Operational & Trading Update

Cairn Energy PLC
17 January 2006

EMBARGOED FOR RELEASE AT 07:00                                  17 January 2006
                                
                                CAIRN ENERGY PLC

                         Operational and Trading Update

Cairn Energy intends to announce its preliminary results for the year to 31
December 2005 on Tuesday 14 March 2006. In advance of these results, Cairn is
providing information on recent operations since the last update on 10 November
2005 and guidance in respect of the Group's trading performance in 2005. This
information is unaudited and is subject to further review.


Operational Update

• First stage of Mangala Field Development Plan approval completed in 
  December 2005
• Evaluation of new appraisal wells and cores is ongoing and is expected
  to increase oil in place estimates from current values of 377 million
  barrels (mmbbls) in Bhagyam and 1071 mmbbls in Mangala
• Mangala Detailed Design and Engineering commenced with Mustang
  Engineering in Houston, a subsidiary of Wood Group
• Commencement of test oil production from one well in the Gauri field,
  Gujarat


Sir Bill Gammell, Chief Executive said:

'Cairn continues to build on the world class Rajasthan discoveries and I remain
confident that the oil and gas resource base will grow through further
exploration and appraisal.

'In the first half of 2006 the Company expects to produce the first oil from the
southern Rajasthan fields and give project sanction for the main Mangala field.'


Enquiries to:

Cairn Energy PLC:

Analysts/Investors
Bill Gammell Chief Executive                           Tel: [phone]
Kevin Hart Finance Director
Mike Watts Exploration Director

Media
David Nisbet, Head of Group Communications

Brunswick Group LLP:
Patrick Handley, Mark Antelme                          Tel: [phone]


Rajasthan RJ-ON-90/1 Overview

Development

The Cairn November 2005 update highlighted a programme of further evaluation of
the Rajasthan northern fields, Mangala, Bhagyam and Aishwariya which is now
underway. This work has moved to a phase of detailed analysis of the potential
for any additions to the volumetric and reserve base. Evaluation of recent
appraisal drilling at the two biggest fields, Mangala and Bhagyam, is on going
and the certified results should be available in March 2006. Current indications
are that oil-in-place estimates will be increased on Mangala, Bhagyam and
Aishwariya.

A key milestone was reached in December 2005 when the Field Development Plans
(FDPs) for Mangala, Aishwariya, Raageshwari oil and Saraswati were approved by
the Rajasthan RJ/ON-90/1 Licence ('the Licence') Operating Committee which
consists of ONGC and Cairn. The FDPs are currently being reviewed by the Licence
Management Committee (Directorate General Hydrocarbons, ONGC and Cairn) for
final approval.

Cairn continues to make good progress on the development of the Mangala field
and work has begun on the detailed design and engineering contract for the
Mangala production and treatment facilities. The contract for this work was
awarded to Mustang Engineering in Houston, a subsidiary of Wood Group.

Another important milestone in the Rajasthan development has been achieved in
January 2006. The Rajasthan State Government gave permission to Cairn to locally
extract saline groundwater as part of the Field Developments. This saline
groundwater will be injected into the oil producing reservoirs for pressure
maintenance and reservoir management purposes. Other pre-sanction critical path
activities, including Environmental Clearance and Land Acquisition, are also
well advanced.

The recent hurricanes in the Gulf of Mexico have had a substantial impact on the
local oil and gas infrastructure which has led to increases in the cost and
availability of equipment and services globally. Cairn is assessing the effects
of these changes on its current project cost and schedule estimates.

The Government of India has appointed MRPL, a subsidiary of ONGC, as its nominee
for the purposes of purchasing any crude oil produced from the Rajasthan
discoveries. Discussions are continuing with MRPL on the transportation and
crude oil sales agreements.

The Declaration of Commerciality for the Bhagyam and Shakti fields has been
submitted and the FDPs are scheduled to be submitted in the first half of this
year.

It is currently planned to commence initial production from the southern
Rajasthan fields in April 2006 from Saraswati. The aim is to achieve production
of approximately two thousand barrels a day by trucking from Saraswati and
Raageshwari by the end of the year.

Exploration and Appraisal

In the last few weeks two small exploration discoveries have been made in the
Fatehgarh formation at Bhagyam south, three kilometres (km) south of Bhagyam and
N-E, 13 km south of Bhagyam. A third well, at N-H, eight km east of Bhagyam,
encountered hydrocarbons in the tight Barmer Hill formation and will require
fraccing before further evaluation. A fourth well is currently operating on a
prospect 3.5 km north-west of Mangala.

A programme of hydraulic fracture stimulation on the Raageshwari Deep Gas
accumulation will commence in February 2006.  Preliminary post-fracture well
results are expected to be available in March, although full evaluation of these
well stimulation treatments could take several months. Gas from Raageshwari will
be utilised as fuel for the Mangala development and subsequent Northern Area
Developments.

The stimulation programme will continue with fracture stimulation of the Barmer
Hill formation in two wells at Mangala and Aishwariya, with the objective of
unlocking the additional resource potential of this formation.

Several appraisal wells in the Guda South field area have been successfully
tested with typically low pre-fracture oil rates from the Thumbli sands. A
Declaration of Commerciality for the Guda field (including Guda South) is in
preparation.


Cambay BasinCB/OS-2 - Gauri Oil

The G-A-3 Gauri oil well has been commissioned and has produced first oil. Oil
is evacuated through the gas system at the Suvali plant in Gujarat, where there
are limited storage facilities, from where it is sold and trucked by road
tanker. The offtake from the well has been variable while testing the ability of
the gas processing plant to handle different volumes of oil production, but
average production over the first 39 days has been 1,017 bopd with a peak
production of 3,409 bopd. Studies have begun to review alternative ways of
exporting the produced oil from the oil storage facilities.

The future performance of this well under depletion will be important in
assessing the recoverable oil potential in Gauri and in similar more extensive
channel reservoirs at Lakshmi.

CambayBasin CB-ONN-2001/1 - Vanthvali -1

The ONGC operated Vanthvali-1 exploration well was plugged and abandoned as a
dry hole.


KG Basin - Ravva

The Ravva field is expected to come off the plateau production rate of 50,000
bopd in first half of 2006. An in-fill drilling programme to extend the plateau
rate was planned for Q4 2005. Delays in obtaining the required drilling
approvals combined with the reduced availability of offshore drilling rigs will
result in this in-fill drilling campaign being planned to begin later this year.


KG Basin - KG-DWN-98/2

Following the drilling of the 'D' discovery well in August 2005, drilling
recommenced on this ONGC-operated, deep water block in November. Two wells are
currently operating on the 'A' and 'U' prospects.


Indian Head Office

A new head office for Cairn's Indian operations was opened in December 2005 in
Gurgaon on the outskirts of Delhi to provide improved support for the Rajasthan
project team and better manage Cairn's business interests in India.


Bangladesh

The infill drilling programme in the 2004/2005 drilling season was successful in
increasing the field deliverability but also indicated that the Sangu field is
structurally more complex than previously thought. Cairn is seeking approval
from its Joint Venture partners and PetroBangla to begin an offshore drilling
programme at the end of 2006. Subject to receiving the required regulatory and
joint venture permissions, it is currently planned to drill a Sangu infill well,
a South Sangu appraisal well and an exploration well on the Hatia prospect in
the next phase of exploration and appraisal.

The future development of South Sangu will depend on the results of the
appraisal well.


Group Production

Following successful in-fill drilling campaigns on the Lakshmi (offshore
north-west India) and Sangu (offshore Bangladesh) gas fields, the group's
entitlement production for 2005 was 28,300 barrels of oil equivalent per day
(boepd) net to Cairn compared to 22,789 boepd in 2004.  Current production is in
line with the company's expectations.

Production boepd      Ravva       Sangu          Lakshmi & Gauri         Total
(approximate)
Gross field          64,300      24,700                   16,800       105,800
Working interest     14,500      18,500                    7,100        40,100
Entitlement interest  6,800      13,800                    7,700        28,300

Due to Cairn's heavily gas biased production mix and the existence of
contractual caps on the gas price received, the average price realised for 2005
is expected to be approximately $25 per boe (2004:$24.06)


Group Reserves

The Field Development Plans for Mangala, Aishwariya, Saraswati and Raageshwari
fields have been submitted for final approval by the RJ-ON-90/1 Management
Committee. Once approval has been obtained the associated reserves from these
fields will be booked.

The results of the recent appraisal drilling programme, analysis of the Sangu
field performance in 2005 and the decision to further appraise the South Sangu
discovery prior to a decision whether to proceed with a development will lead to
a significant reduction in the current Sangu proved plus probable (2P) gas
reserves. The work required to determine the size of this reduction will be
completed by March 2006.

The impact on the Group's financial results is covered within the following
financial update.


FINANCIAL UPDATE

International Accounting Standards

In accordance with European legislation, Cairn has adopted International
Financial Reporting Standards (IFRS) as the basis for preparation of its
financial statements from 1 January 2005, with a date of transition to IFRS of 1
January 2004. Interim results to 30 June 2005 and associated audited restated
financial information were prepared and issued on this revised basis during
2005. These financial documents highlighted that the Group was continuing to
apply its existing full cost accounting policy for oil and gas assets to both
exploration and appraisal activity and in the development and production phase,
pending receipt of any guidance or clarification from either the International
Financial Reporting Interpretations Committee (IFRIC) Agenda Committee or IFRIC.

Following the subsequent publication of IFRIC guidance in November 2005, which
noted the limited scope of IFRS 6 'Exploration for and Evaluation of Mineral
Resources', Cairn has updated its oil and gas accounting policy and consequently
has decided to adopt a successful efforts based accounting policy for its
financial statements.

Cairn is in the process of updating all comparative information to reflect
changes arising from the implementation of this revised methodology. A revised
audited restatement document is scheduled to be issued in February, prior to the
announcement of the 2005 results in March 2006.

Under the successful efforts based approach all exploration and evaluation
expenditure is initially capitalised. It is then expensed through the Income
Statement in the period it is incurred unless the exploration and evaluation
process remains ongoing, or there is a reasonable prospect of a commercial
development. Consequently, all costs directly related to the drilling of
unsuccessful exploration wells are expensed through the Income Statement. In
addition, the geographic cost pool basis is no longer applicable in accounting
for depletion and impairment in the financial statements, which will now be done
on development area basis.

These accounting changes have no impact on any of the fundamentals of the
business including strategy, economic value or cash flow. Cash from operations
will be unaffected although there is a potentially significant impact on the
Income Statement and Balance Sheet as a consequence of these changes.

The combination of the development area basis for depletion and impairment and
the reserves adjustment proposed for Sangu (noted in the reserves section above)
results in an increase in the changes for both depletion and impairment.

US Dollar reporting

Cairn is also adopting the US dollar as the reporting currency of the Group
since this is the principal functional currency of the business. Although
headquartered in the UK, the majority of Cairn's income and expenditure is
transacted in US dollars. By adopting the US dollar for reporting purposes,
Cairn believes the financial statements will give a clearer picture of the
performance of Cairn's business, minimising the impact of US dollar/Sterling
exchange rate fluctuations. This change is to be implemented for the results for
the year ended 31 December 2005.

Financing

At the year end the Group had no gearing and net funds of circa $95m together
with undrawn unsecured revolving credit facilities of $240m (comprising $200m
three and $40m seven year facilities put in place in January 2004). Following
the significant 2004/5 Rajasthan discoveries and the associated development
requirements, the Group is in the process of refinancing its debt facilities.


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 now made 17 oil and gas discoveries on Rajasthan block RJ-ON-90
    /1.

   •Working interests of Rajasthan block RJ-ON-90/1 development area: Cairn
    70% ONGC 30%.

   •India currently imports approximately 2 mmbbls of oil per day. Domestic
    production is approximately 650,000 bopd of which approximately 50,000 bopd
    comes from the Cairn operated Ravva field.


   •Mustang Engineering is a subsidiary of the John Wood Group PLC ('Wood
    Group'), a leading international energy services company with extensive
    experience in the design, project management and construction management of
    different projects in various areas of the world.


For further information on Cairn see www.cairn-energy.plc.uk





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