Final Results

Cairn Energy PLC 19 April 2005 EMBARGOED FOR RELEASE AT 07.00 19 April 2005 CAIRN ENERGY PLC PRELIMINARY RESULTS ANNOUNCEMENT Operational - Rajasthan (Block RJ/ON-90/1) •World class Mangala oil discovery •Mangala development plan targets life of field Proven and Probable (2P) reserves of 376 million barrels (mmbbls) based on secondary recovery by water flood •Bhagyam (N-V) and Aishwariya significant oil discoveries with a further three discoveries in 2004 bringing the total Cairn discovered fields in Rajasthan to 11 •Current life of field reserve estimate of 500 mmbbls based on secondary recovery only for Mangala, Bhagyam and Aishwariya - the three northern fields •Northern fields peak production target 120,000 to 150,000 bopd •Independent assessment of the three northern fields, assigns 1.64 billion barrels of oil in place •Development plans to be submitted to Government of India in May 2005 •Application to more than double the Development Area from 1,858km2 to 4,743 km2 includes Bhagyam and Shakti (N-C) fields •Active programme with 77 wells drilled to date including 51 wells in 2004 Operational - Rest of South Asia •Successful infill development campaigns in both Sangu and Lakshmi fields •Exploration drilling programme planned in Bangladesh for winter 2005/2006 •Additional exploration acreage acquired through ONGC transaction Financial • Turnover before exceptional items £110.2m (2003: £155.8m) • Profit before tax and exceptional items £29.4m (2003: £69.0m) • Operating cash flow £77.5m (2003: £122.2m) • No gearing and net funds of £72.0m at the year end (2003: net funds £17.8m) • $135m pre tax received March 2005 following completion of ONGC transaction Bill Gammell, Chief Executive said: '2004 was an exceptional year for Cairn and our operational success has continued in 2005. To have discovered, appraised and evaluated half a billion barrels of oil reserves in Rajasthan within 15 months is a tremendous achievement by the Cairn team. With the start up of Mangala aimed for the end of 2007 and a peak production target from the three northern fields of 120,000 to 150,000 bopd, this project is not only material to Cairn and its partner ONGC but to the Rajasthan State and the Indian Government. Cairn remains excited by the growth opportunities within its existing portfolio and the prospects for growth across South Asia.' Enquiries to: Cairn Energy PLC: Analysts Tel: 0131 475 3000 Bill Gammell, Chief Executive Mike Watts, Exploration Director Kevin Hart, Finance Director Media David Nisbet, Head of Group Communications Brunswick Group Limited: Tel: 0207 404 5959 Patrick Handley, Mark Antelme Cairn Energy Live Audio Webcast The webcast of the 2004 Results presentation will be available at 09:00hrs (UK time) on Tuesday 19 April, 2005. This will be available on the Cairn Energy PLC website: www.cairn-energy.plc.uk http://www.cairn-energy.plc.uk An archived version of the webcast will be available in the afternoon. CHAIRMAN'S STATEMENT Cairn has a clear strategy to create value through exploration. It has focused its exploration and development activities on South Asia for more than ten years and has opened up an important new hydrocarbon basin in Rajasthan. By developing and producing its own discoveries across the region Cairn has grown organically creating a robust and material business presently operating more than 100,000 boepd on behalf of its joint venture partners. Cairn has a clear competitive edge for the future in this part of Asia. India is one of the fastest growing economies in the world. It currently imports the bulk of its oil needs which explains the importance it places on new indigenous oil discoveries. Our relationship and partnership with ONGC, India's largest oil and gas company which took a 30% stake in the Rajasthan Development Area earlier this year along with an alignment of needs with the Rajasthan State Government and Government of India, leaves Cairn well placed to maximize the value of the Rajasthan discoveries. The Mangala oil discovery in the Rajasthan desert in January 2004 highlights the vision and perseverance with which this South Asian strategy has been pursued. Mangala is the largest oil discovery by any company in India within the last 22 years. Cairn has made a total of 11 discoveries on the Rajasthan block. Each discovery is at a different stage of appraisal and evaluation. It is currently estimated that the total volume of oil in place found so far is more than two billion bbls. During 2004, six discoveries were made, including the three northern fields Mangala, Aishwariya (March) and Bhagyam (August). The Mangala and Aishwariya fields have both been fully appraised by six and five appraisal wells respectively and 3D seismic data. Appraisal of Bhagyam had to be delayed until the award of the north-west extension acreage in January 2005. Four successful Bhagyam appraisal wells have since been drilled between February and April 2005 and two more appraisal wells are planned. A 3D seismic survey over Bhagyam is commencing shortly. Mangala is the largest of these discoveries and it will form the core of the future developments. Cairn's proven plus probable (2P) oil in place estimate for the Mangala field is 1,071 mmbbls. The 2P reserves estimate has been revised by Cairn to 376 mmbbls, based on secondary recovery by water flood until 2041. Cairn estimates the total 2P reserves for the three northern fields to be 500 mmbbls. There is scope to add further reserves to this figure by applying Enhanced Oil Recovery (EOR) techniques, early in the production life of the fields. In the case of Mangala this could be more than 100 mmbbls. An independent review by the international firm of reservoir engineering consultants, DeGolyer and MacNaughton (D&M), conducted in April 2005 has assigned a 2P oil-in-place volume estimate of 1.64 billion bbls for the three northern fields comprising Mangala 1,067 mmbbls, Bhagyam 355 mmbbls and 219 mmbbls at Aishwariya. Peak production targets for the three northern fields are in the 120,000 to 150,000 bopd range with Mangala planned to come on stream at the end of 2007. Cairn currently estimates full field development costs of $3 - $3.50 per barrel (bbl). The majority of expenditure is expected to be incurred after the commencement of Mangala production. The other discoveries made in 2004 were Shakti (June), Vijaya ( N-R-1, September) and Vandana (N-R-2, November). A total of 77 wells have now been drilled by Cairn in Rajasthan, 51 of them in 2004 and 10 in 2005 to date. This is a strong achievement when the logistical requirements for land acquisition, well site preparation, road building as well forging relationships with the local community are considered. A further 20 to 30 wells are presently planned in 2005. This pace of activity can only be sustained in an onshore environment where the costs of each well are relatively low compared to offshore drilling. It is Cairn's belief that there is potential to add further oil in place volumes, elsewhere in the basin, through the continuing exploration and appraisal programme. Financial Results Average daily production for 2004 was 22,789 boepd (2003: 30,214 boepd). The reduced rate reflects an increase in Government entitlement pursuant to the Sangu and Ravva Production Sharing Contracts ('PSCs') and a temporary reduction in field deliverability from Sangu and Lakshmi as a result of well intervention and infill drilling programmes. This activity to increase delivery capacity at both these gas fields commenced in the latter part of the year. As a consequence, 2005 production is currently forecast to exceed 2004 levels. Due to the Group's current production mix being heavily gas biased and the existence of contractual caps on the price received for this gas, the average price realised for 2004 was $24.06 (2003: $22.86). Group turnover, pre exceptionals items, was £110.2m (2003: £155.8m). Operating profit pre exceptional items and operating cashflow were £31.5m and £77.5m respectively (2003: £73.1m and £122.2m). Profit after tax before exceptional items was £19.6m compared to £46.2m in 2003. Exceptional items mainly comprise a provision made following the recent Ravva arbitration award. Profit after tax and exceptional items was £10.8m (2003: £46.2m). The financial statements presented have been impacted by the weakening of the US$ against Sterling during the year as although principally a US$ underlying business the Group reports in Sterling. Cairn will implement International Financial Reporting Standards in 2005. The Group is also considering a transition to US$ for future currency reporting. The Group had net funds of £72m at the year end (2003: net funds £17.8m) and unutilised unsecured credit facilities of $240m. $135m proceeds were received in March 2005 following completion of the ONGC transaction. Directors and Employees A key asset of a business is its people. The attitude, common sense and judgement of the Cairn team is critical to our business culture. Operating in any foreign country is only sustainable when values are shared. The appointment of Andrew Shilston, the finance director of Rolls-Royce plc, as a non-executive director during 2004 has added considerable industry knowledge and financial expertise to the Board. I would like to thank and congratulate all employees for their tremendous efforts in what has been a very special year for the Company. The scale of the discoveries in Rajasthan meant that extra staff were needed and increased demands were placed on those already in place. The continued success of Cairn is very much a team effort, based on the energy, expertise, enterprise, enthusiasm and commitment of every one of its employees in Bangladesh, India and Edinburgh. Outlook Our explorational and operational strengths continue to be underpinned by a solid financial base, which gives us maximum flexibility to capitalise on the many opportunities in South Asia. Having already built a material business, Cairn is well positioned to use its competitive edge to participate in the economic and energy growth of the region. Cairn will submit development plans for its commercial discoveries for the fields within the original Development Area in May 2005, with the aim of obtaining all of the required approvals by the end of the year. An application has been made to the Government of India to enlarge the existing Development Area to include the Bhagyam and Shakti discoveries. If granted, the size of the Development Area will increase from 1,858 km2 to 4,743 km2. It is Cairn's belief that significant exploration potential remains in South Asia. Commitment to this belief combined with the application of state of the art exploration technology in both mature and frontier areas, offers the best chance for continued success. As evidence of this belief Cairn will be participating in the Government of India's next exploration licensing round (NELP V) which closes at the end of May 2005. The challenge for Cairn in 2005 is to grow and augment the world class position it has created in Rajasthan, taking the projects through appraisal, development and on to production. Norman Murray Chairman, 19 April 2005 OPERATIONAL REVIEW The majority of Cairn's operational activity during 2004 and to date in 2005 has been focused on Rajasthan and the infill development drilling at Sangu and Lakshmi. In Rajasthan this has resulted in the discovery and appraisal of a number of fields, including the world class Mangala field and two other significant discoveries Bhagyam and Aishwariya in the north of the block. WESTERN INDIA - RAJASTHAN The Rajasthan block, RJ-ON-90/1, comprises 6,688 km2 of semi desert terrain. It lies in the Barmer Basin, which is a northern extension of the well established oil and gas producing Cambay Basin. Exploration successes by Cairn in 2004 confirmed the oil and gas potential of the Barmer Basin. While hydrocarbons had previously been found at a number of stratigraphic levels throughout the block, a key to the major success was finding high quality oil bearing reservoirs in the Fatehgarh formation in the north. The high oil flow rates and good reservoir interconnectivity seen on well tests are indicative that excellent recovery rates may be expected from these Fatehgarh sands. Cairn drilled a total of 51 exploration and appraisal wells in Rajasthan during 2004, bringing the total number of wells drilled to 77 as of 1st April 2005. These wells can be drilled very cost effectively because of the shallow reservoir depths and being onshore. It also acquired 2,306 km of 2D seismic and 468 km2 of 3D seismic. Cairn holds a 100% equity interest in block wide exploration and in January 2005 ONGC exercised its rights to take a 30% equity interest in the Development Area associated with the commercial discoveries. Cairn estimates the total oil in place discovered to date on the block to be more than 2 billion bbls. For the northern fields a combination of high angle wells, high density well spacing, secondary recovery as well as the application of EOR techniques means that oil recovery will be optimized. The current gross life of field 2P reserves estimate for these fields based on primary and secondary recovery only is 500 mmbbls. The development plans for the northern fields envisage a phased development with production start up at Mangala at the end of 2007 followed by the subsequent production start up of Bhagyam and Aishwariya. The Government of India has instructed various of its oil Public Sector Undertakings to propose export and purchase plans for the increased volumes of crude in order to meet the development schedule. As part of this overall process, various pipeline export options are being investigated including a dedicated pipeline to the coast. The smaller southern fields in Rajasthan are being reviewed for possible early production and evacuation of crude by trucking. Exploration The main oil discoveries made by Cairn during 2004 were: •NB-1 (Mangala Field) in mid January •NA-1 (Aishwariya Field) in March •NC-1 (Shakti Field) in April •NV-1 (Bhagyam Field) in August •NR-1 (Vijaya Field) in September •NR-2 (Vandana Field) in November. In addition, the Raageshwari-4, 5 and 6 appraisal wells drilled through the shallow Thumbli oil reservoir, have confirmed the deep gas bearing volcanics seen in the E-1 discovery well of 2003. They have also established a Fatehgarh deep gas play in the centre of the basin. The NC-1 (Shakti Field) and NV-1 (Bhagyam Field) wells discovered hydrocarbons on the very northern edge of the contract area. Under the terms of the PSC, this enabled the granting of two acreage extensions, totalling an additional 1,708 km 2, to appraise the extent of these discoveries. The Mangala and Aishwariya Fields, together with the Saraswati and Raageshwari Fields, were declared commercial by the Government of India in October 2004. These fields were included in a 1,858 sq km Development Area. This area incorporates other discoveries, which at the time were unappraised, including Guda, Kameshwari (Q-1) and GR-F. The granting of the Development Area secures rights until at least 2020 and the Joint Venture will be seeking to extend this period to 2041 when it submits its development plans. An additional or extended Development Area to secure the Shakti and Bhagyam Fields as well as a number of small Barmer Hill discoveries has been applied for. The ongoing drilling campaign in Rajasthan will focus on the further appraisal of existing discoveries as well as on exploration prospects in the north and south. Oil Appraisal and Development Mangala Field Mangala was fully appraised by wells between March and July and a 3D seismic survey acquired between May and December in 2004. A range of technical studies to characterise the geological, geophysical and geochemical nature and disposition of the reservoirs and fluids is being undertaken. These studies have been integrated with both subsurface and facilities engineering studies in a Front End Engineering and Design (FEED) study that forms the basis of the Field Development Plan which is to be submitted to the Indian Government in May 2005. The development plan for Mangala will target a 35% recovery factor assuming a secondary water flood. Ongoing studies, including water injectivity testing, are aimed at supporting this objective. To combat the high pour point and waxy nature of the crude, injected water is likely to be heated. Cairn is working closely with the local water authorities to ensure a sustainable water extraction and re-injection process. Extensive deep saline (non drinking water) aquifers have been discovered which can be utilised as a source of water for injection purposes. Extraction will be monitored to ensure minimal impact on the water table. Tertiary and enhanced oil recovery techniques, such as polymer flooding or the use of surfactants, are under investigation. Such techniques may further raise the recovery factors in addition to the conventional water flood scheme. Analogous fields worldwide, including some in the neighbouring Cambay Basin in Gujarat, are being reviewed to determine the optimum secondary and tertiary recovery methods. An ultimate recovery factor of more than 40% of oil in place is possible. The current internal Mangala life of field 2P gross reserve estimate is 376 mmbbls, based on secondary recovery by water flood and production to 2041. Peak production is envisaged to be between 100,000 and 110,000 bopd with field start up planned for Q4 2007. Prior to the 3D seismic survey over Mangala being completed, an independent analysis of the data by D&M (July 2004) confirmed a 2P oil in place volume of 1,005 million barrels. After incorporating the 3D seismic data in April 2005 D&M has revised its estimate to 1,067 million barrels. The D&M 2P current reserve estimate for Mangala is 256 mmbbls based on secondary recovery only assuming the production contract term runs until only 2025. D&M estimate that an additional 108 mmbbls of reserves could be added with a successful EOR programme. Aishwariya Field The Aishwariya Field was fully appraised between April and September 2004. A 3D seismic survey has been acquired over the field and is being interpreted. As a result of the early 3D interpretation, an additional appraisal well was drilled to test the crest of the structure. The field is slightly deeper than Mangala and the oil quality, whilst similarly waxy and of high pour point, is less variable than at Mangala, with a mean API gravity of 29 degrees. Despite being smaller than the Mangala Field and having a slightly different reservoir configuration, the proposed techniques of dense drilling, secondary recovery via waterflooding and enhanced/tertiary oil recovery techniques introduced early in field life are equally applicable to the Aishwariya Field. Reserve estimates will be revised once these studies are complete. In April 2005 D&M estimated the 2P oil in place volume for Aishwariya to be 219 mmbbls. The D&M current 2P reserve estimate for Aishwariya is 41 mmbbls based on secondary recovery only and assuming the production contract term runs until only 2025. Bhagyam Field The Bhagyam Field has been appraised between January and April 2005 and two more appraisal wells are planned. A cased hole test in Bhagyam 1-ST established a flow rate of 1,050 bopd of 26 degree API oil from one zone. Two cased hole tests in Bhagyam-4 established a flow rate of 660 bopd of 24.5 degree API oil and 1,700 bopd of 30 degree API oil from two separate zones. The field is slightly shallower than the Mangala field and the oil quality, whilst similarly waxy and of high pour point, is more viscous than at Mangala. Despite being smaller than the Mangala Field, the proposed techniques of dense drilling, secondary recovery via waterflooding and enhanced/tertiary oil recovery techniques introduced early in field life are equally applicable to the Bhagyam field. Reserve estimates may change once the final appraisal wells have been drilled and studies are complete. In April 2005 D&M estimates the 2P oil in place volume for Bhagyam to be 355 mmbbls. The D&M 2P reserve estimate for Bhagyam is 85 mmbbls based on primary and secondary recovery only and production until 2025. D&M estimate that an additional 48 mmbbls of reserves could be added with a successful EOR programme. Shakti Field The Shakti Field was partially appraised between September and December 2004. The Shakti-2 and Shakti-3 well were put on pumped test for a four day period in January 2005 to assess recovery of this relatively viscous 19 degree API oil. Shakti-2 flowed at a sustained rate of 50 bopd and Shakti-3 at a rate of 60 bopd from selected intervals. Guda and GR-F Field The Guda discovery well was drilled in 1999 and encountered oil in the Dharvi Dungar Formation. The GR-F-1 discovery well drilled 9km to the south in 2003 encountered oil in the Thumbli Formation. Subsequent appraisal of these two fields by the Guda-3 and GR-F-2 wells drilled early in 2005, when combined with remapping of the 3D seismic, has established that they are in fact one field at the Thumbli level. Re-examination of the original Guda well has confirmed that the Thumbli reservoir, which was not tested at the time, was oil bearing in these wells. The combined field is to be called Guda. Cairn currently estimates that the range of oil in place volumes for Guda is between 40 and 400 mmbbls. Further appraisal of the Guda Field, comprising an eight well programme, is planned to commence later this year to delineate the potential field size. Saraswati and Raageshwari Fields The Saraswati Field was discovered in late 2001. It has been covered by 3D seismic and 2 appraisal wells were drilled in 2003. The field is complexly faulted and has oil in Barmer Hill and Fatehgarh reservoirs. In 2004, the Saraswati-4 crestal well successfully established significant oil flows from the fractured basement. Although the reservoir quality in the Barmer Hill and Fatehgarh formations gave somewhat low initial flow rates, subsequent fracture stimulation has been more successful in increasing rates. Oil was discovered in Thumbli reservoirs at Raageshwari in early 2003. The Raageshwari -2 and Raageshwari -3 appraisal wells drilled in 2003-2004 have confirmed the presence of oil and gas down dip of the discovery well in separate fault blocks and with slightly differing pressures and oil water contacts. The Declaration of Commerciality submitted to the Government of India in May 2004 included the Saraswati and Raageshwari oil fields. The development plans based on current data will be submitted to the Government of India in May 2005, however a full evaluation programme on these fields is yet to be carried out. Initial fracture stimulation studies have highlighted the potential for productivity increases from the reservoirs in these southern fields. The southern fields, Saraswati, Raageshwari oil and Guda are all candidates for early production and evacuation of crude by trucking. Other Potentially Significant Oil Fields Further evaluation and appraisal of oil discoveries at Kameshwari, Vijaya (NR-1) and Vandana (NR-2) is ongoing. The Vijaya and Vandana discoveries are the first stratigraphic traps to be tested on the block. Both fields have been covered by a 3D seismic survey which is currently being evaluated. The combined oil in place estimates for the Vijaya and Vandana discoveries range between 50 and 500 mmbbls. The Raageshwari Gas Field and Deep Gas Exploration Potential The Raageshwari gas field and the deep gas exploration potential within the southern area is a potential important new resource. Gas has value as an important component of the development plan for the Mangala and northern fields, which will have their own power requirements. The Raageshwari -4 well was drilled in 2004 and confirmed the extension of the deep gas potential proven in the volcanic section at the base of the Raageshwari -1 well. This well also encountered gas in Fatehgarh sands. In 2005, the Raageshwari -5 and -6 wells were drilled to appraise these deep gas reservoirs. The proven mobile gas column established at Raageshwari is 500m. However, the low permeability of both the volcanic and Fatehgarh reservoirs has produced mixed results on test. A further two Raageshwari appraisal wells are planned this year to further delineate this gas field. The Raageshwari - 4 well is currently being tested across the volcanic and Fatehgarh reservoirs. The maximum stable rate achieved has been 3.3 mmsfcd. A stimulation programme is planned to be carried out in the second half of 2005 which is expected to improve productivity. An exploration review of the Central Basin High prospects on trend with Raageshwari, has highlighted potentially significant additional unrisked gas volumes. An exploration well is planned for this year. WESTERN INDIA - CAMBAY BASIN Block CB/OS-2 Lakshmi & Gauri Gas Fields; (Cairn interest: 40%; Cairn Operator) The average gas production from the Lakshmi and Gauri fields in 2004 was 78 mmscfpd (2003: 109 mmscfpd). During the year, an additional offshore gas platform was installed as part of the Gauri development and the Gauri field was brought on stream in April 2004. Production rates from the Lakshmi field were adversely affected by production-related issues on a number of Lakshmi wells, which resulted in these wells being shut-in. The second phase of Lakshmi development drilling, which involved the drilling of five additional production wells, started in November 2004 and was completed in March 2005. In addition, the installation of onshore booster compression is underway. The combined Lakshmi and Gauri gas production can now exceed 100 mmscfd and is currently meeting buyers nominations. As part of the contractual specifications relating to the transmission of sales gas, additional gas dehydration equipment was installed and commissioned at the Suvali gas processing plant during 2004. The potential phased oil development programme for Lakshmi and Gauri, which was scheduled to start with initial test production from the Gauri development well GA-3, has been delayed until Q3 2005 when the results of Phase II of the Lakshmi gas project are expected to have been fully evaluated. Cairn's equity interest in the Lakshmi and Gauri developments has been reduced to 40% following completion of the ONGC deep-water transaction. Exploration (Cairn interest: 60%; Cairn Operator) The CB-X-1 exploration well drilled in January 2004 discovered modest volumes of gas in the Tarkeshwar formation in a structure that is along trend from the producing Olpad Field in an adjacent block. A Declaration of Commerciality has been submitted to the Government of India and a development plan is in preparation to bring the gas to the Suvali processing facility by pipeline at the earliest opportunity. Other Cambay Basin Exploration (Cairn interest: 30%; non operator) The first 3 year exploration phase on block CB-ONN 2002/1 will involve the acquisition of 120 sq km of seismic data and the drilling of three wells. A 3D seismic survey is nearing completion on block CB-ONN 2001/1 and exploration drilling is anticipated in 2005. EASTERN INDIA - KRISHNA - GODAVARI BASIN Ravva Field; (Cairn interest: 22.5%; Cairn Operator) The Ravva Field continued to perform well with average 2004 gross daily production of 53,521 bopd and 87 mmscfpd (2003: 53,463 bopd and 74 mmscfpd). Cairn's average 2004 net entitlement production was 7,516 boepd (2003:10,562 boepd). Under the terms of the Ravva PSC, the Government of India's share of production increased to 60% during 2004, which has resulted in a reduction in Cairn's net entitlement interest. The estimated ultimate reserves (EUR) of both oil and gas have been revised from 279 mmboe to 298 mmboe. An infill development drilling campaign is planned for the field later this year to extend the plateau. A number of exploration prospects have been identified on the Ravva block and it is envisaged that an exploration drilling campaign maybe carried out in the next one to three years. Exploration A 90% interest in the KG-DWN-98/2 deepwater block has been farmed out to ONGC, which becomes operator. A multi-well appraisal of the discoveries made by Cairn in 2001 is expected to commence in 2005. Cairn's interest in the KG-OS/6 block was relinquished in May 2004. NORTHERN INDIA AND NEPAL Exploration Ganga Basin Exploration - India Cairn was awarded a 100% interest in the large 15,500 km2 GV-ONN-2002/1 block in February, as part of its exploration strategy for the lightly explored Ganga Basin in northern India and Nepal. Exploration activity will begin with some aerial geophysical surveys and soil sampling once the Petroleum Exploration License has been finalised. Cairn acquired a 30% interest from ONGC in block GV-ONN 97/1 which is operated by ONGC. A 2D seismic survey has been acquired during 2004 and the prospectivity is being evaluated prior to any drilling. Ganga Basin Exploration - Nepal In August 2004, Cairn signed agreements with the government of Nepal for two Petroleum Agreements covering five large blocks. These blocks lie adjascent to India in the Ganges flood plain and foothills of the Himalaiyas. The first four year exploration commitment is in respect of seismic data only. Work in 2005 will focus largely on environmental, operational and social impact studies which will be crucial to the successful implementation of any operations programme. Cairn is alert to the sensitivities of operating in Nepal and is actively engaging with the authorities and Non Governmental Officers, including the World Wildlife Fund for Nature, to ensure a viable programme. Upon signature of the agreements, Cairn relinquished 2,704 km2 that were designated areas of scientific and environmental importance. Cairn is also monitoring developments and security within the country as a result of recent political events. BANGLADESH Cairn discovered the Sangu gas field in 1996 and took over operatorship of Sangu following the acquisition of Shell's interests in Bangladesh in July 2004. Sangu Development Area; Block 16 (Cairn interest: 75%; Cairn Operator) During 2004, gross offtake from the Sangu field averaged 132 mmscfpd (2003: 141 mmscfpd). The dip in production was partly attributable to production-related issues and the subsequent shut-in of one of the Sangu wells. The average realised gas price for 2004 was $2.904/mcf (2003: $2.921/mcf). Three additional Sangu development wells were drilled and completed between November 2004 and April 2005. Current Sangu production is in excess of 150 mmscfpd. It is expected that production will further increase to assist in meeting the increased gas demand in southern Bangladesh. Production performance in conjunction with the three new development wells identified a difference between the volumetrically-derived estimates and material-balance derived estimates of gas-in-place for two of the main producing reservoirs. Cairn is adopting the lower material-balance derived estimates and re-categorising the difference in the 'possible' reserve category. This review has resulted in a revision of EUR for the field from 1,205 bcf to 950 bcf. During 2004, a significant milestone was achieved, with the Sangu work-force reaching 5 million working hours without a lost time incident. Exploration Seismic data acquisition began on Block 10 in April 2004 and continued until the end of the year. A total of 1,244 km of seismic data was acquired in Block 10 and 70 km in Block 5. This data is currently being interpreted. The next contract phase, which includes drilling commitments, begins in June 2005. Cairn has reached agreement, subject to requisite Government and partner approvals, to extend the term of the PSC in respect of certain parts of Block 16 where a number of material exploration prospects have been mapped. In view of the improved business climate in Bangladesh, Cairn is currently reviewing its options for investment in exploration. Subject to government and partner approvals, Cairn plans to drill some of these exploration prospects during the winter of 2005/2006. NORTH SEA Cairn disposed of its 10% interest in the Gryphon field in May 2004. RESERVES The table below shows reserves information at the end of 2004 on an entitlement basis for the Group. Reserves at Produced Acquisitions Disposals Revisions Reserves at 31/12/03 in 2004 in 2004 in 2004 in 2004 31/12/04 mmboe mmboe mmboe mmboe mmboe North 1.5 (0.1) - (1.4) - - Sea South 75.1 (8.2) 35.5 - (21.0) 81.4 Asia Total 76.6 (8.3) 35.5 (1.4) (21.0) 81.4 On a direct working interest basis, reserves at 31 December 2004 totalled 123.9 mmboe (2003: 113.4 mmboe). FINANCIAL REVIEW Cairn enters 2005 with a strong balance sheet and net funds which will enable it to pursue the financially transforming developments in Rajasthan. Key Statistics 2004 2003 % Increase/ (Decrease) Production (boepd)* 22,789 30,214 (25) Average price per boe ($) 24.06 22.86 5 Turnover before exceptionals (£m) 110.2 155.8 (29) Average cost of sales per boe ($) 13.29 10.49 27 Profit before tax and exceptionals (£m) 29.4 69.0 (57) Profit after tax and exceptionals (£m) 10.8 46.2 (77) Operating cashflow (£m) 77.5 122.2 (37) Net funds (£m) 72.0 17.8 304 *on an entitlement interest basis PROFIT AND LOSS Turnover Average production on a working interest basis remains relatively unchanged year on year at 34,276 boepd (2003: 34,342 boepd). On an entitlement basis, production for the year was 22,789 boepd compared to 30,214 boepd in 2003. Production acquired with the acquisition of Shell's interests in Bangladesh has been recognised from the transaction completion date (30 June 2004). Production relating to the 10% interest in the Gryphon field has been included up to the disposal completion date (26 May 2004). Field production in 2004 has also been impacted by well intervention and infill drilling programmes undertaken to enhance production in the latter part of the year on both the Sangu and Lakshmi gas fields. In accordance with the terms of the respective PSCs, Cairn's production entitlement from both the Ravva and Sangu fields decreased in 2004. Following the Arbitration Hearing award in relation to the interpretation of the Ravva PSC in October, first quarter 2004 entitlement production from the field has been revised to reflect a higher Government profit share during this period. The average price realised by the Group for the year was $24.06 per boe (2003: $22.86 per boe). Turnover, pre exceptional items, which has been impacted by the weakening of the US$ against Sterling during the year, was £110.2m (2003: £155.8m). Gross Profit The Group generated a gross profit before exceptional items of £49.7m (2003: £85.4m). Total cost of sales for the year was £60.5m (2003: £70.5m). Cost of sales per barrel were $13.29 (£7.25) compared to $10.49 (£6.39) in 2003. The Group depletion charge has reduced by 2% to £3.79 per boe in comparison to £3.87 in the previous year. The completion of the Bangladesh acquisition has reduced the depletion charge for the South Asia cost pool, but this has been offset by a revision to the remaining entitlement reserves. This revision was due to a reduction in the calculation of gross remaining proved plus probable reserves, primarily from the Sangu field, and the impact of an increase in the Group's base oil price assumption from $15/bbl to $20/bbl used in calculating Cairn's share of future production. The development plans for Mangala and Aishwariya have yet to be finalised and so the associated Rajasthan reserves have been disclosed but not been booked in the year end financial statements. As a consequence of lower net entitlement, production costs averaged £3.32 per boe for the year compared with £2.41 per boe in 2003. These costs include charges for litigation, arbitration and stock adjustments. Profit for the Year Administrative expenses for the year were £18.2m (2003: £12.3m). This includes a charge of £6.2m (2003: £0.9m) for LTIP amortisation and associated NIC. Net interest payable before exceptional items was £2.1m (2003: £4.1m), including a foreign currency exchange loss of £2.0m (2003: loss £2.7m). The majority of the £9.8m pre exceptional tax charge (2003: £22.8m) arises on profits in India. Profit after tax before exceptional items was £19.6m (2003: £46.2m). Exceptional items/Discontinued operations Following the Arbitration award given on the interpretation of the Ravva PSC, the Group has reviewed its provisioning for this liability and has recognised an additional exceptional charge net of tax of £9.6m. Cairn completed the disposal of its 10% interest in the Gryphon field in the UK North Sea (the Group's only remaining interest in its North Sea cost pool) during the first half of 2004. Following completion of this transaction and the Group's exit from the North Sea, a £0.8m post tax gain has been recognised in the profit and loss account in respect of discontinued activities. Profit after tax and exceptional items was £10.8m (2003: £46.2m). BALANCE SHEET Capital expenditure Capital expenditure during 2004 was £124.8m (2003: £82.8m), made up of £90.9m on exploration/appraisal activities, £32.4m on development activities and £1.5m on other fixed assets. Exploration/appraisal expenditure during the year was incurred largely on the drilling programme in Rajasthan. The majority of development expenditure is in respect of the infill campaigns on both Lakshmi and Sangu gas fields. In addition, £16.9m has been capitalised in respect of the Bangladesh acquisition. Net Assets Net assets at 31 December 2004 were £431.1m (2003: £337.8m). Net assets have been reduced by the weakening of the US$ against Sterling from $1.79 to $1.92 in the period. Payments for Sangu Gas Payments for Sangu Gas have continued to improve during 2004. There are currently no payment arrears (31 December 2003: three months in arrears). Accounting Developments & Policies Adoption of International Financial Reporting Standards (IFRSs) In accordance with European legislation, Cairn will adopt IFRSs in preparing its Financial Statements from 1 January 2005. The project team, established to manage the transition from UK GAAP to IFRS, has completed the majority of its work, with the standards which affect Cairn now identified and their impacts interpreted. Cairn is currently finalising revised accounting policies to comply with IFRSs through discussions with the Group's auditors and industry peers. The major ar eas of impact on Cairn's net profit and shareholders' funds have been identified as IFRS 2 which requires a change to be made for all employee share incentives, and IAS 21 which changes the treatment of exchange differences on consolidation of certain group subsidiaries. In accordance with IFRS 6 Exploration for and evaluation of Mineral resources, Cairn will also be required to expense pre-licence exploration costs, currently capitalised in the Balance Sheet. As part of the transition to IFRS, a re-statement of Cairn's 2004 UK GAAP results is also being undertaken. The reconciliations from UK GAAP to IFRS will be published on the Group's website prior to the 2005 interims. Other issues UITF 38 Accounting for ESOP Trusts became effective for accounting periods ending on or after 22 June 2004 and has therefore been applied to the current year, increasing the charge to the profit and loss account by £2.3m. A prior year adjustment has arisen from this change in accounting policy and prior year comparatives have been restated to reflect the required changes. Cairn is considering reporting its future financial results in US$ which would match the functional currency of the business. The Group currently reports in Sterling, although both income and expenditure are mainly in US$. CASHFLOW Net Cash Inflow, Tax and Interest Group net cash inflow from operations was £77.5m (2003: £122.2m). Tax payments during 2004 were £4.7m (2003: £4.4m). Net interest received was £0.5m (2003: paid £0.6m). Capital Expenditure/Financial Investment Cash outflow from capital expenditure during 2004 was £96.2m, made up of £76.5m exploration/appraisal expenditure, £18.3m development expenditure and £1.4m other expenditure. This differs from balance sheet capital expenditure due to the timing of this expenditure (2003: £75.8m - £55.9m exploration, £18.7m development and £1.2m other). In addition there is an outflow on completion of the Bangladesh acquisition (£23.8m) and a £7.3m inflow on completion of the Gryphon disposal (2003: £10.4m inflow on sale of Dutch assets). Net Funds/Debt and Financing The Group had a net cash outflow before use of liquid resources and financing of £39.4m during 2004 (2003: inflow £51.9m). The Group's financial position was improved by the £102m raised by the placing of 7.5 million new shares in July 2004. At the year end the Group had no gearing and net funds of £72m (2003: net funds £17.8m). In addition, pre tax proceeds of approximately $135m from the previously announced ONGC transaction were received in March 2005. The Group currently has $240m of unutilised unsecured revolving credit facilities. Following the significant discoveries made in Rajasthan during 2004, the Group is currently undertaking a review of its financing requirements and arrangements. Kevin Hart Finance Director, 19 April 2005 Cairn Energy PLC Group Profit and Loss Account For the year ended 31 December 2004 --------------------- --------- --------- ---------- ------ -------- Continuing Continuing Discontinued Total Total operations operations operations 2004 2003 £'000 exceptional £'000 £'000 (Restated) items £'000 £'000 --------------------- --------- --------- ---------- ------ -------- Turnover 108,269 (14,730) 1,910 95,449 155,814 Cost of sales Production costs (27,210) - (479) (27,689) (26,498) Depletion (30,913) - (695) (31,608) (42,731) Decommissioning charge (1,102) - (81) (1,183) (1,231) --------------------- --------- --------- ---------- ------ -------- Gross profit/(loss) 49,044 (14,730) 655 34,969 85,354 Administrative expenses (18,200) - - (18,200) (12,268) --------------------- --------- --------- ---------- ------ -------- Operating profit/(loss) 30,844 (14,730) 655 16,769 73,086 Exceptional gain on sale of oil and gas assets - - 2,206 2,206 - --------------------- --------- --------- ---------- ------ -------- Profit/(loss) on ordinary activities before interest 30,844 (14,730) 2,861 18,975 73,086 Interest receivable and similar income 1,811 - - 1,811 475 Interest payable and similar charges (3,872) (1,017) - (4,889) (4,548) --------------------- --------- --------- ---------- ------ -------- Profit/(loss) on ordinary activities before taxation 28,783 (15,747) 2,861 15,897 69,013 --------------------- --------- --------- ---------- ------ -------- Taxation on profit on ordinary activities (825) - (1,421) (2,246) (5,583) - current (8,981) 6,172 - (2,809) (17,201) - deferred --------------------- --------- --------- ---------- ------ -------- (9,806) 6,172 (1,421) (5,055) (22,784) Profit/(loss) for the year 18,977 (9,575) 1,440 10,842 46,229 --------------------- --------- --------- ---------- ------ -------- Earnings per ordinary share - basic 7.11p 31.47p Earnings per ordinary share - diluted 7.05p 31.38p --------------------- --------- --------- ---------- ------ -------- Cairn Energy PLC Group Statement of Total Recognised Gains and Losses For the year ended 31 December 2004 2004 2003 £'000 (Restated) £'000 Profit for the year 10,842 46,229 Unrealised foreign exchange differences (19,555) (32,854) ------------------------------ ---------- ---------- Total recognised gains and losses relating to the year (8,713) 13,375 ------------------------------ ---------- ---------- Prior year adjustment* (83) ------------------------------ ---------- Total gains and losses recognised since last annual report (8,796) ------------------------------ ---------- Reconciliation of Movements in Shareholders' Funds For the year ended 31 December 2004 2004 2003 £'000 (Restated) £'000 Total recognised gains and losses for the year (8,713) 13,375 Redemption of non-equity shares - (50) New shares issued for cash 101,889 - New shares issued in respect of employee share options 4,559 1,840 Cost of shares purchased by ESOP Trust (9,329) - LTIP charge 4,956 864 ------------------------------- --------- ---------- Net additions to shareholders' funds 93,362 16,029 Opening shareholders' funds (after prior year adjustment)* 337,778 321,749 ------------------------------- --------- ---------- Closing shareholders' funds 431,140 337,778 ------------------------------- --------- ---------- Note: * The prior year adjustment relates to the change in accounting policy arising from the implementation of UITF 38 Accounting for ESOP Trusts. The opening shareholders' funds at 1 January 2004, before deducting Own shares held of £4,293,000 (cost less amortisation under previous UK GAAP) were £342,071,000. Cairn Energy PLC Balance Sheets As at 31 December 2004 Group Group Company Company 2004 2003 2004 2003 £'000 (Restated) £'000 (Restated) £'000 £'000 Fixed assets Exploration assets 235,503 155,046 - - Development/producing assets 232,415 236,749 - - Other fixed assets 1,628 1,546 815 703 Investments 50 54 15,437 14,891 --------------------------- -------- ------- ------- -------- 469,596 393,395 16,252 15,594 Current assets Debtors 69,934 56,866 110,553 54,934 Cash at bank 72,042 17,766 34,409 917 --------------------------- -------- ------- ------- -------- 141,976 74,632 144,962 55,851 Creditors: amounts falling due within one year 81,656 42,396 3,811 2,209 --------------------------- -------- ------- ------- -------- Net current assets 60,320 32,236 141,151 53,642 --------------------------- -------- ------- ------- -------- Total assets less current liabilities 529,916 425,631 157,403 69,236 Provisions for liabilities and charges 30,628 16,082 - - Deferred taxation 68,148 71,771 - - --------------------------- -------- ------- ------- -------- Net assets 431,140 337,778 157,403 69,236 --------------------------- -------- ------- ------- -------- Capital and reserves Called-up share capital - equity 15,901 15,010 15,901 15,010 Share premium 107,278 1,721 107,278 1,721 Other reserves 24,256 24,256 - - Shares held by ESOP trust (14,031) (4,702) (14,031) (4,702) Capital reserves - non 26,281 26,281 50 50 distributable Capital reserves - distributable 109,635 109,635 - - Profit and loss account 161,820 165,577 48,205 57,157 --------------------------- -------- ------- ------- -------- Shareholders' funds 431,140 337,778 157,403 69,236 --------------------------- -------- ------- ------- -------- N L Murray, Chairman W B B Gammell, Chief Executive 19 April 2005 Cairn Energy PLC Group Statement of Cash Flows For the year ended 31 December 2004 2004 2003 £'000 £'000 Net cash inflow from operating activities 77,549 122,177 --------------------------------- ----------- ----------- Returns on investments and servicing of finance Interest received 1,711 475 Interest paid (1,220) (1,027) --------------------------------- ----------- ----------- 491 (552) Taxation (4,678) (4,425) Capital expenditure and financial investment Expenditure on exploration assets (76,492) (55,902) Expenditure on development/producing assets (18,252) (18,670) Acquisition of Bangladesh assets (23,843) - Purchase of other fixed assets (1,459) (1,192) Sale of development/producing assets 7,305 10,368 Sale of other fixed assets 44 73 --------------------------------- ----------- ----------- (112,697) (65,323) Equity dividends paid - - --------------------------------- ----------- ----------- Net cash (outflow)/inflow before use of liquid resources and financing (39,335) 51,877 Management of liquid resources* Cash on short term deposit (55,392) (9,755) Financing Issue of shares - equity share options 4,559 1,840 - equity share placing 101,889 - - non equity - 37 Redemption of non equity shares - (50) Purchase of own shares (9,329) - Repayment of debt - (47,918) --------------------------------- ----------- ----------- 97,119 (46,091) --------------------------------- ----------- ----------- Increase/(decrease) in cash in the year 2,392 (3,969) ================================= =========== =========== * Short term deposits of less than one year are disclosed as liquid resources. Cairn Energy PLC Reconciliation of operating profit to operating cash flows 2004 2003 £'000 (Restated) £'000 Operating profit 16,769 73,086 Depletion and depreciation 32,971 44,151 Decommissioning charge 1,183 1,231 Amortisation of LTIP/provision against investment 4,956 948 Debtors movement 8,122 2,871 Creditors movement 145 2,665 Other provisions 16,234 1,339 Gain on sale of other fixed assets (41) (4) Foreign exchange differences (2,790) (4,110) -------------------------------- ---------- -------- Net cash inflow from operating activities 77,549 122,177 -------------------------------- ---------- -------- Net Funds/(Debt) At Cash Exchange At 31 1 January flow movements December 2004 £'000 £'000 2004 £'000 £'000 Cash at bank 5,678 2,392 (91) 7,979 Short term deposits 12,088 55,392 (3,417) 64,063 ------------------ ----------- --------- ---------- --------- 17,766 57,784 (3,508) 72,042 ------------------ ----------- --------- ---------- --------- Accounting Policies Accounting policies are the same as those applied in the previous year's financial statements other than the amendments arising from the implementation of UITF 38 and the subsequent changes to UITF 17. UITF 38 Accounting for ESOP Trusts became effective for accounting periods ending on or after 22 June 2004. Amendments to UITF 17 following the introduction of UITF 38 requires the recognition of the charge in the profit and loss account for shares held in trust to satisfy awards made under the LTIP to be on the basis of the fair value of the awards at the time they were made. Previously, UK Accounting Standards required the release to be made on the basis of the cost of any shares purchased by the ESOP Trust. In addition, following the implementation of UITF 38, shares in the ESOP trust have been reclassified from 'Investments' to 'Shares held by ESOP trust' within shareholders' funds. The effect of reclassifying the shares from investment in own shares to shareholders' funds is to reduce the Group's net assets by £4.3m at 31 December 2003. A prior year adjustment to the Profit and Loss Account of £83,000 has arisen from this change in accounting policy and prior year comparatives have been restated to reflect the changes required pursuant to UITF 38. As a result of the change to accounting treatment, the profit for the period under review is £2.3m greater than had there been no revision to policies. NOTES: 1. No dividend has been declared (2003: nil). 2. The earnings per ordinary share is calculated on a profit of £10,842,000 (2003: £46,229,000 restated) and on a weighted average of 152,522,282 ordinary shares (2003: 146,888,766). The weighted average of ordinary shares excludes shares held under the LTIP - the shares are held by the Cairn Energy PLC Employees' Share Trust. The diluted earnings per ordinary share is calculated on a profit of £10,842,000 (2003: £46,229,000 restated) and on 153,713,739 ordinary shares (2003: 147,335,237) being the basic weighted average of 152,522,282 ordinary shares (2003: 146,888,766) and the dilutive potential ordinary shares of 1,191,457 ordinary shares (2003: 446,471) relating to share options. 3. Cairn follows the full cost method of accounting for oil and gas assets. Under this method, all expenditure incurred in connection with and directly attributable to the acquisition, exploration, appraisal and development of oil and gas assets, including interest payable and exchange differences incurred on borrowings directly attributable to development projects, is capitalised in two geographical cost pools: North Sea and South Asia. On disposing of the Group's North Sea interest during the year only one cost pool remains at the year end. 4. The financial information contained in this announcement does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. However, the financial statements contained in this announcement are extracted from the audited statutory accounts for the financial year ended 31 December 2004, which will be delivered to the Registrar and Companies. Statutory accounts for the year ended 31 December 2003, on which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies. 5. 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. 6. Full accounts are due to be posted to shareholders on 04 May 2005 and will be available at the Company's registered office, 50 Lothian Road, Edinburgh, EH3 9BY, from that date. 7. The Annual General Meeting is due to held at the Company's registered office, 50 Lothian Road, Edinburgh, EH3 9BY on Friday 03 June 2005 at 12.00pm. Notes to Editors: • Cairn focuses its activities on the geographic region of South Asia. The Group holds material exploration and production positions in west India, east India and Bangladesh along with new exploration rights in northern India and Nepal. • This focus on South Asia has already resulted in a significant number of oil and gas discoveries. In particular, the company made a major oil discovery (Mangala) in Rajasthan in the north west of India at the beginning of 2004. • Cairn has received formal approval from the Government of India for a Declaration of Commerciality in respect of the Mangala, Aishwariya, Saraswati and Raageshwari discoveries. The approval secures Cairn an extensive Development Area of 1,858 km(2) which also incorporates the, GR-F, Kameshwari, N-R and Guda discoveries, which are at various stages of appraisal. • The Development Area is the equivalent in size of 12 North Sea Blocks. • Cairn currently estimates the production life for projects within the Development Area to be in excess of 25 years. Consequently, Cairn intends to seek an extension beyond 2020, which is the current initial development term. • ONGC took up its option to acquire a 30% participating interest in the Mangala and Aishwariya discoveries in January 2005. • The current exploration term for the block is due to expire on May 15th 2005. Cairn is seeking ways to extend activities beyond this date. • India currently imports 2 million barrels of oil a day. It produces 650,000 barrels a day itself of which 50,000 bopd comes from the Cairn operated Ravva field. For further information on Cairn see www.cairn-energy.plc.uk GLOSSARY OF TERMS The following are the main terms and abbreviations used in this announcement: Corporate Cairn the Company and/or its subsidiaries as appropriate Group the Company and/or its subsidiaries as appropriate Company Cairn Energy PLC Board the Board of Directors of Cairn Energy PLC ONGC Oil and Natural Gas Corporation Ltd and/or its subsidiaries as appropriate Shell Shell Bangladesh Exploration and Development B.V. and/or its subsidiaries as appropriate D & M DeGolyer & MacNaughton Technical API American Petroleum Institute units as a measure of oil specific gravity bcf billion cubic feet of gas /boe per barrel of oil equivalent boepd barrels of oil equivalent per day bopd barrels of oil per day mmbbls million barrels of oil mmboe million barrels of oil equivalent /mcf per thousand cubic feet of gas mmscfd million standard cubic feet of gas per day PSC Production Sharing Contract STOIIP Stock Tank Oil In Place 2D / 3D two dimensional / three dimensional Accounting ESOP Trust Employee Share Ownership Plan Trust LTIP long term incentive plan NIC National Insurance Contributions UITF38 Urgent Issues Task Force Abstract number 38 Accounting for ESOP Trusts UK GAAP Generally Accepted Accounting Practice in the United Kingdom IFRS International Financial Reporting Standards IFRS 2 International Financial Reporting Standard number 2 'Share based payment' IAS 21 International Accounting Standard number 21 'The effects of changes in Foreign Exchange Rates' Note: This press release contains forward looking statements that reflect Cairn's expectations regarding future events. Forward looking statements involve risks and uncertainties. Actual events could differ materially from those projected herein and depend on a number of factors including the uncertainties relating to oil and gas exploration and production and sale of oil and gas. This information is provided by RNS The company news service from the London Stock Exchange

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