Annual Report 2007 in PDF - Cairn Energy PLC

RISk FACTORS
CONTINUED
The development plans for the northern fields are expected to assume the use of EOR techniques to extract an additional
incremental percentage of the estimated oil in place in the reservoirs. There is a risk that Cairn India may not be able to use EOR
techniques successfully. These risks include sourcing, purchasing and transportation of large quantities of the types of polymer
chemicals that would be required for the EOR techniques, failure to maintain the properties of the polymer chemicals in the
reservoir, leading to lower incremental recovery of oil and polymer fouling of the surface facilities leading to a deterioration
of the operating efficiency of the processing plant. The economic viability of the EOR application will be determined by the
prevailing crude oil price and the incremental operational expenditure which includes the cost of chemicals. A pilot EOR
project is planned shortly after commencement of production from the Mangala field.
Operations
The Group’s revenues are dependent on the continued performance of its operating facilities. Operational risks include
maintaining asset integrity, which can be affected by a number of factors including improper operating and maintenance
regimes and plant availability, which can be significantly impacted by unplanned shutdowns and/or equipment failure, the
performance by and sharing of risk between JV partners and the location of some of the Group’s operations (which may expose
them to natural hazards such as cyclones, flooding and earthquakes). If these risks materialise, the Group may not be able to
meet its corporate responsibility policies and standards, or planned output levels or unit operating costs. These factors may have
an effect on cost control, or a potentially material impact on the Group’s reputation and the results of the Group’s operations.
Future production of crude oil and natural gas is dependent on the Group finding, or acquiring and developing further reserves.
The Group has exploration licences in a number of countries where environmental, geological and infrastructural conditions are
challenging and as a consequence costs can be higher.
The cost of drilling, completing and operating wells is often uncertain. As a result, the Group may incur cost overruns or may
be required to curtail, delay or cancel drilling operations because of many factors, including unexpected drilling conditions,
pressure or irregularities in geological formations, equipment failures or accidents, adverse weather conditions, the need for
compliance with environmental regulations, governmental requirements and shortages or delays in the availability of drilling
rigs and the delivery of equipment.
If the Group fails to conduct successful exploration activities or to acquire assets holding proven reserves, the Group’s proven
reserves will decline as it extracts and depletes existing reserves. The Group’s future production depends significantly upon its
success in finding or acquiring and developing additional reserves. If the Group is unsuccessful, it may not meet its production
targets, and its total proven reserves and production will decline, which could adversely affect the results of its operations and
financial condition.
Commercial
Cairn India may not be able to obtain competitive market prices for its crude oil sales from its fields in Rajasthan. Cairn India is
obliged to sell 100% of its crude oil production to the GoI or its nominee, and the GoI is obliged to buy the crude oil pursuant
to the PSC. The purchase price will be based upon a basket of crude oils to be decided between Cairn India and the nominee
based upon a mixture and weighting of crude oils that would produce a quality similar to the quality of crude oil expected to
be produced by Cairn India. There can be no assurance that the basket of crude oils used to determine the price of Cairn India
crude oil sales to the nominee will result in a value approximating to the price used by Cairn India in its development
and financial planning.
Under the gas sales agreement for the Sangu gas field in Bangladesh, the price payable to Capricorn for the supplied gas is
capped at a price which equates to approximately $21 per barrel (Brent). As the price is presently at that cap, the price payable
to Capricorn will not increase in line with increases in oil price. The operating costs of the Sangu gas field have, however,
increased as a result of recent high oil prices. There is a risk, therefore, that further increases in the price of oil may further
increase operating costs at the Sangu gas field and that, accordingly, whilst operating costs will ultimately be recoverable
under the PSC cost recovery mechanism, Capricorn’s margin under the sales agreement may be further reduced.
Exchange Rates, Interest Rates and Currency Controls
The Group’s Cash Flow, Income Statement and Balance Sheet are reported in US Dollars and may be significantly affected by
fluctuations in exchange rates. Shares in Cairn India are, and any dividends which may become payable in respect of them will
be, denominated in Rupees. The material holding in Cairn India by the Group, whose principal currency is not Rupees, exposes
the Group to foreign currency exchange rate risk.
Cairn India has been funded largely in United States Dollars through its cash generation from operations, the conversion of the
IPO proceeds and its loan facilities, and has significant United States Dollar cash holdings. Cairn India will nonetheless incur
significant expenses in Rupees in connection with the development of the oil fields in Rajasthan. Accordingly, Cairn India has
adopted and implemented a foreign exchange hedging policy to limit exposure to movement in the exchange rate between
the United States Dollar and the Rupee.
CAIRN ENERGY PLC ANNUAL REPORT 2007 37