cairn energy plc’s consolidated<br />
accounts <strong>in</strong>clude 100% of the results of<br />
both of these subsidiary undertak<strong>in</strong>gs,<br />
cairn <strong>in</strong>dia and capricorn. the <strong>in</strong>terests<br />
held by external shareholders (31% <strong>in</strong><br />
cairn <strong>in</strong>dia and 10% <strong>in</strong> capricorn) are<br />
then reflected as m<strong>in</strong>ority <strong>in</strong>terest<br />
adjustments.<br />
on 7 september <strong>2007</strong>, the group<br />
announced two recommended cash<br />
offers totall<strong>in</strong>g $76.2m (before expenses)<br />
– one for plectrum petroleum plc and<br />
the other for medoil plc. both of these<br />
offers were declared unconditional on<br />
10 october <strong>2007</strong> and their results are<br />
<strong>in</strong>cluded <strong>in</strong> the group’s consolidated<br />
f<strong>in</strong>ancial statements from that date.<br />
on 25 october <strong>2007</strong>, santos <strong>in</strong>ternational<br />
hold<strong>in</strong>gs pty limited acquired 100% of<br />
cairn energy bangladesh limited from<br />
the group (50% of cairn’s bangladesh<br />
position) for a total cash consideration<br />
of $55.8m. this has been reflected as<br />
a disposal of oil and gas assets.<br />
the prior year f<strong>in</strong>ancial statements<br />
have been adjusted for changes <strong>in</strong><br />
the account<strong>in</strong>g for deferred tax and<br />
f<strong>in</strong>ancial assets. the net impact of these<br />
adjustments <strong>in</strong> 2006 was an <strong>in</strong>crease<br />
<strong>in</strong> the loss for the year attributable to<br />
equity holders from $82.0m to $97.1m<br />
and a decrease <strong>in</strong> net assets from<br />
$681.2m to $678.8m.<br />
prOfIt and lOss<br />
turnover<br />
revenue for the year was $287.7m<br />
(2006: $286.3m).<br />
production for the year, on an<br />
entitlement <strong>in</strong>terest basis, has decreased<br />
by 19% to 19,809 boepd (2006: 24,523<br />
boepd). this is primarily due to reduced<br />
field production at both sangu and<br />
cb/os-2.<br />
the group’s production cont<strong>in</strong>ues to<br />
be predom<strong>in</strong>antly gas (circa 63% on an<br />
entitlement basis). this production mix,<br />
together with price caps <strong>in</strong> the gas<br />
contracts, results <strong>in</strong> an average price<br />
realised by the group for the year of<br />
$39.70 per boe (2006: $31.84 per boe).<br />
the <strong>in</strong>crease is due primarily to the<br />
higher oil price environment <strong>in</strong> <strong>2007</strong>.
key f<strong>in</strong>ancial performance <strong>in</strong>dicators<br />
Gross profit<br />
the group generated a gross profit of<br />
$61.5m (2006: $63.9m).<br />
cost of sales for the year was $226.2m<br />
(2006: $222.4m). this <strong>in</strong>cludes a write-off<br />
of unsuccessful exploration costs and<br />
general exploration expenditure of<br />
$40.7m (2006: $62.0m) <strong>in</strong> accordance<br />
with the group’s successful efforts<br />
based account<strong>in</strong>g policies.<br />
production costs for the year were<br />
$66.5m (2006: $56.9m). these <strong>in</strong>clude<br />
pre-exploration costs expensed and<br />
stock movements. production costs<br />
have <strong>in</strong>creased to $9.20 per boe<br />
(2006: $6.36 per boe) due <strong>in</strong> part to<br />
higher pre-award/new venture costs<br />
and the impact of workover costs for<br />
ravva, but also to the fall <strong>in</strong> entitlement<br />
production, with fixed costs spread<br />
over a smaller production base.<br />
the average group rate for<br />
depletion and decommission<strong>in</strong>g has<br />
<strong>in</strong>creased by 15.0% to $13.29 per boe<br />
(2006: $11.56 per boe), ma<strong>in</strong>ly as a result<br />
of the downgrade of the sangu reserves<br />
as outl<strong>in</strong>ed <strong>in</strong> the operat<strong>in</strong>g and<br />
exploration review.<br />
profit for the year<br />
adm<strong>in</strong>istrative expenses for the<br />
year were $88.4m (2006: $60.3m).<br />
these <strong>in</strong>clude a charge of $32.2m<br />
(2006: $18.5m) for share-based<br />
payments plus associated taxes.<br />
cairn <strong>in</strong>dia’s underly<strong>in</strong>g adm<strong>in</strong>istrative<br />
expenses have also <strong>in</strong>creased follow<strong>in</strong>g<br />
its establishment as an autonomous<br />
bus<strong>in</strong>ess with its own list<strong>in</strong>g.<br />
<strong>2007</strong> 2006 % Increase/(decrease)<br />
production (boepd) 19,809* 24,523* (19.2)<br />
average price per boe ($) 39.70 31.84 24.7<br />
turnover ($m) 287.7 286.3 0.5<br />
average production costs per boe ($) 9.20 6.36 44.7<br />
operat<strong>in</strong>g (loss) ($m) (76.3) (64.6) 18.1<br />
profit/(loss) before tax ($m) 1,553.2 (91.8)** 1,791.9<br />
exceptional items ($m) 1,577.3 – –<br />
profit/(loss) after tax ($m) 1,527.8 (97.1)** 1,673.4<br />
cash flow from operat<strong>in</strong>g activities ($m) 155.3 189.4 (18.0)<br />
net assets ($m) 1,749.8 678.8** 157.8<br />
net cash ($m) 827.3 701.3*** 18.0<br />
* on an entitlement <strong>in</strong>terest basis ** restated *** <strong>in</strong>cludes $751.8m raised <strong>in</strong> pre-ipo plac<strong>in</strong>g<br />
an impairment charge of $51.8m has<br />
been made <strong>in</strong> respect of bangladesh<br />
exploration blocks 5, 7 and 10 and the<br />
magnama-1 well and hatia-1 well <strong>in</strong><br />
block 16. the costs of these two wells<br />
have been impaired until the future plans<br />
to assess their potential have been<br />
completed. the carry<strong>in</strong>g value of the<br />
group’s exploration assets <strong>in</strong> nepal of<br />
$7.1m has also been impaired given the<br />
cont<strong>in</strong>ued uncerta<strong>in</strong>ty over the lift<strong>in</strong>g of<br />
contractual force majeure.<br />
net f<strong>in</strong>ance <strong>in</strong>come for the year was<br />
$34.8m (2006 restated: net f<strong>in</strong>ance cost<br />
$27.3m). f<strong>in</strong>ance <strong>in</strong>come <strong>in</strong>creased from<br />
$4.6m to $65.2m reflect<strong>in</strong>g <strong>in</strong>terest<br />
generated on cash balances held<br />
follow<strong>in</strong>g the ipo of cairn <strong>in</strong>dia at the<br />
beg<strong>in</strong>n<strong>in</strong>g of the year. f<strong>in</strong>ance costs<br />
<strong>in</strong>clude a realised foreign exchange loss<br />
of $23.1m (2006: $14.2m) and a $3.3m<br />
(2006: $9.7m) fair value charge <strong>in</strong><br />
respect of foreign exchange options<br />
entered <strong>in</strong>to to manage currency<br />
exposure. realised foreign exchange<br />
losses arose primarily due to the<br />
treatment under ifrs of exchange<br />
movements on <strong>in</strong>tra-group fund<strong>in</strong>g<br />
aris<strong>in</strong>g from the weaken<strong>in</strong>g of the<br />
us dollar aga<strong>in</strong>st sterl<strong>in</strong>g <strong>in</strong> the year.<br />
<strong>in</strong> accordance with ifrs 3 ‘bus<strong>in</strong>ess<br />
comb<strong>in</strong>ations’, negative goodwill aris<strong>in</strong>g<br />
on the acquisition of medoil plc has<br />
been recognised immediately <strong>in</strong> the<br />
<strong>in</strong>come statement.<br />
Cambay Bas<strong>in</strong><br />
India<br />
the group made an exceptional ga<strong>in</strong><br />
of $1,537.0m on the disposal of 31%<br />
of cairn <strong>in</strong>dia through the ipo and an<br />
exceptional ga<strong>in</strong> of $40.3m on the<br />
disposal of 10% of capricorn to dyas bv.<br />
these ga<strong>in</strong>s are not chargeable to tax.<br />
the tax charge for the year was $25.4m<br />
(2006 restated: $5.3m).<br />
the group’s profit for the year is<br />
$1,527.8m (2006 restated: loss $97.1m).<br />
balanCe sheet<br />
Capital expenditure<br />
balance sheet additions dur<strong>in</strong>g the year<br />
were $591.5m (2006: $284.0m), broken<br />
down as follows:<br />
<strong>2007</strong> 2006<br />
$m $m<br />
acquisition of subsidiaries 139.5 –<br />
exploration/appraisal assets 180.5 161.0<br />
development/<br />
produc<strong>in</strong>g assets 245.6 110.5<br />
other assets 25.9 12.5<br />
total 591.5 284.0<br />
acquisition of subsidiaries relates to the<br />
acquisitions of plectrum petroleum plc<br />
and medoil plc.<br />
exploration/appraisal expenditure<br />
by cairn <strong>in</strong>dia dur<strong>in</strong>g the year relates<br />
pr<strong>in</strong>cipally to the cont<strong>in</strong>ued drill<strong>in</strong>g<br />
programme <strong>in</strong> rajasthan. capricorn’s<br />
exploration/appraisal programme<br />
comprised three wells <strong>in</strong> bangladesh <strong>in</strong><br />
south sangu-3, magnama-1 and hatia-1<br />
(hatia was completed <strong>in</strong> 2008).<br />
the majority of the development<br />
expenditure was on rajasthan, plus<br />
some activity on ravva and sangu as<br />
described <strong>in</strong> the operat<strong>in</strong>g and<br />
exploration review.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 29
f<strong>in</strong>ancial review<br />
cont<strong>in</strong>ued<br />
Cash flOW<br />
Cash flows from Operat<strong>in</strong>g activities<br />
cash generated from operat<strong>in</strong>g<br />
activities has decreased to $155.3m<br />
(2006: $189.4m). <strong>in</strong>terest paid was $6.7m<br />
(2006: $5.6m) and <strong>in</strong>come tax payments<br />
dur<strong>in</strong>g <strong>2007</strong> were $14.7m (2006: $12.2m).<br />
Cash flows from Invest<strong>in</strong>g activities<br />
cash outflows from <strong>in</strong>vest<strong>in</strong>g<br />
activities dur<strong>in</strong>g <strong>2007</strong> were $398.8m<br />
(2006: $256.1m) and <strong>in</strong>cluded the<br />
follow<strong>in</strong>g items:<br />
<strong>2007</strong> 2006<br />
$m $m<br />
exploration/appraisal<br />
expenditure 156.4 157.5<br />
development/produc<strong>in</strong>g<br />
expenditure 244.0 115.0<br />
other capital expenditure 10.6 9.1<br />
the acquisitions of plectrum petroleum<br />
plc and medoil plc are also <strong>in</strong>cluded<br />
with<strong>in</strong> cash flows from <strong>in</strong>vest<strong>in</strong>g<br />
activities, as is the disposal of cairn<br />
energy bangladesh limited to santos.<br />
Cash flows from f<strong>in</strong>anc<strong>in</strong>g activities<br />
cash flows from f<strong>in</strong>anc<strong>in</strong>g activities<br />
<strong>in</strong>clude proceeds from the ipo of cairn<br />
<strong>in</strong>dia, received <strong>in</strong> january <strong>2007</strong>, and the<br />
acquisition of 10% of capricorn by dyas<br />
bv <strong>in</strong> september <strong>2007</strong>.<br />
<strong>in</strong> april <strong>2007</strong>, follow<strong>in</strong>g the ipo of<br />
cairn <strong>in</strong>dia, the group returned cash to<br />
shareholders equivalent to £3 per share,<br />
a total return of $935.7m (<strong>in</strong>clud<strong>in</strong>g<br />
expenses).<br />
net assets/net Cash<br />
net assets at 31 december <strong>2007</strong> were<br />
$1,749.8m (2006 restated: $678.8m).<br />
at the year end, the group had net<br />
cash of $827.3m (2006: $701.3m).<br />
30 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
DURING <strong>2007</strong>, THE TwO SEPARATE BUSINESSES<br />
HAVE BEEN FULLY ESTABLISHED wITHIN CAIRN,<br />
EACH wITH ITS OwN FINANCIAL STRATEGY<br />
AND FUNDING NEEDS.<br />
<strong>in</strong> cairn <strong>in</strong>dia, the development programme<br />
under way <strong>in</strong> the rajasthan project is set<br />
to generate levels of cash flow previously<br />
unseen <strong>in</strong> the group and provide the<br />
spr<strong>in</strong>gboard for future growth.<br />
post balance sheet events<br />
<strong>in</strong> march 2008, cairn <strong>in</strong>dia arranged<br />
a private placement of approximately<br />
$625m with petronas and orient<br />
global tamar<strong>in</strong>d fund pte limited, who<br />
have agreed to subscribe for a total of<br />
113 million shares. as a result of this<br />
private placement, cairn energy’s<br />
hold<strong>in</strong>g <strong>in</strong> cairn <strong>in</strong>dia will reduce from<br />
69% to 65%. the cash is due to be<br />
received <strong>in</strong> april, follow<strong>in</strong>g formal<br />
approval of the transaction.<br />
f<strong>in</strong>ancial strategy and Outlook<br />
dur<strong>in</strong>g <strong>2007</strong>, the two separate<br />
bus<strong>in</strong>esses have been fully established<br />
with<strong>in</strong> cairn, each with its own f<strong>in</strong>ancial<br />
strategy and fund<strong>in</strong>g needs. <strong>in</strong> cairn<br />
<strong>in</strong>dia, the development programme<br />
under way <strong>in</strong> the rajasthan project will<br />
generate levels of cash flow previously<br />
unseen <strong>in</strong> the group and provide the<br />
spr<strong>in</strong>gboard for future growth. as well<br />
as the cash on the balance sheet, the<br />
strong operat<strong>in</strong>g cash flows and the cash<br />
raised through the recent equity issue,<br />
there is dedicated project credit facility<br />
already <strong>in</strong> place and discussions to<br />
extend this are at an advanced stage.<br />
<strong>in</strong> capricorn, the bus<strong>in</strong>ess is<br />
exploration-led and the <strong>in</strong>vestments<br />
planned for 2008 and beyond will<br />
drive future growth on this side of the<br />
bus<strong>in</strong>ess. the transactions with dyas<br />
and santos dur<strong>in</strong>g the year have<br />
demonstrated the range of options open<br />
to the capricorn bus<strong>in</strong>ess and provided<br />
the cash to fund the <strong>in</strong>itial stages of this<br />
<strong>in</strong>vestment programme. it is now key<br />
to ensure that the available funds are<br />
targeted on the real growth<br />
opportunities <strong>in</strong> this portfolio.<br />
jann brown<br />
f<strong>in</strong>ance director<br />
11 april 2008<br />
Cambay Bas<strong>in</strong>, India
CAIRN INDIA CAPITAL EXPENDITURE FORECAST 2008<br />
1. DEVELOPmENT/PRODUCING 89%<br />
2. ExPLORATION/APPRAIsAL 10%<br />
3. OThER 1%<br />
CAPRICORN & <strong>PLC</strong> CAPITAL EXPENDITURE FORECAST 2008<br />
1. EXPLORATION/APPRAISAL 93%<br />
2. DEvELOPmENT/PRODUCING 4%<br />
3. OThER 3%<br />
1 2<br />
3<br />
1 2 3<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 31
BOARD OF<br />
DIRECTORS<br />
10<br />
32 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
6<br />
11<br />
1<br />
5<br />
2<br />
3<br />
7
3<br />
9<br />
12<br />
4 8<br />
1 Sir Bill Gammell, Chief exeCutive (55)<br />
2 Dr mike WattS, exploration & neW BuS<strong>in</strong>eSS DireCtor (52)<br />
3 malColm thomS, Chief operat<strong>in</strong>G offiCer (52)<br />
4 phil traCy, enG<strong>in</strong>eer<strong>in</strong>G & operationS DireCtor (57)<br />
5 Jann BroWn, f<strong>in</strong>anCe DireCtor (52)<br />
6 Simon thomSon, leGal & CommerCial DireCtor (43)<br />
7 norman murray, non-exeCutive Chairman (60)<br />
8 hamiSh GroSSart, non-exeCutive Deputy Chairman (51)<br />
9 eD Story, non-exeCutive DireCtor (64)<br />
10 toDD hunt, non-exeCutive DireCtor (55)<br />
11 mark tynDall, non-exeCutive DireCtor (50)<br />
12 anDreW ShilSton, non-exeCutive DireCtor (52)<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 33
oard of directors<br />
cont<strong>in</strong>ued<br />
1 Sir Bill Gammell,<br />
Chief executive (55)<br />
sir bill gammell holds a ba <strong>in</strong> economics<br />
and accountancy from stirl<strong>in</strong>g university.<br />
he founded cairn and was appo<strong>in</strong>ted<br />
chief executive on its <strong>in</strong>itial list<strong>in</strong>g <strong>in</strong> 1988.<br />
sir bill has over 25 years’ experience <strong>in</strong> the<br />
<strong>in</strong>ternational oil and gas <strong>in</strong>dustry. he is<br />
chairman of the scottish <strong>in</strong>stitute of sport<br />
foundation, a member of the board of<br />
sportscotland and a director of artemis aim<br />
vct plc. <strong>in</strong> the 2006 new year honours list<br />
he was awarded a knighthood for services<br />
to <strong>in</strong>dustry <strong>in</strong> scotland. he is also the nonexecutive<br />
chairman of cairn <strong>in</strong>dia limited.<br />
2 Dr mike watts,<br />
exploration & new bus<strong>in</strong>ess director (52)<br />
dr mike watts holds a first class hons<br />
degree and a phd <strong>in</strong> geology. he jo<strong>in</strong>ed shell<br />
<strong>in</strong> 1980, burmah <strong>in</strong> 1985 and premier <strong>in</strong> 1986.<br />
<strong>in</strong> 1991 he was appo<strong>in</strong>ted manag<strong>in</strong>g director<br />
of the amsterdam listed holland sea search<br />
(“hss”), becom<strong>in</strong>g ceo <strong>in</strong> 1993. at this time<br />
he also carried out new ventures <strong>in</strong> <strong>in</strong>dia,<br />
yemen and vietnam for command petroleum<br />
and soco <strong>in</strong>ternational, who were major<br />
<strong>in</strong>vestors <strong>in</strong> hss. <strong>in</strong> 1996, hss was acquired<br />
by cairn and mike was appo<strong>in</strong>ted exploration<br />
director of cairn <strong>in</strong> 1997. he has been closely<br />
associated with numerous oil and gas<br />
discoveries (<strong>in</strong> the north sea, pakistan,<br />
myanmar, thailand, bangladesh and <strong>in</strong>dia),<br />
the south asian strategy at hssh/command/<br />
cairn, the acquisition of command by cairn,<br />
the bangladesh and rajasthan transactions<br />
with shell and the emergence of cairn as<br />
the pre-em<strong>in</strong>ent foreign owned oil and gas<br />
company <strong>in</strong> <strong>in</strong>dia. he is also the chief<br />
executive of the company’s subsidiary,<br />
capricorn. he is the executive director<br />
with responsibility for provid<strong>in</strong>g assurance<br />
to the board on health, safety, environment<br />
(<strong>in</strong>clud<strong>in</strong>g climate change), community and<br />
human rights matters.<br />
3 malcolm Thoms,<br />
Chief Operat<strong>in</strong>g Officer (52)<br />
malcolm thoms holds a bsc hons <strong>in</strong> physics<br />
from ed<strong>in</strong>burgh university and an mba from<br />
heriot watt university. he started his career<br />
as a field eng<strong>in</strong>eer with schlumberger and<br />
subsequently became manager of their<br />
bus<strong>in</strong>esses <strong>in</strong> qatar and brunei. he jo<strong>in</strong>ed<br />
cairn <strong>in</strong> 1989 where he held a number of<br />
senior management positions prior to his<br />
appo<strong>in</strong>tment as an executive director <strong>in</strong> 2000.<br />
malcolm is a non-executive director of cairn<br />
<strong>in</strong>dia limited and revus energy as and he has<br />
also recently been appo<strong>in</strong>ted as a trustee of<br />
the university of ed<strong>in</strong>burgh development<br />
trust. he is the executive director with<br />
responsibility for security matters.<br />
34 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
4 Phil Tracy,<br />
eng<strong>in</strong>eer<strong>in</strong>g & Operations director (57)<br />
phil tracy holds an msc <strong>in</strong> petroleum<br />
eng<strong>in</strong>eer<strong>in</strong>g from imperial college and a<br />
bsc <strong>in</strong> chemical eng<strong>in</strong>eer<strong>in</strong>g from leeds<br />
university. he is a chartered eng<strong>in</strong>eer with<br />
over 30 years’ experience <strong>in</strong> the <strong>in</strong>ternational<br />
oil and gas <strong>in</strong>dustry. he orig<strong>in</strong>ally jo<strong>in</strong>ed cairn<br />
<strong>in</strong> 1988 and served as an executive director<br />
from 1989 until 1999. he subsequently<br />
became manag<strong>in</strong>g director of providence<br />
resources p.l.c. before rejo<strong>in</strong><strong>in</strong>g cairn <strong>in</strong><br />
2002 as chairman of cairn energy <strong>in</strong>dia pty<br />
limited, a post he held until may 2006.<br />
he was appo<strong>in</strong>ted eng<strong>in</strong>eer<strong>in</strong>g & operations<br />
director <strong>in</strong> 2004 and served as rajasthan<br />
project director until december 2006.<br />
<strong>in</strong> december <strong>2007</strong>, phil rejo<strong>in</strong>ed the rajasthan<br />
project board. phil is also a non-executive<br />
director of vienco group limited.<br />
5 jann Brown,<br />
f<strong>in</strong>ance director (52)<br />
jann brown was appo<strong>in</strong>ted f<strong>in</strong>ance director<br />
of cairn <strong>in</strong> 2006. she holds an ma from<br />
ed<strong>in</strong>burgh university and a diploma <strong>in</strong><br />
account<strong>in</strong>g from heriot watt university.<br />
she jo<strong>in</strong>ed cairn <strong>in</strong> 1998 after a career <strong>in</strong> the<br />
accountancy profession, ma<strong>in</strong>ly with kpmg.<br />
she is a member of the <strong>in</strong>stitute of chartered<br />
accountants of scotland and the chartered<br />
<strong>in</strong>stitute of taxation. she is the executive<br />
director with delegated responsibility for<br />
employee matters.<br />
6 Simon Thomson,<br />
legal & Commercial director (43)<br />
simon thomson was appo<strong>in</strong>ted legal &<br />
commercial director of cairn <strong>in</strong> 2006.<br />
he holds an llb hons from aberdeen<br />
university and a diploma <strong>in</strong> legal practice<br />
from glasgow university. he jo<strong>in</strong>ed<br />
cairn <strong>in</strong> 1995 as a lawyer before becom<strong>in</strong>g<br />
group commercial manager. prior to<br />
his appo<strong>in</strong>tment as legal & commercial<br />
director, he served on the group<br />
management board for six years.<br />
he is a director of the scottish <strong>in</strong>stitute<br />
of sport foundation.<br />
7 Norman murray,<br />
non-executive Chairman (60)<br />
norman murray was appo<strong>in</strong>ted an<br />
<strong>in</strong>dependent non-executive director of cairn<br />
<strong>in</strong> 1999 and chairman <strong>in</strong> 2002. he was a<br />
co-founder and former chairman of morgan<br />
grenfell private equity limited and was<br />
also a director of morgan grenfell asset<br />
management limited and a non-executive<br />
director of bristow helicopter group limited.<br />
he is a past chairman of the british venture<br />
capital association and a past president of<br />
the <strong>in</strong>stitute of chartered accountants of<br />
scotland. he is a non-executive director of<br />
greene k<strong>in</strong>g plc and robert wiseman<br />
dairies plc and is also the non-executive<br />
deputy chairman of cairn <strong>in</strong>dia limited.<br />
8 Hamish Grossart,<br />
non-executive deputy Chairman (51)<br />
hamish grossart was appo<strong>in</strong>ted an<br />
<strong>in</strong>dependent non-executive director of cairn<br />
<strong>in</strong> 1994 and became deputy chairman <strong>in</strong><br />
1996. he has over 20 years’ experience on<br />
public company boards <strong>in</strong> a wide range of<br />
<strong>in</strong>dustries, both <strong>in</strong> an executive and nonexecutive<br />
capacity. he is currently also<br />
deputy chairman of british polythene<br />
<strong>in</strong>dustries plc, chairman of <strong>in</strong>digo vision<br />
group plc and a non-executive director of<br />
artemis <strong>in</strong>vestment management limited.<br />
9 Ed Story,<br />
non-executive director (64)<br />
ed story was appo<strong>in</strong>ted an <strong>in</strong>dependent<br />
non-executive director of cairn <strong>in</strong> 1997.<br />
he is president, chief executive and founder<br />
of soco <strong>in</strong>ternational plc and has over 40<br />
years’ experience <strong>in</strong> the <strong>in</strong>ternational oil and<br />
gas <strong>in</strong>dustry. he also serves as the honorary<br />
consul of mongolia <strong>in</strong> houston.<br />
10 Todd Hunt,<br />
non-executive director (55)<br />
todd hunt was appo<strong>in</strong>ted an <strong>in</strong>dependent<br />
non-executive director of cairn <strong>in</strong> 2003.<br />
he is president and jo<strong>in</strong>t owner of atropos<br />
exploration company and atropos<br />
production company based <strong>in</strong> dallas,<br />
texas. he has over 30 years’ experience<br />
<strong>in</strong> the oil and gas <strong>in</strong>dustry.<br />
11 mark Tyndall,<br />
non-executive director (50)<br />
mark tyndall was appo<strong>in</strong>ted an <strong>in</strong>dependent<br />
non-executive director of cairn <strong>in</strong> 2003.<br />
he is chief executive of artemis <strong>in</strong>vestment<br />
management limited and a director of<br />
standard life european private equity<br />
trust plc.<br />
12 Andrew Shilston,<br />
Non-Executive Director (52)<br />
andrew shilston was appo<strong>in</strong>ted an<br />
<strong>in</strong>dependent non-executive director of cairn<br />
<strong>in</strong> 2004. he is a chartered accountant and<br />
has been f<strong>in</strong>ance director of rolls-royce plc<br />
s<strong>in</strong>ce 2003. prior to that he was the f<strong>in</strong>ance<br />
director of enterprise oil plc from 1993 to<br />
2002. he has over 20 years’ experience <strong>in</strong><br />
the oil and gas <strong>in</strong>dustry.
<strong>2007</strong> ACCOUNTS<br />
Risk Factors 36<br />
Corporate Governance Statement 40<br />
Directors’ <strong>Report</strong> 50<br />
Directors’ Remuneration <strong>Report</strong> 57<br />
Independent Auditor’s <strong>Report</strong> to the Members of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> 69<br />
Pr<strong>in</strong>cipal Licence Interests 71<br />
Group Income Statement 73<br />
Statements of Recognised Income and Expense 74<br />
Balance Sheets 75<br />
Statements of Cash Flows 76<br />
Notes to the Accounts 77<br />
Reserves 129<br />
Notice of <strong>Annual</strong> General Meet<strong>in</strong>g 131<br />
Glossary of Terms 134<br />
Company Information 136<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 35
RISk FACTORS<br />
The Company is subject to a variety of risks which derive from the nature of the oil and gas exploration and production<br />
bus<strong>in</strong>ess and relate to the countries <strong>in</strong> which it conducts its activities. Outl<strong>in</strong>ed below is a description of the pr<strong>in</strong>cipal risk<br />
factors that may affect performance. Such risk factors are not <strong>in</strong>tended to be presented <strong>in</strong> any order of priority. Any of<br />
the risks, as well as the other risks and uncerta<strong>in</strong>ties referred to <strong>in</strong> this report, could have a material adverse effect on<br />
bus<strong>in</strong>ess performance. In addition, the risks set out below may not be exhaustive and additional risks and uncerta<strong>in</strong>ties,<br />
not presently known to the Company, or which the Company currently deems immaterial, may arise or become material<br />
<strong>in</strong> the future. The risk factors should be considered <strong>in</strong> conjunction with the cautionary note to shareholders <strong>in</strong> relation to<br />
forward-look<strong>in</strong>g statements set out on pages 36 to 39.<br />
The Company’s performance is dependent upon the performance of <strong>Cairn</strong> India and the Capricorn Group<br />
Follow<strong>in</strong>g the IPO, the Company’s pr<strong>in</strong>cipal assets are its sharehold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India, a company listed on the BSE and NSE<br />
<strong>in</strong> India, and its 90% sharehold<strong>in</strong>g <strong>in</strong> its unlisted subsidiary, Capricorn. Accord<strong>in</strong>gly, the Company’s performance and market<br />
price are dependent upon the performance of <strong>Cairn</strong> India and Capricorn. Any failure by <strong>Cairn</strong> India or by Capricorn to<br />
successfully develop their respective bus<strong>in</strong>esses could have a material adverse effect on the Company’s bus<strong>in</strong>ess performance.<br />
The Company’s material sharehold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India represents a significant proportion of the Company’s value. Any fluctuations<br />
<strong>in</strong> the market price of <strong>Cairn</strong> India’s share price may have a direct effect on the Company’s share price.<br />
Relationship with <strong>Cairn</strong> India<br />
The Company exercises its <strong>in</strong>fluence over <strong>Cairn</strong> India through certa<strong>in</strong> provisions conta<strong>in</strong>ed with<strong>in</strong> the memorandum and articles<br />
of association of <strong>Cairn</strong> India supplemented by the terms of a relationship agreement between <strong>Cairn</strong> India and the Company.<br />
In particular, the Company may reasonably require <strong>Cairn</strong> India to comply with policies and procedures which it has approved<br />
from time to time <strong>in</strong> relation to the Group as a whole. Consequently, <strong>Cairn</strong> India has generally adopted policies and procedures<br />
which are <strong>in</strong> l<strong>in</strong>e with those of the Group such that the identification and treatment of risk is consistent between <strong>Cairn</strong> India<br />
and Capricorn.<br />
Project Assessment and Delivery<br />
There are a number of steps prior to a decision by management to <strong>in</strong>vest <strong>in</strong> or ‘sanction’ a project or new venture. Risks dur<strong>in</strong>g<br />
this pre-sanction period <strong>in</strong>clude technical, eng<strong>in</strong>eer<strong>in</strong>g, commercial and regulatory risks. Typical risks <strong>in</strong>clude over- or underestimation<br />
of crude oil and natural gas <strong>in</strong>itially <strong>in</strong> place and recoverable, <strong>in</strong>adequate front end eng<strong>in</strong>eer<strong>in</strong>g design, not secur<strong>in</strong>g<br />
appropriate long-term commercial agreements or, where required, applicable governmental or regulatory consents, permits,<br />
licences or approvals. This can cause delays to commercialisation of reserves and this may have a material effect on medium<br />
to long-term cash flow and <strong>in</strong>come.<br />
Project delivery is subject to corporate responsibility, technical, commercial, contractor and economic risks. Projects can<br />
be delayed or unsuccessful for many reasons, <strong>in</strong>clud<strong>in</strong>g cost and time overruns of projects under construction, availability,<br />
competence and capability of human resources and contractors, mechanical and technical difficulties and <strong>in</strong>frastructure<br />
constra<strong>in</strong>ts.<br />
In addition, some development projects may require the use of new and advanced technologies or produce hydrocarbons from<br />
challeng<strong>in</strong>g reservoirs, which can exacerbate such problems.<br />
The Company’s pr<strong>in</strong>cipal project is the development by <strong>Cairn</strong> India of discovered oil fields <strong>in</strong> Rajasthan. Availability of production<br />
from the largest oil field, Mangala, is currently scheduled for the second half of 2009. Residual risks relate to the potential for<br />
delays <strong>in</strong> the delivery of materials and equipment, construction, <strong>in</strong>stallation or commission<strong>in</strong>g activities which may lead to the<br />
availability of production be<strong>in</strong>g delayed.<br />
The scope of the project has been expanded to <strong>in</strong>clude transportation <strong>in</strong>frastructure to permit the transport of produced oil to<br />
designated end users <strong>in</strong> India. The present schedule for completion of the transport <strong>in</strong>frastructure will permit efficient evacuation<br />
of the Mangala crude oil once available dur<strong>in</strong>g the second half of 2009. Delays <strong>in</strong> connection with land acquisition, secur<strong>in</strong>g of<br />
rights of way, delivery of materials and equipment, construction, <strong>in</strong>stallation or commission<strong>in</strong>g activities represent residual risks<br />
which may lead to a delay <strong>in</strong> the availability of the transportation <strong>in</strong>frastructure to evacuate the Mangala crude oil <strong>in</strong> l<strong>in</strong>e with the<br />
planned production availability dur<strong>in</strong>g the second half of 2009.<br />
The crude oil at the northern fields <strong>in</strong> Rajasthan is characterised by its viscous nature <strong>in</strong> the reservoir and its propensity to<br />
solidify at higher temperatures, whether <strong>in</strong> the well-bore or at surface, than is commonly the case for most produc<strong>in</strong>g oil<br />
fields. This presents both extraction and transportation risks. The development, production and transportation plans for the<br />
northern fields are dependent upon availability of a reliable fuel supply for power generation and heat<strong>in</strong>g of the facilities.<br />
A parallel development of the Raageshwari gas field <strong>in</strong> Rajasthan is be<strong>in</strong>g undertaken to provide such fuel gas. Under the<br />
present schedule, fuel gas will be available to meet the power generation and heat<strong>in</strong>g requirements to support availability<br />
of production from the Mangala field and the availability of transportation <strong>in</strong>frastructure dur<strong>in</strong>g the second half of 2009.<br />
Residual risks are essentially similar to those which perta<strong>in</strong> to the completion of the Mangala development.<br />
36 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
RISk FACTORS<br />
CONTINUED<br />
The development plans for the northern fields are expected to assume the use of EOR techniques to extract an additional<br />
<strong>in</strong>cremental percentage of the estimated oil <strong>in</strong> place <strong>in</strong> the reservoirs. There is a risk that <strong>Cairn</strong> India may not be able to use EOR<br />
techniques successfully. These risks <strong>in</strong>clude sourc<strong>in</strong>g, purchas<strong>in</strong>g and transportation of large quantities of the types of polymer<br />
chemicals that would be required for the EOR techniques, failure to ma<strong>in</strong>ta<strong>in</strong> the properties of the polymer chemicals <strong>in</strong> the<br />
reservoir, lead<strong>in</strong>g to lower <strong>in</strong>cremental recovery of oil and polymer foul<strong>in</strong>g of the surface facilities lead<strong>in</strong>g to a deterioration<br />
of the operat<strong>in</strong>g efficiency of the process<strong>in</strong>g plant. The economic viability of the EOR application will be determ<strong>in</strong>ed by the<br />
prevail<strong>in</strong>g crude oil price and the <strong>in</strong>cremental operational expenditure which <strong>in</strong>cludes the cost of chemicals. A pilot EOR<br />
project is planned shortly after commencement of production from the Mangala field.<br />
Operations<br />
The Group’s revenues are dependent on the cont<strong>in</strong>ued performance of its operat<strong>in</strong>g facilities. Operational risks <strong>in</strong>clude<br />
ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g asset <strong>in</strong>tegrity, which can be affected by a number of factors <strong>in</strong>clud<strong>in</strong>g improper operat<strong>in</strong>g and ma<strong>in</strong>tenance<br />
regimes and plant availability, which can be significantly impacted by unplanned shutdowns and/or equipment failure, the<br />
performance by and shar<strong>in</strong>g of risk between JV partners and the location of some of the Group’s operations (which may expose<br />
them to natural hazards such as cyclones, flood<strong>in</strong>g and earthquakes). If these risks materialise, the Group may not be able to<br />
meet its corporate responsibility policies and standards, or planned output levels or unit operat<strong>in</strong>g costs. These factors may have<br />
an effect on cost control, or a potentially material impact on the Group’s reputation and the results of the Group’s operations.<br />
Future production of crude oil and natural gas is dependent on the Group f<strong>in</strong>d<strong>in</strong>g, or acquir<strong>in</strong>g and develop<strong>in</strong>g further reserves.<br />
The Group has exploration licences <strong>in</strong> a number of countries where environmental, geological and <strong>in</strong>frastructural conditions are<br />
challeng<strong>in</strong>g and as a consequence costs can be higher.<br />
The cost of drill<strong>in</strong>g, complet<strong>in</strong>g and operat<strong>in</strong>g wells is often uncerta<strong>in</strong>. As a result, the Group may <strong>in</strong>cur cost overruns or may<br />
be required to curtail, delay or cancel drill<strong>in</strong>g operations because of many factors, <strong>in</strong>clud<strong>in</strong>g unexpected drill<strong>in</strong>g conditions,<br />
pressure or irregularities <strong>in</strong> geological formations, equipment failures or accidents, adverse weather conditions, the need for<br />
compliance with environmental regulations, governmental requirements and shortages or delays <strong>in</strong> the availability of drill<strong>in</strong>g<br />
rigs and the delivery of equipment.<br />
If the Group fails to conduct successful exploration activities or to acquire assets hold<strong>in</strong>g proven reserves, the Group’s proven<br />
reserves will decl<strong>in</strong>e as it extracts and depletes exist<strong>in</strong>g reserves. The Group’s future production depends significantly upon its<br />
success <strong>in</strong> f<strong>in</strong>d<strong>in</strong>g or acquir<strong>in</strong>g and develop<strong>in</strong>g additional reserves. If the Group is unsuccessful, it may not meet its production<br />
targets, and its total proven reserves and production will decl<strong>in</strong>e, which could adversely affect the results of its operations and<br />
f<strong>in</strong>ancial condition.<br />
Commercial<br />
<strong>Cairn</strong> India may not be able to obta<strong>in</strong> competitive market prices for its crude oil sales from its fields <strong>in</strong> Rajasthan. <strong>Cairn</strong> India is<br />
obliged to sell 100% of its crude oil production to the GoI or its nom<strong>in</strong>ee, and the GoI is obliged to buy the crude oil pursuant<br />
to the PSC. The purchase price will be based upon a basket of crude oils to be decided between <strong>Cairn</strong> India and the nom<strong>in</strong>ee<br />
based upon a mixture and weight<strong>in</strong>g of crude oils that would produce a quality similar to the quality of crude oil expected to<br />
be produced by <strong>Cairn</strong> India. There can be no assurance that the basket of crude oils used to determ<strong>in</strong>e the price of <strong>Cairn</strong> India<br />
crude oil sales to the nom<strong>in</strong>ee will result <strong>in</strong> a value approximat<strong>in</strong>g to the price used by <strong>Cairn</strong> India <strong>in</strong> its development<br />
and f<strong>in</strong>ancial plann<strong>in</strong>g.<br />
Under the gas sales agreement for the Sangu gas field <strong>in</strong> Bangladesh, the price payable to Capricorn for the supplied gas is<br />
capped at a price which equates to approximately $21 per barrel (Brent). As the price is presently at that cap, the price payable<br />
to Capricorn will not <strong>in</strong>crease <strong>in</strong> l<strong>in</strong>e with <strong>in</strong>creases <strong>in</strong> oil price. The operat<strong>in</strong>g costs of the Sangu gas field have, however,<br />
<strong>in</strong>creased as a result of recent high oil prices. There is a risk, therefore, that further <strong>in</strong>creases <strong>in</strong> the price of oil may further<br />
<strong>in</strong>crease operat<strong>in</strong>g costs at the Sangu gas field and that, accord<strong>in</strong>gly, whilst operat<strong>in</strong>g costs will ultimately be recoverable<br />
under the PSC cost recovery mechanism, Capricorn’s marg<strong>in</strong> under the sales agreement may be further reduced.<br />
Exchange Rates, Interest Rates and Currency Controls<br />
The Group’s Cash Flow, Income Statement and Balance Sheet are reported <strong>in</strong> US Dollars and may be significantly affected by<br />
fluctuations <strong>in</strong> exchange rates. Shares <strong>in</strong> <strong>Cairn</strong> India are, and any dividends which may become payable <strong>in</strong> respect of them will<br />
be, denom<strong>in</strong>ated <strong>in</strong> Rupees. The material hold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India by the Group, whose pr<strong>in</strong>cipal currency is not Rupees, exposes<br />
the Group to foreign currency exchange rate risk.<br />
<strong>Cairn</strong> India has been funded largely <strong>in</strong> United States Dollars through its cash generation from operations, the conversion of the<br />
IPO proceeds and its loan facilities, and has significant United States Dollar cash hold<strong>in</strong>gs. <strong>Cairn</strong> India will nonetheless <strong>in</strong>cur<br />
significant expenses <strong>in</strong> Rupees <strong>in</strong> connection with the development of the oil fields <strong>in</strong> Rajasthan. Accord<strong>in</strong>gly, <strong>Cairn</strong> India has<br />
adopted and implemented a foreign exchange hedg<strong>in</strong>g policy to limit exposure to movement <strong>in</strong> the exchange rate between<br />
the United States Dollar and the Rupee.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 37
RISk FACTORS<br />
CONTINUED<br />
The Group’s f<strong>in</strong>anc<strong>in</strong>g costs may be significantly affected by <strong>in</strong>terest rate volatility. The Group is also exposed to liquidity risks,<br />
<strong>in</strong>clud<strong>in</strong>g risks associated with ref<strong>in</strong>anc<strong>in</strong>g borrow<strong>in</strong>gs as they mature, the risk that borrow<strong>in</strong>g facilities are not available to draw<br />
down and the risk that f<strong>in</strong>ancial assets cannot readily be converted to cash without loss of value.<br />
Furthermore, the GoI currently operates certa<strong>in</strong> controls on currency exports which restrict the transfer from India of Rupees.<br />
While the policy and practice of the GoI has been to relax many of these controls and no restrictions are <strong>in</strong> place at present<br />
that would prevent free remittance of dividends from <strong>Cairn</strong> India to the Company, there is a risk that controls may be<br />
re-imposed <strong>in</strong> future.<br />
Regulation<br />
The Group may <strong>in</strong>cur material costs <strong>in</strong> comply<strong>in</strong>g with, or as a result of health, safety and environmental laws and regulations.<br />
The Group is subject to a broad range of health, safety and environmental laws and regulations that impose controls on, among<br />
other th<strong>in</strong>gs, the storage, handl<strong>in</strong>g and transportation of petroleum products, employee exposure to hazardous substances and<br />
other aspects of its operations.<br />
The Group may also <strong>in</strong>cur liabilities for environmental damage caused by acts or omissions of any third party contractors.<br />
Further, the adoption of new health, safety and environmental laws and regulations, new <strong>in</strong>terpretations of exist<strong>in</strong>g laws,<br />
<strong>in</strong>creased governmental enforcement of environmental laws or other developments <strong>in</strong> the future may require additional capital<br />
expenditures or result <strong>in</strong> the Group <strong>in</strong>curr<strong>in</strong>g additional operat<strong>in</strong>g expenses <strong>in</strong> order to ma<strong>in</strong>ta<strong>in</strong> current or future operations.<br />
These laws and regulations are <strong>in</strong>creas<strong>in</strong>gly str<strong>in</strong>gent and may <strong>in</strong> the future create substantial environmental compliance or<br />
remediation liabilities and costs.<br />
If the Group fails to meet environmental requirements or has a major accident or disaster, it may also be subject to<br />
adm<strong>in</strong>istrative, civil and crim<strong>in</strong>al proceed<strong>in</strong>gs by governmental authorities, as well as civil proceed<strong>in</strong>gs by environmental groups<br />
and other <strong>in</strong>dividuals, which could result <strong>in</strong> f<strong>in</strong>es, penalties and damages aga<strong>in</strong>st it as well as orders that could limit, halt or<br />
even cause closure of its operations, any of which could have material adverse effect on its bus<strong>in</strong>ess, results of operations and<br />
f<strong>in</strong>ancial condition.<br />
The <strong>Cairn</strong> India Group is also subject to limits as to how much it may borrow under both the Indian Companies Act 1956 and<br />
its Articles of Association. Indian law further restricts the ability of the Company to dispose of shares <strong>in</strong> <strong>Cairn</strong> India for certa<strong>in</strong><br />
periods of time.<br />
Capricorn is still wait<strong>in</strong>g for amendments to its PSCs <strong>in</strong> Blocks 5 and 10 <strong>in</strong> Bangladesh to be formalised <strong>in</strong> writ<strong>in</strong>g, further details<br />
of which are set out on page 20. Capricorn also currently has licence awards pend<strong>in</strong>g <strong>in</strong> Spa<strong>in</strong> and <strong>in</strong> Sicily, further details of<br />
which are set out on page 20.<br />
Market Place<br />
The Group’s results of operations and f<strong>in</strong>ancial condition are subject to fluctuations <strong>in</strong> oil and gas prices. The oil and natural<br />
gas <strong>in</strong>dustry is highly competitive. Due to, amongst other th<strong>in</strong>gs, the significant <strong>in</strong>creases <strong>in</strong> <strong>in</strong>ternational oil prices, the Group<br />
is subject to highly competitive market conditions for the resources required to conduct its ongo<strong>in</strong>g bus<strong>in</strong>ess, <strong>in</strong> particular<br />
with regard to the engagement of lead<strong>in</strong>g third party service providers and the purchase of capital equipment. Coupled<br />
with relatively limited resources and expertise <strong>in</strong> India, <strong>in</strong> particular <strong>in</strong> the area surround<strong>in</strong>g Rajasthan, this has resulted <strong>in</strong> a<br />
stra<strong>in</strong> on the specialist eng<strong>in</strong>eer<strong>in</strong>g and other services that <strong>Cairn</strong> India needs to develop its fields <strong>in</strong> Rajasthan. The rema<strong>in</strong><strong>in</strong>g<br />
development costs, as well as the current target of the second half of 2009 for first commercial production from the Mangala<br />
field, are subject to these risks of raw material and equipment shortages, or price <strong>in</strong>creases above those anticipated and an<br />
<strong>in</strong>ability to procure or design the eng<strong>in</strong>eer<strong>in</strong>g services required. Year on year cost escalation <strong>in</strong> the upstream oil and gas<br />
sectors is reported to have been <strong>in</strong> excess of 20% <strong>in</strong> US Dollar terms dur<strong>in</strong>g <strong>2007</strong>.<br />
Insurance<br />
Consistent with good <strong>in</strong>dustry practice, a comprehensive <strong>in</strong>surance programme is ma<strong>in</strong>ta<strong>in</strong>ed to mitigate significant losses.<br />
There is a risk, however, that the Group’s <strong>in</strong>surance policies may not be sufficient <strong>in</strong> cover<strong>in</strong>g all losses which it or any third<br />
parties may suffer. If the Group suffers an event for which it is not adequately <strong>in</strong>sured, there is a risk that this could have a<br />
material adverse effect on its bus<strong>in</strong>ess, results of operations and f<strong>in</strong>ancial condition. The programme is also subject to certa<strong>in</strong><br />
limits, deductibles and other terms and conditions.<br />
Human Resources<br />
The Group’s performance and its ability to mitigate those risk factors with<strong>in</strong> its control depend on the skills and efforts of its<br />
employees and management teams across the Group. Future success will depend to a large extent on the Group’s cont<strong>in</strong>ued<br />
ability to attract, reta<strong>in</strong> and motivate highly skilled and qualified personnel. Attract<strong>in</strong>g and reta<strong>in</strong><strong>in</strong>g top quality managerial talent<br />
has become a serious challenge fac<strong>in</strong>g companies <strong>in</strong> the oil and gas exploration and production sector. Failure to have or reta<strong>in</strong><br />
key positions and functions <strong>in</strong> place could have a material adverse effect on the Group’s bus<strong>in</strong>ess, results of operations and<br />
f<strong>in</strong>ancial condition.<br />
38 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
RISk FACTORS<br />
CONTINUED<br />
Corporate Responsibility<br />
The Group recognises that apply<strong>in</strong>g its CR Policies and ‘Guid<strong>in</strong>g Pr<strong>in</strong>ciples’ <strong>in</strong> all activities is essential <strong>in</strong> ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g its ‘licence<br />
to operate’ and bus<strong>in</strong>ess reputation. CR risks occur when any part of the bus<strong>in</strong>ess fails to implement these Policies and ‘Guid<strong>in</strong>g<br />
Pr<strong>in</strong>ciples’. CR risks that could affect the Group’s ability to deliver projects on time and with<strong>in</strong> budget <strong>in</strong>clude <strong>in</strong>adequate<br />
stakeholder engagement, failure to put <strong>in</strong> place appropriate controls to mitigate environmental and social impacts, not hav<strong>in</strong>g<br />
adequate processes <strong>in</strong> place to protect human rights <strong>in</strong> activities <strong>in</strong> our ‘sphere of <strong>in</strong>fluence’ and the <strong>in</strong>effective implementation<br />
of health and safety policies.<br />
War, Terrorist Attack and Natural Disasters<br />
The Group’s bus<strong>in</strong>ess may be adversely affected by a war, terrorist attack, natural disaster or other catastrophe, particularly given<br />
the location of some of the Group’s assets <strong>in</strong> South Asia where terrorist attacks have become more prevalent <strong>in</strong> recent times.<br />
Furthermore, the Group’s assets are exposed to risks from adverse weather conditions; <strong>in</strong> particular, Capricorn’s assets <strong>in</strong><br />
Bangladesh are exposed to risks from extreme weather conditions, which are often experienced <strong>in</strong> South Asia. In addition,<br />
the low-ly<strong>in</strong>g nature of much of Bangladesh puts it at risk from any rise <strong>in</strong> sea levels as a result of global warm<strong>in</strong>g. Any damage<br />
to the Capricorn <strong>in</strong>frastructure <strong>in</strong> Bangladesh or disruption or suspension of production (<strong>in</strong> particular from the Sangu gas field)<br />
could have a material adverse affect on the f<strong>in</strong>ancial condition and/or operat<strong>in</strong>g results of Capricorn and the Group. In addition,<br />
Capricorn’s assets <strong>in</strong> Greenland are subject to the onset of ice dur<strong>in</strong>g a portion of the year.<br />
Political Climate<br />
The Group is active <strong>in</strong> a number of overseas markets and may be affected by a change <strong>in</strong> fiscal policy <strong>in</strong> respect of, or which<br />
impacts upon, these markets. The Group cannot predict the impact of future changes <strong>in</strong> fiscal policy <strong>in</strong> the countries and<br />
markets <strong>in</strong> which it operates. Amendments to exist<strong>in</strong>g legislation (particularly <strong>in</strong>creases <strong>in</strong> tax rates or withdrawals of tax relief),<br />
the <strong>in</strong>troduction of new tax laws (such as the imposition of import and/or export quotas or import and/or export tariffs) and<br />
changes from time to time <strong>in</strong> the <strong>in</strong>terpretation of exist<strong>in</strong>g tax laws could materially adversely affect the Group’s reputation,<br />
f<strong>in</strong>ancial condition and/or operat<strong>in</strong>g results.<br />
In particular, <strong>Cairn</strong> India may be liable to pay cess under the Indian Oil Industry (Development) Act 1974 (‘OIDA cess’)<br />
<strong>in</strong> relation to the production of crude oil from Rajasthan under the terms of the RJ-ON-90/1PSC. After receiv<strong>in</strong>g an order<br />
confirm<strong>in</strong>g its liability to pay OIDA cess on pit oil <strong>in</strong> March 2006, <strong>Cairn</strong> India appealed this decision with the Customs, Excise<br />
and Service Tax Appellate Tribunal <strong>in</strong> New Delhi; this appeal currently rema<strong>in</strong>s pend<strong>in</strong>g. Any requirement to pay OIDA cess on<br />
commercial production of crude oil, whether or not recoverable pursuant to the terms of the PSC, may have a material adverse<br />
effect on <strong>Cairn</strong> India’s f<strong>in</strong>ancial condition and results of operations.<br />
In respect of the political climate <strong>in</strong> Nepal, despite the ceasefire and ongo<strong>in</strong>g negotiations between the Government of Nepal<br />
and Maoist rebels, the political situation <strong>in</strong> that country is extremely sensitive. The Group has sought to preserve its contractual<br />
position with respect to its Nepalese <strong>in</strong>terests by serv<strong>in</strong>g force majeure notices on the Government of Nepal. There is a risk<br />
that the situation <strong>in</strong> Nepal may never improve sufficiently to enable the Group to recommence its activities <strong>in</strong> that country.<br />
In addition, there is a risk that if the Government of Nepal changes as a result of the recent political <strong>in</strong>stability <strong>in</strong> that country,<br />
the new government may seek to disclaim the Group’s <strong>in</strong>terests <strong>in</strong> Nepal.<br />
Cash Flow<br />
Due to their concentration on exploration, appraisal and development activities, both <strong>Cairn</strong> India and Capricorn are expected<br />
to rema<strong>in</strong> cash flow negative for some time. <strong>Cairn</strong> India plans to f<strong>in</strong>ance its operations from cash generated from its produc<strong>in</strong>g<br />
fields, from the cash proceeds received and reta<strong>in</strong>ed <strong>in</strong> respect of the IPO, from, subject to shareholder approval, the private<br />
placement of shares to Petronas and Orient Global and from committed and available loan facilities. Capricorn expects to<br />
f<strong>in</strong>ance its activities from cash generated from its produc<strong>in</strong>g field, from the recent disposal of a 50% <strong>in</strong>terest <strong>in</strong> this field,<br />
from cash <strong>in</strong>jected as share capital by the Company and from the issue of 10% of the share capital of Capricorn to Dyas BV,<br />
further details of which are set out on page 91.<br />
If production from any of the Group’s currently produc<strong>in</strong>g fields is <strong>in</strong>terrupted or suspended, this would have a further impact<br />
on the Group’s cash flow.<br />
The Group is also exposed to credit risks if counterparties fail to meet their payment obligations.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 39
CORPORATE GOVERNANCE STATEMENT<br />
<strong>Cairn</strong> is committed to achiev<strong>in</strong>g compliance with the pr<strong>in</strong>ciples and provisions set out <strong>in</strong> the Comb<strong>in</strong>ed Code appended<br />
to the List<strong>in</strong>g Rules and to ensur<strong>in</strong>g that high standards of corporate governance are ma<strong>in</strong>ta<strong>in</strong>ed. The Board considers<br />
that the Company is compliant with the Comb<strong>in</strong>ed Code, other than <strong>in</strong> the areas detailed on page 49. Set out below is<br />
a statement of how the Company applied the pr<strong>in</strong>ciples of the Comb<strong>in</strong>ed Code for the year ended 31 December <strong>2007</strong>.<br />
The Board<br />
<strong>Cairn</strong>’s bus<strong>in</strong>ess is <strong>in</strong>ternational <strong>in</strong> scope and carries political, commercial and technical risks. Accord<strong>in</strong>gly, particular attention<br />
is paid to the composition and balance of the Board to ensure that it has wide experience of the sector and regulatory<br />
environment <strong>in</strong> which <strong>Cairn</strong> operates and appropriate f<strong>in</strong>ancial and risk management skills. In each Board appo<strong>in</strong>tment,<br />
whether executive or non-executive, the Board considers that objectivity and <strong>in</strong>tegrity, as well as skills, experience and ability<br />
which will assist the Board <strong>in</strong> its key functions, are prerequisites for appo<strong>in</strong>tment.<br />
The Board currently comprises the Chairman, the Chief Executive, five executive directors and five <strong>in</strong>dependent non-executive<br />
directors. The directors’ biographies are on page 34. Andrew Shilston <strong>in</strong>tends to retire as a non-executive director of the<br />
Company at the AGM to be held on 23 May 2008. Mr Shilston has been a director of the Company s<strong>in</strong>ce November 2004<br />
and has made a significant contribution <strong>in</strong> his role both as an <strong>in</strong>dependent non-executive director and as chairman of the<br />
audit committee dur<strong>in</strong>g an excit<strong>in</strong>g and momentous period for the Company.<br />
Follow<strong>in</strong>g Mr Shilston’s retirement, if the directors who are seek<strong>in</strong>g re-election at the AGM are re-elected, the Board will<br />
comprise the Chairman, the Chief Executive, five executive directors and four <strong>in</strong>dependent non-executive directors. The Board<br />
is currently look<strong>in</strong>g to appo<strong>in</strong>t additional <strong>in</strong>dependent non-executive directors to provide relevant experience, diversity and to<br />
complement exist<strong>in</strong>g non-executive strength and facilitate succession plann<strong>in</strong>g.<br />
Hamish Grossart, Deputy Chairman, is <strong>Cairn</strong>’s senior <strong>in</strong>dependent non-executive director. A key responsibility for the senior<br />
<strong>in</strong>dependent non-executive director is to be available to shareholders <strong>in</strong> the event that they may feel it <strong>in</strong>appropriate to relay<br />
views through the Chairman or the Chief Executive or F<strong>in</strong>ance Director. In addition, the senior <strong>in</strong>dependent non-executive<br />
director takes the lead when the non-executive directors assess the performance of the Chairman, further details of which<br />
are set out on page 41.<br />
All of the directors are subject to election by shareholders at the first <strong>Annual</strong> General Meet<strong>in</strong>g after their appo<strong>in</strong>tment to the<br />
Board and to re-election by shareholders at least once every three years. In addition, any non-executive director who has served<br />
on the Board for more than n<strong>in</strong>e years is subject to annual re-election.<br />
The division of responsibilities between the Chairman and the Chief Executive has been clearly established, set out <strong>in</strong> writ<strong>in</strong>g<br />
and agreed by the Board.<br />
The Board has a formal schedule of matters specifically reserved to it for decision. These reserved matters <strong>in</strong>clude determ<strong>in</strong>ation<br />
of the overall strategy of the Group and approval of the annual report and accounts and any other f<strong>in</strong>ancial statements, the<br />
Group’s annual budget and amendments to that budget over a particular amount, borrow<strong>in</strong>g and security, acquisitions and<br />
disposals, capital expenditure over a specified amount, amendments to the organisational structure of the Group and Board,<br />
approval of significant changes to account<strong>in</strong>g policies and approval of management <strong>in</strong>centive schemes and Group policy on<br />
pensions. The Board delegates operational management of the Group on a day-to-day basis to the GMB, which comprises the<br />
executive directors and senior management.<br />
The Board has full and timely access to all relevant <strong>in</strong>formation to enable it to perform its duties. The Company Secretary is<br />
responsible for advis<strong>in</strong>g the Board, through the Chairman, on all corporate governance matters. In addition, each director has<br />
access to the advice and services of the Company Secretary and Deputy Company Secretary. There is also a procedure agreed<br />
by the Board for directors, <strong>in</strong> furtherance of their duties, to take <strong>in</strong>dependent professional advice if necessary, at the Company’s<br />
expense, up to a pre-determ<strong>in</strong>ed limit.<br />
Dur<strong>in</strong>g <strong>2007</strong>, seven scheduled meet<strong>in</strong>gs of the Board were held, all of which were held at the Company’s registered office <strong>in</strong><br />
Ed<strong>in</strong>burgh. Details of attendance at each of those meet<strong>in</strong>gs, and at meet<strong>in</strong>gs of Board committees, are set out on page 45.<br />
Dur<strong>in</strong>g the year, certa<strong>in</strong> further meet<strong>in</strong>gs took place to deal with specific matters which required to be considered at short<br />
notice. When a specific matter requires consideration at short notice, there is a procedure which sets out when those matters<br />
must be considered at a short notice Board meet<strong>in</strong>g and when they may be dealt with by a committee of the Board (compris<strong>in</strong>g<br />
at least two non-executive directors (one of whom must be the Chairman or Deputy Chairman) and two executive directors).<br />
Any director who is physically unable to attend Board and committee meet<strong>in</strong>gs is given the opportunity to be consulted and<br />
comment <strong>in</strong> advance of the meet<strong>in</strong>g by telephone or <strong>in</strong> writ<strong>in</strong>g. Video and telephone conferenc<strong>in</strong>g facilities are also used<br />
when directors are not able to attend meet<strong>in</strong>gs <strong>in</strong> person.<br />
40 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
The formal agenda for each scheduled Board meet<strong>in</strong>g, which regularly <strong>in</strong>cludes presentations from senior operational<br />
management, is set by the Chairman <strong>in</strong> consultation with the Chief Executive and the Company Secretary. S<strong>in</strong>ce the IPO of<br />
<strong>Cairn</strong> India on the BSE and the NSE at the start of <strong>2007</strong>, the agenda for each Board meet<strong>in</strong>g has <strong>in</strong>cluded a detailed update on<br />
matters <strong>in</strong> respect of the Group’s Indian bus<strong>in</strong>ess from those directors of the Company who also sit <strong>in</strong> a non-executive capacity<br />
on the board of <strong>Cairn</strong> India, currently Sir Bill Gammell, Norman Murray and Malcolm Thoms. The Chief Executive of <strong>Cairn</strong> India,<br />
Rahul Dhir, also frequently attends parts of the meet<strong>in</strong>gs to ensure that the Board is kept fully briefed on matters relat<strong>in</strong>g to<br />
<strong>Cairn</strong> India. Formal m<strong>in</strong>utes of all Board and committee meet<strong>in</strong>gs are circulated to all directors prior to the next Board meet<strong>in</strong>g<br />
and are considered for approval at that Board meet<strong>in</strong>g. In addition, the members of the Board are <strong>in</strong> frequent contact between<br />
meet<strong>in</strong>gs to progress the Group’s bus<strong>in</strong>ess. The non-executive directors also meet <strong>in</strong>formally, without any executives present,<br />
on a regular basis to discuss matters <strong>in</strong> respect of the bus<strong>in</strong>ess.<br />
New directors receive a full and appropriate <strong>in</strong>duction on jo<strong>in</strong><strong>in</strong>g the Board. This <strong>in</strong>volves meet<strong>in</strong>gs with other Board members,<br />
members of the GMB and certa<strong>in</strong> of the Company’s pr<strong>in</strong>cipal advisers. In addition, a new director is provided with an <strong>in</strong>duction<br />
pack which conta<strong>in</strong>s background materials and general <strong>in</strong>formation on the Company, the Company’s policies and procedures,<br />
f<strong>in</strong>ancial <strong>in</strong>formation, an operational review and a brief<strong>in</strong>g on directors’ legal and regulatory responsibilities.<br />
The Company provides the necessary resources for develop<strong>in</strong>g and updat<strong>in</strong>g its directors’ knowledge and capabilities. In<br />
particular, the Company is committed to the provision of cont<strong>in</strong>u<strong>in</strong>g professional development tra<strong>in</strong><strong>in</strong>g to its directors and <strong>in</strong><br />
<strong>2007</strong> held a number of sem<strong>in</strong>ars for Board members, which are regularly presented by the Company’s external advisers and<br />
guest speakers, on subjects appropriate to the Company’s bus<strong>in</strong>ess, <strong>in</strong>clud<strong>in</strong>g changes to legislation, regulation and market<br />
practice. For example, at the meet<strong>in</strong>g of the Board <strong>in</strong> December <strong>2007</strong>, the <strong>Cairn</strong> Professor of Petroleum Eng<strong>in</strong>eer<strong>in</strong>g from<br />
Heriot Watt University (a position recently created through an alliance between the Company and the University) spoke to the<br />
Board about enhanced oil recovery techniques and their applications. These sem<strong>in</strong>ars were held at the end of Board meet<strong>in</strong>gs<br />
and were attended by all directors present at such meet<strong>in</strong>gs. This process is cont<strong>in</strong>u<strong>in</strong>g <strong>in</strong> 2008. Any director may request that<br />
a particular subject is covered <strong>in</strong> a sem<strong>in</strong>ar. In addition, all press cutt<strong>in</strong>gs relat<strong>in</strong>g to the Company and all brokers’ and analysts’<br />
reports on the Company are distributed to all directors.<br />
The Company has directors’ and officers’ liability <strong>in</strong>surance <strong>in</strong> place.<br />
Performance Evaluations<br />
The Board has a formal annual process of rigorous performance evaluation for the Board, audit, nom<strong>in</strong>ation and remuneration<br />
committees and <strong>in</strong>dividual directors. The Board reviews on an annual basis whether such performance evaluation should be<br />
conducted us<strong>in</strong>g an external resource. The Board has decided, however, that there is value <strong>in</strong> conduct<strong>in</strong>g the process <strong>in</strong>ternally<br />
to develop an appropriately tailored approach and benefit first hand from direct <strong>in</strong>put from <strong>in</strong>dividual directors.<br />
The performance evaluation of the Board and the Board committees was primarily based upon answers to a detailed<br />
questionnaire which had been updated s<strong>in</strong>ce the previous year’s evaluation and which was prepared <strong>in</strong>ternally. The questionnaire<br />
was distributed to all Board members and the Company Secretary. The areas covered <strong>in</strong> the questionnaire <strong>in</strong>cluded the<br />
effectiveness of the Board and Board committees, performance aga<strong>in</strong>st objectives, preparation for and performance at meet<strong>in</strong>gs<br />
and corporate governance matters. One particular area that the questionnaire addressed was the performance of those directors<br />
who are also non-executive directors of <strong>Cairn</strong> India <strong>in</strong> respect of the stewardship of that part of the Group’s bus<strong>in</strong>ess. The<br />
questionnaire addressed all of the issues raised by the Higgs Review of the role and effectiveness of non-executive directors.<br />
The review process carried out pursuant to the questionnaires can be summarised as follows:<br />
Evaluators Chairman Executive directors Non-executive directors<br />
Evaluat<strong>in</strong>g<br />
Board ✔ ✔ ✔<br />
Chairman ✔ ✔<br />
Board committees ✔ ✔ ✔<br />
Executive directors ✔ ✔<br />
Non-executive directors ✔ ✔<br />
Self-assessment ✔ ✔ ✔<br />
Once a questionnaire had been completed by each member of the Board and the Company Secretary, the Chairman held a<br />
meet<strong>in</strong>g with each director and the Company Secretary <strong>in</strong>dividually to discuss their responses. The Chairman then reported the<br />
results of the process to the Board at a Board meet<strong>in</strong>g, which discussed the comments and implemented the conclusions. The<br />
Board and Board committees are satisfied that they are operat<strong>in</strong>g effectively.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 41
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
The Deputy Chairman, who is also the Company’s senior <strong>in</strong>dependent non-executive director, sought the views of the<br />
executive directors and met with each of the other non-executive directors, <strong>in</strong> the absence of the Chairman, to discuss<br />
and assess the Chairman’s performance. The results of this review were then discussed with the Chairman. The Board<br />
(not <strong>in</strong>clud<strong>in</strong>g the Chairman) is satisfied that the Chairman’s performance is effective and that he demonstrates cont<strong>in</strong>ued<br />
commitment to the role.<br />
The evaluation <strong>in</strong>dicated areas for improvement, but no significant problems were identified. A performance evaluation of the<br />
Board, the Board committees and <strong>in</strong>dividual directors will cont<strong>in</strong>ue to be conducted annually and the process for such review<br />
will cont<strong>in</strong>ue to be reviewed by the Board <strong>in</strong> order to optimise the process.<br />
The executive directors have their performance <strong>in</strong>dividually reviewed by the remuneration committee aga<strong>in</strong>st objectives which<br />
are set annually. The bonuses payable to the executive directors under the Company’s cash bonus scheme (described further on<br />
page 62) are l<strong>in</strong>ked directly to the results of these reviews.<br />
Independence of Non-Executive Directors<br />
The Board evaluation and review process also covered the <strong>in</strong>dependence of each of the non-executive directors, tak<strong>in</strong>g <strong>in</strong>to<br />
account their <strong>in</strong>tegrity, objectivity and contribution to the Board and its committees. In particular, the process considered the<br />
<strong>in</strong>dependence of Hamish Grossart and Ed Story.<br />
Hamish Grossart<br />
S<strong>in</strong>ce Mr Grossart has served on the Board for more than n<strong>in</strong>e years, <strong>in</strong> terms of the Comb<strong>in</strong>ed Code he can be counted as<br />
<strong>in</strong>dependent only if the Board deems him to be so.<br />
Mr Grossart commits a substantial amount of time to the affairs of the Company. Mr Grossart has also been the Deputy<br />
Chairman and a member of the Company’s nom<strong>in</strong>ation, remuneration and audit committees for a number of years and has been<br />
the Company’s senior <strong>in</strong>dependent non-executive director s<strong>in</strong>ce the role was created <strong>in</strong> 2003. Mr Grossart is a well respected<br />
and highly experienced bus<strong>in</strong>essman with a thorough knowledge of the Group’s bus<strong>in</strong>ess.<br />
The Board is aware that PIRC have queried whether Mr Grossart can be classed as an <strong>in</strong>dependent director of the Company.<br />
It is understood, however, that <strong>in</strong> terms of its <strong>in</strong>ternal policies, PIRC does not consider any non-executive director who has<br />
been on a board for more than n<strong>in</strong>e years to be <strong>in</strong>dependent, notwithstand<strong>in</strong>g that the Comb<strong>in</strong>ed Code permits the Board to<br />
determ<strong>in</strong>e a director with this length of tenure to be <strong>in</strong>dependent. Accord<strong>in</strong>gly, the Board has rigorously reviewed the matter,<br />
without Mr Grossart be<strong>in</strong>g present. Hav<strong>in</strong>g undergone such a process, the Board is firmly of the view that Mr Grossart rema<strong>in</strong>s<br />
<strong>in</strong>dependent <strong>in</strong> character and judgement, that his performance cont<strong>in</strong>ues to be effective and that he demonstrates cont<strong>in</strong>ued<br />
commitment to the role. In particular, the Board noted that Mr Grossart does not participate <strong>in</strong> the Company’s cash bonus<br />
scheme, share option plans, long-term <strong>in</strong>centive plans or pension scheme and is not dependent upon the fees received from<br />
the Company as his primary source of <strong>in</strong>come.<br />
Mr Grossart has <strong>in</strong>dicated that he is will<strong>in</strong>g to stand for re-election as a director of the Company on an annual basis and a<br />
resolution will be proposed at the AGM to be held on 23 May 2008 to this effect. The Board believes that it is <strong>in</strong> shareholders’<br />
<strong>in</strong>terests for Mr Grossart to be re-elected as an <strong>in</strong>dependent non-executive director of the Company. The Board believes<br />
Mr Grossart’s considerable bus<strong>in</strong>ess experience enables him to cont<strong>in</strong>ue to challenge rigorously the executive directors,<br />
the Board and the committees on which he sits <strong>in</strong> both a constructive and appropriate manner and br<strong>in</strong>gs a longer-term<br />
perspective of the Company and the oil <strong>in</strong>dustry to the Board <strong>in</strong> his position as Deputy Chairman and senior <strong>in</strong>dependent<br />
non-executive director.<br />
Ed Story<br />
Mr Story has also served on the Board for more than n<strong>in</strong>e years and, accord<strong>in</strong>gly, can only be considered as <strong>in</strong>dependent if<br />
the Board deems him to be so.<br />
Mr Story was appo<strong>in</strong>ted an <strong>in</strong>dependent non-executive director of <strong>Cairn</strong> <strong>in</strong> 1997. He is a highly respected <strong>in</strong>dividual <strong>in</strong> the<br />
<strong>in</strong>ternational oil and gas <strong>in</strong>dustry, <strong>in</strong> which he has more than 40 years’ experience. He has a particularly detailed knowledge<br />
of the Group’s activities and he rema<strong>in</strong>s committed to the Company. Mr Story is a member of the Company’s nom<strong>in</strong>ation,<br />
remuneration and audit committees.<br />
After rigorous review, and without Mr Story be<strong>in</strong>g present, the Board has concluded that Mr Story rema<strong>in</strong>s <strong>in</strong>dependent <strong>in</strong><br />
character and judgement and that his performance cont<strong>in</strong>ues to be effective as well as demonstrat<strong>in</strong>g a cont<strong>in</strong>ued commitment<br />
to his role as a non-executive director. There is no evidence that length of tenure is hav<strong>in</strong>g any adverse impact on his<br />
<strong>in</strong>dependence. The Board also noted that Mr Story does not participate <strong>in</strong> the Company’s cash bonus scheme, share option<br />
plans, long-term <strong>in</strong>centive plans or pension scheme and is not dependent upon the fees received from the Company as his<br />
primary source of <strong>in</strong>come.<br />
42 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
Mr Story has <strong>in</strong>dicated that he is will<strong>in</strong>g to stand for re-election as a director of the Company on an annual basis and a resolution<br />
will be proposed at the AGM to be held on 23 May 2008 to this effect. The Board believes that it is <strong>in</strong> shareholders’ <strong>in</strong>terests<br />
for Mr Story to be re-elected as an <strong>in</strong>dependent non-executive director of the Company. The Board believes Mr Story cont<strong>in</strong>ues<br />
to challenge rigorously the executive directors, the Board and the committees on which he sits <strong>in</strong> both a constructive and<br />
appropriate manner and that his considerable expertise and <strong>in</strong>dustry experience is of great benefit to the Board, the Company<br />
and shareholders.<br />
Hav<strong>in</strong>g reviewed the <strong>in</strong>dependence of each of the non-executive directors, the Board concluded that all non-executive directors<br />
of the Company are <strong>in</strong>dependent.<br />
Board Committees<br />
The Board has established an audit committee, a remuneration committee and a nom<strong>in</strong>ation committee, each of which has<br />
formal terms of reference approved by the Board. The terms of reference for each of these committees satisfy the requirements<br />
of the Comb<strong>in</strong>ed Code and are reviewed <strong>in</strong>ternally on an ongo<strong>in</strong>g basis by the Board. Copies of the terms of reference are<br />
available for <strong>in</strong>spection on request and will be available for <strong>in</strong>spection before the AGM to be held on 23 May 2008.<br />
The committees are provided with all necessary resources to enable them to undertake their duties <strong>in</strong> an effective manner.<br />
The Company Secretary acts as secretary to the remuneration and nom<strong>in</strong>ation committees and the Deputy Company Secretary<br />
acts as secretary to the audit committee. The m<strong>in</strong>utes of all committee meet<strong>in</strong>gs are circulated to all directors.<br />
Set out below are reports from the audit committee, remuneration committee and nom<strong>in</strong>ation committee.<br />
1. Audit Committee <strong>Report</strong><br />
The audit committee comprises three non-executive directors, all of whom are considered by the Board to be <strong>in</strong>dependent.<br />
Currently, its members are Andrew Shilston (chairman), Hamish Grossart and Ed Story. The Board is satisfied that two members<br />
of the committee have recent and relevant f<strong>in</strong>ancial experience. Mr Shilston was the F<strong>in</strong>ance Director of Enterprise Oil plc from<br />
1993 to 2002 and is currently the F<strong>in</strong>ance Director of Rolls-Royce plc. Mr Grossart serves on audit committees of other listed<br />
companies and tra<strong>in</strong>ed as an <strong>in</strong>vestment banker.<br />
Andrew Shilston <strong>in</strong>tends to retire as a director of the Company at the AGM to be held on 23 May 2008. The nom<strong>in</strong>ation<br />
committee is review<strong>in</strong>g the future composition of the audit committee.<br />
The audit committee met four times <strong>in</strong> <strong>2007</strong>. At the request of the audit committee, the F<strong>in</strong>ance Director and senior members of<br />
the F<strong>in</strong>ance Department attended each of these meet<strong>in</strong>gs. The Chairman also attended two meet<strong>in</strong>gs as an observer, on be<strong>in</strong>g<br />
<strong>in</strong>vited to do so by the committee. In addition, all four meet<strong>in</strong>gs were attended by the external auditors and by the <strong>in</strong>ternal<br />
auditors.<br />
The external auditors receive copies of all audit committee papers (<strong>in</strong>clud<strong>in</strong>g papers to be considered at meet<strong>in</strong>gs when they<br />
are not <strong>in</strong> attendance) and m<strong>in</strong>utes of all committee meet<strong>in</strong>gs. In addition, the chairman of the committee regularly meets with<br />
the external audit partner to discuss matters relevant to the Company.<br />
The role of the committee <strong>in</strong>cludes:<br />
• monitor<strong>in</strong>g the <strong>in</strong>tegrity of the f<strong>in</strong>ancial statements of the Company and formal announcements relat<strong>in</strong>g to the Company’s<br />
f<strong>in</strong>ancial performance and review<strong>in</strong>g any significant f<strong>in</strong>ancial report<strong>in</strong>g judgements conta<strong>in</strong>ed <strong>in</strong> them;<br />
• review<strong>in</strong>g account<strong>in</strong>g policies, account<strong>in</strong>g treatments and disclosures <strong>in</strong> f<strong>in</strong>ancial reports;<br />
• review<strong>in</strong>g the Company’s <strong>in</strong>ternal f<strong>in</strong>ancial controls and <strong>in</strong>ternal control and risk management systems;<br />
• monitor<strong>in</strong>g and review<strong>in</strong>g the effectiveness of the Company’s <strong>in</strong>ternal audit function;<br />
• oversee<strong>in</strong>g the Company’s relationship with the external auditors, <strong>in</strong>clud<strong>in</strong>g mak<strong>in</strong>g recommendations to the Board as to the<br />
appo<strong>in</strong>tment or reappo<strong>in</strong>tment of the external auditors, review<strong>in</strong>g their terms of engagement, and monitor<strong>in</strong>g the external<br />
auditors’ <strong>in</strong>dependence, objectivity and effectiveness; and<br />
• review<strong>in</strong>g the Company’s whistleblow<strong>in</strong>g procedures and ensur<strong>in</strong>g that arrangements are <strong>in</strong> place for the proportionate and<br />
<strong>in</strong>dependent <strong>in</strong>vestigation of possible improprieties <strong>in</strong> respect of f<strong>in</strong>ancial report<strong>in</strong>g and other matters and for appropriate<br />
follow-up action.<br />
The audit committee met on three occasions dur<strong>in</strong>g the year end process. Issues likely to impact the f<strong>in</strong>ancial statements are<br />
raised at the <strong>in</strong>itial meet<strong>in</strong>g by both the senior management and the external auditors. The auditors also present their audit<br />
plan. Audit committee guidance is sought on account<strong>in</strong>g policies and assumptions to be adopted <strong>in</strong> prepar<strong>in</strong>g the f<strong>in</strong>ancial<br />
statements. After discuss<strong>in</strong>g and challeng<strong>in</strong>g the issues raised, the audit committee recommends the policies to be adopted<br />
or direct senior management to produce further <strong>in</strong>formation if deemed necessary.<br />
At the f<strong>in</strong>al meet<strong>in</strong>g, the external auditors report their audit results to the audit committee, <strong>in</strong>clud<strong>in</strong>g a summary of the<br />
significant account<strong>in</strong>g and audit<strong>in</strong>g issues, <strong>in</strong>ternal control f<strong>in</strong>d<strong>in</strong>gs and a summary of audit differences identified. The audit<br />
committee considers any disagreements <strong>in</strong> account<strong>in</strong>g treatment between management and the auditors, should any arise.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 43
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
The audit committee has established a policy <strong>in</strong> relation to the supply of non-audit services by the external auditors and<br />
other third parties. The Company will engage an external adviser to provide non-audit services on the basis of the skills and<br />
experience required for the work, where benefit will be derived as a result of the third party’s knowledge of the Company and<br />
cost. These advisers may <strong>in</strong>clude the Company’s external auditors for a restricted list of non-audit services, although, before<br />
the engagement commences, the Company must be satisfied that the auditors’ objectivity and <strong>in</strong>dependence would not be<br />
compromised <strong>in</strong> any way as a result of be<strong>in</strong>g <strong>in</strong>structed to carry out those services. If the cumulative fees to be paid to an<br />
external adviser for the provision of non-audit services are below a certa<strong>in</strong> level, the adviser may be engaged <strong>in</strong> accordance with<br />
the Company’s f<strong>in</strong>ancial delegations of authority after a quotation has been received. If the fees payable are expected to exceed<br />
that level on a cumulative basis, the engagement must be approved by the audit committee <strong>in</strong> advance after follow<strong>in</strong>g a tender<br />
process.<br />
kPMG LLP has been appo<strong>in</strong>ted by the audit committee to supervise and co-ord<strong>in</strong>ate the Company’s <strong>in</strong>ternal audit function.<br />
At the beg<strong>in</strong>n<strong>in</strong>g of each year, an <strong>in</strong>ternal audit plan is developed by the <strong>in</strong>ternal auditor, <strong>in</strong> consultation with senior<br />
management, based on a review of the outcome of the previous year’s <strong>in</strong>ternal audit, the significant risks <strong>in</strong> the Group Risk<br />
Matrix and identified mitigation measures. The <strong>in</strong>ternal auditor also attends the Group Risk Management Committee meet<strong>in</strong>gs<br />
to ma<strong>in</strong>ta<strong>in</strong> an understand<strong>in</strong>g of the bus<strong>in</strong>ess activities and associated risks. The audit committee receives updates on the<br />
<strong>in</strong>ternal audit work plan on an ongo<strong>in</strong>g basis. The external auditors do not place any reliance on the work undertaken by<br />
the Company’s <strong>in</strong>ternal audit function due to the nature of the scope and the tim<strong>in</strong>g of their work. The external auditors do,<br />
however, attend audit committee meet<strong>in</strong>gs where <strong>in</strong>ternal audit updates are given.<br />
The Company undertook an audit tender process <strong>in</strong> 2003, as a result of which Ernst & Young LLP were re-engaged as the<br />
Company’s auditors. The Company monitors its auditors’ performance on an ongo<strong>in</strong>g basis, <strong>in</strong>clud<strong>in</strong>g an annual assessment<br />
carried out by the audit committee with <strong>in</strong>put from the F<strong>in</strong>ance Director and other key members of the f<strong>in</strong>ance team.<br />
Follow<strong>in</strong>g such assessment, the audit committee meets to discuss what actions, if any, require to be taken.<br />
2. Remuneration Committee <strong>Report</strong><br />
The remuneration committee comprises four non-executive directors, all of whom are considered by the Board to be<br />
<strong>in</strong>dependent. Currently, its members are Hamish Grossart (chairman), Ed Story, Mark Tyndall and Todd Hunt. The remuneration<br />
committee met seven times <strong>in</strong> <strong>2007</strong>.<br />
The Chief Executive, at the request of the committee, attends its meet<strong>in</strong>gs. In addition, he is consulted by the committee on its<br />
proposals. The Chairman also attended three meet<strong>in</strong>gs of the committee dur<strong>in</strong>g <strong>2007</strong> as an observer, on be<strong>in</strong>g <strong>in</strong>vited to do so<br />
by the committee. Certa<strong>in</strong> other of the executive directors attended meet<strong>in</strong>gs of the committee as observers on be<strong>in</strong>g <strong>in</strong>vited to<br />
do so by the committee. None of the members of the committee, nor the Chief Executive nor the Chairman, participated <strong>in</strong> any<br />
meet<strong>in</strong>gs or discussions relat<strong>in</strong>g to their own remuneration.<br />
The role of the committee <strong>in</strong>cludes:<br />
• determ<strong>in</strong><strong>in</strong>g and agree<strong>in</strong>g with the Board the remuneration policy for all the executive directors, the Chairman and the<br />
members of the GMB;<br />
• with<strong>in</strong> the terms of the agreed policy, determ<strong>in</strong><strong>in</strong>g the total <strong>in</strong>dividual remuneration package for each executive director;<br />
• determ<strong>in</strong><strong>in</strong>g the level of awards made under the Company’s share option plans and long-term <strong>in</strong>centive plans and the<br />
performance conditions which are to apply;<br />
• determ<strong>in</strong><strong>in</strong>g bonuses payable under the Company’s cash bonus scheme;<br />
• determ<strong>in</strong><strong>in</strong>g the vest<strong>in</strong>g of awards under the Company’s long-term <strong>in</strong>centive plans and exercise of share options; and<br />
• determ<strong>in</strong><strong>in</strong>g the policy for pension arrangements, service agreements and term<strong>in</strong>ation payments for executive directors.<br />
Details of the Company’s policies on remuneration, service contracts and compensation payments are given <strong>in</strong> the Directors’<br />
Remuneration <strong>Report</strong> on pages 57 to 68.<br />
3. Nom<strong>in</strong>ation Committee <strong>Report</strong><br />
The nom<strong>in</strong>ation committee comprises Norman Murray (chairman), two <strong>in</strong>dependent non-executive directors Hamish Grossart<br />
and Ed Story, and, to ensure <strong>in</strong>put from the executive, one executive director, Sir Bill Gammell (Chief Executive). Certa<strong>in</strong> other<br />
of the non-executive directors attended meet<strong>in</strong>gs of the committee as observers on be<strong>in</strong>g <strong>in</strong>vited to do so by the committee.<br />
The Comb<strong>in</strong>ed Code requires there to be a formal, rigorous and transparent procedure for the appo<strong>in</strong>tment of new directors,<br />
which should be meritocratic and made aga<strong>in</strong>st objective criteria. For this purpose, the Board has established the nom<strong>in</strong>ation<br />
committee, whose role <strong>in</strong>cludes consider<strong>in</strong>g the composition, balance and skills of the Board and mak<strong>in</strong>g recommendations to<br />
the Board on these matters, on the appo<strong>in</strong>tment of new directors and on the reappo<strong>in</strong>tment and orderly succession of exist<strong>in</strong>g<br />
directors.<br />
No new appo<strong>in</strong>tments were made to the Board dur<strong>in</strong>g <strong>2007</strong>.<br />
The nom<strong>in</strong>ation committee met three times <strong>in</strong> <strong>2007</strong>.<br />
44 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
Organisational Plann<strong>in</strong>g<br />
The year <strong>2007</strong> represented a year of change for the <strong>Cairn</strong> organisation. To help staff deal with the chang<strong>in</strong>g environment,<br />
a ‘change management’ workshop was held at the outset of the IPO transition period. This workshop gave staff at all levels<br />
practical strategies, tools and techniques to enable them to adapt to and deal positively with the chang<strong>in</strong>g organisation at <strong>Cairn</strong>.<br />
In September <strong>2007</strong>, a number of Oracle e-Bus<strong>in</strong>ess Suite modules were implemented to assist the organisation with more<br />
efficient data collection, monitor<strong>in</strong>g and report<strong>in</strong>g. F<strong>in</strong>ance, Purchas<strong>in</strong>g, Asset Management, Human Resources and Projects<br />
were all implemented with<strong>in</strong> a six month period. The project <strong>in</strong>cluded ‘requirements gather<strong>in</strong>g’ workshops, module set-up,<br />
three ‘conference room’ pilots and historical data migration.<br />
A comprehensive Leadership Development Programme was also developed <strong>in</strong> conjunction with Henley Management College.<br />
In December <strong>2007</strong>, certa<strong>in</strong> executive directors plus the Group Human Resources Manager attended a two-day workshop which<br />
focused on the areas of personal and people leadership. The next phase of the Leadership Development Programme will be<br />
rolled out to additional senior managers <strong>in</strong> early 2008. Plans are also under way for the development of a Management Skills<br />
Programme for all ‘people managers’ with<strong>in</strong> the Ed<strong>in</strong>burgh organisation.<br />
In April <strong>2007</strong>, the Ed<strong>in</strong>burgh office was successfully re-accredited under the ‘Investors <strong>in</strong> People’ standard.<br />
Directors’ Attendance at Board and Board Committee Meet<strong>in</strong>gs<br />
The table below sets out the attendance record of each director at scheduled Board and Board committee meet<strong>in</strong>gs dur<strong>in</strong>g <strong>2007</strong>:<br />
Board Audit Committee Remuneration Committee Nom<strong>in</strong>ation Committee<br />
Meet<strong>in</strong>gs held dur<strong>in</strong>g <strong>2007</strong> 7 4 7 3<br />
Meet<strong>in</strong>gs attended Meet<strong>in</strong>gs attended Meet<strong>in</strong>gs attended Meet<strong>in</strong>gs attended<br />
Executive Directors<br />
Sir Bill Gammell 7 n/a n/a (1) 3<br />
Dr Mike Watts 7 n/a n/a n/a<br />
Malcolm Thoms 7 n/a n/a (1) n/a<br />
Phil Tracy 7 n/a n/a (1) n/a<br />
Jann Brown 7 n/a (1) n/a (1) n/a<br />
Simon Thomson 7 n/a n/a n/a<br />
Non-Executive Directors<br />
Norman Murray 7 n/a (1) n/a (1) 3<br />
Hamish Grossart 6 (3) 2 (2) 7 3<br />
Ed Story 4 (3) 3 (2) 2 (2) 1 (2)<br />
Todd Hunt 7 n/a 4 (2) n/a (1)<br />
Mark Tyndall 5 (3) n/a 6 (2) n/a (1)<br />
Andrew Shilston 7 4 n/a n/a<br />
Notes:<br />
n/a not applicable (where a director is not a member of the committee).<br />
(1) Dur<strong>in</strong>g <strong>2007</strong>, certa<strong>in</strong> directors who were not committee members attended meet<strong>in</strong>gs of the audit committee, remuneration<br />
committee and nom<strong>in</strong>ation committee by <strong>in</strong>vitation. These details have not been <strong>in</strong>cluded <strong>in</strong> the table.<br />
(2) Where a director was unable to attend meet<strong>in</strong>gs of the Board or of Board committees, he reviewed the relevant papers for<br />
the meet<strong>in</strong>gs and provided his comments to the Board or the Board committees <strong>in</strong> advance of such meet<strong>in</strong>gs.<br />
Relations with Shareholders<br />
Communications with shareholders are given high priority by the Board. <strong>Cairn</strong> sends both its annual report and accounts and<br />
<strong>in</strong>terim report and accounts to all shareholders. In order to ensure that the members of the Board develop an understand<strong>in</strong>g<br />
of the views of major shareholders, there is regular dialogue with <strong>in</strong>stitutional shareholders, <strong>in</strong>clud<strong>in</strong>g meet<strong>in</strong>gs after the<br />
announcement of the year end and <strong>in</strong>terim results. The Chairman attends a number of these meet<strong>in</strong>gs. At the Board meet<strong>in</strong>g<br />
immediately follow<strong>in</strong>g these meet<strong>in</strong>gs, a detailed report is given to all directors who were not <strong>in</strong> attendance at those meet<strong>in</strong>gs.<br />
In addition, the Company ma<strong>in</strong>ta<strong>in</strong>s an external relations database which details all meet<strong>in</strong>gs attended by the directors with third<br />
party stakeholders. All analysts’ and brokers’ reports on the Company are also distributed to all directors. <strong>Cairn</strong> responds to all<br />
correspondence from shareholders and also has a website which conta<strong>in</strong>s a range of <strong>in</strong>formation, <strong>in</strong>clud<strong>in</strong>g a dedicated <strong>in</strong>vestor<br />
relations section.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 45
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
Mr Grossart, the senior <strong>in</strong>dependent non-executive director, is available to shareholders if they have concerns which contact<br />
through the normal channels of the Chairman, Chief Executive or F<strong>in</strong>ance Director has failed to resolve or for which such<br />
contact is <strong>in</strong>appropriate.<br />
Each of the non-executive directors is available to attend meet<strong>in</strong>gs with major shareholders (without the executive directors<br />
present), if requested by such major shareholders.<br />
<strong>Annual</strong> General Meet<strong>in</strong>g<br />
The Board uses the AGM to communicate with private and <strong>in</strong>stitutional <strong>in</strong>vestors and welcomes their participation. It is policy<br />
for all directors to attend the AGM if at all possible. Whilst this may not always be possible for bus<strong>in</strong>ess or personal reasons,<br />
<strong>in</strong> normal circumstances this means that the chairmen of the audit, remuneration and nom<strong>in</strong>ation committees will attend the<br />
AGM and be available to answer questions.<br />
It is policy to <strong>in</strong>volve shareholders fully <strong>in</strong> the affairs of the Company and to give them the opportunity at the AGM to ask<br />
questions about the Company’s activities and prospects.<br />
Details of resolutions to be proposed at the AGM on 23 May 2008 can be found <strong>in</strong> the Notice of <strong>Annual</strong> General Meet<strong>in</strong>g on<br />
pages 131 to 133 and on the Company’s website.<br />
The proxy votes for and aga<strong>in</strong>st each resolution, as well as abstentions, will be counted before the AGM and the results will be<br />
made available at the meet<strong>in</strong>g after the shareholders have voted on each resolution on a show of hands. The Form of Proxy<br />
for the AGM <strong>in</strong>cludes a ‘vote withheld’ option <strong>in</strong> respect of each resolution, to enable shareholders to absta<strong>in</strong> on any particular<br />
resolution. It is expla<strong>in</strong>ed on the Form of Proxy that a ‘vote withheld’ is not a vote <strong>in</strong> law and will not be counted <strong>in</strong><br />
the calculation of the proportion of the votes ‘for’ or ‘aga<strong>in</strong>st’ a resolution.<br />
Directors’ Responsibility Statement<br />
The directors are responsible for prepar<strong>in</strong>g the annual report and the Group and Company f<strong>in</strong>ancial statements <strong>in</strong> accordance<br />
with applicable law and regulations.<br />
Uk company law requires the directors to prepare Group and Company f<strong>in</strong>ancial statements for each f<strong>in</strong>ancial year. Under such<br />
law the directors are required to prepare the Group f<strong>in</strong>ancial statements <strong>in</strong> accordance with IFRS (as adopted by the EU) and<br />
have also elected to prepare the Company f<strong>in</strong>ancial statements <strong>in</strong> accordance with IFRS (as adopted by the EU).<br />
The Group and Company f<strong>in</strong>ancial statements are required by law and IFRS (as adopted by the EU) to present fairly the f<strong>in</strong>ancial<br />
position and performance of the Group and the Company; the Companies Act provides <strong>in</strong> relation to such f<strong>in</strong>ancial statements<br />
that references <strong>in</strong> the relevant part of the Companies Act to f<strong>in</strong>ancial statements giv<strong>in</strong>g a true and fair view, are references to<br />
their achiev<strong>in</strong>g a fair presentation.<br />
In prepar<strong>in</strong>g each of the Group and Company f<strong>in</strong>ancial statements, the directors are required to:<br />
• select suitable account<strong>in</strong>g policies and apply them consistently;<br />
• make judgements and estimates that are reasonable and prudent;<br />
• state whether they have been prepared <strong>in</strong> accordance with IFRS (as adopted by the EU); and<br />
• prepare the f<strong>in</strong>ancial statements on the go<strong>in</strong>g concern basis unless it is <strong>in</strong>appropriate to assume that the Group and the<br />
Company will cont<strong>in</strong>ue <strong>in</strong> bus<strong>in</strong>ess.<br />
The directors are responsible for keep<strong>in</strong>g proper account<strong>in</strong>g records that disclose with reasonable accuracy at any time the<br />
f<strong>in</strong>ancial position of the Company and enable them to ensure that its f<strong>in</strong>ancial statements comply with the Companies Act.<br />
They have general responsibility for tak<strong>in</strong>g such steps as are reasonably open to them to safeguard the assets of the Group<br />
and to prevent and detect fraud and other irregularities.<br />
The directors confirm that, to the best of their knowledge and belief:<br />
• the f<strong>in</strong>ancial statements have been prepared <strong>in</strong> accordance with the standards summarised above, give a true and fair view<br />
of the assets, liabilities and f<strong>in</strong>ancial position of the Group’s affairs as at 31 December <strong>2007</strong> and of its profit for the year then<br />
ended; and<br />
• the Directors’ <strong>Report</strong> <strong>in</strong>cludes a fair review of the development and performance of the Group’s bus<strong>in</strong>ess and a description<br />
of the pr<strong>in</strong>cipal risks and uncerta<strong>in</strong>ties that it faces.<br />
Go<strong>in</strong>g Concern<br />
The directors have considered the factors relevant to support a statement on go<strong>in</strong>g concern. They have a reasonable<br />
expectation that the Group will cont<strong>in</strong>ue <strong>in</strong> operational existence for the foreseeable future and have therefore used the go<strong>in</strong>g<br />
concern basis <strong>in</strong> prepar<strong>in</strong>g the f<strong>in</strong>ancial statements.<br />
46 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
Internal Control<br />
The Board acknowledges its responsibility for the system of <strong>in</strong>ternal control and for review<strong>in</strong>g its effectiveness. The system of<br />
<strong>in</strong>ternal control plays a critical role <strong>in</strong> manag<strong>in</strong>g the risks towards the achievement of corporate vision and objectives, and is<br />
also central to safeguard<strong>in</strong>g shareholders’ <strong>in</strong>terests and Company assets. This system of <strong>in</strong>ternal control is <strong>in</strong> accordance with<br />
the guidance of the Turnbull Committee and is designed to manage rather than elim<strong>in</strong>ate the risk of failure to achieve bus<strong>in</strong>ess<br />
objectives and can only provide reasonable but not absolute assurance aga<strong>in</strong>st material misstatement or loss.<br />
The process has been <strong>in</strong> place <strong>in</strong> respect of the Group for the <strong>2007</strong> account<strong>in</strong>g period and up to the date of approval of the<br />
report and accounts. The Board has carried out a review of the effectiveness of the system of <strong>in</strong>ternal controls dur<strong>in</strong>g <strong>2007</strong> and<br />
will ensure that such reviews are performed <strong>in</strong> 2008. In so do<strong>in</strong>g, the Board has taken <strong>in</strong>to account the assurance provided by<br />
the Chief Executive Officer of <strong>Cairn</strong> India <strong>in</strong> respect of the effectiveness of the system of <strong>in</strong>ternal control with<strong>in</strong> <strong>Cairn</strong> India and<br />
which derives from a parallel process followed with<strong>in</strong> <strong>Cairn</strong> India. The Board is accord<strong>in</strong>gly satisfied that effective control is <strong>in</strong><br />
place and that risks have been mitigated to an acceptable level.<br />
The Company is subject to a variety of risks which derive from the nature of the oil and gas exploration and production bus<strong>in</strong>ess<br />
and relate to the countries <strong>in</strong> which it conducts its activities. The directors believe that <strong>Cairn</strong> derives its competitive edge by<br />
focus<strong>in</strong>g activities <strong>in</strong> areas where they believe they have a technical and commercial advantage and the experience ga<strong>in</strong>ed<br />
over many years enables the Company to manage these risks effectively.<br />
Operations <strong>in</strong> any country are only possible when values are shared, and the directors believe that the Group’s values of<br />
<strong>in</strong>tegrity, social and environmental responsibility, teamwork and nurtur<strong>in</strong>g of <strong>in</strong>dividuals, creativity, risk management and<br />
allianc<strong>in</strong>g with key partners are <strong>in</strong>gredients that are central to the Company’s success. The ability to recognise the value of<br />
work<strong>in</strong>g as a partnership with host governments, both nationally and regionally, has also been a critical <strong>in</strong>gredient <strong>in</strong> this<br />
approach and success.<br />
<strong>2007</strong> was another year of significant change for the Company, with the transfer of management control of <strong>Cairn</strong> India to its own<br />
board of directors follow<strong>in</strong>g the list<strong>in</strong>g on the BSE and NSE on 9 January <strong>2007</strong> and the build<strong>in</strong>g of an exploration portfolio and<br />
new organisation <strong>in</strong> Capricorn. Particular attention has been placed by Group management on ensur<strong>in</strong>g that a robust system of<br />
<strong>in</strong>ternal control has been ma<strong>in</strong>ta<strong>in</strong>ed dur<strong>in</strong>g <strong>2007</strong> <strong>in</strong> relation to the significant risks <strong>in</strong> bus<strong>in</strong>ess activities.<br />
<strong>Cairn</strong> India is subject to the rules, regulations and guidel<strong>in</strong>es of SEBI and to its list<strong>in</strong>g agreement with the BSE and NSE.<br />
Under the terms of a relationship agreement between the Company and <strong>Cairn</strong> India entered <strong>in</strong>to at the time of the IPO<br />
(the ‘Relationship Agreement’), both companies have also agreed to use reasonable endeavours to ensure that they can<br />
comply with their respective obligations to SEBI, the FSA, the BSE, the LSE and the NSE and under the SEBI Insider Trad<strong>in</strong>g<br />
Regulations and Uk regulation and legislation relat<strong>in</strong>g to the disclosure of <strong>in</strong>formation or deal<strong>in</strong>g <strong>in</strong> respect of listed securities<br />
or corporate governance. This has <strong>in</strong>cluded adopt<strong>in</strong>g and follow<strong>in</strong>g the pr<strong>in</strong>ciples and policies of corporate governance,<br />
<strong>in</strong>clud<strong>in</strong>g risk management, which enable each company to comply with these obligations.<br />
The follow<strong>in</strong>g describes the key elements of the <strong>in</strong>ternal control system and the processes used by the Board dur<strong>in</strong>g <strong>2007</strong><br />
to review the effectiveness of the system. It also describes the approach to be taken <strong>in</strong> 2008.<br />
1. Strategic Direction<br />
The Group bus<strong>in</strong>ess model is conventional <strong>in</strong> that strategy is set by the directors and approved by the Board and its<br />
implementation is delegated to the GMB. Follow<strong>in</strong>g its list<strong>in</strong>g on the BSE and NSE <strong>in</strong> January <strong>2007</strong>, <strong>Cairn</strong> India is now an<br />
autonomous company and its directors decide the company strategy. In accordance with the memorandum and articles of<br />
association of <strong>Cairn</strong> India, the Company has nom<strong>in</strong>ated three non-executive directors to the board of <strong>Cairn</strong> India (<strong>in</strong>clud<strong>in</strong>g<br />
Sir Bill Gammell as Chairman) and, therefore, has an <strong>in</strong>put to this strategy.<br />
2. Operat<strong>in</strong>g Management<br />
Outside of <strong>Cairn</strong> India, the Group, through its unlisted subsidiary Capricorn, operates several bus<strong>in</strong>ess units <strong>in</strong> different countries<br />
and with various partners. Work programmes and budgets are prepared annually to meet the Group strategy, start<strong>in</strong>g at the<br />
asset level before be<strong>in</strong>g consolidated at both country and Group levels. After an iterative process, the country budgets are<br />
presented as part of the Group budget to the GMB and the Board for approval.<br />
Each country then prepares a detailed bus<strong>in</strong>ess plan to meet the agreed annual work programme and budget. This sets out<br />
detailed objectives and kPIs for each asset and support<strong>in</strong>g functional department, and is consolidated <strong>in</strong>to the country bus<strong>in</strong>ess<br />
plan. The country bus<strong>in</strong>ess plans are firstly approved by the <strong>in</strong>-country management teams and are then submitted to the GMB<br />
and the Board for approval.<br />
The <strong>in</strong>-country management teams then have the required authority to implement the bus<strong>in</strong>ess plans and to deliver the agreed<br />
work programme with<strong>in</strong> the approved budget and delegation of authorities, and <strong>in</strong> accordance with the <strong>in</strong>ternal control<br />
framework.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 47
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
The remit of the GMB is to oversee the delivery of the strategy through the annual work programmes, budgets and country<br />
bus<strong>in</strong>ess plans. The directors have also appo<strong>in</strong>ted Group functional heads whose roles <strong>in</strong>clude provid<strong>in</strong>g <strong>in</strong>put and ‘challenge’<br />
to the work programmes, budgets and bus<strong>in</strong>ess plans, and supply<strong>in</strong>g the relevant director with full and accurate <strong>in</strong>formation<br />
and to make statements on the adequacy of <strong>in</strong>ternal control.<br />
3. Risk Management<br />
The Group Risk Management Committee (GRMC), established by the Board <strong>in</strong> 1999, cont<strong>in</strong>ues to be responsible for the<br />
development of risk management strategy and processes with<strong>in</strong> the Company and for oversee<strong>in</strong>g the implementation of the<br />
requirements of this strategy. It does this by ensur<strong>in</strong>g that the framework for the identification, assessment, mitigation and<br />
report<strong>in</strong>g on all areas of risk is ‘fit for purpose’ and that appropriate assurance arrangements are <strong>in</strong> place <strong>in</strong> relation to these<br />
risks.<br />
The GRMC is chaired by the F<strong>in</strong>ance Director and comprises executive directors and senior country and Group functional<br />
management. Further changes to the GRMC membership, <strong>in</strong> order to ma<strong>in</strong>ta<strong>in</strong> a robust and challeng<strong>in</strong>g approach to risk<br />
management, are planned <strong>in</strong> 2008.<br />
The Group Bus<strong>in</strong>ess Risk Management Guidel<strong>in</strong>es (GBRMG), that def<strong>in</strong>e the processes through which <strong>Cairn</strong> seeks to<br />
systematically identify, analyse, assess, treat and monitor the bus<strong>in</strong>ess risks faced by the Group, were issued <strong>in</strong> April 2005.<br />
The GBRMG also identify the risk management organisational structure through which bus<strong>in</strong>ess risks are managed and regularly<br />
reviewed at operat<strong>in</strong>g, asset and country levels. It is <strong>in</strong>tended to update the GBRMG dur<strong>in</strong>g 2008.<br />
A country-level RMC has cont<strong>in</strong>ued to operate <strong>in</strong> Bangladesh dur<strong>in</strong>g <strong>2007</strong>. Bus<strong>in</strong>ess risks, together with the identified mitigat<strong>in</strong>g<br />
measures and responsibilities, have been recorded <strong>in</strong> asset and country risk registers which, follow<strong>in</strong>g endorsement by the<br />
<strong>in</strong>-country RMCs, are reported through to the Group risk register. These country and Group risk registers are regularly reviewed<br />
by the GRMC to ensure that the bus<strong>in</strong>ess understands the key risks it faces and that there is an embedded risk management<br />
approach <strong>in</strong> place. At each GRMC meet<strong>in</strong>g a specific risk item has also been reviewed <strong>in</strong> more detail, through presentations by<br />
and question<strong>in</strong>g of the responsible manager. Dur<strong>in</strong>g <strong>2007</strong>, these more detailed risk reviews have <strong>in</strong>cluded the ‘due diligence’<br />
process applied to the evaluation of new bus<strong>in</strong>ess opportunities, Bangladesh exploration and drill<strong>in</strong>g risk mitigation strategies<br />
and the new f<strong>in</strong>ance system implementation programme.<br />
Subsequent to its list<strong>in</strong>g, <strong>Cairn</strong> India operates its own RMC <strong>in</strong> l<strong>in</strong>e with its Bus<strong>in</strong>ess Risk Management System (BRMS).<br />
The <strong>Cairn</strong> India RMC has been established under the chairmanship of the Chief Operat<strong>in</strong>g Officer and reports to the <strong>Cairn</strong> India<br />
Board. The BRMS is substantially similar to that of the Company and, under the terms of the Relationship Agreement, a copy<br />
of the <strong>Cairn</strong> India risk register is rout<strong>in</strong>ely submitted for review at the GRMC, at which a senior representative from <strong>Cairn</strong> India<br />
is present to provide explanation and take questions. The <strong>Cairn</strong> India risk register is <strong>in</strong>tegrated <strong>in</strong>to the Group risk register.<br />
S<strong>in</strong>ce kPMG’s appo<strong>in</strong>tment to manage the Group <strong>in</strong>ternal audit process <strong>in</strong> August 2004, steps have been taken to ensure<br />
<strong>in</strong>ternal audit’s <strong>in</strong>tegration with the risk management process, <strong>in</strong>clud<strong>in</strong>g attendance at GRMC meet<strong>in</strong>gs. <strong>Cairn</strong> India follows a<br />
similar practice with kPMG India, who have also been reta<strong>in</strong>ed as their <strong>in</strong>ternal auditors <strong>in</strong> l<strong>in</strong>e with the Relationship Agreement.<br />
The GRMC reports on the Group’s risk profile to both the audit committee and the Board. Additionally, the Board receives<br />
<strong>in</strong>ternal reviews of the effectiveness of <strong>in</strong>ternal control relative to the key risks. The conclusion of the Board follow<strong>in</strong>g these<br />
reviews dur<strong>in</strong>g <strong>2007</strong> is that the <strong>in</strong>ternal controls <strong>in</strong> respect of key risks are appropriate.<br />
4. Assurance<br />
The <strong>in</strong>tegrated assurance framework adopted by the Board provides for three levels of assurance aga<strong>in</strong>st the risks fac<strong>in</strong>g the<br />
Group: firstly at the operational level; secondly through overview by Group functional management and the GRMC; and thirdly<br />
through <strong>in</strong>ternal, external or jo<strong>in</strong>t venture audits.<br />
Dur<strong>in</strong>g <strong>2007</strong>, the directors reviewed the effectiveness of the Group’s system of f<strong>in</strong>ancial and non-f<strong>in</strong>ancial controls, <strong>in</strong>clud<strong>in</strong>g<br />
operational and compliance controls, risk management and the Group’s high level <strong>in</strong>ternal control arrangements. The directors<br />
derive assurance from the follow<strong>in</strong>g <strong>in</strong>ternal and external controls:<br />
• a regularly updated schedule of matters specifically reserved for a decision by the Board;<br />
• policies and procedures for key bus<strong>in</strong>ess activities;<br />
• an appropriate organisational structure;<br />
• control over non-operated jo<strong>in</strong>t venture activities through delegated representatives;<br />
• specific delegations of authority for all f<strong>in</strong>ancial and other transactions;<br />
• segregation of duties where appropriate and cost effective;<br />
• bus<strong>in</strong>ess and f<strong>in</strong>ancial report<strong>in</strong>g, <strong>in</strong>clud<strong>in</strong>g KPIs;<br />
• functional management reviews;<br />
• the nom<strong>in</strong>ation of various directors of the Company to the <strong>Cairn</strong> India board (<strong>in</strong> a non-executive capacity) and to certa<strong>in</strong> of its<br />
committees. The Board also receives copies of m<strong>in</strong>utes of meet<strong>in</strong>gs of the <strong>Cairn</strong> India board of directors;<br />
48 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
CORPORATE GOVERNANCE STATEMENT<br />
CONTINUED<br />
• a Relationship Agreement with <strong>Cairn</strong> India, which, <strong>in</strong>ter alia, conta<strong>in</strong>s provisions for the supply by <strong>Cairn</strong> India to the<br />
Company of such <strong>in</strong>formation and confirmations as the Company may require to comply with legal, regulatory and report<strong>in</strong>g<br />
obligations;<br />
• a transition support agreement with <strong>Cairn</strong> India which was <strong>in</strong> force for six months subsequent to its list<strong>in</strong>g on 9 January <strong>2007</strong>,<br />
to help ensure a smooth process <strong>in</strong> respect of the relocation of certa<strong>in</strong> managerial functions from the Company’s headquarters<br />
<strong>in</strong> Ed<strong>in</strong>burgh to <strong>Cairn</strong> India;<br />
• an annual ‘letters of assurance’ process, through which country managers confirm the adequacy of <strong>in</strong>ternal f<strong>in</strong>ancial and<br />
non-f<strong>in</strong>ancial controls and their compliance with Group policies and report any control weaknesses identified <strong>in</strong> the past year;<br />
• a ‘letter of assurance’ from the <strong>Cairn</strong> India Chief Executive Officer confirm<strong>in</strong>g the adequacy of <strong>in</strong>ternal controls with<strong>in</strong> <strong>Cairn</strong><br />
India <strong>in</strong> l<strong>in</strong>e with its policy, and report<strong>in</strong>g of any control weaknesses identified <strong>in</strong> the past year;<br />
• Group <strong>in</strong>ternal audits to assess compliance – the <strong>in</strong>ternal auditor implements a number of audits dur<strong>in</strong>g the year <strong>in</strong> l<strong>in</strong>e with<br />
the annual <strong>in</strong>ternal audit plan approved by the audit committee and Board;<br />
• reports from the Group audit committee and GRMC, (<strong>in</strong>clud<strong>in</strong>g reports from the <strong>Cairn</strong> India RMC and <strong>Cairn</strong> India audit<br />
committee);<br />
• reports from the Group external auditor on matters identified dur<strong>in</strong>g its statutory audit;<br />
• reports from audits by host governments and co-venturers; and<br />
• <strong>in</strong>dependent third party reviews commissioned.<br />
Compliance with the Comb<strong>in</strong>ed Code<br />
Throughout <strong>2007</strong> the Company complied with the provisions of the Comb<strong>in</strong>ed Code, except <strong>in</strong> the follow<strong>in</strong>g areas:<br />
Provision of the Comb<strong>in</strong>ed Code Company Position Explanation<br />
A.3.2 – at least half the Board, exclud<strong>in</strong>g<br />
the chairman, should comprise nonexecutive<br />
directors determ<strong>in</strong>ed by the<br />
Board to be <strong>in</strong>dependent.<br />
A.4.1 – a majority of the members of<br />
the nom<strong>in</strong>ation committee should be<br />
<strong>in</strong>dependent non-executive directors.<br />
Throughout <strong>2007</strong> the Board comprised<br />
the Chairman, the Chief Executive,<br />
five other executive directors and five<br />
<strong>in</strong>dependent non-executive directors.<br />
Throughout <strong>2007</strong> the nom<strong>in</strong>ation<br />
committee comprised two <strong>in</strong>dependent<br />
non-executive directors, the Chairman<br />
and one executive director.<br />
The Board believes that the composition<br />
of the Board was appropriate and<br />
effective for the challenges that it faced<br />
dur<strong>in</strong>g <strong>2007</strong>.<br />
The Board believes that the membership<br />
of the committee is appropriate and<br />
effective.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 49
DIRECTORS’ REPORT<br />
The directors of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> present their annual report for the year ended 31 December <strong>2007</strong> together with the f<strong>in</strong>ancial<br />
statements of the Group for the year. These will be laid before the shareholders at the AGM to be held on Friday 23 May 2008.<br />
Results and Dividend<br />
The Group made a profit after tax and exceptional items of $1,527.8m (2006 restated: loss of $97.1m).<br />
The directors do not recommend the payment of a dividend for the year ended 31 December <strong>2007</strong>.<br />
Subsequent events that have occurred after the Balance Sheet dated at 31 December <strong>2007</strong> are <strong>in</strong>cluded <strong>in</strong> Note 37 of the<br />
Notes to the Accounts.<br />
Pr<strong>in</strong>cipal Activities and Bus<strong>in</strong>ess Review<br />
The pr<strong>in</strong>cipal activity of the Company and its subsidiary undertak<strong>in</strong>gs is the exploration for and development and production of<br />
oil and gas. Details of the development of the Group’s bus<strong>in</strong>ess dur<strong>in</strong>g the year and the <strong>in</strong>formation that fulfils the requirements<br />
of the Bus<strong>in</strong>ess Review can be found <strong>in</strong> the Highlights of <strong>2007</strong>, Chairman’s Statement, Chief Executive’s Review, Assets,<br />
Operat<strong>in</strong>g & Exploration Review, Corporate Responsibility and F<strong>in</strong>ancial Review on pages 24 to 31 of this document and the<br />
Risk Factors section on pages 36 to 39, which are deemed to form part of this report by reference.<br />
Details of <strong>Cairn</strong>’s offices are given on the back cover of this report and details of <strong>Cairn</strong>’s advisers are given on page 136.<br />
Acquisitions and Disposals<br />
Details of acquisitions and disposals made dur<strong>in</strong>g the year are conta<strong>in</strong>ed <strong>in</strong> the Chief Executive’s Review on page 8 and <strong>in</strong><br />
Note 3 to the accounts on page 85.<br />
Change of Control<br />
All of the Company’s share <strong>in</strong>centive plans conta<strong>in</strong> provisions relat<strong>in</strong>g to a change of control and full details of these plans are<br />
provided <strong>in</strong> the Directors’ Remuneration <strong>Report</strong> on pages 57 to 68. Outstand<strong>in</strong>g options and awards would normally vest and<br />
become exercisable on a change of control, subject to the satisfaction of performance conditions, if applicable, at that time.<br />
On a change of control of the Company result<strong>in</strong>g <strong>in</strong> the term<strong>in</strong>ation of a director’s employment, each of the executive directors<br />
is also entitled, pursuant to their service contracts, to compensation of a sum equal to their annual basic salary as at the date of<br />
term<strong>in</strong>ation of employment. There are no agreements provid<strong>in</strong>g for compensation for employees on a change of control.<br />
There are no significant agreements to which the Company is a party which take effect, alter or term<strong>in</strong>ate <strong>in</strong> the event of a<br />
change of control of the Company except the $850 million syndicated revolv<strong>in</strong>g credit facility agreement dated 22 November<br />
2006 entered <strong>in</strong>to by certa<strong>in</strong> of the Company’s subsidiaries, The Royal Bank of Scotland <strong>PLC</strong> and IFC and a syndicate of other<br />
commercial banks (the ‘Facility’). Under the Facility, lenders may, upon 30 days’ notice, cancel all of their commitments and<br />
declare all outstand<strong>in</strong>g loans made by them, together with accrued <strong>in</strong>terest, immediately due and payable if any person or<br />
group of persons act<strong>in</strong>g <strong>in</strong> concert ga<strong>in</strong>s control of the Company while it reta<strong>in</strong>s control of <strong>Cairn</strong> India.<br />
Directors<br />
The names and biographical details of the current directors of the Company are given on pages 32-34. The beneficial <strong>in</strong>terests<br />
of the directors <strong>in</strong> the ord<strong>in</strong>ary shares of the Company are shown below:<br />
50 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
As at 31 December 2006 As at 31 December <strong>2007</strong>** As at 31 March 2008**<br />
Sir Bill Gammell 805,000 500,000 500,000*<br />
Dr Mike Watts 300,000 200,000 200,000<br />
Malcolm Thoms 74,437 37,600 37,600<br />
Phil Tracy 61,519 6,400 6,400<br />
Jann Brown 41,519 32,200 32,200<br />
Simon Thomson 39,519 6,637 6,637<br />
Norman Murray 100,000 81,250 81,250<br />
Hamish Grossart 40,000 5,000 5,000<br />
Ed Story 5,000 4,062 4,062<br />
Todd Hunt 35,000 28,436 28,436<br />
Mark Tyndall 5,000 4,062 4,062<br />
Andrew Shilston 5,000 4,062 4,062<br />
* Sir Bill Gammell’s <strong>in</strong>terest <strong>in</strong>cludes 92,257 shares which are held <strong>in</strong> discretionary trusts, where his children are potential<br />
beneficiaries.<br />
** Follow<strong>in</strong>g the share consolidation decribed at note 27.
DIRECTORS’ REPORT<br />
CONTINUED<br />
At 31 December <strong>2007</strong>, none of the directors (or any members of their families) holds an <strong>in</strong>terest <strong>in</strong> options over ord<strong>in</strong>ary shares<br />
<strong>in</strong> the Company.<br />
None of the directors has a material <strong>in</strong>terest <strong>in</strong> any contract, other than a service contract, with the Company or any of its<br />
subsidiary undertak<strong>in</strong>gs. Details of the directors’ service contracts are set out on pages 63 and 64 of the Directors’ Remuneration<br />
<strong>Report</strong>.<br />
Share Capital<br />
The authorised and issued share capital of the Company are shown <strong>in</strong> Note 27 of the Notes to the Accounts. At the date of this<br />
report, 130,845,424 ord<strong>in</strong>ary shares of 6 2 /13 pence each have been issued and are fully paid up and are quoted on the London<br />
Stock Exchange. The rights attach<strong>in</strong>g to the ord<strong>in</strong>ary shares are set out <strong>in</strong> the Company’s articles of association. There are no<br />
special control rights <strong>in</strong> relation to the Company’s shares and the Company is not aware of any agreements between holders<br />
of securities that may result <strong>in</strong> restrictions on the transfer of securities or on vot<strong>in</strong>g rights.<br />
Vot<strong>in</strong>g Rights<br />
Subject to any special rights or restrictions attach<strong>in</strong>g to any class of shares, at a general meet<strong>in</strong>g or class meet<strong>in</strong>g, on a show<br />
of hands, every member present <strong>in</strong> person and every duly appo<strong>in</strong>ted proxy entitled to vote shall have one vote and on a poll<br />
every member present <strong>in</strong> person or by proxy and entitled to vote shall have one vote for every share held by him. In the case<br />
of jo<strong>in</strong>t holders of a share, the vote of the senior member who tenders a vote, whether <strong>in</strong> person or by proxy, shall be accepted<br />
to the exclusion of the votes of the other jo<strong>in</strong>t holders and for this purpose seniority shall be determ<strong>in</strong>ed by the order <strong>in</strong> which<br />
the names stand <strong>in</strong> the register of members <strong>in</strong> respect of the jo<strong>in</strong>t hold<strong>in</strong>g. Under the Companies Acts, members are entitled<br />
to appo<strong>in</strong>t a proxy, who need not be a member of the Company, to exercise all or any of their rights to attend and to speak<br />
and vote on their behalf at a general meet<strong>in</strong>g or class meet<strong>in</strong>g. A member may appo<strong>in</strong>t more than one proxy <strong>in</strong> relation to a<br />
general meet<strong>in</strong>g or class meet<strong>in</strong>g provided that each proxy is appo<strong>in</strong>ted to exercise the rights attached to a different share or<br />
shares held by that member. A corporation which is a member of the Company may authorise one or more <strong>in</strong>dividuals to act as<br />
its representative or representatives at any meet<strong>in</strong>g of the Company, or at any separate meet<strong>in</strong>g of the holders of any class of<br />
shares. A person so authorised shall be entitled to exercise the same powers on behalf of such corporation as the corporation<br />
could exercise if it were an <strong>in</strong>dividual member of the Company.<br />
Restrictions on Vot<strong>in</strong>g<br />
No member shall, unless the directors of the Company otherwise determ<strong>in</strong>e, be entitled <strong>in</strong> respect of any share held by him to<br />
attend or vote at a general meet<strong>in</strong>g of the Company either <strong>in</strong> person or by proxy if any call or other sum presently payable by<br />
him to the Company <strong>in</strong> respect of shares <strong>in</strong> the Company rema<strong>in</strong>s unpaid. Further, if a member has been served with a notice<br />
by the Company under the Companies Acts request<strong>in</strong>g <strong>in</strong>formation concern<strong>in</strong>g <strong>in</strong>terests <strong>in</strong> shares and has failed <strong>in</strong> relation to<br />
any shares to provide the Company, with<strong>in</strong> fourteen days of the notice, with such <strong>in</strong>formation, the directors of the Company<br />
may determ<strong>in</strong>e that such member shall not be entitled <strong>in</strong> respect of such shares to attend or vote (either <strong>in</strong> person or by proxy)<br />
at any general meet<strong>in</strong>g or at any separate general or class meet<strong>in</strong>g of the holders of that class of shares. Proxy forms must be<br />
submitted not less than 48 hours before the time appo<strong>in</strong>ted for the hold<strong>in</strong>g of the meet<strong>in</strong>g or adjourned meet<strong>in</strong>g or (<strong>in</strong> the case<br />
of a poll taken otherwise than at, or on the same day as, the meet<strong>in</strong>g or adjourned meet<strong>in</strong>g) not less than 24 hours before the<br />
time appo<strong>in</strong>ted for the tak<strong>in</strong>g of the poll at which it is to be used.<br />
Variation of Rights<br />
Whenever the share capital of the Company is divided <strong>in</strong>to different classes of shares, all or any of the special rights attached to<br />
any class may, subject to statute and unless otherwise expressly provided by the rights attached to the shares of that class, be<br />
varied or abrogated either with the consent <strong>in</strong> writ<strong>in</strong>g of the holders of not less than three-fourths <strong>in</strong> nom<strong>in</strong>al value of the issued<br />
shares of that class or with the sanction of a special resolution passed at a separate general meet<strong>in</strong>g of the holders of the shares<br />
of that class. At every such separate general meet<strong>in</strong>g the quorum shall be two persons hold<strong>in</strong>g or represent<strong>in</strong>g by proxy at least<br />
one-third <strong>in</strong> nom<strong>in</strong>al value of the issued shares of the class. These provisions apply to the variation or abrogation of the special<br />
rights attached to some only of the shares of any class as if the shares concerned and the rema<strong>in</strong><strong>in</strong>g shares of such class formed<br />
separate classes. The rights attached to any class of shares shall, unless otherwise expressly provided by the terms of issue of<br />
such shares or the terms upon which such shares are for the time be<strong>in</strong>g held, be deemed not to be varied or abrogated by the<br />
creation or issue of further shares rank<strong>in</strong>g pari passu with or subsequent to the first mentioned shares or by the purchase by the<br />
Company of its own shares.<br />
Transfer of Shares<br />
Subject to any procedures set out by the directors <strong>in</strong> accordance with the Articles of Association, all transfers of shares shall be<br />
effected by <strong>in</strong>strument <strong>in</strong> writ<strong>in</strong>g <strong>in</strong> any usual or common form or <strong>in</strong> any other form acceptable to the directors of the Company.<br />
The <strong>in</strong>strument of transfer shall be executed by, or on behalf of, the transferor and (except <strong>in</strong> the case of fully paid shares) by, or<br />
on behalf of, the transferee. The transferor shall be deemed to rema<strong>in</strong> the holder of the shares concerned until the name of the<br />
transferee is entered <strong>in</strong> the register of members of the Company.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 51
DIRECTORS’ REPORT<br />
CONTINUED<br />
The directors may, <strong>in</strong> their absolute discretion and without assign<strong>in</strong>g any reason therefor, refuse to register a transfer of any<br />
share which is not a fully paid share unless such share is listed on the Official List of the Uk List<strong>in</strong>g Authority and traded on<br />
the London Stock Exchange’s ma<strong>in</strong> market for listed securities. The directors may also refuse to register a transfer of a share<br />
<strong>in</strong> uncertificated form where the Company is entitled to refuse (or is excepted from the requirement) under the Uncertificated<br />
Securities Regulations 2001 to register the transfer and they may refuse any such transfer <strong>in</strong> favour of more than four transferees.<br />
The directors may also refuse to register any transfer of a share on which the Company has a lien.<br />
The directors may, <strong>in</strong> their absolute discretion and without assign<strong>in</strong>g any reason therefor, refuse to register a transfer of any<br />
share <strong>in</strong> certificated form unless the relevant <strong>in</strong>strument of transfer is <strong>in</strong> respect of only one class of share, is duly stamped or<br />
adjudged or certified as not chargeable to stamp duty, is lodged at the transfer office or at such other place as the directors may<br />
determ<strong>in</strong>e, is accompanied by the relevant share certificate(s) and such other evidence as the directors may reasonably require<br />
to show the right of the transferor to make the transfer and is <strong>in</strong> favour of not more than four transferees jo<strong>in</strong>tly.<br />
If the directors refuse to register a transfer, they shall, with<strong>in</strong> two months after the date on which the transfer was lodged<br />
with the Company (<strong>in</strong> the case of a share <strong>in</strong> certificated form) or the date on which the operator-<strong>in</strong>struction (as def<strong>in</strong>ed <strong>in</strong> the<br />
Uncertificated Securities Regulations 2001) was received by the Company (<strong>in</strong> the case of a share <strong>in</strong> uncertificated form) (or<br />
<strong>in</strong> either case such longer or shorter period (if any) as the List<strong>in</strong>g Rules may from time to time permit or require), send to the<br />
transferee notice of the refusal.<br />
Major Interests <strong>in</strong> Share Capital<br />
As at 31 March 2008, the Company had received notification that hold<strong>in</strong>gs exceed<strong>in</strong>g the 3 per cent notification threshold were<br />
as follows:<br />
52 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Number of Shares % of Share Capital<br />
BlackRock Investment Management 17,163,948 13.12<br />
Baillie Gifford 13,876,535 10.61<br />
HSBC Investments 12,607,491 9.64<br />
Legal & General Investment Management 9,210,081 7.04<br />
F&C Asset Management 8,344,077 6.38<br />
HSBC James Capel as pr<strong>in</strong>cipal 7,079,940 5.41<br />
TT International Investment Management 4,905,289 3.75<br />
Charitable and Political Donations<br />
The Company has a Charities Committee which is responsible for distribut<strong>in</strong>g the Company’s charitable donations to selected<br />
charities with<strong>in</strong> an overall annual budget. Dur<strong>in</strong>g the year the Company made various charitable contributions <strong>in</strong> the Uk totall<strong>in</strong>g<br />
$3,146,764 (2006: $270,943). Contributions <strong>in</strong> the Uk are made to a variety of charitable organisations whose areas of operation<br />
and activities are aligned with <strong>Cairn</strong>’s. In addition, the Group provides fund<strong>in</strong>g to various charitable <strong>in</strong>itiatives outwith the Uk.<br />
Further details of these can be found <strong>in</strong> our Corporate Responsibility <strong>Report</strong>. In July <strong>2007</strong>, the Company formed a new longteam<br />
strategic alliance with Heriot Watt University. Heriot Watt is one of the Uk’s lead<strong>in</strong>g universities for bus<strong>in</strong>ess and <strong>in</strong>dustry<br />
at the forefront of <strong>in</strong>novative technology and rigorous research-based science. Its Institute of Petroleum Eng<strong>in</strong>eer<strong>in</strong>g operates<br />
one of the largest research programmes <strong>in</strong> its field. The partnership <strong>in</strong>cludes a £1.4 million donation from the Company which<br />
will help towards the fund<strong>in</strong>g of a new Postgraduate Centre and appo<strong>in</strong>tment of the first Programme Co-ord<strong>in</strong>ator for Innovation<br />
and Enterprise. As part of the alliance a new Chair has also been created with<strong>in</strong> the field of Petroleum Eng<strong>in</strong>eer<strong>in</strong>g.<br />
No political donations were made and no political expenditure was <strong>in</strong>curred dur<strong>in</strong>g the year.<br />
Creditor Payment Policy and Practice<br />
It is <strong>Cairn</strong>’s payment policy to ensure settlement of suppliers’ services <strong>in</strong> accordance with the terms of the applicable contracts.<br />
In most circumstances, settlement terms are agreed prior to bus<strong>in</strong>ess tak<strong>in</strong>g place. Trade creditors of the Company at 31<br />
December <strong>2007</strong> were equivalent to 27 days’ purchases, based on the average daily amount <strong>in</strong>voiced by suppliers to the<br />
Company dur<strong>in</strong>g the year.<br />
F<strong>in</strong>ancial Instruments<br />
The f<strong>in</strong>ancial risk management objectives and policies of the Company are detailed <strong>in</strong> Note 30 of the Notes to the Accounts.
DIRECTORS’ REPORT<br />
CONTINUED<br />
Election/Re-Election of Directors<br />
Norman Murray and Sir Bill Gammell retire by rotation at the AGM to be held on 23 May 2008 <strong>in</strong> accordance with the<br />
Company’s Articles of Association and, be<strong>in</strong>g eligible, offer themselves for re-election as directors. Hamish Grossart and<br />
Ed Story have each served on the Board for more than n<strong>in</strong>e years and, <strong>in</strong> accordance with the Comb<strong>in</strong>ed Code, will therefore<br />
seek re-election as directors on an annual basis.<br />
Andrew Shilston retires by rotation at the AGM to be held on 23 May 2008 and will not be offer<strong>in</strong>g himself for re-election.<br />
The Board has carried out a formal performance evaluation and confirms that, after rigorous review, it has determ<strong>in</strong>ed that<br />
the performance of each of the directors who is subject to re-election cont<strong>in</strong>ues to be effective and that each demonstrates<br />
commitment to the role. An explanation of the performance evaluation procedure carried out by the Company is conta<strong>in</strong>ed <strong>in</strong><br />
the Corporate Governance Statement on pages 40 to 49.<br />
The directors’ biographies are on pages 32 to 34. The Company’s Articles of Association provide that directors can be<br />
appo<strong>in</strong>ted by the Company by ord<strong>in</strong>ary resolution or by the Board. The nom<strong>in</strong>ation committee makes recommendations<br />
to the Board on the appo<strong>in</strong>tment and replacement of directors. Further details of the rules govern<strong>in</strong>g the appo<strong>in</strong>tment<br />
and replacement of directors are set out <strong>in</strong> the Corporate Governance Statement on pages 40 to 49 and <strong>in</strong> the Company’s<br />
Articles of Association.<br />
Powers of the Directors<br />
Subject to the Company’s Memorandum and Articles of Association, Uk legislation and any directions given by special<br />
resolution, the bus<strong>in</strong>ess of the Company is managed by the Board. The directors currently have powers both <strong>in</strong> relation to the<br />
issu<strong>in</strong>g and buy<strong>in</strong>g back of the Company’s shares and are seek<strong>in</strong>g renewal of these powers at the forthcom<strong>in</strong>g AGM (see below<br />
under ‘Share Capital Authorities’).<br />
Share Capital Authorities<br />
Resolution 8 <strong>in</strong> the Notice of AGM seeks to give the directors authority to allot up to 43,610,779 unissued ord<strong>in</strong>ary shares, be<strong>in</strong>g<br />
up to an aggregate nom<strong>in</strong>al amount of £2,683,740.25. This maximum amount represents 33.33% of the Company’s total issued<br />
ord<strong>in</strong>ary share capital as at 31 March 2008. As at 31 March 2008 the Company holds no shares <strong>in</strong> treasury, represent<strong>in</strong>g 0% of<br />
the total ord<strong>in</strong>ary share capital (calculated exclusive of treasury shares). The authority conferred by this resolution will expire on<br />
22 May 2013, although the directors <strong>in</strong>tend to seek the renewal of this authority on an annual basis. The directors consider that<br />
the authority proposed to be given pursuant to resolution 8 is desirable to allow the Company to reta<strong>in</strong> flexibility, although they<br />
have no present <strong>in</strong>tention of exercis<strong>in</strong>g this authority.<br />
Resolution 9 <strong>in</strong> the Notice of AGM seeks to give the directors power to allot unissued ord<strong>in</strong>ary share capital and to sell ord<strong>in</strong>ary<br />
shares held <strong>in</strong> treasury for cash up to an aggregate nom<strong>in</strong>al amount of £2,683,740.25 <strong>in</strong> aggregate without first be<strong>in</strong>g required<br />
to offer such shares to exist<strong>in</strong>g shareholders but this authority is limited to:<br />
(i) the allotment of ord<strong>in</strong>ary shares and sale of treasury shares avoid<strong>in</strong>g legal or practical problems should there be an offer of<br />
shares or other securities to shareholders pro rata <strong>in</strong> the future; and<br />
(ii) the allotment and sale of up to 6,542,271 ord<strong>in</strong>ary shares and treasury shares for cash (for any purpose), represent<strong>in</strong>g 5% of<br />
the issued ord<strong>in</strong>ary share capital of the Company as at 31 March 2008.<br />
The authority conferred by this resolution will expire on 22 May 2013, although the directors <strong>in</strong>tend to seek the renewal of this<br />
authority on an annual basis.<br />
Purchase of Own Shares<br />
Resolution 10 <strong>in</strong> the Notice of AGM will be proposed to authorise the Company to make market purchases of its own ord<strong>in</strong>ary<br />
shares. Shares repurchased by the Company pursuant to such authority may be cancelled or held <strong>in</strong> treasury and then either sold<br />
(<strong>in</strong> whole or <strong>in</strong> part) for cash or cancelled (<strong>in</strong> whole or <strong>in</strong> part).<br />
The directors <strong>in</strong>tend to take advantage of the flexibility afforded by this resolution as they deem appropriate. No dividends will<br />
be paid on treasury shares and no vot<strong>in</strong>g rights attach to them.<br />
The maximum aggregate number of ord<strong>in</strong>ary shares that may be purchased pursuant to the authority shall be 14.99% of the<br />
issued ord<strong>in</strong>ary share capital of the Company as at 31 March 2008, be<strong>in</strong>g 19,613,729 ord<strong>in</strong>ary shares. The maximum price which<br />
may be paid for an ord<strong>in</strong>ary share pursuant to this resolution (exclusive of expenses) shall be the higher of (i) an amount equal to<br />
105% of the average of the middle market quotations for the Company’s ord<strong>in</strong>ary shares for the five bus<strong>in</strong>ess days immediately<br />
preced<strong>in</strong>g the date of purchase and (ii) the higher of the price of the last <strong>in</strong>dependent trade of an ord<strong>in</strong>ary share and the highest<br />
current <strong>in</strong>dependent bid for an ord<strong>in</strong>ary share as derived from the London Stock Exchange Trad<strong>in</strong>g System (SETS). The m<strong>in</strong>imum<br />
price that may be paid for an ord<strong>in</strong>ary share pursuant to this resolution (exclusive of expenses) shall be 6 2 /13 pence, be<strong>in</strong>g the<br />
nom<strong>in</strong>al value of an ord<strong>in</strong>ary share.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 53
DIRECTORS’ REPORT<br />
CONTINUED<br />
In accordance with the List<strong>in</strong>g Rules, the Company will not repurchase shares <strong>in</strong> the period of 60 days immediately preced<strong>in</strong>g<br />
the prelim<strong>in</strong>ary announcement of its annual or <strong>in</strong>terim results or, if shorter, the period from the end of the f<strong>in</strong>ancial period<br />
concerned up to and <strong>in</strong>clud<strong>in</strong>g the time of a relevant announcement or, except <strong>in</strong> accordance with the List<strong>in</strong>g Rules, at any<br />
other time when, <strong>in</strong> terms of the Company’s Deal<strong>in</strong>g Rules, the directors would be prohibited from deal<strong>in</strong>g <strong>in</strong> shares.<br />
This authority, if conferred, will only be exercised if to do so would be <strong>in</strong> the best <strong>in</strong>terests of shareholders generally.<br />
This authority will expire on the earlier of 22 November 2009 or the conclusion of the AGM of the Company to be held <strong>in</strong> 2009<br />
(unless previously revoked, varied or renewed by the Company <strong>in</strong> general meet<strong>in</strong>g). The directors <strong>in</strong>tend to seek renewal of this<br />
authority at subsequent <strong>Annual</strong> General Meet<strong>in</strong>gs.<br />
The Company did not purchase any of its own shares dur<strong>in</strong>g <strong>2007</strong> other than the off-market purchase of deferred shares <strong>in</strong> May<br />
<strong>2007</strong> as a consequence of the return of cash to shareholders <strong>in</strong> April <strong>2007</strong>. As at 31 March 2008, options to subscribe for shares<br />
were outstand<strong>in</strong>g over an aggregate of 989,928 ord<strong>in</strong>ary shares (represent<strong>in</strong>g 0.76% of the issued share capital of the Company<br />
as at 31 March 2008). If the outstand<strong>in</strong>g amount of the exist<strong>in</strong>g buy-back authority granted at the <strong>2007</strong> AGM is utilised <strong>in</strong> full<br />
prior to the 2008 AGM and the new authority is granted at the AGM to be held on 23 May 2008 and is then utilised <strong>in</strong> full, the<br />
options outstand<strong>in</strong>g at 31 March 2008 would represent 1.08% of the issued share capital of the Company.<br />
Articles of Association<br />
Unless expressly specified to the contrary there<strong>in</strong>, the Company’s Articles of Association may be amended by a special<br />
resolution of the Company’s shareholders.<br />
Resolution 11 <strong>in</strong> the Notice of AGM will be proposed to adopt new Articles of Association (the ‘New Articles’) <strong>in</strong> order to<br />
update the Company’s current Articles of Association (the ‘Current Articles’) primarily to take account of changes <strong>in</strong> company<br />
law brought about by the Companies Act 2006. The pr<strong>in</strong>cipal changes <strong>in</strong>troduced <strong>in</strong> the New Articles are summarised below.<br />
Other changes which are of a m<strong>in</strong>or, technical or clarify<strong>in</strong>g nature and also some more m<strong>in</strong>or changes which merely reflect<br />
changes made by the Companies Act 2006, have not been noted below. The New Articles show<strong>in</strong>g all of the changes to the<br />
Current Articles are available for <strong>in</strong>spection, as noted <strong>in</strong> the Notice of AGM.<br />
Proposed Changes to the Current Articles<br />
Provisions <strong>in</strong> the Current Articles which replicate provisions conta<strong>in</strong>ed <strong>in</strong> the Companies Act 2006 are <strong>in</strong> the ma<strong>in</strong> amended to<br />
br<strong>in</strong>g them <strong>in</strong>to l<strong>in</strong>e with the Companies Act 2006. Certa<strong>in</strong> examples of such provisions <strong>in</strong>clude provisions as to the form of<br />
resolutions, the variation of class rights and provisions regard<strong>in</strong>g the period of notice required to convene general meet<strong>in</strong>gs.<br />
The ma<strong>in</strong> changes made to reflect this approach are detailed below.<br />
Form of Resolution<br />
The Current Articles conta<strong>in</strong> a provision that, where for any purpose an ord<strong>in</strong>ary resolution is required, a special or extraord<strong>in</strong>ary<br />
resolution is also effective and that, where an extraord<strong>in</strong>ary resolution is required, a special resolution is also effective. This<br />
provision is be<strong>in</strong>g amended as the concept of extraord<strong>in</strong>ary resolutions has not been reta<strong>in</strong>ed under the Companies Act 2006.<br />
The Current Articles enable members to act by written resolution. Under the Companies Act 2006, public companies can no<br />
longer pass written resolutions. These provisions have, therefore, been removed <strong>in</strong> the New Articles.<br />
Variation of Class Rights<br />
The Current Articles conta<strong>in</strong> provisions regard<strong>in</strong>g the variation of class rights. The proceed<strong>in</strong>gs and specific quorum<br />
requirements for a meet<strong>in</strong>g convened to vary class rights are conta<strong>in</strong>ed <strong>in</strong> the Companies Act 2006. The relevant provisions<br />
have, therefore, been amended <strong>in</strong> the New Articles.<br />
Conven<strong>in</strong>g Extraord<strong>in</strong>ary and <strong>Annual</strong> General Meet<strong>in</strong>gs<br />
The provisions <strong>in</strong> the Current Articles deal<strong>in</strong>g with the conven<strong>in</strong>g of general meet<strong>in</strong>gs and the length of notice required to<br />
convene general meet<strong>in</strong>gs are be<strong>in</strong>g amended to conform to new provisions <strong>in</strong> the Companies Act 2006. In particular, an<br />
extraord<strong>in</strong>ary general meet<strong>in</strong>g to consider a special resolution can be convened on 14 days’ notice whereas previously 21 days’<br />
notice was required.<br />
Votes of Members<br />
Under the Companies Act 2006, proxies are entitled to vote on a show of hands whereas under the Current Articles proxies are<br />
only entitled to vote on a poll. The time limits for the appo<strong>in</strong>tment or term<strong>in</strong>ation of a proxy appo<strong>in</strong>tment have been altered by<br />
the Companies Act 2006 so that articles of association cannot provide that they should be received more than 48 hours before<br />
the meet<strong>in</strong>g or <strong>in</strong> the case of a poll taken more than 48 hours after the meet<strong>in</strong>g, more than 24 hours before the time for the<br />
tak<strong>in</strong>g of a poll, with weekends and bank holidays be<strong>in</strong>g permitted to be excluded for this purpose. Multiple proxies may be<br />
appo<strong>in</strong>ted provided that each proxy is appo<strong>in</strong>ted to exercise the rights attached to a different share held by the shareholder.<br />
The New Articles reflect all of these new provisions.<br />
54 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
DIRECTORS’ REPORT<br />
CONTINUED<br />
Age of Directors on Appo<strong>in</strong>tment<br />
The Current Articles conta<strong>in</strong> a provision limit<strong>in</strong>g the age at which a director can be appo<strong>in</strong>ted. Such provision could now fall<br />
foul of the Employment Equality (Age) Regulations 2006 and so has been removed <strong>in</strong> the New Articles.<br />
Retirement of Directors by Rotation<br />
The Current Articles conta<strong>in</strong> a provision requir<strong>in</strong>g a m<strong>in</strong>imum number of one third of the directors who are subject to<br />
retirement by rotation to retire at every AGM. Such provision is no longer appropriate <strong>in</strong> view of the Comb<strong>in</strong>ed Code<br />
requirement for directors to offer themselves for re-election at regular <strong>in</strong>tervals and at least every three years and so has been<br />
removed <strong>in</strong> the New Articles. The New Articles provide that any director who has been appo<strong>in</strong>ted by the Board s<strong>in</strong>ce the last<br />
AGM, or who held office at the time of the two preced<strong>in</strong>g AGMs and who did not retire at either of them, or who has held office<br />
for a cont<strong>in</strong>uous period of n<strong>in</strong>e years or more at the date of the AGM, is to retire at each AGM and, if he wishes to do so, offer<br />
himself for re-appo<strong>in</strong>tment.<br />
Conflicts of Interest<br />
The Companies Act 2006 sets out directors’ general duties which largely codify the exist<strong>in</strong>g law but with some changes.<br />
Under the Companies Act 2006, from 1 October 2008, a director must avoid a situation where he has, or can have, a direct or<br />
<strong>in</strong>direct <strong>in</strong>terest that conflicts, or possibly may conflict with the company’s <strong>in</strong>terests. The requirement is very broad and could<br />
apply, for example, if a director becomes a director of another company or trustee of another organisation. The Companies Act<br />
2006 allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the articles<br />
of association conta<strong>in</strong> a provision to this effect. The Companies Act 2006 also allows the articles of association to conta<strong>in</strong> other<br />
provisions for deal<strong>in</strong>g with directors’ conflicts of <strong>in</strong>terest to avoid a breach of duty. The New Articles give the directors authority<br />
to approve such situations and to <strong>in</strong>clude other provisions to allow conflicts of <strong>in</strong>terest to be dealt with <strong>in</strong> a similar way to the<br />
current position.<br />
There are safeguards which will apply when directors decide whether to authorise a conflict or potential conflict. Firstly,<br />
only directors who have no <strong>in</strong>terest <strong>in</strong> the matter be<strong>in</strong>g considered will be able to take the relevant decision, and secondly,<br />
<strong>in</strong> tak<strong>in</strong>g the decision the directors must act <strong>in</strong> a way they consider, <strong>in</strong> good faith, will be most likely to promote the company’s<br />
success. The directors will be able to impose conditions, limitations and/or terms when giv<strong>in</strong>g authorisation if they th<strong>in</strong>k this<br />
is appropriate.<br />
The New Articles also conta<strong>in</strong> provisions relat<strong>in</strong>g to confidential <strong>in</strong>formation, attendance at Board meet<strong>in</strong>gs and availability of<br />
Board papers to protect a director be<strong>in</strong>g <strong>in</strong> breach of duty if a conflict of <strong>in</strong>terest or potential conflict of <strong>in</strong>terest arises. These<br />
provisions will only apply where the position giv<strong>in</strong>g rise to the potential conflict has previously been authorised by the directors.<br />
Electronic and Web Communications<br />
Provisions of the Companies Act 2006 which came <strong>in</strong>to force <strong>in</strong> January <strong>2007</strong> enable companies to communicate with<br />
members by electronic and/or website communications. The New Articles cont<strong>in</strong>ue to allow communications to members <strong>in</strong><br />
electronic form and, <strong>in</strong> addition, they also permit the Company to take advantage of the new provisions relat<strong>in</strong>g to website<br />
communications. Before the Company can communicate with a member by means of website communication, the relevant<br />
member must be asked <strong>in</strong>dividually by the Company to agree that the Company may send or supply documents or <strong>in</strong>formation<br />
to him by means of a website, and the Company must either have received a positive response or have received no response<br />
with<strong>in</strong> the period of 28 days beg<strong>in</strong>n<strong>in</strong>g with the date on which the request was sent. The Company will notify the member (either<br />
<strong>in</strong> writ<strong>in</strong>g, or by other permitted means) when a relevant document or <strong>in</strong>formation is placed on the website and a member can<br />
always request a hard copy version of the document or <strong>in</strong>formation.<br />
Directors’ Indemnities and Loans to Fund Expenditure<br />
The Companies Act 2006 has <strong>in</strong> some areas widened the scope of the powers of a company to <strong>in</strong>demnify directors and to fund<br />
expenditure <strong>in</strong>curred <strong>in</strong> connection with certa<strong>in</strong> actions aga<strong>in</strong>st directors. The exist<strong>in</strong>g exemption allow<strong>in</strong>g a company to provide<br />
money for the purpose of fund<strong>in</strong>g a director’s defence <strong>in</strong> court proceed<strong>in</strong>gs now expressly covers regulatory proceed<strong>in</strong>gs and<br />
applies to associated companies. The New Articles reflect these new provisions.<br />
General<br />
Generally, the opportunity has been taken to br<strong>in</strong>g clearer language <strong>in</strong>to the New Articles and <strong>in</strong> some areas to conform the<br />
language of the New Articles.<br />
Disclosure of Information to Auditors<br />
The directors of the Company who held office at 31 December <strong>2007</strong> confirm that, as far as they are aware, there is no<br />
relevant audit <strong>in</strong>formation of which the Company’s auditors are unaware. In mak<strong>in</strong>g this confirmation, the directors have taken<br />
appropriate steps to make themselves aware of the relevant audit <strong>in</strong>formation and that the Company’s auditors are aware of this<br />
<strong>in</strong>formation.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 55
DIRECTORS’ REPORT<br />
CONTINUED<br />
Reappo<strong>in</strong>tment of Auditors<br />
Ernst & Young LLP have expressed their will<strong>in</strong>gness to cont<strong>in</strong>ue as auditors and their reappo<strong>in</strong>tment at the AGM to be held<br />
on 23 May 2008 will be proposed <strong>in</strong> accordance with the Companies Act.<br />
AGM 2008<br />
The resolutions to be proposed at the AGM to be held on 23 May 2008 are set out <strong>in</strong> the Notice of AGM.<br />
Please note that this <strong>Annual</strong> <strong>Report</strong> and Accounts (which <strong>in</strong>cludes the Notice of AGM) is an important document and requires<br />
your immediate attention. If you are <strong>in</strong> any doubt as to what action you should take, you should consult your stockbroker,<br />
bank manager, solicitor, accountant or other professional adviser immediately.<br />
If you have sold or transferred all your shares <strong>in</strong> <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> please send this document and the accompany<strong>in</strong>g Form<br />
of Proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was<br />
effected, for transmission to the purchaser or transferee.<br />
The directors consider that all of the resolutions set out <strong>in</strong> the Notice of AGM are <strong>in</strong> the best <strong>in</strong>terests of the Company and<br />
its shareholders as a whole and recommend that shareholders vote <strong>in</strong> favour of each of them.<br />
By order of the Board<br />
Duncan Wood<br />
Company Secretary<br />
31 April 2008<br />
56 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
DIRECTORS’ REMUNERATION REPORT<br />
Remuneration Committee and Advisers<br />
Reference is made on page 44 of the Corporate Governance Statement, where there is a summary of the role of the<br />
remuneration committee.<br />
<strong>Cairn</strong>’s remuneration committee operates with<strong>in</strong> terms of reference set by the Board. These are reviewed periodically to ensure<br />
that the remuneration committee rema<strong>in</strong>s up to date with best practices appropriate to <strong>Cairn</strong>, its strategy and the bus<strong>in</strong>ess<br />
environment <strong>in</strong> which it operates.<br />
The deliberations and decisions of the remuneration committee are governed by the provisions <strong>in</strong> the List<strong>in</strong>g Rules and the<br />
Comb<strong>in</strong>ed Code (appended to the List<strong>in</strong>g Rules) and the remuneration committee has followed these provisions and those<br />
of the Companies Act 1985 (as amended) and the Directors’ Remuneration <strong>Report</strong> Regulations 2002.<br />
As and when the remuneration committee deems appropriate, it takes external advice on remuneration from the Company’s<br />
legal advisers, Shepherd and Wedderburn LLP and auditors, Ernst & Young LLP, <strong>in</strong> respect of the Company’s share option<br />
schemes and long-term <strong>in</strong>centive plans. Advice obta<strong>in</strong>ed from Ernst & Young LLP is purely <strong>in</strong> relation to their <strong>in</strong>dependent<br />
verification of the Company’s performance aga<strong>in</strong>st performance criteria applicable to the Company’s share option schemes<br />
and long-term <strong>in</strong>centive plans.<br />
The current members of the remuneration committee are Hamish Grossart (chairman), Ed Story, Mark Tyndall and Todd Hunt.<br />
The Chairman and Chief Executive are not members of the remuneration committee but may attend its meet<strong>in</strong>gs by <strong>in</strong>vitation<br />
and are consulted <strong>in</strong> respect of certa<strong>in</strong> of its proposals (although they are not consulted or <strong>in</strong>volved <strong>in</strong> any discussions <strong>in</strong> respect<br />
of their own remuneration).<br />
The remuneration committee determ<strong>in</strong>es and agrees with the Board the overall remuneration policy for the executive directors,<br />
the Chairman and the members of the GMB. The remuneration committee also determ<strong>in</strong>es, with<strong>in</strong> the terms of the agreed<br />
policy and hav<strong>in</strong>g consulted with the Chairman and the Chief Executive about their proposals, specific remuneration packages<br />
for each of the executive directors, <strong>in</strong>clud<strong>in</strong>g pension rights and any compensation payments to be paid on term<strong>in</strong>ation.<br />
Remuneration Policy<br />
<strong>Cairn</strong>’s policy on executive directors’ remuneration for the current year and subsequent f<strong>in</strong>ancial years is that the overall<br />
remuneration package should be sufficiently competitive to attract, reta<strong>in</strong> and motivate high quality <strong>in</strong>dividuals capable of<br />
achiev<strong>in</strong>g the Group’s objectives and thereby enhance shareholder value. The package is generally weighted more towards<br />
variable pay and, <strong>in</strong> relation to the variable pay element, the package is weighted more towards long-term performance.<br />
Each executive director’s remuneration package currently consists of basic salary, benefits, annual performance related bonuses,<br />
a long-term <strong>in</strong>centive plan, a def<strong>in</strong>ed contribution pension (if appropriate) and life assurance of four times basic annual salary.<br />
The package is designed to support the Group’s bus<strong>in</strong>ess strategy and to provide an appropriate <strong>in</strong>centive to maximise<br />
<strong>in</strong>dividual and corporate performance, whilst ensur<strong>in</strong>g that overall rewards are market competitive. Details of the <strong>in</strong>dividual<br />
components of the package and of contracts are given below.<br />
The remuneration of the non-executive directors takes the form solely of fees, which are agreed by the executive members of<br />
the Board and the Chairman, hav<strong>in</strong>g taken <strong>in</strong>dependent advice on appropriate levels, with<strong>in</strong> an overall limit determ<strong>in</strong>ed by<br />
shareholders. The fees are designed to attract experienced <strong>in</strong>dividuals and reflect the responsibilities of the role. The fees stated<br />
are <strong>in</strong> respect of all responsibilities undertaken by the non-executive directors, <strong>in</strong>clud<strong>in</strong>g membership of Board committees.<br />
Basic Salary and Benefits<br />
Basic salary is reviewed annually by the remuneration committee and any changes take effect from 1 January each year.<br />
For the year 2008, the basic salaries of the executive directors were reta<strong>in</strong>ed at <strong>2007</strong> levels and are £480,000 for Sir Bill<br />
Gammell, £350,000 for Dr Mike Watts, £300,000 for each of Malcolm Thoms and Phil Tracy, and £250,000 for each of Jann<br />
Brown and Simon Thomson.<br />
The non-executive directors’ fees were also reta<strong>in</strong>ed at <strong>2007</strong> levels, be<strong>in</strong>g £140,000 for Norman Murray, £90,000 for Hamish<br />
Grossart and £50,000 for each of Ed Story, Todd Hunt, Mark Tyndall and Andrew Shilston. Andrew Shilston <strong>in</strong>tends to retire as<br />
a non-executive director of the Company at the AGM to be held on 23 May 2008.<br />
Benefits available to the executive directors comprise a company car, permanent health <strong>in</strong>surance, private health <strong>in</strong>surance and<br />
death <strong>in</strong> service benefit.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 57
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
Share Options<br />
Details of the Group’s current share option plans are as follows:<br />
1. 1996 Second Share Option Scheme (‘1996 Scheme’)<br />
2. 2002 Unapproved Share Option Plan (‘2002 Plan’)<br />
3. 2003 Approved Share Option Plan (‘2003 Plan’)<br />
4. 2006 Share Option Plan (‘2006 Plan’)<br />
5. <strong>Cairn</strong> India Share Option Schemes (‘<strong>Cairn</strong> India Schemes’).<br />
1996 Scheme<br />
The 1996 Scheme was adopted <strong>in</strong> 1996 and expired <strong>in</strong> May 2006. The date of grant of the last award of options under the 1996<br />
Scheme was 1 October 2002. Details of the options outstand<strong>in</strong>g as at 31 December <strong>2007</strong> under the 1996 Scheme are set out <strong>in</strong><br />
Note 7 of the Notes to the Accounts.<br />
2002 Plan and 2003 Plan<br />
The pr<strong>in</strong>cipal difference between the 2002 Plan and the 2003 Plan is that the approval of the Inland Revenue was not sought<br />
for the 2002 Plan. The 2003 Plan was approved by shareholders at the 2003 AGM and subsequently by the Inland Revenue.<br />
The date of grant of the first award of options under the 2002 Plan was 18 March 2003. The date of grant of the first award<br />
of options under the 2003 Plan was 30 June 2003.<br />
Follow<strong>in</strong>g the adoption of the 2006 Plan (see below), no further awards will be granted under the 2002 Plan or the 2003 Plan.<br />
The date of grant of the last award of options under these arrangements was 4 July 2006.<br />
Options granted under the 2002 Plan and the 2003 Plan are exercisable three to ten years follow<strong>in</strong>g the date of grant and are<br />
subject to performance conditions on exercise. In the case of all outstand<strong>in</strong>g options under these arrangements, the option<br />
holder may only exercise their awards if <strong>Cairn</strong>’s share price has <strong>in</strong>creased by 5% on a compound basis over the period from the<br />
date of grant of options up to the date they are exercised. In addition, the percentage <strong>in</strong>crease <strong>in</strong> <strong>Cairn</strong>’s share price over the<br />
period must be at least equal to or greater than the percentage movement <strong>in</strong> the FTSE Oil & Gas Index.<br />
2006 Plan<br />
The 2006 Plan was approved by shareholders at an EGM held <strong>in</strong> November 2006, conditional on the flotation of <strong>Cairn</strong> India<br />
becom<strong>in</strong>g effective, which occurred on 9 January <strong>2007</strong>. The date of grant of the first award of options under the 2006 Plan was<br />
9 January <strong>2007</strong>. No options will be granted under the 2006 Plan to the Company’s executive directors or to any employee or<br />
director of the <strong>Cairn</strong> India Group.<br />
The 2006 Plan, together with the 2006 LTIP described below, reflects the fact that, follow<strong>in</strong>g the flotation of <strong>Cairn</strong> India, there<br />
are two dist<strong>in</strong>ct arms to the Group’s bus<strong>in</strong>ess (namely, a majority sharehold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India and an exploration and production<br />
bus<strong>in</strong>ess owned and operated by the Capricorn Group) and therefore seeks to <strong>in</strong>centivise employees of the Group <strong>in</strong> relation to<br />
the arm(s) which they can affect.<br />
The 2006 Plan enables selected employees (exclud<strong>in</strong>g those that are employed by the <strong>Cairn</strong> India Group) to be granted<br />
‘phantom options’ (which are equity settled) over ‘units’ <strong>in</strong> the Capricorn Group (see below under 2006 LTIP for how these units<br />
are created and valued). On the exercise of an option, participants will generally become entitled to such number of <strong>Cairn</strong><br />
shares as have a market value equal to the notional ga<strong>in</strong> that they realise (i.e. the difference between the ‘notional exercise price’<br />
attributable to their option and the price of the units <strong>in</strong> respect of which their option has been exercised). However, the extent to<br />
which options become exercisable will be dependent on cont<strong>in</strong>ued employment with the Group and the extent to which<br />
pre-determ<strong>in</strong>ed performance conditions are met over a specified period.<br />
All options granted under the 2006 Plan are currently subject to a Capricorn unit price target measured over a three-year<br />
performance period. Under this target, vest<strong>in</strong>g will occur as follows:<br />
Average annual compound growth <strong>in</strong><br />
Percentage of Capricorn units comprised <strong>in</strong> option that vest Capricorn unit price over the performance period<br />
0% Less than 5%<br />
50% 5%<br />
100% 10% or more<br />
50%–100% on a straight-l<strong>in</strong>e basis More than 5% but less than 10%<br />
Notwithstand<strong>in</strong>g the above condition, no part of an option will vest unless the notional total shareholder return (‘TSR’) of a<br />
Capricorn unit over the performance period is sufficient to place it at or above the median level <strong>in</strong> the same comparator group<br />
of companies that is used for the purposes of the Capricorn awards granted pursuant to the 2006 LTIP (see below).<br />
58 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
None of the directors hold any options under any of the Company’s share option plans. S<strong>in</strong>ce 1999, the long-term <strong>in</strong>centives<br />
for executive directors and certa<strong>in</strong> other senior executives have been made pursuant to long-term <strong>in</strong>centive plans and therefore<br />
no options have been granted to these <strong>in</strong>dividuals under any of the Company’s share option plans s<strong>in</strong>ce that time.<br />
<strong>Cairn</strong> India Schemes<br />
As part of the arrangements surround<strong>in</strong>g its flotation, <strong>Cairn</strong> India established the follow<strong>in</strong>g share option schemes pursuant to<br />
which options to acquire its shares can be granted:<br />
• the <strong>Cairn</strong> India Senior Management Plan;<br />
• the <strong>Cairn</strong> India Employee Stock Option Plan (2006); and<br />
• the <strong>Cairn</strong> India Performance Option Plan (2006).<br />
These arrangements (brief details of which are set out <strong>in</strong> Note 7 of the Notes to the Accounts) have been or will be used<br />
to grant options to selected employees and executive directors of <strong>Cairn</strong> India and its various subsidiary undertak<strong>in</strong>gs.<br />
None of the executive directors of the Company participate, or will participate, <strong>in</strong> any of the <strong>Cairn</strong> India Schemes.<br />
Long Term Incentive Plans<br />
Details of the Group’s current LTIPs are as follows:<br />
1. <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Long Term Incentive Plan 2002 (‘2002 LTIP’).<br />
2. <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Long Term Incentive Plan 2006 (‘2006 LTIP’).<br />
2002 LTIP<br />
Details of directors’ awards granted pursuant to the 2002 LTIP, which was implemented <strong>in</strong> 2002, are given on pages 66 and 67.<br />
The 2002 LTIP was superseded by the 2006 LTIP, further details of which are set out on pages 61 and 62. The date of grant of<br />
the last award under the 2002 LTIP was 24 April 2006.<br />
Participants have been granted Tier One and Tier Two awards under the 2002 LTIP. Performance conditions for each are<br />
determ<strong>in</strong>ed by the remuneration committee and the calculation of shares vest<strong>in</strong>g based on these conditions is subject to<br />
<strong>in</strong>dependent verification by Ernst & Young LLP.<br />
Performance Conditions – Tier One<br />
A Tier One award is an award of <strong>Cairn</strong> shares with the vest<strong>in</strong>g and release of all/part of those shares be<strong>in</strong>g dependent upon the<br />
executive rema<strong>in</strong><strong>in</strong>g an employee and achievement of performance conditions over a performance period of three years.<br />
The vest<strong>in</strong>g of all outstand<strong>in</strong>g Tier One awards is subject to a TSR target which is calculated <strong>in</strong> two steps, each of which must<br />
be satisfied.<br />
Step One<br />
First, the TSR of a <strong>Cairn</strong> share dur<strong>in</strong>g the performance period is compared to the average TSR performance of the companies<br />
compris<strong>in</strong>g the relevant FTSE Index (‘the Index’) at the beg<strong>in</strong>n<strong>in</strong>g and at the end of the performance period (details of the FTSE<br />
Indices used are set out on page 60). If <strong>Cairn</strong>’s TSR performance exceeds the average TSR performance of the Index, then the<br />
step one test has been passed. The step two test is then used to calculate how many (if any) <strong>Cairn</strong> shares that are the subject of<br />
the award will vest.<br />
Step Two<br />
Under step two, the TSR of <strong>Cairn</strong> shares is compared to the TSR of a share <strong>in</strong> each company <strong>in</strong> a comparator group compris<strong>in</strong>g<br />
exploration, production and <strong>in</strong>tegrated oil companies over the performance period (details of the relevant comparator groups<br />
are set out on page 60). Each company is then ranked <strong>in</strong> order of TSR performance. <strong>Cairn</strong>’s position <strong>in</strong> the comparator group list<br />
then determ<strong>in</strong>es how many (if any) <strong>Cairn</strong> shares that are the subject of the award will vest, as follows:<br />
Percentage of <strong>Cairn</strong> shares comprised <strong>in</strong> Tier One Award that vest Rank<strong>in</strong>g of <strong>Cairn</strong> <strong>in</strong> relevant comparator group<br />
0% Below median<br />
20% Median<br />
100% Upper quartile or above<br />
20%–100% on a straight-l<strong>in</strong>e basis Between median and upper quartile<br />
In addition, no Tier One award will vest unless the remuneration committee is satisfied that there has been a satisfactory and<br />
susta<strong>in</strong>ed improvement <strong>in</strong> <strong>Cairn</strong>’s underly<strong>in</strong>g f<strong>in</strong>ancial position and performance over the performance period.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 59
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
Performance Conditions – Tier Two<br />
A Tier Two award is a share appreciation right over a number of notional <strong>Cairn</strong> shares. The maximum potential benefit a participant<br />
may receive under a Tier Two award is calculated by compar<strong>in</strong>g the <strong>in</strong>crease <strong>in</strong> <strong>Cairn</strong>’s share price over the performance period with<br />
the change <strong>in</strong> the average share price of the comparator group over the same period. The <strong>in</strong>crease <strong>in</strong> <strong>Cairn</strong>’s share price (if any) over<br />
the rise (or fall) <strong>in</strong> the average share price of the comparator group over the performance period is then multiplied by the number of<br />
notional shares that are the subject of the award. This gives rise to a monetary figure which is then converted <strong>in</strong>to an actual number<br />
of <strong>Cairn</strong> shares us<strong>in</strong>g the market value as at the date of vest<strong>in</strong>g. Where there has been a fall <strong>in</strong> <strong>Cairn</strong>’s TSR, no Tier Two award will vest.<br />
Vest<strong>in</strong>g of the Tier Two award is then subject to a further TSR target which is calculated <strong>in</strong> two steps, each of which must be satisfied.<br />
Step One<br />
This step is the same as step one of the performance conditions <strong>in</strong> respect of Tier One.<br />
Step Two<br />
Under step two, the TSR of <strong>Cairn</strong> shares is compared to the TSR of a share <strong>in</strong> each company comprised <strong>in</strong> the comparator group<br />
over the performance period. As with Tier One awards, each company is then ranked <strong>in</strong> order of TSR performance. <strong>Cairn</strong>’s position<br />
<strong>in</strong> the comparator group list then determ<strong>in</strong>es how many (if any) shares that are the subject of the award will vest, as follows:<br />
Percentage of <strong>Cairn</strong> shares comprised <strong>in</strong> Tier Two Award that vest Rank<strong>in</strong>g of <strong>Cairn</strong> <strong>in</strong> relevant comparator group<br />
0% Below upper quartile<br />
40% Upper quartile<br />
100% Number one position<br />
40%–100% on a straight-l<strong>in</strong>e basis Between upper quartile and number one position<br />
In addition, no Tier Two award will vest unless the remuneration committee is satisfied that there has been a satisfactory and<br />
susta<strong>in</strong>ed improvement <strong>in</strong> <strong>Cairn</strong>’s underly<strong>in</strong>g f<strong>in</strong>ancial position and performance over the performance period.<br />
Release of Shares Follow<strong>in</strong>g Vest<strong>in</strong>g<br />
At the end of the performance period, 50% of vested shares under both Tier One and Tier Two awards are transferred to<br />
participants immediately, and the rema<strong>in</strong><strong>in</strong>g shares are transferred at the end of one year.<br />
FTSE Indices Used for 2002 LTIP<br />
For the first step of the TSR target described on page 59, for 2004 and 2005 awards, the Company’s performance is measured<br />
aga<strong>in</strong>st the FTSE 250 Index. The remuneration committee reviewed this performance condition <strong>in</strong> March 2006 and decided<br />
to measure awards made <strong>in</strong> 2006 aga<strong>in</strong>st the FTSE 350 Index. For awards prior to 2004, the Company’s performance was<br />
measured aga<strong>in</strong>st the FTSE Small Cap Index (exclud<strong>in</strong>g <strong>in</strong>vestment trusts).<br />
Comparator Groups Used for 2002 LTIP<br />
The table below shows the comparator groups applicable to:<br />
• awards made <strong>in</strong> 2003 and 2004;<br />
• awards made <strong>in</strong> 2005; and<br />
• awards made <strong>in</strong> 2006.<br />
As such, the comparator group applicable to awards made on 10 March 2004 and which vested on 28 March <strong>2007</strong> (details of<br />
which are on page 68) is shown <strong>in</strong> the first column of the table below:<br />
2003 and 2004 Awards 2005 Awards 2006 Awards<br />
BG Group <strong>PLC</strong><br />
Chevron Texaco Corporation<br />
Dana Petroleum <strong>PLC</strong><br />
First Calgary Petroleums Limited<br />
Fortune Oil <strong>PLC</strong><br />
John Wood Group <strong>PLC</strong><br />
Melrose Resources <strong>PLC</strong><br />
Occidental Petroleum Corporation<br />
Palad<strong>in</strong> Resources <strong>PLC</strong><br />
Premier Oil <strong>PLC</strong><br />
Ramco <strong>Energy</strong> <strong>PLC</strong><br />
SOCO International <strong>PLC</strong><br />
Tullow Oil <strong>PLC</strong><br />
Venture Production <strong>PLC</strong><br />
60 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
BG Group <strong>PLC</strong><br />
Burren <strong>Energy</strong> <strong>PLC</strong><br />
Chevron Texaco Corporation<br />
Dana Petroleum <strong>PLC</strong><br />
First Calgary Petroleums Limited<br />
Melrose Resources <strong>PLC</strong><br />
Occidental Petroleum Corporation<br />
Palad<strong>in</strong> Resources <strong>PLC</strong><br />
Premier Oil <strong>PLC</strong><br />
SOCO International <strong>PLC</strong><br />
Tullow Oil <strong>PLC</strong><br />
Venture Production <strong>PLC</strong><br />
BG Group <strong>PLC</strong><br />
Burren <strong>Energy</strong> <strong>PLC</strong><br />
Dana Petroleum <strong>PLC</strong><br />
Melrose Resources <strong>PLC</strong><br />
Occidental Petroleum Corporation<br />
Premier Oil <strong>PLC</strong><br />
SOCO International <strong>PLC</strong><br />
Talisman <strong>Energy</strong>, Inc<br />
Tullow Oil <strong>PLC</strong><br />
Venture Production <strong>PLC</strong><br />
Woodside Petroleum Limited
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
2006 LTIP<br />
The 2006 LTIP was approved by shareholders at the EGM held on 17 November 2006, conditional on the flotation of <strong>Cairn</strong> India<br />
becom<strong>in</strong>g effective, which occurred on 9 January <strong>2007</strong>.<br />
The 2006 LTIP enables selected executive directors and employees (exclud<strong>in</strong>g those that are employed by the <strong>Cairn</strong> India<br />
Group) to be granted conditional awards over two separate pools of notional ‘units’, the first relat<strong>in</strong>g to <strong>Cairn</strong> India (‘<strong>Cairn</strong> India<br />
Units’) and the second relat<strong>in</strong>g to the Capricorn Group (‘Capricorn Units’) (together, ‘Units’).<br />
For the purposes of the 2006 LTIP, each of these <strong>Cairn</strong> India Units and Capricorn Units will be ascribed a notional price. On any<br />
day, the price of a <strong>Cairn</strong> India Unit will be equal to the price of a <strong>Cairn</strong> India share, as quoted on the BSE and the NSE of India<br />
(the ‘Exchanges’). The price of a Capricorn Unit will be calculated by tak<strong>in</strong>g the total value of the Capricorn Group and divid<strong>in</strong>g<br />
it by the number of Capricorn Units created for the purposes of the 2006 LTIP. For these purposes, the value of the Capricorn<br />
Group will generally be determ<strong>in</strong>ed by deduct<strong>in</strong>g (i) the value of the Company’s hold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India; and (ii) the amount of<br />
any cash held by the Company that is to be returned to shareholders, from the total market capitalisation of the Company.<br />
The extent to which an award over <strong>Cairn</strong> India Units (a ‘<strong>Cairn</strong> India Award’) or an award over Capricorn Units (a ‘Capricorn<br />
Award’) (together, ‘Awards’) vests will be dependent on cont<strong>in</strong>ued employment with<strong>in</strong> the Group and the extent to which predeterm<strong>in</strong>ed<br />
performance conditions relat<strong>in</strong>g to <strong>Cairn</strong> India or the Capricorn Group are met over a specified period (see below).<br />
Follow<strong>in</strong>g the vest<strong>in</strong>g of an Award, the participant will then generally become entitled to such number of <strong>Cairn</strong> shares as have<br />
a market value equal to the aggregate price of the vested Units. Only 50% of these shares will be transferred to the participant<br />
immediately. The rema<strong>in</strong><strong>in</strong>g 50% will be held for a further year.<br />
The first Awards under the 2006 LTIP were made on 29 March <strong>2007</strong>. On each occasion that Awards are granted, the<br />
remuneration committee will determ<strong>in</strong>e whether a participant is granted a <strong>Cairn</strong> India Award or a Capricorn Award or both. This<br />
decision will be based on the extent to which the ongo<strong>in</strong>g role of the <strong>in</strong>dividual <strong>in</strong> question relates to the Company’s hold<strong>in</strong>g <strong>in</strong><br />
<strong>Cairn</strong> India or the bus<strong>in</strong>ess of the Capricorn Group (or a mixture of both). Notwithstand<strong>in</strong>g this discretion, it is the remuneration<br />
committee’s <strong>in</strong>tention that:<br />
• on any occasion that the Company’s Chief Executive is granted Awards, half those Awards will be <strong>Cairn</strong> India Awards and<br />
half will be Capricorn Awards; and<br />
• on any occasion that Awards are granted to any other executive directors of the Company, not more than 75% of such<br />
Awards will be either <strong>Cairn</strong> India Awards or Capricorn Awards.<br />
Performance Conditions<br />
The remuneration committee has decided that, <strong>in</strong>itially, all Awards granted under the 2006 LTIP will be subject to a relative<br />
TSR target measured over a three-year performance period. For the purposes of apply<strong>in</strong>g this measure to any <strong>Cairn</strong> India<br />
Award, the TSR of a <strong>Cairn</strong> India share will be used. For a Capricorn Award, the condition will be based on the notional TSR<br />
of a Capricorn Unit. Under the TSR condition, the extent to which a <strong>Cairn</strong> India Award or Capricorn Award vests will be<br />
determ<strong>in</strong>ed by compar<strong>in</strong>g the TSR of a <strong>Cairn</strong> India share or Capricorn Unit (as appropriate) over the performance period with<br />
the TSR of a share <strong>in</strong> each company <strong>in</strong> a comparator group. For the purposes of the first Awards granted under the 2006 LTIP<br />
the comparator groups were as follows:<br />
Comparator Group for <strong>Cairn</strong> India Awards Comparator Group for Capricorn Awards<br />
BG Group <strong>PLC</strong><br />
Bharat Petroleum Corporation Limited<br />
Burren <strong>Energy</strong> <strong>PLC</strong><br />
Chesapeake <strong>Energy</strong> Corporation<br />
CNOOC Limited<br />
EOG Resources, Inc<br />
H<strong>in</strong>dustan Petroleum Corporation Limited<br />
Indian Oil Corporation Limited<br />
Newfield Exploration Company<br />
Noble <strong>Energy</strong>, Inc<br />
Oil and Natural Gas Corporation Limited<br />
PTT Exploration & Production <strong>PLC</strong><br />
Santos Limited<br />
Talisman <strong>Energy</strong>, Inc<br />
Tullow Oil <strong>PLC</strong><br />
Western Oil Sands, Inc (1)<br />
Woodside Petroleum Limited<br />
Burren <strong>Energy</strong> <strong>PLC</strong><br />
Dana Petroleum <strong>PLC</strong><br />
Egdon Resources <strong>PLC</strong><br />
Hardy Oil & Gas <strong>PLC</strong><br />
Imperial <strong>Energy</strong> Corporation <strong>PLC</strong><br />
Indago Petroleum Limited (2)<br />
JkX Oil & Gas <strong>PLC</strong><br />
Melrose Resources <strong>PLC</strong><br />
Premier Oil <strong>PLC</strong><br />
Regal Petroleum <strong>PLC</strong><br />
Sibir <strong>Energy</strong> <strong>PLC</strong><br />
SOCO International <strong>PLC</strong><br />
Star <strong>Energy</strong> Group <strong>PLC</strong><br />
Sterl<strong>in</strong>g <strong>Energy</strong> <strong>PLC</strong><br />
Tullow Oil <strong>PLC</strong><br />
Notes:<br />
1. Western Oil Sands, Inc delisted on 22 October <strong>2007</strong> and was replaced <strong>in</strong> the comparator group by Addax Petroleum, Inc with effect from that date.<br />
2. Indago Petroleum Limited delisted <strong>in</strong> June <strong>2007</strong> and has been replaced by DNO ASA.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 61
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
Vest<strong>in</strong>g then takes place as follows:<br />
Percentage of <strong>Cairn</strong> India Units/Capricorn Units Rank<strong>in</strong>g of <strong>Cairn</strong> India share/Capricorn Unit<br />
comprised <strong>in</strong> Award that vest aga<strong>in</strong>st relevant comparator group<br />
0% Below median<br />
20% Median<br />
100% Upper decile<br />
20%–100% on a straight-l<strong>in</strong>e basis Between median and upper decile<br />
In order to ensure that the 2006 LTIP adequately encourages and rewards exceptional performance, the terms of the above<br />
performance condition also provide that, where the TSR of a <strong>Cairn</strong> India share/Capricorn Unit produces a rank<strong>in</strong>g at or above<br />
the upper decile level <strong>in</strong> the appropriate comparator group, a participant will then be given the opportunity to <strong>in</strong>crease the<br />
percentage of the relevant award that vests through the application of a ‘multiplier’ that is l<strong>in</strong>ked to the TSR actually achieved<br />
over the performance period. The way <strong>in</strong> which this multiplier operates is as follows:<br />
Multiplier applied to determ<strong>in</strong>e the number of TSR of a <strong>Cairn</strong> India share over TSR of a Capricorn Unit over<br />
<strong>Cairn</strong> India Units/Capricorn Units that actually vest the performance period the performance period<br />
1 40% or less 75% or less<br />
1.33 80% or more 150% or more<br />
1–1.33 on a straight-l<strong>in</strong>e basis Between 40% and 80% Between 75% and 150%<br />
Notwithstand<strong>in</strong>g the performance of a <strong>Cairn</strong> India share or Capricorn Unit aga<strong>in</strong>st the above targets, no part of any Award will<br />
vest unless the remuneration committee is satisfied that there has been an overall satisfactory and susta<strong>in</strong>ed improvement <strong>in</strong> the<br />
performance of the Company as a whole over the performance period.<br />
The 2006 LTIP is designed to provide the executive directors and other senior executives with a long-team <strong>in</strong>centive based on<br />
the performance of the particular arm of the bus<strong>in</strong>ess that they can affect. As such, the performance conditions described above<br />
are deemed appropriate by the remuneration committee.<br />
Individual Limits<br />
The total value of Units over which an <strong>in</strong>dividual may be granted Awards under the 2006 LTIP dur<strong>in</strong>g the period commenc<strong>in</strong>g on<br />
9 January <strong>2007</strong> (i.e. the date of its adoption) and end<strong>in</strong>g on the f<strong>in</strong>al day of the Company’s f<strong>in</strong>ancial year end<strong>in</strong>g 31 December<br />
<strong>2007</strong> could not exceed 400% of his/her rate of annual base salary. In any subsequent f<strong>in</strong>ancial year of the Company, the total<br />
value of Units over which an <strong>in</strong>dividual may be granted Awards dur<strong>in</strong>g that year will not exceed 300% of his/her annual base<br />
salary (save <strong>in</strong> exceptional circumstances where a 400% limit may be applied). These limits are broadly consistent with those<br />
that applied under the 2002 LTIP and reflect the remuneration committee’s policy of plac<strong>in</strong>g a significantly higher weight<strong>in</strong>g<br />
on variable pay rather than fixed pay.<br />
Share Scheme Dilution<br />
In any ten-year roll<strong>in</strong>g period, the number of shares which may be issued <strong>in</strong> connection with the 2006 LTIP and 2006 Plan,<br />
when added to the number of unissued shares which have been allocated <strong>in</strong> that same period under any other discretionary<br />
share scheme adopted by the Company, cannot exceed 5% of <strong>Cairn</strong>’s issued ord<strong>in</strong>ary share capital.<br />
In addition, <strong>in</strong> any ten-year roll<strong>in</strong>g period, the number of shares which may be issued <strong>in</strong> connection with the 2006 LTIP and 2006<br />
Plan, when added to the number of unissued shares which have been allocated <strong>in</strong> that same period under any other employees’<br />
share scheme adopted by the Company, cannot exceed 10% of <strong>Cairn</strong>’s issued ord<strong>in</strong>ary share capital.<br />
<strong>Annual</strong> Cash Bonus Scheme<br />
<strong>Cairn</strong>’s annual cash bonus scheme applies to all employees and executive directors. Bonuses under the scheme are based on<br />
<strong>in</strong>dividual and Company performance measures. Individual performance is measured through the Company’s performance<br />
management system. Company performance measures are based on annually def<strong>in</strong>ed key performance <strong>in</strong>dicators (‘kPIs’).<br />
The kPIs for <strong>2007</strong> encompassed various portfolio growth and operational performance targets, the substantial majority of which<br />
were met.<br />
For employees other than executive directors, only the <strong>in</strong>dividual and Company performance measures determ<strong>in</strong>e the<br />
overall bonus award. The bonus award to the executive directors is subject to two additional performance measures, be<strong>in</strong>g<br />
performance aga<strong>in</strong>st annually def<strong>in</strong>ed corporate objectives and reserve replacement performance. For <strong>2007</strong>, this resulted <strong>in</strong><br />
one-quarter of the award be<strong>in</strong>g determ<strong>in</strong>ed by <strong>in</strong>dividual performance, one quarter by Company performance, one quarter by<br />
performance aga<strong>in</strong>st corporate objectives and one quarter by reserve replacement performance. The corporate objectives for<br />
<strong>2007</strong> are commercially sensitive and are therefore excluded from this report, as are the 2008 corporate objectives.<br />
62 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
The maximum level of bonus award for the executive directors for <strong>2007</strong> was up to 100% of salary. The bonuses awarded to the<br />
executive directors for performance <strong>in</strong> <strong>2007</strong> are shown <strong>in</strong> the table on page 66. The maximum level of bonus award for other<br />
senior executives for <strong>2007</strong> was 40% of salary. The bonus cap for all other employees for <strong>2007</strong> was between 25% and 40%.<br />
The remuneration committee has the discretion to award bonuses <strong>in</strong> addition to those payable under the annual cash<br />
bonus scheme <strong>in</strong> recognition of particular efforts or achievements by employees, <strong>in</strong>clud<strong>in</strong>g executive directors. In this regard,<br />
the remuneration committee approved a discretionary bonus award to the Chief Executive follow<strong>in</strong>g the successful flotation<br />
of <strong>Cairn</strong> India. This is shown <strong>in</strong> the table on page 66.<br />
Pension Arrangements<br />
The Company is the pr<strong>in</strong>cipal employer for a def<strong>in</strong>ed contribution pension scheme <strong>in</strong> the Uk: the <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Retirement<br />
Benefits Scheme. This scheme is non-contributory and all Uk employees aged 18 and over are eligible to participate <strong>in</strong> the<br />
scheme. The Company contributes 10% of basic annual salary (15% <strong>in</strong> respect of senior executives) to the pension scheme<br />
on behalf of all qualify<strong>in</strong>g employees.<br />
Dr Mike Watts and Jann Brown were members of the <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Retirement Benefits Scheme throughout <strong>2007</strong> and<br />
received a contribution to the scheme equal to 15% of their respective annual basic salaries. Simon Thomson was a member<br />
of the <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Retirement Benefits Scheme for the period to 31 January <strong>2007</strong>. With effect from 1 February <strong>2007</strong>,<br />
he <strong>in</strong>stead elected to receive contributions <strong>in</strong>to a self-<strong>in</strong>vested personal pension plan. In total dur<strong>in</strong>g the year, Simon Thomson<br />
received a contribution equal to 15% of his annual basic salary. Malcolm Thoms also has a personal pension plan and receives<br />
a contribution from the Company equal to 15% of his annual basic salary.<br />
Sir Bill Gammell and Phil Tracy each receive an amount equivalent to 15% of their respective annual basic salaries <strong>in</strong> the form<br />
of additional salary as their pension arrangements are fully funded.<br />
Further details of the contribution made by the Company <strong>in</strong> respect of each executive director are set out <strong>in</strong> the table on<br />
page 66.<br />
The Company is also the pr<strong>in</strong>cipal employer for a Small Self-Adm<strong>in</strong>istered Scheme. Sir Bill Gammell is the sole member of this<br />
scheme. The Company is not contractually obliged to make any contributions <strong>in</strong>to this scheme on behalf of Sir Bill Gammell.<br />
Service Contracts<br />
The Company’s policy is for all executive directors to have contracts of service which can be term<strong>in</strong>ated by either the director<br />
concerned or the Company on giv<strong>in</strong>g 12 months’ notice of term<strong>in</strong>ation. On a change of control of the Company result<strong>in</strong>g <strong>in</strong> the<br />
term<strong>in</strong>ation of a director’s employment, each of the directors is entitled to compensation of a sum equal to his/her annual basic<br />
salary as at the date of term<strong>in</strong>ation of employment.<br />
Each of the non-executive directors has a letter of appo<strong>in</strong>tment <strong>in</strong> terms of which he is appo<strong>in</strong>ted for a fixed three-year period,<br />
subject to the Company’s Articles of Association, which provide for retirement by rotation at least once every three years. The<br />
letters of appo<strong>in</strong>tment set out the time commitment expected by the Company and can be term<strong>in</strong>ated with immediate effect by<br />
either the director concerned or the Company. The Board is satisfied that each of the non-executive directors commits sufficient<br />
time to fulfil his duties as a director of the Company. None of the non-executive directors has any conflict of <strong>in</strong>terest which has<br />
not been disclosed to the Board <strong>in</strong> accordance with the Company’s articles of association.<br />
The executive directors’ service contracts and non-executive directors’ letters of appo<strong>in</strong>tment are available for <strong>in</strong>spection on<br />
request and will be available for <strong>in</strong>spection before and dur<strong>in</strong>g the AGM to be held on 23 May 2008.<br />
Details of the service contracts and letters of appo<strong>in</strong>tment of the current directors of the Company are given <strong>in</strong> the table below.<br />
Effective date Unexpired term Notice period<br />
Executive service contracts<br />
Sir Bill Gammell 19.02.03 n/a 12 months<br />
Dr Mike Watts 19.02.03 n/a 12 months<br />
Malcolm Thoms 19.02.03 n/a 12 months<br />
Phil Tracy 06.02.04 n/a 12 months<br />
Jann Brown 17.11.06 n/a 12 months<br />
Simon Thomson 17.11.06 n/a 12 months<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 63
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
64 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Effective date Unexpired term Notice period<br />
Non-executive letters of appo<strong>in</strong>tment<br />
Norman Murray 19.02.06 11 months None<br />
Hamish Grossart 19.02.06 11 months None<br />
Ed Story 19.02.06 11 months None<br />
Todd Hunt 14.05.06 13 months None<br />
Mark Tyndall 10.10.06 18 months None<br />
Andrew Shilston 08.11.07 31 months None<br />
Certa<strong>in</strong> of the Company’s executive directors serve as non-executive directors on the boards of other companies and are<br />
permitted to reta<strong>in</strong> the fees relat<strong>in</strong>g to those positions. Details of the positions held and the fees receivable are set out <strong>in</strong> the<br />
table below.<br />
Position held Fees (<strong>2007</strong>)<br />
Executive Director<br />
Sir Bill Gammell Non-executive director, Artemis AiM VCT plc £12,500<br />
Malcolm Thoms Non-executive director, Revus <strong>Energy</strong> AS £25,542 (1)<br />
Phil Tracy Non-executive director, Vienco Group Limited £18,000<br />
The Board believes, <strong>in</strong> pr<strong>in</strong>ciple, <strong>in</strong> the benefits of executive directors accept<strong>in</strong>g positions as non-executive directors of other<br />
companies <strong>in</strong> order to widen their skills and knowledge for the benefit of the Company, provided that the time commitments are<br />
not unduly onerous.<br />
The appo<strong>in</strong>tment of any executive director to a non-executive position with another company must be approved by the Board.<br />
In the case of a proposed appo<strong>in</strong>tment to a company with<strong>in</strong> the oil and gas <strong>in</strong>dustry, permission will only be given if the two<br />
companies do not compete <strong>in</strong> the same geographical area.<br />
Note:<br />
(1) Payable partly <strong>in</strong> cash and partly <strong>in</strong> shares.
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
Performance Graphs<br />
Both the FTSE 100 Index and FTSE 250 Index were selected as appropriate comparator <strong>in</strong>dices for the two performance graphs<br />
shown below as although <strong>Cairn</strong> is currently a constituent member of the FTSE 100 Index, it was a constituent member of the<br />
FTSE 250 Index for the majority of <strong>2007</strong>.<br />
The graphs compare <strong>Cairn</strong>’s TSR with that of the chosen <strong>in</strong>dices. The bar chart is presented as additional <strong>in</strong>formation to that<br />
required by the Companies Acts, as amended by the Directors’ Remuneration <strong>Report</strong> Regulations 2002.<br />
Performance Graph – Comparison of five-year cumulative total shareholder return on an <strong>in</strong>vestment of £100<br />
1,200<br />
1,000<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
-20<br />
2002 2003 2004 2005 2006 <strong>2007</strong><br />
Performance Graph – Comparison of year on year change <strong>in</strong> the value of an <strong>in</strong>vestment over the past five years<br />
2003 2004 2005 2006 <strong>2007</strong><br />
The market value of one <strong>Cairn</strong> share on 31 December <strong>2007</strong> was £30.74. Dur<strong>in</strong>g <strong>2007</strong>, the range of high and low market value of<br />
shares was £30.90 to £15.23.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 65
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
INFORMATION SUBJECT TO AUDIT<br />
Directors’ Remuneration<br />
The remuneration of the directors for the year ended 31 December <strong>2007</strong> was as follows:<br />
66 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
<strong>Annual</strong> Other Total Total Pension Pension<br />
Salary Benefits (1) bonus (2) payments Fees <strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
£ £ £ £ £ £ £ £ £<br />
Executive<br />
Sir Bill Gammell 480,000 26,129 240,000 58,000 (3) – 804,129 986,716 72,000 72,000<br />
Dr Mike Watts 350,000 19,512 175,000 – – 544,512 581,844 52,500 52,500<br />
Malcolm Thoms 300,000 23,241 150,000 – – 473,241 504,435 45,000 45,000<br />
Phil Tracy 342,373 (4) 6,486 150,000 – – 498,859 491,296 45,000 45,000<br />
Jann Brown 250,000 22,037 125,000 – – 397,037 252,994 (5) 37,500 4,623<br />
Simon Thomson 250,000 23,837 125,000 – – 398,837 248,591 (5) 37,500 4,623<br />
Non-executive<br />
Norman Murray – – – – 140,000 140,000 190,000 (6) – –<br />
Hamish Grossart – – – – 90,000 90,000 140,000 (6) – –<br />
Ed Story – – – – 50,000 50,000 50,000 – –<br />
Todd Hunt – – – – 50,000 50,000 50,000 – –<br />
Mark Tyndall – – – – 50,000 50,000 75,000 (6) – –<br />
Andrew Shilston – – – – 50,000 50,000 50,000 – –<br />
Former director<br />
kev<strong>in</strong> Hart (7) – – – – – – 660,430 – 39,575<br />
Notes:<br />
(1) Benefits comprise a company car, permanent health <strong>in</strong>surance, private health <strong>in</strong>surance and death <strong>in</strong> service benefit.<br />
(2) The annual bonus for <strong>2007</strong> is payable <strong>in</strong> the subsequent f<strong>in</strong>ancial year.<br />
(3) This bonus payment was made to Sir Bill Gammell <strong>in</strong> respect of the IPO and Sir Bill subsequently donated the full amount to<br />
charity.<br />
(4) This sum <strong>in</strong>cludes the payment of £42,373 to Phil Tracy as an allowance dur<strong>in</strong>g his time spent <strong>in</strong> India from 1 November <strong>2007</strong><br />
to the year end.<br />
(5) Jann Brown and Simon Thomson were appo<strong>in</strong>ted as directors on 17 November 2006. The figures stated are <strong>in</strong> respect of the<br />
period from that date to 31 December 2006 and <strong>in</strong>clude the IPO bonuses detailed <strong>in</strong> the 2006 annual report.<br />
(6) This total <strong>in</strong>cludes a payment <strong>in</strong> respect of additional work on the IPO <strong>in</strong> 2006.<br />
(7) kev<strong>in</strong> Hart resigned as a director with effect from 17 November 2006. The figures stated are <strong>in</strong> respect of the period from<br />
1 January 2006 to that date.<br />
LTIP Awards (2002 LTIP)<br />
The total number of comb<strong>in</strong>ed Tier One and Tier Two awards held by the executive directors pursuant to the 2002 LTIP is as<br />
follows:<br />
At 01.01.07 Awarded <strong>in</strong> year Vested <strong>in</strong> year Lapsed <strong>in</strong> year At 31.12.07<br />
Sir Bill Gammell 294,300 0 25,200 87,800 181,300<br />
Dr Mike Watts 185,300 0 15,200 22,800 147,300<br />
Malcolm Thoms 168,100 0 15,200 22,800 130,100<br />
Phil Tracy 173,700 0 12,800 51,200 109,700<br />
Jann Brown 118,200 0 8,400 44,600 65,200<br />
Simon Thomson 120,500 0 8,400 44,600 67,500
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
An analysis of the Tier One and Tier Two awards held by directors pursuant to the 2002 LTIP dur<strong>in</strong>g <strong>2007</strong> is as follows:<br />
Tier One Awards<br />
Performance period Market value* Sir Bill Gammell Dr Mike Watts Malcolm Thoms Phil Tracy Jann Brown Simon Thomson<br />
10.03.04-09.03.07 £8.735 63,000 38,000 38,000 32,000 21,000 21,000<br />
20.04.05-19.04.08 £11.52 – – – – 22,100 22,100<br />
28.04.05-27.04.08 £11.90 53,500 36,500 33,400 31,500 – –<br />
24.04.06-23.04.09 £23.99 30,000 21,800 18,700 18,700 11,800 12,500<br />
Tier Two Awards<br />
Performance period Market value* Sir Bill Gammell Dr Mike Watts Malcolm Thoms Phil Tracy Jann Brown Simon Thomson<br />
10.03.04-09.03.07 £8.735 50,000 – – 32,000 32,000 32,000<br />
20.04.05-19.04.08 £11.52 – – – – 21,700 21,700<br />
28.04.05-27.04.08 £11.90 71,400 60,900 55,600 42,000 – –<br />
24.04.06-23.04.09 £23.99 26,400 28,100 22,400 17,500 9,600 11,200<br />
* The prices shown <strong>in</strong> the tables above represent the market value of a <strong>Cairn</strong> share on the date of commencement of the<br />
performance period.<br />
LTIP Awards (2006 LTIP)<br />
The Awards held by the executive directors pursuant to the 2006 LTIP are as follows:<br />
Director <strong>Cairn</strong> India Units Capricorn Units<br />
Sir Bill Gammell 515,118 897,196<br />
Dr Mike Watts 187,803 981,308<br />
Malcolm Thoms 482,923 280,374<br />
Phil Tracy 321,949 560,748<br />
Jann Brown 268,291 467,290<br />
Simon Thomson 134,145 700,935<br />
Under the 2006 LTIP, <strong>Cairn</strong> India Units and Capricorn Units are notional units of value relat<strong>in</strong>g to the Company’s hold<strong>in</strong>g <strong>in</strong><br />
<strong>Cairn</strong> India and Capricorn respectively.<br />
All <strong>Cairn</strong> India Units were awarded at £1.86 per Unit (the sterl<strong>in</strong>g equivalent of the flotation price of a <strong>Cairn</strong> India share) and<br />
all Capricorn Units at £1.07 per Unit (be<strong>in</strong>g the value of such a Unit as at the date of flotation of <strong>Cairn</strong> India, calculated <strong>in</strong><br />
accordance with the provisions of the 2006 LTIP).<br />
Each of the above awards will ord<strong>in</strong>arily vest on or around the third anniversary of grant, but only to the extent that the<br />
performance conditions described on pages 59 and 60 of this report are satisfied over a period of three years commenc<strong>in</strong>g<br />
on 9 January <strong>2007</strong> (be<strong>in</strong>g the date of flotation of <strong>Cairn</strong> India). The value of a participant’s vested Units will then be settled <strong>in</strong><br />
the form of ord<strong>in</strong>ary shares of the Company.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 67
DIRECTORS’ REMUNERATION REPORT<br />
CONTINUED<br />
Vested Awards<br />
Details of awards which vested under the 2002 LTIP dur<strong>in</strong>g <strong>2007</strong> are given <strong>in</strong> the table below. Calculations to determ<strong>in</strong>e the<br />
number of shares vest<strong>in</strong>g, based on the performance conditions described on pages 59 and 60 of this report, were carried out<br />
by <strong>Cairn</strong> and <strong>in</strong>dependently verified by Ernst & Young LLP.<br />
68 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Market Market<br />
value of a value of a<br />
<strong>Cairn</strong> share <strong>Cairn</strong> share<br />
on date Vest<strong>in</strong>g on date Tier One Tier Two<br />
Performance period of award date of vest<strong>in</strong>g Shares Shares<br />
Director<br />
Sir Bill Gammell 10.03.04–09.03.07 £8.735 28.03.07 £15.775 25,200 0<br />
Dr Mike Watts 10.03.04–09.03.07 £8.735 28.03.07 £15.775 15,200 0<br />
Malcolm Thoms 10.03.04–09.03.07 £8.735 28.03.07 £15.775 15,200 0<br />
Phil Tracy 10.03.04–09.03.07 £8.735 28.03.07 £15.775 12,800 0<br />
Jann Brown 10.03.04–09.03.07 £8.735 28.03.07 £15.775 8,400 0<br />
Simon Thomson 10.03.04–09.03.07 £8.735 28.03.07 £15.775 8,400 0<br />
The total aggregate ga<strong>in</strong> made by the executive directors on vest<strong>in</strong>g, based on the market value at the date of vest<strong>in</strong>g<br />
multiplied by the total number of shares vest<strong>in</strong>g, was £1,344,030 (2006 total aggregate ga<strong>in</strong>: £20,054,000).<br />
By Order of the Board<br />
Duncan Wood<br />
Company Secretary<br />
11 April 2008
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF<br />
CAIRN ENERGY <strong>PLC</strong><br />
We have audited the group and parent company f<strong>in</strong>ancial statements (the ‘f<strong>in</strong>ancial statements’) of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> for the<br />
year ended 31 December <strong>2007</strong> which comprise the Group Income Statement, the Group and Parent Company Balance Sheets,<br />
the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statement of Recognised Income and<br />
Expense and the related notes 1 to 37. These f<strong>in</strong>ancial statements have been prepared under the account<strong>in</strong>g policies set out<br />
there<strong>in</strong>. We have also audited the <strong>in</strong>formation <strong>in</strong> the Directors’ Remuneration <strong>Report</strong> that is described as hav<strong>in</strong>g been audited.<br />
This report is made solely to the company’s members, as a body, <strong>in</strong> accordance with Section 235 of the Companies Act 1985.<br />
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state<br />
to them <strong>in</strong> an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume<br />
responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report,<br />
or for the op<strong>in</strong>ions we have formed.<br />
Respective responsibilities of directors and auditors<br />
The directors’ responsibilities for prepar<strong>in</strong>g the <strong>Annual</strong> <strong>Report</strong>, the Directors’ Remuneration <strong>Report</strong> and the f<strong>in</strong>ancial statements<br />
<strong>in</strong> accordance with applicable United k<strong>in</strong>gdom law and International F<strong>in</strong>ancial <strong>Report</strong><strong>in</strong>g Standards (IFRSs) as adopted by the<br />
European Union are set out <strong>in</strong> the Statement of Directors’ Responsibilities.<br />
Our responsibility is to audit the f<strong>in</strong>ancial statements and the part of the Directors’ Remuneration <strong>Report</strong> to be audited <strong>in</strong><br />
accordance with relevant legal and regulatory requirements and International Standards on Audit<strong>in</strong>g (Uk and Ireland).<br />
We report to you our op<strong>in</strong>ion as to whether the f<strong>in</strong>ancial statements give a true and fair view and whether the f<strong>in</strong>ancial<br />
statements and the part of the Directors’ Remuneration <strong>Report</strong> to be audited have been properly prepared <strong>in</strong> accordance with<br />
the Companies Act 1985 and, as regards the group f<strong>in</strong>ancial <strong>in</strong>formation, Article 4 of the IAS Regulation. We also report to you<br />
whether <strong>in</strong> our op<strong>in</strong>ion the <strong>in</strong>formation given <strong>in</strong> the directors’ report is consistent with the f<strong>in</strong>ancial statements. The <strong>in</strong>formation<br />
given <strong>in</strong> the directors’ report <strong>in</strong>cludes that specific <strong>in</strong>formation presented <strong>in</strong> the Operat<strong>in</strong>g and F<strong>in</strong>ancial Review that is cross<br />
referred from the Bus<strong>in</strong>ess Review section of the directors’ report.<br />
In addition we report to you if, <strong>in</strong> our op<strong>in</strong>ion, the company has not kept proper account<strong>in</strong>g records, if we have not received all<br />
the <strong>in</strong>formation and explanations we require for our audit, or if <strong>in</strong>formation specified by law regard<strong>in</strong>g directors’ remuneration<br />
and other transactions are not disclosed.<br />
We review whether the Corporate Governance Statement reflects the company’s compliance with the n<strong>in</strong>e provisions of the<br />
2006 Comb<strong>in</strong>ed Code specified for our review by the List<strong>in</strong>g Rules of the F<strong>in</strong>ancial Services Authority, and we report if it does<br />
not. We are not required to consider whether the board’s statements on <strong>in</strong>ternal control cover all risks and controls, or form an<br />
op<strong>in</strong>ion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures.<br />
We read other <strong>in</strong>formation conta<strong>in</strong>ed <strong>in</strong> the <strong>Annual</strong> <strong>Report</strong> and consider whether it is consistent with the audited f<strong>in</strong>ancial<br />
statements. The other <strong>in</strong>formation comprises only the Highlights, Chairman’s Statement and Chief Executives Review, Operat<strong>in</strong>g<br />
and Exploration review, Corporate Responsibility, F<strong>in</strong>ancial Review, Risk Factors, Corporate Governance Statement, Directors’<br />
<strong>Report</strong>, the unaudited part of the Directors’ Remuneration <strong>Report</strong>, and other items listed <strong>in</strong> the table of contents. We consider<br />
the implications for our report if we become aware of any apparent misstatements or material <strong>in</strong>consistencies with the f<strong>in</strong>ancial<br />
statements. Our responsibilities do not extend to any other <strong>in</strong>formation.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 69
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CAIRN ENERGY <strong>PLC</strong><br />
CONTINUED<br />
Basis of audit op<strong>in</strong>ion<br />
We conducted our audit <strong>in</strong> accordance with International Standards on Audit<strong>in</strong>g (Uk and Ireland) issued by the Audit<strong>in</strong>g<br />
Practices Board. An audit <strong>in</strong>cludes exam<strong>in</strong>ation, on a test basis, of evidence relevant to the amounts and disclosures <strong>in</strong> the<br />
f<strong>in</strong>ancial statements and the part of the Directors’ Remuneration <strong>Report</strong> to be audited. It also <strong>in</strong>cludes an assessment of the<br />
significant estimates and judgments made by the directors <strong>in</strong> the preparation of the f<strong>in</strong>ancial statements, and of whether the<br />
account<strong>in</strong>g policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.<br />
We planned and performed our audit so as to obta<strong>in</strong> all the <strong>in</strong>formation and explanations which we considered necessary<br />
<strong>in</strong> order to provide us with sufficient evidence to give reasonable assurance that the f<strong>in</strong>ancial statements and the part of the<br />
Directors’ Remuneration <strong>Report</strong> to be audited are free from material misstatement, whether caused by fraud or other irregularity<br />
or error. In form<strong>in</strong>g our op<strong>in</strong>ion we also evaluated the overall adequacy of the presentation of <strong>in</strong>formation <strong>in</strong> the f<strong>in</strong>ancial<br />
statements and the part of the Directors’ Remuneration <strong>Report</strong> to be audited.<br />
Op<strong>in</strong>ion<br />
In our op<strong>in</strong>ion:<br />
• the group f<strong>in</strong>ancial statements give a true and fair view, <strong>in</strong> accordance with IFRSs as adopted by the European Union, of the<br />
state of the group’s affairs as at 31 December <strong>2007</strong> and of its profit for the year then ended;<br />
• the parent company f<strong>in</strong>ancial statements give a true and fair view, <strong>in</strong> accordance with IFRSs as adopted by the European<br />
Union as applied <strong>in</strong> accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as<br />
at 31 December <strong>2007</strong>;<br />
• the f<strong>in</strong>ancial statements and the part of the Directors’ Remuneration <strong>Report</strong> to be audited have been properly prepared <strong>in</strong><br />
accordance with the Companies Act 1985 and, as regards the group f<strong>in</strong>ancial statements, Article 4 of the IAS Regulation; and<br />
• the <strong>in</strong>formation given <strong>in</strong> the directors’ report is consistent with the f<strong>in</strong>ancial statements.<br />
Ernst & Young LLP<br />
Registered auditor<br />
London<br />
11 April 2008<br />
70 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
PRINCIPAL LICENCE INTERESTS<br />
ASIA<br />
India<br />
Work<strong>in</strong>g <strong>in</strong>terest %<br />
Block PkGM-1 (Ravva) 22.50<br />
Block kG-DWN-98/2 10.00<br />
Block kG-ONN-2003/1 49.00<br />
Block CB/OS-2 Development Areas 40.00<br />
Block RJ-ON-90/1 Development Areas 70.00<br />
Block RJ-ON-90/1 Exploration 100.00<br />
Block RJ-ONN-2003/1 30.00<br />
Block CB-ONN-2002/1 30.00<br />
Block GV-ONN-97/1 30.00<br />
Block GV-ONN-2002/1 100.00<br />
Block GV-ONN-2003/1 49.00<br />
Block VN-ONN-2003/1 49.00<br />
Block GS-OSN-2003/1 49.00<br />
Block kk-DWN-2004/1 40.00<br />
Block PR-OSN-2004/1 35.00<br />
Bangladesh<br />
Block 5* 45.00<br />
Block 7 45.00<br />
Block 10* 45.00<br />
Block 16 – Development Area 37.50<br />
Block 16 – Exploration 37.50<br />
Nepal<br />
Blocks 1 & 2 100.00<br />
Blocks 3 & 5** 100.00<br />
Blocks 4, 6 & 7 100.00<br />
* These PSCs were due to term<strong>in</strong>ate on 4 July 2006 if the parties did not agree that a viable market existed <strong>in</strong> Bangladesh for<br />
any gas discovered <strong>in</strong> those blocks. Although this long stop date has passed, the parties have agreed <strong>in</strong> pr<strong>in</strong>ciple to amend<br />
the work commitments <strong>in</strong> the PSCs and also that a viable market exists <strong>in</strong> Bangladesh; however, these amendments still<br />
require to be formalised <strong>in</strong> writ<strong>in</strong>g by the parties.<br />
** Await<strong>in</strong>g Government approval.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 71
PRINCIPAL LICENCE INTERESTS<br />
CONTINUED<br />
NORTH AMERICA<br />
Greenland<br />
72 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Work<strong>in</strong>g <strong>in</strong>terest %<br />
Exclusive Licence 2002/15 (Atammik) 40.00<br />
Exclusive Licence 2005/06 (Lady Frankl<strong>in</strong>) 40.00<br />
Exclusive Licence 2008/10 (Sigguk) 87.50<br />
Exclusive Licence 2008/11 (Eqqua) 87.50<br />
Exclusive Licence 2008/13 (Saqqamuit) 92.00<br />
Exclusive Licence 2008/14 (k<strong>in</strong>gittoq) 92.00<br />
AFRICA<br />
Tunisia<br />
Nabeul Permit 50.00<br />
Louza Permit 100.00<br />
EUROPE*<br />
Uk (west of Shetland)<br />
Block 214/19 100.00<br />
Block 214/20 100.00<br />
Albania<br />
Block Joni-5 100.00<br />
SOUTH AMERICA<br />
Peru<br />
Block Z-34 50.00<br />
AUSTRALASIA<br />
Australia<br />
Exploration Permit WA-379-P 100.00<br />
Exploration Permit WA-380-P 100.00<br />
Papua New Gu<strong>in</strong>ea<br />
Block PRL-1 12.73<br />
* Capricorn currently has licence awards pend<strong>in</strong>g <strong>in</strong> Spa<strong>in</strong> (Albufera, Ben<strong>in</strong>fayó and Gandía) and Sicily (Permits D349C.R-MD<br />
and D350C.R-MD).
GROUP INCOME STATEMENT<br />
For the year ended 31 December <strong>2007</strong><br />
Group<br />
Group 2006<br />
<strong>2007</strong> (Restated)<br />
Notes $’000 $’000<br />
Revenue 2 287,656 286,304<br />
Cost of sales<br />
Production costs (66,483) (56,931)<br />
Unsuccessful exploration costs (40,714) (62,018)<br />
Depletion and decommission<strong>in</strong>g charge (118,994) (103,487)<br />
––––––––––– –––––––––––<br />
Gross profit 61,465 63,868<br />
Other operat<strong>in</strong>g <strong>in</strong>come 2 6,010 3,340<br />
Adm<strong>in</strong>istrative expenses (88,430) (60,323)<br />
Impairment of <strong>in</strong>tangible exploration/appraisal assets 5(b) (58,924) –<br />
Impairment of property, plant & equipment<br />
– development/produc<strong>in</strong>g assets 5(b) – (71,455)<br />
Reversal of impairment of property, plant & equipment<br />
– development/produc<strong>in</strong>g assets 5(b) 3,718 –<br />
Loss on sale of oil and gas assets (89) –<br />
––––––––––– –––––––––––<br />
Operat<strong>in</strong>g loss 5 (76,250) (64,570)<br />
Negative goodwill on acquisition 3(b) 17,373 –<br />
Exceptional ga<strong>in</strong> on deemed disposal of subsidiaries 6 1,577,276 –<br />
F<strong>in</strong>ance <strong>in</strong>come 9 65,176 4,603<br />
F<strong>in</strong>ance costs 10 (30,339) (31,875)<br />
––––––––––– –––––––––––<br />
Profit/(loss) before taxation 1,553,236 (91,842)<br />
Taxation expense on profit/(loss) 11 (25,391) (5,280)<br />
––––––––––– –––––––––––<br />
Profit/(loss) for the year 1,527,845 (97,122)<br />
––––––––––– –––––––––––<br />
Attributable to:<br />
Equity holders of the parent 29 1,519,653 (97,122)<br />
M<strong>in</strong>ority <strong>in</strong>terests 29 8,192 –<br />
––––––––––– –––––––––––<br />
Earn<strong>in</strong>gs per ord<strong>in</strong>ary share – basic (cents) 12 1,120.38 (61.60)<br />
Earn<strong>in</strong>gs per ord<strong>in</strong>ary share – diluted (cents) 12 1,118.57 (61.60)<br />
––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 73
STATEMENTS OF RECOGNISED INCOME AND EXPENSE<br />
For the year ended 31 December <strong>2007</strong><br />
74 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Group Group Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
Notes $’000 $’000 $’000 $’000<br />
Income and expense recognised directly <strong>in</strong> equity<br />
Surplus on valuation of f<strong>in</strong>ancial assets 29 8,037 – – –<br />
Surplus on valuation of f<strong>in</strong>ancial assets – prior year adjustment 1(u) – 603 – –<br />
Currency translation differences 29 27,524 10,725 11,409 45,400<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total <strong>in</strong>come recognised directly <strong>in</strong> equity 35,561 11,328 11,409 45,400<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Profit/(loss) for the year<br />
Profit/(loss) for the year 1,527,845 (82,017) 1,170,772 164,870<br />
Prior year adjustment 1(u) – (15,105) – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Profit/(loss) for the year (restated) 1,527,845 (97,122) 1,170,772 164,870<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total recognised <strong>in</strong>come and expense for the year 1,563,406 (85,794) 1,182,181 210,270<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Attributable to:<br />
Equity holders of the parent 1,549,215 (85,794) 1,182,181 210,270<br />
M<strong>in</strong>ority <strong>in</strong>terests 14,191 – – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
1,563,406 (85,794) 1,182,181 210,270<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––
BALANCE SHEETS<br />
As at 31 December <strong>2007</strong><br />
Group<br />
Group 2006 Company Company<br />
<strong>2007</strong> (Restated) <strong>2007</strong> 2006<br />
Notes $’000 $’000 $’000 $’000<br />
Non-current assets<br />
Intangible exploration/appraisal assets 13 607,055 419,239 – –<br />
Property, plant & equipment – development/produc<strong>in</strong>g assets 14 498,223 394,010 – –<br />
Property, plant & equipment – other 15 6,566 5,891 994 1,291<br />
Intangible assets – other 16 25,276 6,724 5,303 1,730<br />
Available-for-sale f<strong>in</strong>ancial assets 17 15,905 7,868 – –<br />
Investments 18 – – 654,551 508,056<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
1,153,025 833,732 660,848 511,077<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Current assets<br />
Inventory 19 7,978 4,615 – –<br />
Trade and other receivables 20 307,003 218,159 51,661 80,936<br />
Bank deposits 21 30,053 – – –<br />
Cash and cash equivalents 21 872,272 856,266 16,591 19,513<br />
Derivative f<strong>in</strong>ancial <strong>in</strong>struments 31 2,479 – – –<br />
Income tax assets 7,935 – – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
1,227,720 1,079,040 68,252 100,449<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total assets 2,380,745 1,912,772 729,100 611,526<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Current liabilities<br />
Trade and other payables 22 273,570 897,232 11,309 113,810<br />
Obligations under f<strong>in</strong>ance leases 24 1,949 1,380 – –<br />
Provisions 26 17,766 6,845 – –<br />
Derivative f<strong>in</strong>ancial <strong>in</strong>struments 31 – 9,694 – –<br />
Income tax liabilities 76 6,064 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
293,361<br />
–––––––––––<br />
921,215<br />
–––––––––––<br />
11,309<br />
–––––––––––<br />
113,810<br />
–––––––––––<br />
Non-current liabilities<br />
Loans and borrow<strong>in</strong>gs 21, 25 75,000 155,000 – 47,000<br />
Obligations under f<strong>in</strong>ance leases 24 2,431 3,092 – –<br />
Provisions 26 40,061 24,740 – –<br />
Deferred tax liabilities 23 220,076<br />
–––––––––––<br />
129,965<br />
–––––––––––<br />
–<br />
–––––––––––<br />
–<br />
–––––––––––<br />
337,568 312,797 – 47,000<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total liabilities 630,929 1,234,012 11,309 160,810<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net assets 1,749,816 678,760 717,791 450,716<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Equity attributable to equity holders of the parent<br />
Called-up share capital 27 15,845 25,870 15,845 25,870<br />
Share premium 28 210,901 201,019 210,901 201,019<br />
Shares held by ESOP Trust 29 (32,019) (55,756) (32,019) (55,756)<br />
Foreign currency translation 29 23,996 2,798 45,770 37,181<br />
Capital reserves – non-distributable 29 40,222 40,222 79 79<br />
Reta<strong>in</strong>ed earn<strong>in</strong>gs 29 1,064,148 464,607 477,215 242,323<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
1,323,093 678,760 717,791 450,716<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
M<strong>in</strong>ority <strong>in</strong>terests 29 426,723 – – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total equity 1,749,816 678,760 717,791 450,716<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 75
STATEMENTS OF CASH FLOWS<br />
For the year ended 31 December <strong>2007</strong><br />
76 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Group<br />
Group (Restated) Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
Notes $’000 $’000 $’000 $’000<br />
Cash flows from operat<strong>in</strong>g activities<br />
Profit/(loss) before taxation 1,553,236 (91,842) 1,170,772 165,327<br />
Unsuccessful exploration costs 40,714 62,018 – –<br />
Depletion, depreciation, decommission<strong>in</strong>g and amortisation 125,326 110,494 1,159 2,368<br />
Share-based payments charge 25,274 13,304 3,271 3,474<br />
Impairment and impairment reversals of oil and gas assets 55,206 71,455 – –<br />
Loss on sale of oil and gas assets 89 – – –<br />
Negative goodwill on acquisition (17,373) – – –<br />
Exceptional ga<strong>in</strong> on deemed disposal of subsidiaries (1,577,276) – – –<br />
F<strong>in</strong>ance <strong>in</strong>come (65,176) (4,603) (13,344) (242,578)<br />
F<strong>in</strong>ance costs 30,339 31,875 4,912 12,952<br />
Net <strong>in</strong>terest paid (6,708) (5,599) (350) (1,877)<br />
Income tax paid (14,716) (12,184) – –<br />
Ga<strong>in</strong> on sale of other non-current assets – (2) – –<br />
Foreign exchange differences (2,829) (282) 7,785 9,682<br />
Dividends received – – (1,216,653)<br />
Movement on <strong>in</strong>ventory of oil and condensate (3,363) 918 – –<br />
Trade and other receivables movement 1,883 (7,037) 2,603 7,785<br />
Trade and other payables movement 8,039 15,139 (105,293) 67,957<br />
Movement <strong>in</strong> other provisions 2,611 5,762 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net cash generated from/(used <strong>in</strong>) operat<strong>in</strong>g activities 155,276 189,416 (145,138) 25,090<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash flows from <strong>in</strong>vest<strong>in</strong>g activities<br />
Expenditure on <strong>in</strong>tangible exploration/appraisal assets (156,394) (157,535) – –<br />
Expenditure on tangible development/produc<strong>in</strong>g assets (244,009) (114,995) – –<br />
Purchase of property, plant & equipment – other (2,122) (1,346) (62) (775)<br />
Purchase of <strong>in</strong>tangible assets – other (8,443) (7,779) (3,968) (1,940)<br />
Purchase of <strong>in</strong>vestments – – (233,925) (63,636)<br />
Acquisition costs for bus<strong>in</strong>ess comb<strong>in</strong>ations (77,295) – – –<br />
Cash acquired as a result of bus<strong>in</strong>ess comb<strong>in</strong>ations 7,335 – – –<br />
Cash disposed of on disposal of subsidiary (6,738) – – –<br />
Proceeds on disposal of subsidiary 54,393 – – –<br />
Proceeds on disposal of property, plant & equipment – other – 20 – 1<br />
Movement <strong>in</strong> funds on bank deposits (30,053) 20,000 – –<br />
Interest received 64,532 5,568 13,591 973<br />
Dividends received – – 1,216,653 –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net cash (used <strong>in</strong>)/from <strong>in</strong>vest<strong>in</strong>g activities (398,794) (256,067) 992,289 (65,377)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash flows from f<strong>in</strong>anc<strong>in</strong>g activities<br />
Payment of costs for deemed disposal of subsidiaries (64,304) (23,276) – –<br />
Proceeds from deemed disposal of subsidiaries 1,323,329 751,849 – –<br />
Buy-back of shares <strong>in</strong> subsidiary out of capital – – 128,869 –<br />
Arrangement and facility fees (22,759) (17,074) (262) (866)<br />
Proceeds from issue of shares 9,968 3,219 9,968 3,219<br />
Purchase of own shares – (21,659) – (21,659)<br />
Payment of f<strong>in</strong>ance lease liabilities (1,405) (285) – –<br />
(Repayment)/drawdown of loan facilities (80,000) 155,000 (47,000) 47,000<br />
Return of cash to shareholders (935,653) – (935,653) –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net cash flows from/(used <strong>in</strong>) f<strong>in</strong>anc<strong>in</strong>g activities 229,176 847,774 (844,078) 27,694<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net (decrease)/<strong>in</strong>crease <strong>in</strong> cash and cash equivalents (14,342) 781,123 3,073 (12,593)<br />
Open<strong>in</strong>g cash and cash equivalents at beg<strong>in</strong>n<strong>in</strong>g of year 856,266 75,509 19,513 33,764<br />
Exchange ga<strong>in</strong>s/(losses) on cash and cash equivalents 30,348 (366) (5,995) (1,658)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Clos<strong>in</strong>g cash and cash equivalents 21 872,272 856,266 16,591 19,513<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––
NOTES TO THE ACCOUNTS<br />
For the year ended 31 December <strong>2007</strong><br />
1. Account<strong>in</strong>g Policies<br />
(a) Basis of preparation<br />
<strong>Cairn</strong> prepares its accounts on a historical cost basis. Where there are assets and liabilities calculated on a different basis, this<br />
fact is disclosed <strong>in</strong> the relevant account<strong>in</strong>g policy.<br />
(b) Account<strong>in</strong>g standards<br />
<strong>Cairn</strong> prepares its accounts <strong>in</strong> accordance with applicable International F<strong>in</strong>ancial <strong>Report</strong><strong>in</strong>g Standards (‘IFRS’) as adopted by the<br />
EU. The Group’s f<strong>in</strong>ancial statements are also consistent with IFRS as issued by the International Account<strong>in</strong>g Standards Board<br />
(‘IASB’).<br />
Relevant new standards and <strong>in</strong>terpretations issued by the IASB, but not yet effective and not applied <strong>in</strong> these f<strong>in</strong>ancial<br />
statements, are as follows:<br />
Date of adoption<br />
Title Change to account<strong>in</strong>g policy by <strong>Cairn</strong> Impact on <strong>in</strong>itial application<br />
Effective date from 1 March <strong>2007</strong><br />
IFRIC 11 ‘Group and Treasury<br />
Share Transactions’<br />
Share-based payment awards<br />
relat<strong>in</strong>g to employees of a subsidiary<br />
will be recognised <strong>in</strong> the equity of<br />
that company.<br />
Effective date from 1 January 2009<br />
IFRS 8 ‘Operat<strong>in</strong>g Segments’ No changes to current account<strong>in</strong>g<br />
policy.<br />
Revised IAS 23 ‘Borrow<strong>in</strong>g<br />
Costs’<br />
Revised IAS 1 ‘Presentation of<br />
F<strong>in</strong>ancial Statements’<br />
Effective date from 1 July 2009<br />
Revised IAS 27 ‘Consolidated<br />
and Separate F<strong>in</strong>ancial<br />
Statements’<br />
Revised IFRS 3 ‘Bus<strong>in</strong>ess<br />
Comb<strong>in</strong>ations’<br />
May result <strong>in</strong> more borrow<strong>in</strong>g costs<br />
be<strong>in</strong>g capitalised than under current<br />
policy.<br />
No changes to current account<strong>in</strong>g<br />
policy.<br />
No changes to current policy for<br />
<strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> but will impact<br />
Group subsidiaries.<br />
1 Jan 2008 Decrease <strong>in</strong> reta<strong>in</strong>ed earn<strong>in</strong>gs<br />
of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>, with<br />
correspond<strong>in</strong>g adjustment <strong>in</strong><br />
other debtors. There will be no<br />
impact at Group level.<br />
1 Jan 2009 Alternative disclosures regard<strong>in</strong>g<br />
segmental performance.<br />
1 Jan 2009 Decrease <strong>in</strong> borrow<strong>in</strong>g costs<br />
charged to the Income<br />
Statement, with correspond<strong>in</strong>g<br />
<strong>in</strong>crease <strong>in</strong> assets.<br />
1 Jan 2009 Presentation and disclosure<br />
requirements for certa<strong>in</strong> items<br />
<strong>in</strong> the Income Statement.<br />
I Jan 2009 No impact on <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong><br />
Group or Company accounts.<br />
Expens<strong>in</strong>g of all transaction costs. 1 Jul 2009 Applies only to bus<strong>in</strong>ess<br />
comb<strong>in</strong>ations after effective<br />
date.<br />
No other IFRS as issued by the IASB which are not yet effective are expected to have an impact on the Group’s or Company’s<br />
f<strong>in</strong>ancial statements.<br />
Dur<strong>in</strong>g the year, the Group adopted IFRIC 8 ‘Scope of IFRS 2’; amendment to IFRS 2 ‘Share-based Payment – Vest<strong>in</strong>g<br />
Conditions and Cancellations’; amendment to IAS 1 ‘Presentation of F<strong>in</strong>ancial Statements – Capital Disclosures’; and IFRS 7<br />
‘F<strong>in</strong>ancial Instruments: Disclosures’, amendment to IAS 32 ‘F<strong>in</strong>ancial Instruments: Disclosure and Presentation’.<br />
(c) Presentational currency<br />
The functional currency of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>, the ultimate parent company of the Group, is Sterl<strong>in</strong>g. These accounts have been<br />
presented <strong>in</strong> US Dollars ($), the functional currency of most companies with<strong>in</strong> the Group. It is deemed to be more appropriate to<br />
present the f<strong>in</strong>ancial statements <strong>in</strong> l<strong>in</strong>e with the functional currency of the majority of the Group. The Group’s policy on foreign<br />
currencies is detailed <strong>in</strong> Note 1(p).<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 77
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
1. Account<strong>in</strong>g Policies (cont<strong>in</strong>ued)<br />
(d) Basis of consolidation<br />
The consolidated accounts <strong>in</strong>clude the results of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> and its subsidiary undertak<strong>in</strong>gs to the Balance Sheet date.<br />
The results of subsidiaries acquired or disposed of dur<strong>in</strong>g the year are <strong>in</strong>cluded <strong>in</strong> the Income Statement and Statement of Cash<br />
Flows from the effective date of acquisition or up to the effective date of disposal as appropriate.<br />
<strong>Cairn</strong> allocates the purchase consideration of any acquisition to assets and liabilities on the basis of fair values at the date of<br />
acquisition. Any excess of the cost of acquisition over the fair values of the assets and liabilities is recognised as goodwill.<br />
Any goodwill aris<strong>in</strong>g is recognised as an asset and is subject to annual review for impairment. Goodwill is written off where<br />
circumstances <strong>in</strong>dicate that the value of the underly<strong>in</strong>g cash-generat<strong>in</strong>g unit <strong>in</strong>clud<strong>in</strong>g the asset may no longer support the<br />
carry<strong>in</strong>g value of goodwill. Any such impairment loss aris<strong>in</strong>g is recognised <strong>in</strong> the Income Statement for the period. Impairment<br />
losses relat<strong>in</strong>g to goodwill cannot be reversed <strong>in</strong> future periods. Negative goodwill is credited immediately to the Income<br />
Statement.<br />
<strong>Cairn</strong> has used the exemption granted under s230(1)(b) of the Companies Act 1985 that allows for the non-disclosure of the<br />
Income Statement of the parent company. The profit attributable to the Company for the year ended 31 December <strong>2007</strong> was<br />
$1,170,772,000 (2006: $164,870,000).<br />
(e) Jo<strong>in</strong>t Ventures<br />
<strong>Cairn</strong> participates <strong>in</strong> several un<strong>in</strong>corporated Jo<strong>in</strong>t Ventures which <strong>in</strong>volve the jo<strong>in</strong>t control of assets used <strong>in</strong> the Group’s oil<br />
and gas exploration and produc<strong>in</strong>g activities. <strong>Cairn</strong> accounts for its share of assets, liabilities, <strong>in</strong>come and expenditure of Jo<strong>in</strong>t<br />
Ventures <strong>in</strong> which the Group holds an <strong>in</strong>terest, classified <strong>in</strong> the appropriate Balance Sheet and Income Statement head<strong>in</strong>gs.<br />
<strong>Cairn</strong>’s pr<strong>in</strong>cipal licence <strong>in</strong>terests are jo<strong>in</strong>tly controlled assets.<br />
A list of <strong>Cairn</strong>’s <strong>in</strong>terests <strong>in</strong> un<strong>in</strong>corporated Jo<strong>in</strong>t Ventures is given on page 71.<br />
(f) Revenue and other <strong>in</strong>come<br />
Revenue from operat<strong>in</strong>g activities<br />
Revenue represents <strong>Cairn</strong>’s share of oil, gas and condensate production, recognised on a direct entitlement basis, and tariff<br />
<strong>in</strong>come received for third party use of operat<strong>in</strong>g facilities and pipel<strong>in</strong>es <strong>in</strong> accordance with agreements.<br />
Other <strong>in</strong>come<br />
Income received as operator from Jo<strong>in</strong>t Ventures is recognised on an accruals basis <strong>in</strong> accordance with Jo<strong>in</strong>t Venture agreements<br />
and is <strong>in</strong>cluded with<strong>in</strong> ‘Other operat<strong>in</strong>g <strong>in</strong>come’ <strong>in</strong> the Income Statement. Interest <strong>in</strong>come is recognised us<strong>in</strong>g the effective<br />
<strong>in</strong>terest method on an accruals basis and is recognised with<strong>in</strong> ‘F<strong>in</strong>ance <strong>in</strong>come’ <strong>in</strong> the Income Statement.<br />
(g) Oil and gas <strong>in</strong>tangible exploration/appraisal assets and property, plant & equipment – development/produc<strong>in</strong>g assets<br />
<strong>Cairn</strong> follows a successful efforts based account<strong>in</strong>g policy for oil and gas assets.<br />
Costs <strong>in</strong>curred prior to obta<strong>in</strong><strong>in</strong>g the legal rights to explore an area are expensed immediately to the Income Statement.<br />
Expenditure <strong>in</strong>curred on the acquisition of a licence <strong>in</strong>terest is <strong>in</strong>itially capitalised on a licence by licence basis. Costs are held,<br />
un-depleted, with<strong>in</strong> exploration/appraisal assets until such time as the exploration phase on the licence area is complete or<br />
commercial reserves have been discovered.<br />
Exploration expenditure <strong>in</strong>curred <strong>in</strong> the process of determ<strong>in</strong><strong>in</strong>g exploration targets is capitalised <strong>in</strong>itially with<strong>in</strong> exploration/<br />
appraisal assets and subsequently allocated to drill<strong>in</strong>g activities. Exploration/appraisal drill<strong>in</strong>g costs are <strong>in</strong>itially capitalised on<br />
a well by well basis until the success or otherwise of the well has been established. The success or failure of each exploration/<br />
appraisal effort is judged on a well by well basis. Drill<strong>in</strong>g costs are written off on completion of a well unless the results <strong>in</strong>dicate<br />
that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial.<br />
Follow<strong>in</strong>g appraisal of successful exploration wells, if commercial reserves are established and technical feasibility for extraction<br />
demonstrated, then the related capitalised exploration/appraisal costs are transferred <strong>in</strong>to a s<strong>in</strong>gle field cost centre with<strong>in</strong><br />
development/produc<strong>in</strong>g assets after test<strong>in</strong>g for impairment (see below). Where results of exploration drill<strong>in</strong>g <strong>in</strong>dicate the<br />
presence of hydrocarbons which are ultimately not considered commercially viable, all related costs are written off to the Income<br />
Statement.<br />
All costs <strong>in</strong>curred after the technical feasibility and commercial viability of produc<strong>in</strong>g hydrocarbons has been demonstrated are<br />
capitalised with<strong>in</strong> development/produc<strong>in</strong>g assets on a field by field basis. Subsequent expenditure is capitalised only where<br />
it either enhances the economic benefits of the development/produc<strong>in</strong>g asset or replaces part of the exist<strong>in</strong>g development/<br />
produc<strong>in</strong>g asset. Any rema<strong>in</strong><strong>in</strong>g costs associated with the part replaced are expensed.<br />
78 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Net proceeds from any disposal of an exploration asset are <strong>in</strong>itially credited aga<strong>in</strong>st the previously capitalised costs. Any surplus<br />
proceeds are credited to the Income Statement. Net proceeds from any disposal of development/produc<strong>in</strong>g assets are credited<br />
aga<strong>in</strong>st the previously capitalised cost. A ga<strong>in</strong> or loss on disposal of a development/produc<strong>in</strong>g asset is recognised <strong>in</strong> the Income<br />
Statement to the extent that the net proceeds exceed or are less than the appropriate portion of the net capitalised costs of the<br />
asset.<br />
Depletion<br />
<strong>Cairn</strong> depletes separately, where applicable, any significant components with<strong>in</strong> development/produc<strong>in</strong>g assets, such as fields,<br />
process<strong>in</strong>g facilities and pipel<strong>in</strong>es, which are significant <strong>in</strong> relation to the total cost of a development/produc<strong>in</strong>g asset.<br />
<strong>Cairn</strong> depletes expenditure on property, plant & equipment – development/produc<strong>in</strong>g assets on a unit of production basis,<br />
based on proven and probable reserves on a field by field basis. In certa<strong>in</strong> circumstances, fields with<strong>in</strong> a s<strong>in</strong>gle development<br />
area may be comb<strong>in</strong>ed for depletion purposes.<br />
Impairment<br />
Exploration/appraisal assets are reviewed regularly for <strong>in</strong>dicators of impairment and costs are written off where circumstances<br />
<strong>in</strong>dicate that the carry<strong>in</strong>g value might not be recoverable. In such circumstances the exploration asset is allocated to<br />
development/produc<strong>in</strong>g assets with<strong>in</strong> the same geographic segment and tested for impairment. Any such impairment aris<strong>in</strong>g<br />
is recognised <strong>in</strong> the Income Statement for the period. Where there are no development/produc<strong>in</strong>g assets with<strong>in</strong> a geographic<br />
segment, the exploration/appraisal costs are charged immediately to the Income Statement.<br />
Impairment reviews on development/produc<strong>in</strong>g assets are carried out on each cash-generat<strong>in</strong>g unit identified <strong>in</strong> accordance<br />
with IAS 36 ‘Impairment of Assets’. <strong>Cairn</strong>’s cash-generat<strong>in</strong>g units are those assets which generate largely <strong>in</strong>dependent cash flows<br />
and are normally, but not always, s<strong>in</strong>gle development areas.<br />
At each report<strong>in</strong>g date, where there are <strong>in</strong>dicators of impairment, the net book value of the cash-generat<strong>in</strong>g unit is compared<br />
with the associated expected discounted future net cash flows. If the net book value is higher, then the difference is written off to<br />
the Income Statement as impairment. Discounted future net cash flows for IAS 36 purposes are calculated us<strong>in</strong>g an estimated oil<br />
price of $60/bbl (2006: $30/bbl) or the appropriate gas price as dictated by the relevant gas sales contract, escalation for prices<br />
and costs of 3%, and a discount rate of 10% (2006: 3% and 10% respectively). Forecasted production profiles are determ<strong>in</strong>ed on<br />
an asset by asset basis, us<strong>in</strong>g appropriate petroleum eng<strong>in</strong>eer<strong>in</strong>g techniques.<br />
Where there has been a charge for impairment <strong>in</strong> an earlier period, that charge will be reversed <strong>in</strong> a later period where there has<br />
been a change <strong>in</strong> circumstances to the extent that the discounted future net cash flows are higher than the net book value at the<br />
time. In revers<strong>in</strong>g impairment losses, the carry<strong>in</strong>g amount of the asset will be <strong>in</strong>creased to the lower of its orig<strong>in</strong>al carry<strong>in</strong>g value or<br />
the carry<strong>in</strong>g value that would have been determ<strong>in</strong>ed (net of depletion) had no impairment loss been recognised <strong>in</strong> prior periods.<br />
(h) Property, plant & equipment – other<br />
Property, plant & equipment are measured at cost less accumulated depreciation and impairment and depreciated over their<br />
expected useful economic lives as follows:<br />
Depreciation<br />
<strong>Annual</strong> rate (%) method<br />
Tenants’ improvements 10–33* straight-l<strong>in</strong>e<br />
Vehicles and equipment 25–50* straight-l<strong>in</strong>e<br />
* Depreciation is charged over the shorter of the economic life or the rema<strong>in</strong><strong>in</strong>g term of the lease.<br />
(i) Intangible assets – other<br />
Intangible assets have f<strong>in</strong>ite useful lives, are measured at cost less accumulated amortisation and impairment, and amortised<br />
over their expected useful economic lives as follows:<br />
Amortisation<br />
<strong>Annual</strong> rate (%) method<br />
Software costs 25–50 straight-l<strong>in</strong>e<br />
Goodwill aris<strong>in</strong>g on bus<strong>in</strong>ess comb<strong>in</strong>ations is not amortised but is tested annually for impairment. See Note 1(d) above.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 79
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
1. Account<strong>in</strong>g Policies (cont<strong>in</strong>ued)<br />
(j) Investments<br />
The Company’s <strong>in</strong>vestments <strong>in</strong> subsidiaries are carried at cost less provisions result<strong>in</strong>g from impairment. The recoverable value<br />
of <strong>in</strong>vestments is the higher of its fair value less costs to sell and value <strong>in</strong> use. Value <strong>in</strong> use is based on the discounted future net<br />
cash flows of the oil and gas assets held by the subsidiary.<br />
Discounted future net cash flows for IAS 36 purposes are calculated us<strong>in</strong>g an estimated oil price of $60/bbl (2006: $30/bbl) or<br />
the appropriate gas price as dictated by the relevant gas sales contract, escalation for prices and costs of 3%, and a discount<br />
rate of 10% (2006: 3% and 10% respectively). Forecasted production profiles are determ<strong>in</strong>ed on an asset by asset basis, us<strong>in</strong>g<br />
appropriate petroleum eng<strong>in</strong>eer<strong>in</strong>g techniques.<br />
(k) Inventory<br />
Inventories of oil and condensate held at the Balance Sheet date are valued at net realisable value based on the estimated<br />
sell<strong>in</strong>g price <strong>in</strong> accordance with established <strong>in</strong>dustry practice.<br />
(l) F<strong>in</strong>ancial <strong>in</strong>struments<br />
A f<strong>in</strong>ancial <strong>in</strong>strument is any contract that gives rise to a f<strong>in</strong>ancial asset of one entity and a f<strong>in</strong>ancial liability or equity <strong>in</strong>strument<br />
of another entity.<br />
F<strong>in</strong>ancial assets are categorised as f<strong>in</strong>ancial assets held at fair value through profit or loss, held-to-maturity <strong>in</strong>vestments,<br />
loans and receivables and available-for-sale f<strong>in</strong>ancial assets. The Group holds f<strong>in</strong>ancial assets which are classified as either<br />
available-for-sale f<strong>in</strong>ancial assets or loans and receivables, with the exception of derivative f<strong>in</strong>ancial <strong>in</strong>struments which are<br />
held at fair value through profit or loss.<br />
F<strong>in</strong>ancial liabilities generally substantiate claims for repayment <strong>in</strong> cash or with another f<strong>in</strong>ancial asset. F<strong>in</strong>ancial liabilities are<br />
categorised as either fair value through profit or loss or held at amortised cost. All of the Group’s f<strong>in</strong>ancial liabilities are held at<br />
amortised cost, with the exception of derivative f<strong>in</strong>ancial <strong>in</strong>struments which are held at fair value through profit or loss.<br />
F<strong>in</strong>ancial <strong>in</strong>struments are generally recognised as soon as the Group becomes party to the contractual regulations of the<br />
f<strong>in</strong>ancial <strong>in</strong>strument.<br />
Derivative f<strong>in</strong>ancial <strong>in</strong>struments<br />
The Group uses derivative f<strong>in</strong>ancial <strong>in</strong>struments such as foreign currency options to hedge its risks associated with foreign<br />
currency fluctuations. Such derivative f<strong>in</strong>ancial <strong>in</strong>struments are designated upon <strong>in</strong>itial recognition as at fair value through profit<br />
or loss. The derivative f<strong>in</strong>ancial <strong>in</strong>struments are <strong>in</strong>itially recognised at fair value on the date on which a derivative contract is<br />
entered <strong>in</strong>to and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive<br />
and as liabilities when the fair value is negative.<br />
Any ga<strong>in</strong>s or losses aris<strong>in</strong>g from changes <strong>in</strong> fair value on derivatives dur<strong>in</strong>g the year are taken directly to the Income Statement.<br />
The Group did not apply hedge account<strong>in</strong>g for derivative f<strong>in</strong>ancial <strong>in</strong>struments held dur<strong>in</strong>g the current or prior year.<br />
Available-for-sale f<strong>in</strong>ancial assets<br />
Available-for-sale f<strong>in</strong>ancial assets are those non-derivative f<strong>in</strong>ancial assets that are not classified as loans and receivables. The<br />
Group’s available-for-sale f<strong>in</strong>ancial assets represent listed equity shares which are held at fair value (the quoted market price).<br />
Movements <strong>in</strong> the fair value dur<strong>in</strong>g the year are recognised directly <strong>in</strong> equity and are disclosed <strong>in</strong> the Statement of Recognised<br />
Income and Expense. The cumulative ga<strong>in</strong> or loss that arises on subsequent disposal of available for sale f<strong>in</strong>ancial assets will be<br />
recycled through the Income Statement.<br />
Loans and other receivables<br />
Trade receivables, loans and other receivables that have fixed or determ<strong>in</strong>able payments that are not quoted on an active<br />
market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost us<strong>in</strong>g the effective <strong>in</strong>terest<br />
method less any impairment. Trade and other receivables are recognised when <strong>in</strong>voiced. Interest <strong>in</strong>come is recognised by<br />
apply<strong>in</strong>g the effective <strong>in</strong>terest rate, except for short-term receivables where the recognition of <strong>in</strong>terest would be immaterial.<br />
The carry<strong>in</strong>g amounts of loans and other receivables are tested at each report<strong>in</strong>g date to determ<strong>in</strong>e whether there is objective<br />
material evidence of impairment, for example, overdue trade debt. Any impairment losses are recognised through the use<br />
of an allowance account. When a trade receivable is uncollectible, it is written off aga<strong>in</strong>st the allowance account. Subsequent<br />
recoveries of amounts previously written off are credited aga<strong>in</strong>st the allowance account. Changes <strong>in</strong> the carry<strong>in</strong>g amount of<br />
the allowance account are recognised <strong>in</strong> the Income Statement or the Balance Sheet <strong>in</strong> accordance with where the orig<strong>in</strong>al<br />
receivable was recognised.<br />
Bank deposits<br />
Bank deposits with an orig<strong>in</strong>al maturity of over three months are held as a separate category of current asset and presented on<br />
the face of the Balance Sheet.<br />
80 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Cash and cash equivalents<br />
Cash and cash equivalents comprise cash at bank and short-term deposits with an orig<strong>in</strong>al maturity of three months or less.<br />
For the purposes of the consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents<br />
as def<strong>in</strong>ed above, net of outstand<strong>in</strong>g bank overdrafts.<br />
Trade payables and other non-derivative f<strong>in</strong>ancial liabilities<br />
Trade payables and other creditors are non-<strong>in</strong>terest-bear<strong>in</strong>g and are measured at cost.<br />
Interest-bear<strong>in</strong>g bank loans and borrow<strong>in</strong>gs<br />
All <strong>in</strong>terest-bear<strong>in</strong>g bank loans and borrow<strong>in</strong>gs represent amounts drawn under the Group’s revolv<strong>in</strong>g credit facilities, classified<br />
accord<strong>in</strong>g to the length of time rema<strong>in</strong><strong>in</strong>g under the respective facility. Loans are <strong>in</strong>itially measured at fair value less directly<br />
attributable transaction costs. After <strong>in</strong>itial recognition, <strong>in</strong>terest-bear<strong>in</strong>g loans are subsequently measured at amortised cost us<strong>in</strong>g<br />
the effective <strong>in</strong>terest method. Interest payable is accrued <strong>in</strong> the Income Statement us<strong>in</strong>g the effective <strong>in</strong>terest rate method.<br />
F<strong>in</strong>ance leases<br />
Assets held under f<strong>in</strong>ance leases are recognised as assets of the Group at their fair value at the <strong>in</strong>ception of the lease or, if lower,<br />
at the present value of the m<strong>in</strong>imum lease payments. The correspond<strong>in</strong>g liability to the lessor is <strong>in</strong>cluded <strong>in</strong> the Balance Sheet<br />
as a f<strong>in</strong>ance lease obligation. Lease payments are apportioned between f<strong>in</strong>ance charges and reduction of the lease obligation<br />
so as to achieve a constant rate of <strong>in</strong>terest on the rema<strong>in</strong><strong>in</strong>g balance of the liability. F<strong>in</strong>ance charges are charged to the Income<br />
Statement, unless they are directly attributable to qualify<strong>in</strong>g assets, <strong>in</strong> which case they are capitalised <strong>in</strong> accordance with the<br />
Group’s general policy on borrow<strong>in</strong>g costs (see below).<br />
The Group has reviewed the terms and conditions of the lease arrangements and determ<strong>in</strong>ed that all risks and rewards of<br />
ownership lie with the Group and has therefore accounted for the contracts as f<strong>in</strong>ance leases.<br />
Borrow<strong>in</strong>g costs<br />
Borrow<strong>in</strong>g costs are recognised <strong>in</strong> the Income Statement <strong>in</strong> the period <strong>in</strong> which they are <strong>in</strong>curred except for borrow<strong>in</strong>g costs <strong>in</strong>curred<br />
on borrow<strong>in</strong>gs directly attributable to development projects which are capitalised with<strong>in</strong> the development/produc<strong>in</strong>g asset.<br />
(m) Equity<br />
Equity <strong>in</strong>struments issued by <strong>Cairn</strong> are recorded at the proceeds received, net of direct issue costs, allocated between share<br />
capital and share premium.<br />
(n) Taxation<br />
The tax expense represents the sum of current tax and deferred tax.<br />
The current tax is based on taxable profit/(loss) for the year. Taxable profit/(loss) differs from net profit/(loss) as reported <strong>in</strong> the<br />
Income Statement because it excludes items of <strong>in</strong>come or expense that are taxable or deductible <strong>in</strong> other years and it further<br />
excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated us<strong>in</strong>g tax rates that have<br />
been enacted or substantively enacted by the Balance Sheet date.<br />
Deferred tax is the tax expected to be payable or recoverable on differences between the carry<strong>in</strong>g amounts of assets and<br />
liabilities <strong>in</strong> the f<strong>in</strong>ancial statements and the correspond<strong>in</strong>g tax bases used <strong>in</strong> the computation of taxable profit/(loss).<br />
Deferred <strong>in</strong>come tax liabilities are recognised for all taxable temporary differences except <strong>in</strong> respect of taxable temporary<br />
differences associated with <strong>in</strong>vestments <strong>in</strong> subsidiaries, associates and <strong>in</strong>terests <strong>in</strong> Jo<strong>in</strong>t Ventures where the tim<strong>in</strong>g of the reversal<br />
of the temporary difference can be controlled and it is probable that the temporary difference will not reverse <strong>in</strong> the foreseeable<br />
future. A deferred <strong>in</strong>come tax liability is not recognised if a temporary difference arises on <strong>in</strong>itial recognition of an asset or<br />
liability <strong>in</strong> a transaction that is not a bus<strong>in</strong>ess comb<strong>in</strong>ation and, at the time of the transaction, affects neither the account<strong>in</strong>g<br />
profit nor taxable profit or loss.<br />
Deferred <strong>in</strong>come tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and<br />
unused tax losses, to the extent that it is probable that taxable profits will be available aga<strong>in</strong>st which the deductible temporary<br />
differences, carry-forward of unused tax assets and unused tax losses can be utilised, except where the deferred <strong>in</strong>come<br />
tax asset relat<strong>in</strong>g to the deductible temporary tim<strong>in</strong>g difference arises from the <strong>in</strong>itial recognition of an asset or liability <strong>in</strong> a<br />
transaction that is not a bus<strong>in</strong>ess comb<strong>in</strong>ation and, at the time of the transaction, affects neither the account<strong>in</strong>g profit nor<br />
taxable profit or loss. In respect of deductible temporary differences associated with <strong>in</strong>vestments <strong>in</strong> subsidiaries, associates and<br />
<strong>in</strong>terests <strong>in</strong> Jo<strong>in</strong>t Ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences<br />
will reverse <strong>in</strong> the foreseeable future and taxable profits will be available aga<strong>in</strong>st which the temporary differences can be utilised.<br />
The carry<strong>in</strong>g amount of deferred <strong>in</strong>come tax assets are reviewed at each Balance Sheet date and reduced to the extent that it is no<br />
longer probable that sufficient taxable profits will be available to allow all or part of the deferred <strong>in</strong>come tax asset to be utilised.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 81
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
1. Account<strong>in</strong>g Policies (cont<strong>in</strong>ued)<br />
(n) Taxation (cont<strong>in</strong>ued)<br />
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply <strong>in</strong> the periods <strong>in</strong> which the asset is<br />
realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the Balance Sheet date.<br />
Deferred tax assets and liabilities are only offset where they arise with<strong>in</strong> the same entity and tax jurisdiction and the group<br />
<strong>in</strong>tends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.<br />
(o) Decommission<strong>in</strong>g<br />
At the end of the produc<strong>in</strong>g life of a field, costs are <strong>in</strong>curred <strong>in</strong> remov<strong>in</strong>g and decommission<strong>in</strong>g production facilities.<br />
<strong>Cairn</strong> recognises the full discounted cost of dismantl<strong>in</strong>g and decommission<strong>in</strong>g as an asset and liability when the obligation<br />
arises. The decommission<strong>in</strong>g asset is <strong>in</strong>cluded with<strong>in</strong> property, plant & equipment – development/produc<strong>in</strong>g assets with the<br />
cost of the related <strong>in</strong>stallation. The liability is <strong>in</strong>cluded with<strong>in</strong> provisions. Revisions to the estimated costs of decommission<strong>in</strong>g<br />
which alter the level of the provisions required are also reflected <strong>in</strong> adjustments to the decommission<strong>in</strong>g asset. The amortisation<br />
of the asset, calculated on a unit of production basis based on proven and probable reserves, is <strong>in</strong>cluded <strong>in</strong> the ‘Depletion<br />
and decommission<strong>in</strong>g charge’ <strong>in</strong> the Income Statement and the unw<strong>in</strong>d<strong>in</strong>g of the discount on the provision is <strong>in</strong>cluded with<strong>in</strong><br />
‘F<strong>in</strong>ance costs’.<br />
(p) Foreign currencies<br />
In the accounts of <strong>in</strong>dividual Group companies, <strong>Cairn</strong> translates foreign currency transactions <strong>in</strong>to the functional currency at<br />
the rate of exchange prevail<strong>in</strong>g at the transaction date. Monetary assets and liabilities denom<strong>in</strong>ated <strong>in</strong> foreign currency are<br />
translated <strong>in</strong>to the functional currency at the rate of exchange prevail<strong>in</strong>g at the Balance Sheet date. Exchange differences aris<strong>in</strong>g<br />
are taken to the Income Statement except for those <strong>in</strong>curred on borrow<strong>in</strong>gs specifically allocable to development projects,<br />
which are capitalised as part of the cost of the asset.<br />
<strong>Cairn</strong> ma<strong>in</strong>ta<strong>in</strong>s the accounts of the parent and subsidiary undertak<strong>in</strong>gs <strong>in</strong> their functional currency. Where applicable, <strong>Cairn</strong><br />
translates parent and subsidiary accounts <strong>in</strong>to the presentational currency, $, us<strong>in</strong>g the clos<strong>in</strong>g rate method for assets and<br />
liabilities which are translated <strong>in</strong>to $ at the rate of exchange prevail<strong>in</strong>g at the Balance Sheet date and rates at the date of<br />
transactions for Income Statement accounts. <strong>Cairn</strong> takes exchange differences aris<strong>in</strong>g on the translation of net assets of Group<br />
companies whose functional currency is non-$ directly to reserves.<br />
Rates of exchange to $1 were as follows:<br />
82 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
31 December Average 31 December Average<br />
<strong>2007</strong> <strong>2007</strong> 2006 2006<br />
Sterl<strong>in</strong>g 0.504 0.500 0.511 0.543<br />
Indian Rupee 39.400 41.339 44.260 45.277<br />
(q) Employee benefits<br />
Pension schemes<br />
<strong>Cairn</strong> operates def<strong>in</strong>ed contribution pension schemes <strong>in</strong> the Uk and India. The assets of the schemes are held separately from<br />
those of <strong>Cairn</strong> and its subsidiaries. <strong>Cairn</strong> also operates <strong>in</strong>sured benefit schemes for certa<strong>in</strong> Indian and Bangladeshi employees<br />
as required under local legislation. In accordance with IAS 19 ‘Employee Benefits’ these are treated as def<strong>in</strong>ed contribution<br />
schemes. The pension cost charged represents contributions payable <strong>in</strong> the year <strong>in</strong> accordance with the rules of the schemes.<br />
Share schemes<br />
The cost of awards to employees under <strong>Cairn</strong>’s LTIP and share option plans, granted after 7 November 2002, are recognised<br />
over the three-year period to which the performance relates. The amount recognised is based on the fair value of the shares as<br />
measured at the date of the award. The shares are valued us<strong>in</strong>g either the Black–Scholes model or the b<strong>in</strong>omial model, further<br />
details of which are given <strong>in</strong> Note 7.<br />
The cost of equity-settled transactions is recognised, together with a correspond<strong>in</strong>g <strong>in</strong>crease <strong>in</strong> equity, over the period <strong>in</strong> which<br />
the performance and/or service conditions are fulfilled, end<strong>in</strong>g on the date on which the relevant employees become fully<br />
entitled to the award (‘the vest<strong>in</strong>g date’). The cumulative expense recognised for equity-settled transactions at each report<strong>in</strong>g<br />
date until the vest<strong>in</strong>g date reflects the extent to which the vest<strong>in</strong>g period has expired and the Company’s best estimate of<br />
the number of equity <strong>in</strong>struments that will ultimately vest. The Income Statement charge or credit for a period represents the<br />
movement <strong>in</strong> cumulative expense as recognised at the beg<strong>in</strong>n<strong>in</strong>g and end of that period.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
No expense is recognised for awards that do not ultimately vest, except for awards where vest<strong>in</strong>g is conditional upon a market<br />
condition, which are treated as vest<strong>in</strong>g irrespective of whether or not the market condition is satisfied, provided that all other<br />
performance conditions are satisfied.<br />
Where the terms of an equity-settled award are modified, the m<strong>in</strong>imum expense recognised is the expense as if the terms<br />
had not been modified. An additional expense is recognised for any modification, which <strong>in</strong>creases the total fair value of the<br />
share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.<br />
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not<br />
yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and<br />
designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a<br />
modification of the orig<strong>in</strong>al award, as described <strong>in</strong> the previous paragraph.<br />
Shares acquired to meet awards under these share schemes are held by the ESOP Trust. The accounts of the ESOP Trust are<br />
aggregated <strong>in</strong>to these f<strong>in</strong>ancial statements.<br />
The costs of awards to employees <strong>in</strong> the form of cash but based on share performance (phantom options) are recognised over<br />
the period to which the performance relates. The amount recognised is based on the fair value of the liability aris<strong>in</strong>g from the<br />
transaction.<br />
Term<strong>in</strong>ation benefits<br />
<strong>Cairn</strong> recognises a liability for term<strong>in</strong>ation benefits at the po<strong>in</strong>t where the Group is committed to mak<strong>in</strong>g the payments <strong>in</strong> return<br />
for employee redundancy.<br />
(r) Operat<strong>in</strong>g lease commitments<br />
<strong>Cairn</strong> charges rentals payable under operat<strong>in</strong>g leases to the Income Statement on a straight-l<strong>in</strong>e basis over the lease term. The<br />
Group has reviewed the terms and conditions of the lease arrangements and determ<strong>in</strong>ed that all risks and rewards of ownership<br />
lie with the lessor and has therefore accounted for the contracts as operat<strong>in</strong>g leases.<br />
(s) Exceptional items<br />
Exceptional items are those not considered to be part of the normal operation of the bus<strong>in</strong>ess. Such items are identified as<br />
exceptional and a full explanation is given <strong>in</strong> the notes to the accounts.<br />
(t) key estimations and assumptions<br />
The Group has used estimates and assumptions <strong>in</strong> arriv<strong>in</strong>g at certa<strong>in</strong> figures with<strong>in</strong> the f<strong>in</strong>ancial statements. The result<strong>in</strong>g<br />
account<strong>in</strong>g estimates may not equate with the actual results which will only be known <strong>in</strong> time. Those areas believed to be key<br />
areas of estimation are noted below, with further details of the assumptions used listed at the relevant note.<br />
Item Refer to:<br />
Impairment test<strong>in</strong>g 1(d); 1(g); 1(j); 1(l)<br />
Depletion 1(g)<br />
Fair value on bus<strong>in</strong>ess comb<strong>in</strong>ations 3<br />
Share-based payments 7<br />
Deferred tax 23<br />
Decommission<strong>in</strong>g estimates 26<br />
Oil and gas reserves Reserves table<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 83
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
1. Account<strong>in</strong>g Policies (cont<strong>in</strong>ued)<br />
(u) Prior year adjustments<br />
F<strong>in</strong>ancial assets<br />
Investments, represent<strong>in</strong>g the Group’s hold<strong>in</strong>g <strong>in</strong> Videocon Industries Limited, a company listed <strong>in</strong> India, have been correctly<br />
reclassified as available-for-sale f<strong>in</strong>ancial assets. This <strong>in</strong>vestment was previously recorded as an <strong>in</strong>vestment measured at cost but<br />
as a reliable measure of fair value was readily available this asset should have been reclassified under IAS 39 <strong>in</strong> prior years.<br />
The restated f<strong>in</strong>ancial asset is now shown <strong>in</strong> Note 17.<br />
Indian deferred tax liabilities<br />
Deferred tax liabilities relat<strong>in</strong>g to India have been restated to reflect the taxable temporary difference that rema<strong>in</strong>s at the end of<br />
the seven-year tax holiday period on the Rajasthan tangible development/produc<strong>in</strong>g asset <strong>in</strong> two of the Group’s subsidiaries.<br />
<strong>Cairn</strong> <strong>Energy</strong> India Pty Limited had recorded deferred tax liabilities to reflect the difference between the net book value of<br />
development/produc<strong>in</strong>g assets and tax written down values. However, a liability should only have been created to recognise the<br />
taxable temporary difference on balances rema<strong>in</strong><strong>in</strong>g at the end of the tax holiday period s<strong>in</strong>ce movements <strong>in</strong> net book values<br />
and tax written down values dur<strong>in</strong>g the tax holiday period will have no tax impact.<br />
<strong>Cairn</strong> <strong>Energy</strong> Hydrocarbons Limited previously had no deferred tax liability recognised due to the availability of Indian tax losses.<br />
As these losses will unw<strong>in</strong>d dur<strong>in</strong>g the tax holiday period, a taxable temporary difference will rema<strong>in</strong> at the end of the tax holiday<br />
period reflect<strong>in</strong>g the forecast excess of net book values over tax written down values. A deferred tax liability should therefore<br />
have been recognised.<br />
UK deferred tax assets<br />
Deferred tax assets represent<strong>in</strong>g Uk tax losses available on Indian assets <strong>in</strong> <strong>Cairn</strong> <strong>Energy</strong> Hydrocarbons Limited have been<br />
reversed on the basis that they have no economic benefit to the group given the excess of Indian tax rates over Uk rates and the<br />
availability of double taxation relief. As there would have been no economic benefit associated with the losses <strong>in</strong> previous years,<br />
a prior year adjustment has been made.<br />
The amount of the prior year adjustments and the f<strong>in</strong>ancial statement l<strong>in</strong>e items affected are shown below.<br />
Uk India<br />
2006 F<strong>in</strong>ancial Deferred Deferred<br />
F<strong>in</strong>ancial assets taxation taxation Restated<br />
statements adjustment adjustment adjustment 2006<br />
$’000 $’000 $’000 $’000 $’000<br />
Balance Sheet<br />
F<strong>in</strong>ancial assets – 7,868 – – 7,868<br />
Investments 96 (96) – – –<br />
Deferred tax asset 18,911 – (18,911) – –<br />
Total assets 1,923,911 7,772 (18,911) – 1,912,772<br />
Deferred tax liabilities 138,694 – – (8,729) 129,965<br />
Total liabilities 1,242,741 – – (8,729) 1,234,012<br />
Net assets 681,170 7,772 (18,911) 8,729 678,760<br />
Reta<strong>in</strong>ed earn<strong>in</strong>gs 467,017 7,772 (18,911) 8,729 464,607<br />
Total equity attributable to equity holders 681,170 7,772 (18,911) 8,729 678,760<br />
Income Statement<br />
F<strong>in</strong>ance costs (30,609) – (1,266) – (31,875)<br />
Taxation credit/(expense) 8,559 – (15,039) 1,200 (5,280)<br />
Loss for the year attributable to<br />
equity holders (82,017) – (16,305) 1,200 (97,122)<br />
Earn<strong>in</strong>gs per share – basic (cents) (52.02) – (10.35) 0.77 (61.60)<br />
Earn<strong>in</strong>gs per share – diluted (cents) (52.02) – (10.35) 0.77 (61.60)<br />
Statement of Recognised Income and Expense<br />
Surplus on valuation of f<strong>in</strong>ancial assets – 603 – – 603<br />
Total <strong>in</strong>come/expense recognised directly <strong>in</strong> equity 10,725 603 – – 11,328<br />
Loss for the year (82,017) – (16,305) 1,200 (97,122)<br />
Total recognised <strong>in</strong>come and expense for the year (71,292) 603 (16,305) 1,200 (85,794)<br />
84 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
2. Revenue and Other Income<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Revenue from sale of oil, gas and condensate 286,871 285,709<br />
Tariff <strong>in</strong>come 785 595<br />
––––––––––– –––––––––––<br />
Revenue from operat<strong>in</strong>g activities 287,656 286,304<br />
Interest receivable (Note 9) 65,176 4,603<br />
Other operat<strong>in</strong>g <strong>in</strong>come – Jo<strong>in</strong>t Venture operator fee <strong>in</strong>come 6,010 3,340<br />
––––––––––– –––––––––––<br />
Total <strong>in</strong>come 358,842 294,247<br />
––––––––––– –––––––––––<br />
3. Acquisitions and Disposals<br />
Dur<strong>in</strong>g the year the Group acquired Plectrum Petroleum Plc (‘Plectrum’) and medOil plc (‘medOil’). As required under IFRS 3<br />
‘Bus<strong>in</strong>ess Comb<strong>in</strong>ations’, fair values have been assigned to the identifiable assets and liabilities of those companies <strong>in</strong>clud<strong>in</strong>g<br />
<strong>in</strong>tangible exploration assets. Given the <strong>in</strong>herently uncerta<strong>in</strong> nature of oil and gas exploration, these fair value calculations are<br />
highly judgemental <strong>in</strong> nature. The fair value calculations are based on the <strong>in</strong>formation available at the date of acquisition and<br />
are provisional <strong>in</strong> nature. These will be reassessed with<strong>in</strong> 12 months from the date of acquisition <strong>in</strong> accordance with IFRS 3.<br />
(a) Acquisition of Plectrum Petroleum Plc<br />
On 7 September <strong>2007</strong>, the Group announced a recommended cash offer for Plectrum. Plectrum holds a 50% equity <strong>in</strong>terest<br />
<strong>in</strong> the Nabeul permit offshore Tunisia and <strong>in</strong> addition has <strong>in</strong>terests <strong>in</strong> Australia, Peru and the Uk. The offer was declared<br />
unconditional <strong>in</strong> all respects and <strong>Cairn</strong> ga<strong>in</strong>ed control of Plectrum on 10 October <strong>2007</strong>. By 31 December <strong>2007</strong>, the Group<br />
had acquired 98% of the vot<strong>in</strong>g shares of Plectrum. The rema<strong>in</strong><strong>in</strong>g 2% sharehold<strong>in</strong>g was undergo<strong>in</strong>g compulsory acquisition<br />
as at 31 December <strong>2007</strong>.<br />
The fair value of the identifiable assets and liabilities of Plectrum as at the date of acquisition and the correspond<strong>in</strong>g carry<strong>in</strong>g<br />
amounts immediately prior to acquisition were:<br />
Fair value Previous<br />
recognised carry<strong>in</strong>g<br />
on acquisition value<br />
$’000 $’000<br />
Intangible exploration/appraisal assets 72,598 4,894<br />
Property, plant & equipment – other 8 14<br />
Intangible assets – other – 11,961<br />
Trade and other receivables 4,034 1,326<br />
Cash and cash equivalents 6,107 6,107<br />
Trade and other payables (3,192) (3,192)<br />
Deferred tax liabilities (34,165) –<br />
Provisions (10,861) –<br />
––––––––––– –––––––––––<br />
Net assets 34,529 21,110<br />
––––––––––– –––––––––––<br />
Goodwill aris<strong>in</strong>g on acquisition (Note 16) 13,511<br />
–––––––––––<br />
Total consideration 48,040<br />
–––––––––––<br />
The total cost of the comb<strong>in</strong>ation was $48.0m which is made up of:<br />
Cash purchase of Plectrum shares at 13p per share 46,545<br />
Costs associated with the acquisition 1,495<br />
–––––––––––<br />
$’000<br />
48,040<br />
–––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 85
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
3. Acquisitions and Disposals (cont<strong>in</strong>ued)<br />
Cash outflow on acquisition:<br />
Net cash acquired 6,107<br />
Cash paid on acquisition (48,040)<br />
–––––––––––<br />
Net cash outflow (41,933)<br />
–––––––––––<br />
The goodwill of $13.5m is created on recognition of the deferred tax liability <strong>in</strong> Plectrum on acquisition. The goodwill is tested<br />
for impairment annually and no impairment arises <strong>in</strong> the year ended 31 December <strong>2007</strong>.<br />
Impact of Plectrum Acquisition on Group results <strong>in</strong> <strong>2007</strong><br />
From the date of acquisition, Plectrum <strong>in</strong>curred a loss of $1.7m. This loss is <strong>in</strong>cluded <strong>in</strong> the results of the Group. As Plectrum<br />
does not hold produc<strong>in</strong>g assets, the acquisition had no impact on Group revenue. If the comb<strong>in</strong>ation had taken place at the<br />
beg<strong>in</strong>n<strong>in</strong>g of the year, the profit for the Group would have been $1,523.8m.<br />
(b) Acquisition of medOil plc<br />
On 7 September <strong>2007</strong>, the Group announced a recommended cash offer for medOil. medOil holds a 100% equity <strong>in</strong>terest <strong>in</strong><br />
the Louza permit offshore Tunisia and <strong>in</strong> addition has <strong>in</strong>terests <strong>in</strong> Albania, Spa<strong>in</strong> and Sicily. The offer was declared unconditional<br />
<strong>in</strong> all respects and <strong>Cairn</strong> ga<strong>in</strong>ed control of medOil on 10 October <strong>2007</strong>. By 31 December <strong>2007</strong>, the Group had acquired 97% of<br />
the vot<strong>in</strong>g shares of medOil. The rema<strong>in</strong><strong>in</strong>g 3% sharehold<strong>in</strong>g was undergo<strong>in</strong>g compulsory acquisition as at 31 December <strong>2007</strong>.<br />
The fair value of the identifiable assets and liabilities of medOil as at the date of acquisition and the correspond<strong>in</strong>g carry<strong>in</strong>g<br />
amounts immediately prior to acquisition were:<br />
Fair value Previous<br />
recognised carry<strong>in</strong>g<br />
on acquisition value<br />
$’000 $’000<br />
Intangible exploration/appraisal assets 66,907 3,950<br />
Property, plant & equipment – other 22 22<br />
Trade and other receivables 1,619 41<br />
Cash and cash equivalents 1,228 1,228<br />
Trade and other payables (1,788) (1,788)<br />
Deferred tax liabilities (17,628) –<br />
Provisions (2,154) –<br />
––––––––––– –––––––––––<br />
Net assets 48,206 3,453<br />
––––––––––– –––––––––––<br />
Negative goodwill aris<strong>in</strong>g on acquisition (17,373)<br />
–––––––––––<br />
Total consideration 30,833<br />
–––––––––––<br />
The total cost of the comb<strong>in</strong>ation was $30.8m which is made up of:<br />
Cash purchase of medOil shares at 23p per share 29,610<br />
Costs associated with the acquisition 1,223<br />
–––––––––––<br />
86 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
$’000<br />
$’000<br />
30,833<br />
–––––––––––
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Cash outflow on acquisition:<br />
Net cash acquired 1,228<br />
Cash received for share warrants exercised 1,578<br />
Cash paid on acquisition (30,833)<br />
–––––––––––<br />
Net cash outflow (28,027)<br />
–––––––––––<br />
The negative goodwill of $17.4m arises on acquisition as the fair value of the net assets acquired exceeds the consideration<br />
paid. In accordance with IFRS the negative goodwill is recognised immediately <strong>in</strong> the Income Statement.<br />
Impact of medOil Acquisition on Group results <strong>in</strong> <strong>2007</strong><br />
From the date of acquisition, medOil <strong>in</strong>curred a loss of $0.3m. This loss is <strong>in</strong>cluded <strong>in</strong> the results of the Group. As medOil<br />
does not hold produc<strong>in</strong>g assets, the acquisition had no impact on Group revenue. If the comb<strong>in</strong>ation had taken place at the<br />
beg<strong>in</strong>n<strong>in</strong>g of the year, the profit for the Group would have been $1,526.3m.<br />
(c) Disposal of <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited<br />
On 25 October <strong>2007</strong>, Santos International Hold<strong>in</strong>gs Pty Limited acquired the entire share capital of <strong>Cairn</strong> <strong>Energy</strong> Bangladesh<br />
Limited from the Group for a total cash consideration of $55.8m. There is an additional cont<strong>in</strong>gent consideration of $20.0m,<br />
payable <strong>in</strong> tranches dependent upon future development as a result of the <strong>2007</strong>/2008 exploration drill<strong>in</strong>g programme which has<br />
not been recognised. As a result of this transaction, the Group disposed of a 37.5% hold<strong>in</strong>g <strong>in</strong> Bangladesh Block 16, <strong>in</strong>clud<strong>in</strong>g<br />
Sangu, and a 45% <strong>in</strong>terest <strong>in</strong> each of the Bangladesh Exploration Blocks 5 and 10.<br />
The assets and liabilities disposed of <strong>in</strong> the transaction are summarised <strong>in</strong> the table below:<br />
Intangible exploration/appraisal assets 21,412<br />
Property, plant & equipment – development/produc<strong>in</strong>g assets 37,286<br />
Property, plant & equipment – other 14<br />
Trade and other receivables 16,967<br />
Cash and cash equivalents 6,738<br />
Trade and other payables (29,350)<br />
Deferred tax liability (773)<br />
Of the total cash consideration of $55.8m, $23.0m (less related costs of the transaction) was allocated to Group <strong>in</strong>tangible<br />
exploration/appraisal costs <strong>in</strong> l<strong>in</strong>e with the Group’s account<strong>in</strong>g policies. See Note 13.<br />
4. Segmental Analysis<br />
Geographic segments<br />
The Group’s operat<strong>in</strong>g activities are organised <strong>in</strong>to two dist<strong>in</strong>ct sub-Groups, the Capricorn Group and the <strong>Cairn</strong> India Group,<br />
each report<strong>in</strong>g <strong>in</strong>ternally to its own Chief Executive. A third segment, ‘Other’, exists to accumulate the activities and results of<br />
<strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited and <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> which <strong>in</strong>cludes the adm<strong>in</strong>istrative expenses of <strong>Cairn</strong>’s head office <strong>in</strong> Ed<strong>in</strong>burgh.<br />
Unallocated expenditure and net assets/(liabilities) <strong>in</strong>clud<strong>in</strong>g amounts of a corporate nature, not specifically attributable to one<br />
of the sub-Groups, are also <strong>in</strong>cluded with<strong>in</strong> ‘Other’.<br />
The Capricorn Group’s operations focus on the Group’s South Asian assets <strong>in</strong> Bangladesh and Nepal together with new<br />
exploration activities <strong>in</strong> Tunisia and the rest of the world. The <strong>Cairn</strong> India Group’s operations are entirely with<strong>in</strong> India.<br />
$’000<br />
$’000<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 87
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
4. Segmental Analysis (cont<strong>in</strong>ued)<br />
The segment results for the year ended 31 December <strong>2007</strong> are as follows:<br />
88 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
<strong>Cairn</strong> India Capricorn Group<br />
Group Group Other <strong>2007</strong><br />
$’000 $’000 $’000 $’000<br />
Revenue from sale of oil, gas and condensate 236,724 50,147 – 286,871<br />
Tariff <strong>in</strong>come 785 – – 785<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total revenue 237,509 50,147 – 287,656<br />
Cost of sales (123,466) (102,725) – (226,191)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Gross profit/(loss) 114,043 (52,578) – 61,465<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Segmental operat<strong>in</strong>g profit/(loss) 71,215 (120,179) (27,286) (76,250)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cost of sales <strong>in</strong> the segment results above <strong>in</strong>cludes:<br />
Production costs (45,497) (20,986) – (66,483)<br />
Unsuccessful exploration costs (15,347) (25,367) – (40,714)<br />
Depletion and decommission<strong>in</strong>g charge (62,622) (56,372) – (118,994)<br />
Other segment items <strong>in</strong>cluded <strong>in</strong> the Income Statement are:<br />
Depreciation (1,544) (56) (422) (2,022)<br />
Amortisation (2,582) (1,610) (118) (4,310)<br />
Impairment losses on f<strong>in</strong>ancial assets (other loans and receivables) (2,547) (1,059) – (3,606)<br />
Impairment of <strong>in</strong>tangible exploration/appraisal assets – (58,924) – (58,924)<br />
Reversal of impairment of property, plant & equipment<br />
– development/produc<strong>in</strong>g assets – 3,718 – 3,718<br />
Loss on sale of oil and gas assets – (89) – (89)<br />
Negative goodwill – 17,373 – 17,373<br />
Exceptional ga<strong>in</strong> on deemed disposal of subsidiaries – – 1,577, 276 1,577,276
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
The segment results for the year ended 31 December 2006 were as follows:<br />
<strong>Cairn</strong> India Group<br />
Group Capricorn 2006<br />
(Restated) Group Other (Restated)<br />
$’000 $’000 $’000 $’000<br />
Revenue from sale of oil, gas and condensate 221,956 63,753 – 285,709<br />
Tariff <strong>in</strong>come 595 – – 595<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Total revenue 222,551 63,753 – 286,304<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cost of sales (143,751) (78,685) – (222,436)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Gross profit/(loss) 78,800 (14,932) – 63,868<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Segmental operat<strong>in</strong>g profit/(loss) 119,725 (143,675) (40,620) (64,570)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cost of sales <strong>in</strong> the segment results above <strong>in</strong>cludes:<br />
Production costs (38,585) (18,346) – (56,931)<br />
Unsuccessful exploration costs (56,650) (5,368) – (62,018)<br />
Depletion and decommission<strong>in</strong>g charge (48,516) (54,971) – (103,487)<br />
Other segment items <strong>in</strong>cluded <strong>in</strong> the Income Statement are:<br />
Depreciation (2,393) (3) (749) (3,145)<br />
Amortisation (2,242) – (1,620) (3,862)<br />
Impairment losses on f<strong>in</strong>ancial assets (other loans and receivables) (3,332) (1,274) – (4,606)<br />
Impairment of <strong>in</strong>tangible exploration/appraisal assets – (71,455) – (71,455)<br />
The segment assets and liabilities as at 31 December <strong>2007</strong> and capital expenditure for the year then ended are as follows:<br />
<strong>Cairn</strong> India Capricorn Group<br />
Group Group Other <strong>2007</strong><br />
$’000 $’000 $’000 $’000<br />
Assets 1,761,816 593,916 25,013 2,380,745<br />
Liabilities 331,423 73,439 226,067 630,929<br />
Capital expenditure 320,820 266,298 4,393 591,511<br />
Capital expenditure <strong>in</strong>cludes exploration assets acquired through bus<strong>in</strong>ess comb<strong>in</strong>ations.<br />
The segment assets and liabilities as at 31 December 2006 and capital expenditure for the year then ended are as follows:<br />
<strong>Cairn</strong> India Group<br />
Group Capricorn Other 2006<br />
(Restated) Group (Restated) (Restated)<br />
$’000 $’000 $’000 $’000<br />
Assets 1,099,794 151,250 661,728 1,912,772<br />
Liabilities 1,132,689 35,620 65,703 1,234,012<br />
Capital expenditure 249,622 31,624 2,715 283,961<br />
Segment assets <strong>in</strong>clude <strong>in</strong>tangible exploration/appraisal assets; property, plant & equipment – development/produc<strong>in</strong>g assets;<br />
property, plant & equipment – other; <strong>in</strong>tangible assets – other; trade receivables and operat<strong>in</strong>g cash. They exclude <strong>in</strong>tercompany<br />
balances.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 89
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
4. Segmental Analysis (cont<strong>in</strong>ued)<br />
Segment liabilities comprise operat<strong>in</strong>g liabilities and exclude items such as taxation, corporate borrow<strong>in</strong>gs and <strong>in</strong>ter-company<br />
balances.<br />
Other assets <strong>in</strong>clude assets of <strong>Cairn</strong>’s head office <strong>in</strong> Ed<strong>in</strong>burgh, as well as <strong>in</strong>terest receivable, deposits, cash and cash equivalents<br />
of the Group which cannot be allocated to an operat<strong>in</strong>g segment.<br />
Other liabilities <strong>in</strong>clude liabilities of <strong>Cairn</strong>’s head office <strong>in</strong> Ed<strong>in</strong>burgh, as well as <strong>in</strong>come tax liabilities and deferred tax liabilities of<br />
the Group which cannot be allocated to an operat<strong>in</strong>g segment.<br />
Bus<strong>in</strong>ess Segments<br />
<strong>Cairn</strong> operates <strong>in</strong> only one bus<strong>in</strong>ess segment, be<strong>in</strong>g the oil and gas extractive <strong>in</strong>dustry and therefore no bus<strong>in</strong>ess segmental<br />
analysis is provided.<br />
5. Operat<strong>in</strong>g Loss<br />
(a) Operat<strong>in</strong>g loss is stated after charg<strong>in</strong>g/(credit<strong>in</strong>g):<br />
90 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Unsuccessful exploration costs 40,714 62,018<br />
Movement <strong>in</strong> <strong>in</strong>ventory of oil and condensate (3,363) 918<br />
Depletion and decommission<strong>in</strong>g charge of property, plant & equipment – development/produc<strong>in</strong>g assets 118,994 103,487<br />
Impairment losses on f<strong>in</strong>ancial assets (Other loans and receivables) 3,606 4,606<br />
Depreciation of property, plant & equipment – other 2,022 3,145<br />
Amortisation of <strong>in</strong>tangible assets – other 4,310 3,862<br />
Operat<strong>in</strong>g lease costs<br />
– land and build<strong>in</strong>gs 2,963 2,650<br />
– other 205 283<br />
Impairment of <strong>in</strong>tangible exploration/appraisal assets (Note 13) 58,924 –<br />
Impairment of property, plant & equipment – development/produc<strong>in</strong>g assets (Note 14) – 71,455<br />
Reversal of impairment of property, plant & equipment – development/produc<strong>in</strong>g assets (Note 14) (3,718) –<br />
Loss on sale of oil and gas assets (Note 3(c)) 89 –<br />
Auditor’s remuneration<br />
Fees payable to the Group’s auditor for the audit of the Group’s annual accounts 467 460<br />
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 22 22<br />
Fees payable to the Group’s auditor and its associates for other services:<br />
– for the audit of subsidiaries pursuant to legislation 646 642<br />
– other services pursuant to legislation 111 41<br />
– other services relat<strong>in</strong>g to taxation 68 48<br />
– services relat<strong>in</strong>g to corporate f<strong>in</strong>ance transactions – 132<br />
– all other services 483 232<br />
Fees <strong>in</strong> respect of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> pension scheme<br />
– audit 1 2<br />
Other advisers’ fees <strong>in</strong> respect of taxation work 41 60<br />
Other advisers’ fees <strong>in</strong> respect of other work 331 303<br />
The Group has a policy <strong>in</strong> place for the award of non-audit work to the auditors which, <strong>in</strong> certa<strong>in</strong> circumstances, requires Audit<br />
Committee approval.<br />
Other advisers comprise accountancy firms other than the Group’s auditor.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
(b) Impairment and reversal of impairment<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Impairment of <strong>in</strong>tangible exploration/appraisal assets (58,924) –<br />
Impairment of property, plant & equipment – development/produc<strong>in</strong>g assets – (71,455)<br />
Reversal of impairment of property, plant & equipment – development/produc<strong>in</strong>g assets 3,718 –<br />
At the year end the Group performed a review of the carry<strong>in</strong>g value of cash-generat<strong>in</strong>g units with<strong>in</strong> property, plant & equipment<br />
– development/produc<strong>in</strong>g assets. The review determ<strong>in</strong>ed that the value of certa<strong>in</strong> units previously impaired with<strong>in</strong> the Capricorn<br />
Group was <strong>in</strong> excess of the carry<strong>in</strong>g value. As a result a reversal of the prior year impairment charge of $3.7m was recognised<br />
through the Income Statement.<br />
At the year end the Group also carried out impairment reviews of <strong>in</strong>tangible exploration/appraisal assets where <strong>in</strong>dicators of<br />
impairment were found to exist. As the cash-generat<strong>in</strong>g unit of the Capricorn Group is currently carried at net present value<br />
there is no additional headroom to support the carry<strong>in</strong>g value of exploration assets where such <strong>in</strong>dicators exist. As a result a<br />
write-down of $58.9m <strong>in</strong> relation to <strong>in</strong>tangible exploration/appraisal assets was charged to the Income Statement.<br />
Refer to details on the reason for impairment <strong>in</strong> the Operat<strong>in</strong>g and Exploration Review on page 14 and Note 1(g) for details of<br />
the assumptions used <strong>in</strong> the impairment calculation.<br />
The write-down of oil and gas assets <strong>in</strong> 2006 followed an impairment review of the cash-generat<strong>in</strong>g unit with<strong>in</strong> property, plant<br />
& equipment – development/produc<strong>in</strong>g assets <strong>in</strong> the Capricorn Group segment. The review determ<strong>in</strong>ed that the estimated<br />
net present value of future cash flows was less than the carry<strong>in</strong>g value of the asset <strong>in</strong> the cash-generat<strong>in</strong>g unit. As a result a<br />
write-down of $71.5m was charged to the Income Statement.<br />
(c) Cont<strong>in</strong>u<strong>in</strong>g operations<br />
All profits and losses <strong>in</strong> the current and preced<strong>in</strong>g year were derived from cont<strong>in</strong>u<strong>in</strong>g operations.<br />
6. Exceptional ga<strong>in</strong> on deemed disposal of subsidiaries<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Exceptional ga<strong>in</strong> on deemed disposal of <strong>Cairn</strong> India Limited 1,537,008 –<br />
Exceptional ga<strong>in</strong> on deemed disposal of Capricorn <strong>Energy</strong> Limited 40,268 –<br />
––––––––––– –––––––––––<br />
1,577,276 –<br />
––––––––––– –––––––––––<br />
The Group made an exceptional ga<strong>in</strong> of $1,537.0m on the deemed disposal of 31% of <strong>Cairn</strong> India Limited through the Initial<br />
Public Offer on the Bombay Stock Exchange and the National Stock Exchange of India, which completed on 9 January <strong>2007</strong>.<br />
<strong>Cairn</strong> India Limited listed with a partial Initial Public Offer (‘IPO’) of 538.5m shares of 10 Rupees each, <strong>in</strong>clud<strong>in</strong>g 209.7m shares<br />
by way of pre-IPO placement. A further 13.1m shares were issued dur<strong>in</strong>g the subsequent stabilisation period. The Company’s<br />
<strong>in</strong>direct percentage hold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India Limited reduced as a result from 100% to 69.0%.<br />
The Group also made an exceptional ga<strong>in</strong> of $40.3m on the deemed disposal of 10% of Capricorn <strong>Energy</strong> Limited to Dyas BV<br />
on 7 September <strong>2007</strong>. This resulted from the issue of share capital by Capricorn <strong>Energy</strong> Limited <strong>in</strong> a private placement.<br />
The Company reta<strong>in</strong>s a direct 90% hold<strong>in</strong>g <strong>in</strong> Capricorn <strong>Energy</strong> Limited.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 91
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
7. Staff Costs<br />
92 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Wages and salaries 77,909 57,733<br />
Redundancy costs 1,254 1,667<br />
Social security costs and other taxes 4,876 2,792<br />
Pension costs 2,455 2,612<br />
Share-based payments charge 32,235 18,527<br />
––––––––––– –––––––––––<br />
118,729 83,331<br />
––––––––––– –––––––––––<br />
Staff costs are shown gross before amounts recharged to Jo<strong>in</strong>t Ventures and <strong>in</strong>clude the costs of share-based payments.<br />
The share-based payments charge <strong>in</strong>cludes amounts <strong>in</strong> respect of both equity and cash-settled phantom options and associated<br />
National Insurance contributions. The share-based payments charge also <strong>in</strong>cludes the cost of Fr<strong>in</strong>ge Benefits Tax, payable to the<br />
Indian Government on the exercise of share options held by <strong>Cairn</strong> India employees. The effective date of <strong>Cairn</strong> India’s liability to<br />
Fr<strong>in</strong>ge Benefits Tax was 1 April <strong>2007</strong>.<br />
The average number of full-time equivalent employees, <strong>in</strong>clud<strong>in</strong>g executive directors and <strong>in</strong>dividuals employed by the Group<br />
work<strong>in</strong>g on Jo<strong>in</strong>t Venture operations, was:<br />
Number of employees<br />
<strong>2007</strong> 2006<br />
Uk 86 110<br />
India 464 431<br />
Bangladesh 97 83<br />
––––––––––– –––––––––––<br />
Group 647 624<br />
––––––––––– –––––––––––<br />
The Group operates a number of share-based schemes for the benefit of its employees.<br />
<strong>Cairn</strong> Group and Company<br />
No difference <strong>in</strong> the schemes below apply for Group and Company other than charges for these schemes that are made to<br />
<strong>Cairn</strong> India and the <strong>Cairn</strong> Bangladesh companies where their staff are members of these schemes.<br />
Share options<br />
Pre-2006 Plans<br />
Under the 1996 Second Share Option Scheme (the ‘1996 Scheme’), at 1 January <strong>2007</strong>, certa<strong>in</strong> executive directors and<br />
employees had been granted options to subscribe for ord<strong>in</strong>ary shares which are exercisable between 2003 and 2012, at prices<br />
between £1.950 and £2.675. At 31 December <strong>2007</strong>, there were 19,000 options outstand<strong>in</strong>g (2006: 60,500 options outstand<strong>in</strong>g)<br />
with a weighted average rema<strong>in</strong><strong>in</strong>g contractual life of 3.85 years (2006: 4.97 years) (options exercised <strong>in</strong> <strong>2007</strong>: 41,500;<br />
2006: 96,100). All awards under the 1996 scheme were granted prior to 7 November 2002.<br />
Under the 2002 Unapproved Share Option Plan (the ‘2002 Plan’), at 1 January <strong>2007</strong>, certa<strong>in</strong> executive directors and<br />
employees had been granted options to subscribe for ord<strong>in</strong>ary shares which are exercisable between 2006 and 2016,<br />
at prices between £3.055 and £21.530. At 31 December <strong>2007</strong>, there were 961,003 options outstand<strong>in</strong>g (2006: 1,548,584<br />
options outstand<strong>in</strong>g) with a weighted average rema<strong>in</strong><strong>in</strong>g contractual life of 7.94 years (2006: 8.51 years) (options exercised<br />
<strong>in</strong> <strong>2007</strong>: 443,431; 2006: 225,382).<br />
The options outstand<strong>in</strong>g at the end of the year under the 2002 Plan can be broken down <strong>in</strong>to the follow<strong>in</strong>g weighted average<br />
exercise price (WAEP) variants:<br />
<strong>2007</strong> 2006<br />
Exercisable between Number WAEP (£) Number WAEP (£)<br />
2006–2013 15,000 3.06 64,550 3.06<br />
<strong>2007</strong>–2014 50,439 8.74 359,659 8.74<br />
<strong>2007</strong>–2015 313,684 11.52 416,226 11.56<br />
2009–2016 581,880 21.53 708,149 21.53<br />
––––––––––– –––––––––––<br />
961,003 1,548,584<br />
––––––––––– –––––––––––
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Under the 2003 Approved Share Option Plan (the ‘2003 Plan’), at 1 January <strong>2007</strong>, certa<strong>in</strong> executive directors and employees<br />
had been granted options to subscribe for ord<strong>in</strong>ary shares which are exercisable between 2006 and 2016, at prices between<br />
£3.095 and £21.530. At 31 December <strong>2007</strong>, there were 77,809 options outstand<strong>in</strong>g (2006: 196,399 options outstand<strong>in</strong>g) with a<br />
weighted average rema<strong>in</strong><strong>in</strong>g contractual life of 7.26 years (2006: 7.76 years) (options exercised <strong>in</strong> <strong>2007</strong>: 104,829; 2006: 198,889).<br />
The options outstand<strong>in</strong>g at the end of the year under the 2003 Plan can be broken down <strong>in</strong>to the follow<strong>in</strong>g WAEP variants:<br />
<strong>2007</strong> 2006<br />
Exercisable between Number WAEP (£) Number WAEP (£)<br />
2006–2013 10,250 3.10 46,500 3.10<br />
<strong>2007</strong>–2014 8,699 8.74 52,385 8.74<br />
<strong>2007</strong>–2015 38,578 11.52 67,479 11.66<br />
2009–2016 20,282 21.53 30,035 21.53<br />
––––––––––– –––––––––––<br />
77,809 196,399<br />
––––––––––– –––––––––––<br />
The above share option schemes are subject to performance conditions on exercise. The option holder may only exercise<br />
options if <strong>Cairn</strong>’s share price has <strong>in</strong>creased by 5% on a compound basis over the period from the date of grant of options up to<br />
the date they are exercised. In addition, the percentage <strong>in</strong>crease <strong>in</strong> <strong>Cairn</strong>’s share price over the period must be at least equal to<br />
or greater than the percentage movement <strong>in</strong> the FTSE Oil and Gas Index.<br />
The follow<strong>in</strong>g table details the number and WAEP of share options for the various <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> share option schemes at the<br />
Balance Sheet date:<br />
1996 Scheme 2002 Plan 2003 Plan<br />
Number WAEP (£) Number WAEP (£) Number WAEP (£)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year 60,500 2.55 1,548,584 15.11 196,399 10.36<br />
Lapsed dur<strong>in</strong>g the year – – (144,150) 18.54 (13,761) 17.85<br />
Exercised dur<strong>in</strong>g the year (41,500) 2.59 (443,431) 9.24 (104,829) 7.64<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 19,000 2.48 961,003 17.30 77,809 12.71<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Exercisable at the end of the year 19,000 65,439 18,949<br />
There were no options granted <strong>in</strong> the year.<br />
The follow<strong>in</strong>g table details the number and WAEP of share options for the various share option schemes as at 31 December 2006:<br />
1996 Scheme 2002 Plan 2003 Plan<br />
Number WAEP (£) Number WAEP (£) Number WAEP (£)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year 161,600 2.54 1,144,872 8.58 380,766 5.76<br />
Granted dur<strong>in</strong>g the year – – 723,287 21.53 31,429 21.53<br />
Lapsed dur<strong>in</strong>g the year (5,000) 2.68 (94,193) 11.92 (16,907) 11.28<br />
Exercised dur<strong>in</strong>g the year (96,100) 2.52 (225,382) 3.88 (198,889) 3.24<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 60,500 2.55 1,548,584 15.11 196,399 10.36<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Exercisable at the end of the year 60,500 125,725 50,211<br />
Weighted average fair value of options<br />
granted <strong>in</strong> year – £8.70 £8.70<br />
<strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> share options were exercised on a regular basis throughout the year. The weighted average share price dur<strong>in</strong>g<br />
the year was £18.88 (2006: £20.19).<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 93
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
7. Staff Costs (cont<strong>in</strong>ued)<br />
The <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> share options have been valued us<strong>in</strong>g a b<strong>in</strong>omial model. The ma<strong>in</strong> <strong>in</strong>puts to the model <strong>in</strong>clude the<br />
number of options, share price, leaver rate, trigger po<strong>in</strong>ts, discount rate and volatility.<br />
•<br />
•<br />
•<br />
•<br />
Leaver rate assumptions are based on past history of employees leav<strong>in</strong>g the Company prior to options vest<strong>in</strong>g and are<br />
revised to equal the number of options that ultimately vest.<br />
Trigger po<strong>in</strong>ts are the profit po<strong>in</strong>ts at which the relevant percentage of employees are assumed to exercise their options.<br />
The risk free rate is based on the yield on a zero coupon Government bond with a term equal to the expected term on the<br />
option be<strong>in</strong>g valued.<br />
Volatility was determ<strong>in</strong>ed as the annualised standard deviation of the cont<strong>in</strong>uously compounded rates of return on the<br />
shares of a peer group of similar companies selected from the FTSE as disclosed <strong>in</strong> the Directors’ Remuneration <strong>Report</strong> on<br />
pages 57 to 68 over a ten-year period to the date of award.<br />
94 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
2002 Plan 2003 Plan<br />
Vest<strong>in</strong>g % 85.74% – 89.48% 85.74% – 88.34%<br />
Trigger po<strong>in</strong>ts 25% profit – 15% 25% profit – 15%<br />
50% profit – 25% 50% profit – 25%<br />
75% profit – 25% 75% profit – 25%<br />
100% profit – 15% 100% profit – 15%<br />
125% profit – 10% 125% profit – 10%<br />
No trigger – 10% No trigger – 10%<br />
Risk free rate 4.0% – 4.8% 4.0% – 4.8%<br />
Volatility 40.24% 40.24%<br />
2006 Plan<br />
Under the 2006 Share Option Plan (the ‘2006 Plan’), certa<strong>in</strong> executive directors and employees had been granted ‘phantom<br />
options’ (which are equity settled) over ‘units’ <strong>in</strong> the Group. On the exercise of an option, participants will generally become<br />
entitled to such number of <strong>Cairn</strong> shares as have a market value equal to the notional ga<strong>in</strong> that they realise, be<strong>in</strong>g the difference<br />
between the ‘notional exercise price’ attributable to their option and the price of the units <strong>in</strong> respect of which their option has<br />
been exercised. However, the extent to which options become exercisable is dependent on cont<strong>in</strong>ued employment with the<br />
Group and the extent to which predeterm<strong>in</strong>ed performance conditions are met over a three-year period.<br />
The follow<strong>in</strong>g table details the number and notional exercise price of share options issued under the 2006 Plan at the Balance<br />
Sheet date:<br />
Notional<br />
exercise<br />
Number price (£)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year – –<br />
Granted dur<strong>in</strong>g the year 3,998,172 1.07<br />
Lapsed dur<strong>in</strong>g the year (218,692) 1.07<br />
Exercised dur<strong>in</strong>g the year – –<br />
––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 3,779,480 1.07<br />
––––––––––– –––––––––––<br />
Exercisable at the end of the year –<br />
Weighted average fair value of options granted <strong>in</strong> year £0.18<br />
Weighted average rema<strong>in</strong><strong>in</strong>g contractual life of outstand<strong>in</strong>g options 9.24 years<br />
The fair value of the awards has been calculated us<strong>in</strong>g a b<strong>in</strong>omial model. The ma<strong>in</strong> <strong>in</strong>puts to the model are as per the 2002 and<br />
2003 Plans detailed above. For details on the vest<strong>in</strong>g conditions attached to the 2006 Plan refer to the Directors’ Remuneration<br />
<strong>Report</strong> on pages 58 to 63.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
2006 Plan<br />
Vest<strong>in</strong>g % 28.01%<br />
Trigger po<strong>in</strong>ts 25% profit – 15%<br />
50% profit – 25%<br />
75% profit – 25%<br />
100% profit – 15%<br />
125% profit – 10%<br />
No trigger – 10%<br />
Risk free rate 4.9%<br />
Volatility 63%<br />
Lapse due to withdrawals 5% p.a.<br />
LTIP<br />
The fair value of both the 2002 and 2006 LTIP scheme awards has been calculated us<strong>in</strong>g a b<strong>in</strong>omial model. The ma<strong>in</strong> <strong>in</strong>puts to<br />
the model are as per the share options schemes above. For details on the vest<strong>in</strong>g conditions attached to the LTIP refer to the<br />
Directors’ Remuneration <strong>Report</strong> on pages 58 to 63.<br />
2002 LTIP<br />
At 31 December <strong>2007</strong>, there were 916,600 options outstand<strong>in</strong>g with a weighted average rema<strong>in</strong><strong>in</strong>g contractual life of 0.67<br />
years.<br />
The awards exist<strong>in</strong>g under the LTIP are detailed <strong>in</strong> the table below together with the weighted average grant price (WAGP) at<br />
the Balance Sheet date:<br />
Number WAGP (£)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year 1,484,200 13.45<br />
Vested dur<strong>in</strong>g the year (123,600) 8.74<br />
Lapsed dur<strong>in</strong>g the year (444,000) 10.21<br />
––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 916,600 15.84<br />
––––––––––– –––––––––––<br />
The awards outstand<strong>in</strong>g at the end of the year can be broken down <strong>in</strong>to the follow<strong>in</strong>g WAGP variants:<br />
<strong>2007</strong> 2006<br />
Vest<strong>in</strong>g Number WAGP (£) Number WAGP (£)<br />
<strong>2007</strong> – – 500,000 8.74<br />
2008 610,600 11.76 645,700 11.57<br />
2009 306,000 23.99 338,500 23.99<br />
––––––––––– –––––––––––<br />
916,600 1,484,200<br />
––––––––––– –––––––––––<br />
There were no options granted <strong>in</strong> the year.<br />
At 31 December 2006, there were 1,484,200 options outstand<strong>in</strong>g with a weighted average rema<strong>in</strong><strong>in</strong>g contractual life of<br />
1.17 years.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 95
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
7. Staff Costs (cont<strong>in</strong>ued)<br />
The awards exist<strong>in</strong>g under the LTIP are detailed <strong>in</strong> the table below together with the WAGP at 31 December 2006.<br />
96 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Number WAGP (£)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year 2,697,500 6.61<br />
Vested dur<strong>in</strong>g the year (1,379,518) 3.08<br />
Granted dur<strong>in</strong>g the year 397,300 23.99<br />
Lapsed dur<strong>in</strong>g the year (231,082) 13.67<br />
––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 1,484,200 13.45<br />
––––––––––– –––––––––––<br />
The weighted average fair value of options granted <strong>in</strong> the year was £5.97.<br />
The fair value of the awards under the 2002 LTIP is based on an <strong>in</strong>dependent valuation us<strong>in</strong>g the follow<strong>in</strong>g assumptions:<br />
Tier 1 Tier 2<br />
Vest<strong>in</strong>g % 25.03% 19.03%<br />
Volatility 41.37% 41.37%<br />
Risk free rate 4.6% 4.6%<br />
The discount rate used has been set as the yield on a zero coupon Government bond with a term equal to the expected term<br />
on the option be<strong>in</strong>g valued (allow<strong>in</strong>g for expected early redemption of the option).<br />
2006 LTIP<br />
Under the 2006 LTIP, certa<strong>in</strong> executive directors had been granted ‘phantom options’ (which are equity settled) over ‘units’ <strong>in</strong><br />
the Group. Follow<strong>in</strong>g the vest<strong>in</strong>g of an award, participants will generally become entitled to such number of <strong>Cairn</strong> shares<br />
as have a market value equal to the aggregate price of the vested units. Only 50% of these shares will be transferred to the<br />
participant immediately. The rema<strong>in</strong><strong>in</strong>g 50% will be held for a further year.<br />
The awards exist<strong>in</strong>g at the Balance Sheet date are detailed <strong>in</strong> the table below.<br />
Capricorn Units <strong>Cairn</strong> India Units<br />
Notional Notional<br />
exercise exercise<br />
Number price (£) Number price (£)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year – – – –<br />
Granted dur<strong>in</strong>g the year 7,090,655 1.07 2,044,374 1.86<br />
Lapsed dur<strong>in</strong>g the year (373,832) 1.07 – –<br />
Exercised dur<strong>in</strong>g the year – – – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 6,716,823 1.07 2,044,374 1.86<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Exercisable at the end of the year – –<br />
Weighted average fair value of options granted <strong>in</strong> year £0.39 £0.61<br />
Weighted average rema<strong>in</strong><strong>in</strong>g contractual life of outstand<strong>in</strong>g options 2.25 years 2.25 years<br />
The fair value of the awards under the 2006 LTIP is based on an <strong>in</strong>dependent valuation us<strong>in</strong>g the follow<strong>in</strong>g assumptions:<br />
Capricorn Units <strong>Cairn</strong> India Units<br />
Vest<strong>in</strong>g % 36.83% 32.97%<br />
Volatility % 63% 42%<br />
Risk free rate 4.9% p.a. 4.9% p.a.<br />
Lapse due to withdrawals nil nil
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Employee Share-Related Bonuses<br />
<strong>Cairn</strong> granted benefits to certa<strong>in</strong> employees whereby they receive a cash sum that is calculated by reference to the improvement<br />
<strong>in</strong> share price from the date of grant of the award. At 31 December <strong>2007</strong>, there were no outstand<strong>in</strong>g balances <strong>in</strong> respect of such<br />
awards (2006: $92,000 disclosed <strong>in</strong> ‘Other creditors and accruals’ with<strong>in</strong> trade and other payables).<br />
<strong>Cairn</strong> India Limited<br />
<strong>Cairn</strong> India Senior Management Plan<br />
The <strong>Cairn</strong> India Senior Management Plan (CISMP) was adopted by the company <strong>in</strong> November 2006. This is a discretionary<br />
arrangement that allowed the company to grant pre IPO options over its shares to a limited number of its key senior<br />
management team. Follow<strong>in</strong>g the completion of the company’s flotation, no further options will be granted pursuant to this<br />
arrangement.<br />
The vest<strong>in</strong>g conditions for options granted under the CISMP are the successful completion of <strong>Cairn</strong> India’s flotation, the<br />
cont<strong>in</strong>ued employment of the relevant participant with<strong>in</strong> the <strong>Cairn</strong> India Group over a specified period of time and the<br />
achievement of certa<strong>in</strong> specified performance targets relat<strong>in</strong>g to the Rajasthan development. Option exercises will be<br />
settled by an allotment of shares <strong>in</strong> <strong>Cairn</strong> India to the relevant <strong>in</strong>dividual.<br />
The options granted under the CISMP are exercisable between 9 January <strong>2007</strong> and 1 April 2010, at Rs.33.70. At 31 December<br />
<strong>2007</strong>, there were 7,506,473 options outstand<strong>in</strong>g (2006: 8,298,713 options outstand<strong>in</strong>g) with a weighted average rema<strong>in</strong><strong>in</strong>g<br />
contractual life of 1.93 years (2006: 3.01 years).<br />
The follow<strong>in</strong>g table details the number and WAEP of share options for the CISMP:<br />
<strong>2007</strong> 2006<br />
Number WAEP (Rs.) Number WAEP (Rs.)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year 8,298,713 33.70 – –<br />
Granted dur<strong>in</strong>g the year – – 8,298,713 33.70<br />
Lapsed dur<strong>in</strong>g the year (792,240) 33.70 – –<br />
Exercised dur<strong>in</strong>g the year – – – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 7,506,473 33.70 8,298,713 33.70<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Exercisable at the end of the year 3,030,318 –<br />
Weighted average fair value of options granted <strong>in</strong> year – Rs.131.19<br />
No CISMP options were exercised dur<strong>in</strong>g the year; consequently there is no weighted average share price.<br />
The CISMP options have been valued us<strong>in</strong>g the Black–Scholes model. The ma<strong>in</strong> <strong>in</strong>puts to the model <strong>in</strong>clude the number of<br />
options, share price, trigger po<strong>in</strong>ts, discount rate, expected life of the options and volatility. Volatility was determ<strong>in</strong>ed as the<br />
annualised standard deviation of the cont<strong>in</strong>uously compounded rates of return on the shares over a period of time.<br />
The fair value of the options is based on an <strong>in</strong>dependent valuation us<strong>in</strong>g the follow<strong>in</strong>g assumptions:<br />
9 January 9 July 31 December 1 April<br />
Vest<strong>in</strong>g Date <strong>2007</strong> 2008 2009 2010<br />
Vest<strong>in</strong>g % 33.33%-50% 25%-33.33% 25% 33.33%<br />
Volatility 45.99% 41.49% 39.67% 39.67%<br />
Risk free rate 6.82% 7.22% 7.44% 7.46%<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 97
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
7. Staff Costs (cont<strong>in</strong>ued)<br />
<strong>Cairn</strong> India Employee Stock Option Plan (2006)<br />
The <strong>Cairn</strong> India Employee Stock Option Plan (2006) (‘CIESOP’), which was adopted by <strong>Cairn</strong> India <strong>in</strong> November 2006,<br />
is a discretionary arrangement that allows the company to grant options over its shares to selected employees and<br />
executive directors.<br />
Under the plan, <strong>Cairn</strong> India will grant options equivalent to 88,265,718 equity shares (when aggregated with the number of<br />
options to be granted pursuant to the <strong>Cairn</strong> India Performance Option Plan (2006) (‘CIPOP’) of the face value of Rs.10 each at<br />
an exercise price that will be determ<strong>in</strong>ed by the Remuneration Committee, but not less than the fair market value of the equity<br />
shares on the date of grant to each of the eligible employees of <strong>Cairn</strong> India.<br />
Options will generally vest on the third anniversary of grant, subject to the <strong>in</strong>dividuals rema<strong>in</strong><strong>in</strong>g <strong>in</strong> employment. In accordance<br />
with generally prevail<strong>in</strong>g practice <strong>in</strong> India, the ability to exercise these options will not be subject to the satisfaction of any<br />
additional performance conditions. Option exercises will be settled by an allotment of shares to the relevant <strong>in</strong>dividual.<br />
The follow<strong>in</strong>g table details the number and WAEP of share options issued under the CIESOP at the Balance Sheet date:<br />
98 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Number WAEP (Rs.)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year – –<br />
Granted dur<strong>in</strong>g the year 8,982,755 164.27<br />
Lapsed dur<strong>in</strong>g the year (437,045) 160.00<br />
Exercised dur<strong>in</strong>g the year – –<br />
––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 8,545,710 164.49<br />
––––––––––– –––––––––––<br />
Exercisable at the end of the year –<br />
Weighted average fair value of options granted <strong>in</strong> year Rs.89.4<br />
Weighted average rema<strong>in</strong><strong>in</strong>g contractual life of outstand<strong>in</strong>g options 9.47 years<br />
The CIESOP options have been valued us<strong>in</strong>g the Black–Scholes model. The ma<strong>in</strong> <strong>in</strong>puts to the model are as per the CISMP<br />
above.<br />
The fair value of the options is based on an <strong>in</strong>dependent valuation us<strong>in</strong>g the follow<strong>in</strong>g assumptions:<br />
1 January 20 September<br />
Vest<strong>in</strong>g Date 2010 2010<br />
Vest<strong>in</strong>g % 100% 100%<br />
Volatility 41.04% 36.40%<br />
Risk free rate 7.50% 7.23%<br />
<strong>Cairn</strong> India Performance Option Plan (2006)<br />
The CIPOP was adopted by <strong>Cairn</strong> India <strong>in</strong> November 2006, and is a discretionary arrangement that allows the company to grant<br />
options over its shares to selected employees and executive directors.<br />
Under the plan, <strong>Cairn</strong> India will grant options equivalent to 88,265,718 equity shares (when aggregated with the number of<br />
options to be granted pursuant to the CIESOP) of the face value of Rs.10 each at an exercise price of Rs.10 each to each of the<br />
eligible employees of <strong>Cairn</strong> India.<br />
The vest<strong>in</strong>g of these options will generally be dependent on both cont<strong>in</strong>ued employment and the extent to which<br />
predeterm<strong>in</strong>ed performance conditions are met over a specified period of at least three years. Initially, the performance<br />
condition attached to options granted pursuant to the CIPOP will be based on the TSR of <strong>Cairn</strong> India compared to the TSR of a<br />
group of exploration, production and <strong>in</strong>tegrated oil companies.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
The follow<strong>in</strong>g table details the number and WAEP of share options issued under the CIPOP at the Balance Sheet date.<br />
Number WAEP (Rs.)<br />
Outstand<strong>in</strong>g at the beg<strong>in</strong>n<strong>in</strong>g of the year – –<br />
Granted dur<strong>in</strong>g the year 4,943,389 164.55<br />
Lapsed dur<strong>in</strong>g the year (188,145) 160.00<br />
Exercised dur<strong>in</strong>g the year – –<br />
––––––––––– –––––––––––<br />
Outstand<strong>in</strong>g at the end of the year 4,755,244 164.73<br />
––––––––––– –––––––––––<br />
Exercisable at the end of the year –<br />
Weighted average fair value of options granted <strong>in</strong> year Rs.156.58<br />
Weighted average rema<strong>in</strong><strong>in</strong>g contractual life of outstand<strong>in</strong>g options 9.49 years<br />
The CIPOP options have been valued us<strong>in</strong>g the Black–Scholes model. The ma<strong>in</strong> <strong>in</strong>puts to the model are as per the CISMP above.<br />
The fair value of the options is based on an <strong>in</strong>dependent valuation us<strong>in</strong>g the follow<strong>in</strong>g assumptions:<br />
1 January 20 September<br />
Vest<strong>in</strong>g date 2010 2010<br />
Vest<strong>in</strong>g % 100% 100%<br />
Volatility 41.61% 40.24%<br />
Risk free rate 7.33% 7.65%<br />
8. Directors’ Emoluments<br />
Details of each director’s remuneration, pension entitlements, share options and awards pursuant to the LTIP are set out <strong>in</strong> the<br />
Directors’ Remuneration <strong>Report</strong> on pages 57 to 68. Directors’ emoluments are <strong>in</strong>cluded with<strong>in</strong> remuneration of key management<br />
personnel disclosures <strong>in</strong> Note 36.<br />
9. F<strong>in</strong>ance Income<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Bank <strong>in</strong>terest 47,396 3,838<br />
Other <strong>in</strong>terest 17,780 765<br />
––––––––––– –––––––––––<br />
10. F<strong>in</strong>ance Costs<br />
65,176 4,603<br />
––––––––––– –––––––––––<br />
2006<br />
<strong>2007</strong> (Restated)<br />
$’000 $’000<br />
Bank loan and overdraft <strong>in</strong>terest 7,318 6,649<br />
Other f<strong>in</strong>ance charges 8,873 4,727<br />
––––––––––– –––––––––––<br />
16,191 11,376<br />
Less: borrow<strong>in</strong>g costs capitalised (13,868) (4,625)<br />
––––––––––– –––––––––––<br />
2,323 6,751<br />
Other f<strong>in</strong>ance costs – unw<strong>in</strong>d<strong>in</strong>g of discount 1,687 1,183<br />
– fair value movement on currency exchange options 3,254 9,694<br />
Exchange loss 23,075 14,247<br />
––––––––––– –––––––––––<br />
30,339 31,875<br />
––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 99
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
10. F<strong>in</strong>ance Costs (cont<strong>in</strong>ued)<br />
Under Uk tax law, borrow<strong>in</strong>g costs which are capitalised <strong>in</strong> the accounts will generally be deductible expenses for tax <strong>in</strong> the<br />
period <strong>in</strong> which they are capitalised. Under Indian tax law, capitalised costs must be apportioned between property, plant and<br />
equipment and <strong>in</strong>tangible assets based on the nature of the assets which were funded by the borrow<strong>in</strong>g. To the extent that the<br />
borrow<strong>in</strong>g costs relate to property, plant and equipment, they will be deductible for tax accord<strong>in</strong>g to the normal tax depreciation<br />
rules. Borrow<strong>in</strong>g costs relat<strong>in</strong>g to <strong>in</strong>tangibles will be a deductible expense, for Indian tax purposes, <strong>in</strong> the period <strong>in</strong> which they<br />
are capitalised.<br />
11. Taxation on Profit/(Loss)<br />
(a) Analysis of tax charge <strong>in</strong> year<br />
100 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
2006<br />
<strong>2007</strong> (Restated)<br />
Note $’000 $’000<br />
Current tax:<br />
Uk corporation tax<br />
Adjustments <strong>in</strong> respect of prior periods (7,589) (1)<br />
––––––––––– –––––––––––<br />
Foreign tax<br />
Indian M<strong>in</strong>imum Alternate Tax on profits for the year at 10.53% (2006: 9.80%) 8,978 8,273<br />
Adjustments <strong>in</strong> respect of prior periods 1,580 –<br />
Withhold<strong>in</strong>g taxes deducted at source 302 1,388<br />
––––––––––– –––––––––––<br />
10,860 9,661<br />
––––––––––– –––––––––––<br />
Total current tax 3,271 9,660<br />
––––––––––– –––––––––––<br />
Deferred tax:<br />
United K<strong>in</strong>gdom<br />
Temporary differences <strong>in</strong> respect of non-current assets (1,571) (23,536)<br />
Losses (4,594) –<br />
Other temporary differences (171) (344)<br />
––––––––––– –––––––––––<br />
(6,336)<br />
–––––––––––<br />
(23,880)<br />
–––––––––––<br />
India<br />
Temporary differences <strong>in</strong> respect of non-current assets 25,820 20,282<br />
Losses 2,698 (178)<br />
Other temporary differences (62)<br />
–––––––––––<br />
(604)<br />
–––––––––––<br />
28,456 19,500<br />
––––––––––– –––––––––––<br />
Total deferred tax 23 22,120 (4,380)<br />
––––––––––– –––––––––––<br />
Tax charge on profit/(loss) 25,391 5,280<br />
––––––––––– –––––––––––
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
(b) Factors affect<strong>in</strong>g tax charge for year<br />
A reconciliation of <strong>in</strong>come tax expense applicable to profit/(loss) before <strong>in</strong>come tax at the applicable tax rate to <strong>in</strong>come tax<br />
expense at the Group’s effective <strong>in</strong>come tax rate is as follows:<br />
2006<br />
<strong>2007</strong> (Restated)<br />
$’000 $’000<br />
Profit/(loss) before taxation 1,553,236 (91,842)<br />
––––––––––– –––––––––––<br />
Tax at the weighted average rate of corporation tax of 29.66% (2006 (Restated): 36.59%) 460,690 (33,605)<br />
Effects of:<br />
M<strong>in</strong>imum Alternate Tax payable 8,978 4,506<br />
Adjustments <strong>in</strong> respect of prior periods – current tax (6,009) (1)<br />
– deferred tax (5,469) (4,084)<br />
Temporary differences not recognised 27,285 29,056<br />
Non-taxable ga<strong>in</strong> on deemed disposal of subsidiaries (466,287) –<br />
Non-deductible expenses and non-taxable <strong>in</strong>come (3,316) 7,421<br />
Withhold<strong>in</strong>g tax 302 1,388<br />
Foreign exchange movements 8,879 1,419<br />
Other 338 (820)<br />
––––––––––– –––––––––––<br />
Total tax charge 25,391 5,280<br />
––––––––––– –––––––––––<br />
The applicable tax rate was the weighted average rate for the year of the Uk, Netherlands, Australian, Indian, Jersey and<br />
Bangladesh tax rates. There have been no major changes <strong>in</strong> the statutory tax rates apply<strong>in</strong>g <strong>in</strong> each of these jurisdictions;<br />
however, the weighted average rate is subject to fluctuations from year to year based on the level of profits and losses which<br />
arise to the Group <strong>in</strong> each jurisdiction.<br />
(c) Factors that may affect future corporation tax charges<br />
At 31 December <strong>2007</strong>, <strong>Cairn</strong> had losses of approximately $261.9m (2006: $167.4m) available for offset aga<strong>in</strong>st future trad<strong>in</strong>g<br />
profits chargeable to Uk Corporation Tax. In addition there are surplus management expenses of $134.4m (2006: $54.0m) and<br />
non-trade deficits of $14.4m (2006: $26.7m) available for offset aga<strong>in</strong>st future <strong>in</strong>vestment <strong>in</strong>come. There were no capital losses<br />
at 31 December <strong>2007</strong> (2006: $24.3m) available to offset future capital ga<strong>in</strong>s aris<strong>in</strong>g <strong>in</strong> the Uk. The capital losses are no longer<br />
carried forward with<strong>in</strong> the Group follow<strong>in</strong>g the disposal of <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited. None of the trad<strong>in</strong>g losses, surplus<br />
management expenses or non-trade deficits have been recognised for deferred tax as there is no reasonable certa<strong>in</strong>ty that they<br />
will be used. Under Uk tax law, tax losses may generally be carried forward <strong>in</strong>def<strong>in</strong>itely.<br />
At 31 December <strong>2007</strong>, <strong>Cairn</strong> had losses of approximately $14.7m (2006: $14.7m) available for offset aga<strong>in</strong>st future trad<strong>in</strong>g<br />
profits chargeable to Netherlands Corporate Income Tax, but there are restrictions on the use of these losses. Under<br />
Netherlands tax law, losses may be carried forward for a period of up to n<strong>in</strong>e years. No deferred tax asset has been<br />
recognised <strong>in</strong> respect of these losses.<br />
At 31 December <strong>2007</strong>, <strong>Cairn</strong> had losses of approximately $373.6m (2006: $274.6m) available for offset aga<strong>in</strong>st future trad<strong>in</strong>g<br />
profits chargeable to Indian Corporate Income Tax. Under Indian tax laws, losses may be carried forward for a period of up to<br />
eight years. These losses have not been recognised for deferred tax purposes as it is not sufficiently certa<strong>in</strong> that they will be<br />
utilised aga<strong>in</strong>st future trad<strong>in</strong>g profits chargeable to Indian tax. $341.7m (2006: $269.3m) of the loss has not been recognised as<br />
it is expected that these losses will expire dur<strong>in</strong>g the period of an Indian tax holiday. The rema<strong>in</strong><strong>in</strong>g $31.9m (2006: nil) of the loss<br />
has not been recognised due to expectations regard<strong>in</strong>g the level of <strong>in</strong>come <strong>in</strong> the entity concerned.<br />
Tax losses <strong>in</strong>curred <strong>in</strong> one jurisdiction cannot usually be offset aga<strong>in</strong>st profits or ga<strong>in</strong>s aris<strong>in</strong>g <strong>in</strong> another jurisdiction.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 101
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
12. Earn<strong>in</strong>gs per Ord<strong>in</strong>ary Share<br />
The earn<strong>in</strong>gs per ord<strong>in</strong>ary share are calculated on a profit of $1,519,653,000 (2006 (restated): loss $97,122,000) and on a<br />
weighted average of 135,637,411 ord<strong>in</strong>ary shares (2006: 157,654,751). The weighted average of ord<strong>in</strong>ary shares excludes shares<br />
held by the <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Employees’ Share Trust. No retrospective adjustment was made to the weighted average number<br />
of shares, relat<strong>in</strong>g to the share consolidation of 23 March <strong>2007</strong>, as there was a correspond<strong>in</strong>g change <strong>in</strong> resources <strong>in</strong> the form of<br />
the return of cash to shareholders (see Notes 27 and 29).<br />
The diluted earn<strong>in</strong>gs per ord<strong>in</strong>ary share are calculated on a profit of $1,519,511,000 and on 135,844,139 ord<strong>in</strong>ary shares.<br />
The profit of $1,519,511,000 reflects the reduced profit attributable to equity holders of the parent after potential <strong>Cairn</strong> India<br />
share option issues. The figure of 135,844,139 ord<strong>in</strong>ary shares is the basic weighted average of 135,637,411 ord<strong>in</strong>ary shares<br />
and the 206,728 dilutive potential ord<strong>in</strong>ary shares relat<strong>in</strong>g to share options.<br />
In respect of 2006, 587,128 potential ord<strong>in</strong>ary shares were anti-dilutive.<br />
13. Intangible Exploration/Appraisal Assets<br />
<strong>Cairn</strong> India Capricorn<br />
Group Group Total<br />
Group $’000 $’000 $’000<br />
Cost<br />
At 1 January 2006 290,437 31,418 321,855<br />
Additions 141,826 19,142 160,968<br />
Transfers between categories (1,566) – (1,566)<br />
Unsuccessful exploration costs (56,650) (5,368) (62,018)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 374,047 45,192 419,239<br />
Acquisition of subsidiaries – 139,505 139,505<br />
Additions 108,628 71,888 180,516<br />
Transfers between categories (11,155) – (11,155)<br />
Disposals – (21,412) (21,412)<br />
Unsuccessful exploration costs (15,347) (25,367) (40,714)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 456,173 209,806 665,979<br />
––––––––––– ––––––––––– –––––––––––<br />
Impairment<br />
At 1 January 2006 and <strong>2007</strong> – – –<br />
Impairment – 58,924 58,924<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> – 58,924 58,924<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December <strong>2007</strong> 456,173 150,882 607,055<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December 2006 374,047 45,192 419,239<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 1 January 2006 290,437 31,418 321,855<br />
––––––––––– ––––––––––– –––––––––––<br />
Dur<strong>in</strong>g the year, <strong>Cairn</strong> booked reserves <strong>in</strong> respect of the Lakshmi Oil field (2006: CB-X). As a consequence $11.2m (2006: $1.6m)<br />
of costs were transferred to property, plant & equipment – development/produc<strong>in</strong>g assets (Note 14).<br />
The acquisition of subsidiaries refers to the acquisition of Plectrum and medOil dur<strong>in</strong>g the year. See Note 3 for further details.<br />
The disposal of assets <strong>in</strong> <strong>2007</strong> relates to the sale of <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited to Santos International Hold<strong>in</strong>gs Pty<br />
Limited. See Note 3 for details.<br />
102 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
All exploration/appraisal assets were reviewed for <strong>in</strong>dicators of impairment at the year end and, where <strong>in</strong>dicators were found,<br />
tested for impairment. Exploration/appraisal costs of $58.9m relat<strong>in</strong>g to Bangladesh and Nepalese assets were subsequently<br />
impaired. See Note 5 for further details of the impairment review. Costs <strong>in</strong> <strong>Cairn</strong> India <strong>in</strong>clude $75m <strong>in</strong> relation to the Northern<br />
Appraisal Area (‘NAA’) <strong>in</strong> Rajasthan. <strong>Cairn</strong> has sought to <strong>in</strong>clude the entire acreage with<strong>in</strong> a development area submitted to the<br />
GoI for approval. Should the GoI approve less than the full NAA, costs relat<strong>in</strong>g to acreage outside the approved development<br />
area would be charged to the Income Statement. Costs relat<strong>in</strong>g to the NAA have been tested for impairment but are supported<br />
by the headroom with<strong>in</strong> the <strong>Cairn</strong> India cash-generat<strong>in</strong>g unit.<br />
14. Property, Plant & Equipment – Development/Produc<strong>in</strong>g Assets<br />
<strong>Cairn</strong> India Capricorn<br />
Group Group Total<br />
Group $’000 $’000 $’000<br />
Cost<br />
At 1 January 2006 417,379 229,187 646,566<br />
Additions 97,975 12,482 110,457<br />
Transfers between categories 1,566 – 1,566<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 516,920 241,669 758,589<br />
Additions 208,085 37,535 245,620<br />
Transfers between categories 11,155 – 11,155<br />
Disposals – (197,663) (197,663)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 736,160 81,541 817,701<br />
––––––––––– ––––––––––– –––––––––––<br />
Depletion and decommission<strong>in</strong>g<br />
At 1 January 2006 130,816 58,821 189,637<br />
Charge for the year 48,516 54,971 103,487<br />
Impairment – 71,455 71,455<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 179,332 185,247 364,579<br />
Charge for the year 62,621 56,373 118,994<br />
Reversal of impairment – (3,718) (3,718)<br />
Disposals – (160,377) (160,377)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 241,953 77,525 319,478<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December <strong>2007</strong> 494,207 4,016 498,223<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December 2006 337,588 56,422 394,010<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 1 January 2006 286,563 170,366 456,929<br />
––––––––––– ––––––––––– –––––––––––<br />
Dur<strong>in</strong>g the year, <strong>Cairn</strong> booked reserves <strong>in</strong> respect of the Lakshmi Oil field (2006: CB-X). As a consequence $11.2m (2006: $1.6m)<br />
of costs were transferred from <strong>in</strong>tangible exploration/appraisal assets (Note 13).<br />
Included with<strong>in</strong> additions dur<strong>in</strong>g the year is an amount of $13.9m of borrow<strong>in</strong>g costs (2006: $4.6m) capitalised at a rate of 17.3%<br />
(2006: 6.3%).<br />
The development assets were reviewed for <strong>in</strong>dicators of impairment at the year end and the carry<strong>in</strong>g value of the assets revised<br />
where <strong>in</strong>dicators of impairment or reversal of prior impairments were found. See Note 5 for further details of the impairment<br />
review.<br />
The disposal of assets <strong>in</strong> <strong>2007</strong> relates to the sale of <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited to Santos International Hold<strong>in</strong>gs Pty<br />
Limited. See Note 3 for details.<br />
The net book value at 31 December <strong>2007</strong> <strong>in</strong>cludes $351.9m (2006: $198.0m) <strong>in</strong> respect of assets under construction which are<br />
not yet subject to depletion.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 103
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
15. Property, Plant & Equipment – Other<br />
Tenants’ Vehicles and<br />
improvements equipment Total<br />
Group $’000 $’000 $’000<br />
Cost<br />
At 1 January 2006 6,636 11,848 18,484<br />
Exchange differences aris<strong>in</strong>g 284 727 1,011<br />
Additions 3,307 1,450 4,757<br />
Disposals (358) (189) (547)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 9,869 13,836 23,705<br />
Exchange differences aris<strong>in</strong>g 35 152 187<br />
Additions 782 2,314 3,096<br />
Disposals – (6,202) (6,202)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 10,686 10,100 20,786<br />
––––––––––– ––––––––––– –––––––––––<br />
Depreciation<br />
At 1 January 2006 3,696 10,630 14,326<br />
Exchange differences aris<strong>in</strong>g 205 667 872<br />
Charge for the year 1,687 1,458 3,145<br />
Disposals (358) (171) (529)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 5,230 12,584 17,814<br />
Exchange differences aris<strong>in</strong>g 27 83 110<br />
Charge for the year 506 1,516 2,022<br />
Disposals – (5,726) (5,726)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 5,763 8,457 14,220<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December <strong>2007</strong> 4,923 1,643 6,566<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December 2006 4,639 1,252 5,891<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 1 January 2006 2,940 1,218 4,158<br />
––––––––––– ––––––––––– –––––––––––<br />
The net book value of assets held under f<strong>in</strong>ance leases or hire purchase contracts at 31 December <strong>2007</strong> was $3.8m<br />
(2006: $4.1m). Additions dur<strong>in</strong>g the year <strong>in</strong>clude $0.3m (2006: $4.8m) of property, plant & equipment – other held under<br />
f<strong>in</strong>ance leases or hire purchase contracts. Leased assets are pledged as security for the related f<strong>in</strong>ance lease or hire<br />
purchase liability.<br />
104 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Tenants’ Vehicles and<br />
improvements equipment Total<br />
Company $’000 $’000 $’000<br />
Cost<br />
At 1 January 2006 2,139 5,025 7,164<br />
Exchange differences aris<strong>in</strong>g 284 721 1,005<br />
Additions 28 747 775<br />
Disposals – (38) (38)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 2,451 6,455 8,906<br />
Exchange differences aris<strong>in</strong>g 35 92 127<br />
Additions 13 347 360<br />
Disposals – (92) (92)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 2,499 6,802 9,301<br />
––––––––––– ––––––––––– –––––––––––<br />
Depreciation<br />
At 1 January 2006 1,461 4,576 6,037<br />
Exchange differences aris<strong>in</strong>g 205 626 831<br />
Charge for the year 214 570 784<br />
Disposals – (37) (37)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 1,880 5,735 7,615<br />
Exchange differences aris<strong>in</strong>g 27 82 109<br />
Charge for the year 101 505 606<br />
Disposals – (23) (23)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 2,008 6,299 8,307<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December <strong>2007</strong> 491 503 994<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December 2006 571 720 1,291<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 1 January 2006 678 449 1,127<br />
––––––––––– ––––––––––– –––––––––––<br />
The Company does not hold assets under f<strong>in</strong>ance leases or hire purchase contracts.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 105
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
16. Intangible Assets – Other<br />
Goodwill<br />
Software<br />
costs Total<br />
Group $’000 $’000 $’000<br />
Cost<br />
At 1 January 2006 – 11,094 11,094<br />
Exchange differences aris<strong>in</strong>g – 617 617<br />
Additions – 7,779 7,779<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> – 19,490 19,490<br />
Exchange differences aris<strong>in</strong>g – 189 189<br />
Additions 13,511 9,263 22,774<br />
Disposals – (4,359) (4,359)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 13,511 24,583 38,094<br />
––––––––––– ––––––––––– –––––––––––<br />
Amortisation<br />
At 1 January 2006 – 8,493 8,493<br />
Exchange differences aris<strong>in</strong>g – 411 411<br />
Charge for the year – 3,862 3,862<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> – 12,766 12,766<br />
Exchange differences aris<strong>in</strong>g – 96 96<br />
Charge for the year – 4,310 4,310<br />
Disposals – (4,354) (4,354)<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> – 12,818 12,818<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December <strong>2007</strong> 13,511 11,765 25,276<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 31 December 2006 – 6,724 6,724<br />
––––––––––– ––––––––––– –––––––––––<br />
Net book value at 1 January 2006 – 2,601 2,601<br />
––––––––––– ––––––––––– –––––––––––<br />
Goodwill relates to the acquisition of Plectrum dur<strong>in</strong>g the year (see Note 3). Goodwill has been tested for impairment at the<br />
balance sheet date aga<strong>in</strong>st the carry<strong>in</strong>g value of the related cash-generat<strong>in</strong>g unit, <strong>in</strong>clud<strong>in</strong>g deferred taxation. No impairment<br />
was identified.<br />
106 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Software costs Total<br />
Company $’000 $’000<br />
Cost<br />
At 1 January 2006 4,543 4,543<br />
Exchange differences aris<strong>in</strong>g 613 613<br />
Additions 1,940 1,940<br />
––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 7,096 7,096<br />
Exchange differences aris<strong>in</strong>g 188 188<br />
Additions 4,033 4,033<br />
Disposals (1,191) (1,191)<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 10,126 10,126<br />
––––––––––– –––––––––––<br />
Amortisation<br />
At 1 January 2006 3,290 3,290<br />
Exchange differences aris<strong>in</strong>g 492 492<br />
Charge for the year 1,584 1,584<br />
––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 5,366 5,366<br />
Exchange differences aris<strong>in</strong>g 95 95<br />
Charge for the year 553 553<br />
Disposals (1,191) (1,191)<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 4,823 4,823<br />
––––––––––– –––––––––––<br />
Net book value at 31 December <strong>2007</strong> 5,303 5,303<br />
––––––––––– –––––––––––<br />
Net book value at 31 December 2006 1,730 1,730<br />
––––––––––– –––––––––––<br />
Net book value at 1 January 2006 1,253 1,253<br />
––––––––––– –––––––––––<br />
17. Available-for-Sale F<strong>in</strong>ancial Assets<br />
<strong>2007</strong><br />
2006<br />
(Restated)<br />
Group $’000 $’000<br />
Listed equity shares 15,905 7,868<br />
––––––––––– –––––––––––<br />
15,905 7,868<br />
––––––––––– –––––––––––<br />
Available-for-sale f<strong>in</strong>ancial assets consist of an <strong>in</strong>vestment <strong>in</strong> the ord<strong>in</strong>ary shares of Videocon Industries Limited, listed <strong>in</strong> India,<br />
which by its nature has no fixed maturity date or coupon rate.<br />
F<strong>in</strong>ancial assets were previously held as unlisted <strong>in</strong>vestments. They have been reclassified <strong>in</strong> the current year and the prior year<br />
value restated. See Note 1(u).<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 107
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
18. Investments<br />
Subsidiary<br />
undertak<strong>in</strong>gs Total<br />
Company $’000 $’000<br />
Cost and net book value<br />
At 1 January 2006 24,829 24,829<br />
Exchange differences aris<strong>in</strong>g 33,564 33,564<br />
Additions 615,629 615,629<br />
Disposals (165,966) (165,966)<br />
––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 508,056 508,056<br />
Exchange differences aris<strong>in</strong>g 1,461 1,461<br />
Additions 273,903 273,903<br />
Disposals (128,869) (128,869)<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 654,551 654,551<br />
––––––––––– –––––––––––<br />
Dur<strong>in</strong>g 2006, the Company acquired various <strong>in</strong>vestments <strong>in</strong> subsidiaries from <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited as settlement of<br />
a capital reduction by that company. Two further subsidiaries, <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited and Capricorn (orig<strong>in</strong>ally <strong>in</strong>corporated<br />
as <strong>Cairn</strong> Resources Limited) were <strong>in</strong>corporated dur<strong>in</strong>g 2006, and the <strong>in</strong>vestments transferred to these companies through share<br />
for share exchanges. In addition, <strong>in</strong>ter-company loan balances due to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> from both <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited<br />
and Capricorn were settled by an equity issue from the subsidiaries.<br />
Disposals <strong>in</strong> 2006 represent the elim<strong>in</strong>ation of the Company’s <strong>in</strong>vestment <strong>in</strong> <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited on receipt of a<br />
dividend <strong>in</strong> specie follow<strong>in</strong>g a capital reduction <strong>in</strong> that company.<br />
Included <strong>in</strong> the total consideration for additions <strong>in</strong> 2006 of $615.6m is $63.6m directly settled by means of cash and cash<br />
equivalents.<br />
Additions <strong>in</strong> <strong>2007</strong> represent further <strong>in</strong>vestments <strong>in</strong> Capricorn. Included <strong>in</strong> the total consideration of $273.9m is $233.9m directly<br />
settled by means of cash and cash equivalents.<br />
Disposals dur<strong>in</strong>g <strong>2007</strong> represent a repurchase of share capital by <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited. This was settled <strong>in</strong> full by offsett<strong>in</strong>g<br />
an <strong>in</strong>ter-company loan balance.<br />
Further details on these transactions are conta<strong>in</strong>ed <strong>in</strong> Note 36.<br />
108 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
The Company’s pr<strong>in</strong>cipal subsidiaries as at the Balance Sheet date are set out below.<br />
Country of Country of<br />
Proportion<br />
of vot<strong>in</strong>g<br />
rights and<br />
ord<strong>in</strong>ary<br />
Company Pr<strong>in</strong>cipal activity <strong>in</strong>corporation operation shares<br />
Direct hold<strong>in</strong>gs<br />
Capricorn Hold<strong>in</strong>g company Scotland Scotland 90%<br />
<strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited Hold<strong>in</strong>g company Scotland Scotland 100%<br />
Indirect hold<strong>in</strong>gs – Capricorn Group<br />
<strong>Cairn</strong> <strong>Energy</strong> Sangu Field Limited Exploration & production Scotland Bangladesh 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Exploration (Bangladesh) Limited Exploration Scotland Bangladesh 90%<br />
Holland Sea Search Hold<strong>in</strong>gs NV Hold<strong>in</strong>g company The Netherlands The Netherlands 90%<br />
<strong>Cairn</strong> Exploration (No. 1) Limited Exploration Scotland India 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Search Limited Exploration Scotland India 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Exploration and<br />
Production Company Limited Exploration Scotland India 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Nepal Hold<strong>in</strong>gs Limited Hold<strong>in</strong>g company Scotland Scotland 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Dhangari Limited Exploration Scotland Nepal 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> karnali Limited Exploration Scotland Nepal 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Lumb<strong>in</strong>i Limited Exploration Scotland Nepal 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Malangawa Limited Exploration Scotland Nepal 90%<br />
<strong>Cairn</strong> <strong>Energy</strong> Birganj Limited Exploration Scotland Nepal 90%<br />
Capricorn Petroleum Limited Hold<strong>in</strong>g Company Scotland Scotland 90%<br />
medOil plc* Exploration England & Wales Tunisia/Albania 90%<br />
medOil Resources Limited* Exploration England & Wales England 90%<br />
Capricorn Oil and Gas Limited Hold<strong>in</strong>g Company Scotland Scotland 90%<br />
Plectrum Petroleum Plc* Exploration England & Wales Peru/Australia 90%<br />
Plectrum Oil and Gas Plc* Hold<strong>in</strong>g Company England & Wales Scotland 90%<br />
Plectrum Oil Limited* Exploration England & Wales Scotland 90%<br />
REAP Tunisia GmbH* Exploration Switzerland Tunisia 90%<br />
Indirect hold<strong>in</strong>gs – <strong>Cairn</strong> UK Hold<strong>in</strong>gs Limited Group (<strong>in</strong>clud<strong>in</strong>g <strong>Cairn</strong> India Group)<br />
<strong>Cairn</strong> India Limited Hold<strong>in</strong>g company India India 69%<br />
<strong>Cairn</strong> India Hold<strong>in</strong>gs Limited Hold<strong>in</strong>g company Jersey Jersey 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Hold<strong>in</strong>gs Limited Hold<strong>in</strong>g company Scotland Scotland 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Hydrocarbons Limited Exploration & production Scotland India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Australia Pty Limited Hold<strong>in</strong>g company Australia Australia 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> India Pty Limited Exploration & production Australia India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Netherlands Hold<strong>in</strong>gs BV Hold<strong>in</strong>g company The Netherlands The Netherlands 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Group Hold<strong>in</strong>gs BV Hold<strong>in</strong>g company The Netherlands The Netherlands 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> India Hold<strong>in</strong>gs BV Hold<strong>in</strong>g company The Netherlands The Netherlands 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> India West Hold<strong>in</strong>gs BV Hold<strong>in</strong>g company The Netherlands The Netherlands 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Cambay Hold<strong>in</strong>gs BV Hold<strong>in</strong>g company The Netherlands The Netherlands 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Gujarat Hold<strong>in</strong>gs BV Hold<strong>in</strong>g company The Netherlands The Netherlands 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> India West BV Exploration & production The Netherlands India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Cambay BV Exploration & production The Netherlands India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Gujarat BV Exploration & production The Netherlands India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Discovery Limited Exploration Scotland India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Gujarat Block 1 Limited Exploration Scotland India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Exploration (No. 2) Limited Exploration Scotland India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Exploration (No. 4) Limited Exploration Scotland India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Exploration (No. 6) Limited Exploration Scotland India 69%<br />
<strong>Cairn</strong> <strong>Energy</strong> Exploration (No. 7) Limited Exploration Scotland India 69%<br />
* Subsidiaries acquired as a result of bus<strong>in</strong>ess comb<strong>in</strong>ations <strong>in</strong> <strong>2007</strong>. See Note 3 for further details.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 109
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
18. Investments (cont<strong>in</strong>ued)<br />
On 9 January <strong>2007</strong>, <strong>Cairn</strong> India listed on the Bombay Stock Exchange and the National Stock Exchange of India. As a result<br />
<strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>’s proportion of vot<strong>in</strong>g rights and ord<strong>in</strong>ary sharehold<strong>in</strong>g <strong>in</strong> the company and its subsidiaries reduced to 69.0%.<br />
See Note 6.<br />
On 7 September <strong>2007</strong>, Dyas BV acquired a 10% sharehold<strong>in</strong>g <strong>in</strong> Capricorn. As a result <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>’s proportion of vot<strong>in</strong>g<br />
rights and ord<strong>in</strong>ary sharehold<strong>in</strong>g <strong>in</strong> the company and its subsidiaries reduced to 90%. See Note 6.<br />
On 25 October <strong>2007</strong>, the Group disposed of <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited to Santos International Hold<strong>in</strong>gs Pty Limited for<br />
a consideration of $55.8m. See Note 3.<br />
There is a restriction <strong>in</strong> the ability of some Group companies to distribute profits to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>, the ultimate parent<br />
company, as a result of negative distributable reserves <strong>in</strong> <strong>Cairn</strong> <strong>Energy</strong> Hold<strong>in</strong>gs Limited, an <strong>in</strong>termediate hold<strong>in</strong>g company.<br />
19. Inventory<br />
110 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Group Group Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
$’000 $’000 $’000 $’000<br />
Oil and condensate <strong>in</strong>ventories 7,978 4,615 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
20. Trade and Other Receivables<br />
Group Group Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
$’000 $’000 $’000 $’000<br />
Trade receivables 41,915 62,487 – –<br />
Amounts owed by subsidiary undertak<strong>in</strong>gs – – 50,502 71,782<br />
Other debtors 15,455 5,846 783 8,372<br />
Jo<strong>in</strong>t Venture debtors and prepayments 231,892 97,703 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
289,262 166,036 51,285 80,154<br />
Prepayments 17,741 52,123 376 782<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
307,003 218,159 51,661 80,936<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Included with<strong>in</strong> Group prepayments at 31 December 2006 is an amount of $36.8m relat<strong>in</strong>g to costs of the IPO of <strong>Cairn</strong> India<br />
Limited. All amounts relat<strong>in</strong>g to the IPO were settled dur<strong>in</strong>g <strong>2007</strong>.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Group<br />
As at 31 December, the age<strong>in</strong>g analysis of trade and other receivables, exclud<strong>in</strong>g prepayments, is as set out below:<br />
Total Current < 30 days 30–60 days 60–90 days 90–120 days >120 days<br />
$’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
<strong>2007</strong><br />
Neither past due nor impaired 246,439 246,439 – – – – –<br />
Past due but not impaired 37,847 – 10 47 3,942 256 33,592<br />
Current and impaired 6,655 6,655 – – – – –<br />
Past due and impaired 75,246 – – – 6 12 75,228<br />
Allowance for doubtful debts (76,925) (6,655) – – (6) (12) (70,252)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
As at 31 December <strong>2007</strong> 289,262 246,439 10 47 3,942 256 38,568<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
2006<br />
Neither past due nor impaired 96,432 96,432 – – – – –<br />
Past due but not impaired 63,274 – – – 806 780 61,688<br />
Past due and impaired 68,309 – – – – – 68,309<br />
Allowance for doubtful debts (61,979) – – – – – (61,979)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
As at 31 December 2006 166,036 96,432 – – 806 780 68,018<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
The movement <strong>in</strong> allowance for doubtful debts <strong>in</strong>dividually or collectively impaired is as set out below:<br />
<strong>2007</strong> <strong>2007</strong> 2006 2006<br />
Trade Jo<strong>in</strong>t Venture Trade Jo<strong>in</strong>t Venture<br />
receivables debtors receivables debtors<br />
$’000 $’000 $’000 $’000<br />
As at 1 January 40,169 21,810 19,995 –<br />
Amounts written off dur<strong>in</strong>g year* (8,164) – (1,100) –<br />
Increase <strong>in</strong> allowance capitalised <strong>in</strong> the Balance Sheet – 19,504 – 18,478<br />
Increase <strong>in</strong> allowance recognised <strong>in</strong> the Balance Sheet* – – 20,000 –<br />
Increase <strong>in</strong> allowance recognised <strong>in</strong> Income Statement 2,071 1,535 1,274 3,332<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
As at 31 December 34,076 42,849 40,169 21,810<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
* The movements dur<strong>in</strong>g the period relate to amounts with correspond<strong>in</strong>g balances <strong>in</strong> trade receivables, deferred <strong>in</strong>come or<br />
other creditors <strong>in</strong> the Balance Sheet and therefore do not affect the Income Statement.<br />
In determ<strong>in</strong><strong>in</strong>g the recoverability of a trade or other receivable, the Group carries out a risk analysis based on the type and age<br />
of the outstand<strong>in</strong>g receivable.<br />
Included <strong>in</strong> the allowance for doubtful debts are <strong>in</strong>dividually impaired Jo<strong>in</strong>t Venture debtors with a balance of $42.9m<br />
(2006: $21.8m). These predom<strong>in</strong>antly relate to outstand<strong>in</strong>g Rajasthan cash calls which are currently be<strong>in</strong>g pursued by<br />
<strong>Cairn</strong> India management.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 111
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
20. Trade and Other Receivables (cont<strong>in</strong>ued)<br />
Company<br />
As at 31 December, the age<strong>in</strong>g analysis of trade and other receivables not impaired is as set out below.<br />
112 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Total Current < 30 days 30–60 days 60–90 days 90–120 days >120 days<br />
$’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
<strong>2007</strong><br />
Neither past due nor impaired 22,613 22,613 – – – – –<br />
Past due but not impaired 28,672 – – – – 10,455 18,217<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
As at 31 December <strong>2007</strong> 51,285 22,613 – – – 10,455 18,217<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
2006<br />
Neither past due nor impaired 68,495 68,495 – – – – –<br />
Past due but not impaired 11,659 – 2,263 1,644 549 294 6,909<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
As at 31 December 2006 80,154 68,495 2,263 1,644 549 294 6,909<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
There is no allowance for doubtful debts <strong>in</strong> the Company.<br />
21. Net Funds<br />
At 1 New f<strong>in</strong>ance Exchange<br />
At 31<br />
December<br />
January <strong>2007</strong> Cash flow leases movements <strong>2007</strong><br />
Group $’000 $’000 $’000 $’000 $’000<br />
Bank deposits – 30,053 – – 30,053<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash at bank 27,573 (13,986) – 11,907 25,494<br />
Short-term deposits 828,693 (356) – 18,441 846,778<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash and cash equivalents 856,266 (14,342) – 30,348 872,272<br />
Bank loans (155,000) 80,000 – – (75,000)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net cash 701,266 95,711 – 30,348 827,325<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
F<strong>in</strong>ance leases (4,472) 1,406 (768) (546) (4,380)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net funds 696,794 97,117 (768) 29,802 822,945<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31<br />
At 1 New f<strong>in</strong>ance Exchange December<br />
January 2006 Cash flow leases movements 2006<br />
Group $’000 $’000 $’000 $’000 $’000<br />
Bank deposits 20,000 (20,000) – – –<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash at bank 15,831 12,779 – (1,037) 27,573<br />
Short-term deposits 59,678 768,344 – 671 828,693<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash and cash equivalents 75,509 781,123 – (366) 856,266<br />
Bank loans – (155,000) – – (155,000)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net cash 95,509 606,123 – (366) 701,266<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
F<strong>in</strong>ance leases – 953 (5,432) 7 (4,472)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net funds 95,509 607,076 (5,432) (359) 696,794<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
As at the year end, the Group had cash balances equivalent to $213,000 (2006: $245,000) <strong>in</strong> Bangladeshi Taka <strong>in</strong> Bangladesh<br />
which are not readily convertible <strong>in</strong>to other currencies.<br />
Cash at bank earns <strong>in</strong>terest at float<strong>in</strong>g rates based on daily bank deposit rates. Short-term deposits are made for vary<strong>in</strong>g periods<br />
from overnight to three months depend<strong>in</strong>g on the cash requirements of the Group.<br />
At 31<br />
At 1 January Exchange December<br />
<strong>2007</strong> Cash flow movements <strong>2007</strong><br />
Company $’000 $’000 $’000 $’000<br />
Cash at bank 2,213 8,228 (4,421) 6,020<br />
Short-term deposits 17,300 (5,155) (1,574) 10,571<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash and cash equivalents 19,513 3,073 (5,995) 16,591<br />
Bank loans (47,000) 47,000 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net funds (27,487) 50,073 (5,995) 16,591<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31<br />
At 1 January Exchange December<br />
2006 Cash flow movements 2006<br />
Company $’000 $’000 $’000 $’000<br />
Cash at bank 1,892 2,258 (1,937) 2,213<br />
Short-term deposits 31,872 (14,851) 279 17,300<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash and cash equivalents 33,764 (12,593) (1,658) 19,513<br />
Bank loans – (47,000) – (47,000)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Net funds 33,764 (59,593) (1,658) (27,487)<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Cash at bank earns <strong>in</strong>terest at float<strong>in</strong>g rates based on daily bank deposit rates. Short-term deposits are made for vary<strong>in</strong>g periods<br />
from overnight to three months depend<strong>in</strong>g on the cash requirements of the Company.<br />
22. Trade and Other Payables<br />
Group Group Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
$’000 $’000 $’000 $’000<br />
Trade payables 3,844 2,816 606 2,760<br />
Amounts owed to subsidiary undertak<strong>in</strong>gs – – 5,324 90,403<br />
Other taxation and social security 11,323 2,205 1,250 873<br />
Other creditors and accruals 43,012 42,645 4,129 19,774<br />
Deferred <strong>in</strong>come – 751,849 – –<br />
Jo<strong>in</strong>t Venture creditors and accruals 215,391 97,717 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
273,570 897,232 11,309 113,810<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Deferred <strong>in</strong>come as at 31 December 2006 represents pre-placement proceeds received <strong>in</strong> respect of the IPO. This completed <strong>in</strong><br />
January <strong>2007</strong> and the proceeds have been recognised with<strong>in</strong> this year’s Income Statement. See Note 6 for details.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 113
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
23. Deferred Taxation<br />
114 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Liabilities Group<br />
Note $’000 $’000<br />
At 1 January 2006 (Restated) 1(u) (129,143) (129,143)<br />
Charge to Income Statement 4,380 4,380<br />
Exchange differences (5,202) (5,202)<br />
––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> (Restated) 1(u) (129,965) (129,965)<br />
Credit to Income Statement (22,120) (22,120)<br />
Fair value adjustments on bus<strong>in</strong>ess comb<strong>in</strong>ations (51,793) (51,793)<br />
Disposals 773 773<br />
Exchange differences (16,971) (16,971)<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> (220,076) (220,076)<br />
––––––––––– –––––––––––<br />
Liabilities Group<br />
$’000 $’000<br />
Deferred taxation – UK<br />
Accelerated allowances (51,793) (51,793)<br />
––––––––––– –––––––––––<br />
Deferred taxation – India<br />
Accelerated allowances (170,559) (170,559)<br />
Other temporary differences 2,276 2,276<br />
––––––––––– –––––––––––<br />
(168,283) (168,283)<br />
––––––––––– –––––––––––<br />
Total deferred taxation as at 31 December <strong>2007</strong> (220,076) (220,076)<br />
––––––––––– –––––––––––<br />
Liabilities Group<br />
Note $’000 $’000<br />
Deferred taxation – UK (Restated) 1(u)<br />
Accelerated allowances (7,440) (7,440)<br />
Other temporary differences 478 478<br />
––––––––––– –––––––––––<br />
(6,962) (6,962)<br />
––––––––––– –––––––––––<br />
Deferred taxation – India (Restated) 1(u)<br />
Accelerated allowances (127,040) (127,040)<br />
Losses 2,218 2,218<br />
Other temporary differences 1,819 1,819<br />
––––––––––– –––––––––––<br />
(123,003) (123,003)<br />
––––––––––– –––––––––––<br />
Total deferred taxation as at 31 December 2006 (Restated) (129,965) (129,965)<br />
––––––––––– –––––––––––
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
At the Balance Sheet date, the aggregate amount of temporary differences associated with undistributed earn<strong>in</strong>gs of<br />
subsidiaries for which deferred tax liabilities have not been recognised was $29.6m (2006: $110.6m). No liability has been<br />
recognised <strong>in</strong> respect of these differences because <strong>Cairn</strong> is <strong>in</strong> a position to control the tim<strong>in</strong>g of the reversal of the temporary<br />
differences and it is probable that such differences will not reverse <strong>in</strong> the foreseeable future.<br />
As at the Balance Sheet date, a deferred tax asset was not recognised <strong>in</strong> respect of Group losses of $799.0m (2006 (restated):<br />
$532.1m) (Company: $131.7m; 2006: $64.8m) where it is not probable that they can be utilised <strong>in</strong> future periods.<br />
At 31 December <strong>2007</strong>, no deferred tax asset has been recognised <strong>in</strong> respect of trad<strong>in</strong>g losses. At 31 December 2006, a deferred<br />
tax asset of $5.3m (restated) was recognised as it was considered that these losses would be utilised aga<strong>in</strong>st future trad<strong>in</strong>g<br />
profits aris<strong>in</strong>g to the Group.<br />
24. Obligations under F<strong>in</strong>ance Leases<br />
The Group has f<strong>in</strong>ance leases for various items of tenants’ improvements and office equipment all of which provide the specific<br />
entity which holds the lease with the option to purchase. Future f<strong>in</strong>ance lease commitments are as follows:<br />
Present value of m<strong>in</strong>imum<br />
M<strong>in</strong>imum lease payments lease payments<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
Group $’000 $’000 $’000 $’000<br />
Amounts payable:<br />
With<strong>in</strong> one year 2,268 1,613 1,949 1,380<br />
Between two and five years 2,642 3,614 2,431 3,092<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
4,910 5,227 4,380 4,472<br />
Less: future f<strong>in</strong>ance charges (530) (755) – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Present value of lease obligations 4,380 4,472 4,380 4,472<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
The average lease term is 3 to 5 years. For the year ended 31 December <strong>2007</strong>, the average effective borrow<strong>in</strong>g rate was 7.52%<br />
(2006: 16.92%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have<br />
been entered <strong>in</strong>to for cont<strong>in</strong>gent rental payments. The fair value of the Group’s lease obligations approximates their carry<strong>in</strong>g<br />
amount. The Group’s obligations under f<strong>in</strong>ance leases are secured by the lessors’ rights over the leased assets.<br />
The Company does not have any obligations under f<strong>in</strong>ance leases.<br />
25. Loans and Borrow<strong>in</strong>gs<br />
Group Group Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
$’000 $’000 $’000 $’000<br />
Bank loans 75,000 155,000 – 47,000<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong>, the loans were advanced under the Group’s $850m, syndicated, revolv<strong>in</strong>g float<strong>in</strong>g rate credit facilities<br />
(2006: $1bn facility); see Note 30 for details. Interest dur<strong>in</strong>g the year was charged at an average rate of 7.4% (2006: 6.6%).<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 115
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
26. Provisions<br />
Decommission<strong>in</strong>g Other provisions Total<br />
Group $’000 $’000 $’000<br />
At 1 January 2006 15,730 1,726 17,456<br />
Change <strong>in</strong> decommission<strong>in</strong>g estimate 7,184 – 7,184<br />
Increase of provision – 9,171 9,171<br />
Provision utilised – (3,409) (3,409)<br />
Discount unwound <strong>in</strong> the year 1,183 – 1,183<br />
––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 24,097 7,488 31,585<br />
Change <strong>in</strong> decommission<strong>in</strong>g estimate 8,929 – 8,929<br />
Increase of provision – 4,604 4,604<br />
Additions on acquisition of subsidiaries – 13,015 13,015<br />
Provision utilised – (1,993) (1,993)<br />
Discount unwound <strong>in</strong> the year 1,687 – 1,687<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 34,713 23,114 57,827<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong><br />
Current 279 17,487 17,766<br />
Non-current 34,434 5,627 40,061<br />
––––––––––– ––––––––––– –––––––––––<br />
116 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
34,713 23,114 57,827<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December 2006<br />
Current – 6,845 6,845<br />
Non-current 24,097 643 24,740<br />
––––––––––– ––––––––––– –––––––––––<br />
24,097 7,488 31,585<br />
––––––––––– ––––––––––– –––––––––––<br />
Decommission<strong>in</strong>g costs are expected to be <strong>in</strong>curred between 2008 and 2020 (2006: 2008 and 2020). The provision has been<br />
estimated us<strong>in</strong>g exist<strong>in</strong>g technology at current prices and discounted us<strong>in</strong>g a real discount rate of 7% p.a. (2006: 7%). The<br />
change <strong>in</strong> decommission<strong>in</strong>g estimate <strong>in</strong> <strong>2007</strong> arose as a result of an <strong>in</strong>crease <strong>in</strong> the estimated costs of decommission<strong>in</strong>g for the<br />
Ravva, Lakshmi and Gauri fields and additional wells drilled <strong>in</strong> Rajasthan. The change <strong>in</strong> decommission<strong>in</strong>g estimate <strong>in</strong> 2006 arose<br />
primarily as a result of the recognition of a decommission<strong>in</strong>g provision for the Rajasthan fields.<br />
Other provisions are production related payments payable to the GoI specified with<strong>in</strong> the respective PSCs and provisions for<br />
committed spend recognised on the acquisition of Plectrum and medOil (see Note 3).<br />
A cont<strong>in</strong>gent liability has been disclosed with<strong>in</strong> these f<strong>in</strong>ancial statements <strong>in</strong> respect of additional payments that may fall due<br />
with regard to the Ravva arbitration proceed<strong>in</strong>gs; see Note 35 for details.<br />
27. Share Capital<br />
Number Number Number<br />
5p 10p 62 /13p<br />
B Shares Ord<strong>in</strong>ary Ord<strong>in</strong>ary<br />
Group and Company ’000 ’000 ’000<br />
Authorised ord<strong>in</strong>ary shares<br />
At 1 January 2006 and 1 January <strong>2007</strong> – 225,000 –<br />
Consolidation of Shares 160,468 (225,000) 365,625<br />
B Shares repurchased and cancelled (160,468) – –<br />
––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> – – 365,625<br />
––––––––––– ––––––––––– –––––––––––
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Number Number Number<br />
5p 10p 6 2 /13p 10p 6 2 /13p<br />
B Shares Ord<strong>in</strong>ary Ord<strong>in</strong>ary Ord<strong>in</strong>ary Ord<strong>in</strong>ary<br />
’000 ’000 ’000 $’000 $’000<br />
Allotted, issued and fully paid ord<strong>in</strong>ary shares<br />
At 1 January 2006 – 159,767 – 25,775 –<br />
Issued and allotted for employee share options – 520 – 95 –<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> – 160,287 – 25,870 –<br />
Issued and allotted for employee share options<br />
pre-consolidation – 181 – 36 –<br />
Consolidation of shares 160,468 (160,468) 130,380 (25,906) 15,795<br />
B Shares repurchased and cancelled (160,468) – – – –<br />
Issued and allotted for employee share options<br />
post-consolidation – – 183 – 50<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> – – 130,563 – 15,845<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At an extraord<strong>in</strong>ary general meet<strong>in</strong>g held on 22 March <strong>2007</strong>, it was resolved that the 160,467,920 exist<strong>in</strong>g ord<strong>in</strong>ary shares of<br />
10 pence each be replaced by 130,380,185 new ord<strong>in</strong>ary shares of 6 2 /13 pence each and 160,467,920 B shares of 5 pence each.<br />
The effective date of this transaction was 23 March <strong>2007</strong>.<br />
The B share scheme allowed <strong>Cairn</strong> to return to shareholders $936m (<strong>in</strong>clud<strong>in</strong>g expenses) of the proceeds from the flotation<br />
of its Indian bus<strong>in</strong>ess, <strong>Cairn</strong> India. The B shares were not listed on the Official List nor admitted to trad<strong>in</strong>g on the London Stock<br />
Exchange. As at the Balance Sheet date, all B shares had been fully converted to cash.<br />
In order to make the market price of a <strong>Cairn</strong> share comparable before and after the return of cash to shareholders, a share<br />
consolidation was carried out to convert 16 exist<strong>in</strong>g ord<strong>in</strong>ary shares of 10 pence each to 13 new ord<strong>in</strong>ary shares of 6 2 /13 pence<br />
each.<br />
Follow<strong>in</strong>g the share capital consolidation, <strong>Cairn</strong>’s authorised equity share capital was 365,625,000 shares of 6 2 /13 pence each.<br />
28. Share Premium<br />
<strong>2007</strong> 2006<br />
Group and Company $’000 $’000<br />
At 1 January 201,019 197,895<br />
Aris<strong>in</strong>g on shares issued for employee share options 9,882 3,124<br />
––––––––––– –––––––––––<br />
At 31 December 210,901 201,019<br />
––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 117
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
29. Equity<br />
Equity Shares held Foreign<br />
Capital<br />
reserves Reta<strong>in</strong>ed Total<br />
share by ESOP currency Other – non- earn<strong>in</strong>gs M<strong>in</strong>ority equity<br />
capital Trust translation reserves distributable (Restated) <strong>in</strong>terests (Restated)<br />
Group $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
At 1 January 2006 223,670 (37,311) (7,927) 215,713 45,331 318,122 – 757,598<br />
Prior year adjustment (Note 1(u)) – – – – – 12,092 – 12,092<br />
–––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– ––––––––––<br />
At 1 January 2006 (Restated) 223,670 (37,311) (7,927) 215,713 45,331 330,214 – 769,690<br />
Exercise of employee<br />
share options 3,219 – – – – – – 3,219<br />
Share-based payments – – – – – 13,304 – 13,304<br />
Cost of shares vest<strong>in</strong>g – 3,214 – – – (3,214) – –<br />
Cost of shares purchased – (21,659) – – – – – (21,659)<br />
Surplus on valuation<br />
of f<strong>in</strong>ancial assets – – – – – 603 – 603<br />
Currency translation differences – – 10,725 – – – – 10,725<br />
Transfer to reta<strong>in</strong>ed earn<strong>in</strong>gs – – – (215,713) (5,109) 220,822 – –<br />
Loss for the year – – – – – (97,122) – (97,122)<br />
–––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– ––––––––––<br />
At 1 January <strong>2007</strong> 226,889 (55,756) 2,798 – 40,222 464,607 – 678,760<br />
Exercise of employee<br />
share options 9,968 – – – – – – 9,968<br />
M<strong>in</strong>ority <strong>in</strong>terests created<br />
on deemed disposal of subsidiaries – – – – – – 408,061 408,061<br />
Share-based payments – – – – – 20,803 4,471 25,274<br />
Cost of shares vest<strong>in</strong>g – 9,935 – – – (9,935) – –<br />
Currency translation differences 2,820 – 21,198 – – – 3,506 27,524<br />
Cash returned to shareholders (12,931) 13,802 – – – (936,524) – (935,653)<br />
Surplus on valuation of f<strong>in</strong>ancial assets – – – – – 5,544 2,493 8,037<br />
Profit for the year – – – – – 1,519,653 8,192 1,527,845<br />
–––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– ––––––––––<br />
At 31 December <strong>2007</strong> 226,746 (32,019) 23,996 – 40,222 1,064,148 426,723 1,749,816<br />
–––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– ––––––––––<br />
Shares held by ESOP Trust<br />
Shares held by the ESOP Trust represent the cost of shares held by the <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Employees’ Share Trust at<br />
31 December <strong>2007</strong>. The number of shares held by the <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Employees’ Share Trust at 31 December <strong>2007</strong><br />
was 1,342,701 (2006: 2,293,478) and the market value of these shares was £41,274,619 (2006: £41,259,669).<br />
As a result of the return of cash to shareholders (see below), $13.8m was returned to the ESOP Trust and is aggregated <strong>in</strong> the<br />
f<strong>in</strong>ancial statements.<br />
Foreign currency translation<br />
Group<br />
Unrealised foreign exchange ga<strong>in</strong>s and losses aris<strong>in</strong>g on consolidation of subsidiary undertak<strong>in</strong>gs are taken directly to reserves<br />
<strong>in</strong> accordance with IAS 21‘The Effects of Changes <strong>in</strong> Foreign Exchange Rates’.<br />
In accordance with IAS 21, foreign exchange differences aris<strong>in</strong>g on <strong>in</strong>tra-group loans are not elim<strong>in</strong>ated on consolidation; this<br />
reflects the exposure to currency fluctuations where the subsidiaries <strong>in</strong>volved have differ<strong>in</strong>g functional currencies. These <strong>in</strong>tra-group<br />
loans are not considered to be an <strong>in</strong>vestment <strong>in</strong> a foreign operation.<br />
Company<br />
Unrealised foreign exchange ga<strong>in</strong>s and losses arise on translation of the Company’s £ functional results <strong>in</strong>to $ presentational<br />
currency <strong>in</strong> accordance with IAS 21.<br />
118 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
Other reserves<br />
Other reserves, compris<strong>in</strong>g capital redemption reserves and other distributable capital reserves of a subsidiary, were capitalised<br />
<strong>in</strong> 2006. Follow<strong>in</strong>g a subsequent capital reduction <strong>in</strong> the subsidiary, these were transferred to reta<strong>in</strong>ed earn<strong>in</strong>gs.<br />
Capital reserves – non-distributable<br />
Capital reserves – non-distributable <strong>in</strong>clude non-distributable amounts aris<strong>in</strong>g on various Group acquisitions. Movement <strong>in</strong><br />
2006 follows capitalisation of reserves <strong>in</strong> a subsidiary. Follow<strong>in</strong>g a subsequent capital reduction <strong>in</strong> the subsidiary, these were<br />
transferred to reta<strong>in</strong>ed earn<strong>in</strong>gs.<br />
Cash returned to shareholders<br />
In April <strong>2007</strong>, <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> returned cash to shareholders of £3 per share out of the proceeds of the flotation of <strong>Cairn</strong><br />
India on the Bombay Stock Exchange and National Stock Exchange of India. Costs of the transaction of $3,292,000 have been<br />
charged direct to equity and are <strong>in</strong>cluded with<strong>in</strong> the reduction <strong>in</strong> reta<strong>in</strong>ed earn<strong>in</strong>gs<br />
Capital<br />
Equity Shares Foreign reserves<br />
share held by currency – non- Reta<strong>in</strong>ed Total<br />
capital ESOP trust translation distributable earn<strong>in</strong>gs equity<br />
Company $’000 $’000 $’000 $’000 $’000 $’000<br />
At 1 January 2006 223,670 (37,311) (8,219) 79 73,928 252,147<br />
Exercise of employee share options 3,219 – – – – 3,219<br />
Share-based payments – – – – 6,739 6,739<br />
Cost of shares vest<strong>in</strong>g – 3,214 – – (3,214) –<br />
Cost of shares purchased – (21,659) – – – (21,659)<br />
Currency translation differences – – 45,400 – – 45,400<br />
Profit for the year – – – – 164,870 164,870<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 1 January <strong>2007</strong> 226,889 (55,756) 37,181 79 242,323 450,716<br />
Exercise of employee share options 9,968 – – – – 9,968<br />
Share-based payments – – – – 10,579 10,579<br />
Cost of shares vest<strong>in</strong>g – 9,935 – – (9,935) –<br />
Cash returned to shareholders (12,931) 13,802 – – (936,524) (935,653)<br />
Currency translation differences 2,820 – 8,589 – – 11,409<br />
Profit for the year – – – – 1,170,772 1,170,772<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 226,746 (32,019) 45,770 79 477,215 717,791<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
30. F<strong>in</strong>ancial Risk Management: Objectives and Policies<br />
<strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> Group and Company<br />
The primary f<strong>in</strong>ancial <strong>in</strong>struments comprise bank loans, cash, short- and medium-term deposits, money market liquidity<br />
funds, loans and other receivables and f<strong>in</strong>ancial liabilities held at amortised cost. The Group’s strategy has been to f<strong>in</strong>ance its<br />
operations through a mixture of reta<strong>in</strong>ed profits and bank borrow<strong>in</strong>gs. Other alternatives such as equity f<strong>in</strong>ance and project<br />
f<strong>in</strong>ance are reviewed by the Board, when appropriate, to fund substantial acquisitions or oil and gas projects.<br />
The Group and local treasury functions are responsible for manag<strong>in</strong>g <strong>in</strong>vestment and fund<strong>in</strong>g requirements <strong>in</strong>clud<strong>in</strong>g bank<strong>in</strong>g<br />
and cash flow monitor<strong>in</strong>g. They must also recognise and manage <strong>in</strong>terest and foreign exchange exposure whilst ensur<strong>in</strong>g that<br />
the Company and the Group has adequate liquidity at all times <strong>in</strong> order to meet their immediate cash requirements.<br />
The Company and the Group may from time to time opt to use derivative f<strong>in</strong>ancial <strong>in</strong>struments to m<strong>in</strong>imise their exposure to<br />
fluctuations <strong>in</strong> foreign exchange and <strong>in</strong>terest rates. Dur<strong>in</strong>g the year, <strong>Cairn</strong> India entered <strong>in</strong>to forward foreign exchange options<br />
to hedge the exposure of future Indian Rupee requirements as part of the Rajasthan Development. Refer to Note 31 for further<br />
details.<br />
Dur<strong>in</strong>g <strong>2007</strong>, a currency exchange option contract matured. The contract was entered <strong>in</strong>to by the Company <strong>in</strong> 2006 <strong>in</strong> order to<br />
hedge the impact of currency fluctuations result<strong>in</strong>g from transactions carried out <strong>in</strong> Indian Rupees as part of the IPO. This was<br />
not exercised due to favourable movements <strong>in</strong> the exchange rate.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 119
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
30. F<strong>in</strong>ancial Risk Management: Objectives and Policies (cont<strong>in</strong>ued)<br />
The ma<strong>in</strong> risks aris<strong>in</strong>g from the Company’s and the Group’s f<strong>in</strong>ancial <strong>in</strong>struments are liquidity risk, <strong>in</strong>terest rate risk, foreign<br />
currency risk, commodity price risk and credit risk. The Board reviews and agrees policies for manag<strong>in</strong>g each of these risks and<br />
these are summarised below.<br />
Liquidity risk<br />
<strong>Cairn</strong> India has available an $850m revolv<strong>in</strong>g credit facility to fund Rajasthan developments. The facility was previously held<br />
by <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> and certa<strong>in</strong> of its subsidiaries but an amendment agreement was entered <strong>in</strong>to on 22 November 2006<br />
to transfer the facility to <strong>Cairn</strong> India. Follow<strong>in</strong>g the IPO of <strong>Cairn</strong> India on the Bombay Stock Exchange and the National Stock<br />
Exchange of India, the amendment agreement became fully effective on 31 January <strong>2007</strong>.<br />
The facility is provided by a consortium of ten <strong>in</strong>ternational banks (expiry date 31 December 2011) and the International F<strong>in</strong>ance<br />
Corporation (expiry date 31 December 2015). Interest is charged at float<strong>in</strong>g rates determ<strong>in</strong>ed by LIBOR plus an applicable<br />
marg<strong>in</strong>. The maximum facility amount that can be drawn at any po<strong>in</strong>t <strong>in</strong> time is determ<strong>in</strong>ed by reference to the net present value<br />
of the Rajasthan developments. The full $850m facility is currently available to be drawn. <strong>Cairn</strong> India may cancel and repay the<br />
facility at any time.<br />
Under the terms of the orig<strong>in</strong>al agreement, as security under the facility, a share pledge was provided over the shares <strong>in</strong> <strong>Cairn</strong><br />
<strong>Energy</strong> Hydrocarbons Limited (a 100% subsidiary of <strong>Cairn</strong> India Hold<strong>in</strong>gs Limited which holds 50% of the Group’s <strong>in</strong>terest <strong>in</strong><br />
Rajasthan).<br />
On 28 March 2008, <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> entered <strong>in</strong>to a £30m revolv<strong>in</strong>g credit facility to fund its work<strong>in</strong>g capital. The facility is jo<strong>in</strong>tly<br />
provided by The Royal Bank of Scotland <strong>PLC</strong> and the Bank of Scotland <strong>PLC</strong> and expires on 31 January 2013. Interest is charged<br />
at float<strong>in</strong>g rates determ<strong>in</strong>ed by LIBOR plus an applicable marg<strong>in</strong>.<br />
In addition, as at 31 December <strong>2007</strong>, the Group has $80m (2006: $65m) of facilities <strong>in</strong> place to cover the issue of bank<br />
guarantees. Fixed rates of <strong>in</strong>terest apply to these. $18.2m was unutilised at 31 December <strong>2007</strong> (2006: $28.9m).<br />
The Group currently has surplus cash which it has placed <strong>in</strong> a comb<strong>in</strong>ation of money market liquidity funds and shortand<br />
medium-term deposits, ensur<strong>in</strong>g sufficient liquidity to enable the Group to meet its short/medium-term expenditure<br />
requirements.<br />
Interest rate risk<br />
Surplus funds are placed on short/medium-term deposit at float<strong>in</strong>g rates. It is <strong>Cairn</strong>’s policy to deposit funds with banks or other<br />
f<strong>in</strong>ancial <strong>in</strong>stitutions that offer the most competitive <strong>in</strong>terest rate at time of issue.<br />
Short/medium-term borrow<strong>in</strong>g arrangements are available at float<strong>in</strong>g rates. The treasury function may from time to time opt to<br />
manage a proportion of the <strong>in</strong>terest costs on this debt by us<strong>in</strong>g derivative f<strong>in</strong>ancial <strong>in</strong>struments such as <strong>in</strong>terest rate swaps. At<br />
this time, however, there are no such <strong>in</strong>struments (2006: none).<br />
Interest rate risk table<br />
The follow<strong>in</strong>g table demonstrates the sensitivity of the Group’s profit before tax to a change <strong>in</strong> <strong>in</strong>terest rates (through the impact<br />
on float<strong>in</strong>g rate borrow<strong>in</strong>gs and deposits). In addition there would be an <strong>in</strong>crease of $375,000 to development/produc<strong>in</strong>g assets<br />
carry<strong>in</strong>g value as a result of the capitalisation of the borrow<strong>in</strong>g costs for the Rajasthan development (2006: $150,000) .<br />
120 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Increase/decrease Effect on profit<br />
<strong>in</strong> basis po<strong>in</strong>ts before tax<br />
<strong>2007</strong> 50 $3,325,000<br />
2006 50 $232,000<br />
The amounts calculated are based on actual draw<strong>in</strong>gs and deposits <strong>in</strong> the periods for 50 basis po<strong>in</strong>t movement <strong>in</strong> the total rate<br />
of <strong>in</strong>terest on each loan or deposit.<br />
Foreign currency risk<br />
<strong>Cairn</strong> manages exposures that arise from receipt of revenues <strong>in</strong> foreign currencies, by match<strong>in</strong>g receipts and payments <strong>in</strong> the<br />
same currency, and actively manag<strong>in</strong>g the residual net position.<br />
In order to m<strong>in</strong>imise <strong>Cairn</strong>’s exposure to foreign currency fluctuations, currency assets are matched with currency liabilities by<br />
borrow<strong>in</strong>g or enter<strong>in</strong>g <strong>in</strong>to foreign exchange contracts <strong>in</strong> the applicable currency if deemed appropriate. The loan facilities allow<br />
loans denom<strong>in</strong>ated <strong>in</strong> US Dollars, Sterl<strong>in</strong>g, Euros or such other currency as may be agreed between the lenders and <strong>Cairn</strong> from<br />
time to time.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
<strong>Cairn</strong> reports <strong>in</strong> US Dollars which, with most assets US$ denom<strong>in</strong>ated, m<strong>in</strong>imises the impact of foreign exchange movements on<br />
the Group’s Balance Sheet.<br />
Dur<strong>in</strong>g the year, <strong>Cairn</strong> India entered <strong>in</strong>to foreign exchange options to hedge the exposure of future Indian Rupee requirements<br />
as part of the Rajasthan Development. Refer to Note 31 for further details.<br />
Commodity price risk<br />
There are implicit product price hedges <strong>in</strong> place through the pric<strong>in</strong>g mechanisms applicable to Sangu, Lakshmi and Ravva<br />
Gas Sales Contracts (GSCs). The requirement for hedg<strong>in</strong>g <strong>in</strong>struments to unw<strong>in</strong>d these pric<strong>in</strong>g mechanisms is reviewed on<br />
an ongo<strong>in</strong>g basis. These implicit product price hedges do not give rise to any embedded derivatives under IAS 39.<br />
Ravva and CB-OS/2 oil sales are required to be made to approved government nom<strong>in</strong>ated buyers at float<strong>in</strong>g prices.<br />
No commodity price hedg<strong>in</strong>g contracts have been entered <strong>in</strong>to dur<strong>in</strong>g either the current or the previous year. There were no<br />
outstand<strong>in</strong>g commodity price contracts at the start of the year or at the end of the year.<br />
Credit risk<br />
<strong>Cairn</strong> has obta<strong>in</strong>ed payment guarantees or letters of credit from buyers as payment security on both the Lakshmi and Sangu<br />
GSCs. With respect to Ravva there is no payment security; however, the buyers have been nom<strong>in</strong>ated by the GoI.<br />
With respect to deposit, money market and other treasury arrangements, as a general rule the Board will only approve<br />
a bank or f<strong>in</strong>ancial <strong>in</strong>stitution that has a Moody’s or Standard & Poor’s rat<strong>in</strong>g for long-term deposits of AA and above.<br />
The Board will cont<strong>in</strong>ue to assess the Group’s strategies for manag<strong>in</strong>g credit risks but at this time they view exist<strong>in</strong>g policies as<br />
satisfactory for oil and gas sales <strong>in</strong> South Asia. At the year end the Group does not have any significant concentrations of bad<br />
debt risk other than that disclosed <strong>in</strong> Note 20.<br />
The maximum credit risk exposure relat<strong>in</strong>g to f<strong>in</strong>ancial assets is represented by the carry<strong>in</strong>g value as at the Balance Sheet date.<br />
Capital management<br />
The objective of the Group’s capital management structure is to ensure that there rema<strong>in</strong>s sufficient liquidity with<strong>in</strong> the Group to<br />
carry out committed work programme requirements. The Group monitors the long-term cash flow requirements of the bus<strong>in</strong>ess<br />
<strong>in</strong> order to assess the requirement for changes to the capital structure to meet that objective.<br />
The Group manages its capital structure and makes adjustments to it, <strong>in</strong> light of changes to economic conditions. To ma<strong>in</strong>ta<strong>in</strong><br />
or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital, issue new shares for<br />
cash, repay debt or undertake other such restructur<strong>in</strong>g activities as appropriate.<br />
No changes were made <strong>in</strong> the objectives, policies or processes dur<strong>in</strong>g the year ended 31 December <strong>2007</strong>.<br />
Group capital and net debt were made up as follows:<br />
<strong>2007</strong><br />
2006<br />
(Restated)<br />
Group $’000 $’000<br />
Bank loans and borrow<strong>in</strong>gs 75,000 155,000<br />
Trade and other payables 273,570 897,232<br />
Less cash and short-term deposits (902,325) (856,266)<br />
––––––––––– –––––––––––<br />
Net debt (553,755) 195,966<br />
Equity 1,749,816 678,760<br />
––––––––––– –––––––––––<br />
Group capital and net debt 1,196,061 874,726<br />
––––––––––– –––––––––––<br />
Gear<strong>in</strong>g ratio – 22.4%<br />
––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 121
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
30. F<strong>in</strong>ancial Risk Management: Objectives and Policies (cont<strong>in</strong>ued)<br />
Company capital and net debt were made up as follows:<br />
<strong>2007</strong> 2006<br />
Company $’000 $’000<br />
Bank loans and borrow<strong>in</strong>gs – 47,000<br />
Trade and other payables 11,309 113,810<br />
Less cash and short-term deposits (16,591) (19,513)<br />
––––––––––– –––––––––––<br />
Net debt (5,282) 141,297<br />
Equity 717,791 450,716<br />
––––––––––– –––––––––––<br />
Company capital and net debt 712,509 592,013<br />
––––––––––– –––––––––––<br />
Gear<strong>in</strong>g ratio – 23.9%<br />
––––––––––– –––––––––––<br />
31. F<strong>in</strong>ancial Instruments<br />
The Group and Company calculates the fair value of assets and liabilities by reference to amounts considered to be receivable or<br />
payable on the Balance Sheet date. The Group’s f<strong>in</strong>ancial assets and liabilities, together with their fair values, are as follows:<br />
F<strong>in</strong>ancial assets<br />
Carry<strong>in</strong>g amount Fair value<br />
2006 2006<br />
<strong>2007</strong> (Restated) <strong>2007</strong> (Restated)<br />
Group $’000 $’000 $’000 $’000<br />
Bank deposits 30,053 – 30,053 –<br />
Cash and cash equivalents 872,272 856,266 872,272 856,266<br />
Derivative f<strong>in</strong>ancial assets 2,479 – 2,479 –<br />
Available-for-sale f<strong>in</strong>ancial asset 15,905 7,868 15,905 7,868<br />
Trade receivables 41,915 62,487 41,915 62,487<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
122 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
962,624 926,621 962,624 926,621<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
All of the above f<strong>in</strong>ancial assets are current and unimpaired with the exception of trade receivables. An analysis of the age<strong>in</strong>g of<br />
trade receivables is provided <strong>in</strong> Note 20.<br />
F<strong>in</strong>ancial liabilities<br />
Carry<strong>in</strong>g amount Fair value<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
Group $’000 $’000 $’000 $’000<br />
Bank loans 75,000 155,000 75,000 155,000<br />
Trade payables 3,844 2,816 3,844 2,816<br />
F<strong>in</strong>ance leases 4,380 4,472 4,380 4,472<br />
Decommission<strong>in</strong>g provision 34,713 24,097 34,713 24,097<br />
Derivative f<strong>in</strong>ancial liabilities – 9,694 – 9,694<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
117,937 196,079 117,937 196,079<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
The derivative f<strong>in</strong>ancial assets <strong>in</strong> <strong>2007</strong> relate to forward foreign exchange options to hedge the exposure of future Indian Rupee<br />
requirements as part of the Rajasthan Development entered <strong>in</strong>to by the <strong>Cairn</strong> India Group. The fair value of the currency options<br />
is determ<strong>in</strong>ed by reference to market values for similar options at the year end. The cost to the Group of exercis<strong>in</strong>g the currency<br />
options on contractual maturity was paid on purchase of the options. The fair value movement <strong>in</strong> the carry<strong>in</strong>g value of the option<br />
has been <strong>in</strong>cluded <strong>in</strong> the <strong>2007</strong> f<strong>in</strong>ancial statements. The options are not hedge accounted.<br />
The available-for-sale f<strong>in</strong>ancial asset relates to listed equity shares held by <strong>Cairn</strong> India. Refer to Note 17 for further detail.<br />
The derivative f<strong>in</strong>ancial liabilities <strong>in</strong> 2006 represent foreign exchange currency options entered <strong>in</strong>to to manage the currency<br />
risk from the IPO of <strong>Cairn</strong> India. These options were not hedge accounted for. The options matured dur<strong>in</strong>g <strong>2007</strong> and were not<br />
exercised.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
The fair value of f<strong>in</strong>ancial assets and liabilities has been calculated by discount<strong>in</strong>g the expected future cash flows at prevail<strong>in</strong>g<br />
<strong>in</strong>terest rates.<br />
The follow<strong>in</strong>g table sets out the amount, by maturity, of the Group’s f<strong>in</strong>ancial liabilities.<br />
At 31 December <strong>2007</strong><br />
Less than One to Two to Three to Four to More than<br />
one year two years three years four years five years five years Total<br />
$’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
Bank loans* (5,372) (5,372) (5,372) (67,136) (1,014) (16,276) (100,542)<br />
Trade payables (3,844) – – – – – (3,844)<br />
F<strong>in</strong>ance leases* (2,268) (1,557) (894) (176) (15) – (4,910)<br />
Decommission<strong>in</strong>g provision** (288) – – – – (68,621) (68,909)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31 December 2006<br />
(11,772) (6,929) (6,266) (67,312) (1,029) (84,897) (178,205)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Less than One to Two to Three to Four to More than<br />
one year two years three years four years five years five years Total<br />
$’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
Bank loans* (10,631) (10,631) (10,631) (10,631) (137,880) (29,201) (209,605)<br />
Trade payables (2,816) – – – – – (2,816)<br />
F<strong>in</strong>ance leases* (1,613) (1,509) (1,260) (742) (103) – (5,227)<br />
Decommission<strong>in</strong>g provision** – (200) – – – (50,435) (50,635)<br />
Derivative f<strong>in</strong>ancial liabilities (9,694) – – – – – (9,694)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
(24,754) (12,340) (11,891) (11,373) (137,983) (79,636) (277,977)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
* Bank loans and f<strong>in</strong>ance leases <strong>in</strong>clude <strong>in</strong>terest for the purposes of the maturity analysis.<br />
** The decommission<strong>in</strong>g provision is discounted at a rate of 7% to give the net present value which is carried at the balance<br />
sheet date. The gross amount is <strong>in</strong>cluded <strong>in</strong> the maturity analysis table <strong>in</strong> accordance with the requirements of IFRS.<br />
The Company’s f<strong>in</strong>ancial assets and liabilities, together with their fair values are as follows:<br />
F<strong>in</strong>ancial assets<br />
Carry<strong>in</strong>g amount Fair value<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
Company $’000 $’000 $’000 $’000<br />
Cash and cash equivalents 16,591 19,513 16,591 19,513<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
All of the above f<strong>in</strong>ancial assets are current and unimpaired.<br />
16,591 19,513 16,591 19,513<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 123
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
31. F<strong>in</strong>ancial Instruments (cont<strong>in</strong>ued)<br />
F<strong>in</strong>ancial liabilities<br />
Carry<strong>in</strong>g amount Fair value<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
Company $’000 $’000 $’000 $’000<br />
Bank loans – 47,000 – 47,000<br />
Trade payables 606 2,760 606 2,760<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
The follow<strong>in</strong>g table sets out the amount, by maturity, of the Company’s f<strong>in</strong>ancial liabilities:<br />
124 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
606 49,760 606 49,760<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong><br />
Less than One to Two to Three to Four to More than<br />
one year two years three years four years five years five years Total<br />
Company $’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
Trade payables (606) – – – – – (606)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
At 31 December 2006<br />
Less than One to Two to Three to Four to More than<br />
one year two years three years four years five years five years Total<br />
Company $’000 $’000 $’000 $’000 $’000 $’000 $’000<br />
Bank loans* (2,991) (2,991) (2,991) (2,991) (41,672) (8,704) (62,340)<br />
Trade payables (2,760) – – – – – (2,760)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
* Bank loans <strong>in</strong>clude <strong>in</strong>terest for the purposes of the maturity analysis.<br />
32. Capital Commitments<br />
Oil and gas expenditure<br />
(5,751) (2,991) (2,991) (2,991) (41,672) (8,704) (65,100)<br />
––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Group Group Company Company<br />
<strong>2007</strong> 2006 <strong>2007</strong> 2006<br />
$’000 $’000 $’000 $’000<br />
Intangible exploration/appraisal assets 698,084 208,724 – –<br />
Property, plant & equipment – development/produc<strong>in</strong>g assets 88,567 44,811 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
Contracted for 786,651 253,535 – –<br />
––––––––––– ––––––––––– ––––––––––– –––––––––––<br />
The above capital commitments represent <strong>Cairn</strong>’s share of obligations <strong>in</strong> relation to its <strong>in</strong>terests <strong>in</strong> Jo<strong>in</strong>t Ventures. As all <strong>Cairn</strong><br />
Jo<strong>in</strong>t Ventures are jo<strong>in</strong>tly controlled assets, these commitments represent <strong>Cairn</strong>’s share of the capital commitment of the Jo<strong>in</strong>t<br />
Ventures themselves.<br />
33. Pension Commitments<br />
The Group and Company have no pension commitments as at the Balance Sheet date (2006: nil).
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
34. Other F<strong>in</strong>ancial Commitments<br />
Group<br />
Operat<strong>in</strong>g leases – as lessee<br />
Group entities have entered <strong>in</strong>to commercial leases for certa<strong>in</strong> land and build<strong>in</strong>gs and for plant, mach<strong>in</strong>ery and office<br />
equipment. The leases have an average life of between one and six years. There are no restrictions placed on the lessee by<br />
enter<strong>in</strong>g <strong>in</strong>to these leases.<br />
Total future m<strong>in</strong>imum lease payments under non-cancellable operat<strong>in</strong>g leases are as follows:<br />
M<strong>in</strong>imum lease M<strong>in</strong>imum lease<br />
payments payments<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Land and build<strong>in</strong>gs, with<strong>in</strong>:<br />
One year 5,384 3,427<br />
Two to five years 16,316 12,958<br />
After five years 200 2,538<br />
––––––––––– –––––––––––<br />
21,900 18,923<br />
––––––––––– –––––––––––<br />
Other, with<strong>in</strong>:<br />
One year 15,080 5,970<br />
Two to five years 54,200 21<br />
––––––––––– –––––––––––<br />
69,280 5,991<br />
––––––––––– –––––––––––<br />
Included with<strong>in</strong> other operat<strong>in</strong>g lease commitments is <strong>Cairn</strong>’s share of operat<strong>in</strong>g leases entered <strong>in</strong>to by Jo<strong>in</strong>t Ventures of<br />
$15,074,000 due with<strong>in</strong> one year and $54,200,000 due between two and five years. These are also <strong>in</strong>cluded <strong>in</strong> ‘Capital<br />
Commitments’ disclosed <strong>in</strong> Note 32 where appropriate.<br />
Company<br />
Operat<strong>in</strong>g leases – as lessee<br />
The Company has entered <strong>in</strong>to commercial leases for certa<strong>in</strong> land and build<strong>in</strong>gs and for office equipment. The leases have an<br />
average life of between one and six years. There are no restrictions placed on the lessee by enter<strong>in</strong>g <strong>in</strong>to these leases.<br />
Total future m<strong>in</strong>imum lease payments under non-cancellable operat<strong>in</strong>g leases are as follows:<br />
M<strong>in</strong>imum lease M<strong>in</strong>imum lease<br />
payments payments<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Land and build<strong>in</strong>gs, with<strong>in</strong>:<br />
One year 2,399 2,337<br />
Two to five years 9,595 9,346<br />
After five years 200 2,531<br />
––––––––––– –––––––––––<br />
12,194 14,214<br />
––––––––––– –––––––––––<br />
Other, with<strong>in</strong>:<br />
One year 6 47<br />
Two to five years – 20<br />
––––––––––– –––––––––––<br />
6 67<br />
––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 125
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
35. Cont<strong>in</strong>gent Liabilities<br />
Ravva Arbitration<br />
The calculation of the GoI’s share of petroleum produced from the Ravva oil field has been a matter of disagreement for some<br />
years. Ravva is an un<strong>in</strong>corporated Jo<strong>in</strong>t Venture <strong>in</strong> which <strong>Cairn</strong> India has an <strong>in</strong>terest.<br />
An arbitration panel op<strong>in</strong>ed <strong>in</strong> October 2004 and <strong>Cairn</strong> has been will<strong>in</strong>g to be bound by the award, although it was not as<br />
favourable as had been hoped. The GoI, however, has lodged an appeal <strong>in</strong> the Malaysian courts and <strong>Cairn</strong> India cont<strong>in</strong>ues to<br />
ma<strong>in</strong>ta<strong>in</strong> its challenge to the GoI’s appeal.<br />
<strong>Cairn</strong> has challenged both the GoI’s right to appeal, and the grounds of that appeal. If the GoI were successful on both these<br />
po<strong>in</strong>ts, it is unclear what process would then follow to resolve the orig<strong>in</strong>al issue under dispute. <strong>Cairn</strong> India will defend its right to<br />
cont<strong>in</strong>ue to refer to the exist<strong>in</strong>g arbitration panel, whose composition and terms of reference were agreed by all parties at the<br />
outset. A date for the appeal has been set <strong>in</strong> the second half of 2008.<br />
In the event that the GoI’s appeal succeeded and a process then ensued which concluded with the arbitration award be<strong>in</strong>g<br />
reversed <strong>in</strong> a manner and <strong>in</strong> a forum which <strong>Cairn</strong> accepted as b<strong>in</strong>d<strong>in</strong>g, then <strong>Cairn</strong> India would be due to pay an additional<br />
$63.9m. <strong>Cairn</strong> India would also be potentially liable for <strong>in</strong>terest on this sum currently estimated at $24.2m, though the<br />
calculation of <strong>in</strong>terest would require further agreement.<br />
In a separate and unrelated dispute related to the profit petroleum calculations under the Ravva PSC, the Ravva JV received a<br />
claim from the DGH for approximately US$166.4m (represent<strong>in</strong>g US$37.4m net to <strong>Cairn</strong>) for an alleged underpayment of profit<br />
petroleum to the GOI, together with <strong>in</strong>terest on that amount through to 30 June 2006 of US$30.6m (represent<strong>in</strong>g US$6.9m net<br />
to <strong>Cairn</strong>).<br />
This claim relates to the GOI’s allegation that the Ravva JV has recovered costs <strong>in</strong> excess of the Base Development Costs (BDC)<br />
cap imposed <strong>in</strong> the PSC and that the Ravva JV has also allowed these excess costs <strong>in</strong> the calculation of the PTRR. <strong>Cairn</strong> India<br />
and its JV partners believe that such a claim is unsusta<strong>in</strong>able under the terms of the PSC because, amongst other reasons, the<br />
BDC cap only applies to the <strong>in</strong>itial development of the Ravva field and not to subsequent development activities under the PSC.<br />
Additionally the Ravva JV has contested the basis of the calculation <strong>in</strong> the above claim from the DGH. Even if upheld, <strong>Cairn</strong><br />
believes that the DGH has miscalculated the sums that would be due to the GOI <strong>in</strong> such circumstances.<br />
Indian Service Tax<br />
<strong>Cairn</strong> India has received two show cause notices from the GoI for non-payment of service tax as a recipient of services from<br />
Foreign Service providers. These notices cover periods from 16 August 2002 to 31 March 2006 and 1 April 2006 to 31 March<br />
<strong>2007</strong> and total $15.5m. A writ petition challeng<strong>in</strong>g the applicability of the service tax has been filed with the High Court <strong>in</strong> India.<br />
Should the adjudication go aga<strong>in</strong>st <strong>Cairn</strong> India, the company would be liable for the $15.5m, though it would be able to recover<br />
amounts relat<strong>in</strong>g to services provided to Jo<strong>in</strong>t Ventures from Jo<strong>in</strong>t Venture partners.<br />
Guarantees<br />
It is normal practice for the Group to issue guarantees <strong>in</strong> respect of obligations dur<strong>in</strong>g the normal course of bus<strong>in</strong>ess.<br />
The Group had provided the follow<strong>in</strong>g guarantees at 31 December <strong>2007</strong>:<br />
• various guarantees under the Group’s bank facilities (see Note 30) for the Group’s share of m<strong>in</strong>imum work programme<br />
commitments for the current year of $80m;<br />
• parent company guarantees for the Group’s obligations under PSC, sales and other contracts.<br />
36. Related Party Transactions<br />
The Company’s pr<strong>in</strong>cipal subsidiaries are listed <strong>in</strong> Note 18. The follow<strong>in</strong>g table provides the balances which are outstand<strong>in</strong>g with<br />
subsidiary companies at the Balance Sheet date.<br />
126 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Amounts owed from subsidiary undertak<strong>in</strong>gs 50,502 71,782<br />
Amounts owed to subsidiary undertak<strong>in</strong>gs (5,324) (90,403)<br />
––––––––––– –––––––––––<br />
45,178 (18,621)<br />
––––––––––– –––––––––––<br />
The amounts outstand<strong>in</strong>g are unsecured and repayable on demand, and will be settled <strong>in</strong> cash. Interest, where charged, is at<br />
market rates. No guarantees have been given.
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
The follow<strong>in</strong>g table provides the transactions with subsidiary companies recorded <strong>in</strong> the profit (2006: loss) for the year, all of<br />
which were carried out on an arm’s-length basis.<br />
<strong>2007</strong> 2006<br />
$’000 $’000<br />
Amounts <strong>in</strong>voiced 36,905 43,546<br />
Management fees 1,575 4,574<br />
Waiver of <strong>in</strong>ter-company loan balances – (11,258)<br />
Inter-company <strong>in</strong>terest receivable 750 923<br />
Inter-company <strong>in</strong>terest payable 898 925<br />
(a) 2006 Group reorganisations<br />
Capitalisation of loan with <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited and capital reduction<br />
On 24 March 2006, the Company received equity from <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited (‘CEBL’) <strong>in</strong> settlement of an <strong>in</strong>tercompany<br />
loan of $70m. On 28 April 2006, a further $63.6m of share capital was <strong>in</strong>jected <strong>in</strong>to CEBL by <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>.<br />
On 21 June 2006, CEBL received Court approval for a capital reduction where $361.5m was returned to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>,<br />
creat<strong>in</strong>g a capital reserve <strong>in</strong> the Company’s Balance Sheet. The $361.5m was settled by way of transfer of the share capital<br />
of the follow<strong>in</strong>g subsidiaries:<br />
• <strong>Cairn</strong> Petroleum India Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Discovery Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Search Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Hydrocarbons Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Hold<strong>in</strong>gs Limited<br />
• <strong>Cairn</strong> Exploration and Production Company Limited.<br />
Loan capitalisation and share exchange agreement with Capricorn for <strong>in</strong>vestments <strong>in</strong> subsidiaries<br />
On 24 April 2006, <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> <strong>in</strong>corporated a new subsidiary, Capricorn, which was <strong>in</strong>itially <strong>in</strong>corporated as <strong>Cairn</strong><br />
Resources Limited.<br />
On 30 June 2006, <strong>Cairn</strong> <strong>Energy</strong> Nepal Hold<strong>in</strong>gs Limited, a subsidiary of the Company, issued 2,039,011 ord<strong>in</strong>ary £1 shares at<br />
par <strong>in</strong> settlement of a loan balance.<br />
On 30 June 2006, the Company received 8,610,481 ord<strong>in</strong>ary £1 shares from Capricorn <strong>in</strong> a share for share exchange for the<br />
entire issued share capital of the follow<strong>in</strong>g companies:<br />
• <strong>Cairn</strong> <strong>Energy</strong> Bangladesh Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Exploration Bangladesh Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Sangu Field Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Nepal Hold<strong>in</strong>gs Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Management Limited<br />
• <strong>Cairn</strong> Oil Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> North Sea Limited<br />
• <strong>Cairn</strong> Resources Management Limited<br />
• <strong>Energy</strong> Explorer Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Assets Limited.<br />
Share exchange agreement with <strong>Cairn</strong> UK Hold<strong>in</strong>gs Limited for <strong>in</strong>vestments <strong>in</strong> subsidiaries<br />
On 26 June 2006, the Company <strong>in</strong>corporated a new subsidiary, <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited. On 30 June 2006 the company<br />
received 221,444,034 ord<strong>in</strong>ary £1 shares at par from <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited <strong>in</strong> a share for share exchange for the entire<br />
issued share capital of the follow<strong>in</strong>g companies:<br />
• <strong>Cairn</strong> Petroleum India Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Discovery Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Gujarat Block 1 Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Hydrocarbons Limited<br />
• <strong>Cairn</strong> <strong>Energy</strong> Hold<strong>in</strong>gs Limited<br />
• <strong>Cairn</strong> Exploration (No. 7) Limited<br />
• <strong>Cairn</strong> Exploration (No. 6) Limited<br />
• <strong>Cairn</strong> Exploration (No. 4) Limited<br />
• <strong>Cairn</strong> Exploration (No. 2) Limited.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 127
NOTES TO THE ACCOUNTS<br />
CONTINUED<br />
36. Related Party Transactions (cont<strong>in</strong>ued)<br />
Increase <strong>in</strong> <strong>in</strong>vestments <strong>in</strong> subsidiaries and debt conversion<br />
On 1 September 2006, <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited issued 29,780,710 £1 ord<strong>in</strong>ary shares at par to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> pursuant to<br />
a debt conversion agreement between <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>, <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited, <strong>Cairn</strong> India Hold<strong>in</strong>gs Limited and <strong>Cairn</strong><br />
<strong>Energy</strong> Hydrocarbons Limited (a subsidiary of <strong>Cairn</strong> India Hold<strong>in</strong>gs at this time).<br />
In summary, this agreement provided that $56.8m due to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> from <strong>Cairn</strong> <strong>Energy</strong> Hydrocarbons Limited was<br />
assigned to <strong>Cairn</strong> Uk Hold<strong>in</strong>gs <strong>in</strong> exchange for an issue of shares. <strong>Cairn</strong> Uk Hold<strong>in</strong>gs then assigned the debt to <strong>Cairn</strong> India<br />
Hold<strong>in</strong>gs <strong>in</strong> exchange for 29,780,710 £1 ord<strong>in</strong>ary shares <strong>in</strong> <strong>Cairn</strong> India Hold<strong>in</strong>gs.<br />
Further loan capitalisations and capital contributions<br />
Follow<strong>in</strong>g the restructur<strong>in</strong>g of the group, <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> made the follow<strong>in</strong>g additional <strong>in</strong>vestments <strong>in</strong> subsidiaries:<br />
•<br />
•<br />
•<br />
$10.0m <strong>in</strong> Capricorn follow<strong>in</strong>g the capitalisation of a loan balance;<br />
$0.5m <strong>in</strong> <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited follow<strong>in</strong>g the capitalisation of a loan balance; and<br />
$0.6m <strong>in</strong> <strong>Cairn</strong> <strong>Energy</strong> Hold<strong>in</strong>gs Limited follow<strong>in</strong>g a capital contribution.<br />
(b) <strong>2007</strong> Group transactions<br />
Dur<strong>in</strong>g <strong>2007</strong>, Capricorn issued new share capital to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> for a total consideration of $275.2m.<br />
On 31 December <strong>2007</strong>, <strong>Cairn</strong> Uk Hold<strong>in</strong>gs Limited repurchased share capital from <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>, reduc<strong>in</strong>g the company’s<br />
<strong>in</strong>vestment. Capital of $128.9m was returned to <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong>.<br />
(c) Remuneration of key management personnel<br />
The remuneration of directors, who are the key management personnel of the Group, is set out below <strong>in</strong> aggregate. Further<br />
<strong>in</strong>formation about the remuneration of <strong>in</strong>dividual directors is provided <strong>in</strong> the audited part of the Directors’ Remuneration <strong>Report</strong><br />
on pages 57 to 68.<br />
<strong>2007</strong> 2006<br />
Group and Company $’000 $’000<br />
Short-term employee benefits 7,013 7,664<br />
Pension contributions 592 413<br />
Share-based payments 3,243 1,555<br />
––––––––––– –––––––––––<br />
128 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
10,848 9,632<br />
––––––––––– –––––––––––<br />
(d) Other transactions<br />
Dur<strong>in</strong>g the year the Group did not make any purchases <strong>in</strong> the ord<strong>in</strong>ary course of bus<strong>in</strong>ess from an entity under common control<br />
(2006: $356,000). There were no amounts owed to the party at the year end (2006: $nil).<br />
37. Events after the Balance Sheet Date<br />
In March 2008, <strong>Cairn</strong> India arranged a private placement of approximately $625m with Petronas and Orient Global Tamar<strong>in</strong>d<br />
Fund Pte Limited, who have agreed to subscribe for a total of 113 million shares. As a result of this private placement,<br />
<strong>Cairn</strong> <strong>Energy</strong>’s hold<strong>in</strong>g <strong>in</strong> <strong>Cairn</strong> India will reduce from 69% to 65%. The cash is due to be received <strong>in</strong> April, follow<strong>in</strong>g formal<br />
approval of the transaction.
RESERVES<br />
Direct Direct<br />
work<strong>in</strong>g entitlement<br />
<strong>in</strong>terest basis basis<br />
Group proven plus probable oil reserves ’000 bbls ’000 bbls<br />
At 1 January <strong>2007</strong> 207,178 179,618<br />
Additions of reserves <strong>in</strong> place 1,511 1,392<br />
Revisions of previous estimates 42,943 (14,018)<br />
Production (4,599) (2,687)<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 247,033 164,305<br />
––––––––––– –––––––––––<br />
Group proven plus probable gas reserves mmscf mmscf<br />
At 1 January <strong>2007</strong> 140,124 98,251<br />
Addition of reserves <strong>in</strong> place 974 896<br />
Revisions of previous estimates (56,514) (36,732)<br />
Production (34,741) (27,259)<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 49,843 35,156<br />
––––––––––– –––––––––––<br />
Group proven plus probable oil and gas reserves ’000 boe ’000 boe<br />
At 31 December <strong>2007</strong> 255,340 170,164<br />
––––––––––– –––––––––––<br />
At 31 December 2006 230,532 195,993<br />
––––––––––– –––––––––––<br />
Reserves by geographical segment at 31 December <strong>2007</strong> are as follows: ’000 boe ’000 boe<br />
India 254,365 169,386<br />
Bangladesh & Nepal 975 778<br />
––––––––––– –––––––––––<br />
At 31 December <strong>2007</strong> 255,340 170,164<br />
––––––––––– –––––––––––<br />
Reserves by geographical segment at 31 December 2006 are as follows: ’000 boe ’000 boe<br />
India 216,017 185,704<br />
Bangladesh & Nepal 14,515 10,289<br />
––––––––––– –––––––––––<br />
At 31 December 2006 230,532 195,993<br />
––––––––––– –––––––––––<br />
Production by geographical segment <strong>in</strong> the year was as follows: ’000 boe ’000 boe<br />
India 6,825 4,381<br />
Bangladesh & Nepal 3,564 2,849<br />
––––––––––– –––––––––––<br />
For the purposes of this table, 6 mscf of gas has been converted to 1 boe.<br />
10,389 7,230<br />
––––––––––– –––––––––––<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 129
RESERVES<br />
CONTINUED<br />
In India and Bangladesh absolute title to any hydrocarbon reserves is vested <strong>in</strong> the host government. However, under the terms<br />
of the PSCs, <strong>Cairn</strong> is entitled to receive a share of the hydrocarbon production and associated revenues.<br />
Group reserves have therefore been presented both on a direct entitlement basis and a direct work<strong>in</strong>g <strong>in</strong>terest basis. The direct<br />
entitlement basis takes <strong>in</strong>to account projections of government share of production calculated <strong>in</strong> accordance with certa<strong>in</strong> price<br />
and expenditure assumptions. Entitlement <strong>in</strong>terest reserves are utilised for unit of production basis calculations <strong>in</strong> the f<strong>in</strong>ancial<br />
statements.<br />
Direct work<strong>in</strong>g <strong>in</strong>terest basis is <strong>Cairn</strong>’s share of production calculated by reference to our Jo<strong>in</strong>t Venture participat<strong>in</strong>g <strong>in</strong>terest as<br />
shown <strong>in</strong> the Pr<strong>in</strong>cipal Licence Interests on page 71.<br />
For details of the book<strong>in</strong>g of new reserves and the revision to exist<strong>in</strong>g reserves dur<strong>in</strong>g the year, see the Operat<strong>in</strong>g and<br />
Exploration Review on page 17.<br />
Group reserves on an entitlement <strong>in</strong>terest basis are calculated on the Group’s long-term oil price assumption of $60/bbl<br />
(2006: $30/bbl) or the appropriate gas price as dictated by the relevant gas sales contract, escalation for prices and costs of 3%.<br />
130 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTICE OF ANNUAL GENERAL MEETING<br />
Notice is hereby given that the <strong>Annual</strong> General Meet<strong>in</strong>g of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> will be held <strong>in</strong> the Board Room of the Caledonian<br />
Hilton, Pr<strong>in</strong>ces Street, Ed<strong>in</strong>burgh EH1 2AB on Friday 23 May 2008 at 12noon for the follow<strong>in</strong>g purposes:<br />
As Rout<strong>in</strong>e Bus<strong>in</strong>ess<br />
To consider and, if thought fit, pass the follow<strong>in</strong>g resolutions, of which resolutions 1 to 7 will be proposed as ord<strong>in</strong>ary<br />
resolutions:<br />
1 That the report and accounts for the year ended 31 December <strong>2007</strong> be received.<br />
2 That the Directors’ Remuneration <strong>Report</strong> conta<strong>in</strong>ed <strong>in</strong> the report and accounts be approved.<br />
3 That Ernst & Young LLP be reappo<strong>in</strong>ted as auditors and that the directors be authorised to fix their remuneration.<br />
4 That Norman Murray, who retires by rotation, be re-elected as a director. Mr Murray is a member of the nom<strong>in</strong>ation<br />
committee.<br />
5 That Sir Bill Gammell, who retires by rotation, be re-elected as a director. Mr Gammell is a member of the nom<strong>in</strong>ation<br />
committee.<br />
6 That Hamish Grossart, who retires pursuant to the provisions of the Comb<strong>in</strong>ed Code, be re-elected as a director.<br />
Mr Grossart is a member of the audit, remuneration and nom<strong>in</strong>ation committees.<br />
7 That Ed Story, who retires pursuant to the provisions of the Comb<strong>in</strong>ed Code, be re-elected as a director. Mr Story is a<br />
member of the audit, remuneration and nom<strong>in</strong>ation committees.<br />
As Special Bus<strong>in</strong>ess<br />
To consider and, if thought fit, pass the follow<strong>in</strong>g resolutions, of which resolution 8 will be proposed as an ord<strong>in</strong>ary resolution<br />
and resolutions 9, 10 and 11 will be proposed as special resolutions:<br />
8 That, <strong>in</strong> substitution for any exist<strong>in</strong>g authority pursuant to section 80 of the Companies Act 1985 (as amended) (the ‘Act’)<br />
and <strong>in</strong> accordance with section 80 of the Act (and so that expressions used <strong>in</strong> this resolution shall bear the same mean<strong>in</strong>gs<br />
as <strong>in</strong> that section), but without prejudice to the exercise of any such authority prior to the date hereof, the directors of the<br />
Company be and are hereby generally and unconditionally authorised to allot relevant securities of the Company up to an<br />
aggregate nom<strong>in</strong>al amount of £2,683,740.25, provided that this authority shall expire on 22 May 2013 (unless previously<br />
revoked, varied or extended by the Company <strong>in</strong> general meet<strong>in</strong>g), but shall allow and enable the directors of the Company<br />
to make offers or agreements <strong>in</strong> relation to relevant securities before the expiry of this authority which would or might<br />
require relevant securities to be allotted <strong>in</strong> pursuance of such offers or agreements after the expiry of such period and<br />
to make allotments pursuant to such offers or agreements notwithstand<strong>in</strong>g that such period has expired.<br />
9 That, <strong>in</strong> substitution for any exist<strong>in</strong>g power under section 95 of the Companies Act 1985 (as amended) (the ‘Act’), but without<br />
prejudice to the exercise of any such power prior to the date hereof, the directors of the Company be and they are hereby<br />
empowered, pursuant to section 95(1) of the Act, to:<br />
(a) allot equity securities (as def<strong>in</strong>ed <strong>in</strong> section 94(2) of the Act) for cash pursuant to the authority referred to <strong>in</strong> resolution 8<br />
set out <strong>in</strong> the Notice conven<strong>in</strong>g the <strong>Annual</strong> General Meet<strong>in</strong>g of the Company on 23 May 2008 as if section 89(1) of the<br />
Act did not apply to any such allotment; and<br />
(b) sell relevant shares (as def<strong>in</strong>ed <strong>in</strong> section 94(5) of the Act) <strong>in</strong> the Company if, immediately before the sale, such shares are<br />
held by the Company as treasury shares (as def<strong>in</strong>ed <strong>in</strong> section 162A(3) of the Act) (‘treasury shares’) for cash (as def<strong>in</strong>ed <strong>in</strong><br />
section 162D(2) of the Act), as if section 89(1) of the Act did not apply to any such sale,<br />
up to an aggregate nom<strong>in</strong>al amount of £2,683,740.25, such power to expire on 22 May 2013, unless previously revoked,<br />
varied or extended by the Company <strong>in</strong> general meet<strong>in</strong>g, provided that such power shall be limited to the allotment of equity<br />
securities and the sale of treasury shares:<br />
(i) <strong>in</strong> connection with an offer of equity securities open for acceptance for a period fixed by the directors of the<br />
Company to the holders of ord<strong>in</strong>ary shares <strong>in</strong> the share capital of the Company on a fixed record date <strong>in</strong> proportion<br />
(as nearly as practicable) to their respective hold<strong>in</strong>gs of such ord<strong>in</strong>ary shares (but subject to such exclusions or other<br />
arrangements as the directors of the Company may consider necessary or expedient to deal with legal problems<br />
under or result<strong>in</strong>g from the application or apparent application of the laws of any territory or the requirements of any<br />
regulatory body or any stock exchange <strong>in</strong> any territory or <strong>in</strong> connection with fractional entitlements or otherwise<br />
howsoever); and<br />
(ii) other than pursuant to sub-paragraph (i) of this resolution, up to an aggregate nom<strong>in</strong>al amount of £402,601.29; save<br />
that the Company may, at any time prior to the expiry of such power, make an offer or enter <strong>in</strong>to an agreement which<br />
would or might require equity securities to be allotted or treasury shares to be sold after the expiry of such power<br />
and the directors of the Company may allot equity securities or sell treasury shares <strong>in</strong> pursuance of such an offer or<br />
agreement as if such power had not expired.<br />
10 That, <strong>in</strong> substitution for any exist<strong>in</strong>g authority pursuant to section 166 of the Companies Act 1985 (as amended) (the ‘Act’),<br />
the Company be and is hereby generally authorised to make market purchases (with<strong>in</strong> the mean<strong>in</strong>g of section 163(3) of<br />
the Act) pursuant to and <strong>in</strong> accordance with section 166 of the Act of fully paid ord<strong>in</strong>ary shares of 6 2 /13 pence each <strong>in</strong> the<br />
capital of the Company (the ‘ord<strong>in</strong>ary shares’ and each an ‘ord<strong>in</strong>ary share’) upon and subject to the follow<strong>in</strong>g conditions<br />
but otherwise unconditionally:<br />
(i) the maximum number of ord<strong>in</strong>ary shares hereby authorised to be purchased is 19,613,729 ord<strong>in</strong>ary shares <strong>in</strong> the capital<br />
of the Company (represent<strong>in</strong>g 14.99% of the Company’s issued ord<strong>in</strong>ary share capital at 31 March 2008);<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 131
NOTICE OF ANNUAL GENERAL MEETING<br />
CONTINUED<br />
(ii) the m<strong>in</strong>imum price (exclusive of expenses) which may be paid for an ord<strong>in</strong>ary share shall not be less than the nom<strong>in</strong>al<br />
value of the ord<strong>in</strong>ary shares at the time of purchase;<br />
(iii) the maximum price (exclusive of expenses) which may be paid for each such ord<strong>in</strong>ary share is, <strong>in</strong> respect of an ord<strong>in</strong>ary<br />
share contracted to be purchased on any day, the higher of (a) an amount (exclusive of expenses) equal to 105 per cent.<br />
of the average of the mid-market quotations for an ord<strong>in</strong>ary share of the Company and derived from the Daily Official<br />
List of the London Stock Exchange for the five bus<strong>in</strong>ess days immediately preced<strong>in</strong>g the day on which the ord<strong>in</strong>ary share<br />
is contracted to be purchased; and (b) an amount equal to the higher of the price of the last <strong>in</strong>dependent trade of an<br />
ord<strong>in</strong>ary share and the highest current <strong>in</strong>dependent bid for an ord<strong>in</strong>ary share as derived from the London Stock<br />
Exchange Trad<strong>in</strong>g System (SETS); and<br />
(iv) unless previously varied, revoked or renewed, the authority conferred by this resolution shall expire on the earlier of<br />
22 November 2009 or at the conclusion of the next <strong>Annual</strong> General Meet<strong>in</strong>g of the Company after the date on which<br />
this resolution is passed, provided that the Company may before such expiry enter <strong>in</strong>to a contract to purchase ord<strong>in</strong>ary<br />
shares under this authority which will or may be completed or executed wholly or partly after the expiration of such<br />
authority and may make a purchase of ord<strong>in</strong>ary shares <strong>in</strong> pursuance of such contract.<br />
11 That the Articles of Association produced to the meet<strong>in</strong>g and <strong>in</strong>itialled by the chairman of the meet<strong>in</strong>g for the purpose of<br />
identification be adopted as the Articles of Association of the Company <strong>in</strong> substitution for, and to the exclusion of, the<br />
exist<strong>in</strong>g Articles of Association, with effect from the conclusion of the 2008 <strong>Annual</strong> General Meet<strong>in</strong>g.<br />
By order of the Board<br />
Duncan Wood<br />
Company Secretary<br />
50 Lothian Road<br />
Ed<strong>in</strong>burgh EH3 9BY<br />
23 April 2008<br />
Notes:<br />
1 A member entitled to attend and vote at the meet<strong>in</strong>g is entitled to appo<strong>in</strong>t one or more proxies to attend, speak and<br />
vote <strong>in</strong>stead of him or her. A proxy need not be a member of the Company but must attend the meet<strong>in</strong>g to represent<br />
you. A form of proxy accompanies this annual report and must be lodged with the Company at the office of its registrars,<br />
Equ<strong>in</strong>iti Limited, Aspect House, Spencer Road, Lanc<strong>in</strong>g, West Sussex BN99 6ZR (the ‘Registrars’) or received via the<br />
Sharevote service (see Note 2 below) (a) not less than 48 hours before the time appo<strong>in</strong>ted for the meet<strong>in</strong>g or any<br />
adjournment(s) thereof, or (b) lodged us<strong>in</strong>g the CREST proxy vot<strong>in</strong>g service (see Note 7 below). The appo<strong>in</strong>tment of<br />
a proxy will not preclude a member entitled to attend and vote at the meet<strong>in</strong>g from do<strong>in</strong>g so if he or she wishes.<br />
You can only appo<strong>in</strong>t a proxy us<strong>in</strong>g the procedures set out <strong>in</strong> these notes and the notes to the form of proxy.<br />
2 Members may register their proxy appo<strong>in</strong>tments or vot<strong>in</strong>g directions electronically via the www.sharevote.co.uk website,<br />
where full details of the procedure are given. Members will need the Reference Number, Card ID and Account Number<br />
set out on the form of proxy which accompanies this annual report. Members are advised to read the terms and conditions<br />
of use carefully. Electronic communication facilities are available to all shareholders and those who use them will not be<br />
disadvantaged. The Company will not accept any communication that is found to conta<strong>in</strong> a computer virus.<br />
3 You may appo<strong>in</strong>t more than one proxy, provided that each proxy is appo<strong>in</strong>ted to exercise rights attached to different<br />
ord<strong>in</strong>ary shares. You may not appo<strong>in</strong>t more than one proxy to exercise rights attached to any one ord<strong>in</strong>ary share. To appo<strong>in</strong>t<br />
more than one proxy, please contact the Registrars on 0871 384 2660.<br />
4 The right to appo<strong>in</strong>t a proxy does not apply to persons whose shares are held on their behalf by another person and who<br />
have been nom<strong>in</strong>ated to receive communications from the Company <strong>in</strong> accordance with section 146 of the Companies Act<br />
2006 (‘Nom<strong>in</strong>ated Persons’). Nom<strong>in</strong>ated Persons may have a right under an agreement with the registered shareholder who<br />
holds the shares on their behalf to be appo<strong>in</strong>ted (or to have someone else appo<strong>in</strong>ted) as a proxy. Alternatively, if Nom<strong>in</strong>ated<br />
Persons do not have such a right, or do not wish to exercise it, they may have a right under such an agreement to give<br />
<strong>in</strong>structions to the person hold<strong>in</strong>g the shares as to the exercise of vot<strong>in</strong>g rights.<br />
5 There will be available for <strong>in</strong>spection at the registered office of the Company dur<strong>in</strong>g normal bus<strong>in</strong>ess hours on any weekday<br />
(exclud<strong>in</strong>g public holidays) from the date of this notice until the date of the meet<strong>in</strong>g and at the place of the meet<strong>in</strong>g for at<br />
least 15 m<strong>in</strong>utes prior to the meet<strong>in</strong>g and dur<strong>in</strong>g the meet<strong>in</strong>g, copies of the follow<strong>in</strong>g documents:<br />
(a) the register of directors’ <strong>in</strong>terests <strong>in</strong> ord<strong>in</strong>ary shares of the Company;<br />
(b) the executive directors’ service contracts and non-executive directors’ letters of appo<strong>in</strong>tment;<br />
(c) the Company’s Memorandum of Association and exist<strong>in</strong>g Articles of Association; and<br />
(d) the proposed new Articles of Association and a copy of the exist<strong>in</strong>g articles marked to show the changes proposed to be<br />
adopted pursuant to resolution 11 set out <strong>in</strong> this notice.<br />
132 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong>
NOTICE OF ANNUAL GENERAL MEETING<br />
CONTINUED<br />
6 The Company, pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, hereby specifies that only those<br />
shareholders registered on the register of members of the Company as at 6.00pm on 21 May 2008 shall be entitled to<br />
attend and vote at the meet<strong>in</strong>g <strong>in</strong> respect of shares registered <strong>in</strong> their name at that time. Changes to entries on the register<br />
of members after 6.00pm on 21 May 2008 shall be disregarded <strong>in</strong> determ<strong>in</strong><strong>in</strong>g the rights of any person to attend and vote at<br />
the meet<strong>in</strong>g, notwithstand<strong>in</strong>g any provisions <strong>in</strong> any enactment, the Articles of Association of the Company or other<br />
<strong>in</strong>strument to the contrary.<br />
7 CREST members who wish to appo<strong>in</strong>t a proxy or proxies through the CREST electronic proxy appo<strong>in</strong>tment service may do<br />
so for the <strong>Annual</strong> General Meet<strong>in</strong>g to be held on 23 May 2008 and any adjournment(s) thereof by us<strong>in</strong>g the procedures<br />
described <strong>in</strong> the CREST Manual. CREST personal members or other CREST sponsored members and those CREST members<br />
who have appo<strong>in</strong>ted a vot<strong>in</strong>g service provider(s) should refer to their CREST sponsor or vot<strong>in</strong>g service provider(s) who will be<br />
able to take the appropriate action on their behalf.<br />
In order for a proxy appo<strong>in</strong>tment or <strong>in</strong>struction made us<strong>in</strong>g the CREST service to be valid, the appropriate CREST message<br />
(a ‘CREST Proxy Instruction’) must be properly authenticated <strong>in</strong> accordance with Euroclear Uk & Ireland Limited’s (‘EUI’)<br />
specifications and must conta<strong>in</strong> the <strong>in</strong>formation required for such <strong>in</strong>structions, as described <strong>in</strong> the CREST Manual. The<br />
message, regardless of whether it constitutes the appo<strong>in</strong>tment of a proxy or an amendment to the <strong>in</strong>struction given to a<br />
previously appo<strong>in</strong>ted proxy, must, <strong>in</strong> order to be valid, be transmitted so as to be received by the Registrars by no later than<br />
12.00noon on 21 May 2008. No such message received through the CREST network after this time will be accepted. For this<br />
purpose, the time of receipt will be taken to be the time (as determ<strong>in</strong>ed by the timestamp applied to the message by the<br />
CREST Applications Host) from which the Registrars are able to retrieve the message by enquiry to CREST <strong>in</strong> the manner<br />
prescribed by CREST. After this time, any change of <strong>in</strong>structions to proxies appo<strong>in</strong>ted through CREST should be<br />
communicated to the appo<strong>in</strong>tee through other means.<br />
CREST members and, where applicable, their CREST sponsors or vot<strong>in</strong>g service provider(s) should note that EUI does not<br />
make available special procedures <strong>in</strong> CREST for any particular messages. Normal system tim<strong>in</strong>gs and limitations will<br />
therefore apply <strong>in</strong> relation to the <strong>in</strong>put of CREST Proxy Instructions. It is the responsibility of the CREST member concerned<br />
to take (or, if the CREST member is a CREST personal member or sponsored member or has appo<strong>in</strong>ted a vot<strong>in</strong>g service<br />
provider(s), to procure that his CREST sponsor or vot<strong>in</strong>g service provider(s) take) such action as shall be necessary to ensure<br />
that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members<br />
and, where applicable, their CREST sponsors or vot<strong>in</strong>g service provider(s) are referred, <strong>in</strong> particular, to those sections of the<br />
CREST Manual concern<strong>in</strong>g practical limitations of the CREST system and tim<strong>in</strong>gs.<br />
The Company may treat as <strong>in</strong>valid a CREST Proxy Instruction <strong>in</strong> the circumstances set out <strong>in</strong> regulation 35(5)(a) of the<br />
Uncertificated Securities Regulations 2001.<br />
8 As at 5.00pm on 31 March 2008, the Company’s issued share capital comprised 130,845,424 ord<strong>in</strong>ary shares of 6 2 /13 pence<br />
each. Each ord<strong>in</strong>ary share carries the right to one vote at a general meet<strong>in</strong>g of the Company and, therefore, the total number<br />
of vot<strong>in</strong>g rights <strong>in</strong> the Company as at 5.00pm on 31 March 2008 was 130,845,424.<br />
9 This Notice of <strong>Annual</strong> General Meet<strong>in</strong>g should be read <strong>in</strong> conjunction with the sections of the <strong>Annual</strong> <strong>Report</strong> entitled<br />
‘Board of Directors’ on pages 32 to 34 and ‘Directors’ <strong>Report</strong>’ on pages 50 to 56.<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 133
GLOSSARY OF TERMS<br />
The follow<strong>in</strong>g are the ma<strong>in</strong> terms and abbreviations used <strong>in</strong> this annual report.<br />
CORPORATE<br />
AGM <strong>Annual</strong> General Meet<strong>in</strong>g<br />
Board the Board of Directors of <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong><br />
BSE Bombay Stock Exchange<br />
<strong>Cairn</strong> / <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong> and/or its subsidiaries as<br />
<strong>Cairn</strong> <strong>Energy</strong> appropriate<br />
<strong>Cairn</strong> India / <strong>Cairn</strong> India Limited and/or its subsidiaries<br />
CIL as appropriate<br />
<strong>Cairn</strong> India <strong>Cairn</strong> India and/or its previously named<br />
Group subsidiaries as appropriate<br />
Capricorn / Capricorn Oil Limited (previously named<br />
Capricorn Group Capricorn <strong>Energy</strong> Limited) and/or its<br />
subsidiaries as appropriate<br />
Comb<strong>in</strong>ed Code The Comb<strong>in</strong>ed Code dated June 2006<br />
appended to the List<strong>in</strong>g Rules<br />
Companies Act The Companies Act 1985 (as amended)<br />
and/or the Companies Act 2006<br />
(as amended), as appropriate<br />
the Company <strong>Cairn</strong> <strong>Energy</strong> <strong>PLC</strong><br />
DGH Director General of Hydrocarbons<br />
Dyas Dyas BV<br />
EGM Extraord<strong>in</strong>ary General Meet<strong>in</strong>g<br />
EU European Union<br />
FSA F<strong>in</strong>ancial Services Authority<br />
GMB Group Management Board<br />
GoI Government of India<br />
Group the Company and its subsidiaries<br />
134 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
GSCs gas sales contracts<br />
IFC International F<strong>in</strong>ance Corporation<br />
IPO Initial public offer<strong>in</strong>g of shares <strong>in</strong> <strong>Cairn</strong> India<br />
Limited<br />
JV jo<strong>in</strong>t venture<br />
kPI key performance <strong>in</strong>dicator<br />
List<strong>in</strong>g Rules The List<strong>in</strong>g Rules of the United k<strong>in</strong>gdom<br />
List<strong>in</strong>g Authority<br />
LSE London Stock Exchange<br />
LTIP Long Term Incentive Plan<br />
medOil medOil plc and/or its subsidiaries<br />
as appropriate<br />
NELP VI Sixth New Exploration Licenc<strong>in</strong>g<br />
Policy round<br />
NELP VII Seventh New Exploration Licenc<strong>in</strong>g<br />
Policy round<br />
NSE National Stock Exchange of India Limited<br />
OGP International Association of Oil and Gas<br />
Producers<br />
OIDA cess Indian Oil Industry (Development) Act 1974<br />
ONGC Oil and Natural Gas Corporation Ltd<br />
Orient Global Orient Global Tamar<strong>in</strong>d Fund Pte Limited<br />
Petronas Petroliam Nasional Berhad<br />
Plectrum Plectrum Petroleum Plc and/or its<br />
subsidiaries as appropriate<br />
PIRC Pensions Investment Research<br />
Consultants Limited<br />
PSC Production Shar<strong>in</strong>g Contract<br />
RMC Risk Management Committee<br />
Santos Santos International Hold<strong>in</strong>gs Pty Limited<br />
SEBI Securities and Exchange Board of India
GLOSSARY OF TERMS<br />
CONTINUED<br />
TECHNICAL<br />
2C best estimate cont<strong>in</strong>gent resources<br />
2P proven plus probable<br />
2D/3D two dimensional/three dimensional<br />
ASP alkal<strong>in</strong>e-surfactant-polymer<br />
boe barrels of oil equivalent<br />
boepd barrels of oil equivalent per day<br />
bopd barrels of oil per day<br />
bscf billion standard cubic feet of gas<br />
DoC Declaration of Commerciality<br />
EOR enhanced oil recovery<br />
EPC Eng<strong>in</strong>eer<strong>in</strong>g Procurement Contract<br />
FDP field development plan<br />
FEED front end eng<strong>in</strong>eer<strong>in</strong>g and design<br />
MBA fields Mangala, Bhagyam and Aishwariya<br />
mmbbls million barrels of oil<br />
mmboe million barrels of oil equivalent<br />
mmscf million standard cubic feet of gas<br />
mmscfd million standard cubic feet of gas per day<br />
NAA Northern Appraisal Area<br />
RoU Rights of Use<br />
STOIIP stock tank oil <strong>in</strong>itially <strong>in</strong> place<br />
ACCOUNTING<br />
$ United States Dollars<br />
bn billion<br />
CIESOP <strong>Cairn</strong> India Employee Stock Option Plan<br />
CIPOP <strong>Cairn</strong> India Employee Performance<br />
Option Plan<br />
CISMP <strong>Cairn</strong> India Senior Management Plan<br />
ESOP Employee Share Ownership Plan<br />
IAS International Account<strong>in</strong>g Standard<br />
IFRIC International F<strong>in</strong>ancial <strong>Report</strong><strong>in</strong>g<br />
Interpretations Committee<br />
IFRS International F<strong>in</strong>ancial <strong>Report</strong><strong>in</strong>g Standards<br />
IAS 36 International Account<strong>in</strong>g Standard 36<br />
‘Impairment of Assets’<br />
LIBOR London Inter-Bank Offered Rate<br />
m million<br />
PTRR post-tax rate of return<br />
TSR total share return<br />
WAEP weighted average excercise price<br />
CORPORATE RESPONSIBILITY<br />
BRMG Bus<strong>in</strong>ess Risk Management Guidel<strong>in</strong>es<br />
CAB <strong>Cairn</strong> Advisory Board<br />
CH 4<br />
Methane<br />
CR Corporate Responsibility<br />
CRMS Corporate Responsibility Management<br />
System<br />
ERM Environmental Resource Management<br />
ESIA Environmental and Social Impact<br />
Assessment<br />
GHG green house gas<br />
HSE Health, Safety and Environment<br />
ISO 14001 International Standard for Environmental<br />
Management Systems<br />
LTI lost time <strong>in</strong>cident<br />
LTIFR lost time <strong>in</strong>cident frequency rate<br />
PCDP Public Consultation and Disclosure Plan<br />
TRIF total recordable <strong>in</strong>cident frequancy<br />
CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong> 135
COMPANY INFORMATION<br />
F<strong>in</strong>ancial Advisers<br />
N M Rothschild & Sons Limited<br />
New Court<br />
St Swith<strong>in</strong>’s Lane<br />
London EC4P 4DU<br />
Secretary<br />
Duncan Wood LLB<br />
Solicitors<br />
Shepherd and Wedderburn LLP<br />
Saltire Court<br />
20 Castle Terrace<br />
Ed<strong>in</strong>burgh EH1 2ET<br />
Auditor<br />
Ernst & Young LLP<br />
1 More London Place<br />
London SE1 2AF<br />
Stockbrokers<br />
Hoare Govett Limited<br />
250 Bishopsgate<br />
London EC2M 4AA<br />
Merrill Lynch International<br />
2 k<strong>in</strong>g Edward Street<br />
London EC1A 1HQ<br />
136 CAIRN ENERGY <strong>PLC</strong> ANNUAL REPORT <strong>2007</strong><br />
Registrars<br />
Equ<strong>in</strong>iti<br />
Aspect House<br />
Spencer Road<br />
Lanc<strong>in</strong>g<br />
West Sussex BN99 6DA<br />
T 0871 384 2660<br />
www.shareview.co.uk<br />
Bankers<br />
Bank of Scotland plc<br />
The Mound<br />
Ed<strong>in</strong>burgh EH1 1YZ<br />
Citigroup<br />
33 Canada Square<br />
Canary Wharf<br />
London E14 5LB<br />
International F<strong>in</strong>ance Corporation (IFC)<br />
2121 Pennsylvania Avenue, NW<br />
Wash<strong>in</strong>gton DC 20433<br />
United States of America<br />
The Royal Bank of Scotland plc (RBS)<br />
24/25 St Andrew Square<br />
Ed<strong>in</strong>burgh EH2 1AF<br />
Note<br />
<strong>Cairn</strong> India has an $850m syndicated revolv<strong>in</strong>g credit facility<br />
with 12 <strong>in</strong>ternational banks, <strong>in</strong>clud<strong>in</strong>g International F<strong>in</strong>ance<br />
Corporation.<br />
These materials conta<strong>in</strong> forward-look<strong>in</strong>g statements regard<strong>in</strong>g <strong>Cairn</strong>, our corporate plans, future f<strong>in</strong>ancial condition, future results of operations, future bus<strong>in</strong>ess<br />
plans and strategies. All such forward-look<strong>in</strong>g statements are based on our management’s assumptions and beliefs <strong>in</strong> the light of <strong>in</strong>formation available to them<br />
at this time. These forward-look<strong>in</strong>g statements are, by their nature, subject to significant risks and uncerta<strong>in</strong>ties and actual results, performance and achievements<br />
may be materially different from those expressed <strong>in</strong> such statements. Factors that may cause actual results, performance or achievements to differ from<br />
expectations <strong>in</strong>clude, but are not limited to, regulatory changes, future levels of <strong>in</strong>dustry product supply, demand and pric<strong>in</strong>g, weather and weather related<br />
impacts, wars and acts of terrorism, development and use of technology, acts of competitors and other changes to bus<strong>in</strong>ess conditions. <strong>Cairn</strong> undertakes no<br />
obligation to revise any such forward-look<strong>in</strong>g statements to reflect any changes <strong>in</strong> <strong>Cairn</strong>’s expectations with regard thereto or any change <strong>in</strong> circumstances or<br />
events after the date hereof.
The cover and text pages 1-36 of this report are<br />
pr<strong>in</strong>ted on Hello Matt, a material that is produced<br />
at a mill that holds ISO 14001 certification.<br />
Cert no. TT-COC-002242<br />
Pages 37–136 of this report are pr<strong>in</strong>ted on Naturalis<br />
Smooth Recycled a material produced at a mill that<br />
holds ISO 14001 certification.<br />
50%
HEAD OFFICE<br />
50 Lothian Road<br />
Ed<strong>in</strong>burgh<br />
EH3 9BY<br />
T +44 131 475 3000<br />
F +44 131 475 3030<br />
E pr@cairn-energy.plc.uk<br />
www.cairn-energy.plc.uk<br />
BANGLADESH<br />
IDB Bhaban 9th Floor<br />
E/8A Rokeya Sharani<br />
Sher-E-Bangla Nagar<br />
Agargaon<br />
Dhaka 1207<br />
T +880 2 812 7387<br />
F +880 2 812 5744<br />
NEPAL<br />
House No.66<br />
Hitaisi Marg<br />
Ward No.4<br />
Baluwater<br />
Kathmandu<br />
www.cairn-energy.plc.uk<br />
CAIRN INDIA<br />
Head Office<br />
3rd & 4th Floors<br />
Vipul Plaza, Suncity<br />
Sector 54<br />
Gurgaon 122 002<br />
T +91 124 414 1360<br />
F +91 124 288 9320<br />
Registered Office<br />
101, West View<br />
Veer Savarkar Marg<br />
Prabhadevi<br />
Mumbai 400025