Cairn Energy PLC has today released its Full Year Results 2018.

Simon Thomson, Chief Executive Officer, Cairn Energy PLC said:
“Cairn plans a material exploration programme in 2019 targeting a billion barrels of gross resources, supported by cash flow from our production base. With active development projects within the portfolio, we look forward to additional sustained production and cash flow generation over the long term.

Cairn offers shareholders multiple catalysts for value creation. Our financial flexibility and continued focus on capital discipline ensure that the company remains strongly positioned to deliver an active programme.”

2018 Summary

• Combined net production averaged ~17,500* boepd
• Oil and gas sales revenue US$396m, average realised price US$68 boe**; average production cost US$20.5 per mmboe
• Net cash inflow from oil and gas production US$229m
• Capital expenditure: cash outflow of US$252m***, remaining cash outflows post year end US$30m
• Year end Group cash US$66m; US$85m drawn under US$575m RBL facility
• Operating loss US$182m from the impairment of Kraken following downward revision in reserves; net loss after tax US$1.1bn resulting principally from write down of Cairn’s investments in India

2019 Outlook

• Estimated net production of 19,000 to 22,000 bopd*; average production cost US$20/bbl
• Forecast capital expenditure US$300m***
• Senegal – SNE field development first phase on schedule. Targeting first oil 2022, gross production 100,000 bopd
• Norway – Nova field development on schedule. Targeting first oil 2021, peak gross production 50,000 bopd
• UK and Norway – up to four exploration wells (three Cairn operated) planned, targeting ~500 mmboe. The first well in the programme, Presto, spudded on March 1
• Mexico – three exploration wells (two Cairn operated) planned targeting ~500mmboe
• Hearings for Cairn’s arbitration claim against India concluded in 2018; drafting of the award by the Tribunal is ongoing

*Before FlowStream’s production entitlement of ~1,360 bopd in 2018; expected to be 1,350 to 1,575 bopd in 2019
**Before hedging costs of US$1.34 boe
***Net of Norwegian tax refund

Reserves

Group 2P reserves increased during the year by 2.5 mmboe from 53.8 mmboe to 56.3 mmboe.

Production during the year depleted reserves by 6.4 mmboe and a downward revision of 6.8 mmboe (19%) in the Kraken reserve estimates was offset by Nova which was sanctioned during the year adding 15.2 mmboe.

Production

Catcher
Gross production from the Catcher Area (Cairn 20% WI) (comprising the Catcher, Varadero and Burgman fields) averaged 43,000 boepd in 2018. This reflected the field’s ramp-up to plateau production rates in May following gas export commissioning and significantly increased plant availability during the second half of the year. Oil production from the Catcher FPSO continues to exceed nameplate capacity (60,000 bopd) and the JV has agreed with the FPSO provider to increase production from 60,000 bopd to 66,000 bopd (gross) on a reasonable endeavours basis. Reservoir performance to date has been good and analysis at year end 2018 has resulted in a slight increase in 2P reserves.

Cairn is working with the rest of the Catcher JV to optimise further investment in the Catcher area, including consideration of in-fill drilling and near-field opportunities to extend plateau production. A firm commitment has been made to drill an additional Varadero producer in 2020, with additional optional rig slots available for two further wells.

Kraken
Gross production from Kraken (Cairn 29.5% WI) averaged 30,300 boepd in 2018, which was below expectations. Production levels were most significantly affected by production system outages on the FPSO, weather-related incidents and higher water-cut than originally expected. Cairn is working with the field operator and FPSO contractor to achieve improvements in the uptime of the FPSO and a planned shut-down is scheduled later in 2019. Reservoir performance has been evaluated and at year end, Cairn’s estimation of Kraken 2P reserves has been reduced to reflect current performance. This has resulted in an impairment of US$166.3m in the carrying value of the Kraken asset. The JV is evaluating further investment opportunities in the Kraken area to provide new drilling opportunities in 2020.

The DC4 subsea infrastructure was successfully installed in H2 2018. The three-well DC4 drilling programme is ongoing and remains on schedule with production onstream from the first DC4 well.

Developments

Senegal – SNE
In 2018 substantial progress was made on the SNE field multi-phase development (Cairn 40% WI) with a number of key milestones achieved. Our partner Woodside has now assumed the role of operator, as planned, and the JV is targeting a final investment decision in mid-2019 and first oil in 2022.

The SNE development concept is a stand-alone FPSO vessel facility with a capacity of ~100,000 bopd, with 23 subsea wells and supporting subsea infrastructure. It will be designed to allow subsequent SNE development phases, including options for gas export to shore and for future subsea tiebacks from other reservoirs and fields.

In January 2019, the JV received approval in principle for the technical basis of the SNE Development and Exploitation Plan and confirmation that the licence covering the SNE development area would be extended to allow for the conclusion of FEED and to mature financing activities during 2019 prior to Exploitation Licence award. Separately, the JV has submitted a request to the government for an extension of the licence area covering the FAN and SNE North/Spica exploration areas to undertake further evaluation.

The Environmental and Social Impact Assessment (ESIA) was submitted in 2018 and approved in January 2019.

Project finance has been successfully launched with detailed work underway on financing structures for the JV.

FEED activities for the subsea contract and for the FPSO facility have been awarded to Subsea Integration Alliance and MODEC International Inc, respectively. The FEED work involves undertaking activities required to finalise the costs and technical definition for the development to enable a final investment decision.

The JV is now planning to undertake a 3D high bandwidth seismic survey in Q2/3 2019. It is expected that the survey will improve reservoir definition to support development well placement.

Norway – Nova

The Nova (Cairn 20% WI) development in Norway is on schedule with first oil targeted in 2021 and expected to deliver peak production of 50,000 bopd (10,000 net to Cairn).

Cairn participated in the discovery of the Nova field in 2012, at the time known as Skarfjell. The field development is located in the Norwegian North Sea ~17km south west of the existing Gjøa field and is estimated to contain recoverable resources of ~80 mmboe.

The Plan for Development and Operation (PDO) was submitted by operator Wintershall to the Norwegian Ministry of Petroleum and Energy and approved in H2 2018.

Hydrocarbons from the Nova reservoir will be developed with a subsea tie-back connecting two templates to the nearby Gjøa platform for processing and export. Development execution activities are expected to commence mid-year 2019 for the initial modification work on the Gjøa platform.

Exploration 

In 2019 we have a programme of material exploration drilling opportunities across mature, emerging and frontier locations in Europe, West Africa and Latin America. We are planning up to seven wells targeting total gross volume of more than one billion barrels. In 2018 we acquired several new country interests in Suriname, Côte D’Ivoire and Mauritania adding further high impact volume potential to our asset base.

Mexico

Cairn holds three licences offshore Mexico, in Block 7 (Cairn 35% WI), Block 9 (Cairn operator 65% WI) and Block 15 (Cairn operator 50% WI) covering a total acreage position of 2,080 km² in a highly prolific, yet under-explored region.

The first well in our Mexico programme will be drilled on Block 7, operated by ENI. The Operator is progressing all required permits. A site survey will compete shortly and well selection and preparations are well advanced to commence drilling in Q3 2019. An additional well is planned on Block 7 in 2020.

The second well will be on Block 9 and operated by Cairn. The exploration plan has been approved and a rig contract is in place with Maersk for the Maersk Developer Semi-Submersible Drilling Rig and a group services package with Schlumberger for onshore and supply base operations. Drilling operations are expected to commence in Q3 2019 targeting the Alom prospect, followed by an additional well targeting the Bitol prospect in Q4 2019 (also Cairn operated). This will be the third well in our Mexico programme. 

On Block 15, the exploration plan was submitted in Q4 2018 and an environmental baseline survey completed in Q1 2019. Further evaluation of the block is ongoing.

UK & Norway 

Cairn participated in four exploration wells in the UK & Norway region in 2018: PL682 (Cairn 30% WI) targeting the Tethys prospect in Q1, PL790 (Cairn 25% WI) containing the Raudåsen prospect in Q2, P2184 (Cairn operator 45% WI) targeting the Ekland prospect in Q4 and P1763 (Cairn 50% WI) containing the Agar discovery and Plantain prospect also in Q4.

Agar is estimated by the operator to hold recoverable resources of 15-50 mmboe. Further evaluation of the development options and broader exploration potential is ongoing. Cairn has the option to take over operatorship of future activity on the area. 

Cairn was awarded three new licences in the Norwegian Petroleum Directorate’s APA 2017 announced in Q1 2018, all non-operated with material equity positions, and one new non-operated licence in the APA 2018, PL418B. Cairn was also awarded five new licences, three as operator, in the UK Oil & Gas Authority’s 30th Offshore Licensing Round in Q2 2018.

Plans are in place for four exploration wells in the UK/Norway region in 2019, three of which will be operated by Cairn. The first well in the programme, operated by Equinor, is Presto (Cairn 30% WI) which has commenced operations with the Transocean Spitsbergen rig on PL885 in the Norwegian North Sea.

The second well in the programme is expected to be Lynghaug, Cairn’s first operated well in Norway. Lynghaug (Cairn 50% WI), licence PL758, is expected to spud in Q3 2019. Success in this well could lead to follow on exploration opportunities along the Nordland Ridge. Lynghaug will be drilled by the Transocean Arctic drilling rig. 

The third well in the programme is Godalen (Cairn 40% WI) in licence PL842, Cairn’s second operated well in Norway, which is expected to spud in Q4 2019. Godalen will also be drilled by the Transocean Arctic. 

The fourth well in the programme is Chimera (Cairn 60% WI) in licence P2312 in the UK North Sea, Cairn’s second operated well in the UK, which is expected to spud in Q4 2019. In Q4 2018, Cairn agreed to farm out a 40% WI in this licence to Suncor Energy UK.

Suriname

In 2018 Cairn was awarded an exploration agreement (Cairn operator 100% WI) on the largest block offshore Suriname by Staatsolie, the State Oil Company of Suriname. The licence covers an area of ~13,000 km² in the Demerara plateau in the Guyana-Suriname basin which has a conjugate margin to the SNE field in Senegal.

In December 2018, Cairn’s ESIA was submitted and approved ahead of our initial planned 2D seismic acquisition commitment of 4,150km. 85% of this seismic programme has now been successfully completed with the remaining 15% expected to complete by the end of Q2 2019. Data processing will be ongoing for the remainder of this year.

Mauritania

In Mauritania, Cairn has an option agreement with Total to enter block C7, targeting a turbidite fan play in a large offshore exploration block in a proven oil province. Cairn has a right to acquire a 30% WI (Total operator 60% WI and Societé Mauritanienne des Hydrocarbures 10% WI), subject to government and partner approvals. A ~7,000km² seismic programme was completed in 2018 with final interpretation of data expected in H1 2019 after which a well decision will follow.

Côte d’Ivoire

In Côte d’Ivoire, Cairn has entered into the continental rift play with Tullow Oil. Cairn has agreed a farm-in for a 30%, non-operated, interest in all seven of Tullow’s onshore licences (CI -301, CI-302, CI-518, CI-519, CI-520, CI-521 and CI-522), subject to obtaining the necessary government approvals. Tullow completed a full tensor gravity gradiometry survey covering 8,600 km² in H1 2018, following which a 2D seismic survey is planned for 2019.

Republic of Ireland

In the Republic of Ireland, Cairn has an acreage position in the Porcupine Basin with an interest in two licences and two licence options over an area of ~4,000km². Processing of the 3D seismic data set acquired in 2017 across LO 16/19 (Cairn operator 70% WI) and the adjacent LO 16/18 (Cairn 100% WI) is now complete.

India

Cairn commenced proceedings against India in 2015 following retrospective taxation actions undertaken by the Indian Income Tax Department (“IITD”) in 2014. Final merits hearings for the arbitration concluded during 2018. Cairn’s claim under the Treaty is for monetary compensation of ~US$1.4 billion, the sum required to reinstate the Company to the position it would have been in, but for the actions of the IITD since January 2014. The arbitration Panel is expected to issue a binding and internationally-enforceable award, and Cairn continues to have a high level of confidence in the merits of its claims in the arbitration.

Now that the merits submissions and hearings have concluded, the arbitration Panel is preparing its final award with respect to Cairn’s claim under the Treaty. The Panel had originally guided the arbitration parties that it expected to issue an award expeditiously following the conclusion of the main merits hearings in The Hague held in August 2018.

When the parties appeared before the Tribunal in December 2018, the Panel advised that it had not been able to advance the award as expected due to the number of procedural matters that had been brought before it since the August hearings, and that it is was not in a position at that time to give guidance to the parties on the expected timing of the issuance of the award.

Cairn subsequently wrote to the Panel in February 2019 asking if it was then able to provide any guidance on timing, and the Panel has now responded that although it remains mindful of Cairn’s need for a swift decision, given its workload and the number of matters before it, it is still unable to provide specific guidance on timing. As a result of this, Cairn expects that the timetable for issuing the award will be more protracted than originally anticipated and is unlikely to be before late 2019.

The Panel has said it will keep the parties updated regarding its progress.

To date, the IITD has seized dividends due to Cairn from its shareholding in Vedanta Limited (VL) totalling approximately US$164m and it has offset a tax rebate of US$234m due to Cairn as a result of overpayment of capital gains tax on a separate matter. During the year, the IITD seized proceeds from a 4.9% sale of Cairn’s shareholding in VL, together with redemption proceeds on the VL preference shares, totalling US$713m. Following these sales, Cairn’s retained holding in VL is now 0.1%.

Board changes

Jackie Sheppard retired as a non-executive director of the Company at the year-end having served on the Board since 2010. Alexander Berger, non-executive director, has served on the Board for nine years and has advised the Company that he will not be seeking re-election at the Annual General Meeting in May 2019. He will therefore retire from the Company on that day.