CAIRN ENERGY PLC ANNUAL REPORT & ACCOUNTS 2008 www.cairnenergy.com
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Delivering Value CAIRN ENERGY PLC ANNUAL REPORT & ACCOUNTS 2008 OVERVIEW O verview About Cairn 4 Highlights of 2008 5 Rajasthan Development Overview 8
BUSINESS REVIEW Chairman’s Statement 12 Chief Executive’s Review 16 Operating and Exploration Review 18 BUSINESS REVIEW Cairn India Assets 21 Capricorn Assets 24 Corporate Responsibility 28 Financial Review 34 Board of Directors 38
Governance and accounts Risk Factors 41 Corporate Governance Statement 45 Directors’ Report 56
G overn a nce a n d a ccounts Directors’ Remuneration Report 60 Principal Licence Interests 73 Independent Auditor’s Report to the Members of Cairn Energy PLC 75 Group Income Statement 77 Statements of Recognised Income and Expense 78 Balance Sheets 79 Statement of Cash Flows 80 Notes to the Accounts 81 Reserves 132 Glossary of Terms 134 Company Information 136
Printed on Hello Matt (300gsm cover & 170gsm pages 1-40) and Soporset Offset (110gsm pages 41-136). Hello Matt and Soporset are FSC-recognised papers, produced from sustainably-managed forests. This publication was printed with vegetable oil-based inks by an FSC-recognised printer that holds an ISO 14001 accreditation. Cairn has demonstrated a long term commitment to India over 15 years of investment and throughout 2008 it continued to build on the foundations for its future.
The commencement of oil production from Rajasthan will initiate a period of transformational growth for the company as we target 175,000 bopd from the Mangala, Bhagyam and Aishwariya fields.
We are also confident that our new frontier exploration position in Greenland has the potential to provide further transformational growth in the years to come.
CAIRN ENERGY PLC ANNUAL REPORT 2008 1
Capricorn. and India Cairn 2008 Previous page Previous Processing Mangala the of Construction Mangala underway. is Rajasthan, Terminal, 2009. Q3 in commence to due is production CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 4 is an Edinburgh-based oil and gas exploration and production production and exploration gas and oil Edinburgh-based an is Cairn 1988. since Exchange Stock London the on listed company business: the of parts two are There is an exploration led business with a strategy of organic organic of strategy a with business led exploration an is Capricorn assets core Capricorn’s acquisition. enhancing value and growth is Capricorn Mediterranean. the and Asia South Greenland, in are Cairn. of subsidiary 90% non-listed a is listed on the Bombay Stock Exchange and the the and Exchange Stock Bombay the on listed is India Cairn of total a in interests has and India of Exchange Stock National in interest 65% a holds Cairn Lanka. Sri and India in blocks 14 Cairn. of subsidiary listed a is India Cairn India. Cairn About Cairn About overVIEW Highlights of 2008
Phased Mangala, Bhagyam and Aishwariya (MBA) development project on track and funded to deliver first oil from the core Mangala development during H2 2009
Construction of Mangala Processing Terminal (MPT) underway with four processing trains planned with a nameplate capacity of 205,000 bopd with scope for expansion
Leading material frontier exploration position offshore west and south Greenland
Operational Four processing trains: Greenland Group booked entitlement reserves • Q3 2009: Mangala production train 1 Leading material frontier exploration increased from 170.2 mmboe to (30,000 bopd capacity), initial export position offshore west and south 254.5 mmboe by trucking Greenland Gross operated production for 2008: • Q4 2009: Mangala production train 2 Processing of 10,000 km of 2D seismic 76,298 boepd (2007: 87,031 boepd) (50,000 bopd capacity), export by data almost complete Average net entitlement production pipeline Additional seismic and well site surveys for 2008: 12,801 boepd • H1 2010: Mangala production train 3 planned for summer 2009 (2007: 19,809 boepd) (50,000 bopd capacity), providing for 125,000 bopd Mangala plateau Financial India production Profit after tax of $367m including Phased Mangala, Bhagyam and • 2011: Production train 4 (75,000 bopd $356m exceptional gain on 4% Aishwariya (MBA) development project capacity), providing for 175,000 bopd placement of shares in Cairn India on track and funded to deliver first oil Rajasthan plateau production. Limited (CIL) (2007 restated: $1,556m from the core Mangala development Aishwariya production potential upgraded including $1,539m exceptional gain during H2 2009 from 10,000 bopd to 20,000 bopd, subject on IPO of CIL) Construction of Mangala Processing to regulatory approval Cairn placing raised $161m in Terminal (MPT) underway with four More than 3,000 km2 of acreage secured March 2009 processing trains planned with a under long term development contract Cash generated from operations nameplate capacity of 205,000 bopd $150m (2007: $155m ) with scope for expansion Raageshwari East well, 90 km south of Mangala, flowed 500 bopd on test Group net cash at 31 December 2008 $898m ( 2007: $827m)
CAIRN ENERGY PLC ANNUAL REPORT 2008 5
2 LONDON += Delhi New Combined Area ~3,134km Area Combined London & Delhi New
PIPELINE Mangala Mangala Processing (MPT) Terminal 65km Rajasthan Block Block Rajasthan RJ-ON-90/1 130km 2008 2 Previous page Previous from km 600 runs pipeline export The Gujarat the to desert Rajasthan the the via production of Export coast. 2009. Q4 in commence to due is pipeline
The size and scale of our development in the Rajasthan desert desert Rajasthan the in development our of scale and size The and construction the standards, anyone’s by significant is themselves for speak alone figures infrastructure
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 8 Rajasthan Development Overview Development Rajasthan Fact inter-field and field intra of km 500 Approx roads field inter of km 80 and pipelines laying with comparable built, been have Brighton. to London from road new a
The total acreage of of acreage total The Development Field our same the nearly is Area and Delhi New as area combined London 3,111 km overVIEW 1.6 km2 The Mangala Processing Terminal (MPT) covers an area equivalent to 200 football pitches
Fact Engineering and construction work on site has used more than 23,500 metric tonnes of steelwork and over 98,000 m3 of concrete.
600 km The Export Pipeline would almost run from Edinburgh to London
Fact The insulated pipeline will maintain United Kingdom the crude oil temperature above Distance from Edinburgh 65°C along its entire length. to London ~650 km
CAIRN ENERGY PLC ANNUAL REPORT 2008 9
Chairman’s Statement Norman Murray, Chairman BUSIN E SS
REV I E W Today Cairn’s Indian business is entering a period of transformational growth with the phased build up of oil production, followed by a sustainable plateau, from its world class oil fields in Rajasthan.
Previous page The Mangala Processing Terminal, Rajasthan. Mangala production is due to commence in Q3 2009.
12 CAIRN ENERGY PLC ANNUAL REPORT 2008 The planned ultimate production capacity of the Rajasthan development has increased over the last 12 months as we have sought to optimise the potential of the resource base. The decision to develop the key fields in a phased manner has enhanced operational flexibility and allowed the initial focus to remain on Mangala and the export infrastructure.
The Bhagyam and Aishwariya fields, Enhanced Oil Recovery (EOR), the Barmer Hill potential and other fields will follow in sequence when production is expected to rise to more than 175,000 barrels of oil per day.
Once Mangala is on stream it will generate revenues that will be used initially to invest in further development work in Rajasthan and to pay down debt. The increasing production profile will deliver further value from Rajasthan, which will in turn provide Corporate Overview the Group with additional financial flexibility. Cairn has a focused strategy for delivering organic growth and shareholder value. Greenland Cairn’s exploration acreage position in Greenland is held through Underpinning the strategy for growth is the sequential its 90% owned international exploration subsidiary Capricorn. development of our 25 oil discoveries in Rajasthan, A total of eight offshore blocks were acquired during 2008 and complemented by a new and exciting frontier exploration Capricorn has already completed its obligatory seismic work position in Greenland. programme for the first four-year period over all of its blocks. Planning for an exploration drilling campaign is already underway. Cairn’s vision to create and build a business in India over the last 15 years has been based on the firm belief in the hydrocarbon The Arctic basins of Greenland are increasingly being recognised potential of the country and its hidden value potential. Today as a potentially world class prospective area. In July 2008, the US Cairn’s Indian business, operated and managed by Cairn India Geological Survey (USGS) released its Circum-Arctic Resource Limited (CIL), is entering a period of transformational growth with Appraisal report and concluded that “The extensive Arctic the phased build up of oil production, followed by a sustainable continental shelf may constitute the geographically largest plateau, from its world class oil fields in Rajasthan. unexplored prospective area for petroleum remaining on earth.” A previous study by the USGS in 1996 recognised Greenland as Cairn holds a similar vision for Greenland, based on the same one of the world’s top ten potential hydrocarbon destinations for belief in its hydrocarbon potential. These two areas are however ‘yet to finds’. at different stages of the exploration and production cycle; in Rajasthan, production will commence in 2009, whilst Greenland Board offers material frontier exploration potential, the true value of I would like to record my thanks to Ed Story who stood down as a which has yet to be discovered. Non-Executive Director in January 2009 having joined the Board in 1997. His insight and knowledge of the worldwide oil and gas In the first half of 2008, the Government of India (GoI) approved industry has been hugely beneficial to the Board. the shifting of the point where the crude would be delivered from the MBA fields in Rajasthan. This meant that the contractual crude Dr James Buckee, the former President and Chief Executive Officer oil delivery point moved from the Mangala Processing Terminal of Talisman Energy, was appointed to the Board in January 2009. (MPT) in the Rajasthan desert to existing infrastructure hubs and points on the Gujarat coast, with investment in the evacuation I am also delighted to report that Mike Watts, formerly Exploration pipeline included in the project. This change in development plan and New Business director is now Deputy Chief Executive of necessitated the raising of $630m of additional funds via a placing the Company. of CIL shares in April 2008. Following the placing, the Company’s holding in CIL reduced by 4% to 65%. Outlook The Group intends to continue to target material growth across In the second half of the year, the capital markets (both debt and its business. equity) were difficult to access for most businesses. The main priority for Cairn throughout this period was to re-examine and The focus in 2009 is delivering production in Rajasthan on re-schedule the phasing of certain key elements of the Rajasthan schedule and agreeing oil sales contracts with the buyers of development. This was done to meet the target delivery date of the Rajasthan crude. first oil in the second half of 2009 and to ensure that the project remained suitably financed. Cairn’s original vision for and belief in India has been borne out by events. This year will see production commence not only in The 5% placing of PLC shares announced in March 2009 has Rajasthan but also from the substantial discoveries made by raised $161m to strengthen Cairn’s equity capital base in order Reliance off the east coast. to maintain operational and financial flexibility across all of its operations both in relation to the Rajasthan development and Our exploration activities in Greenland are at a very early stage, its exploration position in Greenland. but we firmly believe in the country’s hydrocarbon potential and our evaluation efforts will continue whilst we also investigate India options for early drilling. The current focus for CIL is the delivery of the high-value Rajasthan project. The next two years promise to be an exciting time for Cairn. With a marked increase in Group production and cash flow we will continue to evaluate the strategic options for further creation of shareholder value.
Norman Murray Chairman, 6 April 2009 Image (Above) Cairn Board visit to the Mangala Processing Terminal, Rajasthan in December 2008.
CAIRN ENERGY PLC ANNUAL REPORT 2008 13
Chief Executive’s Review Sir Bill Gammell, Chief Executive BUSIN E SS REV I E W
Cairn’s Rajasthan development continues to grow in scope and scale with first oil production in the second half of 2009.
The Mangala terminal includes the phased construction of four planned processing trains with a combined production capacity of 205,000 bopd, and potential for expansion.
We have established a material frontier exploration position offshore west and south Greenland with 72,000 km2 under licence and the company continues to examine options for early drilling.
Previous page Nanortalik Port, Island of Qoornoq, south Greenland
16 CAIRN ENERGY PLC ANNUAL REPORT 2008 More than 3,000 km2 in Rajasthan are now under long term development contract. There is further incremental production growth potential across this acreage as demonstrated by the Raageshwari East well, which flowed 500 bopd in December 2008.
The challenge in the coming years will be to exploit the full resource potential in the Barmer basin in Rajasthan through the use of EOR techniques and through further work on the remaining fields including the Barmer Hill reservoirs.
Subject to regulatory approval there is potential to extend and also enhance peak plateau production from the resource base of the Rajasthan fields above the level of 175,000 bopd.
Greenland Cairn strategy has always been to focus on opportunities with A significant frontier exploration position in Greenland has been material growth potential. For more than 20 years Cairn has been established. Within the first year of the licence agreements a successful in exploring for, finding and developing hydrocarbons 10,000 km 2D seismic programme in the west and south of and the focus on South Asia has been the cornerstone of the Greenland has been acquired and final processed results for the Group’s growth. Integral to the next stage of growth are the Disko area became available in late March. The seismic results for Rajasthan development project centred on Mangala, the largest the southern area are expected in April. This seismic programme of 25 current discoveries on the block and the expansion into has satisfied in full the Group’s initial four year exploration work frontier exploration acreage in Greenland. programme across all of its acreage. Interpretation of these data sets is now underway. India Cairn India, in its second year of operation as an Indian listed The first Cairn operated exploration drilling in Greenland is subsidiary, has continued to make good progress across all planned for 2011. It is however the intention to undertake at least of its business. three drilling site surveys and to purchase certain long lead items this year in order to preserve the option, should a suitable rig The integrated upstream and midstream project in Rajasthan become available, for exploration drilling in 2010. (with local power and water supply) is one of the largest onshore oil and gas developments in India with more than 10,000 workers Offshore west Greenland can be considered as containing three currently involved in construction activities in Rajasthan and Gujarat. separate geological basin areas with various sub-basins; the eight blocks Cairn has acquired are spread across each of these main Preparations for first oil from the Rajasthan fields are on track basins. The two Disko blocks, for example, lie within the Baffin Bay and the development of the MPT to which the bulk of the other Basin, where to date no offshore drilling has taken place. field facilities will be connected is well underway. Construction of the 600 km heated pipeline from the MPT to the coast and In view of the perceived material exploration potential of the complex work in respect of the related facilities is on track. Greenland, Cairn is still looking to enhance its acreage portfolio, particularly when the Baffin Bay and North East Greenland Basins The size and scope of the Rajasthan project has substantially are put up for bid by the authorities in 2010 and 2012 respectively. increased since the original Mangala discovery in 2004 when peak Subject to Government approval the company intends to acquire production was originally forecast at 100,000 barrels of oil per reconnaissance seismic along the coast of east Greenland this day (bopd). Today the facilities at the MPT will include the phased year where it has applied for a Prospecting Licence. construction of four processing trains with a production capacity of 205,000 bopd and scope for expansion. Financial Review In 2008, Cairn has focused on allocating its resources to those The MBA fields have proven plus probable (2P) gross reserves assets that will drive shareholder value. At 31 December 2008 and 2C resources of almost 700 million barrels of oil equivalent Cairn had net cash of $898m, positive operating cash flows and (mmboe) with a further 300 mmboe of EOR potential presently net assets of $2.3bn. classified as contingent resource. Subject to the results of the EOR project these resources would be expected to be re-categorised The Group’s existing cash resources, debt facilities and cash over time as additional 2P reserves. First production from Rajasthan flow from operations provide adequate funding to complete is scheduled to commence by trucking in Q3 2009. The pipeline the core Mangala development project plus the pipeline and to and the significant related terminal facilities are currently being built commence first production in 2009. However, Cairn will continue to be ready by Q4 2009. Mangala plateau production is planned to monitor the credit markets to assess current pricing, and may to reach 125,000 bopd in 2010 with overall plateau production of consider expanding its facilities in due course. 175,000 bopd expected to commence in 2011 from the MBA fields. Cairn has always maintained a capital structure appropriate The GoI is in the process of confirming multiple nominees for the for its operations in exploration, appraisal and development. Rajasthan crude. The pipeline routing to a nodal point within the Given the background of global market conditions Cairn decided existing Indian Oil Corporation (IOC) infrastructure and to coastal to strengthen its equity capital base and earlier this month raised destinations gives Cairn and its partner, ONGC, access to wider a further $161m through a 5% placing of shares. refining capacity. In order to facilitate the trucking and sale of oil ahead of the pipeline completion, trial runs have been successfully Cairn has entered 2009 with the financial and operational carried out on the route from Mangala to the Gujarat coast. flexibility necessary to deliver its key project in Rajasthan thereby providing cash flow to target the next phase of growth and continued creation of shareholder value. Image (Above) (Left to right) Murli Deora, Petroleum Minister, GoI; Ashok Gehlot, Sir Bill Gammell Chief Minister of Rajasthan; Hema Ram Choudhary, Revenue Minister, Chief Executive, 6 April 2009 Government of Rajasthan; and R. S. Pandey, Petroleum Secretary, GoI; visit to Mangala Processing Terminal and inauguration of the pipeline work in Rajasthan in February 2009.
CAIRN ENERGY PLC ANNUAL REPORT 2008 17 Operating and Exploration Review Dr Mike Watts, Deputy Chief Executive Phil Tracy, Engineering & Operations Director BUSIN E SS REV I E W
We are pleased that the resource base in Rajasthan continues to grow and show the potential for further value optimisation.
The phased plateau production rate of 175,000 bopd may be enhanced or extended should the encouraging tests of enhanced oil recovery be confirmed.
We are also delighted to have built an exciting early entry position in Greenland where exploration is at an embryonic stage.
Dr Mike Watts Deputy Chief Executive
18 CAIRN ENERGY PLC ANNUAL REPORT 2008 Group Production Cairn’s average gross production during 2008 was 76,298 barrels of oil equivalent per day (boepd) (2007: 87,031 boepd). The Group’s average entitlement production for 2008 was 12,801 boepd net to Cairn (2007:19,809 boepd).
The figures in the table below show group production for 2008 on a gross, working interest and entitlement interest basis (including 100% of both CIL’s and Capricorn’s production).
Production (boepd) Ravva CB/OS-2 Sangu Total
Gross field 53,809 13,778 8,711 76,298 Working interest 12,107 5,511 3,267 20,885 Entitlement interest 5,711 4,478 2,612 12,801
The average realised price per barrel of oil equivalent (boe) for 2008 was $63.88 (2007: $39.70). Cairn’s current entitlement interest production is 46% gas: 54% oil. On commencement of production from Rajasthan the vast majority of the Group’s production will be oil.
Group Booked 2P Reserves The table below shows reserves information at 31 December 2008 on an entitlement interest basis for the Group (including 100% of both CIL’s and Capricorn’s reserves). For accounting and reserves purposes, the Group has used an oil price assumption of $50/bbl for 2009 and $65 for 2010 onwards (real) (2007: $60/bbl (real)).
Reserves Reserves 31.12.07 Produced in Additions in Revisions in 31.12.08 2P mmboe mmboe mmboe mmboe mmboe
India 169.4 (3.7) 65.9 21.3 252.9 Bangladesh 0.8 (1.0) – 1.8 1.6 Total 170.2 (4.7) 65.9 23.1 254.5
On a direct working interest basis, 2P reserves as at 31 December 2008 have increased by 92.7 mmboe to 348.0 mmboe (31 December 2007: 255.3 mmboe), comprising 346.0 mmboe in India and 2.0 mmboe in Bangladesh. The net entitlement reserves position has also increased by 84.3 mmboe from 170.2 to 254.5 mmboe. This increase is largely due to the booking of Bhagyam and Aishwariya 2P reserves. It also includes an increase in the entitlement to Mangala oil as a result of the increase of plateau offtake rate and the inclusion of pipeline costs following the GoI approval to the moving of the delivery point to the coast. There is also a reduction as a consequence of a change in the Group’s oil price assumption.
The Group’s net entitlement interest to reserves is significantly geared to the oil price assumption used and the potential movement in reserves at different long-term oil prices is shown below.
Increase/(reduction) Oil price Net entitlement compared to $65/boe ($/boe) reserves (mmboe) base case (mmboe)
$40 291.3 36.8 $80 241.3 (13.2)
Figures include 100% of CIL’s and Capricorn’s production and reserves.
Phil Tracy Engineering & Operations Director
CAIRN ENERGY PLC ANNUAL REPORT 2008 19 Operating and Exploration Review Continued BUSIN E SS REV I E W Cairn India: In readiness for production in Q3 2009 good progress is being made in the development of the MPT with more than 6,000 workers currently involved in upstream construction activities in Rajasthan.
India Reserves Bangladesh Reserves With approved Field Development Plans (FDPs) in place for The net entitlement 2P reserves for Sangu are 1.6 mmboe at the the Mangala, Saraswati, Raageshwari, Bhagyam and Aishwariya 2008 year end, compared to 0.8 mmboe at the 2007 year end. fields, net entitlement 2P reserves totalling 240.5 mmboe The increase has resulted from better than forecast production have been booked for the Rajasthan fields at the 2008 year end. from a number of wells, well intervention work in Q4 2008 and There is a further 12.4 mmboe 2P reserves in the Lakshmi, incremental recovery associated with installation of onshore Gauri and Ravva fields at the year end. compression, which is due to commence operation in Q3 2009. A reduction in forecast operating costs has also extended the The net entitlement 2P reserves for Mangala, Saraswati and expected field life. Sangu net entitlement 2P reserves now Raageshwari were originally booked at the 2005 year end represent around 0.6% of total booked Group reserves. following the approval by the GoI of the FDPs. The Aishwariya reserves were not booked at that time even though the FDP Cairn India was approved. This was because the Aishwariya development Rajasthan (Block RJ-ON-90/1) (Cairn India 70% (Operator); was planned to follow the larger Bhagyam development and ONGC 30%) the Bhagyam FDP was not yet submitted. Cairn and its JV partner ONGC now have 3,111 km2 under long term contract on the Rajasthan licence of which the main Two additional Mangala wells were drilled and extensive field development area covers 1,859 km2. The Bhagyam and reservoir studies completed following the submission of Kameshwari development areas cover 430 km2 and 822 km2 the original Mangala FDP. During 2007, the stock tank oil respectively. initially in place (STOIIP) volumes in Mangala and Aishwariya were also updated based on the results of remapping, more The phased integrated development plan for the block, which accurate water saturation determination and a comprehensive includes gas, water and pipeline operations, is focused on the petrophysical review. Mangala field with the MPT the hub through which all facilities will be connected. A Mangala FDP Addendum was submitted in Q4 2008, which included a higher oil production offtake from 100,000 bopd Development – Upstream to 125,000 bopd (resulting in greater cumulative production In readiness for production in Q3 2009 good progress is during the production sharing contract (PSC) period) and being made in the development of the MPT with more than implementation of an EOR pilot. This higher offtake rate has 6,000 workers currently involved in upstream construction been included in the calculation of Mangala reserves. The activities in Rajasthan. estimated incremental volumes expected to be recovered through EOR are not included in the reserves figures but are The well pads to enable first production have been completed classified as contingent resources. and development drilling is well underway with two multi-purpose mobile drilling rigs at the Mangala site. The work over rig to The Bhagyam FDP was submitted to the Joint Venture (JV) complete the wells is also on site. The wells drilled to date support and the GoI in May 2007 and was approved by the GoI in the ramp-up production profile for the Mangala field. March 2008. Consequently, Bhagyam and Aishwariya reserves were booked at 2008 mid year.
20 CAIRN ENERGY PLC ANNUAL REPORT 2008 70% RJ-ON-90/1 (Rajasthan)
DELHI 30% RJ-ONN-2003/1 JAIPUR
KATHMANDU PIPELINE VN-ONN-2003/1 49% 30% CB-ONN-2002/1
GV-ONN-2003/1 24%
GV-ONN-2002/1 50%
CB-X 49% GS-OSN-2003/1 40% CB/OS-2 (Cambay Basin) GAURI
AMBE GAURI
MUMBAI LAKSHMI 22.5% PKGM-1 (Ravva)
RAVVA
40% KK-DWN-2004/1 RAVVA
KG-DWN-98/2 10%
KG-ONN-2003/1 49%
PR-OSN-2004/1 35%
SL-2007-01-001 100%
Key Oil Production Cairn India Assets Gas Production
CAIRN ENERGY PLC ANNUAL REPORT 2008 21 BUSIN E SS REV I E W
Construction of the key facilities and related infrastructure in The front end engineering design for Bhagyam has been completed. readiness for the Q3 start is making good progress with all of The Aishwariya STOIIP has increased to 293 mmbbls. The estimated the key elements to enable production from the MPT now in an increased 2P reserves and 2C resources is 62 mmboe supporting a advanced stage of preparation. These include key features such plateau production of 20,000 bopd compared to the 10,000 bopd as well pads, in-field infrastructure, processing facilities, export plan approved in 2006. These estimates are subject to regulatory and facilities and power generation and utilities. partner approvals and the implementation of a revised FDP.
The overall development includes the construction of four Development – Pipeline – (Cairn India 70% (Operator) planned processing trains with a capacity of 205,000 bopd ONGC 30%) and scope for expansion: Construction of the ~600 km insulated and heated pipeline is well underway with more than 4,000 personnel involved in the • Q3 2009: Mangala production train 1 (30,000 bopd capacity), building of the facilities including the terminals. initial export by trucking • Q4 2009: Mangala production train 2 (50,000 bopd capacity), Approval under Right of Use (RoU) has been obtained in export by pipeline principle from the GoI for the entire length of the pipeline from • H1 2010: Mangala production train 3 (50,000 bopd capacity), Barmer to the Gujarat coast. The land for all the above ground providing for 125,000 bopd Mangala plateau production installations and the terminals at Viramgam, Radhanpur and the • 2011: Production train 4 (75,000 bopd capacity), providing Gujarat coast has been acquired. for 175,000 bopd Rajasthan plateau production The pipeline route through Rajasthan and Gujarat passes through Cairn has been able to significantly enhance the reserves, STOIIP eight districts and more than 250 villages. There are also 35 heating and production rates since the original FDP was approved by the stations under construction along the length of the pipeline plus GoI in 2006. a terminal at Viramgam, which will function as both a storage and pump station with the ability to distribute to refiners. The key features of the revised Mangala FDP submitted in 2008 and which is now with GoI for approval are: Currently there are nine pipeline laying spreads deployed in Gujarat and Rajasthan. To date ~215 km of pipeline has been • A 25% increase in the plateau production rate to constructed and lowered. 125,000 bopd • Upward revision of the 2P (P50) STOIIP to 1,293 mmbbls, an The pipeline route has ~600 crossings of various types increase of more than 20% over the earlier estimated figures (rivers, roads, rail etc) with all the necessary approvals from • A 30% increase in the 2P reserves and 2C resources over the respective statutory authorities in place. In total there are previous estimates to 474 mmbbls (a recovery factor of 59 cased crossings of which 36 have been completed with around 37% of 2P STOIIP) construction underway on seven additional cased crossings.
The revised FDP was submitted following further drilling in the Construction at the Viramgam terminal is well advanced, with development area, along with extensive subsurface and detailed all storage tanks and the main building superstructures nearing design and engineering studies. completion. The manufacture and delivery of all long lead items are in the final stages of completion and are well in advance of the dates they are required on site to support construction.
Image (Above) The export pipeline runs from the Mangala Processing Terminal, Rajasthan to the Gujarat coast.
22 CAIRN ENERGY PLC ANNUAL REPORT 2008 Rajasthan – Sales Cairn will also continue to consider low cost development India currently imports more than two million bopd against options for the smaller fields through the use of cost effective a domestic production of 700,000 bopd. The Indian refining technologies and by leveraging the existing infrastructure. sector is growing rapidly and demand for crude oil is expected to increase. Cairn India – Producing Assets Average gross production from Block CB/OS-2 for 2008 was Following final GoI approvals, the route of the Rajasthan pipeline 13,778 boepd (comprising average gas production of 39 million allows access to an existing pipeline infrastructure, with a final standard cubic feet of gas per day (mmscfd) and average oil/ coastal delivery point that will afford access to the majority of condensate production of 7,228 bopd). India’s refining capacity. Oil production has increased from the new wells that were added The oil from Rajasthan is categorised as medium sweet crude during the 2008 infill well development drilling campaign. with an average API of 28º. The viscosity and pour point are relatively high, but normal for crude generated from this type Krishna-Godavari Basin – Eastern India of onshore lacustrine source rock. The oil must however be Ravva (Cairn India 22.5% (Operator) kept warm during transportation. Average gross production from the Ravva field for 2008 was 53,809 boepd (comprising average oil production of Prior to first production via the pipeline the crude from the 41,999 bopd and average gas production of 71 mmscfd). MPT will be trucked to the Gujarat coast. The GoI has nominated Mangalore Refinery and Petrochemicals Limited (MRPL) as Production at Ravva is being sustained with the contribution purchaser of the crude and is in the process of confirming from new wells and successful workovers that were conducted additional nominees. Currently, Cairn India’s focus is to complete in the 2008 drilling campaign. Further studies are continuing arrangements for crude oil sales in Q3 2009. to identify additional in-place reserves within the field.
In order to facilitate the trucking and sale of oil ahead of the Three new infield subsea pipelines have been installed to pipeline completion trial runs have been successfully carried overcome pipeline capacity bottlenecks and the commissioning out on the route from Mangala to the Gujarat coast. of these pipelines is ongoing to aid production from the field.
Kameshwari Development Area (Cairn India 100%) Cairn India – Exploration During 2008 the GoI approved the three discoveries made in During 2008 Cairn India operated four of seven wells in which Kameshwari West 2, 3 and 6 and the new Development Area it participated, three of which were successful: of 822 km2. • The RB-4 well in Ravva encountered additional oil sands that Enhanced Oil Recovery (EOR) were later put on stream at 500 bopd through the Ravva Cairn has made 25 discoveries in the RJ-ON-90/1 block to date production facilities. and has established a significant growing resource base in the • Raageshwari East-1 in Rajasthan flowed 500 bopd and Barmer basin, currently estimated at around 3.7 billion barrels 0.4 mmscfd on test from Thumbli sands in a separate oil of oil in place. Cairn continues its efforts to develop this resource accumulation adjacent to the Raageshwari field. base through the application of appropriate cost efficient • The Mangala North-1 well extended the contingent resource technologies. The initial focus has been to develop the MBA fields in the Barmer Hill Formation for the Mangala field. which contain over two billion barrels in place in the Fatehgarh reservoirs, through primary and secondary recovery schemes. Two wells were drilled in CB-ONN-2002/1 and one in each of GV-ONN-2002/1 and GV-ONN-97/1, all of which were dry. Cairn continues its efforts on the staged and early application of aqueous-based chemical flooding EOR techniques in the MBA Seismic acquisition included both 2D and 3D seismic in blocks fields. Early application of chemical flooding EOR in these fields KG-ONN-2003/1, GV-ONN-2003/1 and 2D in block VN- would be designed to increase the overall recovery from the ONN-2003/1. A marine 2D seismic survey was also completed fields, extend their crude oil production plateau periods, reduce in block KK-DWN-2004/1 in 2008. water production, mitigate future decline rates and potentially accelerate crude oil production. Cairn is actively planning to Over the next 12 months further drilling and seismic programmes conduct an EOR pilot trial in the Mangala field following very are planned. Drilling is scheduled onshore in the KG basin, with encouraging results obtained from the laboratory and simulation acquisition of 3D seismic totalling 1,800 km2 to commence studies. The current assessment of the EOR resource base is offshore India and in Sri Lanka. more than 300 mmbbls of incremental recoverable oil from the MBA fields.
In addition Cairn continues to evaluate the resources and the development options of the other discoveries, of which the Barmer Hill formation over the Mangala and Aishwariya fields contains around 400 mmbbls of oil in place in tighter reservoir rocks (lower permeabilities). This reservoir has tested oil at rates of up to 250 bopd after stimulation. Analogous fields in the world have been developed with expected ultimate recoveries of 7-20% under primary and secondary recovery schemes. Cairn is planning to conduct pilot activities to evaluate this additional resource potential and associated development options.
CAIRN ENERGY PLC ANNUAL REPORT 2008 23 Operating and Exploration Review Continued BUSIN E SS REV I E W
Greenland Offshore exploration acreage
Disko West 87.5% Exclusive Licence 2008/10 (Sigguk) 87.5% Exclusive Licence 2008/11 (Eqqua)
West Greenland Albania Offshore exploration acreage 40% Exclusive Licence 2002/15 (Atammik) 40% Exclusive Licence 2005/06 (Lady Franklin) 100% Block Joni-5
South Greenland
92% Exclusive Licence 2008/14 (Kingittoq) 92% Exclusive Licence 2008/13 (Saqqamuit) 92% Exclusive Licence 2009/11 (Salliit) 92% Exclusive Licence 2009/10 (Uummannarsuaq) Tunisia Offshore exploration acreage
50% Nabeul Permit 100% Louza Permit
Capricorn Assets
24 CAIRN ENERGY PLC ANNUAL REPORT 2008 Nepal Currently in force majeure Onshore exploration acreage
1 2 4 6 7 Bangladesh Offshore gas and condensate production Onshore and offshore exploration 100% Blocks 1 & 2 Gross production: 59.6mmscfd 100% Blocks 4, 6 & 7 3** 5** 100% Blocks 3 & 5**
**awaiting government approval 37.5% Block 16 – Development Area 45% Block 10* 50% Block 16 – Exploration
Manpura Magnama Hatia Sangu
*see note in Principal Licence Interests page 73
Northern India Onshore exploration acreage
50% Block GV-ONN-2002/1 25% Block GV-ONN-2003/1 Papua New Guinea Offshore appraisal acreage
12.73% Block PRL-1
Key Gas Production
CAIRN ENERGY PLC ANNUAL REPORT 2008 25 Operating and Exploration Review Continued
BUSIN E SS Capricorn: Capricorn continues to build an asset base for exploration led growth and has strengthened its exploration portfolio by building
REV I E W its acreage position in Greenland throughout 2008.
Capricorn now has assets in South Asia (Northern India, Bangladesh and Nepal), Greenland, the Mediterranean (Tunisia, Albania and pending licence awards in Spain) and Papua New Guinea.
Greenland During 2008, Capricorn completed its obligation seismic work Capricorn has acquired a leading frontier exploration position programme for the first licence phase over all six of its operated offshore west and south Greenland. licences. A 6,600 km 2D seismic survey was acquired in the Disko West blocks Sigguk and Eqqua, followed by the acquisition of a The prospective geological basins around the coast of further 1,200 km 2D seismic survey in the southern Kingittoq and Greenland are at a very early stage of evaluation with only six Saqqamuit blocks and around 1,780 km of 2D seismic data over offshore and one onshore exploration well having been drilled the Salliit and Uummannarsuaq blocks (Cape Farewell 1 & 2). to date, and most of those during the 1970s. However, the Processing of all the collected data is nearing completion. results of these wells, together with more recent onshore geological mapping over the past 15 years, have confirmed A Controlled Source Electromagnetic Survey (CSEM) was also the presence of all the essential elements required for the acquired in 2008 over the Lady Franklin and Atammik blocks generation and trapping of hydrocarbons. operated by EnCana and the data is currently being evaluated.
The Circum-Arctic Resource Appraisal study published by the Additional seismic and well site surveys are being planned for US Geological Survey (USGS) in 2008 estimates significant the 2009 operational season. ‘yet to find’ hydrocarbons within the Arctic Greenlandic basins, recognising Greenland as a potentially very prospective, but Bangladesh under- explored country. Production and Development In 2008, the Sangu gas field passed a landmark of 10 years on The report contains the USGS assessment of risked potential production, during which time it has consistently demonstrated in the eastern Greenland (31 billion boe), northern Greenland an enviable record for safety and low cost production. The field (3.3 billion boe) and western Greenland – east Canada is now in decline and during the year, Cairn and its JV partners (17 billion boe) basins. The south Greenland off-shore area lies successfully completed three well intervention programmes and outside of the Arctic Circle and was not included in the survey. committed to a compression project, which is currently being implemented. These measures will help to increase and extend The Greenlandic and Danish authorities are in the process of production. gradually opening up the Arctic areas of these basins to the industry through competitive bid rounds, whilst other selected The third well intervention programme carried out on wells 1 areas are available via application. and 9 in the Sangu field resulted in an initial 60% improvement in production, and rates are now around 55 mmscfd.
26 CAIRN ENERGY PLC ANNUAL REPORT 2008 To augment further gas production from Sangu the installation Nepal of an onshore compressor is under way and is expected to be The security situation in Nepal continues to be monitored operational by July 2009. closely. Contractual force majeure remains in place on the acreage in Nepal, precluding in-country operations. As soon as Sangu has produced in excess of 440 bcf since production the security situation permits, fieldwork will include aerogravity started in 1998. Located in the Bay of Bengal, some 50 km off and seismic acquisition. the coast at Chittagong, the field is the only offshore gas field in Bangladesh. Sangu was one of the largest discoveries in the Other Assets 1990s, when Cairn was one of the first international companies (Tunisia, Albania, Australia, Peru, Spain, Papua New Guinea) to start operating in the country. To date, Cairn and its JV In the Mediterranean, site surveys have been carried out in partners have invested approximately $1bn in Bangladesh. Tunisia for exploration well locations in both the Louza and Nabeul permits. The JV partners in the Sangu field are currently Cairn, Santos and HBR Energy. An environmental impact assessment is presently underway offshore Albania ahead of a planned 2009 3D seismic survey. Exploration Following the drilling campaign at Magnama and Hatia earlier Several licence applications offshore Spain remain pending. in 2008, there have been no further operations in Block 16 and As a result of an ongoing rationalisation programme, the an appraisal programme is being considered. exploration permits inherited from Plectrum in Australia (Bremer Basin), Peru and The Shetlands have been either In Block 5 Cairn and its JV Partner Santos have decided not transferred or relinquished. to proceed into the next phase of the PSC and the block has therefore been returned to the Government of Bangladesh. In Papua New Guinea the Operator (Talisman) has recently completed a 3D seismic survey over the undeveloped Pandora gas field to define better the extent of the gas resource.
Dr Mike Watts Deputy Chief Executive
Phil Tracy Engineering & Operations Director
Image (Top) Qaqortoq Harbour, south Greenland, January 2008
CAIRN ENERGY PLC ANNUAL REPORT 2008 27 Corporate Responsibility BUSIN E SS REV I E W
During 2008, we concentrated on eight key areas of business practice identified as having high significance through our business risk management and stakeholder engagement processes.
2008 Highlights • Reduction in Lost Time Injury Frequency Rate (LTIFR) and Total Recordable Incident Frequency Rate (TRIFR) across Cairn India and Capricorn • International Finance Corporation (IFC)/Cairn India partnership in Rajasthan • Updated Corporate Responsibility (CR) Guiding Principles and Climate Change strategy • Greenhouse Gas (GHG) emissions rate below the industry average • Code of Business Ethics updated • No recordable safety or environmental incidents during the Greenland seismic campaign
28 CAIRN ENERGY PLC ANNUAL REPORT 2008 Our Corporate Responsibility Priorities During 2008, we concentrated on eight key areas of business Cairn is conscious that its operations – especially in regions of practice identified as having high significance through our economic, social or environmental sensitivity – may have impacts business risk management and stakeholder engagement on staff, local communities and the environment. Cairn aspires processes. These are: to the highest standards in all of its business activities including corporate responsibility. Cairn promotes the principles of • Stakeholder Engagement respect, relationships and responsibility to staff, partners, • Business Ethics suppliers and contractors. This helps to create a widespread • Employee Development and sustainable business culture, founded on a fundamental • Health Safety and Security respect for people. • Community Development • Human Rights Underpinning our strategy for transformational growth is • Environmental Impacts the phased development of our 25 oil discoveries in Rajasthan, • Climate Change complemented by a new and exciting frontier exploration position in Greenland. We have sought to meet these priorities through responsible business practices underpinned by our policies and guiding We remain committed to ensuring the sustainability of principles. Some years ago, Cairn established specific group- our business strategy by conducting all of our activities wide policies for Health, Safety and Environment, Security in a responsible manner. and Corporate Social Responsibility. Endorsed by the Board, these policies establish the principles by which the Company is managed. Our CR Guiding principles describe Cairn’s fundamental values and approach to managing CR.
The CR guiding principles and policies can be downloaded from the Cairn website at www.cairnenergy.com.
Image (Left) A student at a Cairn supported school in the Barmer district of Rajasthan
Image (Above) Local women carrying water in the Barmer district of Rajasthan
CAIRN ENERGY PLC ANNUAL REPORT 2008 29 mployee Development Employee employee Consequently, people. its by driven is success Cairn’s development organisational and personal and engagement 2008, throughout Company the for areas focus key been have the where business the of arm Capricorn the in particularly 2008, In greatest. been has transformation organisational employee an after Capricorn for policies HR updated have we and UK the across out carried was survey engagement development management and Leadership Bangladesh. receiving Cairn by recognised being focus key a remained has 2008. for award People Your Developing PLC Scotland the UK the below remain also business the across rates Absentee benchmark Development and Personnel of Institute Chartered over absenteeism in increase some been has there although 2008. in business the Security and Safety Health, and safety health, the protect must we that recognise We sites our on working contractors and employees our of security operations. our with contact into come who people the and employed are people 10,000 than more Gujarat and Rajasthan In are We coast. Gujarat the to pipeline and MPT the building in across improved have statistics safety our that report to pleased gas and oil the for average the below remain and business the Oil of Association International the by reported last as industry maintained also we 2008, In 2007. for (OGP) Producers Gas and Sangu our at year consecutive 10th a for incidents time lost zero Bangladesh. in plant production guiding principles guiding 2008 Engagement Ethics CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 30 Corporate Responsibility Corporate Continued It is important that we operate at all times with integrity, integrity, with times all at operate we that important is It Ethics Business of Code The transparency. and honesty review. under currently are Policy Whistleblowing and new the out roll to plan communication comprehensive A 2009. for proposed is staff all to Policy and Code Revenues paid to government and the value of contracts of value the and government to paid Revenues the in significant be can activities our out carrying in awarded communities local the in and operate we which in countries work. we which in Business hindrance major a as recognised is occurs it when Corruption disproportionate often an with development sustainable to on impact the worst its At communities. poor on impact growth, economic impeding considerable, be can businesses legal serious representing and competition distorting risks. reputational and Stakeholder lasting and open strong, building that believe we Cairn At social a merely not is stakeholders our with relationships goals. business our achieving to vital also is it responsibility, impact potentially may and – by influenced are activities Our and national local, at stakeholders different of range a – local and governments particular, In levels. international out carry to capacity our affect significantly can communities of scale the Rajasthan, In aims. our achieve and activities our consultation. extensive requires project development our and Consultation Public a by guided be to continues This in meetings consultation 54 completed that Plan Disclosure Rajasthan the for received were grievances Thirty-four 2008. 2008, In resolved. successfully were which of all 2008 in project we where Greenland in consultation public initiated have we recording without campaign acquisition seismic a out carried activity. our to relation in grievance single a In 2008, Corporate Responsibility Responsibility Corporate 2008, In of the Group and stakeholders’ expectations. expectations. stakeholders’ and Group the of were reviewed and updated in line with the re-organisation re-organisation the with line in updated and reviewed were
BUSINESS REVIEW Community Development Cairn recognises that its activities can affect the social and economic environment of the communities in which we operate. This is particularly true where Cairn’s presence dominates local industrial or commercial activity as is the case in the remote and arid part of Rajasthan where Cairn are developing major oil and gas fields. In 2008, we have continued our partnership with the IFC, further establishing the Enterprise Centre to promote local economic development, a rural dairy development project and a child and maternal health awareness initiative.
Human Rights Cairn recognises the importance of human rights. In Rajasthan, we continue to apply a ‘Rights Aware’ approach to safeguard the local community’s right to water in an area with limited water resources while accessing the water required to support Lost Time Injury Frequency Rate (LTIFR) our operations. Land acquisition for the Rajasthan project is also important for a project requiring land access for well pads, terminals and pipelines. Consultation underpins the land 0.99 acquisition plans and ensure that processes for grievances and 0.76 0.6 compensation are well understood by effected stakeholders. 0.66 Capricorn Cairn India 0.36 0.39 0.27
Environmental Impact 0 OGP Benchmark* Cairn recognises that its exploration, development and 2006 2007 2008 production activities can have an impact on the environment. Some of Cairn’s exploration and production acreage lies in areas of environmental significance. Cairn recognises its responsibilities and focuses on the avoidance of negative Total Recordable Incident Frequency Rate (TRIFR) impacts on the environment during its operations. In 2008, 2.9 2.68 we were pleased to complete the seismic acquisition offshore 2.75 Greenland without safety or environmental incident. 1.64
1.5 Capricorn 0.71 Last year, we reported that we were exploring long-term water 0.73 Cairn India effluent management solutions for our production facility at 0 OGP Benchmark* Sangu in Bangladesh in order to eradicate the requirement to 2006 2007 2008 dilute effluent to meet regulatory discharge limits. We have been * Note OGP benchmark data is not yet available for 2008 examining the feasibility of reinjecting produced water into a non-producing well and testing the effectiveness of this solution, culminating in a successful pilot carried out in October and November of 2008. Produced water injection will be continued GHG Intensity in 2009.
■ 163.0 Climate Change 162.0 Cairn India production sites Activities involved in our operations, such as power generation, ■ Sangu production site, flaring, venting and transportation, produce emissions to air, 48.4
40.8 Bangladesh 37.7 23.0 23.0 including methane (CH ) and carbon dioxide (CO ), two gases 14.0 4 2 ■ OGP benchmark recognised as GHG. The burning of oil and gas, our primary products, also produces emissions. Climate change is a complex 2006 2007 2008 issue with many causes both natural and due to human activity. Tonnes CO2E per 1,000 tonnes of hydrocarbon production Energy is essential to social and economic progress but we recognise that we have a responsibility to take a precautionary approach to climate change. In 2008, we adopted a climate change strategy for the group focussing on four key areas: i. Verifying and reporting on GHG ii. Maintaining energy and emissions efficiency iii. Demonstrating informed and transparent action on climate change iv. Contributing to programmes addressing environmental and social impacts of climate change Our CR approach and priorities are described in detail At all times, we seek to minimise GHG emissions of our within the Corporate Responsibility Report 2008 (CRR 2008) operations. In 2008, we met our targets for GHG emissions that complements this report. Environmental Resource across the business maintaining our emissions relative to Management (ERM) has provided limited assurance of the hydrocarbon production below the average for the oil and gas contents of the CRR 2008 and a statement of their findings industry as last reported by OGP for 2007. is included.
Image (Above) Cairn has supported the rebuilding of several schools such as this one in the aftermath of the 2006 floods in Rajasthan.
CAIRN ENERGY PLC ANNUAL REPORT 2008 31
Financial Review Jann Brown, Finance Director BUSIN E SS
REV I E W In 2008, Cairn has focused on allocating its resources to those assets which will drive shareholder value. At 31 December 2008 Cairn had net cash and bank deposits of $898m, positive operating cashflows and net assets of $2.3bn.
In March 2009, the Group announced a 5% placing which raised a further $161m (£116m). Cairn is, therefore, well placed to deliver the core Mangala development project in Rajasthan and continue to pursue opportunities for growth.
Previous page The IFC/Cairn India Dairy Development Project in Barmer, Rajasthan. As part of a daily routine, a family from a remote village travel to the nearest milk collection point to sell milk.
34 CAIRN ENERGY PLC ANNUAL REPORT 2008 Key financial % Increase Total production costs, which include pre-award costs and stock performance indicators 2008 2007 (decrease) movements, have also remained in line with 2007. Production Production (boepd)* 12,801 19,809 (35) costs per boe have increased slightly as the fixed cost elements Average price per boe ($) 63.88 39.70 61 are spread over a declining production base; in addition pre- award costs have increased. Revenue ($m) 299 288 4 Average production costs per boe ($) 14.28 9.20 22 Unsuccessful exploration costs of $48m for the year primarily Operating profit/(loss) ($m) 43 (76) 156 relate to dry exploration wells in and proposed relinquishment of Profit before tax ($m) 441 1,590** (72) the GV-ONN 97/1, GV-ONN 2002/1 and CB-ONN-2002/1 blocks. Exceptional items ($m) 356 1,579** (77) Profit after tax ($m) 367 1,556** (76) Total depletion and decommissioning charges have fallen Cash flow from operating activities ($m) 150 155 (3) significantly reflecting the sale of 50% of our interest in Sangu Net assets ($m) 2,279 1,770** 29 in 2007. The depletion and decommissioning charge per boe Net cash ($m) 898 827 9 has also fallen from $13.29 to $10.16 as a consequence of reserve additions in Sangu and CB/OS-2. * On an entitlement interest basis ** Restated as a result of changes in the accounting for deferred tax Gross profit for the year was $137m (2007: $62m).
Accounting Overview Profit for the Year In March 2008 CIL arranged a private placement with Petronas Administrative expenses include non-cash charges for share- and Orient Global Tamarind Fund Pte Limited, who subscribed based payments of $21m (2007: $25m) and for depreciation $634m for a total of 113m new shares, representing 4% of and amortisation of $10m (2007: $6m). Net of these charges, the company. As a consequence Cairn’s holding in CIL has administrative expenses have increased from $57m to $64m reduced from 69% to 65%. reflecting the growth in CIL’s corporate infrastructure.
The 35% interest in CIL held by external shareholders is reflected An impairment charge of $13m has been recognised against in our Financial Statements as a minority interest, as is the 10% the Magnama and Hatia exploration well costs incurred interest in Capricorn held by Dyas. in the year. The impairment charge in 2007 also related to Magnama and Hatia well costs and certain other blocks The fair values assigned to the assets and liabilities of subsidiaries in Bangladeshand Nepal. acquired in the last financial year have been reassessed in accordance with IFRS 3 resulting in a reduction on goodwill from $14m to $4m Net finance income for the year was $42m (2007: $52m). (see Note 3 of the Fiancial Statements for further details). In addition, Finance income received, mainly bank interest, was $66m the prior period results have been adjusted for changes in the (2007: $65m). Finance costs have increased from $13m to accounting for deferred tax. $24m primarily as a result of realised foreign exchange losses (increased from $6m to $10m) and charges in respect of The Group’s significant accounting policies and details of options held to manage Rupee currency exposures (increased the key accounting estimates and assumptions are disclosed from $3m to $7m). within the notes to the Financial Statements where appropriate. The net impact of these adjustments is set out in Note 37 of The Group made an exceptional gain of $356m on the deemed the Financial Statements. disposal of 4% of CIL to Petronas and Orient Global Tamarind Fund Pte Limited through an issue of shares. The prior year’s Production, Revenue and Gross Profit exceptional gain relates to the disposal of 31% of CIL on its Oil production accounted for 54% (2007: 37%) of the Group’s initial public offering (IPO) and the disposal of a 10% interest entitlement production. Total average entitlement production in Capricorn to Dyas. These gains are not chargeable to tax. for 2008 has fallen by 35% from 19,809 boepd to 12,801 boepd. This reflects the sale of 50% of our interest in Sangu last year, The Group’s total tax charge for the year was $74m (2007: $34m). a general decline in gross production across all of our fields Of this, only $14m is current tax (2007: $4m, after the release and the impact of higher oil prices, which also reduces Cairn’s of an $8m provision). Actual tax paid was $14m (2007: $15m). entitlement interest. The majority of the total tax charge is deferred tax on temporary differences between the book values and tax written down Lower entitlement production levels have, however been offset values of the Rajasthan fields. Deferred tax is provided at the by the strong oil prices and revenue therefore remains in line effective tax rate expected to apply over the life of these fields. with 2007. Reported profit for the year was $367m (2007 restated: $1,556m). Profit for the year, adjusted for the gains arising on the deemed disposal and IPO of CIL, was $11m (2007 restated: loss $23m).
CAIRN ENERGY PLC ANNUAL REPORT 2008 35 Financial Review Continued BUSIN E SS REV I E W
Portfolio Management In light of the downturn in global market conditions the The Board continues to monitor the Group’s portfolio actively. Group has targeted its cash resources on the core Mangala In order to secure a release from commitments: the Group development project in Rajasthan and where prudent, relinquished its interests in Block 5 Bangladesh and Blocks exploration activities have been deferred, resulting in 214/19 and 214/20 West of Shetland and transferred $1.5m to a lower overall exploration spend this year. Gold Oil along with its interest in Block Z-34 Peru. In addition, exploration permits WA-379-P and WA-380-P offshore Western The Board will continue to focus the Group’s cash resources Australia were transferred to Enovation Resources Limited and to maximise shareholder value and maintain financial and Arcadia Petroleum Limited respectively. These transactions had operational flexibility. Balance sheet additions on the core no impact on the Group’s profit for the year. Mangala development in 2009 are expected to be $910m net to Cairn ($1.3bn gross). Cash Flow, Capital Investment and Liquidity Cash flow from operating activities has decreased slightly from Group net cash at 31 December 2008, after taking account of $155m to $150m. the $500m debt drawn was $898m (2007: $827m). The facility is now fully drawn and has a phased repayment schedule that Major inflows during the year came from the private placement does not start until July 2010. by CIL raising $630m (net of expenses) and from the drawdown of $425m of its $850m facility, taking the total debt drawn at the Details of the Group’s financial risk management objectives year end to $500m. The Group earned interest on cash balances and policies are set out in Note 30 of the Financial Statements. of $51m (2007: $65m). Financial Strategy and Outlook Cash outflow on capital expenditure is set out on the table below: The Group’s existing cash resources, debt facilities and cash flow from operations provide adequate funding to complete 2008 2007 the core Mangala development project plus the pipeline and to $m $m commence first production in 2009. However, Cairn will continue Exploration/appraisal expenditure 125 156 to monitor the credit markets to assess current pricing and may Development/producing expenditure 494 244 consider expanding its facilities in due course. Other capital expenditure 5 11 Cairn has always maintained a capital structure appropriate for its operations in exploration, appraisal and development. Given the background of global market conditions Cairn decided to strengthen its equity capital base and earlier this month raised a further $161m through a 5% placing of shares.
Cairn has entered 2009 with the financial and operational flexibility necessary to deliver its key project in Rajasthan thereby providing cash flow to target the next phase of growth and continued creation of shareholder value.
Jann Brown Finance Director
36 CAIRN ENERGY PLC ANNUAL REPORT 2008 The Group’s existing cash resources, debt facilities and cash flow from operations provide adequate funding to complete the core Mangala development project and commence first production in 2009.
Images (Above) Steam boilers at the Mangala Processing Terminal, Rajasthan Export oil tanks at the Mangala Processing Terminal, Rajasthan
CAIRN ENERGY PLC ANNUAL REPORT 2008 37 Board of Directors
12 8 9 BUSIN E SS REV I E W 6
1 5
1 Sir Bill Gammell He joined Cairn in 1989 and held a number of senior management Chief Executive (56) positions prior to his appointment as an executive director in 2000. Sir Bill Gammell holds a BA in Economics and Accountancy Malcolm is a non-executive director of Cairn India Limited and he from Stirling University and was awarded a knighthood in 2006 has also recently been appointed as a Trustee of The University of for services to industry in Scotland. Sir Bill has over 25 years’ Edinburgh Development Trust. As an executive director of Cairn, experience in the international oil and gas industry. He founded Malcolm has particular responsibility for security matters. Cairn and was appointed Chief Executive on its initial listing in 1988. He is the non-executive Chairman of Cairn India Limited and 4 Phil Tracy is a member of the Asia Task Force and the UK India Business Engineering & Operations Director (58) Council. Sir Bill, who is an ex Scotland rugby internationalist, Phil Tracy holds a MSc in Petroleum Engineering from Imperial is also Chairman of Winning Scotland Foundation and a director College and a BSc in Chemical Engineering from Leeds University. of sportscotland and Glasgow 2014 Limited. He is a Chartered Engineer with over 30 years’ experience in the international oil and gas industry. He originally joined Cairn in 2 Dr Mike Watts 1988 and served as an executive director from 1989 until 1999. Deputy Chief Executive (53) He subsequently became managing director of Providence Dr Mike Watts holds a First Class Hons degree and a PhD in Resources P.l.c. before rejoining Cairn in 2002 as Chairman of Geology. He joined Shell in 1980, Burmah in 1985 and Premier Cairn Energy India Pty Limited, a post he held until May 2006. in 1986. In 1991 he was appointed Managing Director of the He was appointed Engineering & Operations director in 2004 Amsterdam listed Holland Sea Search, which was acquired by and served as Rajasthan Project Director until December 2006. Cairn in 1996. Mike was appointed Exploration Director of Cairn in In December 2007, Phil rejoined the Rajasthan Project Board. 1997 and Deputy Chief Executive with effect from 31 March 2009. He has been closely associated with the emergence of Cairn 5 Jann Brown as the pre-eminent foreign owned oil and gas company in Finance Director (53) India and the major holder of frontier exploration acreage in Jann Brown was appointed Finance Director of Cairn in 2006 and Greenland. As an executive director of Cairn, Mike has particular is also a non-executive director of Cairn India Limited. She holds a responsibility for providing assurance to the Board on health, MA from Edinburgh University and a diploma in accounting from safety, environment (including climate change), community and Heriot-Watt University. She joined Cairn in 1998 after a career in the human rights matters. accountancy profession, mainly with KPMG. She is a member of the Institute of Chartered Accountants of Scotland and the Chartered 3 Malcolm Thoms Institute of Taxation. As an executive director of Cairn, Jann has Chief Operating Officer (53) particular responsibility for employee matters. In addition to her Malcolm Thoms holds a BSc Hons in Physics from Edinburgh roles within the Cairn group, she is the Senior Independent Director University and an MBA from Heriot-Watt University. He started his of Hansen Transmissions International nv, a Belgian engineering career as a field engineer with Schlumberger and subsequently company which is listed on the London Stock Exchange. became manager of their businesses in Qatar and Brunei.
38 CAIRN ENERGY PLC ANNUAL REPORT 2008 4 10
11
3
7 2
6 Simon Thomson 9 Todd Hunt Legal & Commercial Director (44) Non-Executive Director (56) Simon Thomson was appointed Legal & Commercial Director Todd Hunt was appointed an independent non-executive of Cairn in 2006. He holds a LLB Hons from Aberdeen University director of Cairn in 2003. He is President and joint owner and a Diploma in Legal Practice from Glasgow University. of Atropos Exploration Company and Atropos Production He joined Cairn in 1995 as a lawyer before becoming Group Company based in Dallas, Texas. He has over 30 years’ Commercial Manager. Prior to his appointment as Legal & experience in the oil and gas industry. Commercial Director, he served on the Group Management Board for six years. He is also a director of Winning Scotland Foundation. 10 Mark Tyndall Non-Executive Director (51) 7 Norman Murray Mark Tyndall was appointed an independent non-executive Non-Executive Chairman (61) director of Cairn in 2003. He is Chief Executive of Artemis Norman Murray was appointed an independent non-executive Investment Management Limited. director of Cairn in 1999 and Chairman in 2002. He was a co-founder and former Chairman of Morgan Grenfell Private 11 Iain McLaren Equity Limited and was also a director of Morgan Grenfell Asset Non-Executive Director (58) Management Limited and a non-executive director of Bristow Iain McLaren was appointed an independent non-executive Helicopter Group Limited. He is a past Chairman of the British director of Cairn on 1 July 2008. He was formerly Senior Partner Venture Capital Association and a past President of the Institute for KPMG in Scotland and has significant experience in the oil of Chartered Accountants of Scotland. He is a non-executive and gas sector. Iain is also a director of The Scottish Council for director of Greene King PLC and Robert Wiseman Dairies plc. Development and Industry, Baillie Gifford Shin Nippon PLC and Investors Capital Trust plc. He is Chair of The Oversight Board 8 Hamish Grossart of the Institute of Chartered Accountants of Scotland. Non-Executive Deputy Chairman (52) Hamish Grossart was appointed an independent non-executive 12 Dr Jim Buckee director of Cairn in 1994 and became Deputy Chairman in Non-Executive Director (63) 1996. He has 25 years’ experience on public company boards Dr Jim Buckee was appointed an independent non-executive in a wide range of industries, both in an executive and non- director of Cairn on 15 January 2009. He has more than executive capacity. He is currently also Deputy Chairman of 35 years’ experience in the oil and gas industry having held British Polythene Industries PLC, Chairman of Indigo Vision senior executive positions with Shell, Burmah Oil and BP, and Group plc and a non-executive director of Artemis Investment was formerly President and Chief Executive Officer of Talisman Management Limited. Energy Inc.
CAIRN ENERGY PLC ANNUAL REPORT 2008 39 Governance and accounts Risk Factors 41 Corporate Governance Statement 45 Directors’ Report 56
Gover nanc e Directors’ Remuneration Report 60 Principal Licence Interests 73 Independent Auditor’s Report to the Members of Cairn Energy PLC 75
and Group Income Statement 77 Statements of Recognised Income and Expense 78 acc o unts Balance Sheets 79 Statement of Cash Flows 80 Notes to the Accounts 81 Reserves 132 Glossary of Terms 134 Company Information 136
40 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 41
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Availabilityproductioncurrentlyof is Mangala,scheduledfield,largest2009export initial withthefrom Q3oil trucking. for by Thereafter Mangala production is expected to build up to 125,000 bopd with export via pipeline during the first half of 2010. The Company’s to pipeline exporttransportationinfrastructure and pads, well principal (MPT), Terminal Processing Mangala the of project installation the includes is the development by Cairnenable India the of transport discovered of oil produced fields in and Rajasthan. treated oil The to scope designated of this end project users in India. Post sanction, project deliveryProjectsunsuccessfulbecan reasons, including manycompetence availability,for capability and resourceshuman contractors, andof is particularly subjectmechanicaltechnicalanddifficulties infrastructureand to technical,constraints, costresultingincreases,completionindeferralin delays and of commercial,income contractor, from production economic and from corporateadvancedtechnologies theproduce hydrocarbonsor challengingfromreservoirs, field exacerbatewhichcan problems.such responsibility under development. risks. In addition, some development projects may require the use of new and not securingnot appropriate long-term commercialwhererequired,applicableagreements governmentalor, regulatory or consents, materialeffectpermits,commercialisationa the approvals.causelicences can have onortoreserves delaysThis may of thisand income. and flow cash long-term to medium The Bhagyam and Aishwariyadeliveryequipment,materialstheand Fields indelaysof construction, installationcommissioning or delayactivities, to lead are whichmay then scheduled to commence production in 2011. Project risks include the potential for Project optimal the base, resource Assessment the accuracy suitable with determine necessaryto is it project development any andof sanction to Prior Delivery commencingas completedevelopmentwellthe to as take productionwill costsdevelopment, theitfield, timeof thethe profile of or concluding commercial arrangementstypicallytechnical,engineering, commercialregulatorySpecificornature. risks in includepossible the over-estimation crude oilof with buyers forrecoverable,andinadequateplace initially naturalin technical andgasgeophysical and the assessment, inaccurate sale costestimations, of the oil or gas produced. Risks during the pre-sanction period are solidify to propensityits and reservoir the in nature viscous its characterisedby is Rajasthan in northern fields the at oil crude presents The This fields. oil producing most for case the commonly is than surface, at or well-bore the in whether temperatures, low at both extraction and transportationdependentfacilities.parallelgenerationpowerreliablethesupplyfueldevelopment forA uponavailability heating of a and of risks. The development, production and transportation plans for the northern fields are of SEBI and to its listing agreement with the BSE. The Company is therefore at risk of changes to the companyregulationsthesethechanges into riskof therefore Company atis The itslisting agreement BSE. to theandwith SEBI of affectcountriesmayrequirements meetingfullythattheoperationstheir not countries. both risks the of Companyin and hasThe adopted a suite of policies andcomplyingfullyreportingmarketwithnot or India.requirementsand procedures UK the in and through their application, aims to minimise the risk of inconsistent communications productionfields.start-upoil theMBA in thefrom in levels up build and As a listed company on the LSE, the Company is subject to the rules of the FSA, the LSE, the Listing Rules and the DisclosureListingthetheand RulesandLSE, the FSA, the rulessubjectof theCompanyisthe to LSE, the listedcompany on a As rules,subjectregulationstheCairnguidelinesis India andto NSE, and BSE thecompanylisted on a whereas Rules,as Insider Trading of association of Cairn India and by the terms of a relationship agreement between Cairn India and the Company. Under the Under Company. the and India Cairn between agreement relationship a of terms the by and India Cairn of association of memorandum and articles ofnomineedirectorcommitteeauditoneadditionally,the and,two onnominee association, anddirectors remuneration thelegal onits committee. with comply to Company the enable to theinformation of disclosure Company and sharing the regulates agreement hasrelationship The three nominee directors of on list regulatoryand definitive theobligationsspecificallyalso and a comply bestsuchwith shallpractice provides CIL in that principles, board covered standards, is policies information required of The CIL, with. comply to including it requires reasonably Company the which provisions the and Chairman requirements.informationagreed The Company’s material shareholding in Cairn India represents a significant proportion of the Company’s value. Any fluctuations The Company’sThePerformance Dependentis Performanceuponthe CairnCapricornofIndiathe and Group its90%andIndia, in NSE and BSE Company’sprincipalthecompanyThelistedshareholding on assets Cairna its65% India, in are shareholding in its unlistedperformancetheCapricorn bysuccessfully Capricorn.CairnandCairn subsidiary,IndiaortoIndia of failureby Any respectivedevelop their Capricorn. Accordingly,businesses the could Company’s have a material performance adverseand effect market on price the Company’s are dependent business upon performance. India Cairn with Relationship The Company exercises its influence over Cairn India through certain provisions contained within the memorandum and articles in the future. The risk 136. page on factors out set statementsforward-looking should be consideredin conjunctionwith thecautionary note to shareholders inrelation to in the market price of Cairn India’s share price may have a direct effect on the Company’s share price. andproduction businessprincipal andriskfactors affectthatmay relate performance. Suchriskfactors presentedintendedpriority.order notbeareof any to in to uncertainties, the and risks countries additional and exhaustive otherrisks,thetherisksas well uncertaintiesof andbe as Any not inthisreferredreport, materialin may toa could whichadversehave effectbelow out set it risks conducts the addition, In performance. business its on activities. Outlinedpresentlynotwhich belowCompanytheCompany,orthe knowncurrently to deemsimmaterial, becomearise ismayormaterial a descriptionof the The CompanysubjectvarietyTheis risks a of including to thoseexplorationwhichgasand deriveoilthe nature fromthe of Risk Factors Risk Risk Factors Continued
of the Raageshwari gas field in Rajasthan is being undertaken to provide such fuel gas. Under the present schedule, fuel gas will be available to meet the power generation and heating requirements to support availability of production from the Mangala field and the availability of transportation infrastructure during the second half of 2009. Residual risks are essentially similar to those which pertain to the completion of the Mangala development.
Efficient recovery of Mangala production requires the use of secondary recovery techniques, which requires the injection of water to maintain reservoir pressure and to sweep the oil to the production wells. The accessing, delivery and injection of this water into the reservoir has a number of associated risks including maintaining regulatory approval for the extraction of saline water from subterranean aquifers, maintaining the water infrastructure and injecting sufficient volumes of water into the reservoir to achieve the desired levels of secondary recovery. The inability to inject sufficient volumes of water could result in lower offtake volumes and lower ultimate recoverable reserves.
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 to test the validity of the EOR techniques.
Operations The Company’s revenues are dependent on the continued production from its operating facilities in India and Bangladesh. Operational risks include maintaining asset integrity, which can be affected by a number of factors including not following prescribed operating and GOVERNANCE AND ACCOUNTS maintenance procedures resulting in reduced plant availability, 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) can also affect operations. 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 from new fields 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 could 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 oil and gas reserves and resources, the Group’s reserves and resources 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 and resources. 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 sell all of the oil that it is able to produce from its fields in Rajasthan or obtain the crude oil price determined in accordance with the PSC. Under the PSC Cairn India is obliged to sell 100% of its crude oil production to the GoI, which nominates the buyer(s). The GoI may not be able to fulfil its obligation under the PSC in which case Cairn India’s ability to sell all of the oil that it can produce and at the price set out in the PSC might be compromised. This could lead to reduced cash flow and future projects currently planned to be funded out of cash flows may be deferred.
The purchase price calculation mechanism set out in the PSC is based upon a basket of crude oils to be decided between Cairn India and the nominee(s) 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(s) will result in a value approximating to the price used by Cairn India in its development and financial planning.
Exchange Rates, Interest Rates, Currency Controls and Fiscal Regulation 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.
42 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 43
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Corporate Responsibility (CR) (CR) Responsibility Corporate activitiesPrinciples’‘Guidingall recognisesessentialGroupandmaintainingThe Policies inapplyingis itsin ‘licence that itsCR suffers an event for which it is not adequately insured, there is a risk that this could have a materialadversea effect have could itsbusiness,thisriskthat onadequately a not insured,thereisis whichitsuffers for event an attract,abilityto skilledqualifiedmotivatehighlyretainandandpersonnel. Attracting retainingqualityandtopmanagerial talent positionsexploration andretainkey gas or and production challenge andoil facinghave thecompanies a to inis Failure sector. materialbusiness,adversea effect resultsoperationsfunctionsGroup’s have could of thefinancialplaceandcondition. on in to inadequate include operate’budget within and time on projects deliver and to ability businessGroup’s affect the could that risks CR reputation. Principles’. CR risks occur whenstakeholderappropriateplace anyengagement, inmitigateenvironmental putcontrols to failuresocialto impacts, and having partnot of the business failsadequate to implement processes these in Policies placeworksites. Group’s healththeproblemsinjuriessafety andathealthtoand leadpolicies, alsowhichcouldof to and protect ‘Guiding human rights in activities in our ‘sphere of influence’ and the ineffective implementation Environmental Regulation Regulation Environmental The Group may incur material costs in complying with, or as a result of, health, safety and environmental laws and regulations. The Group’s financing costs mayCairn controlsfrom dividends be of remittance significantly free prevent would on that present currency at place in are restrictions no affected and controls exportsthese of many relax by which interestrestrict rate volatility. the transferIndia Furthermore, to from the Company, India the of there Rupees. GoI currently is a Whileto risk dispose that the operates policy controls of certain and certain may practice be of its re-imposed shares of the in GoI in Cairn future. has been India Indian to until law three further years after restricts the IPO. the ability of the Company Cairn India has been funded largely in US DollarsthroughbeenfundeditsUS cashCairngeneration has largelyIndia in Rupees operations,proceedsfrom IPO theconversionin the ofexpenses significant incur nonetheless will India Cairn holdings. cash Dollar US significant has and facilities, loan its and in connection with the developmentRupee.theand exchangebetweenDollarrate the exposureUS exchangemovementin hedging thelimitpolicy to to of the oil fields in Rajasthan.Accordingly, Cairn India has adopted and implemented a foreign Market Place Market The Group’s results from its operationsindustryamongstsignificantcompetitive.things, otherthehighlyto, Due increaseis subsequent and international declinepricesin oil and financial conditionsubjectcompetitivehighlyisGroup2008, conditionsresourcestomarketthe thein conduct requiredfor to itsongoingbusiness, are subject to fluctuations in oil and gas prices. The oil and natural gas Risk Factors Risk Continued If theGroup fails to meet closure cause environmental even or criminalandproceedingscivil governmentalhalt proceedingsby civil environmentalauthorities, as limit, bywell othergroupsasand could that orders as well requirements as it against damages and penalties fines, in result could or which hasindividuals, a major accident or disaster,materialadversea effect have whichcoulditsitsbusiness,operations,on of of resultsoperations any of financial andcondition. it may also be subject to administrative, adoption of new health, safety and environmental laws and regulations, new interpretations of existing laws, increased governmental governmental increased laws, existing of interpretations new Theregulations, and Group laws mayenvironmental also and safety incur health, new liabilities of adoption for environmental damageenforcement caused by of acts environmental or omissionsGroup laws of incurring or any other third developments party additional contractors.increasingly operating in the future Further, expenses stringent may require the in order and additional may to in maintain the capital future current create expenditures orsubstantial future operations. or result environmental in the These laws compliance and regulations or remediation are liabilities and costs. Resources Human its efforts of and skills the on depend control its within factorsrisk those mitigate to ability its performanceand Group’s The continued Group’s theextentlarge on employeesmanagement successa Futureand dependacrossGroup.teams thewillto The Group is subject to a broadstorage,things,transportationotherthehandlingand rangepetroleumof products, employeeexposurehazardous of to substances health,and safetyoperations. andits aspectsof other environmental laws and regulations that impose controls on, among in particular with regard towith the engagement relatively of limited leading resources thirdspecialistengineeringservices otherandRajasthan. developitsfieldsremaining partyCairn indevelopmentTheneedsthat Indiato costs, and expertise service providers in India, in and particular the purchase in the of capital area surrounding equipment. Rajasthan, Coupled this has resulted in a strain on the Grouptheparties thirdIfsuffer. any sufficient may lossesorbeinsurance coveringwhichitnotall policiesin may Group’s the that resultsoperationsof financialandcondition. insuranceThe programme subjectalsocertain is to limits, deductibles termsotherand conditions. and Insurance Consistent with good industry practice, an insurance programme is in place to mitigate significant losses. There is a risk, however, Theprimary the current with closely liaise to sought capitalhas Company The schedule. on personnel and constraints materials equipment, deliver to project, may also impact the abilitycontractors ofthe contractors to ensure appropriate and their sub-contractors timing of payments. working on the Rajasthan of raw material and equipment shortages, or price increases above those anticipated and an inability to procure or design the the design or procure to inability an and first2009foranticipated commercial of second currentproduction the halfthe target subject ofas these arerisksthose wellMangalafield, tothe from as above increases price or shortages, equipment and material raw of required. services engineering Risk Factors Continued
The Group’s producing fields and construction projects carry significant health, safety and environmental risks. The Group seeks to minimise these risks though the application of the CR Management System (CRMS). The CRMS provides the basis for managers and supervisors to conduct risk assessments and to identify and implement appropriate steps to minimise the risks to people, facilities and the environment. Road transportation has been identified as a key safety risk in our activities and appropriate measures are in place aimed at minimising the potential for accidents or environmental impacts.
War, Terrorist Attack and Natural Disasters The Group’s business may be adversely affected by a war, terrorist attack, natural disaster or other catastrophe, particularly given the location of some of the Group’s assets in South Asia where terrorist attacks have become more prevalent in recent times. Regular security assessments, audits and ongoing engagement with Government officials are the main ways through which the Group mitigates the risks to staff and assets from terrorist actions.
The Group’s assets are also exposed to risks from adverse weather conditions. In India the projects in Rajasthan and production operations in Cambay can be impacted by heavy rains during the monsoon season. Capricorn’s assets in Bangladesh are also exposed to risks from extreme weather conditions, such as cyclones, which can occur in South Asia. The low-lying nature of much of Bangladesh puts it at risk from any rise in sea levels as a result of global warming. Any damage to the Cairn India and Capricorn infrastructure in India or Bangladesh or disruption or suspension of production could have a material adverse affect on the financial condition and/or operating results of the Group.
Capricorn’s ability to conduct its operations in its Greenland acreage may be adversely affected by sea ice and icebergs even within the operating windows during which activities can normally proceed.
Political Climate The Group is active in a number of overseas markets and may be affected by a change in fiscal policy in respect of, or which impacts GOVERNANCE AND ACCOUNTS upon, these markets. The Group cannot predict the impact of future changes in fiscal policy in the countries and markets in which it operates. Amendments to existing legislation (particularly increases in tax rates or withdrawals of tax relief), the introduction of new tax laws (such as the imposition of import and/or export quotas or import and/or export tariffs) and changes from time to time in the interpretation of existing tax laws could materially adversely affect the Group’s reputation, financial condition and/or operating results.
Cairn India may be liable to pay cess under the Indian Oil Industry (Development) Act 1974 (‘OIDA cess’) in relation to the production of crude oil from Rajasthan under the terms of the RJ-ON-90/1 PSC. Any requirement to pay OIDA cess on commercial production of crude oil, whether or not recoverable pursuant to the terms of the PSC, may have a material adverse effect on Cairn India’s financial condition and results of operations.
In respect of the political climate in Nepal, with the declaration of a Republic on 28 May 2008 and the entry of the Maoist party into Government the security and political situation in that country has improved but remains sensitive. For this reason Capricorn has not lifted the force majeure notices served earlier in respect of its exploration interests and will await further progress before doing so. There is a risk that the situation in Nepal may never improve sufficiently to enable the Group to recommence its activities in that country.
Cash Flow and Funding Cairn has always maintained a capital structure appropriate for its operations in exploration, appraisal and development. Due to the concentration on exploration, appraisal and development activities, both Cairn India and Capricorn are expected to remain cash flow negative for some time. Given the current global market conditions, the Company strengthened its equity capital base in March 2009 through placing approximately 5 per cent of the existing issued ordinary share capital with both new and existing institutional investors, in order to maintain operational and financial flexibility across Cairn’s operations, particularly in relation to the Rajasthan development and to its exploration position in Greenland.
Cairn India finances its operations from cash generated from its producing fields, from the cash proceeds received and retained in respect of the IPO and from the private placement of shares to Petronas and Orient Global in 2008 and committed and available loan facilities. If production from any of the producing fields is interrupted or suspended, this would have a negative impact on the Group’s cash flow.
The directors consider that the existing banking facilities, together with the Group’s cash resources, currently provide sufficient funding to complete the core Mangala development and the export pipeline, and that the additional equity raised in March 2009 will enable the Group to retain significantly greater optionality in the delivery of its Rajasthan project.
Global Economic Slowdown and Associated Risk The Group is exposed to liquidity risks, including risks associated with refinancing borrowings as they mature, the risk that borrowing facilities are not available to draw down and the risk that assets cannot readily be converted to cash without loss of value. This risk has been increased by the volatility of the current economic environment. The Group may be unable to obtain sufficient credit or may only be able to obtain credit on unfavourable terms due to banking and capital market conditions. If this happens, the Group may not be able to develop new projects or meet existing financial commitments and, as a result, operating results, revenues and cash-flows may be adversely affected.
The Group is exposed to counterparty risk that could result in financial losses and credit risks should those counterparties, including JV partners and suppliers, become unable to meet their obligations to the Group. The current economic climate has increased this counterparty risk.
44 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 45
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN During the year, certain furtherWhen a meetings specific took matter place requires(comprisingcommitteeBoardleast tothe ata of by withdealt dealshort-notice beconsidered a may theyatwhen meetingBoardand with consideration specific matters at short that notice, required there to is be a procedure considered that at short sets out notice. when those matters must be The formal agenda for each scheduledis set by the Board Chairmanmeeting, in consultation whichmeeting regularly includes with includes the a Chief detailed presentations Executivenon-executiveMalcolmThoms).Brownanda Jann Gammell,in Cairncapacitysit (currentlyBillalsoIndia updateboardof Sir the on and on from matters the Company senior in respect Secretary. operational of the In management, particular, Group’s Indian the business agenda for from each those Board directors of the Company who During 2008, seven scheduledBoardmeetingsthoseof meetings, attendanceat andof Details each of Delhi. atNew inEdinburghmeetingother heldthewith meetings of the Board51. page on were out set are held,committees, six of which were held at the Company’s registered office in directorphysicallyattendcommitteeAnyandopportunityisBoardunableto whothe givenmeetings is consulted beand to writing.telephonetelephoneVideoin andmeetingorby conferencing the advance comment of usedwhenfacilitiesinalso are directors are not able to attend meetings in person. by the Board for directors,forBoard furtherancethe inindependent by take duties,theirto professional of Company’snecessary, theadviceif at pre-determinedlimit. a to up expense, two non-executive directors (one of whom must be the Chairman or Deputy Chairman) and two executive directors). fully kept is Board the that ensure to meetings the partsof attends frequently also Dhir, Rahul India, Cairn of Executive Chief The The Board has a formalschedulemattersa of specificallyhasBoard The decision.reservedforThese reservedit to matters includedetermination The division of responsibilities between the Chairman and the Chief Executive has been clearly established, set out in writing and writing in out set established, clearly been has Executive Chief the and Chairman the between responsibilities of division The agreed by the Board and was reviewed during 2008 to ensure it remains appropriate and effective. All of the directors are subject to election by shareholders at the first AGM after their appointment to the Board and to re-election to and Board the to appointment their after AGM first the at shareholders by election to subject are directors the of All by shareholders at least oncenine every years three is subject years. In to addition, annual re-election. any non-executive director who has served on the Board formore than performtorelevant informationenableitall its duties.timelyCompanyaccessto Secretaryand Theto full has Board The is has director each addition, In matters. governance corporate all on Chairman, the through Board, the advising for responsible access to the advice and services of the Company Secretary and Deputy Company Secretary. There is also a procedure agreed The Board currently comprises the Chairman, the Chief Executive, five executive directors and five independent non-executive independent five and directors executive five Executive, Chief the Chairman, the comprises currently Board The directors. The directors’January following2009resignationstheirrespectively, 2008 15 effectwith andHowever, directorsMay biographies 23 fromduringyear. the are on pages 38 to 39. Andrew Shilston and Ed Story also taken both be will role served this although director non-executive independent senior asCairn’s currently non-executive is Chairman, DeputyGrossart, Hamish responsibility key seniorindependenttheA for 2009. non-executiveMcLarenMay Iaineffectwith be by director to over 19 from is ExecutiveChiefinappropriatethroughviewsChairmanthe itthe relay feelor to may shareholderstheythat availabletoevent the in or the Finance Director. In addition,directors the senior assess independent the performance non-executive of the Chairman, director further takes details the lead of role which when are the set non-executive out on page 46. The Board Management the to delegated delegates is basis day-to-day a on Group the theof management Operational execution management. senior and directors of its strategic objectivesOperating to the Team, Chief which Executive’s comprises Committee, the asset managers which comprises and functional the executive heads of department. are prerequisites for appointment. appointment. for prerequisites are included. longer no are details biographical their reportannualthefinancialother approvalaccountsstatements, strategyandofand Groupanyoverall the theand Group’s of of the particularbudgetamendmentsannuala andbudgetthat overamount, borrowing to security, and acquisitions disposals,and approval Board, and Group the structureof organisational the to amendments amount, specified a over expenditure capital of significant changes to accountingThe schedule policies of matters and approval reserved of management to the Board incentive was also reviewed schemes and and updated Group policy during on pensions. 2008. Cairn’s business is international in scope and carries political, commercial and technical risks. Accordingly, particular attention is paid paid is attention particular Accordingly, risks. technical and commercial The Boardpolitical, carries and scope in international is business Cairn’s to the composition and balanceCairnoperates,appropriate and of financialriskappointment,managementBoardandeach skills. In thewhethernon-executive, executive or Board to ensure that itconsidersBoardthe objectivityfunctions, thatskills,experience has its key as assist abilityinwellBoard willand integrity,the thatas and wide experience of the sector and regulatoryenvironment in which Set out below is a statement of how the Company applied the principles of the Combined Code for the year ended 31 December 2008. Cairn is committed to achieving compliance with the principles and provisions set out in the Combined Code appended to to appended Code Combined the in out set provisions and principles the with complianceachieving to committedthe is that Cairn considers Board The maintained. are governance corporate of standards high that ensuring to and Rules Listing the Companycompliantis withCombinedthe areasothertheCode,detailedthanin page 55. on Corporate Governance Statement Governance Corporate Corporate Governance Statement Continued
briefed on matters relating to Cairn India. Formal minutes of all Board and committee meetings are circulated to all directors prior to the next Board meeting and are considered for approval at that Board meeting. In addition, the members of the Board are in frequent contact between meetings to progress the Group’s business. The non-executive directors also meet informally, without any executives present, on a regular basis to discuss matters in respect of the business.
New directors receive a full and appropriate induction on joining the Board. This involves meetings with other Board members, senior management and certain of the Company’s principal advisers. In addition, a new director is provided with an induction pack which contains background materials and general information on the Company, the Company’s policies and procedures, financial information, an operational review and a briefing on directors’ legal and regulatory responsibilities. Details of the procedures followed for the appointments of Iain McLaren and Dr Jim Buckee, who were appointed as non-executive directors of the Company during 2008 and 2009 respectively, are set out on pages 49 and 50.
The Company provides the necessary resources for developing and updating its directors’ knowledge and capabilities. In particular, the Company is committed to the provision of continuing professional development training to its directors and in 2008 held a number of seminars for Board members, which are regularly presented by the Company’s external advisers and guest speakers, on subjects appropriate to the Company’s business, including changes to legislation, regulation and market practice. These seminars were held at the end of Board meetings and were attended by all directors present at such meetings. This process is continuing in 2009. Any director may request that a particular subject is covered in a seminar. In addition, all press cuttings relating to the Company and all brokers’ and analysts’ reports on the Company are distributed to all directors. At least once a year, the Board visits an operational site and in December 2008, the directors visited the Company’s operations in Rajasthan, India.
The Company has directors’ and officers’ liability insurance in place.
Performance Evaluations GOVERNANCE AND ACCOUNTS The Board has a formal rigorous process of annual performance evaluation for the Board, audit, nomination and remuneration committees and individual directors. The Board reviews on an annual basis whether such performance evaluation should be conducted using an external resource. The Board decided, however, that for 2008 there was value in conducting the process internally to develop an appropriately tailored approach and benefit first-hand from direct input from individual directors.
The performance evaluation of the Board and the Board committees was primarily based upon answers to a detailed questionnaire which had been updated since the previous year’s evaluation and which was prepared internally by the Company Secretary and Chairman. The questionnaire was distributed to all Board members and the Company Secretary. The areas covered in the questionnaire included the effectiveness of the Board and Board committees, performance against objectives, preparation for and performance at meetings and corporate governance matters. One particular area that the questionnaire addressed was the performance of those directors who are also non-executive directors of Cairn India in respect of the stewardship of that part of the Group’s business. The questionnaire addressed all of the issues raised by the Higgs Review of the role and effectiveness of non-executive directors.
The review process carried out pursuant to the questionnaires can be summarised as follows:
Evaluators Chairman Executive directors Non-executive directors
Evaluating Board Chairman Board committees Executive directors Non-executive directors Self-assessment
Once a questionnaire had been completed by each member of the Board and the Company Secretary, the Chairman held a meeting with each director and the Company Secretary individually, as appropriate to discuss their responses. The Chairman then reported the results of the process to the Board at a Board meeting, which discussed the comments and implemented the conclusions. The Board and Board committees are satisfied that they are operating effectively.
The Deputy Chairman sought the views of the executive directors and met with each of the other non-executive directors, in the absence of the Chairman, to discuss and assess the Chairman’s performance. The results of this review were then discussed with the Chairman. The Board (not including the Chairman) is satisfied that the Chairman’s performance is effective and that he demonstrates continued commitment to the role.
The performance evaluation process indicated areas for improvement, which have been or are being implemented. Following the performance evaluations, the Board believes that all of the directors’ performance (including those of Todd Hunt, Dr Mike Watts, Phil Tracy and Hamish Grossart, who are standing for re-election at the AGM) continues to be effective and that they demonstrate commitment to the role.
46 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 47
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
provides an objective,providesanrobust consistent andassumptions, the challengesenior management to beliefsof views and and the other directors; questionsdebatesintelligently,constructively challengesandrigorously dispassionately; and bestintereststheorganisation theintimes its shareholders;actsof andall at and business,detailedwhole.extensive industryanda a knowledge Group’s has the asmarket theof and
Set out below are reports from the audit committee, remuneration committee and nomination committee. The CompanySecretaryThe actssecretarycommittee as committeesall thecirculatedmeetings minutesof arethetoto and directors.all The executiveThedirectors performancetheir have individuallyremunerationthe reviewedby committee againstobjectives which A performanceA committeesBoardtheBoard, individualthe andevaluation directorsofconducted be continueto willannuallyand optimiseprocess.theorderto inBoard the reviewedby be continue to willreviewsuch method forthe The committeesThenecessary providedallarewith undertake effectiveresourcesenableto theman toduties their in manner. Corporate Governance Statement Governance Corporate Continued as Grossart considered Hamish be can he Code Combined the of terms in years, nine than more for Board the on served Grossarthas Mr Since so. be to him deems Board the if only independent Deputy the been Grossarthas Mr particular, In Company. the of affairs the to time of amount substantial a Grossartcommits Mr Chairman and a member of the Company’s will Company’sseniorindependentMcLaren non-executiveIain Grossart relinquishing 2003.Mrthat becreatedhoweverindirector was will role agreed thesince has Board nomination, the and 2009 May 19 effectfrom with director remunerationnon-executive independent senior of role the and audit committeesassume for a number this role of years on that andreplaceMrwill Buckee Jimagreed date. that hashasBoard The 2009. nominationthecommittee,May member beeneffectwithof also a In 19 from addition, the Mr Grossart isHunt Grossart resigning remunerationTodd thechairmanmember. asof committeea asNorman andreplaceMurrayhim will as chairman and a member of the remuneration committee and as considereddirectorbefollowingbehaviours thea independent:believesthattoBoardessential orderThe for are in • Committees Board The Board has established anterms audit of committee, reference a approved remunerationavailableforreferenceare terms of the CopiesBoard. of the ongoing byby basisreviewedCombinedinternallyan are Codeonand the Board. committee The terms and a nomination of2009. referenceMay 19 on heldinspectionbe inspection availableforto berequest onwillAGM andbeforethe committee, for each of these each of committees which has formal satisfy the requirements of the Independence of Non-Executive Directors Non-Executive of Independence non-executiveprocessindependencetheevaluationreviewBoardthecovered andThealso of each directors, of accounttakinginto the considered again process the particular, In committees. its and Board the to contribution objectivityand integrity, their independence of Hamish Grossart. The Board is aware that PIRC havenon-executiveconsideritsnotanyinternaldoes policies,termsaofPIRC directorinbeen understood,on that has who queried however, whether Mr Grossartboard can for be more classed thanindependent. be nine as to an tenure years independentof length this with director to be independent, director of notwithstanding the Company. It is that the Combined Code permits the Board to determine a non-executiveindependencethereviewedtheHaving of each directors, of non-executiveconcluded Boardtheall that directors of independent. are Company the are set annually. The bonuses payable to the executivebonusesthedirectorsThe payable to annually. Company’ssetcash under thebonusscheme are (described further on page 66 and 67) are linked directly to the results of these reviews. nominationtheGrossartcommittee.member replaceMrof willa as Mr Grossart to be re-elected believes thattherefore Board The as duetime. an this independent toat valuable both are business theGroup’s the current of understanding detailed non-executive his and matters, financial economic in climate director and of the the recent Company.that changes Mr In Grossart’s addition, in Board the composition, continued Board is firmly presence Mr Grossart’s of the on belief the Board experience, and the audit particularly committee is helpful for continuity. • • • Having thoroughly reviewed thedemonstrates matter, without each Mr of Grossart the behaviours being set present, out above the and Board that is there firmly is of currently the view that no evidence Mr Grossart that length of tenure is having an Mr Grossart has indicated that he is willing to stand for re-election as a director of the Company on an annual basis and a resolutiona standre-electionandbasisannualGrossart forto an willing CompanyMrdirector on the is indicated a of hashe thatas shareholders’in effect.thisis interests2009 itto believesthatBoard May The for 19 onheld be to proposedAGM thebe willat adversethe in participate not Grossartdoes Mr impact that noted Board the particular, on In his role. the independence. to commitment continued demonstrates he upon dependent not is and Thescheme pension or Board plans incentive long-term plans, believes option share scheme, bonus cash thatCompany’s Mr Grossart’s performancethe fees continues received to from be effective the Company and as his that primary source of income. Corporate Governance Statement Continued
1. Audit Committee Report The audit committee comprises three non-executive directors, all of whom are considered by the Board to be independent. Currently, its members are Iain McLaren (chairman), Hamish Grossart and Dr Jim Buckee. The Board is satisfied that two members of the committee have recent and relevant financial experience. Mr McLaren was formerly a partner at KPMG LLP. Mr Grossart serves on audit committees of other listed companies and trained as an investment banker. The Board considers it appropriate for Mr Grossart to remain a member of the audit committee for the time being to ensure continuity given that Iain McLaren and Dr Jim Buckee are new members of the committee.
Andrew Shilston served as chairman of the audit committee during the year under review until his resignation with effect from 23 May 2008. Ed Story also served as a member of the audit committee during the entire year under review, although he has subsequently resigned as a non-executive director with effect from 15 January 2009.
The audit committee met five times in 2008. At the request of the audit committee, the Finance Director and senior members of the Finance Department attended each of these meetings. The Chairman also attended one meeting as an observer, on being invited to do so by the committee. In addition, all five meetings were attended by the external auditors and by the internal auditors.
The external auditors receive copies of all audit committee papers (including papers to be considered at meetings when they are not in attendance) and minutes of all committee meetings. In addition, the chairman of the committee regularly meets with the external audit partner to discuss matters relevant to the Company.
The role of the committee includes: • monitoring the integrity of the financial statements of the Company and formal announcements relating to the Company’s financial performance and reviewing any significant financial reporting judgements contained in them; • reviewing accounting policies, accounting treatments and disclosures in financial reports; GOVERNANCE AND ACCOUNTS • reviewing the Company’s internal financial controls and internal control and risk management systems; • monitoring and reviewing the effectiveness of the Company’s internal audit function; • overseeing the Company’s relationship with the external auditors, including making recommendations to the Board as to the appointment or reappointment of the external auditors, reviewing their terms of engagement, and monitoring the external auditors’ independence, objectivity and effectiveness; and • reviewing the Company’s whistleblowing procedures and ensuring that arrangements are in place for the proportionate and independent investigation of possible improprieties in respect of financial reporting and other matters and for appropriate follow-up action.
The audit committee met on three occasions during the 2007 year-end process. Issues likely to impact the financial statements are raised at the initial meeting by both the senior management and the external auditors. The auditors also present their audit plan. Audit committee guidance is sought on accounting policies and assumptions to be adopted in preparing the financial statements. After discussing and challenging the issues raised, the audit committee recommends the policies to be adopted or direct senior management to produce further information if deemed necessary.
At the final meeting, the external auditors report their audit results to the audit committee, including a summary of any significant accounting and auditing issues, internal control findings and a summary of audit differences identified. The audit committee considers any disagreements in accounting treatment between management and the auditors, should any arise.
The audit committee has established a policy in relation to the supply of non-audit services by the external auditors and other third parties. The Company will engage an external adviser to provide non-audit services on the basis of the skills and experience required for the work, where benefit will be derived as a result of the third party’s knowledge of the Company and cost. These advisers may include the Company’s external auditors for a restricted list of non-audit services, although, before the engagement commences, the Company must be satisfied that the auditors’ objectivity and independence would not be compromised in any way as a result of being instructed to carry out those services. If the cumulative fees to be paid to an external adviser for the provision of non-audit services are below a certain level, the adviser may be engaged in accordance with the Company’s financial delegations of authority after a quotation has been received. If the fees payable are expected to exceed that level on a cumulative basis, the engagement must be approved by the audit committee in advance after following a tender process.
KPMG LLP has been appointed by the audit committee to supervise and co-ordinate the Company’s internal audit function. KPMG also provide internal audit services to Cairn India. At the beginning of each year, an internal audit plan is developed by the internal auditor, in consultation with senior management, based on a review of the outcome of the previous year’s internal audit, the significant risks in the Group Risk Matrix and identified mitigation measures. The internal auditor also attends meetings of the Group Risk Management Committee and certain of the meetings of the Management Operating Team to maintain an understanding of the business activities and associated risks. The audit committee receives updates on the internal audit work plan on an ongoing basis. The external auditors do not place any reliance on the work undertaken by the Company’s internal audit function due to the nature of the scope and the timing of their work. The external auditors do, however, attend audit committee meetings where internal audit updates are given.
48 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 49
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN determining the level of awards made under the Company’s share option plans and long-term incentive plans and the and plans incentive long-term and plans option share Company’s the under made awards of level the determining performance conditions whichdeterminingbonusesCompany’spayablecash underthebonusscheme; are to apply; determiningCompany’sawardslong-termunderthevestingoptions;shareandtheof exercise incentive of and plans determiningpensionpolicythearrangements,for service agreements terminationand payments executivedirectors. for McLaren Iain of Appointment technical the considered committee nomination the director, non-executive a as Shilston Andrew of resignation the Following abilities required by his successor.committeeauditthechairmanShilston’s actasfollowingof Mr to relevanther financialrecentand experienceor enable him to In particular, the his nomination and sectordeparture gas and oil the of knowledge committee detailed his from given successor suitable a that as Scotland, considered role.in LLP KPMG of partner After senior that detailed proposal a anydirectors, non-executive other such the consideration,of views appointee the seeking After profession. accounting the in experience should significant the nomination have such committeethat identified Iain McLaren Iain be McLaren, appointed whounanimously as was a non-executive formerly approved a director the appointment.committee and as chairman with Iain effect McLaren of the audit from was21 appointed August 1 committee July 2008. 2008. as a was Mr non-executive McLaren put to the was Board, appointed director who as and a member as chairman of the nomination of the audit committee with effect from determiningremunerationtheexecutiveBoardagreeingthedirectors,the withand allpolicy membersChairmanforthethe and of the CEC; determiningagreedindividualpolicy,totalthe the terms remuneration within of the executiveeachpackagedirector;for
• • • Details of the Company’s policiesRemuneration on remuneration, Report service on pages 60 contracts to 72. and compensationReport Committee Nomination 3. payments are given inthe nominationThecommittee currently Directors’ comprises NormanMurraytwoindependent (chairman), non-executive directors, HamishGrossart StoryservedExecutive). GammellEd (Chief asBill executive Sir director,oneexecutive,ensureinputthefrom to McLaren, and,Iain and • The role of the committee includes:• • • and 2008 July 1 effectfrom with Company the of directors non-executive as appointed were Buckee Jim Dr and McLaren Iain January 2009respectively. 15 followingproceduresTherespect followed theseinwere appointments: of proposals. The Chairman also attended four meetings of the committee during 2008 as an observer, on being invited to do so by by The so do Chiefto invited being on Executive, observer, an as 2008 during committee the of atmeetings four theattended also Chairman request The proposals. of the committee, attendsthe committee. its meetings. Certain In addition, otherby the of he thecommittee. is executive consulted None directors by the of the committee membersor attended discussions on of its the meetings committee, relating of the to nor their committee the Chief own remuneration. Executive as observers nor the on being Chairman, invited participated to do so in any meetings rigorousformal,transparentandCombined a The be Code requires directors,procedureappointmentthereto thenew for of which should be meritocratic and madeincludeswhoseroleconsidering makingrecommendations andBoard composition,on theBoard the the skills of balance andto against objective criteria.thesematters,directorsappointmentreappointmentthenewthe on on of orderly andand succession existing ofdirectors. For this purpose, the Board has established the nomination committee, 2. Remuneration Committee ReportCommittee Remuneration 2. remunerationThe committee comprisesindependent. non-executivefourbe to Boardconsideredthearewhomdirectors, by of all Storymemberserved a Ed Buckee. as Jim Dr andHunt itsmembersCurrently,Todd HamishGrossart are MarkTyndall, (chairman), be will ofand 2009 the May remuneration19 on committee remuneration the of member a as and chairman committee as resign Grossartwill Hamish above, during the year under reviewreplaced until his by resignation Jim Buckee as chairman with effect and by from Norman 15 January Murray 2009. as a member. As mentioned The remuneration committee met five times in 2008. will and 2009 May 19 effectfrom with committee nomination the of member a as resign Grossartwill Hamish above, mentioned As nominationthecommitteememberappointed of be a will MarkTyndall agreedthatalso has Board TheHunt. Todd replacedbeby with effect from 19 May 2009. the EY senior audit partner2008 working year-end with Cairn process. is subject to rotation and a new audit partnerworked with the Company on the a member of the nomination committee2008. ofin the times non-executive duringfive met thecommittee year directors undernomination The review attended until his meetings resignation of the with committee effect as from observers 15 January on 2009. being Certain invited other to do so by the committee. carried out by the audit committeeauditfinancecarriedmembersthedepartment.the Finance Director inputwiththeby from of key outother and this,additionFollowingassessment,suchIn to taken. be requirecommitteeauditto the discuss meets actions,to whatany, if The Company undertook an auditCompany’sauditors.Company monitorsThe itsauditors’ performance tender ongoingassessmentannualincludingbasis,anan on process in 2003, as a result of which Ernst & Young LLP (EY) were re-engaged as the Corporate Governance Statement Governance Corporate Continued Corporate Governance Statement Continued
• Appointment of Dr Jim Buckee The nomination committee evaluated the balance of skills, knowledge and experience on the Board and recommended that the Company appoint a new non-executive director. Having considered the preferable background of any potential candidate, it was agreed that any appointee should have extensive experience in the oil and gas industry and have an engineering background. The nomination committee recommended to the Board that Dr Jim Buckee, who had previously been President and Chief Executive Officer of Talisman Energy, Inc. be appointed as a non-executive director of the Company and as a member of the audit committee and remuneration committee. Dr Buckee’s appointment was unanimously approved by the Board and he was appointed as a non-executive director and as a member of the audit committee and the remuneration committee with effect from 15 January 2009.
Following their identification as candidates and prior to their appointment, both Iain McLaren and Dr Jim Buckee met with the chairman and other members of the nomination committee and also with the executive directors and senior management. They were also given the opportunity to carry out due diligence on the Company, including meetings with the Company’s auditors, discussions with the executive directors and attendance at results presentations prior to their appointment.
Although neither of the above directors was identified by means of an external search consultancy or by advertising, the nomination committee does use the services of independent consultants from time to time to assist in the identification of candidates for non-executive directors and/or to benchmark candidates already identified by the committee against possible candidates identified by consultants. By way of example, Spencer Stuart assisted the Company in identifying Andrew Shilston as a non-executive director and Ridgeway Partners assisted in identifying candidates for non-executive directors of Cairn India Limited.
The nomination committee is currently considering the possibility of appointing another non-executive director to the Board during the next 12 months and Ridgeway Partners have been retained to assist in this process. The nomination committee reviews Board composition on an ongoing basis and regularly considers whether any skills gap exists on the Board. Any new appointments to the Board will be considered in this context. GOVERNANCE AND ACCOUNTS
Succession Planning The nomination committee regularly reviews the structure, size and composition (including the skills, knowledge and experience) required of the Board and makes recommendations to the Board as appropriate. The Board has satisfied itself that the nomination committee has in place appropriate plans for orderly succession to the Board and senior management positions as well as procedures to ensure an appropriate balance of skills within the Company and on the Board and its committees. The Board and nomination committee are satisfied that individuals currently fulfilling key senior management positions in the organisation have the requisite depth and breadth of skills, knowledge and experience to ensure that orderly succession to the Board can take place.
Organisational Planning The focus throughout 2008 was on employee engagement and organisational development.
It is essential that all employees are able to contribute to the future of the organisation and engage fully in its ongoing development. Having undergone significant organisational change over the preceding two years, in 2008 the Company conducted an independent employee engagement survey to formally solicit feedback from staff. Overall the results of the survey were largely positive, although some key areas for development were also highlighted. All staff were involved in developing actions to address the highlighted development areas and a follow-up survey is planned for 2009.
Leadership and management development was also a key focus in 2008. Following on from the success of the 2007 pilot programme (which was attended by several executive directors), all senior managers participated in a bespoke Henley leadership programme during 2008. A separate management development programme was also developed and run in June and November for all other ‘people managers’ in Edinburgh and Bangladesh respectively. Further leadership and management development will be undertaken in 2009.
Building upon a holistic, independent benefits review undertaken for the Edinburgh office in 2007, coupled with changes to rules governing UK pensions, the Company proposed a new, more flexible Group Personal Pension Plan, which would allow each employee to make their pension arrangements specific and unique to their circumstances. Following a comprehensive staff consultation, the new Group Personal Pension Plan came into force on 1 June 2008. Since implementing the new scheme, the number of staff making additional voluntary contributions to their pensions has increased from 4% to 31%.
In April 2008, the Company was awarded the Scotland PLC Developing Your People Award, which ‘recognises the efforts of companies in nurturing and encouraging their employees to make the most of their talents’.
50 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS (1) (1) (3) 51
2 5 5 5
5 n/a n/a n/a n/a n/a n/a n/a n/a
2008
Meetings attended Meetings Nomination Committee Nomination
(1) (1) (1) (1) (2) (2) (4) 4 4 5 5 n/a n/a n/a n/a n/a n/a n/a n/a n/a CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Meetings attended Meetings Remuneration Committee Remuneration
(1) (1) (1) (1) (1) (2) (3) (4) 4 5 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Audit Committee Audit Meetings attended Meetings 2 (2) (2) (3) (4) 7 6 4 7 7 7 7 5 7 7 7 7 n/a Board Meetings attended Meetings
During 2008, certain directors who were not committee members attended meetings of the audit committee, remuneration committee, audit the of meetings attended members committee not were who directorscertain 2008, During committee and nominationcommittees,Boardrelevantreviewedpapers committeeof thehe foror attend Boarddirector the meetings unableto Where a wasof by invitation. These details have not been included in the table. Iain McLaren was appointed as a director on 1 July 2008. The number of Board meetings and audit committee meetings meetings committee audit and meetings Board of number The 2008. July 1 on director a as appointed was McLaren Iain on committee nomination the of member a as appointed was McLaren Mr date. that effectfrom with stated is attended 21 August 2008. The numberJanuary 2009. director 15 appointed ofa onwasBuckee as Jim Dr meetings attended is statednon-executiveAndrewShilstona was withdirectorcommittee auditthechairman andJanuary duringperiodof the 1 from2008 to effect from that date. the meetings and provided his comments to the Board or the Board committees in advance of such meetings. committeeauditattendedmeetings2008. Board3 hemeetings. Duringandtime May this3 23 non-executiveunderreviewStorya DuringyearwasJanuary the Ed director 2009. January duringperiod the15 1 from2008 to committeeattendedauditmeetings,Boardhe remuneration3 meetings, 3 3 committee nomination committeemeetings2 and meetings.
Iain McLaren Dr Jim Buckee Mark Tyndall Executive Directors Sir Bill Gammell Meetings held during 2008 Meetings held during Directors’ Attendance at Board and Board Committee Meetings Committee Board and Board at Attendance Directors’ The table below sets out the attendance record of each director at scheduled Board and Board committee meetings during 2008: Corporate Governance Statement Governance Corporate Continued At the end of 2008 and then again prior to the AGM to be held on 19 May 2009, the Chairman and the Company Secretary held held Secretary Company the and Chairman the 2009, May 19 on held be to AGM the to prior again then and 2008 of end the At Company’sinstitutionalthemeetings severalwith of discuss shareholders,to currentPIRC,RREVcorporate andABI, the governance issues,reportstheir particular, stepsCompany’sreportannualthethatthein onpreviousaccounts and, thefinancialand year for had been taken by the Company duringare in place 2008 to to ensure address the comments continuing made independence in respect of of Board the non-executive composition and directors. the procedures that Each of the non-executive directorspresent), is if available requested to by attend such major meetings shareholders. with major shareholders (without the executive directors The seniorindependentThe non-executive concernsshareholdersdirectorcontactavailableto have thatthey is throughifnormal the channels of the Chairman, Chief Executive or Finance Director has failed to resolve or for which such contact is inappropriate. from shareholders and also has a website, which contains a range of information, including a dedicated investor relations section. All analysts’Allbrokers’ reportsanddistributed also directors. Companyare the all on to correspondenceCairn responds all to these meetings, a detailed report is given to all directors who were not in attendance at those meetings. In addition, the Company Company the addition, In meetings. those at attendance in not were who directors all to given is report detailed a meetings, these externalmaintainsan relationsdatabase meetings whichdetailsattendeddirectorsall the by partythirdwith stakeholders. Dr Mike Watts Hamish Grossart interimresults.year-endandthe meetingChairmanBoard immediately theseThethemeetings.attends number following of At a (2) Jann Brown Malcolm Thoms Notes: n/a not applicable (where a director(1) is not a member of the committee). understandinghalf-yearlydevelopanshareholders.Board membersreportthetheensure all views that of theorder to to of In shareholders,major regularof dialogueinstitutionalwiththereis shareholders, includingmeetings afterannouncement the of (4) (5) Shareholders with Relations Communications with shareholders are given high priority by the Board. Cairn sends both its annual report and accounts and (3) (6) Todd Hunt Todd Phil Tracy Simon Thomson Non-Executive Directors Norman Murray Corporate Governance Statement Continued
Annual General Meeting The Board uses the AGM to communicate with private and institutional investors and welcomes their participation. It is policy for all directors to attend the AGM if at all possible. Whilst this may not always be possible for business or personal reasons, in normal circumstances the chairmen of the audit, remuneration and nomination committees will attend the AGM and be available to answer questions.
It is policy to involve shareholders fully in the affairs of the Company and to give them the opportunity at the AGM to ask questions about the Company’s activities and prospects.
Details of resolutions to be proposed at the AGM on 19 May 2009 can be found in the Notice of Annual General Meeting and on the Company’s website.
The proxy votes for and against each resolution, as well as abstentions, will be counted before the AGM and the results will be made available at the meeting after the shareholders have voted on each resolution on a show of hands. The Form of Proxy for the AGM includes a ‘vote withheld’ option in respect of each resolution, to enable shareholders to abstain on any particular resolution. It is explained on the Form of Proxy that a ‘vote withheld’ is not a vote in law and will not be counted in the calculation of the proportion of the votes ‘for’ or ‘against’ a resolution.
Directors’ Responsibility Statement The directors are responsible for preparing the annual report and the Group and Company financial statements in accordance with applicable United Kingdom law and those IFRSs as adopted by the EU.
The directors are required to prepare the Group and Company financial statements for each financial year which present fairly the financial position of the Group and Company and the financial performance and cash flows of the Group and Company for that GOVERNANCE AND ACCOUNTS period. In preparing each of the Group and Company financial statements, the directors are required to: • select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirement in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s and Company’s financial position and financial performance; and • state that the Group and Company have complied with IFRSs, subject to any material departures disclosed and explained in the financial statements.
The directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the Group’s and Company’s financial statements comply with the Companies Act and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Going Concern The directors have considered the factors relevant to support a statement on going concern. They have a reasonable expectation that the Group will continue in operational existence for the foreseeable future and have therefore used the going concern basis in preparing the financial statements.
Internal Control The Board acknowledges its responsibility for the system of internal control and for reviewing its effectiveness. The system of internal control plays a critical role in managing the risks towards the achievement of corporate vision, strategy and objectives, and is also central to safeguarding shareholders’ interests and Company assets. This system of internal control is in accordance with the guidance of the Turnbull Committee and is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss.
The process has been in place in respect of the Group for the 2008 accounting period and up to the date of approval of the report and accounts. The Board has carried out a review of the effectiveness of the system of internal controls during 2008 and will ensure that such reviews are performed in 2009. In so doing, the Board has taken into account the assurance provided by the Chief Executive Officer of Cairn India in respect of the effectiveness of the system of internal control within Cairn India and which derives from a parallel process followed within Cairn India. The Board is accordingly satisfied that effective control is in place and that risks have been mitigated to an acceptable level.
The Company is subject to a variety of risks that derive from the nature of the oil and gas exploration and production business and relate to the countries in which it conducts its activities. The directors believe that Cairn derives its competitive edge by focusing activities in areas where they believe they have a technical and commercial advantage and the experience gained over many years enables the Company to manage these risks effectively.
52 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 53
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN The Group BusinessGroupTheManagementwhichdefines Riskprocesses theSystem (GBRMS), through whichCairnsystematically seeks to ensurealignment2008riskupdatedwithidentify,toassess, wasanalyse,businessin monitor the andGroup, treat therisks faced by management processes acrossbusiness the group. risks The GBRMS are managed also identifies and regularly the risk reviewed management at operating, organisational asset, country structure and group through levels. which Chairman of the Audit Committee is a member of the GRMC and the Internal Auditor also attends meetings, in order to ensure internal internal ensure to order in meetings, attends also Auditor Internal the and The GRMC GRMC the of is member chaired a is Committee byAudit the the Financeof Chairman Director process. management andrisk the comprises with integration audit’s executive directors and senior functional management. Thenon-executive The GRMC membership was changed in 2008 in order to maintain a robustchallengingmembershipmaintainanda GRMCapproachriskmanagement. Theorderto 2008 changed to in was in 3. Risk management is risk of The areas Group all on Risk reporting and Management mitigation assessment, Committeeidentification, ofthe riskfor framework management the (GRMC), that ensuring establishedby strategythis does It strategy. and by the processes Board in 1999, within continues the Company‘fit to be responsible for and purpose’ for overseeing and for the that development the appropriate implementation assurance of the arrangements requirements of are this in place in relation to these risks. of internal control.internal of The remit of the CEC is to overseeappointedalsofunctionalGroup have work programmes, thewhoseheads includerolesto providing the‘challenge’budgets input and delivery of the strategybusinessandsupplying andplans,relevantdirectorstatements theaccurate and make information fullwithadequacy the to onand through the annual business plans and approved budget. The directors The asset management teams then have the required authority to implement the business plans and to deliver the agreed work agreed the deliver to and plans business the implement to authority required the have then teams management asset The programmeapprovedwithinthebudgetdelegationauthorities,and accordance internalof in thewith controlandframework. 2. Operating management Outside the startingat strategy, of Group Cairn the meet to annually India,prepared are budgets and programmes the partners.Work various work with Group,annual and agreed the meet to throughprepared also is plan business detailed its A level. unlisted Group at consolidated being before level subsidiaryasset Capricorn, operatesprogrammethe budget.setsdetailedandThisoutsupporting asset objectiveseachandto for KPIs presented and functional is budgetdepartments, several and plan is andbusiness the process, iterative business an After plan. business annual company’s the units into consolidated in different countries approval. for Board the and CEC its own board of directors.Cairninputto non-executivean In therefore,hasChairman) and, Gammellas Cairndirectors (including accordanceBillIndia boardof Sir the on withthe memorandumIndia’s strategy. and articles From of time association to time,Norman these Murray of Cairn three as India, non-executive a non-executive theNormanthis,additionMurrayHamishGrossart andInto Company alternate actcandirectorsas directorCairn during India2007. of to directors director has three of are Cairn also rotated India.Jann Malcolm Brown and during and Thoms Malcolm 2008 also Jann replaced Thoms Brown respectively. Hamish replaced Grossart as a non-executive 2008 was another year of change for the Company with the focus on supporting the subsidiary company Cairn India with India Cairn company subsidiary the supporting on focus the with Company the for change of year another was 2008 Capricorn the in organisation new portfolioand exploration an building and development Field Mangala the progressing subsidiary. Particular attention has been placed by Group management on ensuring that a robust system of internal control Operations in any country areenvironmentalsocialand responsibility, onlyteamworknurturingand individuals, of creativity,riskmanagement alliancing key with and possible when valuespartners are shared, are and ingredients the directorscritical thatapproachbeena hostwithgovernments,ingredientalsothissuccess.and has in regionally,nationally both and believe are central that the to Group’s the Company’s values of success. integrity, The ability to recognise the value of working as a partnership 1. Strategic directionStrategic 1. The Group businesssubsidiary modelCompanya withtheCairn is India of Januaryin 2007, NSE and is BSE FollowingtheitslistingCEC. on thedelegated conventional isto in that strategy is set by the directors and approved by the Board and its implementation Corporate Governance Statement Governance Corporate Continued followinginternaldescribeselementsThethecontrol systemprocessesduringreview Board the2008of key the and tothe used by the effectiveness of the system. It also describes the approach to be taken in 2009. Cairn India is subject to the rules, regulations and guidelines of SEBI and to its listing agreement with the BSE and NSE. Underthe NSE. anditslisting agreement BSE to thewithand rules,subject regulations theCairn SEBI guidelinesis India andto of terms of a relationship agreementreasonableAgreement’),usecomplyrespectivecantheirwith endeavoursagreedtheyensuretoalso that companies both to have between the CompanyregulationRegulationsandUK Insiderand Trading SEBI underthe and NSE theand LSE the BSE, theFSA, and the obligationsSEBI, to Cairn India entered into atlegislation the time of the relating IPO (the ‘Relationship to the disclosureincludedadoptingprinciplesfollowingthecorporateand policies of and governance, including riskmanagement, enablewhich of information obligations. these with comply to orcompany each dealing in respect of listed securities or corporate governance. This has has been maintained during 2008 in relation to the significant risks in these business activities. Corporate Governance Statement Continued
Subsequent to its listing, Cairn India operates its own RMC in line with its Business Risk Management System (BRMS) under the chairmanship of the Chief Operating Officer and reporting to the Cairn India Board. Risk Management Sub Committees have also been set up reporting to the Cairn India RMC to consider the specific risks associated with operations, finance, exploration and the Rajasthan upstream and midstream projects. The Cairn India BRMS is substantially similar to that of the Company and, under the terms of the Relationship Agreement, a copy of the Cairn India risk report and RMC minutes is routinely submitted for review at the GRMC, at which a senior representative from Cairn India is present to provide explanation and take questions.
Business risks in Capricorn, together with the identified mitigating measures and responsibilities, are recorded in asset and country risk registers which, following endorsement by the Management Operating Board, are reported through to the Group risk register. The Cairn India and Capricorn risk registers are integrated into the Group risk register, and are regularly reviewed by the GRMC to ensure that the business understands the key risks it faces and that there is an embedded risk management approach in place across the Group.
The GRMC reports on the Group’s risk profile to both the audit committee and the Board. Additionally, the audit committee and Board receive internal reviews of the effectiveness of internal control relative to the key risks. The conclusion of the Board following these reviews during 2008 is that the internal controls in respect of key risks are appropriate.
4. Assurance The integrated assurance framework adopted by the Board provides for three levels of assurance against the risks facing the Group: firstly at the operational level; secondly through overview by Group functional management and the GRMC; and thirdly through internal, external or joint venture audits.
During 2008, the directors reviewed the effectiveness of the Group’s system of financial and non-financial controls, including operational and compliance controls, risk management and the Group’s high level internal control arrangements. The directors GOVERNANCE AND ACCOUNTS derive assurance from the following internal and external controls: • a regularly updated schedule of matters specifically reserved for a decision by the Board; • policies and procedures for key business activities; • an appropriate organisational structure; • control over non-operated joint venture activities through delegated representatives; • specific delegations of authority for all financial and other transactions; • segregation of duties where appropriate and cost effective; • business and financial reporting, including KPIs; • functional management reviews; • the nomination of various directors of the Company to the Cairn India board (in a non-executive capacity) and to certain of its committees. The Board also receives copies of minutes of meetings of the Cairn India board of directors; • a Relationship Agreement with Cairn India, which, inter alia, contains provisions for the supply by Cairn India to the Company of such information and confirmations as the Company may require to comply with legal, regulatory and reporting obligations; • an annual ‘letters of assurance’ process, through which country managers confirm the adequacy of internal financial and non-financial controls and their compliance with Group policies and report any control weaknesses identified in the past year; • a ‘letter of assurance’ from the Cairn India Chief Executive Officer confirming the adequacy of internal controls within Cairn India in line with its policy, and reporting of any control weaknesses identified in the past year; • Group internal audits to assess compliance – the internal auditor implements a number of audits during the year in line with the annual internal audit plan approved by the audit committee and Board; • reports from the Group audit committee and GRMC, (including reports from the Cairn India RMC and Cairn India audit committee); • reports from the Group external auditor on matters identified during its statutory audits; • reports from audits by host governments and co-venturers; and • independent third party reviews.
54 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 55
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Explanation The Board firmly believes that the that believes firmly Board The was Board the of composition appropriate and effective 2008. during faced it that challenges for the maintained it that satisfied is Board The independence of degree sufficient a to it enable to year the throughout its properly and effectively discharge obligations under the CombinedThe composition Code. of theunder Boardis planning succession of issue and the item regular a is and review constant the of meetings for agenda the on committee. nomination nomination the 2008 startof the At independent two comprised committee Chairman the directors, non-executive Following director. executive one and the appointment of Iain McLaren of member and director non-executive as a Company the committee, nomination the provision. the with complied has Story Ed 2008, of end the Since resigned as a non-executivebeingare MarkTyndall andHunt Todd director but committee the of members appointed May 19 on AGM the effectfrom with newly the that believes Board The 2009. committee the of membership agreed is appropriate and effective. Andrew of resignation the Following Shilston as a non-executive committee audit the of chairman and director committee audit the 2008, May 23 on non- independent two only comprised effect with However, directors. executive again Company the 2008 July 1 from Board the as provision this with complied partnerformer a McLaren, Iain appointed at KPMG LLP, as a non-executive directorand chairman of the audit Company the committee.when period the During did not comply, no meetings (whetherscheduled or otherwise) of thecommittee audit took place. The Company is committed to ensuringthat the AGM is used constructively.unavailabilitythecertain to of Due key a May, late in Board the of members on AGM the hold to taken was decision providing although which, 2009 May 19 working 20 than less with shareholders to directors all enable will notice, days investors provide therefore and attend questions ask opportunity to the with of such directors.
Company Position Company From 1 January 2008 until 23 May 2008, May 23 until 2008 January 1 From Chairman, the comprised Board the executive other five Executive, Chief the directors and five independentAndrew Following directors. executive non- 2008, May 23 on resignation Shilston’s the number of independent four to decreased directors non- executive on appointment McLaren’s Iain until 2008, of end the Since 2008. July 1 Ed Story has resigned and Jim Buckee has been appointed as an independentdirector. non-executive The Company complied with thisprovision from 1 July 2008period the During 2008. December until 31 2008 June 30 to 2008 January 1 from with comply not did Company the provision. the The Company complied with thisprovision during the 2008 yearMay 23 from otherperiod the during than to 30 June 2008. The Notice of AGM andworking related 17 shareholders to sent papersbeing are weekends including days clear (26 days and bank holidays) priorstatutory the with complies to This theyear. AGM this the in contained period notice minimum Act. Companies
A.3.2 – at least half the Board, excluding excluding Board, the half least at – A.3.2 the chairman, should comprisethe by determined directors executive non- Board to be independent. Compliance with the Combined Code Combined the with Compliance Throughoutfollowingareas:theCombined2008 Companyin thecomplied theexceptprovisionstheCode, with of Code Combined the of Provision Corporate Governance Statement Governance Corporate Continued A.4.1 – a majority of the membersbe should committee nomination the of independentnon-executive directors. establish should Board the – C.3.1 an audit committee of at leastindependent threenon-executive directors. arrange should Company the – D.2.4 for the Notice of AGM and 20 least at relatedshareholders to sent be to papers workingAGM. beforethedays Directors’ Report
The directors of Cairn Energy PLC present their annual report for the year ended 31 December 2008 together with the financial statements of the Group for the year. These will be laid before the shareholders at the AGM to be held on Tuesday 19 May 2009.
Results and Dividend The Group made a profit after tax and exceptional items of $366.7m (2007: $1,555.8m restated).
The directors do not recommend the payment of a dividend for the year ended 31 December 2008.
Subsequent events that have occurred after the Balance Sheet date as at 31 December 2008 are included in Note 38 of the Notes to the Accounts.
Principal Activities and Business Review The principal activity of the Company and its subsidiary undertakings is the exploration for and development and production of oil and gas. Details of the development of the Group’s business during the year and the information that fulfils the requirements of the Business Review can be found in the Highlights of 2008, Chairman’s Statement, Chief Executive’s Review, Assets, Operating & Exploration Review, Corporate Responsibility and Financial Review on pages 5 to 37 of this document and the Risk Factors section on pages 41 to 44, which are deemed to form part of this report by reference.
Details of Cairn’s offices are given on the back cover of this report and details of Cairn’s advisers are given on page 136.
Change of Control All of the Company’s share incentive plans contain provisions relating to a change of control and full details of these plans are provided in the Directors’ Remuneration Report on pages 60 to 72. Outstanding options and awards would normally vest and become exercisable on a change of control, subject to the satisfaction of performance conditions, if applicable, at that time. GOVERNANCE AND ACCOUNTS
On a change of control of the Company resulting in the termination of a director’s employment, each of the executive directors is also entitled, pursuant to their service contracts, to compensation of a sum equal to their annual basic salary as at the date of termination of employment. There are no agreements providing for compensation to employees on a change of control.
There are no significant agreements to which the Company is a party that take effect, alter or terminate in the event of a change of control of the Company except the $850 million syndicated revolving credit facility agreement dated 22 November 2006 entered into by certain of the Company’s subsidiaries, The Royal Bank of Scotland PLC and IFC and a syndicate of other commercial banks (the ‘Facility’). Under the Facility, lenders may, upon 30 days’ notice, cancel all of their commitments and declare all outstanding loans made by them, together with accrued interest, immediately due and payable if any person or group of persons acting in concert gains control of the Company while it retains control of Cairn India.
Directors The names and biographical details of the current directors of the Company are given on pages 38 and 39. The beneficial interests of the directors in the ordinary shares of the Company are shown below:
As at 31 December 2007 As at 31 December 2008 As at 6 April 2009
Sir Bill Gammell 500,000 421,732 421,732(1) Dr Mike Watts 200,000 193,383 193,383 Malcolm Thoms 37,600 53,869 53,869 Phil Tracy 6,400 11,550 11,550 Jann Brown 32,200 41,434 41,434 Simon Thomson 6,637 9,403 9,403 Norman Murray 81,250 40,000 40,000 Hamish Grossart 5,000 5,000 5,000 Todd Hunt 28,436 18,280 18,280 Mark Tyndall 4,062 4,062 4,062 Iain McLaren – 2,000 2,000 Dr Jim Buckee – – 2,000
Former directors Andrew Shilston(2) 4,062 – – Ed Story(3) 4,062 4,062 –
Notes: (1) Sir Bill Gammell’s interest includes 102,257 shares which are held in discretionary trusts, where his children are potential beneficiaries. (2) Andrew Shilston resigned as a director on 23 May 2008. (3) Ed Story resigned as a director on 15 January 2009.
56 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
57
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN pence each have been issued and are fully paid up and are quoted on the London Stock Stock London the on quoted are and up paid fully are and issued been have each pence 13 / 2 Transfer of Shares directorstheprocedures accordancebySubject Articlesanyout inthewith set Association, to oftransfers all besharesshall of effected by instrument in writing in any usual or common form or in any other form acceptable to the directors of the Company. The directors may, in theirListingOfficialtheUKAuthoritylisted theonunlessshare issharesuch paid Listfullyof absolute London traded the anda on not whichis discretion and withoutStock assigning Exchange’s any main reason market therefor, forform listed refuse where securities. the to register Company is a The transfer entitledtransferees.fourthanmore transfer such registerrefuseof favourdirectorstransferany The directorstheto may in also they2001 and may to of refuse any may share also (or is refuse excepted to registerrefuse from the to register a requirement) transfer any of transfer a share under in the uncertificated of Uncertificated a share on which the Securities Company has a Regulations lien. of the issued shares with of passu the pari class. ranking shares shares further These of of issue any or provisions class creation the as by if the applyabrogated or unless sharesotherwisesharesshall, termsclassshares uponwhichsuchofthe sharessuch anyor expressly varied issue to of terms of the provided be by the to concerned variationnot deemed be held, and orbeing abrogation thetime the remaining for are of the shares special of such rights class attached formedor subsequent separate to some only to classes. the of first the The mentioned rights attached shares or to by the purchase by the Company of its own shares. shares)by, paidfully case of thetransferorthe in (except behalfandof, on orinstrument The transferexecutedof by, beshall transferee.sharestheconcernedthe nametransferor holder theofThe thebehalfremainuntil of, deemed on beto shall or of the transferee is entered in the register of members of the Company. Variation of Rights of Variation specialtherights ofattached divideddifferentanyany Companyinto isorWhenevercapitaltheshare to the shares,classes all of of every At class. subjectstatute unlessthat to otherwiseand classmay, of expresslyvariedrights class,orthebe thatprovidedattached sharesby of the shares to the of holders the of meeting general separate abrogateda at passed resolution eitherspecial a of withsanction the thewith or consent class in writing of the holdersseparatesuch generaltwoquorumpersonsmeeting theberepresentingshall least one-third holding proxyorvaluenominal at of inby not less than three-fourths in nominal value of the issued shares of that the Company, to exercise all or any of their rights to attend and to speak and vote on their behalf at a generalclassmeeting.meetinga or behalf theirat on vote speakandattendrights theirto andto of any or exerciseall to Company, the to provide the Company, withingeneralat meetingany or proxy) at personby in(either or attendrespectvoteentitled besharessuchinorto membernot of shall 14 days of the notice, with such information,any separate general the directors orotherwise classtakenpoll a at,thanadjourned caseof meetingthe orthe (in meeting holdingappointedor of thetimebeforethe for of meeting the Company of the may holders determinethetakingappointedhoursthetime of beforetheadjourned for of meeting or the 24 lessthanmeeting) as, not that daysame the on or that class such of shares. Proxyused.be formsto is whichit at poll must be submitted not less than 48 hours Voting Rights Voting hands,of showspecial rightsSubjectrestrictions anya generalclassormeeting, on meetingto a or shares, at classofattaching any to everypollmember a on and vote everyonememberperson present have every appointedinshall andduly proxy vote entitled to share, a holdersjointof caseof the In him. everyby heldsharefor vote one have shall vote entitledproxyandto person presentby in or theof votes theexclusion ofthe accepted tobe shall proxy, personwhetherby in or seniormembervote, tenders thewho a of vote the purposethismembersholdersregister jointforstandtheothernamesseniority andof whichthe in determinedorder in thebe shall by memberof a be Companiesholding.respectUndernottheneedjoint whotheActs,in proxy, of membersappointentitleda areto Voting on Restrictions him by payable presently sum unlessdirectorsmember totheCompanyother shall,otherwisethe Nohim of or by heldsharerespectentitled determine, beany in call of any if proxy by or person in either Company the of meeting general a at vote or attend to the Company in respect of sharesCompany in under the Company the Companies remains unpaid. Acts requesting Further, if information a member has been concerning served with interests a notice in by shares the and has failed in relation to any shares Exchange. The rights attaching to the ordinary shares are set out in the Company’s articles of association. There are no special no are There association. of articles Company’s the in out set are shares ordinary the to attaching rights The securities Exchange. of holders between agreements any of aware not is Company the and shares Company’s the to relation in rights control that may result in restrictions on the transfer of securities or on voting rights. A member may appoint more thanto one exercise proxy in the relation rights to attached a generalmay authorise to meeting a different or one class or share more meeting individualspersonsuch orauthorisedshares.behalfpowerssameA soofexercise entitledtheclass onof be to shallanyholders sharesthe of meetingof provided heldCompany. to the by that actof thatmember individual as eachan member.were its it if proxy representativeexercise could Acorporation corporation the is as corporation appointed or which representatives is a member of the at any Company meeting of the Company, or at any separate At 31December 2008, none of the directors (or any members of their families) holds an interest in options over ordinary shares Directors’ Report Directors’ Continued Capital Share The authorised and issuedordinary6 sharesof sharereport,137,681,011 capital of the Company are shown in Note 27 of the Notes to the Accounts. At the dateof this None of the directors has a material interest in any contract, other than a service contract, with the Company or any of its subsidiaryits of any or Company the with contract,service a than other contract, any in interest material a has directors the of None undertakings. Details of the directors’ service contracts are set out on pages 67 and 68 of the Directors’ Remuneration Report. in the Company. Directors’ Report Continued
The directors may, in their absolute discretion and without assigning any reason therefor, refuse to register a transfer of any share in certificated form unless the relevant instrument of transfer is in respect of only one class of share, is duly stamped or adjudged or certified as not chargeable to stamp duty, is lodged at the transfer office or at such other place as the directors may determine, is accompanied by the relevant share certificate(s) and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer and is in favour of not more than four transferees jointly.
If the directors refuse to register a transfer, they shall, within two months after the date on which the transfer was lodged with the Company (in the case of a share in certificated form) or the date on which the operator-instruction (as defined in the Uncertificated Securities Regulations 2001) was received by the Company (in the case of a share in uncertificated form) (or in either case such longer or shorter period (if any) as the Listing Rules may from time to time permit or require), send to the transferee notice of the refusal.
Major Interests in Share Capital As at 6 April 2009, the Company had received notification that holdings exceeding the 3% notification threshold were as follows:
Number of Shares % of Share Capital
BlackRock Investment Management 12,950,020 9.41 HSBC Global Asset Management 10,295,930 7.48 Baillie Gifford 9,511,098 6.91 Legal & General Investment Management 7,938,733 5.77 F&C Asset Management 7,721,304 5.61 Fidelity Investments 6,716,093 4.88 TT International Investment Management 6,219,768 4.52 GOVERNANCE AND ACCOUNTS Henderson Global Investors 4,621,928 3.36 Barclays Global Investors 4,603,925 3.34
Charitable and Political Donations The Company has a Charities Committee which is responsible for distributing the Company’s charitable donations to selected charities within an overall annual budget. There are currently seven members of the Charities Committee comprising a broad range of employees from across the organisation. The Chief Executive is not a member of the Charities Committee.
During the year the Company made various charitable contributions in the UK totalling $285,968 (2007: $3,146,764). Contributions in the UK are made to a variety of charitable organisations whose areas of operation and activities are aligned with Cairn’s. In addition, the Group provides funding to various charitable initiatives outwith the UK. Further details of these can be found in our Corporate Responsibility Report.
No political donations were made and no political expenditure was incurred during the year.
Creditor Payment Policy and Practice It is Cairn’s payment policy to ensure settlement of suppliers’ services in accordance with the terms of the applicable contracts. In most circumstances, settlement terms are agreed prior to business taking place. Trade creditors of the Company at 31 December 2008 were equivalent to 27.5 days’ purchases, based on the average daily amount invoiced by suppliers to the Company during the year.
Financial Instruments The financial risk management objectives and policies of the Company are detailed in Note 30 of the Notes to the Accounts.
Election/Re-Election of Directors The directors’ biographies are on pages 38 and 39. The Company’s Articles of Association provide that directors can be appointed by the Company, by ordinary resolution or by the Board. The nomination committee makes recommendations to the Board on the appointment and replacement of directors. Further details of the rules governing the appointment and replacement of directors are set out in the Corporate Governance Statement on pages 45 to 55 and in the Company’s Articles of Association. An explanation of the performance evaluation procedure carried out by the Company is also contained in the Corporate Governance Statement, on pages 45 to 55.
Powers of the Directors Subject to the Company’s Memorandum and Articles of Association, UK legislation and any directions given by special resolution, the business of the Company is managed by the Board. The directors currently have powers both in relation to the issuing and buying back of the Company’s shares and are seeking renewal of these powers at the forthcoming AGM.
58 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
59
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN AGM 2009 Circularcontainingexplainedthefullyand in out set 2009 are May 19 onheld be to proposedAGM resolutionstheThebe at to By order of the Board Wood Duncan SecretaryCompany 6 April 2009 Ernst & Young LLP have expressed their willingness to continue as auditors and their reappointment at the AGM to be held on on held Auditors be of to Reappointment AGM the at reappointment their and auditors as continue to willingness their expressed have LLP Young & Ernst proposedaccordancebe2009Companies willinthewith MayAct. 19 Please note that this Annual Report and Accounts is an important document and requires your immediate attention.documentaccompanyingpleasesendthisthetransferredand CircularCairn or sold EnergyPLC shares in your have youall If If you are containing the Notice of AGM and the Form of Proxy to theits and purchaser Company the of interests best the in are or AGM transferee of Notice the in out set resolutions the of or all to that the consider directors The bank, stockbroker or othershareholders agent as a whole and recommend that shareholders vote in favour of each of them. to make themselves aware of the relevant audit information and that the Company’s auditors are aware of this information. the Notice of AGM which is being posted to shareholders together with this Annual Reportin any and doubt Accounts.as to what action immediately. adviser youprofessional should take, you should consult your stockbroker, bank manager, solicitor, accountant or other through whom the sale or transfer was effected, for transmission to the purchaser or transferee. Articles of Association of Articles Unless expressly specified to thecontrary therein, the Company’s Articles of Association may be amended by a special resolution Directors’ Report Directors’ Continued Disclosure of Information to Auditors to Information of Disclosure relevantauditno thereis aware, areDecember they as 2008 farconfirmdirectors31 office asTheheldCompany that,who theat of information of which the Company’s auditors are unaware. In making this confirmation, the directors have taken appropriate steps of the Company’s shareholders. Directors’ Remuneration Report
Remuneration Committee and Advisers Reference is made on page 49 of the Corporate Governance Statement, where there is a summary of the role of the remuneration committee.
Cairn’s remuneration committee operates within terms of reference set by the Board. These are reviewed periodically to ensure that the remuneration committee remains up to date with best practices appropriate to Cairn, its strategy and the business environment in which it operates. The terms of reference are available on request from the Company Secretary.
The deliberations and decisions of the remuneration committee are governed by the provisions in the Listing Rules and the Combined Code (appended to the Listing Rules) and the remuneration committee has followed these provisions and those of the Companies Act 1985 (as amended) and the Directors’ Remuneration Report Regulations 2002. In accordance with the requirements of this legislation, a resolution to approve the remuneration committee’s report will be proposed at the forthcoming AGM.
As and when the remuneration committee deems appropriate, it takes external advice on remuneration from a number of sources. During the year it consulted with Hewitt New Bridge Street (an independent executive compensation consultancy appointed by the committee) on various aspects of the directors’ remuneration packages. The Company’s legal advisers, Shepherd and Wedderburn LLP and auditors, Ernst & Young LLP, also provided assistance to the committee in respect of the Company’s share option schemes and long-term incentive plans. Advice obtained from Ernst & Young LLP is purely in relation to their independent verification of the Company’s achievement against performance criteria applicable to the Company’s share option schemes and long-term incentive plans.
The current members of the remuneration committee are Hamish Grossart (chairman), Mark Tyndall, Todd Hunt and Jim Buckee. Ed Story served as a member of the committee during the year until his resignation with effect from 15 January 2009. Jim Buckee was appointed as a director of the Company and member of the remuneration committee, also on 15 January 2009. As explained GOVERNANCE AND ACCOUNTS in the corporate governance statement, Hamish Grossart will resign as chairman and as a member of the committee with effect from 19 May 2009 and will be replaced by Jim Buckee as chairman and by Norman Murray as a member.
The Chief Executive is not a member of the remuneration committee but may attend its meetings by invitation and is consulted in respect of certain of its proposals (although the Chief Executive is not consulted or involved in any discussions in respect of his own remuneration).
The remuneration committee determines and agrees with the Board the overall remuneration policy for the executive directors and the members of the CEC. The remuneration committee also determines, within the terms of the agreed policy and having consulted with the Chief Executive about their proposals, specific remuneration packages for each of the executive directors, including pension rights and any compensation payments to be paid on termination.
Remuneration Policy – Overview Cairn’s policy on executive directors’ remuneration for the current year and subsequent financial years is that the overall remuneration package should be sufficiently competitive to attract, retain and motivate high quality individuals capable of achieving the Group’s objectives and thereby enhancing shareholder value. The package is generally weighted more towards variable pay and, in relation to the variable pay element, the package is weighted more towards long-term performance. In designing the remuneration structures of the executive directors, the committee takes into account pay policies within the Group as a whole.
Each executive director’s remuneration package currently consists of basic salary, benefits, annual performance-related bonuses, a long-term incentive plan, a defined contribution pension (if appropriate) and life assurance of four times basic annual salary.
The package is designed to support the Group’s business strategy and to provide an appropriate incentive to maximise individual and corporate performance, whilst ensuring that overall rewards are market competitive. Details of the individual components of the package and of contracts are given below.
The remuneration of the non-executive directors takes the form solely of fees, which are agreed by the executive members of the Board and the Chairman, having taken independent advice on appropriate levels, within an overall limit determined by shareholders. The fees are designed to attract experienced individuals and reflect the responsibilities of the role. The fees stated on page 70 are in respect of all responsibilities undertaken by the non-executive directors, including membership of Board committees.
Remuneration Policy – Proposed Changes in 2009 At this year’s AGM, in addition to the standard advisory vote on this remuneration report the Company’s shareholders will be asked to approve resolutions relating to the adoption of new share schemes that will be used to grant awards and options over ordinary shares to the Company’s senior executives and employees in 2009 and subsequent years.
Further details in relation to this proposal are set out below and in the Circular to shareholders accompanying this Annual Report and Accounts.
60 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 61
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 1996 Second Share Option Scheme (‘1996 Scheme’) SecondOptionShareScheme(‘1996 1996 2002Unapproved(‘2002Plan’)OptionSharePlan 2003Approved(‘2003OptionPlan’)SharePlan (‘20062006OptionSharePlan’)Plan CairnOptionShareSchemesIndia (‘Cairn Schemes’). India options’ (which are equity settled) over ‘units’ in the Capricorn Group (see below under 2006 LTIP for how these units are created created are Theunits these how 2006 for LTIP 2006 Plan under below enables(see Group Capricorn the in ‘units’ selected over settled)equity are (which options’ employees (excluding thoseparticipantsoption,an exerciseaof thegenerallyvalued).On have Cairnand willbecome shares numbersuch asentitled of to that are employed by thedifferencethe betweenrealise(i.e. Cairntheyexerciseprice’attributablethat ‘notional notionalgainthe the equalto valuemarkettheir to India Group) to be grantedoption ‘phantom and the price of the unitsdependentexercisablebewhichpre-determinedcontinued willextenton employmenttheto andGroup the with inperformance respect of which theirconditions option has been are met exercised). over a specified However, period. the extent to which options become The 2006 Plan, together with the 2006 LTIP described below, were intended to reflect the fact that, following the flotation of of flotation the following that, fact the reflect to intended were below, described LTIP 2006 the with together Plan, 2006 The Cairn India, there were two distinctand production arms to business the Group’saffect.couldwhichtheyarm(s) business owned the relationto in and operated (namely, a majority by the Capricorn shareholding Group) in and Cairn therefore India and sought an exploration to incentivise employees of the Group 2006 Plan to the Company’s executive directors or to any employee or director of the Cairn India Group. 2006 Plan The 2006 Plan was approved by shareholdersbecoming effective, at an EGM held which in occurred November 2006, on 9 January conditional 2007. The on date the of flotation grant of the of first Cairn award India of options under the 2006 Plan was grant of options up to the date they are exercised. In addition, the percentage increase in Cairn’s share price over the periodaddition,theexercised.percentagemustthe areInpriceshareover they Cairn’s increasedate the in to optionsup grantof Index.Gas & percentageFTSEOilthethan greaterthe or movementin leastequalto at be grantedbeunderthe will beenor performanceoptions have a Nowith 2007March 29 periodJanuarycommencing 9 2007. on Options granted under the 2002 Plan and the 2003 Plan are exercisable three to ten years following the date of grant and are are and grant of date the following years ten to three exercisable are Plan 2003 the and Plan 2002 the under granted Options subjectperformanceoutstandingto all caseof theconditions optionsIn exercise. underthese onarrangements, optionholderthe may only exercise their awards if Cairn’s share price has increased by 5% on a compound basis over the period from the date of The date of grant of the last award of options under these arrangements was 4 July 2006. Following the adoption of the 2006 Plan (see below), no further awards will be granted under the 2002 Plan or the 2003Plan.thefurther or grantedno 2002Planbeunderbelow), the awards(seewill 2006 Plan theadoption Following the of for the 2002 Plan. The2003 Plan was approved by shareholders at the 2003 AGM and subsequently by the Inland Revenue. 2002 Plan and 2003 Plan The principal difference between the 2002 Plan and the 2003 Plan is that the approval of the Inland Revenue was not sought 2. 3. 4. 5. Scheme 1996 in out set The are Scheme 1996 Scheme1996 the under 2008 December 31 was at as outstanding adopted options the of Details 2002. October in 1 was 1996Scheme and expired in May 2006. TheNote date 7 of of grant the Notes of the to the last Accounts. award of options under the 1996 Share Options – Current Arrangements Current – Options Share follows:currentas optionareshareplans Group’s the Detailsof 1. Benefits available to the executivedeath in directors service benefit. comprise a company car, permanent health insurance, private health insurance and Also with effect from 1 January 2008 and following the review carried out by Hewitt New Bridge Street in July 2008, the non-executive non-executive the 2008, July in Street Bridge New Hewitt by out carried review the following and 2008 January 1 from effect with Also directors fees were increasedexecutive to £200,000 directors. for Norman In addition Murray,The non-executive £105,000 to this a fee for of Hamish directors’ £10,000 Grossart is payable fees and for to the £60,000 2009 chairman were for retained each of each of the of at the 2008 other audit levels. non- and remuneration committees. to £552,000 for Sir Bill Gammell, £402,500 for Dr Mike Watts and £345,000 for each of Malcolm Thoms, Phil Tracy, Jann Brown and Brown Jann Tracy, executive thedirectors2008salariesbasicPhil JulycarriedtheHewittreviewof Bridge inincreasedStreet New Following by werea Thoms, out Malcolm of each for £345,000 and Watts Mike Dr for £402,500 Gammell, Bill Sir for £552,000 to Simon Thomson. These increasessince took 2006. effect The executive from 1 January directors’ 2008 and salaries represented have been the retained first increase at these in levels executive for the directors’ year 2009. salaries Basic Salary and BenefitsremunerationthesalarydecidingBasicreviewed annuallyby In iscommitteechangeseffect take Januaryany and year. 1 from each practice remuneration on information up-to-date gives which benchmarking objective on relies committee the levels, appropriate within a comparator group of similar companies within the sector. Directors’ Remuneration Report Remuneration Directors’ Continued Directors’ Remuneration Report Continued
All options granted under the 2006 Plan are currently subject to a Capricorn unit price target measured over a three-year performance period. Under this target, vesting will occur as follows:
Average annual compound growth in Percentage of Capricorn units comprised in option that vest Capricorn unit price over the performance period
0% Less than 5% 50% 5% 100% 10% or more 50%-100% on a straight-line basis More than 5% but less than 10%
Notwithstanding the above condition, no part of an option will vest unless the notional total shareholder return (‘TSR’) of a Capricorn unit over the performance period is sufficient to place it at or above the median level in the same comparator group of companies that is used for the purposes of the Capricorn awards granted pursuant to the 2006 LTIP (see below).
None of the directors holds any options under any of the Company’s share option plans. Since 1999, the long-term incentives for executive directors and certain other senior executives have been made pursuant to long-term incentive plans and therefore no options have been granted to these individuals under any of the Company’s share option plans since that time.
Share Options – proposed arrangements Over recent months, significant issues have been identified in relation to the mechanism used to place a value on the units over which options have been granted pursuant to the 2006 Plan.
As explained in the Circular to shareholders accompanying this Annual Report and Accounts, the remuneration committee has GOVERNANCE AND ACCOUNTS decided that, in view of these concerns, it is no longer appropriate to continue with the current unitised structure of this arrangement. As a result, it is seeking shareholder approval at the AGM to introduce new share option schemes that will replace the 2006 Plan for all future grants.
Further details in relation to these new schemes are set out in the Circular. It is, however, worth noting that their terms effectively mirror those of the 2006 Plan summarised above, save that awards will be granted over ordinary shares in the Company rather than units.
The remuneration committee is currently assessing how to treat outstanding options that have already been granted under the 2006 Plan. As and when a preferred approach has been identified, appropriate proposals will be put to shareholders for their consideration and approval.
Cairn India Schemes As part of the arrangements surrounding its flotation, Cairn India established the following share option schemes pursuant to which options to acquire its shares can be granted: • the Cairn India Senior Management Plan; • the Cairn India Employee Stock Option Plan (2006); and • the Cairn India Performance Option Plan (2006).
These arrangements (brief details of which are set out in Note 7 of the Notes to the Accounts) have been or will be used to grant options to selected employees and executive directors of Cairn India and its various subsidiary undertakings. None of the executive directors of the Company participates, or will participate, in any of the Cairn India Schemes.
Long-Term Incentive Plans – current arrangements Details of the Group’s current LTIPs are as follows: 1. Cairn Energy PLC Long-Term Incentive Plan 2002 (‘2002 LTIP’). 2. Cairn Energy PLC Long-Term Incentive Plan 2006 (‘2006 LTIP’).
2002 LTIP Details of directors’ awards granted pursuant to the 2002 LTIP, which was implemented in 2002, are given on pages 97 and 98. The 2002 LTIP was superseded by the 2006 LTIP, further details of which are set out on page 98. The date of grant of the last award under the 2002 LTIP was 24 April 2006.
Participants have been granted Tier One and Tier Two awards under the 2002 LTIP. Performance conditions for each are determined by the remuneration committee and the calculation of shares vesting based on these conditions is subject to independent verification by Ernst & Young LLP.
Performance Conditions – Tier One A Tier One award is an award of Cairn shares with the vesting and release of all/part of those shares being dependent upon the executive remaining an employee and achievement of performance conditions over a performance period of three years.
The vesting of all outstanding Tier One awards is subject to a TSR target that is calculated in two steps, each of which must be satisfied.
62 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 63
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Ranking of Cairn in relevant comparator group comparator relevant in Cairn of Ranking Ranking of Cairn in relevant comparator group comparator relevant in Cairn of Ranking Below upper quartile Upper quartile Number one position Between upper quartile and number one position Below median Median Upper quartile or above Between median and upper quartile Step Two Step companycomprisedeachcomparatorthe in share ingroupover a of TSR thecomparedCairn sharesisto of TSR theUndersteptwo, performance.performanceTSRthe orderof positiontherankedtheninCairn’s in company awards, is period.each One Tierwith As follows:vest,as willawardsubject thethe aresharesof thatcomparator any) (ifdeterminesthengrouplist many how 2002LTIP FTSEindicesusedfor targetdescribed2005TSRCompany’sperformance awards,thethefirstfor the stepof above, For measured againstFTSEis the 250 Index. The remunerationIndex. 350 FTSE the against 2006 in committee reviewed this performance condition in March 2006 and decided to measure awards made Step OneStep This step is the same as step one of the performance conditions in respectof Tier One. sharesfollowingvestingReleaseof At the end ofthe performanceimmediately, period, 50% and of vested the remaining shares under shares both are transferred Tier One and Tier at Two the awards end of are one transferred year. to participants of Cairn shares using the market value as at the date of vesting. Where there has been a fall in Cairn’s TSR, no Tier Two award will vest.willaward Two Tier no TSR, Cairn’s in fall vesting.beena Wheretherehasof date the at as valueCairnmarketsharestheusing of satisfied.furtherwhichmustbesubjectcalculatedthen twoa targetsteps,of whichis iseach award inTSRto Two Tierthe of Vesting 40% 100% 40%-100% on a straight-line basis unlessremunerationvestthewillaward committee satisfactorysatisfied beena isTwo Tiertherehasaddition, that no In and sustained improvement in Cairn’s underlying financial position and performance over the performance period. Percentage of Cairn shares comprised in Tier Two Award that vest that Award Two Tier in comprised shares Cairn of Percentage 0% Step Two Step comparatora groupcomprisingcompanyineach in share a of TSR thecomparedCairn sharesisto of TSR theUndersteptwo, exploration, production andset integrated out on page 65). oil companies Each companyfollows:vest,as willawardsubject thetheCairn aresharesof thatany) (if determines over many how is the then performance ranked in order period of TSR (details performance. of the relevant Cairn’s position comparator in the groups comparator are group list then Performance Conditions – TierA Tier Two Two award is a share appreciation right over a number of notional Cairn shares. The maximum potential benefit a participant award will vest.willaward 0% 20% 100% 20%–100% on a straight-line basis unlessremunerationvestthewillaward One Tier addition,committee satisfactory nosatisfied In beena is therehas that and sustained improvement in Cairn’s underlying financial position and performance over the performance period.may receive under a Tier Two award|the is calculated change in the by average comparingcomparatorperformancethethe averagepricegroupovershareof sharethenumber ofinthefall) multipliedthenperiod by isrise (or the the price increase of the in comparator Cairn’s share groupnotional price over over the shares the same performance that period. are the The subject period increase with of the in Cairn’s award. share This gives price rise (if any) to a monetary over figure which is then converted into an actual number Percentage of Cairn shares comprised in Tier One Award that vest that Award One Tier in comprised shares Cairn of Percentage Step OneStep First, the TSR of a Cairn shareperformancethe of endthecomprisingFTSE the beginningperiodat therelevant Index’)(‘theFTSEIndexand (details duringofthe at the performanceperformanceTSR Cairn’s performanceIf averageexceedsTSR thestep64). Index,pagethethen the period on out of set Indices usedare is compared to the averageone test TSR performance has been passed. of the The companies step two test is then used to calculate how many (if any) Cairn shares that are the subject of the Directors’ Remuneration Report Remuneration Directors’ Continued Directors’ Remuneration Report Continued
Comparator groups used for 2002 LTIP The table below shows the comparator groups applicable to: • awards made in 2005; and • awards made in 2006.
As such, the comparator group applicable to awards made on 28 April 2005 and which vested on 14 May 2008 (details of which are on page 72) is shown in the first column of the table below:
2005 Awards 2006 Awards
BG Group PLC BG Group PLC Burren Energy PLC Burren Energy PLC* Chevron Texaco Corporation Dana Petroleum PLC Dana Petroleum PLC Melrose Resources PLC First Calgary Petroleums Limited Occidental Petroleum Corporation Melrose Resources PLC Premier Oil PLC Occidental Petroleum Corporation SOCO International PLC Paladin Resources PLC Talisman Energy, Inc Premier Oil PLC Tullow Oil PLC SOCO International PLC Venture Production PLC Tullow Oil PLC Woodside Petroleum Limited Venture Production PLC
* Burren Energy delisted on 29 February 2008. For awards made in 2006 Burren’s performance was tracked up to the date on GOVERNANCE AND ACCOUNTS which the offer to acquire it became unconditional and thereafter tracked the interest rate payable for a short-term gilt.
2006 LTIP The 2006 LTIP was approved by shareholders at the EGM held on 17 November 2006, conditional on the flotation of Cairn India becoming effective, which occurred on 9 January 2007.
The 2006 LTIP enables selected executive directors and employees (excluding those that are employed by the Cairn India Group) to be granted conditional awards over two separate pools of notional ‘units’, the first relating to Cairn India (‘Cairn India Units’) and the second relating to the Capricorn Group (‘Capricorn Units’) (together, ‘Units’).
For the purposes of the 2006 LTIP, each of these Cairn India Units and Capricorn Units is ascribed a notional price. On any day, the price of a Cairn India Unit is equal to the price of a Cairn India share, as quoted on the BSE and the NSE of India (the ‘Exchanges’). The price of a Capricorn Unit is calculated by taking the total value of the Capricorn Group and dividing it by the number of Capricorn Units created for the purposes of the 2006 LTIP. For these purposes, the value of the Capricorn Group is generally determined by deducting (i) the value of the Company’s holding in Cairn India; and (ii) the amount of any cash held by the Company that is to be returned to shareholders, from the total market capitalisation of the Company.
The extent to which an award over Cairn India Units (a ‘Cairn India Award’) or an award over Capricorn Units (a ‘Capricorn Award’) (together, ‘Awards’) vests will be dependent on continued employment within the Group and the extent to which pre-determined performance conditions relating to Cairn India or the Capricorn Group are met over a specified period (see below).
Following the vesting of an award, the participant will then generally become entitled to such number of Cairn shares as have a market value equal to the aggregate price of the vested Units. Only 50% of these shares will be transferred to the participant immediately. The remaining 50% will be held for a further year.
The first awards under the 2006 LTIP were made on 29 March 2007 with a performance period commencing on 9 January 2007.
Performance conditions All awards granted to date under the 2006 LTIP are subject to a relative TSR target measured over a three-year performance period. For the purposes of applying this measure to any Cairn India Award, the TSR of a Cairn India share is used. For a Capricorn Award, the condition is based on the notional TSR of a Capricorn Unit. Under the TSR condition, the extent to which a Cairn India Award or Capricorn Award vests is determined by comparing the TSR of a Cairn India share or Capricorn Unit (as appropriate) over the performance period with the TSR of a share in each company in a comparator group. The tables below show the comparator groups for Awards granted under the 2006 LTIP.
64 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 65
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Ranking of Cairn India share/Capricorn Unit share/Capricorn India Cairn of Ranking group comparator relevant against Comparator group for Capricorn Awards made in 2008 in made Awards Capricorn for group Comparator Comparator group for Capricorn Awards made in 2007 in made Awards Capricorn for group Comparator Below median Median Upper decile Between median and upper decile BurrenPLC* Energy PetroleumPLC Dana ASADNO ResourcesEgdonPLC PLC Gas & OilHardy ImperialEnergyCorporation PLC PLC Gas & JKXOil MelroseResourcesPLC PLC OilPremier PetroleumPLC Regal PLC EnergySibir InternationalSOCO PLC PLC* EnergyGroupStar SterlingEnergyPLC PLC Oil Tullow PLC Dana Petroleum DNO ASA PLC Egdon Resources & Gas PLC Oil Hardy Corporation PLC Imperial Energy JKX Oil & Gas PLC PLC Resources Melrose PLC Oil Premier PLC Regal Petroleum PLC Salamander Energy PLC Sibir Energy SOCO International PLC PLC Sterling Energy Oil PLC Tullow PLC Production Venture
Burren Energy delisted on 29which February the offer 2008. to For acquire awards it made became in 2007 unconditional Burren’s performance and thereafter was tracked tracked up the to the interest date on rate payable for a short-term gilt. Percentage of Cairn India Units/Capricorn Units Units/Capricorn India Cairn of Percentage 0% comprised in Award that vest that Award in comprised 20% 100% 20%-100% on a straight-line basis Addax Petroleum, Inc Addax Petroleum, Comparator group for Cairn India Awards made in 2008 in made Awards India Cairn for group Comparator * follows:as placetakesthenVesting PLC Group BG BharatPetroleumCorporation Limited Burren PLC* Energy ChesapeakeCorporationEnergy LimitedCNOOC Resources,EOGInc HindustanPetroleumCorporation Limited CorporationIndianOil Limited NewfieldExploration Company Inc NobleEnergy, CorporationNaturalandGas Oil Limited PTTExploration Production& PLC LimitedSantos Inc Energy, Talisman PLC Oil Tullow WoodsidePetroleumLimited PLC BG Group Corporation Limited Bharat Petroleum Corporation Chesapeake Energy CNOOC Limited Inc EOG Resources, Corporation Limited Hindustan Petroleum Indian Oil Corporation Limited Newfield Exploration Company Inc Noble Energy, Oil and Natural Gas Corporation Limited PLC PTT Exploration & Production Santos Limited Inc Energy, Talisman Oil PLC Tullow PLC Production Venture Limited Petroleum Woodside AddaxIncPetroleum, Comparator group for Cairn India Awards made in 2007 in made Awards India Cairn for group Comparator Directors’ Remuneration Report Remuneration Directors’ Continued Directors’ Remuneration Report Continued
In order to ensure that the 2006 LTIP adequately encourages and rewards exceptional performance, the terms of the above performance condition also provide that, where the TSR of a Cairn India share/Capricorn Unit produces a ranking at or above the upper decile level in the appropriate comparator group, a participant will then be given the opportunity to increase the percentage of the relevant award that vests through the application of a ‘multiplier’ that is linked to the TSR actually achieved over the performance period. The way in which this multiplier operates is as follows:
Multiplier applied to determine the number of TSR of a Cairn India share over TSR of a Capricorn Unit over Cairn India Units/Capricorn Units that actually vest the performance period the performance period
1 40% or less 75% or less 1.33 80% or more 150% or more 1-1.33 on a straight-line basis Between 40% and 80% Between 75% and 150%
Notwithstanding the performance of a Cairn India share or Capricorn Unit against the above targets, no part of any Award will vest unless the remuneration committee is satisfied that there has been an overall satisfactory and sustained improvement in the performance of the Company as a whole over the performance period.
The 2006 LTIP is designed to provide the executive directors and other senior executives with a long-term incentive based on the performance of the particular arm of the business that they can affect. As such, the performance conditions described above are deemed appropriate by the remuneration committee.
Individual limits The total value of Units over which an individual may be granted Awards under the 2006 LTIP during the period commencing on 9 January 2007 (i.e. the date of its adoption) and ending on the final day of the Company’s financial year ending 31 December 2007 GOVERNANCE AND ACCOUNTS could not exceed 400% of his/her rate of annual base salary. In any subsequent financial year of the Company, the total value of Units over which an individual may be granted Awards during that year must not exceed 300% of his/her annual base salary (save in exceptional circumstances where a 400% limit may be applied). These limits are broadly consistent with those that applied under the 2002 LTIP and reflect the remuneration committee’s policy of placing a significantly higher weighting on variable pay rather than fixed pay.
Long-Term Incentive Plans – proposed arrangements For the same reasons as noted above in relation to the 2006 Plan, the remuneration committee has concluded that it is no longer appropriate to continue with the current structure of the 2006 LTIP, insofar as it relates to Capricorn Units. As a result, it is seeking shareholder approval at the AGM to introduce a new long term incentive plan that will replace the 2006 LTIP for all future grants.
Further details in relation to this new LTIP are set out in the Circular to shareholders accompanying this Annual Report and Accounts. It is, however, worth noting that its terms are largely identical to those of the 2006 LTIP summarised above, save that awards will be granted over ordinary shares in the Company rather than Units.
The remuneration committee is currently assessing how to treat outstanding awards over Capricorn Units that have already been granted under the 2006 LTIP. As and when a preferred approach has been identified, appropriate proposals will be put to shareholders for their consideration and approval.
Share Scheme Dilution In any ten-year rolling period, the number of shares that may be issued in connection with the 2006 LTIP and 2006 Plan, when added to the number of unissued shares that have been allocated in that same period under any other discretionary share scheme adopted by the Company, cannot exceed 5% of Cairn’s issued ordinary share capital.
In addition, in any ten-year rolling period, the number of shares that may be issued in connection with the 2006 LTIP and 2006 Plan, when added to the number of unissued shares that have been allocated in that same period under any other employees’ share scheme adopted by the Company, cannot exceed 10% of Cairn’s issued ordinary share capital.
Annual Cash Bonus Scheme Cairn’s annual cash bonus scheme applies to all employees and executive directors. Bonuses under the scheme are based on individual and Company performance measures. Individual performance is measured through the Company’s performance management system. Company performance measures are based on annually defined key performance indicators (‘KPIs’). The KPIs for 2008 encompassed various portfolio growth and operational performance targets, the substantial majority of which were met.
For employees other than executive directors, only the individual and Company performance measures determine the overall bonus award. The bonus award to the executive directors is subject to two additional performance measures, being performance against annually defined corporate objectives and reserve replacement performance. For 2008, this resulted in one-quarter of the award being determined by individual performance, one-quarter by Company performance, one-quarter by performance against corporate objectives and one-quarter by reserve replacement performance. The corporate objectives for 2008 are commercially
66 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 67
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN The Company is also the principal employer for a Small Self-Administered Scheme. Sir Bill Gammell is the sole member of thisSelf-AdministeredmembersoleSmall of theprincipal thea Gammellalsois employerCompanyfor is BillThe Scheme.Sir Gammelland Bill contractuallycontributionsSir not anyCompany behalfscheme.schemeof isThe thisonmake into obliged to Further details of the contributions made by the Company in respect of each executive director are set out in the table on page 70. Sir Bill Gammell and Phil Tracy each received an amount equivalent to 15% of their respectivetheir of formof salariesthebasic annual in amountequivalent15% receivedeachan to Tracy Phil Gammelland Bill Sir additionalsalarypensiontheirarrangements as funded.fullyare Simon Thomson andsalaries. basic Malcolmannual respective their of 15% Thoms to equal each have an individual personal pension plan and received a contribution from the Company on inspection for available are appointment of letters directors’ non-executive contracts and service directors’ executive The 2009. May 19 onheld be inspection availabletofor berequest willduringAGM andbeforetheand Dr Mike Watts and Jann Brown wereCapricorn members Oil of the Group Cairn Pension Energy Plan PLC from Retirement 1 June 2008. Benefits Each received Scheme until a contribution 31 May 2008 and equal of the to 15% of their respective annual basic salaries. On a change of control of the Company resulting in the termination of a director’s employment,Each of the each non-executive of the directors directorssubject is entitled to has the a letter Company’s of appointment Articlesof appointment of in Association, terms set of outwhich the which he time isdirector appointed provide commitment for concerned for retirement expected a fixed or three-year the by by rotation the Company.his Company duties period, The at least as Board and a director can once is be satisfied terminated every of the threeto Company. that the with years. Board each immediate None of in The the accordance of letters the non-executive effect non-executive with by either the directors Company’s directors the Articles commits has any sufficient conflict of Association. of interest time to fulfil that has not been disclosed Pension Arrangements Pension the 2008, June 1 effectfrom With UK. the in scheme pension personal group contribution defined a operates Company The previous Company The participate. to scheme eligible are employees permanent UK (the all non-contributory and remains Cairnscheme The Plan). EnergyPension PLC Retirement Benefitsqualifyingallrespect employees.behalfseniorinexecutives)of on of salaryannualbasiccontributes of(15% 10% Scheme) was replaced with a new scheme (the Capricorn Oil Group year. the during so do not did ContractsService executivecontractsdirectorsall have forCompany’spolicy serviceThedirectorto isterminatedeither the of becan by concernedthat or the Company on giving 12 months’change notice of control), of termination. the executive to In is Depending the termination event directors early on of onpolicy early thecommittee’s would circumstances termination The met). be been entitledproportion retaina outstandingtheirtoexecutive director,theof have itsdiscretion allow awards tounder long-term by incentivearrangements conditions the of toperformance termination, Company lossapplicable ofany salary,that (other extent thethe than benefitsto executive only as (but a result and directors pension of a contributions may be entitled,emphasiseterminatedthefullestearlyterminationdutythethe partylosscausedtheextentof practicable. to mitigateanyby to for or the the remuneration notice periods. committee may exercise to compensation of a sum equal to his/her annual basic salary as at the date of termination of employment. A similar structuresimilar A equivalentwith maximum operate2009. bonuspotentials willin The remuneration committeerecognitionparticularin of has efforts achievementsemployees,or theincludingby executive directors. werekind thisbonuses Noof discretion to award bonusesawarded in to executive addition to directors those payable during under 2008. the annual cash bonus scheme The maximum level of bonus awardthe for executive the executive directors directors40%.2008betweenandemployeesfor otherwasfor all 25% bonusforcapsalary. The seniorof executives200840% performancewasfor for 2008 was in up 2008 to 100% are of shown salary. in the The table actual on bonuses page70. The awarded maximum to level of bonus award for other sensitive and are thereforesensitive2009areexcludedreport,corporatethe andthisfrom are objectives.as thesemeasures, theirandchoiceof The overall the to both tied be should compensation incentive short-term any that belief committee’s the reflects weightings, respective performance of the Company and to those areas of its business that each individual can directly influence. Directors’ Remuneration Report Remuneration Directors’ Continued Directors’ Remuneration Report Continued
Details of the service contracts and letters of appointment of the current directors of the Company are given in the table below.
Effective date Unexpired term Notice period
Executive service contracts Sir Bill Gammell 19.02.03 n/a 12 months Dr Mike Watts 19.02.03 n/a 12 months Malcolm Thoms 19.02.03 n/a 12 months Phil Tracy 06.02.04 n/a 12 months Jann Brown 17.11.06 n/a 12 months Simon Thomson 17.11.06 n/a 12 months
Non-executive letters of appointment Norman Murray 19.02.09 34 months None Hamish Grossart 19.02.09 34 months None Todd Hunt 14.05.06 1 month None Mark Tyndall 10.10.06 7 months None Iain McLaren 01.07.08 26 months None Dr Jim Buckee 15.01.09 32 months None
Certain of the Company’s executive directors serve as non-executive directors on the boards of other companies and are permitted to retain the fees relating to those positions. Details of the positions held and the fees receivable are set out in the table below.
Position held Fees (2008) GOVERNANCE AND ACCOUNTS Executive Director Sir Bill Gammell Non-executive director, Artemis AiM VCT plc £12,500 Malcolm Thoms Non-executive director, Revus Energy AS £30,438 (1) Jann Brown Non-executive director, Hansen Transmissions International nv £30,559 (2)
Notes: (1) Malcolm Thoms ceased to be a director of Revus Energy AS on 22 December 2008. His fees reflect the period from 1 January 2008 to that date and were payable partly in cash and partly in shares. (2) Jann Brown was appointed a director of Hansen Transmissions International nv on 16 May 2008 and her fees reflect the period from that date to 31 December 2008.
The Board believes, in principle, in the benefits of executive directors accepting positions as non-executive directors of other companies in order to widen their skills and knowledge for the benefit of the Company, provided that the time commitments are not unduly onerous.
The appointment of any executive director to a non-executive position with another company must be approved by the Board. In the case of a proposed appointment to a company within the oil and gas industry, permission will only be given if the two companies do not compete in the same geographical area.
68 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 69
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 2008 2008 2008 2008 20042004 2005 2005 2006 2006 2007 2007 20032003 2004 2004 2005 2005 2006 2006 2007 2007 0 0 80 80 60 60 40 40 20 20 -20 -20 140 140 120 120 100 100 200 200 180 180 160 160 1,000 1,200 1,000 1,200
The market value of one Cairn share on 31 December 2008 was £20.15. During 2008, the range of high and low market value value market low and high of range the 2008, During £20.15. was 2008 December 31 on share Cairn one of value market The of shares was £36.81 to £11.79.
Performance graph – comparison of year on year change in the value of aninvestment over the past five years
Performance graph – comparison of five-year cumulative total shareholder return on an investment of £100 The graphs compare Cairn’s TSR with that of the chosenchartthepresentedindices.additionalbar The isof as that informationwithgraphs that The TSRcompare Cairn’sto CompaniestherequiredDirectors’Acts, theamendedby asby Remuneration Report Regulations2002. Performance graphs Performance graphsperformance two the for indices comparator appropriate as selected were Index 250 FTSE and Index entirety100 FTSEthe the for Both 100 FTSE the of member a was and Index 100 FTSE the of member constituent a currently is Cairn below. shown previousyears.constituentinIndex FTSEbeen250a alsothe2008member has but of of Directors’ Remuneration Report Remuneration Directors’ Continued Directors’ Remuneration Report Continued
INFORMATION SUBJECT TO AUDIT
Directors’ Remuneration The remuneration of the directors for the year ended 31 December 2008 was as follows:
Annual Other Total Total Pension Pension Salary Benefits(1) bonus(2) payments Fees 2008 2007 2008 2007 £ £ £ £ £ £ £ £ £
Executive Sir Bill Gammell 552,000 27,132 250,000 – – 829,132 804,129 82,000 72,000 Dr Mike Watts 402,500 14,045 250,000 – – 666,545 544,512 60,375 52,500 Malcolm Thoms 345,000 18,457 150,000 – – 513,457 473,241 51,750 45,000 Phil Tracy(3) 345,000 9,352 150,000 – – 504,352 498,859 51,750 45,000 Jann Brown 345,000 22,210 200,000 – – 567,210 397,037 51,750 37,500 Simon Thomson 345,000 27,867 150,000 – – 522,867 398,837 51,750 37,500
Non-executive Norman Murray – – – – 200,000 200,000 140,000 – – Hamish Grossart – – – – 105,000 105,000 90,000 – – Todd Hunt – – – – 60,000 60,000 50,000 – – Mark Tyndall – – – – 60,000 60,000 50,000 – – Iain McLaren(4) – – – – 35,000 35,000 – – – Dr Jim Buckee(5) – – – – – – – – – GOVERNANCE AND ACCOUNTS Former director Andrew Shilston(6) – – – – 25,000 25,000 50,000 – – Ed Story(7) – – – – 60,000 60,000 50,000 – –
Notes: (1) Benefits comprise a company car, permanent health insurance, private health insurance and death-in-service benefit. (2) The annual bonus for 2008 is payable in the subsequent financial year. (3) Phil Tracy received additional remuneration totalling £692,160 in respect of services provided to Cairn India Limited during 2008 under the terms of a secondment agreement between the Company and Cairn India Limited. (4) Iain McLaren was appointed a director on 1 July 2008 and his fees reflect the period from that date to the year end. (5) Dr Jim Buckee was appointed a director on 15 January 2009 and therefore did not receive fees during 2008. (6) Andrew Shilston retired as a director on 23 May 2008. (7) Ed Story retired as a director on 15 January 2009.
LTIP Awards (2002 LTIP) The total number of combined Tier One and Tier Two awards held by the executive directors pursuant to the 2002 LTIP is as follows:
At 01.01.08 Awarded in year Vested in year Lapsed in year At 31.12.08
Sir Bill Gammell 181,300 0 39,232 85,668 56,400 Dr Mike Watts 147,300 0 26,765 70,635 49,900 Malcolm Thoms 130,100 0 24,492 64,508 41,100 Phil Tracy 109,700 0 23,099 50,401 36,200 Jann Brown 65,200 0 16,206 27,594 21,400 Simon Thomson 67,500 0 16,206 27,594 23,700
An analysis of the Tier One and Tier Two awards held by the executive directors pursuant to the 2002 LTIP during 2008 is as follows:
Tier One Awards Performance period Market value* Sir Bill Gammell Dr Mike Watts Malcolm Thoms Phil Tracy Jann Brown Simon Thomson
20.04.05-19.04.08 £11.52 – – – – 22,100 22,100 28.04.05-27.04.08 £11.90 53,500 36,500 33,400 31,500 – – 24.04.06-23.04.09 £23.99 30,000 21,800 18,700 18,700 11,800 12,500
70 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 71 –
2008 21,700 58,230 11,200
738,718 134,145 700,935 269,323 401,785 622,673 601,802 461,699 882,176 384,751 735,147 192,375 At 31.12.08 At 31.12.08 At 1,411,481 1,543,808 1,102,720 Simon Thomson Simon Simon Thomson Simon Thomson Simon – 0 0 0 0 0 0 0 0 0 0 0 0 9,600 21,700 268,291 467,290 267,857 116,460 Brown Jann Brown Jann Brown Jann Lapsed in year in Lapsed year in Lapsed – 0 0 0 0 0 0 0 0 0 0 0 0 42,000 17,500 Tracy Phil Tracy Phil Tracy Phil 321,949 560,748 321,428 139,750 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Vested in year in Vested year in Vested – 81,520 55,600 22,400 58,230 223,600 482,923 280,374 514,285 321,428 139,750 562,500 139,750 321,428 139,750 321,428 116,460 267,857 401,785 Malcolm Thoms Malcolm Malcolm Thoms Malcolm Thoms Malcolm Awarded in year in Awarded year in Awarded – 60,900 81,520 28,100 515,118 187,803 981,308 897,196 187,803 562,500 981,308 482,923 280,374 321,949 560,748 268,291 467,290 134,145 700,935 At 01.01.08 At 01.01.08 At Watts Mike Dr Watts Mike Dr Watts Mike Dr
– 71,400 26,400 515,118 897,196 223,600 514,285 Gammell Bill Sir Sir Bill Gammell Bill Sir Sir Bill Gammell Bill Sir
£1.86 £1.07 £3.22 £1.40 £11.52 £11.90 £23.99 Unit value* Unit Unit value* Unit Market value* Market The ‘unit value’ shown in the tables above represents the notional value of a Cairn India Unit or Capricornappropriate)orCairn Unit(as tablesIndiarepresentson theUnitabovea shown invalue’ of notionalvalue the ‘unit The the date of commencement of the performance period as calculated in accordance with the provisions of the 2006 LTIP. The prices shown in the tables above represent the market value of a Cairn share on the date of commencement of the of commencement of date the on share Cairn a of value market the represent above tables the in shown prices The performanceperiod.
Sir Bill Gammell Tier Two Awards period Performance 20.04.05-19.04.08 Directors’ Remuneration Report Remuneration Directors’ Continued 09.01.07-08.01.10 Performance Period Performance Performance Period Performance 09.01.07-08.01.10 Sir Bill Gammell 28.04.05-27.04.08 Dr Mike Watts 07.05.08-06.05.11 07.05.08-06.05.11 Dr Mike Watts Malcolm Thoms 24.04.06-23.04.09 There have been no variations to the terms and conditions of the above awards during the year. Each of the above awards will ordinarily vest on or shortly after the expiry of the applicable performance period, but only to the to only but performanceperiod, applicable the of expiry the aftershortly or on vest ordinarily will awards above the of Each vested participant’s a of value The satisfied. are report this of 66 to 64 page on described performanceconditions the that extent ordinaryCompany. settledtheformof bethethen shares Unitsof willin Cairn India and Capricorn Energy respectively. Under the 2006 LTIP, Cairn India Units and Capricorn Units are notional units of value relating to the Company’s holding in * Capricorn Units Capricorn Malcolm Thoms Cairn India Units There have been no variations to theterms and conditions ofLTIP the Awards above awards (2006 LTIP) duringfollows:as theexecutiveis thedirectors by awardsheld2006numberpursuantLTIP total theof The year. to Each of the above awards will ordinarily vest on or shortly after the expiry of the applicable performance period, but only to the to only but performanceperiod, applicable the of expiry the aftershortly or on vest ordinarily will awards above the of Each extent that the performance conditions described on page 64 of this report are satisfied. * Phil Tracy Phil Tracy Jann Brown Jann Brown Simon Thomson Simon Thomson Capricorn Units Capricorn Cairn India Units An analysis of the awards held by the executive directors pursuant to the 2006 LTIP during 2008 is as follows:executiveduringas thedirectors2008is by awardsheldthe 2006pursuantLTIP analysisthe Anof to Directors’ Remuneration Report Continued
Vested Awards Details of awards which vested under the 2002 LTIP during 2008 are given in the table below. Calculations to determine the number of shares vesting, based on the performance conditions described on pages 62 and 63 of this report were carried out by Cairn and independently verified by Ernst & Young LLP.
Market value of Market value of Date of Performance a Cairn share on Vesting a Cairn share on Tier One Tier Two Director award period date of award date date of vesting shares shares
Sir Bill Gammell 28.04.05 28.04.05-27.04.08 £11.90 14.05.08 £33.475 39,232 0 Dr Mike Watts 28.04.05 28.04.05-27.04.08 £11.90 14.05.08 £33.475 26,765 0 Malcolm Thoms 28.04.05 28.04.05-27.04.08 £11.90 14.05.08 £33.475 24,492 0 Phil Tracy 28.04.05 28.04.05-27.04.08 £11.90 14.05.08 £33.475 23,099 0 Jann Brown 20.04.05 20.04.05-19.04.08 £11.52 14.05.08 £33.475 16,206 0 Simon Thomson 20.04.05 20.04.05-19.04.08 £11.52 14.05.08 £33.475 16,206 0
The total aggregate gain made by the executive directors on vesting, based on the market value at the date of vesting multiplied by the total number of shares vesting, was £4,887,350 (2007 total aggregate gain: £1,344,030).
By order of the Board Hamish Grossart Chairman of the Remuneration Committee 6 April 2009 GOVERNANCE AND ACCOUNTS
72 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 73
2008 22.50 10.00 49.00 40.00 60.00 70.00 30.00 30.00 49.00 49.00 49.00 40.00 35.00 45.00 37.50 50.00 100.00 100.00 100.00 100.00 100.00 100.00 Working interest % interest Working
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
Awaiting Government approval Government Awaiting This PSC was due to terminate on 4 July 2006 if the parties did not agree that a viable market existed in Bangladesh for any any for Bangladesh in existed market viable a that agree not did parties the if 2006 July 4 on terminate to due was PSC work This the amend to principle in agreed have parties the passed, has date stop long this Although block. the in discovered be gas to require still amendments these however, Bangladesh; in exists market viable a that also and PSC the in commitments formalised in writing by the parties.
** Block RJ-ONN-2003/1 Block GV-ONN-2003/1 Blocks 3 & 5** Blocks 4, 6 & 7 Sri Lanka SL-2007-01-001 * Block KG-DWN-98/2 Block KG-ONN-2003/1 Areas Block CB/OS-2 Development Block CB/OS-2 Exploration Block RJ-ON-90/1 Development Areas Block RJ-ON-90/1 Exploration Block CB-ONN-2002/1 Block GV-ONN-2002/1 Block VN-ONN-2003/1 Block GS-OSN-2003/1 Block KK-DWN-2004/1 Block PR-OSN-2004/1 Bangladesh Block 10* Block 16 – Development Area Block 16 – Exploration Nepal Blocks 1 & 2 ASIA India Block PKGM-1 (Ravva)
Principal Licence Interests Licence Principal Principal Licence Interests continued
Working interest %
NORTH AMERICA
Greenland 40.00 Exclusive Licence 2002/15 (Atammik) 40.00 Exclusive Licence 2005/06 (Lady Franklin) 87.50 Exclusive Licence 2008/10 (Sigguk) 87.50 Exclusive Licence 2008/11 (Eqqua) 92.00 Exclusive Licence 2008/13 (Saqqamuit) 92.00 Exclusive Licence 2008/14 (Kingittoq) 92.00 Exclusive Licence 2009/10 (Uummannarsuaq) 92.00 Exclusive Licence 2009/11 (Salliit) 92.00
AFRICA
Tunisia
Nabeul Permit 50.00
Louza Permit 100.00
GOVERNANCE AND ACCOUNTS EUROPE***
Albania
Block Joni-5 100.00
AUSTRALASIA
Papua New Guinea****
Block PRL-1 12.73
With the exception of Blocks GV-ONN-2002/1 and GV-ONN-2003/1, the Cairn Group’s licence interests in India and Sri Lanka are held entirely through the Cairn India Group. The Cairn Group’s interests in Blocks GV-ONN-2002/1 and GV-ONN-2003/1 are held jointly by the Cairn India Group and the Capricorn Group. All of the remaining licence interests of the Cairn Group are held through the Capricorn Group.
*** Capricorn currently has licence awards pending in Spain (Albufera, Beninfayó, Gandía and Alta Mar 1 and 2). **** The Government of Papua New Guinea has a 22.5% back-in right regarding this licence, which would reduce Cairn’s equity to 9.86%.
74 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 75
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We review whether the Corporatethe on Combinedopinion an form Governance or controls, and risks Codeall cover control specified internal Statement on statements Board’s the whether consider to reflects for required not our review the by company’s the Listing compliance Ruleseffectiveness of the with Financial the nine of provisions Services the Group’s corporate Authority, of the 2006 governance and we report procedures if it does or not. its We are risk and control procedures. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the all received not have we if records, accounting proper kept not has company the opinion, our in if, you to report we addition In information and explanationsdisclosed. not transactions are we require for our audit, or if information specified by law regarding directors’ remuneration and other We report to you our opinion as to whether the financial statements give a true and fair view and whether financial statements and statements financial whether and view fair and true a give statements financial the whether to as opinion our you to report We opinion our in whether the you to report part also We Regulation. ofIAS the the of 4 Directors’Articlestatements, financial group the regards as and, Remuneration1985 Report to be auditedthe information have been properly given in the prepared directors’report in includes accordance report that is with specific consistent theAssets, CompaniesOperatingExploration & Corporate information Review, Responsibility cross referredisBusiness with thatFinancialthefrom Reviewand the Act financial presented statements.Reviewin the Highlights section The information of of the 2008, directors’ Chairman’s given report. in the Statement, directors’ Chief Executive’s Review, Respective Responsibilities of Directors and Auditors and Directors of Responsibilities Respective The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and theOur financial responsibility statements is to audit accordance the financial with relevant statements legal and and the regulatory part of the requirements Directors’ Remuneration and International Report Standards to be audited on Auditing in (UK and Ireland). to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume or accept not Our do we auditlaw, by permitted extent fullest work the To haspurpose. other beenno for and report auditors’ undertaken an in them to sothat we might stateresponsibility to the company’s members to anyone those otheror for mattersthan the the opinions we company are required we and have the formed. to company’s state members as a body, for our audit work, for this report,the by adopted as (IFRSs) Standards Reporting Financial International and law Kingdom United applicable with accordance in European Unionare set out in the Statement of Directors’ Responsibilities. items other and Report Remuneration Directors’ the of part unaudited the Report, TheDirectors’ otherStatement, information Governance Corporate comprises Review, only the Operating andlisted Exploration in the table Review, of contents. Financialinconsistencies Review, We consider Chairman’s the with implications Statement, the financial Chief for our statements. Executive’s report if we Our become responsibilities aware of any apparent do not extend misstatements to any other or information. material This report is made solely to the company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. CompaniesaccordancetheAct inSectionwith1985. of body, 235 members,company’sa the report Thisassolely tomade is We have audited the group andDecember parent 2008endedwhichcomprise31 Company IncomeBalanceSheets,GroupStatement,and GroupandtheGroup the the notes company related the and Expense and Income financialRecognised of Statements Company and Group the Statements, statements Flow Cash Company (the ‘financial statements’)1 to 38. These of financial Cairn Energy statements PLCinformation for the have year been in theprepared Directors’ under Remuneration the accounting Report policies that set is out described therein. as We having have also been audited audited. the Independent Auditor’s Report to the Members of Cairn Energy PLC Energy Cairn of Members the to Report Auditor’s Independent Independent Auditor’s Report to the Members of Cairn Energy PLC continued
Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations that we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.
Opinion In our opinion: • the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2008 and of its profit for the year then ended; • the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2008; • the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and • the information given in the Directors’ Report is consistent with the financial statements.
GOVERNANCE AND ACCOUNTS
Ernst & Young LLP Registered Auditor Glasgow 7 April 2009
76 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 77 –
$m 6.0 3.7 (0.1) 2007 12.7 61.5 35.0 65.1 (40.7) (58.9) (76.2) (12.9) (34.4) (66.5) (88.4) Group Group 2008 287.7 (119.0) (restated) (restated) 1,543.1 1,579.2 1,590.2 1,555.8 1,137.76 1,135.94 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – $m 6.5 2.7 2008 17.9 12.0 42.7 66.2 (23.8) (74.2) (47.7) (47.6) (21.0) (66.9) (94.6) Group 348.8 299.3 137.1 355.8 440.9 366.7 266.92 268.73 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
2 2 5 9 29 29 12 12 3(c) 5(a) 5(a) 5(b) 5(b) 5(b) 6,37 Notes 10,37 11,37 3(b),37
Revenue
Group Income Statement Income Group 2008 December 31 Ended Year the For Minority interests – basic (cents) Earnings share per ordinary Cost of sales charge Depletion and decommissioning profit Gross Administrative expenses Reversal of impairment of intangible exploration/appraisal assets plant & equipment Reversal of impairment of property, Loss on sale of oil and gas assets Operating profit/(loss) subsidiaries Exceptional gain on deemed disposal of Finance income Finance costs taxation before Profit expense on profit Taxation the year for Profit Attributable to: – diluted (cents) Earnings share per ordinary Production costs Production Other operating income assets – development/producing Negative goodwill on acquisition Equity holders of the parent Unsuccessful exploration costs Unsuccessful exploration Impairment of intangible exploration/appraisal assets Statements of Recognised Income and Expense For the Year Ended 31 December 2008
Group Group 2007 Company Company 2008 (restated) 2008 2007 Notes $m $m $m $m
Income and expense recognised directly in equity
(Deficit)/surplus on valuation of financial assets 29 (14.0) 8.0 – – Currency translation differences 29 (150.6) 27.6 (187.7) 11.4 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Total (expense)/income recognised directly in equity (164.6) 35.6 (187.7) 11.4 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Profit/(loss) for the year 37 366.7 1,555.8 (19.4) 1,170.7 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Total recognised income and expense for the year 202.1 1,591.4 (207.1) 1,182.1 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Attributable to: Equity holders of the parent 236.5 1,572.6 (207.1) 1,182.1 Minority interests (34.4) 18.8 – – ––––––––––– ––––––––––– ––––––––––– –––––––––––
202.1 1,591.4 (207.1) 1,182.1 ––––––––––– ––––––––––– ––––––––––– ––––––––––– GOVERNANCE AND ACCOUNTS
78 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 79 – – – – – – – – – – – – – – – –
$m 1.0 5.3 0.1 2007 51.6 16.6 11.3 15.8 45.8 11.3 68.2 11.3 (32.0) 2008 477.1 654.5 210.9 717.7 717.7 660.8 729.0 717.7 Company ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – – – – – – – – – – – – – $m 0.3 4.8 0.1 2008 47.3 12.4 15.8 12.4 52.1 12.4 (28.8) 458.2 482.4 219.0 522.4 522.4 482.7 534.8 522.4 (141.9) Company ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– $m 0.1 1.9 8.6 2.4 6.6 8.0 2.4 7.9 2007 75.0 16.1 15.9 30.1 40.1 15.8 24.0 40.2 (32.0) Group Group 429.2 607.1 498.2 307.0 872.3 273.6 200.1 210.9 284.2 317.6 601.8 (restated) 1,081.7 1,769.8 1,340.6 1,143.9 1,227.7 2,371.6 1,769.8 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
– $m 6.3 2.2 2.0 3.2 8.6 1.9 2.6 3.7 2008 26.7 15.8 40.2 10.7 10.5 (28.8) (78.8) Group 677.6 540.9 500.0 260.4 219.0 563.0 501.9 284.9 551.4 790.3 1,433.7 1,119.6 1,113.0 2,278.7 1,601.1 1,703.8 1,916.6 1,341.7 3,620.4 2,278.7 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
29 29 29 22 24 24 26 27 28 29 29 13 14 15 17 18 19 20 21 21 31 Notes 26,37 21,25 23,37 16,37
Non-current assets Non-current assets Intangible exploration/appraisal
Balance Sheets Balance 2008 December 31 at As
Provisions Income tax liabilities Provisions Property, plant & equipment – development/producing assets plant & equipment – development/producing Property, plant & equipment – other Property, Intangible assets – other financial assets Available-for-sale Investments and other receivables Trade Bank deposits Cash and cash equivalents Derivative financial instruments Income tax assets Obligations under finance leases Obligations under finance leases tax liabilities Deferred premium Share held by ESOP Trust Shares translation currency Foreign – non distributable Capital reserves Retained earnings
equity Total
Non-current liabilities Non-current Loans and borrowings Minority interests assets Current liabilities Total Inventory
Total assets Total Net assets
liabilities Current and other payables Trade Equity attributable to equity holders of the parent capital Called-up share Statement of Cash Flows For the Year Ended 31 December 2008
Group Group 2007 Company Company 2008 (restated) 2008 2007 Notes $m $m $m $m
Cash flows from operating activities Profit/(loss) before taxation 440.9 1,590.2 (19.4) 1,170.7 Unsuccessful exploration costs 47.7 40.7 – – Depletion, depreciation, decommissioning and amortisation 57.4 125.3 0.4 1.1 Share based payments charge 20.9 25.3 3.3 3.7 Impairment and impairment reversals of oil and gas assets 11.8 55.2 – – Loss on sale of oil and gas assets – 0.1 – – Negative goodwill on acquisition – (35.0) – – Exceptional gain on deemed disposal of subsidiaries (355.8) (1,579.2) (0.3) – Finance income (66.2) (65.1) (0.9) (13.3) Finance costs 23.8 12.9 7.0 4.9 Net interest paid 0.4 (6.7) – (0.4) Income tax paid (13.6) (14.7) – – Foreign exchange differences (9.5) (2.9) (8.8) 7.5 Dividends received – – – (1,216.6) Movement on inventory of oil and condensate 5.4 (3.4) – – Trade and other receivables movement 5.9 1.9 (3.0) 2.6 Trade and other payables movement (18.4) 8.1 (2.8) (105.3) Movement in other provisions (0.3) 2.6 – – ––––––––––– ––––––––––– ––––––––––– ––––––––––– GOVERNANCE AND ACCOUNTS Net cash generated from/(used in) operating activities 150.4 155.3 (24.5) (145.1) ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash flows from investing activities Expenditure on intangible exploration/appraisal assets (125.2) (156.4) – – Expenditure on tangible development/producing assets (493.7) (244.0) – – Purchase of property, plant & equipment – other (4.1) (2.1) – (0.1) Purchase of intangible assets – other (1.3) (8.5) – (3.9) Purchase of investments – – – (233.9) Acquisition costs for business combinations – (77.2) – – Cash acquired as a result of business combinations – 7.3 – – Cash disposed of on disposal of subsidiary (1.5) (6.7) – – Proceeds on disposal of subsidiary – 54.4 – – Proceeds on disposal of property, plant & equipment – other – – 0.3 – Proceeds on disposal of intangible assets – other – – 4.8 – Movement in funds on bank deposits (254.3) (30.1) – – Interest received 50.9 64.5 0.9 13.6 Dividends received – – – 1,216.6 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net cash (used in)/from investing activities (829.2) (398.8) 6.0 992.3 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash flows from financing activities Payment of costs for deemed disposal of subsidiaries – (64.3) – – Proceeds from deemed disposal of subsidiaries 633.7 1,323.3 – – Buy back of shares in subsidiary out of capital – – – 128.9 Arrangement and facility fees (23.3) (22.8) (3.2) (0.3) Proceeds from issue of shares 8.1 10.0 8.1 9.9 Payment of finance lease liabilities (0.8) (1.4) – – Drawdown/(repayment) of loan facilities 425.0 (80.0) – (47.0) Return of cash to shareholders – (935.6) – (935.6) ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net cash flows from/(used in) financing activities 1,042.7 229.2 4.9 (844.1) ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net increase/(decrease) in cash and cash equivalents 363.9 (14.3) (13.6) 3.1 Opening cash and cash equivalents at beginning of year 872.3 856.3 16.6 19.5 Exchange (losses)/gains on cash and cash equivalents (123.2) 30.3 1.8 (6.0) ––––––––––– ––––––––––– ––––––––––– –––––––––––
Closing cash and cash equivalents 21 1,113.0 872.3 4.8 16.6 ––––––––––– ––––––––––– ––––––––––– –––––––––––
80 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
81
2008
effective date. effective combinations after Applies only to business disposal will change. Presentation of gain on deemed Presentation requirements for certain items items certain for requirements in the Income Statement. Presentation and disclosure Presentation statement, with corresponding statement, with corresponding in assets. increase costs charged to the income costs charged Decrease in borrowing in borrowing Decrease Impact on initial application initial on Impact CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
1 Jul 2009 1 Jul 2009
1 Jan 2009
1 Jan 2009 Date of adoption of Date Cairn by
value rather than fair value. Expensing of all transaction costs. subsidiaries will be recognised at book book at recognised be will subsidiaries Share for share exchange transactions in in transactions exchange share for Share from Income Statement direct to equity. to equity. Statement direct Income from Reclassification of gain on deemed disposal
accounting policy. No changes to current
policy. capitalised than current costs being borrowing in more May result policy accounting to Change
c) Presentationalcurrency c) Sterling.Theseaccountsbeenis functional have Group, The the ultimateparentcompanyof thecurrency Cairn EnergyPLC, of functionalappropriatethemore be deemedDollars to($), currency to presentedis US most companies It in Group.withinof the present the financial statementscurrencies in line is with detailed the functional in note 1(p). currency of the majority of the Group. The Group’s policy on foreign as of 1 January 2008. The Group concluded that the operating segments determined in accordance with IFRS 8 are equivalent to to equivalent are 8 IFRS with accordance in determined segments operating the that concluded Group The 2008. January 1 of as the business segments previouslyinformation.comparative identified under IAS 14. IFRS 8 disclosures are shown in Note 4, including related revised Cairn has adopted IFRS 8 – ‘Operating Segments’. IFRS 8 replaces IAS 14 ‘Segment Reporting’. Cairn early adopted this standard or company level. level. company or Cairn has adopted IFRIC – 11 ‘Grouprelating and Treasury to employees Share Transactions’. of a subsidiary This to interpretation be recognised in requires the equity share of that based company. payment On adoption, awards there was no impact at group No other IFRS as issued by thestatements. IASB financial which are not yet effective are expected to have an impact on the Group’s or Company’s
– Revised IFRS 3 ‘Business Combinations’
Separate Financial Statements’ Revised IAS 27 ‘Consolidated and Effective date from 1 July 2009 date from Effective of Financial Statements’ Financial of IAS 1 ‘Revised Presentation IAS 1 ‘Revised Presentation
‘Borrowing Costs (Revised)’ ‘Borrowing Revised IAS 23 Title 1 January 2009 date from Effective Relevant new standards andfollows: interpretationsas are issued by the IASB, but not yet effective and not applied in these financial statements b) Accounting standards Accounting b) Cairn prepares its accountsThe in Group’s accordance financial with statements applicable International are also consistent Financial with IFRS Reporting as issued Standards by the International(‘IFRS’) as adopted Accounting by the Standards EU. Board (‘IASB’). Cairnprepareshistoricalitsaccounts a assetscost onbasis.Where therearedifferentliabilities andcalculated a basis,on this fact is disclosedin the relevantaccounting policy. 1. Accounting Policies Accounting 1. a) Basis of preparation The consolidated financial statementsauthorised for of Cairn issue Energy in accordanceKingdomUnitedthedomiciledpublicallywhoseand PLCsharesinare traded. registered TheLothianRoad, (‘Cairn’50office located atis with or a ‘theresolution Group’) for ofScotland. theEdinburgh, the directors period ended on 6 April 31 December 2009. The 2008 Group were is a limited company incorporated Notes to the Accounts Accounts the the to to Notes Notes Notes to the Accounts continued
1. Accounting Policies continued d) Basis of consolidation The consolidated accounts include the results of Cairn Energy PLC and its subsidiary undertakings to the Balance Sheet date. The results of subsidiaries acquired or disposed during the year are included in the Income Statement and Statement of Cash Flows from the effective date of acquisition or up to the effective date of disposal as appropriate.
Cairn allocates the purchase consideration of any acquisition to assets and liabilities on the basis of fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the assets and liabilities is recognised as goodwill. Any goodwill arising is recognised as an asset and is subject to annual review for impairment. Goodwill is written off where circumstances indicate that the value of the underlying cash generating unit including the asset may no longer support the carrying value of goodwill. Any such impairment loss arising is recognised in the Income Statement for the period. Impairment losses relating to goodwill cannot be reversed in future periods. Negative goodwill is credited immediately to the Income Statement.
Cairn has used the exemption granted under section 230(1)(b) of the Companies Act 1985 that allows for the non disclosure of the Income Statement of the parent company. The loss attributable to the Company for the year ended 31 December 2008 was $19.4m (2007: profit of $1,170.7m).
e) Joint Ventures Cairn participates in several unincorporated Joint Ventures that involve the joint control of assets used in the Group’s oil and gas exploration and producing activities. Cairn accounts for its share of assets, liabilities, income and expenditure of Joint Ventures in which the Group holds an interest, classified in the appropriate Balance Sheet and Income Statement headings. Cairn’s principal licence interests are jointly controlled assets.
A list of Cairn’s interests in unincorporated Joint Ventures is given on page 73 and 74. GOVERNANCE AND ACCOUNTS
f) Revenue and other income Revenue from operating activities Revenue represents Cairn’s share of oil, gas and condensate production, recognised on a direct entitlement basis, and tariff income received for third-party use of operating facilities and pipelines in accordance with agreements.
Other income Income received as operator from Joint Ventures is recognised on an accruals basis in accordance with Joint Venture agreements and is included within ‘Other operating income’ in the Income Statement. Interest income is recognised using the effective interest method on an accruals basis and is recognised within ‘Finance income’ in the Income Statement.
g) Oil and gas intangible exploration/appraisal assets and property, plant & equipment – development/producing assets Cairn follows a successful efforts-based accounting policy for oil and gas assets.
Costs incurred prior to obtaining the legal rights to explore an area are expensed immediately to the Income Statement.
Expenditure incurred on the acquisition of a licence interest is initially capitalised on a licence-by-licence basis. Costs are held, undepleted, within exploration/appraisal assets until such time as the exploration phase on the licence area is complete or commercial reserves have been discovered.
Exploration expenditure incurred in the process of determining exploration targets is capitalised initially within exploration/appraisal assets and subsequently allocated to drilling activities. Exploration/appraisal drilling costs are initially capitalised on a well-by-well basis until the success or otherwise of the well has been established. The success or failure of each exploration/appraisal effort is judged on a well-by-well basis. Drilling costs are written off on completion of a well unless the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial.
Following appraisal of successful exploration wells, if commercial reserves are established and technical feasibility for extraction demonstrated, then the related capitalised exploration/appraisal costs are transferred into a single field cost centre within development/producing assets after testing for impairment (see below). Where results of exploration drilling indicate the presence of hydrocarbons that are ultimately not considered commercially viable, all related costs are written off to the Income Statement.
All costs incurred after the technical feasibility and commercial viability of producing hydrocarbons has been demonstrated are capitalised within development/producing assets on a field-by-field basis. Subsequent expenditure is capitalised only where it either enhances the economic benefits of the development/producing asset or replaces part of the existing development/ producing asset. Any remaining costs associated with the part replaced are expensed.
Net proceeds from any disposal of an exploration asset are initially credited against the previously capitalised costs. Any surplus proceeds are credited to the Income Statement. Net proceeds from any disposal of development/producing assets are credited against the previously capitalised cost. A gain or loss on disposal of a development/producing asset is recognised in the Income Statement to the extent that the net proceeds exceed or are less than the appropriate portion of the net capitalised costs of the asset.
82 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 83
2008
method method continued Amortisation Depreciation Depreciation straight line straight line straight line
25-50 10-33* 25-50* CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Annual Rate (%) Rate Annual Annual Rate (%) Rate Annual
continued Depreciation is charged over the shorter of the economic life or the remaining term of the lease.theremaining termofthe Depreciationshorteroreconomic thethelifecharged over isof
Software costs Software
improvements Tenants’
Where there has been a charge for impairment in an earlier period that charge will be reversed in a later periodlaterwheretherehas reverseda beearlierperiodinimpairment chargewillchargeanthatfor inbeen a Wheretherehas been a change in circumstancesreversingimpairmentIn itsoriginaltime.carrying losses,of lowercarrying increasedthethe be asset orto willvaluethe amountof to the extent that the discountedthe carrying future value net cash that flows would are have higher been determined than the net book (net ofh) value Property, depletion) at the plant had no & impairment equipmentProperty, – loss other been plant recognised and equipment in priorexpectedfollows:usefuleconomicas lives are periods. measured at cost less accumulated depreciation and impairment and depreciated over their 1. Accounting Policies Policies Accounting 1. intangiblegas andexploration/appraisal Oil g) assetsproperty,equipment development/producingand & – plant assets compared is unit generating cash the of value book net the impairment, of indicators are there where date, reporting each At offwritten is difference the then higher, is value book net the If flows. cash net future discounted expected associated the with gas appropriate tothe or the $60/bbl), of Incomelong-term and short- (2007: Statement $65/bbl of price oil long-term a and $50/bbl as of impairment. price oil short-term Discounted futureprice net cash as dictatedpetroleum flows appropriate using basis, asset-by-asset an for on determined by IAS are the profiles production Forecast 36 relevantrespectively). purposes 10% and gas are sales calculated contract, using escalation techniques. engineering an estimated for prices and costs of 3%, and a discount rate of 10% (2007: 3% Impairment reviews on development/producingIAS 36 ‘Impairment areas. development of assets single Assets’. always, not but arenormally, Cairn’s carried cash out generating on each cash-generating units are those assets unit identified which generate in accordance largely with independent cash flows and are Notes to the Accounts the to Notes continued Impairment Exploration/appraisalassetsreviewed‘Explorationregularly indicatorsare impairmentfor6 ofIFRS guidancefollowingtheinfor and Evaluation of Mineral Resources’development/producingallocatedassetisto assetsoperatingsame withinthe segmentimpairment. testedandfor impairment Any and tested for impairmentarising where is recognised such indicators in thesegment, Income exist. Statement In the such exploration/appraisal circumstances for the year. Where the there exploration costs are no are development/producing charged immediately to assets the Income within Statement. an operating Cairndepletesexpenditure property,equipmentbedevelopment/producing on & production– plant may of unit basedbasis,a area assetson – development single a within fields circumstances, certain In basis. field-by-field a on reserves probable and proved on purposes. depletion for combined Depletion Cairndepletesseparately,significantwhereapplicable, any components withindevelopment/producing assets,fields, assuch development/producingprocessinga costof facilitiestotalpipelines,thesignificant and relationwhichareto asset.in Discounted future net cash flows for IAS 36 purposes are calculated using an estimated short-term oil price of $50/bbl and a j) Investments j) The Company’s investmentsdiscountedthebased cashonfuture isnet use in Value use. in valueand inless costssellvalue itsfair investments to of higherthe subsidiaries is are carriedflows at cost of less the oil provisions and gas assets resulting held by from the impairment. subsidiary. The recoverable value of Goodwillbusinessarisingonabove.amortised combinations not testedimpairment. is1(d) annually foris butnote See long-term oil price of $65/bbl (2007: short- and long-term of $60/bbl) or the appropriate gas price as dictated by the relevant gas sales contract, escalationproductiondeterminedasset-by-assetprofilesarean on appropriateusingbasis, for petroleumengineering pricestechniques. and costs of 3%, and a discount rate of 10% (2007: 3% and 10% respectively). Forecast Vehicles and equipment Vehicles i) Intangible assets – other Intangiblecostlessaccumulatedmeasuredatareassetsuseful finite amortisationlives, have impairment,andamortised and over expectedtheir follows:usefuleconomicas lives * Notes to the Accounts continued
1. Accounting Policies continued k) Inventory Inventories of oil and condensate held at the balance sheet date are valued at net realisable value based on the estimated selling price in accordance with established industry practice.
l) Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial assets are categorised as financial assets held at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group holds financial assets that are classified as either available-for-sale financial assets or loans and receivables, with the exception of derivative financial instruments, which are held at fair value through profit or loss.
Financial liabilities generally substantiate claims for repayment in cash or another financial asset. Financial liabilities are categorised as either fair value through profit or loss or held at amortised cost. All of the Group’s financial liabilities are held at amortised cost, with the exception of derivative financial instruments, which are held at fair value through profit or loss.
Financial instruments are generally recognised as soon as the Group becomes party to the contractual regulations of the financial instrument.
Derivative financial instruments The Group uses derivative financial instruments such as foreign currency options to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are designated upon initial recognition as at fair value through profit or loss. The derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into GOVERNANCE AND ACCOUNTS and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value on derivatives during the year are taken directly to the Income Statement. The Group did not apply hedge accounting for derivative financial instruments held during the current and prior year.
Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables. The Group’s available-for-sale financial assets represent listed equity shares that are held at fair value (the quoted market price). Movements in the fair value during the year are recognised directly in equity and are disclosed in the Statement of Recognised Income and Expense. The cumulative gain or loss that arises on subsequent disposal of available-for-sale financial assets will be recycled through the Income Statement.
Loans and other receivables Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted on an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method less any impairment. Trade and other receivables are recognised when invoiced. Interest income is recognised by applying the effective interest rate, except for short-term receivables where the recognition of interest would be immaterial.
The carrying amounts of loans and other receivables are tested at each reporting date to determine whether there is objective material evidence of impairment, for example overdue trade debt. Any impairment losses are recognised through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the Income Statement or Balance Sheet in accordance with where the original receivable was recognised.
Bank deposits Bank deposits with an original maturity of over three months are held as a separate category of current asset and presented on the face of the Balance Sheet.
Cash and cash equivalents Cash and cash equivalents comprise cash at bank and short-term deposits with an original maturity of three months or less.
For the purposes of the consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
Trade payables and other non derivative financial liabilities Trade payables and other creditors are non-interest bearing and are measured at cost.
Interest-bearing bank loans and borrowings All interest-bearing bank loans and borrowings represent amounts drawn under the Group’s revolving credit facilities, classified according to the length of time remaining under the respective facility. Loans are initially measured at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans are subsequently measured at amortised cost using the effective interest method. Interest payable is accrued in the Income Statement using the effective interest rate method.
84 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 85
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN continued continued The liability the in charge’ is includeddecommissioning and ‘Depletion the within in required included provisions.is reserves, are probable also and reflectedproved Revisions on based basis toproduction in the adjustments estimated costs to the decommissioning of decommissioningIncome Statement, asset. that and alter The the amortisation unwinding the level of of the the of provisions the discount asset, on calculated the provision on a is unit included of within ‘Finance costs’. o) Decommissioning o) At the end of the producing lifediscounteddismantlingfulldecommissioningthe costofand liabilityasset obligationand anthewhen of arises. decommissioningas The a field, costs are incurredincludedassetiswithin property,equipmentdevelopment/producing & – plant inrelatedinstallation.theassets cost removingof thewith and decommissioning production facilities. Cairn recognises Deferredtaxassetsoffsetonlyliabilities and ariseentityaresamewithin wheretheythetax jurisdictionand intendsgrouptheand settleassetandrealisetheliability the to simultaneously. orbasis, net settlea eitherto on Deferred tax assets and liabilitiesrealised or are the measured liability at the is settled, tax rates based that are on expected tax rates and to apply laws enacted in the periods or substantively in which the asset enacted is at the Balance Sheet date. The carrying amount of deferreddeferredlongerutilised.probablethepartsufficientbe incomethattax orofasset to all allowtaxable availableto profitsbe will income tax assets are reviewed at each Balance Sheet date and reduced to the extent that it is no of deductible temporary differences associated with investments in subsidiaries, associates and interests in Joint Ventures, deferred Ventures, Joint in interests and associates subsidiaries, in investments with associated temporarydifferencesdeductible of future foreseeable the in reverse will temporarydifferences the that probable is it that extent the to recognised only are assets tax taxableandavailableagainst temporaryprofitsbewhichthe will differences utilised.becan the deductible temporarybusiness timing difference combination arises and, at from the the time initial of the transaction, recognition of affects an asset or neither liability the in accounting a transaction profit that nor is taxable not a profit or loss. In respect Deferredincometaxassetsdeductiblerecognised areall for temporary differences, carry forwardunusedtax assetsof unused and probabletaxableisthat availableagainst deductibleextentitprofits bewhichthethethattaxlosses, will to temporary differences, carry forward of unused tax assets and unused tax losses can be utilised, except where the deferred income tax asset relating to Deferred income tax liabilities are recognised for all taxable temporary differences except in respect of taxable temporary differences differences temporary taxable of respect in except differences temporary taxable all for recognised are liabilities tax income Deferred associatedinvestmentswith subsidiaries,temporarytheinreversal theof associates of timing interestswhere theandVentures Joint in differenceprobabletemporarytheisthat controlled itbe canandforeseeable differencethe deferred reverse infuture. notA will income tax liability is not recognisednot a business if a combination temporary difference and, at the time arises of the on transaction, initial recognition affects of an neither asset or the liability accounting in a transaction profit nor taxable that is profit or loss. Deferred tax is the tax expectedin the financial to be payable statements or recoverable and the on corresponding differences between tax bases the used carrying in the computation amounts of assets of taxable and liabilities profit. The current tax is based on taxablebecause profit it excludes for the items year. Taxable ofnever income profit taxable or expense differs or deductible. that fromdate. Sheet are Balance the net taxable by enacted profit The Group’s or as deductible reported liability in in for the other current Income years Statement tax and is it calculated further excludes using tax items rates that that are have been enacted or substantively n) Taxation n) The tax expense represents the sum of current tax and deferred tax. Borrowingcosts incurredBorrowingborrowingarefor whichtheyperiodexceptcosts costsrecognisedthe IncomeStatementin the are inincurred in on borrowings directly attributable to development projectsm) Equitycapital share between allocated costs, thatissue direct of net are received, proceeds capitalised the at recorded are Cairn by issuedinstruments Equity within the development/producingpremium. share and asset. The Group has reviewed the terms and conditions of the lease arrangementsleaseconditionsthetermsreviewedandthe hasof Group The ownership determined risksrewardsandandof all that lie with the Group and has therefore accounted for the contracts as finance leases. at the to present as so obligation lease the of reduction value and charges finance apportionedbetween of are payments the Lease obligation. minimum lease finance lease payments. The correspondingachieve a constant liability rate of to interest thedirectlyunlessare theyattributable lessorqualifyingto generalcapitalisedassets,are whichcase theyaccordance inGroup’s inthe with on the is included remaining in balance the Balancepolicy of the Sheet on liability. borrowing as a Finance costs charges (see below). are charged to the Income Statement, 1. Accounting Policies Policies Accounting 1. Financialinstrumentsl) leases Finance Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, Notes to the Accounts the to Notes continued Notes to the Accounts continued
1. Accounting Policies continued p) Foreign currencies In the accounts of individual Group companies, Cairn translates foreign currency transactions into the functional currency at the rate of exchange prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into the functional currency at the rate of exchange prevailing at the Balance Sheet date. Exchange differences arising are taken to the Income Statement except for those incurred on borrowings specifically allocable to development projects, which are capitalised as part of the cost of the asset.
The Group maintains the accounts of the parent and subsidiary undertakings in their functional currency. Where applicable, the Group translates parent and subsidiary accounts into the presentational currency, $, using the closing rate method for assets and liabilities that are translated into $ at the rate of exchange prevailing at the Balance Sheet date and rates at the date of transactions for Income Statement accounts. Cairn takes exchange differences arising on the translation of net assets of Group companies whose functional currency is non $ directly to reserves.
Rates of exchange to $1 were as follows: 31 December Average 31 December Average 2008 2008 2007 2007
Sterling 0.684 0.540 0.504 0.500 Indian Rupee 48.620 43.146 39.400 41.339
q) Employee benefits Pension schemes Cairn operates defined contribution pension schemes in the UK and India. The assets of the schemes are held separately from those of GOVERNANCE AND ACCOUNTS Cairn and its subsidiaries. Cairn also operates insured benefit schemes for certain Indian and Bangladeshi employees as required under local legislation. In accordance with IAS 19 ‘Employee Benefits’ these are treated as defined contribution schemes. The pension cost charged represents contributions payable in the year in accordance with the rules of the schemes.
Share schemes The cost of awards to employees under Cairn’s LTIP and share option plans, granted after 7 November 2002, are recognised over the three-year period to which the performance relates. The amount recognised is based on the fair value of the shares as measured at the date of the award. The shares are valued using either the Black Scholes or binomial model, further details of which are given in note 7.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘the vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. The Income Statement charge or credit for a period represents the movement in cumulative expense as recognised at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.
Shares acquired to meet awards under these shares schemes are held by the ESOP Trust. The accounts of the ESOP Trust are aggregated into these financial statements.
The costs of awards to employees, in the form of cash but based on share performance (phantom options) are recognised over the period to which the performance relates. The amount recognised is based on the fair value of the liability arising from the transaction.
Termination benefits Cairn recognises a liability for termination benefits at the point where the Group is committed to making the payments in return for employee redundancy.
86 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 87
3 7
$m 23 26 0.8 6.0 2007 65.1 1 (g) 2008 286.9 287.7 358.8 Refer to: Refer
––––––––––– ––––––––––– –––––––––––
Reserves table $m 0.9 2008 66.2 12.0 298.4 299.3 377.5 1 (d); 1 (g); 1 (j); 1 (l) ––––––––––– ––––––––––– –––––––––––
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
continued
Depletion Revenue from sale of oil, gas and condensate Revenue from
key areas of estimation are noted below, with furtherwithestimationassumptionsbelow, notedtheof relevantdetails areasnote. are theof usedlisted at key Item Impairment testing 1. Accounting Policies Policies Accounting 1. r) Operating lease commitmentsCairn charges rentals payable under operating leases to the Income Statement on a straight line basis over the lease term. Notes to the Accounts the to Notes continued assumptions and estimations Key t) resulting The statements. financial the within figures certain at arriving in assumptions and estimates used has Group The be believedThoseto areastime.actual known accountingequatethe withinbe results, estimatesnotonly whichwill may s) Exceptional items Exceptional items are thoseaccounts.the to notesthe explanationin fullgiven isexceptionala notand considered to be part of the normal operation of the business. Such items are identified as The Group has reviewed the terms and conditions of the lease arrangements and determined that all risks and rewards of of rewards and risks all that determined and arrangements lease the of conditions and terms the reviewed has Group The ownership lie with the lessor and has therefore accounted for thecontracts as operating leases. Fair value on business combinations Tariff income Tariff Share based payments based Share operating activities Revenue from Deferred tax Deferred Interest receivable (note 9) receivable Interest Decommissioning estimates Other operating income – Joint Venture operator fee income Other operating income – Joint Venture Oil and gas reserves income Total 2. Revenue and Other Income Capricorn Oil and Gas Tunisia Gmbhinterest (formerly in the Nabeul REAP Gmbh), permit a subsidiarysale offshore of Plectrum Tunisia of Plectrum Petroleum was transferred Petroleum Limited. Limited, to Capricorn which holds Petroleum a 50% Limited, equity a member of the Group, prior to the Disposals and Acquisitions 3. transactions2008 Limited DisposalPetroleumPlectrum of in interest 50% a was asset principal (whose Limited Petroleum Plectrum of capital share issued entire the 2008, October 9 On Block Z-34, offshore Peru) wasa transferred payment of $1.5m to to Gold Gold in Oil connection Caribbeanbook value. with Limited the transfer. (a subsidiary However of Gold no gain Oil or PLC) loss (‘Gold’). has been The recognised, Group made as Plectrum was sold at Notes to the Accounts continued
3. Acquisitions and Disposals continued 2007 transactions a) Acquisition of Plectrum Petroleum Limited (formerly Plectrum Petroleum Plc) On 7 September 2007, the Group announced a recommended cash offer for Plectrum. Plectrum and its subsidiaries held a 50% equity interest in the Nabeul permit offshore Tunisia and in addition held interests in Australia, Peru and the UK at the time of acquisition. The offer was declared unconditional in all respects and Cairn gained control of Plectrum on 10 October 2007.
The fair value of the identifiable assets and liabilities of Plectrum as at the date of acquisition and the corresponding carrying amounts immediately prior to acquisition were: Fair value recognised Previous on acquisition carrying value $m $m
Intangible exploration/appraisal assets 72.6 4.9 Intangible assets – other – 12.0 Trade and other receivables 4.0 1.3 Cash and cash equivalents 6.1 6.1 Trade and other payables (3.2) (3.2) Deferred tax liabilities (34.2) – Provisions (1.7) – ––––––––––– –––––––––––
Net assets 43.6 21.1 ––––––––––– ––––––––––– GOVERNANCE AND ACCOUNTS Goodwill arising on acquisition (note 16) 4.4 –––––––––––
Total consideration 48.0 –––––––––––
The provisions were reassessed during the year and reduced accordingly. Consequently, goodwill arising on acquisition has been restated to $4.4m from $13.5m reported in the 31 December 2007 financial statements.
The total cost of the combination was $48.0m which is made up of: $m
Cash purchase of Plectrum shares at 13p per share 46.5 Costs associated with the acquisition 1.5 –––––––––––
48.0 –––––––––––
Cash outflow on acquisition: $m
Net cash acquired 6.1 Cash paid on acquisition (48.0) –––––––––––
Net cash outflow (41.9) –––––––––––
The goodwill of $4.4m arises on acquisition as consideration paid exceeds the fair value of assets acquired, including the deferred tax liability recognised. Refer to note 16 for further details.
From the date of acquisition to 31 December 2007, Plectrum incurred a loss of $1.7m. This loss is included in the results of the Group. As Plectrum does not hold producing assets, the acquisition had no impact on Group revenue. If the combination had taken place at the beginning of the year, the profit for the Group in 2007 would have been $1,523.8m.
88 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 89 – – 8
. $m $m $m 4.0 1.2 1.2 0 1.6 1.2 3.4 (1.8) 29.6 3 (30.8) (28.0) 2008 Previous Previous ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– carrying value carrying
$m 1.6 1.2 (1.8) (2.1) 66.9 65.8 30.8 (35.0) Fair value value Fair acquisition ––––––––––– ––––––––––– ––––––––––– ––––––––––– recognised on recognised
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
continued
Net cash acquired at 23p per share of medOil shares Cash purchase
Intangible exploration/appraisal assets
3. Acquisitions and Disposals and Acquisitions 3. The fair value of the identifiablewere: acquisition to prior immediately assets and liabilities of medOil as at the date of acquisitionand the corresponding carrying amounts Notes to the Accounts the to Notes continued medOilAcquisitionPlc of b) On 7 September 2007, the Group announcedLouza permit a recommended offshore cash Tunisia Octoberrespectsunconditional offer all 2007. 10 in medOilCairnon andgained and controlof in for addition medOil. has medOil interests holds a in 100% Albania equity and interest applications in the pending in Spain. The offer was declared and other receivables Trade Costs associated with the acquisition warrants exercised for share Cash received Cash outflow on acquisition:
Cash and cash equivalents Cash paid on acquisition Trade and other payables Trade Net cash outflow c) Disposal of Cairn Energy BangladeshEnergy DisposalCairnLimited of c) On 25 October 2007 Santos Internationalfor a total cash Holdings consideration Pty Limitedexplorationdependent2007/2008 thebeenrecognised. drillingresultprogramme,uponfutureof not development whichhasa of as $55.8m. acquired There 100% isinterestin an 45% of a includingandSangu, Cairn additionalBangladesh holdingin Block16, transactionthis resultof 37.5% a disposed GroupAsa the Energy of contingent Bangladesh consideration Limited fromeach the of of the $20.0m, Group Bangladesh which is Exploration payable in tranches Blocks 5 and 10. Provisions From the date of acquisitionproducing tocombinationholdatplacethe takenmedOil Asassets,notdoes hadIf impact acquisitionrevenue. Group the 31 no on had December 2007, medOil incurredthe beginning a loss of $0.3m. of the This year, loss the profit is included for the in Group the results in 2007 would of the have Group. been $1,526.3m. Net assets Negative goodwill arising on acquisition consideration Total
The total cost of the combination was $30.8m which is made up of: Deferredtaxliabilitiesrecognised acquisitionsubsequently on have beenreassessed Consequently,full.releasednegative andin Decemberfinancialreported 2007statements. 31 the in goodwillacquisitionarisingbeenrestatedon$17.4m from In $35.0m has to paid. consideration the exceeds acquired assets net the of value fair the as acquisition on arises goodwill negative The negativerecognisedgoodwilltheaccordance is IFRSIncomewith Statement.immediatelythe in Notes to the Accounts continued
3. Acquisitions and Disposals continued c) Disposal of Cairn Energy Bangladesh Limited continued The assets and liabilities disposed of in the transaction are summarised in the table below: $m
Intangible exploration/appraisal assets 21.4 Property, plant and equipment – development/producing assets 37.4
Trade and other receivables 17.0 Cash and cash equivalents 6.7
Trade and other payables (29.4) Deferred tax liability (0.8)
Of the total cash consideration of $55.8m, $23.0m (less related costs of the transaction) was allocated to Group intangible exploration/appraisal costs in line with the Group’s accounting policies. See Note 13.
4. Segmental Analysis Operating segments For management purposes, the Group is organised into two business units; the Capricorn Group, being Capricorn Oil Limited and its subsidiary undertakings, and the Cairn India Group, each reporting internally to its own chief executive. There are three reportable operating segments as follows:
Cairn India Limited Group’s operations are primarily within India. GOVERNANCE AND ACCOUNTS
Capricorn Group’s operations focus on new exploration activities in Greenland and the Mediterranean. The Capricorn Group also includes the Group’s interests in Bangladesh and Nepal and a share in certain North Indian assets operated by Cairn India Limited.
Cairn Energy PLC exists to accumulate the activities and results of Cairn UK Holdings Limited, an intermediate holding company and direct parent of Cairn India Limited, and Cairn Energy PLC company results. Unallocated expenditure and net assets/(liabilities) including amounts of a corporate nature, not specifically attributable to one of the sub-Groups, are also included within this segment.
No operating segments have been aggregated to form the above reportable segments.
Management monitors the results of its business units separately for the purposes of making decisions about resource allocation and performance assessment.
The segment results for the year ended 31 December 2008 are as follows: Cairn India Capricorn Cairn Energy Group Group Group PLC 2008 $m $m $m $m
Revenue from external customers 282.4 16.9 – 299.3 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Results: Depreciation (3.5) (0.6) – (4.1) Amortisation (3.2) (2.5) – (5.7) Unsuccessful exploration costs (27.8) (19.9) – (47.7) Depletion and decommissioning charge (44.8) (2.8) – (47.6) Impairment of intangible exploration/appraisal assets – (21.0) – (21.0) Reversal of impairment of intangible exploration/appraisal assets – 6.5 – 6.5 Reversal of impairment of property, plant & equipment – development/producing assets – 2.7 – 2.7 Exceptional gain on deemed disposal of subsidiaries – – 355.8 355.8 Interest income 56.2 9.1 0.9 66.2 Interest expense (9.3) – – (9.3) Tax (charge)/credit (74.1) (0.2) 0.1 (74.2) Minority Interest 22.7 (4.8) – 17.9
Segment Profit/(loss) 69.1 (47.5) 345.1 366.7 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Capital expenditure 613.2 79.0 – 692.2 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Operating assets 3,037.5 541.6 41.3 3,620.4 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Operating liabilities 1,234.5 112.8 (5.6) 1,341.7 ––––––––––– ––––––––––– ––––––––––– –––––––––––
90 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 91
$m $m 3.7 (2.0) (4.3) (7.3) 2007 2007 50.2 65.1 12.7 (40.7) (58.9) (34.4) Group Group Group Group 2008 237.5 287.7 287.7 582.4 601.8 (119.0) (restated) 1,579.2 1,555.8 2,371.6 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– – – – – – – $m $m 8.0 4.4 PLC (0.4) (0.1) (0.7) 2008 16.9 21.8 24.9 Group 282.4 299.3 226.1 (restated) 1,579.2 1,569.8 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– Energy Cairn
– $m 3.7 9.5 5.6 (0.1) (1.6) (0.1) (2.9) 50.2 46.8 (25.4) (56.4) (58.9) (62.5) Group 257.2 584.9 (restated) Capricorn ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
– – – $m (1.5) (2.6) (6.5) 33.8 15.6 48.5 (15.3) (62.6) (48.0) Group 237.5 320.8 328.9 (restated) 1,761.8 Cairn India Cairn ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
continued
apital expenditure in 2007 includes exploration assets acquired through business combinations.
India
Revenue from external customers Revenue from 4. Segmental4. Analysis follows:asDecember are 2007endedsegment 31 The yearresults the for Notes to the Accounts the to Notes continued Bangladesh
Results: Depreciation Revenue from one customer in the Cairn India Group segment amounted to $127.4m, arising from oil and gas contract sales. The revenue information above is based on the location of the sales. Amortisation Unsuccessful exploration costs Unsuccessful exploration Depletion and decommissioning charge Impairment of intangible exploration/appraisal assets Reversal of impairment of property, plant & equipment Reversal of impairment of property, – development/producing assets – development/producing Exceptional gain on deemed disposal of subsidiaries Exceptional gain on deemed disposal of income Interest expense Interest charge Tax Minority Interest Segment Profit/(loss)
Capital expenditure
Operating assets
Operating liabilities
Other assets include assets of Cairn’s head office in Edinburgh, as well as interestOtherreceivable,asassets deposits,well office Edinburgh,include ashead assetscashinCairn’s cashequivalents and of Geographicinformation customers: external from Revenues Segment liabilities comprisebalances. operating liabilities and exclude items such as taxation, corporate borrowings and inter-company liabilities tax deferred and liabilities tax income as well as Edinburgh, in office head Cairn’s of liabilities include liabilities Other operatinganallocated whichcannotsegment.beto Group, the of C Segment assets include intangibleproperty,equipmentother;intangible& – plant assetsother;trade receivables – operating and excludeinter-companycash. They exploration/appraisalbalances. assets; property, plant & equipment – development/producing assets; operatinganallocated whichcannotsegment.beto Group, the of Notes to the Accounts continued
4. Segmental Analysis continued Non-current assets Group Group 2008 2007 $m $m
India 1,503.6 969.6 Tunisia 156.7 145.6 Greenland 35.5 – Bangladesh 12.3 4.0 UK 2.7 2.2 Other 3.9 6.6 ––––––––––– –––––––––––
1,714.7 1,128.0 ––––––––––– –––––––––––
Non-current assets for this purpose consist of intangible exploration/appraisal assets; property, plant & equipment – development/ producing assets; property, plant & equipment – other; and, intangible assets – other. Available-for-sale financial assets have been excluded.
5. Operating Profit/(Loss) a) Operating profit/(loss) is stated after charging/(crediting): 2008 2007 $m $m GOVERNANCE AND ACCOUNTS
Unsuccessful exploration costs 47.7 40.7 Movement in inventory of oil and condensate 5.4 (3.4) Depletion & decommissioning charge of property, plant & equipment – development/producing assets 47.6 119.0 Impairment losses on financial assets (Other loans and receivables) 1.6 2.0 Depreciation of property, plant & equipment – other 4.1 2.0 Amortisation of intangible assets – other 5.7 4.3 Operating lease costs – land and buildings 2.9 3.0 – other 0.1 0.2 Impairment of intangible exploration/appraisal assets (Note 13) 21.0 58.9 Reversal of impairment of intangible exploration/appraisal assets (Note 13) (6.5) – Reversal of impairment of property, plant & equipment – development/producing assets (Note 14) (2.7) (3.7) Loss on sale of oil and gas assets (Note 3) – 0.1
Auditor’s remuneration $’000 $’000
Fees payable to the Group’s auditor for the audit of the Group’s annual accounts 625 467 Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 25 22 Fees payable to the Group’s auditor and its associates for other services: – for the audit of subsidiaries pursuant to legislation 501 646 – other services pursuant to legislation 235 111 – other services relating to taxation 8 68 – services relating to corporate finance transactions 275 – – all other services 258 483 Fees in respect of the Cairn Energy PLC pension scheme – audit 2 1
Other advisors’ fees in respect of taxation work 54 41 Other advisors’ fees in respect of other work 2,735 331
The Group has a policy in place for the award of non-audit work to the auditors which, in certain circumstances, requires audit committee approval.
Other advisers comprise accountancy firms other than the Group’s auditor.
92 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 93
–
$m $m
3.7 2007 2007 40.3 (58.9) 2008
(restated) 1,538.9 1,579.2 ––––––––––– –––––––––––
– $m $m 6.5 2.7 2008 2008 (21.0) 355.8 355.8 ––––––––––– –––––––––––
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
continued
Exceptional gain on deemed disposal of Cairn India Limited Impairment of intangible exploration/appraisal assets 5. Operating Profit/(Loss) Profit/(Loss) Operating 5. b) Impairment and reversal of impairment Notes to the Accounts the to Notes continued Exceptional gain on deemed disposal of Capricorn Oil Limited Reversal of impairment assets intangible exploration/appraisal
Reversal of impairment of property, plant & equipment – development/producing assets plant & equipment – development/producing Reversal of impairment of property,
6. Exceptional Gain on Deemed Disposal of Subsidiaries of Disposal Deemed on Gain Exceptional 6. c) Continuing operationsContinuing c) profitscurrentderivedprecedingthelossesAllwereandcontinuingfromand inyear operations. Refer to details on the reasonimpairmentcalculation.the in assumptionsused for impairment in the Operating and Exploration Review on page 18 and note 1(g) for details of the as unsuccessfulas exploration costs.these Ascostspreviously were impairmentsimpaired,fully the beenreleased on have block. the of relinquishment During the year, the Group relinquished Block 5 inBangladesh. As a result costs of $6.5m were charged to the Income Statement Where such indicators are identifiedexploration/appraisalassetsimpairmentCapricorn thefollowedan testof cashGroupgenerating producing Theunit.this asset in the Group tests thoserelation cash-generatingin $58.9m) assets (2007: $21.0m forwrite-downof a result impairment. a As unitidentified. are impairment isof indicators currently where assets exploration In the current carried year at the net write-down presentto intangible value of and intangible no exploration/appraisal additional headroom exists assets to support has been charged the carrying to the Income value Statement. of At the year end the Group also reviews intangible/exploration assets for indicators of impairment defined under IFRS 6. At the year end the Group reviewsproducing the carrying assets value for indicators of cashthe generating value of impairment of certain units within or units reversal previously property,of prior of prior year plant impaired year impairment & impairment. equipment within charges the – development/ In Capricorn the of $2.7m current (2007: Group $3.7m) year has was this been in review excess recognised determined of the carrying through that the value. Income As a Statement. result a reversal in a private placement. The Company retains a direct 90% interest in Capricorn Oil Limited. In 2007, the Group also made an exceptional gain of $40.3m on the deemed disposal of 10% of Capricorn Oil Limited (formerly Limited Oil Capricorn of 10% of disposal deemed the on $40.3m of gain exceptional an made also Group the 2007, In Capricorn Energy Limited) to Dyas BV on 7 September 2007. This resultedfrom the issue of share capital by Capricorn Oil Limited Share options exercised under the Cairn India Senior Management Plan account for the additional reduction of the Company’s Company’s the of reduction additional the for account Plan Management Senior India Cairn the under exercised options Share indirect percentage holding in Cairn India Limited. At 31 December 2008, the CompanyIn retained 2007 the Group an indirect made an holding exceptionalInitial of 64.68% gain Public of $1,538.9m Offer (restated) (‘IPO’)Cairn on on the the India Bombay deemed Limited Stock disposal Exchange listed of withA 31% further and of Cairn a National partial India 13.1m shares Stock IPO Limited of were Exchange 538.5m issued through sharesIndia of during India, the of Limited 10 Rupees the which subsequent reduced each, completed including as a stabilisation result on 9 January 209.7m from shares 100% 2007. period. by to way 69.0%. of pre-IPO The Company’s placement. indirect percentage holding in Cairn The Group made an exceptional4.12% gain of this of $355.8m disposal on the was deemed through disposalwhich the private completed of 4.23% placement on of Cairn 16 April on India 2008. theLimited, Bombay Limited Cairn Stock further India during Exchange Limited the to which period. and entered the National investors an agreement Stock agreed Exchange with to purchase Petronas of India, and a total Orient of 113m shares Global of Tamarind Cairn India Fund Pte Limited at Rs. 224.30Limited. perIndia Cairn in share. Notes to the Accounts continued
7. Staff Costs 2008 2007 $m $m
Wages and salaries 81.5 77.9 Redundancy costs 0.9 1.2 Social security costs and other taxes 3.7 4.9 Pension costs 3.8 2.5 Share based payments charge 23.0 32.2 ––––––––––– –––––––––––
112.9 118.7 ––––––––––– –––––––––––
Staff costs are shown gross before amounts recharged to Joint Ventures and include the costs of share-based payments. The share-based payments charge includes amounts in respect of both equity and cash-settled phantom options and associated National Insurance Contributions. The share-based payments charge also includes the cost of Fringe Benefits Tax, payable to the Indian Government on the exercise of share options held by Cairn India employees. The effective date of Cairn India’s liability to Fringe Benefits Tax was 1 April 2007.
The average number of full-time equivalent employees, including executive directors and individuals employed by the Group working on Joint Venture operations, was:
Number of employees 2008 2007
GOVERNANCE AND ACCOUNTS UK 80 86 India 581 464 Bangladesh 72 97 Tunisia 2 – ––––––––––– –––––––––––
Group 735 647 ––––––––––– –––––––––––
The Group operates a number of share-based schemes for the benefit of its employees:
Cairn Energy PLC Group and Company No difference in the schemes below apply for Group and Company other than charges for these schemes that are made to Cairn India companies and the Cairn Bangladesh companies where their staff are members of these schemes.
Share options Pre-2006 Plans Under the 1996 Second Share Option Scheme (the ‘1996 Scheme’), at 1 January 2008, certain executive directors and employees had been granted options to subscribe for ordinary shares that are exercisable between 2005 and 2012, at prices between £1.950 and £2.675. At 31 December 2008, there were 10,000 options outstanding (2007: 19,000 options outstanding) with a weighted average remaining contractual life of 3.18 years (2007: 3.85 years) (options exercised in 2008: 9,000; 2007: 41,500). All awards under the 1996 scheme were granted prior to 7 November 2002.
Under the 2002 Unapproved Share Option Plan (the ‘2002 Plan’), at 1 January 2008, certain executive directors and employees had been granted options to subscribe for ordinary shares that are exercisable between 2006 and 2016, at prices between £3.055 and £21.530. At 31 December 2008, there were 614,619 options outstanding (2007: 961,003 options outstanding) with a weighted average remaining contractual life of 7.16 years (2007: 7.94 years) (options exercised in 2008: 281,161; 2007: 443,431).
94 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 95
3.06 3.10 8.74 8.74 7.64 2008 12.71 10.36 21.53 17.85 10.46 11.52 11.52 21.53 21.53 16.90 12.71 WAEP (£) WAEP (£) WAEP WAEP (£) WAEP (£) WAEP ––––––––––– ––––––––––– ––––––––––– ––––––––––– 2007 2007 2003 Plan 2003 Plan 2003 8,699 9,899 (1,393) Number Number 77,809 15,000 10,250 50,439 38,578 20,282 24,792 77,809 77,809 18,949 Number Number (13,761) (51,624) 196,399 313,684 581,880 961,003 (104,829) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– 3.06 8.74 8.74 9.24 17.30 15.11 20.31 18.54 12.87 11.52 11.52 21.53 21.53 19.01 17.30 WAEP (£) WAEP (£) WAEP WAEP (£) WAEP (£) WAEP ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 2008 2008 2002 Plan 2002 Plan 2002 – 5,675 4,224 Number Number Number Number 13,000 19,253 14,893 24,792 65,439 (65,223) 961,003 106,020 476,346 614,619 961,003 614,619 138,273 (144,150) (281,161) (443,431) 1,548,584 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – 2.48 2.55 2.27 2.59 2.68 2.48 WAEP (£) WAEP (£) WAEP ––––––––––– ––––––––––– ––––––––––– –––––––––––
1996 Scheme 1996 Scheme 1996 – – Number Number (9,000) 19,000 60,500 10,000 19,000 19,000 10,000 (41,500) ––––––––––– ––––––––––– ––––––––––– ––––––––––– continued
Outstanding at the beginning of the year
Outstanding at the beginning of the year
2006–2013
Exercisable between Exercisable between Exercisable 2006–2013 7. StaffCosts 7. followingweightedtheaverage downintobroken becan 2002Plan under theoptionsyear outstandingThe the of endthe at exercise price (WAEP) variants: Notes to the Accounts the to Notes continued Lapsed during the year Lapsed during the year 2007–2014 2007–2014 Exercised during the year Exercised Exercised during the year Exercised 2008–2015 2008–2015
2009–2016 2009–2016 Outstanding at the end of the year Outstanding at the end of the year
Exercisable at the end of the year Exercisable Exercisable at the end of the year Exercisable
Cairn Energy PLC share optionsyear were was exercised £25.33 (2007: on a £18.88). regular basis throughout the year. The weightedaverage share price during the There were no options granted in the year. no options were There There were no options granted in the year. no options were There December 2007: 31 various theoptionshareoptionsschemesatshare for as of following tableTheWAEP numberdetailsandthe The options outstanding at the end of the year under the 2003 Plan can be broken down into the following WAEP variants: followingWAEP the downintobroken becan 2003Planunder the optionsyear outstanding The the of endthe at optionsharetheschemesvarious atthe Cairnoptionsshare forEnergyPLC of following tableTheWAEP numberdetailsandthe date: Sheet Balance Under the 2003 Approved Sharebeen Option granted Plan (the options ‘2003 to subscribe Plan’),£21.530. at 1 January At for 31 December ordinary 2008,104,829). 2007: 2008, shares certain2008:(optionsexercised51,624; years)in 7.26 there (2007: years whichremainingcontractual 6.77 of executivelife were are 24,792 exercisable directors options outstanding between and employees 2006 (2007: and had 2016, 77,809 at prices options between outstanding) £3.095 and with a weighted average The above share optiontheydate the to options schemesup grantof of perioddatecompoundthethefrom overa basis on increased5% pricesharehas by Cairn’s are subject to performancebecome conditions exercisable. on exercise. In addition, Thethan option the the percentage percentage holder may only movement increase exercise in in the Cairn’s options FTSE share Oil if and price Gas Index. over the period must be at least equal to or greater Notes to the Accounts continued
7. Staff Costs continued The Cairn Energy PLC share options have been valued using a binomial model. The main inputs to the model include the number of options, share price, leaver rate, trigger points, discount rate and volatility. • Leaver rate assumptions are based on past history of employees leaving the Company prior to options vesting and are revised to equal the number of options that ultimately vest. • Trigger points are the profit points at which the relevant percentage of employees is assumed to exercise their options. • 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 option being valued. • Volatility was determined as the annualised standard deviation of the continuously compounded rates of return on the shares of a peer group of similar companies selected from the FTSE, as disclosed in the Directors’ Remuneration Report on pages 60 to 72, over a ten-year period to the date of award. 2002 Plan 2003 Plan
Vesting % 85.74%-89.48% 85.74%-88.34% Trigger points 25% profit-15% 25% profit-15% 50% profit-25% 50% profit-25% 75% profit-25% 75% profit-25% 100% profit-15% 100% profit-15% 125% profit-10% 125% profit-10% No trigger-10% No trigger-10% Risk-free rate 4.0%-4.8% 4.0%-4.8% Volatility 40.24% 40.24%
2006 Plan GOVERNANCE AND ACCOUNTS Under the 2006 Share Option Plan (the ‘2006 Plan’), certain executive directors and employees had been granted ‘phantom options’ (which are equity settled) over ‘units’ in the Group. On the exercise of an option, participants will generally become entitled to such number of Cairn shares as have a market value equal to the notional gain that they realise, being the difference between the ‘notional exercise price’ attributable to their option and the price of the units in respect of which their option has been exercised. However, the extent to which options become exercisable is dependent on continued employment with the Group and the extent to which predetermined performance conditions are met over a three-year period.
The following table details the number and weighted average notional exercise price (WANEP) of share options issued under the 2006 Plan at the Balance Sheet date:
Number WANEP (£)
Outstanding at the beginning of the year 3,834,268 1.07 Granted during the year 1,002,841 1.40 Lapsed during the year (374,642) 1.07 Exercised during the year – – ––––––––––– –––––––––––
Outstanding at the end of the year 4,462,467 1.14 ––––––––––– –––––––––––
Exercisable at the end of the year – Weighted average fair value of options granted in year £0.27 Weighted average remaining contractual life of outstanding options 8.49 years
The following table details the number and weighted WANEP of share options issued under the 2006 Plan as at 31 December 2007:
Number WANEP (£)
Outstanding at the beginning of the year – – Granted during the year 4,052,960 1.07 Lapsed during the year (218,692) 1.07 Exercised during the year – – ––––––––––– –––––––––––
Outstanding at the end of the year 3,834,268 1.07 ––––––––––– –––––––––––
Exercisable at the end of the year – Weighted average fair value of options granted in year £0.18 Weighted average remaining contractual life of outstanding options 9.24 years
The fair value of the awards has been calculated using a binomial model. The main inputs to the model are as per the 2002 and 2003 Plans detailed above. For details on the vesting conditions attached to the 2006 Plan refer to the Directors’ Remuneration Report on pages 60 to 72.
96 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 97
8.74 2008 13.45 15.84 11.76 11.88 23.99 10.21 12.58 23.99 15.84 5% pa WAGP (£) WAGP (£) WAGP (£) WAGP 2006 Plan 2006 63%-74% ––––––––––– ––––––––––– ––––––––––– ––––––––––– 4.7%-5.1% 2007
No trigger-10% 75% profit-25% 50% profit-25% 25% profit-15% 28.01%-33.43% 125% profit-10% 100% profit-15% Number Number Number 916,600 610,600 306,000 276,100 916,600 916,600 (123,600) (228,775) (444,000) (411,725) 1,484,200 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– 23.99 WAGP (£) WAGP CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 2008
– Number 276,100 276,100 ––––––––––– –––––––––––
continued The awards existing under thedate: Sheet Balance LTIP are detailed in the table below together with the weighted average grant price (WAGP) at the 2002 LTIP At 31 December 2008, there were 276,100 options outstanding with a weighted average remaining contractual life of 0.33 years. The fair value of both the 2002 and 2006 LTIP scheme awards has been calculated using a binomial model. The main inputs to the to inputs main The LTIP model. binomial a using calculated been has awards scheme LTIP 2006 and 2002 the both of value fair The model are as per the share optionsRemuneration66. to Reportpages62 on schemes above. For details on the vesting conditions attached to the LTIP refer to the Directors’ Lapse due to withdrawals Volatility Risk-free rate Risk-free
Trigger points Trigger Outstanding at the beginning of the year
2008
Outstanding at the beginning of the year
Vesting 7. StaffCosts 7. % Vesting Notes to the Accounts the to Notes continued Vested during the year Vested Vested during the year Vested 2009 Lapsed during the year Lapsed during the year
Outstanding at the end of the year
Outstanding at the end of the year
The awards outstanding at the end of the year can be broken down into the following WAGP variants: followingWAGP the downintobroken becan awardsyear outstanding Thethe of endthe at The awards existing under the LTIP are detailed in the table below together with the WAGP at 31 December 2007: At 31 December 2007, there were 916,600 options outstanding with a weighted average remaining contractual life of 0.67 years. There were no options granted in the year. There were no options granted in the year. Notes to the Accounts continued
7. Staff Costs continued The fair value of the awards under the 2002 LTIP is based on an independent valuation using the following assumptions:
Tier 1 Tier 2
Vesting % 25.03% 19.03% Volatility 41.37% 41.37% Risk-free rate 4.6% 4.6%
The discount rate used has been set as the yield on a zero coupon Government bond with a term equal to the expected term on the option being valued (allowing for expected early redemption of the option).
2006 LTIP Under the 2006 LTIP, certain executive directors had been granted ‘phantom options’ (which are equity-settled) over ‘units’ in the Group. Following the vesting of an award, participants will generally become entitled to such number of Cairn shares as have a market value equal to the aggregate price of the vested units. Only 50% of these shares will be transferred to the participant immediately. The remaining 50% will be held for a further year.
The awards existing at the Balance Sheet date are detailed in the table below: Capricorn Units Cairn India Units Number WANEP (£) Number WANEP (£)
Outstanding at the beginning of the year 6,716,823 1.07 2,218,391 1.89 Granted during the year 4,151,756 1.41 940,084 3.22
GOVERNANCE AND ACCOUNTS Lapsed during the year – – – – Exercised during the year – – – – ––––––––––– ––––––––––– ––––––––––– –––––––––––
Outstanding at the end of the year 10,868,579 1.20 3,158,475 2.29 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Exercisable at the end of the year – – Weighted average fair value of options granted in year £0.52 £1.03 Weighted average remaining contractual life of outstanding options 1.67 years 1.60 years
The awards existing at 31 December 2007 are detailed in the table below: Capricorn Units Cairn India Units Number WANEP (£) Number WANEP (£)
Outstanding at the beginning of the year – – – – Granted during the year 7,090,655 1.07 2,218,391 1.89 Lapsed during the year (373,832) 1.07 – – Exercised during the year – – – – ––––––––––– ––––––––––– ––––––––––– –––––––––––
Outstanding at the end of the year 6,716,823 1.07 2,218,391 1.89 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Exercisable at the end of the year – – Weighted average fair value of options granted in year £0.39 £0.63 Weighted average remaining contractual life of outstanding options 2.25 years 2.30 years
The fair value of the awards under the 2006 LTIP is based on an independent valuation using the following assumptions:
Capricorn Units Cairn India Units
Vesting % 36.83%-37.14% 31.94%-32.97% Volatility % 63%-74% 41%-42% Risk-free rate 4.7%-4.9% pa 4.7%-4.9% pa Lapse due to withdrawals nil nil
Cairn India Limited Cairn India Senior Management Plan The Cairn India Senior Management Plan (CISMP) was adopted by the company in November 2006. This is a discretionary arrangement that allowed the company to grant pre IPO options over its shares to a limited number of its key senior management team. Following the completion of the company’s floatation, no further options will be granted pursuant to this arrangement.
98 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 99 – – –
2008 33.70 33.70 33.70 164.49 226.21 167.08 185.31 WAEP (Rs.) WAEP (Rs.) WAEP 25%-50% ––––––––––– ––––––––––– ––––––––––– ––––––––––– 2007 6.82%-7.46%
– – – – – – 39.67%-45.99% Number Number (792,240) Rs.129.94 8,545,710 8,298,713 3,809,896 7,506,473 3,030,318 ––––––––––– ––––––––––– ––––––––––– ––––––––––– 8.85 years 11,139,570 (1,216,036)
– – 33.70 33.70 33.70 WAEP (Rs.) WAEP ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN 2008
– – – – Number Rs.218.13 7,506,473 2,238,078 ––––––––––– ––––––––––– (5,268,395)
continued Outstanding at the beginning of the year
Outstanding at the beginning of the year The following table details the number and WAEP of share options for the CISMP: theoptionsshare for of following tableTheWAEP numberdetailsandthe The options granted under the2008, CISMP there areexercisable were 2,238,078 between optionscontractual 9 outstanding Januarylife 2007 of and (2007: 3.75 30 years April 7,506,473 (2007: options 2011, at Rs.33.70. 2.23 years). outstanding) At 31 December with a weighted average remaining 7. StaffCosts 7. The vesting conditions for optionsemployment granted of the under relevant the CISMP participantspecifiedperformance are targetsRajasthanthe development.shares relatingin theto allotment settled of anOption be exercises willby successful within the completion CairnCairn India of India Group Cairn Limited over India’s a specified to flotation, the relevant period the individual. continued of time and the achievement of certain Notes to the Accounts the to Notes continued Granted during the year Granted during the year Lapsed during the year Lapsed during the year Exercised during the year Exercised Exercised during the year Exercised
Exercisable at the end of the year Exercisable
Outstanding at the end of the year Outstanding at the end of the year Weighted average fair value of options granted in year Weighted
Weighted average remaining contractual life of outstanding options average remaining Weighted Exercisable at the end of the year Exercisable
Weighted average fair value of options granted in year Weighted Weighted average share price of options exercised in year price of options exercised average share Weighted The following table details the number and WAEP of share options issued under the CIESOP at the Balance Sheetdate:Balancetheoptionsshare issuedat CIESOP of underthe following table TheWAEP numberdetailsandthe Options will generally vest on the third anniversarythirdgenerallyOptions theadditional will onvest grant, individualssubject the any ofemployment. remainingaccordanceto in Inwith satisfaction of the to subject be not will options these exercise to ability the India, in practice prevailing generally performancerelevantindividual.the conditions.shares to allotmentsettled of Optionanbe exercises willby Under the plan, Cairn India will grant options equivalent to 88,265,718 equity optionssharesaggregated(whennumberof the with grantoptions Cairnequivalent 88,265,718 will India plan, Under the to to be granted pursuant to theof equitydatethethe determinedRemuneration shares ontheof bevalue market fair will by thethatCommittee,less than Cairn not but India Performance Optiongrant Plan to each (2006) of the (CIPOP) eligible of the employees face value of Cairn of Rs.10 each India. at an exercise price Cairn India Employee Stock OptionThe Cairn Plan (2006) India Employee Stockdiscretionary Optionselectedarrangementitssharestogrant optionsover employeescompany executiveto the directors.andallows that Plan (2006) – (CIESOP), which was adopted by Cairn India Limited in November 2006, is a Risk-free rate Risk-free Volatility The fair value of the options is based on an independentan basedonoptions isfollowingthevaluation assumptions:the using of value fair The % Vesting The CISMP options have been valued using the Black Scholes model. The main inputs to the model include the number of options,modelincludenumberinputstheof theScholesBlackmain been valuedthemodel.Theto using options have CISMP The triggerprice,sharepoints,determinedannualised Volatilityvolatility.optionswasexpected discounttheandthe rate, as of life standard deviation of the continuously compounded rates of return on the shares over a period of time. Notes to the Accounts continued
7. Staff Costs continued The following table details the number and WAEP of share options issued under the CIESOP at 31 December 2007:
Number WAEP (Rs.)
Outstanding at the beginning of the year – – Granted during the year 8,982,755 164.27 Lapsed during the year (437,045) 160.00 Exercised during the year – – ––––––––––– –––––––––––
Outstanding at the end of the year 8,545,710 164.49 ––––––––––– –––––––––––
Exercisable at the end of the year – Weighted average fair value of options granted in year Rs.89.4 Weighted average remaining contractual life of outstanding options 9.47 years
The CIESOP options have been valued using the Black Scholes model. The main inputs to the model are as per the CISMP above.
The fair value of the options is based on an independent valuation using the following assumptions: Vesting % 100% Volatility 36.4%-41.04% Risk-free rate 6.94%-9.2%
GOVERNANCE AND ACCOUNTS Cairn India Performance Option Plan (2006) The Cairn India Performance Option Plan (CIPOP) was adopted by Cairn India in November 2006, and is a discretionary arrangement that allows the company to grant options over its shares to selected employees and executive directors.
Under the plan, Cairn India will grant options equivalent to 88,265,718 equity shares (when aggregated with the number of 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 eligible employees of the Cairn India.
The vesting of these options will generally be dependent on both continued employment and the extent to which predetermined performance conditions are met over a specified period of at least three years. Initially, the performance condition attached to options granted pursuant to the CIPOP will be based on the total shareholder return (TSR) of Cairn India compared to the TSR of a group of exploration, production and integrated oil companies.
The following table details the number and WAEP of share options issued under the CIPOP at the Balance Sheet date:
Number WAEP (Rs.)
Outstanding at the beginning of the year 4,755,244 10.00 Granted during the year 789,567 10.00 Lapsed during the year (2,100,864) 10.00 Exercised during the year – – ––––––––––– –––––––––––
Outstanding at the end of the year 3,443,947 10.00 ––––––––––– –––––––––––
Exercisable at the end of the year – Weighted average fair value of options granted in year Rs.221.09 Weighted average remaining contractual life of outstanding options 1.98 years
The following table details the number and WAEP of share options issued under the CIPOP at 31 December 2007:
Number WAEP (Rs.)
Outstanding at the beginning of the year – – Granted during the year 4,943,389 10.00 Lapsed during the year (188,145) 10.00 Exercised during the year – – ––––––––––– –––––––––––
Outstanding at the end of the year 4,755,244 10.00 ––––––––––– –––––––––––
Exercisable at the end of the year – Weighted average fair value of options granted in year Rs.156.58 Weighted average remaining contractual life of outstanding options 2.74 years
100 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 101 – –
$m 2007 47.4 17.7 65.1 10.00 10.00 10.00 100% 100% 2008 5.36% 42.01% WAEP (Rs.) WAEP ––––––––––– ––––––––––– ––––––––––– ––––––––––– CIPOP Phantom CIPOP 7.33%-9.37% – – – 37.49%-41.61% $m 1.0 CIPOP Phantom CIPOP 2008 65.2 66.2 100% 5.51% Number (38,008) 42.01% 822,867 784,859 Rs.163.37 ––––––––––– ––––––––––– ––––––––––– ––––––––––– 2.57 years CIPOP Phantom CIPOP
– – – 218.19 218.19 WAEP (Rs.) WAEP ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
– – – – CIESOP Phantom CIESOP Number 362,556 362,556 Rs.40.69 ––––––––––– ––––––––––– 2.61 years
continued
The vesting of thesecash-settledvestingTheof generallydependentoptions’will‘phantombe continuedboth onemployment extent the and cash-settledof following date:BalanceSheettableTheWAEP numberdetailstheandthe options’ at ‘phantom Cairn India Employee Share RelatedCairngrantedIndiabenefitsthe calculated certainreference to is toby thatcashsum employees wherebyreceivea they Bonuses improvement in Cairn India share price. to which the predetermined performance conditions of the CIESOP and CIPOP are met over a specified period of three years. Risk-free rate Risk-free Volatility Bank interest
Vesting % Vesting
Outstanding at the beginning of the year
The fair value of the options is based on an independentan basedonoptions isfollowingthevaluation assumptions:the using of value fair The % Vesting 7. StaffCosts 7. above. CISMP theper as modelareinputsthe ScholesBlackmain beenmodel.valuedtheTheto using options have CIPOP The Notes to the Accounts the to Notes continued Other interest Volatility Granted during the year
Risk-free rate Risk-free Lapsed during the year
9. Finance Income Emoluments Directors’ 8. director’seachtheDetails ofremuneration, in outset pension are entitlements, LTIP awardsoptionssharepursuanttheand to Directors’Directors’ Remunerationemoluments72. includedReport to managementarepages60within remuneration on key of 36. note in disclosurespersonnel Exercised during the year Exercised
Outstanding at the end of the year
Exercisable at the end of the year Exercisable Weighted average fair value of options granted in year Weighted Weighted average remaining contractual life of outstanding options contractual life of outstanding average remaining Weighted The fair value of the options is based on an independentan basedonoptions isfollowingthevaluation assumptions:the using of value fair The The cash-settled phantomabove. optionsCISMP have been valued using the Black Scholes model. The main inputs to the model are as per the Notes to the Accounts continued
10. Finance Costs 2007 2008 (restated) $m $m
Bank loan and overdraft interest 9.3 7.3 Other finance charges 12.3 8.9 ––––––––––– ––––––––––– 21.6 16.2 Less: borrowing costs capitalised (16.9) (13.9) ––––––––––– ––––––––––– 4.7 2.3 Other finance costs – unwinding of discount 2.4 1.7 – fair value movement on currency exchange options 6.9 3.2 Exchange loss 9.8 5.7 ––––––––––– –––––––––––
23.8 12.9 ––––––––––– –––––––––––
Under UK tax law, borrowing costs which are capitalised in the accounts will generally be deductible expenses for tax in the period in which they are capitalised. Under Indian tax law, capitalised costs must be apportioned between property, plant and equipment and intangible assets based on the nature of the assets which were funded by the borrowing. To the extent that the borrowing costs relate to property, plant and equipment, they will be deductible for tax according to the normal tax depreciation rules. Borrowing costs relating to intangibles will be a deductible expense, for Indian tax purposes, in the period in which they are capitalised. GOVERNANCE AND ACCOUNTS
102 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 103 – – –
$m 9.0 2.2 0.3 3.9 2.2 (7.6) (7.6) (1.6) (4.6) (0.1) (6.3) (1.5) 2007 30.5 34.4 11.5 36.1 36.8 2008 (restated) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – $m 7.6 6.7 5.3 0.2 0.2 (0.1) (0.1) (6.0) (3.3) 2008 60.3 74.2 14.0 13.9 63.6 60.3 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
23 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
Current tax: Current UK corporation tax periods of prior Adjustments in respect 11. Taxation on Profit a) Analysis of tax charge in year Notes to the Accounts the to Notes continued
on profit charge Tax
Foreign Tax Foreign at 42.23% (2007: 42.13%) for the year on profits Indian Regular Tax Indian Regular Tax on profits for the year at 33.99% (2007: 33.91%) for the year on profits Indian Regular Tax Indian Minimum Alternate Tax on profits for the the for profits on Tax Alternate Minimum Indian year at 10.56% (2007: 10.53%) Other overseas taxes Adjustments in respect of prior periods Adjustments in respect Withholding at source taxes deducted
Total current tax current Total Deferred tax: Deferred United KingdomUnited assets of non-current in respect differences Temporary Losses Other temporary differences
India assets of non-current in respect differences Temporary Losses Other temporary differences
Total deferred tax deferred Total Notes to the Accounts continued
11. Taxation on Profit continued b) Factors affecting tax charge for year A reconciliation of income tax expense applicable to profit before income tax at the applicable tax rate to income tax expense at the Group’s effective income tax rate is as follows: 2007 2008 (restated) $m $m
Profit before taxation 440.9 1,590.2 ––––––––––– –––––––––––
Tax at the weighted average rate of corporation tax of 31.91% (2007 (restated): 29.66%) 140.7 471.7
Effects of: Minimum Alternate Tax payable 5.3 9.0 Adjustments in respect of prior years – current tax (6.1) (5.4) – deferred tax 17.5 (5.5) Temporary differences not recognised 34.7 35.7 Non-taxable gain on disposal/deemed disposal of subsidiaries (101.0) (466.8) Non-deductible expenses and non-taxable income (17.0) (8.5) Withholding tax 0.2 0.3 Foreign exchange movements 0.5 3.7 Other (0.6) 0.2 ––––––––––– –––––––––––
GOVERNANCE AND ACCOUNTS Total tax charge 74.2 34.4 ––––––––––– –––––––––––
The applicable tax rate was the weighted average rate for the year of the UK, Netherlands, Australian, Indian, Jersey, Swiss, Bangladeshi, Sri Lankan and Mauritian tax rates. The UK mainstream rate of corporation tax reduced from 30% to 28% on 1 April 2008, resulting in an averaged UK rate for the year of 28.5%. Other than this, there have been no major changes in the statutory tax rates applying in each of these jurisdictions, however, the weighted average rate is subject to fluctuations from year to year based on the level of profits and losses which arise to the Group in each jurisdiction.
c) Factors that may affect future corporation tax charges At 31 December 2008, Cairn had losses of approximately $366.0m (2007: $261.9m) available for offset against future trading profits chargeable to UK Corporation Tax. In addition there are surplus management expenses of $121.9m (2007: $134.4m) and non-trade deficits of $10.1m (2007: $14.4m) available for offset against future investment income. None of the trading losses, surplus management expenses or non-trade deficits has been recognised for deferred tax as there is no reasonable certainty that they will be used. Under UK tax law, tax losses may generally be carried forward indefinitely.
At 31 December 2008, Cairn had losses of approximately $14.7m (2007: $14.7m) available for offset against future trading profits chargeable to Netherlands Corporate Income Tax, but there are restrictions on the use of these losses. Under Netherlands tax law, losses may be carried forward for a period of up to nine years. No deferred tax asset has been recognised in respect of these losses.
At 31 December 2008, Cairn had losses of approximately $369.1m (2007: $373.6m) available for offset against future trading profits chargeable to Indian Corporate Income Tax. Under Indian tax laws, losses may be carried forward for a period of up to eight years. These losses have not been recognised for deferred tax purposes as it is not sufficiently certain that they will be utilised against future trading profits chargeable to Indian tax. $334.9m (2007: $341.7m) of the loss has not been recognised as it is expected that these losses will expire during the period of an Indian tax holiday. The remaining $34.2m (2007: $31.9m) of the loss has not been recognised due to expectations regarding the level of income in the entity concerned.
Tax losses incurred in one jurisdiction cannot usually be offset against profits or gains arising in another jurisdiction.
104 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 105 –
$m (6.5) Total 58.9 58.9 21.0 73.4 (11.2) (21.4) (40.7) (98.8) (47.7) 419.3 139.5 180.5 666.0 116.9 636.4 563.0 607.1 419.3 2008 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– – – – $m (6.5) 45.2 71.9 75.9 58.9 58.9 21.0 73.4 45.2 (21.4) (25.4) (19.9) Group 139.5 209.8 265.8 192.4 150.9 Capricorn ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – – – – $m 41.0 (11.2) (15.3) (98.8) (27.8) Group 374.1 108.6 456.2 370.6 370.6 456.2 374.1 Cairn India Cairn ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
Group Cost At 1 January 2007
13. Intangible Exploration/AppraisalIntangibleAssets 13. The diluted earnings per ordinaryordinary share shares is calculated (2007: 135,844,139). onafter a profit The profit potential of $346.9m of $346.9m Cairn (2007 reflects India (restated):ordinary Limited the reduced profit share shares option $1,543.1m) profit and and the issues. on attributable 170,420 129,973,851 dilutive The 129,973,851 potential ordinary to equity ordinary shares holders is of shares the the basic parent relating weighted to share average options. of 129,803,431 12. Earnings per Ordinary Share Ordinary per Earnings 12. The earnings per ordinarythe share 129,803,431to relating shares, is of number calculated ordinaryaverage weighted the to made was adjustment retrospective shares on No aTrust. profit to Share cash of (2007:Employees’ return the PLC of ofform 135,637,411). $348.8m the in Theresources in change weightedcorresponding (2007a was there as (restated): average2007, March 23 of consolidation number share profit of shares $1,543.1m) and excludes on a weighted sharesshareholders average held by of the Cairn (see notes Energy 27 and 29). Notes to the Accounts the to Notes continued Acquisition of subsidiaries Additions Transfers between categories Transfers Disposals Unsuccessful exploration costs At 1 January 2008 Additions Transfers between categories Transfers Unsuccessful exploration costs At 31 December 2008
Impairment At 1 January 2007 Impairment At 1 January 2008 Impairment Reversal of impairment At 31 December 2008
Net book value at 31 December 2008
Net book value at 31 December 2007
Net book value at 1 January 2007
Notes to the Accounts continued
13. Intangible Exploration/Appraisal Assets continued Exploration costs transferred to property, plant and equipment – development/producing assets (note 14) during the year of $98.8m relate to successful exploration activities. This includes Rajasthan costs associated with Bhagyam and Aishwariya oil fields where Cairn booked reserves during the year and Ravva general costs, which have been allocated to successful exploration activities. Transfers in 2007 of $11.2m were costs associated with Lakshmi oil reserves that were booked in that year.
During the year, the Group relinquished Block 5 in Bangladesh. As a result costs of $6.5m were charged to the Income Statement as unsuccessful exploration costs. As these costs were previously fully impaired, the impairments have been released on relinquishment of the block.
The acquisition of subsidiaries in 2007 refers to the acquisition of Plectrum and medOil. See note 3 for further details.
The disposal of assets in 2007 relates to the sale of Cairn Energy Bangladesh Limited to Santos International Holdings Pty Limited. See note 3 for details.
At the year end, the Group reviews exploration/appraisal assets for indicators of impairment defined under IFRS 6. Where an indicator is identified, the asset is tested for impairment.
In 2008, exploration/appraisal costs of $21.0m (2007: $58.9m) relating to Bangladesh and Nepalese assets have been impaired. See note 5 for further details of the impairment review.
14. Property, Plant & Equipment – Development/Producing Assets Cairn India Capricorn
GOVERNANCE AND ACCOUNTS Group Group Total Group $m $m $m
Cost At 1 January 2007 516.9 241.7 758.6 Additions 208.1 37.5 245.6 Transfers between categories 11.2 – 11.2 Disposals – (197.7) (197.7) ––––––––––– ––––––––––– –––––––––––
At 1 January 2008 736.2 81.5 817.7 Additions 564.4 3.1 567.5 Transfers between categories 98.8 – 98.8 ––––––––––– ––––––––––– –––––––––––
At 31 December 2008 1,399.4 84.6 1,484.0 ––––––––––– ––––––––––– –––––––––––
Depletion and decommissioning At 1 January 2007 179.3 185.2 364.5 Charge for the year 62.6 56.4 119.0 Reversal of impairment – (3.7) (3.7) Disposals – (160.3) (160.3) ––––––––––– ––––––––––– –––––––––––
At 1 January 2008 241.9 77.6 319.5 Charge for the year 44.8 2.8 47.6 Reversal of impairment – (2.7) (2.7) ––––––––––– ––––––––––– –––––––––––
At 31 December 2008 286.7 77.7 364.4 ––––––––––– ––––––––––– –––––––––––
Net book value at 31 December 2008 1,112.7 6.9 1,119.6 ––––––––––– ––––––––––– –––––––––––
Net book value at 31 December 2007 494.3 3.9 498.2 ––––––––––– ––––––––––– –––––––––––
Net book value at 1 January 2007 337.6 56.5 394.1 ––––––––––– ––––––––––– –––––––––––
Included within additions during the year is an amount of $16.9m of directly attributable borrowing costs (2007: $13.9m). The net book value at 31 December 2008 includes $985.8m (2007: $351.9m) in respect of assets under construction which are not yet subject to depletion.
106 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 107 – –
$m 0.2 3.1 6.5 0.1 2.0 4.1 8.6 6.6 5.9 (6.2) (2.3) (1.6) (5.7) (2.0) (1.5) Total 23.7 20.8 23.4 17.8 14.2 14.8 2008 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– $m 0.2 2.3 1.7 1.5 0.1 1.5 8.5 1.8 0.9 8.2 2.0 1.6 1.2 (6.2) (1.5) (1.6) (5.7) (1.5) (1.5) 13.8 10.1 10.2 12.6 equipment Vehicles and Vehicles ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – – $m 9.9 0.8 4.8 5.2 0.5 5.7 2.3 6.6 6.6 5.0 4.7 (0.8) (1.5) (0.5) (0.9) 10.7 13.2 Tenants’ ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– improvements CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
continued
15. Property, Plant & Equipment – Other The disposal of assets in 2007See relates note 3 for to details. the sale of Cairn Energy Bangladesh Limited to Santos International Holdings Pty Limited. Exploration oil Aishwariya and Bhagyam with associated costs costs Rajasthan in includes This activities. transferredexploration successful to relate $98.8m to property, plant andfieldswhereCairnbookedreserves Ravvageneral equipmentand successful beenallocatedcosts,yearduring theto whichhave exploration – development/producingactivities. assets Transfers (note in 13) during 2007 of $11.2m the are year costs of associated with Lakshmi oil reserves that were booked in that year. Cost At 1 January 2007 At the year end the Group reviewsproducingthe of the details further for carrying 5 note See assets carryingvalue. the of excess value in forwas Group Capricorn indicators the of within cash impaired previously units generating of impairment units within or reversal property,impairmentreview. of a prior plant year & equipment impairment. – development/ This review determined that the value of certain 14. Property,Equipment Development/ProducingPlant& 14. – Assets Notes to the Accounts the to Notes continued Group Exchange differences arising Exchange differences Additions Disposals At 1 January 2008 Exchange differences arising Exchange differences Additions Disposals Transfer between categories Transfer At 31 December 2008
Depreciation At 1 January 2007 Exchange differences arising Exchange differences Charge for the year Charge Disposals At 1 January 2008 Exchange differences arising Exchange differences Charge for the year Charge Disposals Transfer between categories Transfer At 31 December 2008
Net book value at 31 December 2008
Net book value at 31 December 2007
Net book value at 1 January 2007
During the year, the useful life assumptions for Property, Plant and Equipment were reviewed. At this time, assets previously previously assets time, this At reviewed. were Equipment and Plant Property, for assumptions life useful the year, the During included as tenants’ improvements lives. useful remaining were transferred to vehicles and equipment to align assets of a similar nature and with similar The net book value of assets heldAdditions under finance duringliability. purchase hire or the leases lease finance related yearthe security for as orpledged include are assetscontracts. hireLeasedpurchase purchase $4.1m (2006: contract $0.3m) of property, at 31 December plant 2008 & equipment was $6.0m (2007: – other $3.8m). held under finance leases or hire Notes to the Accounts continued
15. Property, Plant & Equipment – Other continued Tenants’ Vehicles and improvements equipment Total Company $m $m $m
Cost At 1 January 2007 2.5 6.4 8.9 Exchange differences arising – 0.1 0.1 Additions – 0.4 0.4 Disposals – (0.1) (0.1) ––––––––––– ––––––––––– –––––––––––
At 1 January 2008 2.5 6.8 9.3 Exchange differences arising (0.7) (0.6) (1.3) Additions 0.1 – 0.1 Disposals – (5.6) (5.6) ––––––––––– ––––––––––– –––––––––––
At 31 December 2008 1.9 0.6 2.5 ––––––––––– ––––––––––– –––––––––––
Depreciation At 1 January 2007 1.9 5.7 7.6 Exchange differences arising – 0.1 0.1 Charge for the year 0.1 0.5 0.6 Disposals – – –
GOVERNANCE AND ACCOUNTS ––––––––––– ––––––––––– –––––––––––
At 1 January 2008 2.0 6.3 8.3 Exchange differences arising (0.5) (0.6) (1.1) Charge for the year 0.2 0.1 0.3 Disposals – (5.3) (5.3) ––––––––––– ––––––––––– –––––––––––
At 31 December 2008 1.7 0.5 2.2 ––––––––––– ––––––––––– –––––––––––
Net book value at 31 December 2008 0.2 0.1 0.3 ––––––––––– ––––––––––– –––––––––––
Net book value at 31 December 2007 0.5 0.5 1.0 ––––––––––– ––––––––––– –––––––––––
Net book value at 1 January 2007 0.6 0.7 1.3 ––––––––––– ––––––––––– –––––––––––
The Company does not hold assets under finance leases or hire purchase contracts.
108 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
109
$m 0.2 1.3 0.2 4.3 5.7 6.7 (4.4) (3.1) (1.4) (4.4) (2.1) (1.4) Total
19.5 13.7 29.0 25.8 12.8 12.9 15.5 10.7 16.1 2008 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– $m 0.2 9.3 1.3 0.2 4.3 5.7 6.3 6.7 (4.4) (3.1) (1.4) (4.4) (2.1) (1.4) costs 19.5 24.6 21.4 12.8 12.9 15.1 11.7 Software ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – – – – – – – – – – – – $m 4.4 4.4 4.4 4.4 4.4 Goodwill ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
16. Intangible Assets – Other Cost At 1 January 2007 Notes to the Accounts the to Notes continued Group Exchange differences arising Exchange differences Additions Disposals At 1 January 2008 Exchange differences arising Exchange differences Additions Disposals At 31 December 2008
Amortisation and impairment At 1 January 2007 Exchange differences arising Exchange differences Charge for the year for Charge Disposals At 1 January 2008 Exchange differences arising Exchange differences Charge for the year for Charge Disposals At 31 December 2008
Net book value at 31 December 2008
Net book value at 31 December 2007
Net book value at 1 January 2007
Goodwill was acquired through business combinations in 2007 (see note 3). The goodwill has been allocated to the CapricorngoodwillthebeenallocatedTheGoodwill acquiredhasto was through business 3). note combinations (see2007 in cash-generatingunit, which is also a reporting segment, and has been tested for impairment. No impairment has been identified The key assumptions are sensitive to market fluctuations and the success of future exploration drilling programs. The most likely likely most The programs. drilling exploration future of success the and fluctuations market to sensitive are assumptions key The cash-generatingrecoverablethethe material amountchangeof to futurea resultsthe factorresultthein of willis that unit explorationfutureeconomicdetermine potential.licencedrilling,area’s whichwill the The recoverable amount of the Capricorn cash-generating unit has been determined based on value in use using estimated using use in value on based determined been has cash-generatingunit Capricorn the of amount recoverable The cashflowprojectionsexplorationthelicenceperiod theof reported assetsover as management.unit withinthe key to The assumptions used in the calculation are disclosed in note 1(g). in the period (2007: $nil). Notes to the Accounts continued
16. Intangible Assets – Other continued Software costs Total Company $m $m
Cost At 1 January 2007 7.1 7.1 Exchange differences arising 0.2 0.2 Additions 4.0 4.0 Disposals (1.2) (1.2) ––––––––––– –––––––––––
At 1 January 2008 10.1 10.1 Exchange differences arising (1.4) (1.4) Disposals (6.2) (6.2) ––––––––––– –––––––––––
At 31 December 2008 2.5 2.5 ––––––––––– –––––––––––
Amortisation At 1 January 2007 5.4 5.4 Exchange differences arising 0.1 0.1 Charge for the year 0.5 0.5 Disposals (1.2) (1.2) ––––––––––– ––––––––––– GOVERNANCE AND ACCOUNTS At 1 January 2008 4.8 4.8 Exchange differences arising (1.0) (1.0) Charge for the year 0.1 0.1 Disposals (1.4) (1.4) ––––––––––– –––––––––––
At 31 December 2008 2.5 2.5 ––––––––––– –––––––––––
Net book value at 31 December 2008 – – ––––––––––– –––––––––––
Net book value at 31 December 2007 5.3 5.3 ––––––––––– –––––––––––
Net book value at 1 January 2007 1.7 1.7 ––––––––––– –––––––––––
During the year, the Company disposed of its intangible assets to Capricorn Energy Limited, a direct subsidiary, at arm’s length values.
110 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
111
$m $m 1.4 Total 2007 15.9 15.9 508.1 273.9 654.5 482.4 (128.9) (172.1) 2008 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 $m $m 1.9 1.9 1.4 2008
508.1 273.9 654.5 482.4 (128.9) (172.1) Subsidiary ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– undertakings 31 December 31
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
Group Cost and net book value At 1 January 2007
17. Available-for-Sale Financial Assets Financial Available-for-Sale 17. Listed equity shares Notes to the Accounts the to Notes continued Company
arising Exchange differences Additions Investments 18. Available-for-sale financialwhich assets by its consist nature has of an no investment fixed maturity in the date ordinary or coupon shares rate. of Videocon Industries Limited, listed in India, Disposals At 1 January 2008 Exchange differences arising Exchange differences At 31 December 2008
Further details on these transactions are contained in note 36. Disposals during 2007 represent a repurchase of share capital by Cairn Energy UK Holdings Limited. This was settled in full by by full in settled was This Limited. Holdings UK Energy Cairn by capital share of repurchase a represent 2007 during Disposals balance. loan intercompany offsettingan Additions in 2007 representconsideration further investments of $273.9m is in $233.9m Capricorn directly Oil Limited settled (formerly by means of cash Capricorn and cash Energy equivalents. Limited). Included in the total Notes to the Accounts continued
18. Investments continued The Company’s principal subsidiaries as at the Balance Sheet date are set out below: Proportion of voting rights Country of Country of and ordinary Company Principal activity incorporation operation shares
Direct holdings Capricorn Oil Limited (formerly Capricorn Energy Limited) Holding company Scotland Scotland 90% Cairn UK Holdings Limited Holding company Scotland Scotland 100%
Indirect holdings – Capricorn Oil Limited Group Capricorn Energy Limited (formerly Capricorn Oil Limited) Holding Company Scotland Scotland 90% Cairn Energy Sangu Field Limited Exploration & production Scotland Bangladesh 90% Cairn Energy Exploration (Bangladesh) Limited Exploration Scotland Bangladesh 90% Cairn Energy Bangladesh Block 7 B.V. Holding company The Netherlands The Netherlands 90% Holland Sea Search Holdings N.V. Holding company The Netherlands The Netherlands 90% Cairn Exploration (No. 1) Limited Exploration Scotland India 90% Cairn Energy Search Limited Exploration Scotland India 90% Command Petroleum (Gulf) Limited Exploration Papa New Guinea Papa New Guinea 90% Cairn Resources Management Limited Exploration Scotland China 90% Cairn Energy Exploration and
GOVERNANCE AND ACCOUNTS Production Limited Exploration Scotland India 90% Cairn Energy Nepal Holdings Limited Holding company Scotland Scotland 90% Cairn Energy Dhangari Limited Exploration Scotland Nepal 90% Cairn Energy Karnali Limited Exploration Scotland Nepal 90% Cairn Energy Lumbini Limited Exploration Scotland Nepal 90% Cairn Energy Malangawa Limited Exploration Scotland Nepal 90% Cairn Energy Birganj Limited Exploration Scotland Nepal 90% Capricorn Petroleum Limited Holding Company Scotland Scotland 90% medOil plc* Exploration England & Wales Tunisia/Albania 90% medOil Resources Limited* Exploration England & Wales England 90% Capricorn Oil and Gas Limited Holding Company Scotland Scotland 90% Plectrum Oil and Gas Limited (formerly Plectrum Oil and Gas Plc)* Holding Company England & Wales Scotland 90% Plectrum Oil Limited* Exploration England & Wales Scotland 90% Capricorn Albania Limited Exploration Scotland Albania 90% Capricorn Oil and Gas Tunisia (formerly REAP Tunisia GmbH)* Exploration Switzerland Tunisia 90% Capricorn Greenland Exploration 1 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 2 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 3 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 4 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 5 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 6 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 7 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 8 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 9 Limited Exploration Scotland Greenland 90% Capricorn Greenland Exploration 10 Limited Exploration Scotland Greenland 90% Capricorn Atammik Limited Exploration Scotland Greenland 90% Capricorn Lady Franklin Limited Exploration Scotland Greenland 90%
112 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 113
shares 2008 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% 64.68% voting rights voting and ordinary ordinary and Proportion of Proportion
India India India India India India India India India India India India India Jersey operation Country of Country Australia Scotland Sri Lanka Mauritius Mauritius The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands
India CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Jersey Country of Country Australia Australia Scotland Scotland Scotland Scotland Scotland Scotland Scotland Scotland Sri Lanka Mauritius Mauritius Singapore incorporation The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands
Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Principal activity Principal Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Exploration & production Exploration & production Exploration & production Exploration & production Exploration & production continued Subsidiaries acquired as a result of business combinations in 2007. See note 3 for furtherfor 3 details.note See businessSubsidiariesresultof combinations2007. a acquired inas Company B.V. Cairn India West Energy Cairn Cambay B.V. Energy Cairn Gujarat B.V. Energy Cairn Discovery Limited Energy Cairn Gujarat Block 1 Limited Energy Cairn Exploration (No. 2) Limited Energy Cairn Exploration (No. 4) Limited Energy Cairn Exploration (No. 6) Limited Energy Cairn Exploration (No. 7) Limited Energy CIG Mauritius Holding Private Limited CIG Mauritius Private Limited Cairn Gujarat Holdings B.V. Energy Cairn Cambay Holdings B.V. Energy Holdings B.V. Cairn India West Energy Cairn India Holdings B.V. Energy Holdings B.V. Cairn Group Energy Cairn Energy India Pty Limited Cairn India Pty Energy Cairn Netherlands Holdings B.V. Energy Cairn Energy Australia Pty Limited Cairn Australia Energy There is a restriction in theas ability a result of of some negative Group distributable companies to distribute reserves profits in Cairn to Energy Cairn Holdings Energy PLC, Limited, the ultimate an intermediate parent company, holding company. On 25 October 2007 the Group disposedconsideration of Cairn of $55.8m. Energy Bangladesh See note 3. Limited to Santos International Holdings Pty Limited for a On 7 September 2007, Dyas Investments BV acquired a 10% shareholding in Capricorn Energy Limited. As a result Cairn Energy Energy Cairn result a As Limited. Energy Capricorn in shareholding 10% a acquired BV Investments Dyas 2007, September 7 On PLC’s proportion of voting rights and Ordinary Shareholding in the company and its subsidiaries reduced to 90%. See note 6. share issues on vesting of share options awards to Cairn India staff, Cairn Energy PLC’s proportion of voting rights and OrdinaryAs and rights a resultvoting of proportion PLC’s ofEnergy Cairn staff, the India Cairn private to awards options share of vesting placement on issues share of 113m shares with PetronasShareholding and Orient Global further Tamarind reduced Fund Pte to 64.68%. in April See 2008 note and 6. further On 9 January 2007, Cairn India LimitedCairn Energy listed PLC’s on the proportion Bombay Stock of voting Exchange rights and the and National Ordinary Stock Shareholding Exchange of in India. the company As a result and its subsidiaries reduced to 69.0%. Limited Cairn Hydrocarbons Energy Cairn Lanka Private Limited Cairn Developments Pte Limited Energy * CairnHoldings Limited India Limited Cairn Holdings Energy (including Cairn holdings – Cairn India Limited Group) UK Holdings Limited Group Indirect CairnLimited India 18. Investments 18. Notes to the Accounts the to Notes continued
Notes to the Accounts continued
19. Inventory Group Group Company Company 31 December 31 December 31 December 31 December 2008 2007 2008 2007 $m $m $m $m
Oil and condensate inventories 2.6 8.0 – – ––––––––––– ––––––––––– ––––––––––– –––––––––––
2.6 8.0 – – ––––––––––– ––––––––––– ––––––––––– –––––––––––
20. Trade and Other Receivables Group Group Company Company 31 December 31 December 31 December 31 December 2008 2007 2008 2007 $m $m $m $m
Trade receivables 27.0 41.9 – – Amounts owed by subsidiary undertakings – – 37.4 50.5 Other debtors 52.0 37.5 9.5 0.8 Joint Venture debtors and prepayments 369.0 209.9 – – ––––––––––– ––––––––––– ––––––––––– ––––––––––– 448.0 289.3 46.9 51.3
Prepayments 53.9 17.7 0.4 0.3
GOVERNANCE AND ACCOUNTS ––––––––––– ––––––––––– ––––––––––– –––––––––––
501.9 307.0 47.3 51.6 ––––––––––– ––––––––––– ––––––––––– –––––––––––
As at 31 December, the ageing analysis of trade and other receivables, excluding prepayments, is set out below:
Total Current < 30 days 30-60 days 60-90 days 90-120 days >120 days Group $m $m $m $m $m $m $m
2008 Neither past due nor impaired 350.0 350.0 – – – – – Past due but not impaired 98.0 – – 6.2 69.7 – 22.1 Current and impaired – – – – – – – Past due and impaired 100.3 – – 0.7 0.5 0.3 98.8 Allowance for doubtful debts (100.3) – – (0.7) (0.5) (0.3) (98.8) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
As at 31 December 2008 448.0 350.0 – 6.2 69.7 – 22.1 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
2007 Neither past due nor impaired 246.4 246.4 – – – – – Past due but not impaired 37.9 – – 0.1 3.9 0.3 33.6 Current and impaired 6.7 6.7 – – – – – Past due and impaired 75.2 – – – – – 75.2 Allowance for doubtful debts (76.9) (6.7) – – – – (70.2) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
As at 31 December 2007 289.3 246.4 – 0.1 3.9 0.3 38.6 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
114 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 115 – – – – –
$m $m 1.5 0.9 21.8 41.1 19.5 41.1 42.8 18.2 17.2 18.2 60.9 debtors 2008 >120 days >120 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– Joint Venture Venture Joint
– – – – – – – – – – – – $m $m 10.5 10.5 12.2 12.2 90-120 days 90-120 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– Other debtors Other
– – – – – – – – – $m $m 2.0 1.6 (8.1) (8.5) 40.2 34.1 27.2 60-90 days 60-90 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN receivables Trade
– – – – – – $m 30-60 days 30-60 ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – – $m < 30 days 30 < ––––––––––– ––––––––––– ––––––––––– –––––––––––
– – $m 5.8 5.8 22.6 22.6 Current ––––––––––– ––––––––––– ––––––––––– ––––––––––– $m 5.8 Total 41.1 46.9 22.6 28.7 51.3 continued ––––––––––– ––––––––––– ––––––––––– ––––––––––– The movementsamountsTheduringperiod correspondingtowiththe relate tradebalancesreceivables,in deferredother incomeor creditors in theBalance Sheet therefore do not affect the Income Statement.
2008 Neither past due nor impaired Company As at 1 January 2007 20. Trade and OtherandReceivables Trade 20. doubtfulallowanceformovement in The debts individually collectively below:or outset impaired is Notes to the Accounts the to Notes continued
Past due but not impaired during year* Amounts written off
Increase in allowance capitalised in the Balance Sheet in allowance capitalised Increase As at 31 December 2008 Increase in allowance recognised in Income Statement in Income in allowance recognised Increase
2007 Neither past due nor impaired As at 1 January 2008 Amounts written off during year* Amounts written off Past due but not impaired Increase in allowance capitalised in the Balance Sheet Increase As at 31 December 2007 Increase in allowance recognised in the Balance Sheet* in allowance recognised Increase
Increase in allowance recognised in Income Statement in allowance recognised Increase There is no allowance for doubtfulallowancefor nocompany. the debtsThereis in
As at 31 December 2008
Included in the allowance for doubtful debts are individually impaired Joint Venture debtors with a balance of $60.9m (2007:$42.8m). (2007:$42.8m). $60.9m of balance a with debtors Venture Joint impaired individually are debtsdoubtful for allowance the in Included Thesepredominantlyoutstanding to relate Rajasthancurrentlycash costs.whicharecalls pursuedbeingmanagement. exploration increaseunsuccessful by Thein in included is debtors Venture Joint impaired for Statement Income the in recognised allowance As at 31 December 2008, the ageing analysis of trade and other receivables not impaired is set out below: In determining the recoverability of a trade or other receivable, the Group carries out a risk analysis based on the type and age of of age and type the on based analysis risk a out carries Group the receivable, other or trade a of recoverability the determining In outstanding receivable. the * Notes to the Accounts continued
21. Net Funds At 1 January New finance Exchange At 31 December 2008 Cash flow leases movements 2008 Group $m $m $m $m $m
Bank deposits 30.1 254.3 – 0.5 284.9 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash at bank 25.5 (12.5) – 1.5 14.5 Short-term deposits 846.8 376.4 – (124.7) 1,098.5 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash and cash equivalents 872.3 363.9 – (123.2) 1,113.0
Bank loans (note 25) (75.0) (425.0) – – (500.0) ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net cash 827.4 193.2 – (122.7) 897.9 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Finance leases (note 24) (4.3) 0.8 (2.4) 0.5 (5.4) ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net funds 823.1 194.0 (2.4) (122.2) 892.5 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
At 1 January New finance Exchange At 31 December
GOVERNANCE AND ACCOUNTS 2007 Cash flow leases movements 2007 Group $m $m $m $m $m
Bank deposits – 30.1 – – 30.1 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash at bank 27.6 (14.0) – 11.9 25.5 Short-term deposits 828.7 (0.3) – 18.4 846.8 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash and cash equivalents 856.3 (14.3) – 30.3 872.3
Bank loans (note 25) (155.0) 80.0 – – (75.0) ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net cash 701.3 95.8 – 30.3 827.4 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Finance leases (note 24) (4.5) 1.4 (0.8) (0.4) (4.3) ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net funds 696.8 97.2 (0.8) 29.9 823.1 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
As at the year end, the Group had no cash balances in Bangladeshi Taka in Bangladesh, which are not readily convertible into other currencies (2007: $0.2m). The Group has deposits equivalent to $30.1m (2007: $nil) in Sri Lanka Rupee in Sri Lanka, which are not readily convertible into other currencies.
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods from overnight deposits to three months depending on the cash requirements of the Group.
At 1 January Exchange At 31 December 2008 Cash flow movements 2008 Company $m $m $m $m
Cash at bank 6.0 (1.8) 0.3 4.5 Short-term deposits 10.6 (11.8) 1.5 0.3 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Cash and cash equivalents 16.6 (13.6) 1.8 4.8 ––––––––––– ––––––––––– ––––––––––– –––––––––––
Net funds 16.6 (13.6) 1.8 4.8 ––––––––––– ––––––––––– ––––––––––– –––––––––––
116 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 117 – –
$m $m $m $m 6.0 0.6 5.3 1.3 4.1 0.8 9.1 (0.2) 2007 2007 10.6 16.6 11.3 16.6 (34.2) (60.3) (30.5) (34.2) (34.2) Group Group (200.1) (136.0) (260.4) (235.3) (226.2) (260.4) 2008 Company ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 At 31 December December 31 At
– – $m $m $m $m 0.5 0.3 1.6 0.8 9.1 (4.4) (1.6) (6.0) (0.2) (6.0) 2008 10.0 12.4 (34.2) (59.9) (28.8) (34.2) (34.2) (200.5) (138.1) (260.4) (235.3) (226.2) (260.4) Liabilities Liabilities Company Exchange movements ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31
– – – – – – – – – – – $m $m $m $m 0.4 2.1 8.2 3.9 3.1 (0.4) (1.7) (5.1) 2007 11.3 43.0 47.0 50.1 Assets Group Assets 215.4 273.6 Cash flow Cash ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
– 37 $m $m 2.2 3.2 5.1 2008 Note 17.3 33.9 19.5 2007 (47.0) (27.5) Group 498.7 540.9 At 1 January 1 At ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31
continued
Company
Accelerated allowances taxation – UK Deferred At 1 January 2007 (restated)
payables Trade
Cash at bank 21. Net FundsNet 21. Notes to the Accounts the to Notes continued Charge to Income Statement Charge
Short-termdeposits Amounts owed to subsidiary undertakings to Income Statement Charge
Other taxation and social security Fair value adjustments on business combinations At 31 December 2008 Other creditors and accruals Other creditors Cash and cash equivalents Disposals
Accelerated allowances Deferred taxation – India Deferred Joint Venture creditors and accruals creditors Joint Venture Bank loans Exchange differences Other temporary differences
Net funds Taxation Deferred 23. At 1 January 2008 (restated)
22. Trade and OtherandPayables Trade 22. Cash at bank earns interest atfrom floating overnight rates deposits based on daily to three bank months deposit depending rates. Short-term on the cash requirements deposits are of made the for Company. varying periods Total deferred taxation as at 31 December 2008 deferred Total
Notes to the Accounts continued
23. Deferred Taxation continued Assets Liabilities Group Notes $m $m $m
Deferred taxation – UK (restated) Accelerated allowances – (34.2) (34.2) ––––––––––– ––––––––––– –––––––––––
– (34.2) (34.2) ––––––––––– ––––––––––– –––––––––––
Deferred taxation – India (restated) Accelerated allowances (0.7) (170.9) (171.6) Other temporary differences 1.1 4.6 5.7 ––––––––––– ––––––––––– –––––––––––
0.4 (166.3) (165.9) ––––––––––– ––––––––––– –––––––––––
Total deferred taxation as at 31 December 2007 (restated) 37 0.4 (200.5) (200.1) ––––––––––– ––––––––––– –––––––––––
At the Balance Sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was $408.4m (2007 (restated): $406.7m). No liability has been recognised in respect of these differences because Cairn is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.
GOVERNANCE AND ACCOUNTS As at the Balance Sheet date, a deferred tax asset was not recognised in respect of Group losses of $881.8m (2007: $799.0m) (Company: $113.1m; 2007: $131.7m) where it is not probable that they can be utilised in future periods.
No deferred tax asset has been recognised at 31 December 2008 (2007: nil) in respect of trading or other losses, as it is not considered to be sufficiently certain that these losses will be utilised against future trading or other profits arising to the Group.
24. Obligations Under Finance Leases The Group has finance leases for various items of tenants’ improvements and office equipment all of which provide the specific entity which holds the lease with the option to purchase. Future finance lease commitments are as follows: Present value of Minimum lease payments minimum lease payments 31 December 31 December 31 December 31 December 2008 2007 2008 2007 Group $m $m $m $m
Amounts payable:
Within one year 2.7 2.3 2.2 1.9 Between two and five years 3.7 2.6 3.2 2.4 ––––––––––– ––––––––––– ––––––––––– –––––––––––
6.4 4.9 5.4 4.3 Less: future finance charges (1.0) (0.6) – – ––––––––––– ––––––––––– ––––––––––– –––––––––––
Present value of lease obligations 5.4 4.3 5.4 4.3 ––––––––––– ––––––––––– ––––––––––– –––––––––––
The average lease term is 3 to 5 years. For the period ended 31 December 2008, the average effective borrowing rate was 9.04% (2007: 7.52%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The fair value of the Group’s lease obligations approximates their carrying amount. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets.
The Company does not have any obligations under finance leases.
118 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 119 –
$m $m 8.9 4.6 3.9 1.7 4.6 2.4 2.0 8.6 (2.0) Total 2007 31.6 48.7 28.7 26.7 28.7 40.1 48.7 (13.4) (13.6) 2008 Company ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31
– – – – – $m $m 7.5 4.6 3.9 4.6 5.0 2.0 3.0 5.0 8.3 5.7 (2.0) 2008 14.0 14.0 (13.6) Company ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 provisions Other – – – – – – $m $m 8.9 1.7 2.4 0.3 2007 75.0 24.1 34.7 23.7 23.7 23.7 34.4 34.7 (13.4) Group ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
Decommissioning
$m 2008 Group 500.0 ––––––––––– 31 December 31
ent
At 1 January 2007
Bank loans 25. Loans and Borrowings and Loans 25. Notes to the Accounts the to Notes continued Group Change in decommissioning estimate 26. Provisions 26. At 31 December 2008the loans were(2007:advanced $850m facility); under the see Group’s note $850m 31 for details. hybrid, syndicated, Interest during revolving the year floating was charged rate credit at an average facilities rate of 5.29% (2007: 7.4%). of provision Increase Additions on acquisition of subsidiaries Provision utilised Provision Discount unwound in the year At 1 January 2008 Change in decommissioning estimate of provision Increase Provision utilised Provision Discount unwound in the year At 31 December 2008 At 31 December 2008 Current Non-current
Current
At 31 December 2007 Non-curr
A contingentliabilityA beendisclosedhas withinthese financialstatements respectadditionalinwith duefallof payments may that regard to the Ravva arbitration proceedings; see note 35 for details. Other provisions are productioncommitted related spend payments recognised payable on the to the acquisition GoI specified of Plectrum within the and respective medOil (see PSCs note 3). and provisions for Decommissioning costs are expectedestimated to using be incurred existing between technologydecommissioning 2012 and at 2041 current (2007: estimate 2008 prices and inLakshmi andtogetherGaurifieldsand 2020).andestimateswithadditional RajasthanRajasthan 2008drilled the of wellsinatand facilities place in discounted The arose provision as a using result has a real of been a third discountthe year party end. rate review of 7% pa of (2007: estimated 7%). The change costs in of decommissioning for the Ravva and Notes to the Accounts continued
27. Share Capital Number Number Number 2 5p 10p 6 /13 p B Shares Ordinary Ordinary Group and Company ’000 ’000 ’000
Authorised ordinary shares At 1 January 2007 – 225,000 – Consolidation of Shares 160,468 (225,000) 365,625 B Shares repurchased and cancelled (160,468) – – ––––––––––– ––––––––––– –––––––––––
At 1 January and 31 December 2008 – – 365,625 ––––––––––– ––––––––––– –––––––––––
Number Number Number 2 2 5p 10p 6 /13 p 10p 6 /13 p B Shares Ordinary Ordinary Ordinary Ordinary ’000 ’000 ’000 $m $m
Allotted, issued and fully paid ordinary shares At 1 January 2007 – 160,287 – 25.9 – Issued and allotted for employee share options pre consolidation – 181 – – – Consolidation of shares 160,468 (160,468) 130,380 (25.9) 15.8
GOVERNANCE AND ACCOUNTS B Shares repurchased and cancelled (160,468) – – – – Issued and allotted for employee share options post consolidation – – 409 – – ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
At 1 January 2008 – – 130,789 – 15.8 Issued and allotted for employee share options – – 342 – – ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
At 31 December 2008 – – 131,131 – 15.8 ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
At an extraordinary general meeting held on 22 March 2007, it was resolved that the 160,467,920 existing ordinary shares of 2 10 pence each be replaced by 130,380,185 new ordinary shares of 6 /13 pence each and 160,467,920 B shares of 5 pence each. The effective date of this transaction was 23 March 2007.
The B share scheme allowed Cairn to return to shareholders $936m (including expenses) of the proceeds from the flotation of its Indian business, Cairn India. The B shares were not listed on the Official List nor admitted to trading on the London Stock Exchange. As at 31 December 2007, all B shares had been fully converted to cash.
In order to make the market price of a Cairn share comparable before and after the return of cash to shareholders, a share consolidation 2 was carried out to convert 16 existing ordinary shares of 10 pence each to 13 new ordinary shares of 6 /13 pence each.
2 Following the share capital consolidation, Cairn’s authorised equity share capital was 365,625,000 shares of 6 /13 pence each.
28. Share Premium
2008 2007 Group and Company $m $m
At 1 January 210.9 201.0 Arising on shares issued for employee share options 8.1 9.9 ––––––––––– –––––––––––
At 31 December 219.0 210.9 ––––––––––– –––––––––––
120 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 121 – –
$m
9.9 8.0 8.1 (6.1) Total 25.3 27.6 20.9 (14.0) Equity 679.0 672.9 405.9 277.8 366.7 (935.6) (150.6) 2008 (restated) 1,555.8 1,769.8 2,278.7
––––––––––– ––––––––––– ––––––––––– –––––––––––
– – – – – – – – $m 4.5 3.6 2.5 5.0 (4.5) 12.7 17.9 (47.8) 405.9 429.2 277.8 677.6 Minority interests (restated) ––––––––––– ––––––––––– ––––––––––– ––––––––––– – – – – – – $m 5.5 (6.1) (3.2) (9.5) 20.8 15.9 (10.0) 464.9 458.8 348.8 (936.5) earnings Retained (restated) 1,543.1 1,081.7 1,433.7 ––––––––––– ––––––––––– ––––––––––– ––––––––––– CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN – – – – – – – – – – – – – – – – $m 40.2 40.2 40.2 40.2 Capital distributable ––––––––––– ––––––––––– ––––––––––– ––––––––––– reserves – non – reserves
– – – – – – – – – – – – – – $m 2.8 2.8 21.2 24.0 (78.8) Foreign (102.8) currency translation ––––––––––– ––––––––––– ––––––––––– ––––––––––– – – – – – – – – – – – – – $m 3.2 10.0 13.8 (55.8) (55.8) (32.0) (28.8) Shares held by held Trust ESOP ––––––––––– ––––––––––– ––––––––––– ––––––––––– – – – – – – – – – – – – $m 9.9 2.8 8.1 Share (12.9) Equity 226.9 226.9 Capital 226.7 234.8 ––––––––––– ––––––––––– ––––––––––– –––––––––––
At 1 January 2007 29. Equity 29. Notes to the Accounts the to Notes continued Group Prior year adjustments
A 1 January 2007 (restated) Exercise of employee share options of employee share Exercise Minority interests created on created Minority interests subsidiaries deemed disposal of Share based payments based Share Cost of shares vesting Cost of shares translation differences Currency Cash returned to shareholders of financial assets Surplus on valuation Profit for the year for Profit
At 1 January 2008 Exercise of employee share options of employee share Exercise Minority interests created on created Minority interests deemed disposal of subsidiaries Share based payments based Share Cost of shares vesting Cost of shares translation differences Currency of financial assets Surplus on valuation Profit for the year for Profit
At 31 December 2008
In accordance with IAS 21, foreign exchange differences arising on intra-group loans are not eliminated on consolidation; in accordance with IAS 21, ‘The effects of changes in foreign exchange rates’. this reflects the exposure to currency fluctuations where the subsidiaries involved have differing functional currencies. Foreign currency translation currency Foreign Group Unrealised foreign exchange gains and losses arising on consolidation of subsidiary undertakings are taken directly to reserves shareholders to returned Cash In April 2007, Cairn Energy PLC returnedthe Bombay cash Stock to Exchange shareholders andequity National of £3 per and Stock share are included Exchange out of the within proceeds of India. the Costs reduction of the flotation of the in transaction retained of Cairn earnings. India of $3.3m on have been charged direct to As a result of the return of cash to shareholders, $13.8m was returned to the ESOP Trust in 2007 and is aggregated in the financialaggregatedthe isin and 2007 in Trust ESOPreturnedthe was to shareholders, cashtoreturn theof $13.8m resultof a As statements. Company presentational $ into results functional £ Company’s the of translation on arise losses and gains exchange foreign Unrealised currency in accordance with IAS 21. non-distributable – reserves Capital Capital reserves – non-distributable include non distributable amounts arising on various Group acquisitions. Shares held by ESOP Trust Shares held by the ESOP Trust representThe number the of shares cost of shares held by the heldthe Cairn by market the Energy Cairn value PLC Energy of Employees’ these PLC shares Employees’ Share was Trust £23.3m Share at 31 (2007: Trust December at £41.3m). 31 December 2008 was 2008. (2007: 1,157,415 1,342,701) and These intra-group loans are not considered to be an investment in a foreign operation. Notes to the Accounts continued
29. Equity continued Equity Shares Foreign Capital Share held by currency reserves – non Retained Total Capital ESOP Trust translation distributable earnings Equity Company $m $m $m $m $m $m
At 1 January 2007 226.9 (55.8) 37.2 0.1 242.3 450.7 Exercise of employee share options 9.9 – – – – 9.9 Share-based payments – – – – 10.6 10.6 Cost of shares vesting – 10.0 – – (10.0) – Cash returned to shareholders (12.9) 13.8 – – (936.5) (935.6) Currency translation differences 2.8 – 8.6 – – 11.4 Profit for the year – – – – 1,170.7 1,170.7 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
At 1 January 2008 226.7 (32.0) 45.8 0.1 477.1 717.7 Exercise of employee share options 8.1 – – – – 8.1 Share-based payments – – – – 3.7 3.7 Cost of shares vesting – 3.2 – – (3.2) – Currency translation differences – – (187.7) – – (187.7) Loss for the year – – – – (19.4) (19.4) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
At 31 December 2008 234.8 (28.8) (141.9) 0.1 458.2 522.4 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– GOVERNANCE AND ACCOUNTS
30. Financial Risk Management: Objectives and Policies Group and Company The main risks arising from the Company’s and the Group’s financial instruments are liquidity risk, interest rate risk, foreign currency risk, commodity price risk and credit risk. The respective Boards of Cairn Energy PLC and Cairn India Limited review and agree policies for managing each of these risks and these are summarised below:
The Group’s treasury functions at Cairn Energy PLC, Capricorn Oil Limited, Cairn India Limited and local operational offices are responsible for managing liquidity and credit risk relating to instruments other than receivables for their respective businesses in accordance with the policy set by their Board. This is carried out by monitoring of investment and funding requirements by using a number of techniques including daily cash flow monitoring. They must also recognise and manage interest, foreign exchange and commodity price exposure whilst ensuring that the Company and the Group has adequate liquidity at all times in order to meet its immediate cash requirements. Credit risk relating to receivables is managed by both Group, Cairn India Group and local management.
The primary financial instruments comprise bank loans, cash, short- and medium-term deposits, money market liquidity and mutual funds, intra-group loans, forward foreign exchange options, and other receivables and financial liabilities held at amortised cost. The Group’s strategy has been to finance its operations through a mixture of retained profits and bank borrowings. Other alternatives like equity and other forms of non investment grade debt finance are reviewed by the respective Boards, when appropriate, to fund substantial acquisitions or oil and gas projects.
Liquidity risk Cairn India has available a $850.0m revolving credit facility to fund Rajasthan developments. The facility was previously held by Cairn Energy PLC and certain of its subsidiaries but an amendment agreement was entered into on 22 November 2006 to transfer the facility to Cairn India. Following the IPO of Cairn India on the Bombay Stock Exchange and the National Stock Exchange of India the amendment agreement became fully effective on 31 January 2007.
The facility is provided by a consortium of ten international banks (expiry date 31 December 2011) and the International Finance Corporation (expiry date 31 December 2015). Interest is charged at floating rates determined by LIBOR plus an applicable margin. The maximum facility amount that can be drawn at any point in time is determined by reference to the net present value of the Rajasthan developments. The full $850.0m facility is currently available to be drawn, of which $500.0m was drawn at 31 December 2008 (2007: $75.0m). Cairn India may cancel and repay the facility at any time.
Under the terms of the original agreement, as security under the facility, a share pledge was provided over the shares in Cairn Energy Hydrocarbons Limited (a 100% subsidiary of Cairn India Holdings Limited, which holds 50% of the Group’s interest in Rajasthan).
On 28 March 2008 Cairn Energy PLC entered into a £30.0m revolving credit facility to fund its working capital. The facility is jointly provided by The Royal Bank of Scotland PLC and the Bank of Scotland PLC and expires on 31 January 2013. Interest is charged at floating rates determined by LIBOR plus an applicable margin. At 31 December 2008 £nil was drawn.
In addition, as at 31 December 2008 the Group has $80.0m (2007: $90.0m) of facilities in place to cover the issue of bank guarantees. Fixed rates of interest apply to these. $49.0m (2007: $28.2m) was unutilised at 31 December 2008.
122 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
123
2008 $4.5m $3.3m before tax before Effect on profit on Effect
50 50 in basis points basis in CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Increase/decrease
continued
continued 2008
Interest rate risk table interestfollowingchangetableTheratesin(throughdemonstratesimpact thea onprofitbefore tax to sensitivity the Group’s the of floating rate borrowings andvalue deposits). as a result In addition of the capitalisation there would be of an the increase borrowing of $0.8m costs to development/producing for the Rajasthan development assets (2007: carrying $0.4m). Short/medium-term borrowing arrangements are available at floating rates. The treasury function may from time to time opt to to opt time to time from may functiontreasury The rates. floating at available are arrangementsShort/medium-term borrowing manage a proportion of the interesthowever, there costs are on no this such debt instruments by using derivative (2007: none). financial instruments like interest rate swaps. At this time, Interest rate riskInterestrate Surplus yield acceptable an achieve to fundsrequirement The issue. of time are at rate placed interest competitive most the offer onthat institutions short/mediumfinancial term depositis at balanced floating against rates. It the is need Cairn’s to minimise policy to liquidity deposit funds and counterparty with banks or other risk. 30. Financial30. RiskManagement: Objectives Policiesand risk Liquidity The Groupliquidity is market conscious money in investing when and ratings published ofusing counterparties monitors the Group The current counterparty exposure. environment and constantlyand mutual monitors funds primarily counterparty by consideration risk. Policies of the are funds in place investment to limit policy. The Group currently has surplus cash, which it has placed in a combination of money market liquiditymarketcombinationmoney a fundsfixed-termof andplacedcurrentlyinGroup Thesurplushas hasdepositswhichitcash, Internationalnumberfinancialof Indianbanksandinstitutions,anda with ensuringsufficient meetliquidityto Groupenablethe to short/medium-termrequirements.itsexpenditure Notes to the Accounts the to Notes continued
2007 No commodity price hedgingnormallyhedgenotwould GroupTheoutstanding contracts year. thecommodity of end the price contractsat or starttheyear the at of have been enteredcommodity into during price either risk the but current the respective or the previous Boards year. do There monitor were the no position. This will also be the case for Rajasthancaseforthesaleswhencommence. be also will This Ravva and CB-OS/2 oil sales are made to approved government nominated buyers or approved third parties at floating prices. Commodity price risk There are implicit product priceSales hedges Contracts in place (GSCs). through Thebasis. requirement the pricing These mechanisms implicit for hedging product instruments applicable price to hedges Sangu, to unwind do CB-OS/2 not these give and pricing rise Ravva to any mechanisms Gas embedded is derivatives reviewed on an under ongoing IAS 39. During 2007, a currency exchange option contract matured. The contract was entered into by the Company in 2006 in order to to order in 2006 in Company the by into entered was contract The matured. contract option exchange currency a 2007, During hedge the impact rate. ofexchange the currency in movements favourable to due exercised fluctuations resulting from transactions carried out in Indian Rupees as part of the IPO. This was not During the year Cairn India enteredrequirements into forward as part foreign of the Rajasthan exchange options Development. to hedge Referthe exposure to note 31 for of further future Indian details. Rupee Company and Group may from time to time, opt to use derivative financial instruments to minimise its exposure to fluctuations in in fluctuations to exposure its minimise to instruments financial derivative use to opt time, to time from may Group and Company interestrates.and exchange foreign on the Group’s Balance Sheet. Cairnreportsdollarsmostwithassetsdollar-denominated, which,US US in minimisesimpactforeignexchange themovements of In order to minimise Cairn’s exposure to foreign currency fluctuations, currency assets are matched with currency liabilities by by liabilities currency with matched are assetscurrency fluctuations, currency foreign to exposure Cairn’s minimise to order In are facilities loan The appropriate. deemed if currency applicable the contractsin exchange foreign into entering or borrowing the between agreed be may as currency other such or Sterling dollars, US in currencies in drawings allow multi-currency and lenders and Cairn from time to time. Cairn manages exposures that arise from receipt of revenues in foreign currencies, by matching receipts and payments in the same same the in payments and receipts matching by currencies, currencyriskforeign Foreign in revenues of receipt from arise that exposures manages Cairn currency,activelyandposition.residual managingthenet Generallyreceipts exposure that paymentsbeen limitedgiventhe and has functionaldollars,thedollars.and CurrentlyUS mostlyUS a currency beenin isthereis Grouphave mostcompaniesthe are inof significant Indian Rupee requirement but forward foreign exchange options are being utilised to mitigate this exposure. The amounts calculated are basedinterest on actual on each drawings loan or deposit. and deposits in the periods for a 50 basis point movement in the total rate of Notes to the Accounts continued
30. Financial Risk Management: Objectives and Policies continued Credit risk Cairn has obtained payment guarantees or letters of credit from buyers as payment security on both the CB-OS/2 and Sangu GSCs. With respect to Ravva there is no payment security, however the buyers have been nominated by the GoI.
Investments in money market liquidity funds are only made with AAA-rated funds and where the investment policy is limited to liquidity instruments which excludes equity. Deposits and other investments are generally only placed with banks or financial institutions that has a Moody’s or Standard & Poor’s rating of AA and above. As at the 31 December 2008, $1,089.7m of the cash equivalents was held with 13 banks and $335.7m was held with 14 money market funds.
The respective Boards will continue to assess the Group’s strategies for managing credit risks but at this time they view existing policies as satisfactory for oil and gas sales in South Asia. At the year end the Group does not have any significant concentrations of bad debt risk other than that disclosed in note 20.
The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the Balance Sheet date.
Capital management The objective of the Group’s capital management structure is to ensure that there remains sufficient liquidity within the Group to carry out committed work programme requirements. The respective Groups monitor the long-term cash flow requirements of their businesses in order to assess the requirement for changes to the capital structure to meet that objective and to maintain flexibility.
The respective Boards manage their own capital structure and makes adjustments to it, in light of changes to economic conditions. To maintain or adjust the capital structure, the Groups may adjust the dividend payment to shareholders, return capital, issue new shares for cash, repay debt, put in place new debt facilities or other such restructuring activities as appropriate. GOVERNANCE AND ACCOUNTS
No significant changes were made in the objectives, policies or processes during the period ended 31 December 2008.
Group capital and net debt were made up as follows: 31 December 31 December 2008 2007 Group $m $m
Bank loans and borrowings 500.0 75.0 Trade and other payables 540.9 273.6 Less cash and short-term deposits (1,397.9) (902.4) ––––––––––– –––––––––––
Net funds (357.0) (553.8) Equity 2,278.7 1,769.8 ––––––––––– –––––––––––
Group capital and net debt 1,921.7 1,216.0 ––––––––––– –––––––––––
Gearing ratio – – ––––––––––– –––––––––––
Company capital and net debt were made up as follows: 31 December 31 December 2008 2007 Company $m $m
Trade and other payables 12.4 11.3 Less cash and short-term deposits (4.8) (16.6) ––––––––––– –––––––––––
Net debt/(funds) 7.6 (5.3) Equity 522.4 717.7 ––––––––––– –––––––––––
Company capital and net debt 530.0 712.4 ––––––––––– –––––––––––
Gearing ratio 1.4% – ––––––––––– –––––––––––
124 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 125
$m $m $m 3.9 2.4 4.3 (3.2) (6.4) Total 2007 2007 30.1 75.0 15.9 41.9 34.7 (73.7) 872.3 215.4 209.9 333.3 (603.6) (498.7) 2008 1,172.5 (1,185.6) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 31 December 31 – – – Fair value Fair Fair value Fair $m $m $m 3.2 3.7 5.4 1.9 2008 2008 27.0 23.7 (98.8) (70.2) 284.9 500.0 498.7 369.0 (169.0) five years five 1,113.0 1,031.0 1,799.5 More than More ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 31 December 31 – – – – $m $m $m 3.9 2.4 4.3 (5.3) (5.3) 2007 2007 30.1 75.0 15.9 41.9 34.7 872.3 215.4 209.9 333.3 Four to Four five years five 1,172.5 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 31 December 31 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN – – $m $m $m Carrying amount Carrying Carrying amount Carrying 3.2 3.7 1.9 5.4 (5.3) (0.5) (3.5) (9.3) 2008 2008 27.0 23.7 284.9 500.0 498.7 369.0 Three to Three 1,113.0 1,031.0 1,799.5 four years four ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 31 December 31
– – – to $m (1.5) Two Two (439.2) (440.7) three years three ––––––––––– –––––––––––
– – – $m (1.7) (27.5) (29.2) One to One two years two ––––––––––– ––––––––––– – $m (3.2) (2.7) (27.5) (498.7) (532.1) one year one Less than Less ––––––––––– ––––––––––– The decommissioning provision is discounted at a rate of 7% to give the net present value, which is carried at the balance balance the financeat leasesandincludeloanspurposescarriedmaturityBankinterest thethe for ofis analysis. which value, present net the give to 7% of rate a at discounted is provision decommissioning The sheet date. The gross amount is included in the maturity analysis table in accordance with the requirements of IFRS.
Group Group
Bank loans*
Bank loans
Financial assets Financial 31. Financial InstrumentsFinancial 31. The Group and Company calculatesfinancialassetsfollows: liabilities,as andtogetherGroup’s valuesarefairThe theirwith Sheetdate.Balance thepayable on the fair value of assets and liabilities by reference to amounts considered to be receivable or Bank deposits Notes to the Accounts the to Notes continued Trade payables Trade Cash and cash equivalents payables Trade Joint Venture creditors and accruals creditors Joint Venture Joint Venture creditors and accruals creditors Joint Venture Derivative financial assets Derivative financial Finance leases* Available-for-sale financial asset Available-for-sale Finance leases Decommissioning provision** receivables Trade Decommissioning provision
and prepayments debtors Joint Venture
* ** At 31 December 2008 The following table sets out the amount, by maturity, of the Group’s financialliabilities: Group’s the maturity,of followingamount,tablebyThe setsthe out The fair value of financial assetsinterestrates. and liabilities has been calculated by discounting the expected future cash flows at prevailing The available-for-sale financial asset relates to listed equity shares held by Cairn India. Refer to note 17 for further detail. The derivative financialthe exercising of assets group Rupeethe to cost The end. in requirements year 2008 the at options andsimilar for 2007values market to as relate reference part by determined is tooptions of forward the of carryingvalue the Rajasthan in movement value foreign fair The options. the Development of exchange purchase on paid was maturitycontractual on options currency options entered to into hedge by the the Cairn exposure Indiathe of option Group. future The has Indian fair been value included of the in currency the 2008 and 2007 financial statements. The options are not hedge accounted.
Financial liabilities Financial All of the above financial assets are current and unimpaired with the exception of trade receivables. An analysis of the ageing of of ageing the of analysis An receivables. trade of exception the with unimpaired and current are assets financial above the of All trade receivables is provided in note 20. Notes to the Accounts continued
31. Financial Instruments continued At 31 December 2007 Less than One to Two to Three to Four to More than one year two years three years four years five years five years Total $m $m $m $m $m $m $m
Bank loans* (5.4) (5.4) (5.4) (67.1) (1.0) (16.2) (100.5) Trade payables (3.9) – – – – – (3.9) Joint Venture creditors and accruals (215.4) – – – – – (215.4) Finance leases* (2.3) (1.6) (0.9) (0.1) – – (4.9) Decommissioning provision** (0.3) – – – – (68.6) (68.9) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
(227.3) (7.0) (6.3) (67.2) (1.0) (84.8) (393.6) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
* Bank loans and finance leases include interest for the purposes of the maturity analysis. ** The decommissioning provision is discounted at a rate of 7% to give the net present value, which is carried at the balance sheet date. The gross amount is included in the maturity analysis table in accordance with the requirements of IFRS.
The Company’s financial assets and liabilities, together with their fair values, are as follows:
Financial assets Carrying amount Fair value 31 December 31 December 31 December 31 December 2008 2007 2008 2007 GOVERNANCE AND ACCOUNTS Company $m $m $m $m
Cash and cash equivalents 4.8 16.6 4.8 16.6 Amounts owed by subsidiary undertakings 37.4 50.5 37.4 50.5 ––––––––––– ––––––––––– ––––––––––– –––––––––––
42.2 67.1 42.2 67.1 ––––––––––– ––––––––––– ––––––––––– –––––––––––
All of the above financial assets are current and unimpaired.
Financial liabilities Carrying amount Fair value 31 December 31 December 31 December 31 December 2008 2007 2008 2007 Company $m $m $m $m
Trade payables 0.5 0.6 0.5 0.6 Amounts owed to subsidiary undertakings 10.0 5.3 10.0 5.3 ––––––––––– ––––––––––– ––––––––––– –––––––––––
10.5 5.9 10.5 5.9 ––––––––––– ––––––––––– ––––––––––– –––––––––––
The following table sets out the amount, by maturity, of the Company’s financial liabilities:
At 31 December 2008 Less than One to Two to Three to Four to More than one year two years three years four years five years five years Total Company $m $m $m $m $m $m $m
Trade payables (0.5) – – – – – (0.5) Amounts owed to subsidiary undertakings (7.4) (2.6) (10.0) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
(7.9) (2.6) – – – – (10.5) ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––
126 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 127 – – –
$m $m $m 5.4 0.2 (0.6) (5.3) (5.9) Total 2007 2007 16.3 21.9 15.1 54.2 69.3 2008 Minimum ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 At 31 December 31 At lease payments lease
– – – – Company $m $m $m 4.5 9.2 (0.3) (0.3) 2008 2008 13.7 103.1 312.5 209.4 five years five Minimum More than More ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 At 31 December 31 At lease payments lease
– – $m $m 2007 88.6 – 698.1 786.7 Four to Four five years five ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
Group – – $m $m 2008 289.5 726.6 Three to Three 1,016.1 four years four ––––––––––– ––––––––––– ––––––––––– ––––––––––– 31 December 31
– – $m Two to Two three years three ––––––––––– –––––––––––
– – $m One to One two years two ––––––––––– ––––––––––– $m (0.6) (5.0) (5.6) one year one Less than Less ––––––––––– ––––––––––– continued
One year Company Land and buildings, within: Intangible exploration/appraisal assets
Trade payables Trade 31. Financial Instruments31. At 31 December 2007 Notes to the Accounts the to Notes continued
Two to five years Two Amounts owed to to owed Amounts subsidiary undertakings assets plant & equipment – development/producing Property, After five years
One year within: Other, Contracted for Two to five years Two
32. Capital CommitmentsCapital 32. Oil and gas expenditure Total futurepaymentsleaseminimum undernon-cancellableTotal operatingfollows:as leasesare 34. Financial CommitmentsFinancial 34. Group lessee as – leases Operating Group entities have entered intoThe commercial leases have an leases average for life certain of between land and 1 and buildings 6 years. There and for are plant, no restrictions machinery and placed office on the equipment. lessee by entering into these leases. 33. Pension Commitments Pension 33. The Group and Company have no pension commitments as at the Balance Sheet date (2007: nil). The above capitalaboveThe commitmentsCairn itsinterestsall AsobligationsVentures.relation Jointrepresentto inof share in Cairn’s jointlycontrolledareassets, VenturesJoint thesecommitments capitaltheJointrepresentcommitment theof share Cairn’s of themselves.Ventures Notes to the Accounts continued
34. Financial Commitments continued Included within other operating lease commitments is Cairn’s share of operating leases entered into by Joint Ventures of $103.1m (2007: $15.1m) due within one year and $209.4m (2007: $54.2m) due between two and five years. These are also included in ‘Capital Commitments’ disclosed in note 32 where appropriate.
Company Operating leases – as lessee The Company has entered into commercial leases for certain land and buildings and for office equipment. The leases have an average life of between 1 and 6 years. There are no restrictions placed on the lessee by entering into these leases.
Total future minimum lease payments under non-cancellable operating leases are as follows: Minimum Minimum lease payments lease payments At 31 December At 31 December 2008 2007 $m $m
Land and buildings, within: One year 1.8 2.4 Two to five years 5.5 9.6 After five years – 0.2 ––––––––––– –––––––––––
7.3 12.2 ––––––––––– ––––––––––– GOVERNANCE AND ACCOUNTS Other, within: One year – – Two to five years – – ––––––––––– –––––––––––
– – ––––––––––– –––––––––––
35. Contingent Liabilities Ravva arbitration The calculation of the Government of India’s (GoI) share of petroleum produced from the Ravva oil field has been a matter of disagreement for some years. Ravva is an unincorporated Joint Venture (JV) in which Cairn has an interest.
An arbitration panel opined in October 2004 and Cairn has been willing to be bound by the award, although it was not as favourable as had been hoped. The GoI, however, has lodged an appeal in the Malaysian courts in respect of one element of the award that was in Cairn’s favour, namely the ‘ONGC Carry’ issue.
Cairn challenged both the GoI’s right to appeal and the grounds of that appeal.
A judgement was delivered at the Malaysian High Court on 12 January 2009 ruling in favour of the GoI and setting the arbitration award aside. This has the effect of negating the original award in favour of Cairn. This judgement is subject to appeal to the Malaysian Court of Appeal and, potentially, the Malaysian Federal Court. Cairn has appealed to the Malaysian Court of Appeal.
Should Cairn finally lose the argument through the Malaysian courts, given the terms of the High Court’s award itself, this will require the matter to be arbitrated afresh under the terms of the PSC for dispute resolution.
Cairn has received advice from their Malaysian legal counsel to the effect that they have strong grounds for appeal through the Malaysian courts but, even if this proved unsuccessful, given there was one arbitration award in Cairn’s favour on this issue and a similar award was made in favour of one of Cairn’s Joint Venture partners on the same issue in a separate arbitration with GoI, Cairn believes it has a good chance of any new arbitration panel coming to the same conclusion.
In the event that the GoI’s appeal ultimately succeeded and a process then ensued that concluded with the arbitration award being reversed in a manner and a forum which Cairn accepted as binding (in effect by a new arbitration panel ruling in favour of GoI), then Cairn would be due to pay an additional $63.9m. Cairn would also be potentially liable for interest on this sum currently estimated at $29.8m though the calculation of interest would require further agreement.
The ‘ONGC Carry’ issue relates to whether Contractor Parties under Ravva PSC are entitled to include in their accounts for the purposes of calculating the PTRR certain costs paid by Contractor Parties in consideration for ONGC having paid 100% of costs prior to the signing of the Ravva PSC in 1994.
128 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS
129
$m (5.3) 2007
50.5 45.2 2008 ––––––––––– ––––––––––– At 31 December 31 At $m 2008 37.4 27.4 (10.0) ––––––––––– ––––––––––– At 31 December 31 At
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
continued Various guarantees under the Group’s bank facilities (see note 30) for the Group’s share of minimum work programme work minimum of share Group’s the for 30) note (see facilities bank Group’s the under guarantees Various commitments for the currentobligationscontracts.othersalesandunder PSC, company guaranteesParentGroup’s the yearfor of $31.0m (2007: 80.0m).
Amounts owed from subsidiary undertakings Amounts owed from
The Group had provided the following guarantees at 31 Decemberprovided 2008:followingguaranteeshadtheGroup31 The at • Indian tax holiday on gas productionprofitsdeductioncommercialActthetheallowsfromof production 100% Section of IndianIncomeTax refiningthe or 80-IB of (9) Guarantees It is normal practice for the Group to issue guarantees in respect of obligations during the normal course of business. • TransactionsParty Related 36. withoutstanding are which balances the provides table following The 18. note in listed are subsidiaries principal Company’s The subsidiary companies at the Balance Sheet date: go against Cairn India, it will be liable to pay the service tax of $27.6m, including related interest, although this could be recovered recovered be could this although interest, 16 Augustrelated including 2002$27.6m, of taxservice the to pay 31 to March liable be will 2007.it India, TheCairn against go reply operator. for is India Cairn third which of Venture show Joint to provided services cause to relates it where noticepart in has to be filed before the authorities. Should the adjudication eitherseparatelygas, and beenoilunderstoodalwaysboth defined,has tobut refernot isto oil’ term ‘mineralThe mineral oil. of on production of crude oil but have to 80-IBsection continued restrictionof the challenging 2008 December in Court High toGujarat the exclude to petition writ a filed gas.India Cairn unsuccessful,challengethisis event thepotential relatedproductionliabilityinteresttaxthe holidaytaxInandthe onfor oil. of Decemberapproximatelyproduction 2008gasisperiods 31 claimed on$52.4m. all to for In a separate and unrelated dispute related to the profit petroleum calculations under the Ravva PSC, the Ravva JV received a 35. Contingent Liabilities Liabilities Contingent 35. Indian of recipient a as taxservice Service of non-payment for India in authorities tax Tax the from notices cause show three received India Cairn challenging petition writ A 2008. March 31 to 2002 August 16 from periods cover notices These suppliers. foreign from services the applicability of service tax has been filed with the Chennai High Court in respect of two such show cause notices for the period Notes to the Accounts the to Notes continued Tax DevelopmentBase therecoveredIndian Government’sPost coststheexcessofhas Ravva allegation inJVthe torelates the thatclaim This of calculation the in costs excess these allowed also has JV Ravva the that and PSC the in imposed cap (‘BDC’) Costs unsustainablebecause,isamongst PSCclaim theReturnreasons, other Cairntermsa such(PTRR).ofunder thethatbelievesof Rate the BDC cap only applies toupheld,Cairnif Even the DGH.the fromclaim calculationabove thethe contested alsoAdditionally inof basis has theRavva initial JV the development of the Ravvabelieves field that and the not DGH to subsequent has miscalculated development the sums activities that would be under due to the the PSC. Indian Government in such circumstances. This matter has now been referred toarbitration and the arbitration panel is in theprocess of being constituted. term the 80-IB(9), section of purpose the ‘for that stating by deduction this remove to appeared Bill Finance Indian 2008 by The announcements Subsequent Act’. the of sections other in unlike gas, natural and petroleum include not does oil” “mineral the Indian Finance Minister and the Ministry of Petroleum and Natural Gas have confirmed that tax holiday would be available claim from the Director General of Hydrocarbons (DGH) for approximately $166.4m (representing $37.4m net to Cairn) for an allegedan Cairn)for to net Directorthefrom(representingclaimHydrocarbons General of $37.4m approximately for (DGH) $166.4m underpayment of profit petroleum$30.6m to (representing the Indian Government, $6.9m net to Cairn). together with interest on thatamount through to 30 June 2006 of collectively.or Amounts owed to subsidiary undertakings amountsTheoutstanding settledunsecured,marketbecash.Interest,are at willrepayable demand in wherecharged,and onis rates. No guarantees have been given. Notes to the Accounts continued
36. Related Party Transactions continued The following table provides the transactions with subsidiary companies recorded in the profit (2007: profit) for the year, all of which were carried out on an arms length basis: 2008 2007 $m $m
Amounts invoiced 14.5 36.9 Cost sharing arrangement 4.6 – Management fees – 1.6 Intercompany interest receivable – 0.8 Intercompany interest payable – 0.9
a) 2007 Group transactions During 2007, Capricorn Energy Limited issued new share capital to Cairn Energy PLC for a total consideration of $273.9m.
On 31 December 2007, Cairn Energy UK Holdings Limited repurchased share capital from Cairn Energy PLC reducing the company’s investment. Proceeds of $128.9m were received for the repurchase.
b) Remuneration of key management personnel The remuneration of directors, who are the key management personnel of the Group, is set out below in aggregate. Further information about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report on pages 60 to 72.
2008 2007 Group and Company $m $m GOVERNANCE AND ACCOUNTS Short-term employee benefits 9.0 7.0 Pension contributions 0.6 0.6 Share based payments 3.5 3.2 ––––––––––– –––––––––––
13.1 10.8 ––––––––––– –––––––––––
c) Other transactions During the year the Group did not make any purchases in the ordinary course of business from an entity under common control (2007: $nil). There were no amounts owed to the party at the year end (2007: $nil). During the year the Company disposed of its intangible assets to Capricorn Oil Limited, a direct subsidiary, at arm’s length values (refer to Note 16).
37. Prior Year Adjustments Indian deferred tax liabilities Deferred tax liabilities relating to India have been restated to reflect the taxable temporary difference that remains at the end of the seven-year tax holiday period on the Rajasthan tangible development/producing asset in two of the Group’s subsidiaries.
Cairn Energy India Pty Limited had recorded deferred tax liabilities to reflect the difference between the net book value of development/producing assets and, their tax written down values. However, a liability should only have been created to recognise the taxable temporary difference on balances remaining at the end of the tax holiday period since movements in net book values and tax written down values during the tax holiday period will have no tax impact. Inconsistencies were also identified between the deferred tax calculations of Cairn Energy India Pty Limited and those of the rest of the Group, and these have also been adjusted (this also resulted in a restatement at 31 December 2007).
Cairn Energy Hydrocarbons Limited previously had no recognised deferred tax liability recognised due to the availability of Indian tax losses. As these losses will unwind during the tax holiday period, a taxable temporary difference will remain at the end of the tax holiday period reflecting the forecast excess of net book values over tax written down values. A deferred tax liability should therefore have been recognised.
Fair values on acquisition of subsidiaries Fair values were assigned to the assets and liabilities of subsidiaries acquired during 2007. Under IFRS 3, these fair values have been reassessed during the period. See note 3 for further details.
130 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 131
$’m 8.6
16.1 35.0 12.7 (12.9) (34.4) 200.1 601.8 429.2 2008 Restated 2,371.6 1,769.8 1,081.7 1,340.6 1,769.8 1,579.2 1,590.2 1,555.8 1,543.1 1,555.8 1,591.4 1,137.76 1,135.94 December 2007 December
– – – – $’m 2.4 1.7 1.7 0.7 2.4 1.9 7.7 2.6 (2.4) (2.4) (9.0) 17.4 19.3 10.3 5.68 5.67 10.3 10.3 taxation adjustments India Deferred India
– – $’m 1.8 1.8 (9.1) (9.1) (9.1) 17.6 15.8 15.8 17.6 17.6 17.6 17.6 15.8 17.6 17.6 IFRS 3 IFRS (17.6) (26.7) 11.70 11.70 restatements CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN
$’m 8.3 25.2 17.7 17.4 (30.3) (25.4) 220.1 630.9 426.7 Financial 2,380.7 1,749.8 1,064.2 1,323.1 1,749.8 1,577.3 1,553.3 1,527.9 1,519.6 1,527.9 1,563.5 1,120.38 1,118.57 Statements December 2007 December
continued pence each in the capital of the Company. 13 / 2
37. Prior Year Adjustments PriorYear 37. below. shown affectedare items line statement financial the and adjustments year prior the of amount The Balance Sheet Intangible assets – other Notes to the Accounts the to Notes continued
Total assets Total Provisions Deferred tax liabilities Deferred Total liabilities Total Net assets Retained earnings Total equity attributable to equity equity to attributable equity Total holders of the parent Minority interests Total equity Total Income Statement Exceptional gain on deemed disposal Finance costs Negative goodwill on acquisition Profit before taxation before Profit expense on profit Taxation Profit for the year for Profit Profit for the year attributable to: to: attributable year the for Profit Equity holders of the parent Minority interests Earnings – basic (cents) per share Earnings – diluted (cents) per share Statement of Recognised Income and Expense the year for Profit Total recognised income and recognised Total expense for the period When issued, the shares will be credited as fully paid and will rank pari passu in all respectsall rankpassupariinwill existing andthewithpaid credited fullyordinary be Whenas issued, shares willthe sharesof 38. EventsAfterBalance38. the Sheet Date ordinary issued existing Cairn’s in On 5% March 11 of increase an represent issued 2009, shares The the company$161.0m. are placement the completed of proceeds gross The a placing of 6,542,270 newcapital. share ordinary shares at a price of 1775 pence per Placing Share. 6 Reserves
Direct Direct working entitlement interest basis interest basis Group proven plus probable oil reserves ’000 bbls ’000 bbls
At 1 January 2008 247,033 164,305 Additions of reserves in place 92,124 65,690 Revisions of previous estimates 6,181 22,106 Production (4,521) (2,548) ––––––––––– –––––––––––
At 31 December 2008 340,817 249,553 ––––––––––– –––––––––––
Group proven plus probable gas reserves mmscf mmscf
At 1 January 2008 49,843 35,156 Addition of reserves in place 1,548 1,129 Revisions of previous estimates 10,256 6,381 Production (18,717) (12,812) ––––––––––– –––––––––––
At 31 December 2008 42,930 29,854 ––––––––––– –––––––––––
GOVERNANCE AND ACCOUNTS Group proven plus probable oil and gas reserves ’000 boe ’000 boe
At 31 December 2008 347,972 254,529 ––––––––––– –––––––––––
At 31 December 2007 255,340 170,164 ––––––––––– –––––––––––
Reserves by geographical segment at 31 December 2008 are as follows: ’000 boe ’000 boe
India 345,957 252,918 Bangladesh & Nepal 2,015 1,611 ––––––––––– –––––––––––
At 31 December 2008 347,972 254,529 ––––––––––– –––––––––––
Reserves by geographical segment at 31 December 2007 are as follows: ’ 000 boe ’000 boe
India 254,365 169,386 Bangladesh & Nepal 975 778 ––––––––––– –––––––––––
At 31 December 2007 255,340 170,164 ––––––––––– –––––––––––
Production by geographical segment in the year was as follows: ’000 boe ’000 boe
India 6,444 3,727 Bangladesh & Nepal 1,196 956 ––––––––––– –––––––––––
7,640 4,683 ––––––––––– –––––––––––
132 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 133
2008 CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN Notes Glossary of Terms
The following are the main terms and abbreviations used in this annual report.
Corporate
ABI Association of British Insurers GSCs gas sales contracts AGM Annual General Meeting IFC International Finance Corporation Board the Board of Directors of Cairn Energy PLC IPO Initial public offering of shares in Cairn India BSE Bombay Stock Exchange Limited Cairn/ Cairn Energy PLC and/or its subsidiaries as JV Joint Venture Cairn Energy appropriate Listing Rules The Listing Rules of the United Kingdom Cairn India/ Cairn India Limited and/or its subsidiaries Listing Authority CIL as appropriate LSE London Stock Exchange Cairn India Cairn India and/or its previously named LTIP Long-Term Incentive Plan Group subsidiaries as appropriate medOil medOil plc and/or its subsidiaries Capricorn/ Capricorn Oil Limited (previously named as appropriate Capricorn Group Capricorn Energy Limited) and/or its MRPL Mangalore Refinery and Petrochemicals subsidiaries as appropriate Limited (subsidiary of ONGC) CEC Chief Executive’s Committee (formerly known NSE National Stock Exchange of India Limited as the Group Management Board) OGP International Association of Oil and Gas Combined Code The Combined Code dated June 2006
GOVERNANCE AND ACCOUNTS Producers appended to the Listing Rules OIDA cess Indian Oil Industry (Development) Act 1974 Companies Act The Companies Act 1985 (as amended) and/ or the Companies Act 2006 (as amended), ONGC Oil and Natural Gas Corporation Ltd as appropriate Orient Global Orient Global Tamarind Fund Pte Limited the Company Cairn Energy PLC Petronas Petroliam Nasional Berhad DGH Director General of Hydrocarbons Plectrum Plectrum Petroleum Plc and/or Dyas Dyas BV its subsidiaries as appropriate EGM Extraordinary General Meeting PIRC Pensions Investment Research Consultants Limited EU European Union PSC Production Sharing Contract FSA Financial Services Authority RMC Risk Management Committee GoI Government of India RREV Research, Recommendations and Group the Company and its subsidiaries Electronic Voting Santos Santos International Holdings Pty Limited SEBI Securities and Exchange Board of India
134 CAIRN ENERGY PLC ANNUAL REPORT 2008 GOVERNANCE AND ACCOUNTS 135
2008
CAIRN ENERGY PLC ANNUAL REPORT REPORT ANNUAL PLC ENERGY CAIRN United States DollarsStatesUnited billion Cairn India Employee Stock Option Performance Employee Plan India Cairn Plan Option Cairn India Senior Management Plan Plan Ownership Share Employee Standard Accounting International InternationalReportingFinancial Committee Interpretations Standards Reporting Financial International 36 Standard Accounting International ‘Impairment of Assets’ London Inter-Bank Offered Rate million post-tax rate of return returnshareholder total priceexcerciseaverageweighted Methane Responsibility Corporate Management Resource Environmental gas greenhouse lost time injury frequency rate Corporate Responsibility Management Management Responsibility Corporate System total recordable incident frequency rate esponsibility R
4 orporate ccounting C A $ bn CIESOP CIPOP CISMP ESOP IAS IFRIC IFRS IAS 36 LIBOR m PTRR TSR WAEP CR CRMS ERM GHG LTIFR TRIFR CH best estimate contingent resources contingent estimate best proven plus probable barrels of oil equivalent barrels of oil equivalent per day barrels of oil per day enhanced oil recovery field development plan Aishwariya and Bhagyam Mangala, oil barrelsmillionof equivalentoil barrelsmillionof standardgasmillion of cubicfeet day perstandardgas million of cubicfeet ProcessingTerminal Mangala Rights of Use placeinitiallyinstock tankoil
echnical 2C T 2P boe boepd bopd EOR FDP MBA mmbbls mmboe mmscf mmscfd MPT RoU STOIIP Glossary of Terms of Glossary continued Company Information
Financial Advisers Registrars N M Rothschild & Sons Limited Equiniti New Court Aspect House St Swithin’s Lane Spencer Road London EC4P 4DU Lancing West Sussex BN99 6DA Secretary T 0871 384 2660 Duncan Wood LLB www.shareview.co.uk
Solicitors Bankers Shepherd and Wedderburn LLP Bank of Scotland Corporate 1 Exchange Cresent 2nd Floor Conference Square New Uberior House Edinburgh EH3 8UL 11 Earl Grey Street Edinburgh EH3 9BN Auditor Ernst & Young LLP Citigroup 10 George Street 33 Canada Square Edinburgh EH2 2DZ Canary Wharf London E14 5LB Stockbrokers RBS Hoare Govett Limited International Finance Corporation (IFC) 250 Bishopsgate 2121 Pennsylvania Avenue, NW London EC2M 4AA Washington DC 20433 GOVERNANCE AND ACCOUNTS United States of America Merrill Lynch International 2 King Edward Street The Royal Bank of Scotland plc (RBS) London EC1A 1HQ 24/25 St Andrew Square Edinburgh EH2 1AF
Note Cairn India has an $850m syndicated revolving credit facility with 12 international banks, including International Finance Corporation.
These materials contain forward-looking statements regarding Cairn, our corporate plans, future financial condition, future results of operations, future business plans and strategies. All such forward-looking statements are based on our management’s assumptions and beliefs in the light of information available to them at this time. These forward-looking statements are, by their nature, subject to significant risks and uncertainties and actual results, performance and achievements may be materially different from those expressed in such statements. Factors that may cause actual results, performance or achievements to differ from expectations include, but are not limited to, regulatory changes, future levels of industry product supply, demand and pricing, weather and weather related impacts, wars and acts of terrorism, development and use of technology, acts of competitors and other changes to business conditions. Cairn undertakes no obligation to revise any such forward-looking statements to reflect any changes in Cairn’s expectations with regard thereto or any change in circumstances or events after the date hereof.
136 CAIRN ENERGY PLC ANNUAL REPORT 2008 OVERVIEW O verview About Cairn 4 Highlights of 2008 5 Rajasthan Development Overview 8
BUSINESS REVIEW Chairman’s Statement 12 Chief Executive’s Review 16 Operating and Exploration Review 18 BUSINESS REVIEW Cairn India Assets 21 Capricorn Assets 24 Corporate Responsibility 28 Financial Review 34 Board of Directors 38
Governance and accounts Risk Factors 41 Corporate Governance Statement 45 Directors’ Report 56
G overn a nce a n d a ccounts Directors’ Remuneration Report 60 Principal Licence Interests 73 Independent Auditor’s Report to the Members of Cairn Energy PLC 75 Group Income Statement 77 Statements of Recognised Income and Expense 78 Balance Sheets 79 Statement of Cash Flows 80 Notes to the Accounts 81 Reserves 132 Glossary of Terms 134 Company Information 136
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