Sir Bill Gammell, Chief Executive, said:
"Cairn has undergone an extensive restructuring of its business with the IPO of Cairn India and the formation of Capricorn. We continue to be focused on delivering the Rajasthan development and ensuring the upstream project remains on track to produce first oil in 2009. Cairn India is aligned with its joint venture partner ONGC and intends to become an active participant in midstream activities with a view to optimizing value from its exposure to the entire production and oil sales chain. We are actively evaluating growth opportunities for Capricorn."
The last year has been momentous for Cairn as it set about creating an autonomous business in India (Cairn India) and a separate company (Capricorn) based in Edinburgh and more focused on exploration. Cairn Energy PLC continues to be the parent company of each of these businesses.
The flotation and listing of Cairn India on the Bombay Stock Exchange and the National Stock Exchange of India was successfully completed on 9 January 2007 raising a total of $1.98bn and leaving Cairn with a holding of 69% in Cairn India. From the funds raised, approximately $940m is being returned to existing Cairn shareholders, representing £3 per share. A further $600m has been retained to fund ongoing working capital requirements in Cairn India. The balance of around $300m, after fees of the transaction and debt repayment, is being retained by Cairn and is therefore available for potential investment in new business opportunities.
The IPO of Cairn India was the largest IPO to date in the Indian primary equity markets and Cairn India currently has a market capitalization in excess of $5 billion, ranking it the fourth largest oil and gas company in India. The IPO attracted a number of high quality investors (including PETRONAS, which holds 10%) thereby signifying investor confidence in the Indian equity story, the regulatory environment and the capital markets. Cairn India is committed to continuing investment in India and is very much focused on creating shareholder value by developing its world-class resource base in Rajasthan and seeking to continue Cairn's track record of exploration success.
As previously announced, all of the assets not transferred to Cairn India in the IPO - those in Bangladesh, Nepal and certain exploration interests in northern India - have been brought under Capricorn, which is currently a wholly owned subsidiary of Cairn. The balance of proceeds raised in the IPO that are not being returned to shareholders have been retained to support the growth of Capricorn, with the aim of creating further value for shareholders in the future.
The Group continues to be well placed financially with a strong balance sheet, positive operating cash flows, a $850m syndicated revolving credit facility, and cash generated from the flotation of the Indian business to drive forward the Rajasthan development and pursue opportunities in other business areas.
The IPO was completed in less than 10 months from inception to execution and the manner in which Cairn's staff dealt with not only the restructuring of the business but also the additional workload of this complex transaction is a testament to their dedication and efficiency.
In recognition of the fact that a significant part of Cairn India's future operations will be focused on Rajasthan, a new Indian headquarters has been established at Gurgaon on the outskirts of Delhi. Cairn's original Indian headquarters, in Chennai, Tamil Nadu has now closed. This has necessitated the relocation of a number of Cairn staff and their families and I would like to thank them for their ongoing support.
Cairn Energy PLC (and Capricorn) will continue to be run from Edinburgh with operational offices in Dhaka and Chittagong. In addition, Cairn has recently opened an office in Kathmandu to support its proposed operational activities in Nepal.
The Cairn Board held two meetings in India during 2006 and heard at first hand about the support work carried out in Rajasthan during the floods that affected the region in 2006.
We also continued our numerous community programs in all of our operational areas across South Asia.
The restructuring of Cairn's activities into two separate businesses means that each of these businesses is now positioned more effectively to pursue their respective strategies.
Cairn India will focus on delivering the very significant future cash flows associated with production from the Rajasthan discoveries, while also maximizing new investment opportunities in the rapidly growing Indian market.
In parallel with this and by using its established exploration and transaction expertise, Capricorn will continue to follow a strategy of seeking to add shareholder value through material growth.
CHIEF EXECUTIVE'S REVIEW
Just over three years ago Cairn made the transformational discovery of Mangala in Rajasthan. Following successful completion of the IPO in January 2007 and its establishment as an autonomous business, Cairn India is well placed to move that discovery and others in Rajasthan forward in preparation for first oil production in 2009.
In parallel with this, Capricorn is examining a number of opportunities for growth.
The IPO of Cairn India is a natural evolution of our business, building on the decade of remarkable achievement that Cairn has had in South Asia. The successful completion of the IPO has created an autonomous business with an experienced management team capable of developing and building on our world class assets in India.
Cairn India's oil and gas fields at Ravva and CB/OS-2 continue to be the cornerstone of its existing production. During 2006 both of these assets benefited from revised gas prices and improved oil production. An ongoing drilling program at Ravva and new developments planned on CB/OS-2 will ensure that these assets continue to underpin Cairn India's activities elsewhere in India.
A step change in production is expected from 2009, when the first of the Rajasthan developments is scheduled to come onstream. The Mangala field will be brought on production first followed by the Bhagyam and Aishwariya fields and the targeted gross production from these three fields is 150,000 bopd. Once onstream, these fields will create enormous value for the GoI, the Rajasthan State Government and for investors and other stakeholders in both Cairn and Cairn India.
Laboratory studies have indicated that the early application of enhanced oil recovery (EOR) techniques on the Mangala and Bhagyam fields is expected to extend significantly the production plateau and ultimate reserves for these fields. Further work is also planned to determine the best method of extracting the oil from the potentially productive Barmer Hill formation.
India's exploration potential is huge, with the majority of the 26 hydrocarbon basins in the country being under-explored. Cairn India has recently secured two new exploration blocks in the NELP VI licensing round and now has an interest in a total of 15 blocks in India. Cairn India is well placed to build on this asset base and to bid for further exploration acreage that may be offered in future licensing rounds.
The upstream picture in Rajasthan is progressing well. Current estimates for the proven and probable (2P) hydrocarbons in place for the six fields Mangala, Bhagyam, Aishwariya, Saraswati, Raageshwari Oil and Raageshwari Deep Gas total 2.2 billion boe and the associated 2P reserves plus contingent resources are 864 million boe.
The additional smaller and/or low permeability fields and reservoirs have an estimated 2P hydrocarbons in place volume of more than 1.4 billion boe. Over the coming years, Cairn India's focus will be on converting as much of this contingent resource base into 2P reserves as is economically possible.
In this regard, work is also ongoing to establish optimal EOR techniques in the Rajasthan block to extend plateau production and maximize recovery factors. Laboratory work is currently underway to establish the potential of these technologies, particularly in relation to how they can be used in Mangala and Bhagyam, the largest of the Rajasthan fields.
The first phase of development drilling on Saraswati has been completed and development drilling is now underway on Raageshwari. Development drilling on Mangala is scheduled to commence in 2008.
The GoI has approved the Declaration of Commerciality for Bhagyam, the second largest field in Block RJ-ON-90/1, along with the Shakti field. FDPs for Bhagyam and Shakti are expected to be submitted to the GoI in Q2 2007.
Cairn India is aligned with its joint venture partner ONGC on a midstream solution and intends to become an active participant in midstream activities with a view to optimizing value from its exposure to the entire production and oil sales chain.
Through third party discussions and studies relating to the evacuation of the crude, Cairn India now has a comprehensive understanding of the construction schedule for a pipeline from the fields in Rajasthan. Specialist consulting engineers have been retained to help develop this knowledge base further and to assist Cairn India in addressing the associated technical and commercial issues involved.
A proposal is currently being prepared for submission to the GoI seeking approval to include within the FDP a pipeline to transport Rajasthan crude from Mangala to a coastal terminal facility. The proposed routing of the pipeline will allow access to the existing pipeline infrastructure and refinery network, with a final coastal delivery point that also affords access to the majority of India's refining capacity. It is proposed that the pipeline will fall within the definition of the field development activities and will accordingly be funded 70% by Cairn India and 30% by ONGC. If the pipeline is included in the FDP, the costs would be recoverable under the PSC. The conceptual engineering and route identification for the pipeline are at an advanced stage.
Cairn India and ONGC are continuing discussions on the approach to pricing of the Rajasthan crude.
Rajasthan Project Funding
Cairn India's funding for the initial upstream development will be provided from ongoing cash generation, its retained proceeds of the IPO ($600m) and specific banking facility ($850m). Funding for the midstream pipeline can also largely be met from these sources. Once the Mangala oil field is onstream subsequent development phases will be funded out of the resultant cash flows and borrowings under the facility.
A planned three well offshore drilling campaign in Bangladesh commenced in January 2007 and is ongoing. However, due to operational delays the third well in the sequence - an exploration well on the Hatia prospect - will now not be drilled in the current weather window. A separate high impact exploration campaign targeting both the Hatia and Magnama prospects is being planned for late 2007/early 2008.
The first well drilled in the current program was a down-dip appraisal well on the South Sangu field, which unfortunately encountered a gas water contact in the main reservoir. The gas volumes associated with South Sangu are now considered to be non-commercial and it has been decided not to proceed with its development.
Present drilling operations are focused on a Sangu infill development well (Sangu-10). The principal objective of the Sangu-10 well is to test a potentially undrained compartment in the main Sangu field. At the time of the January 2007 operational update, it was expected that the results of Sangu-10 would be known by the time of the preliminary results announcement. However, operational delays have meant that the results of this well are not yet available. It has therefore been decided to reclassify 88 bscf of the 100 bscf attributable to the success case from the 2P to the 3P category to reflect fully the risk that this compartment may be partially drained. This has had the effect of increasing the gross Sangu reserves reduction to 213 bscf compared to the 187 bscf announced in the January 2007 operational update.
The Sangu gas field, although now in decline, has produced in excess of 400 bscf since commencement of production in 1998. To date, the Sangu joint venture has generated gross revenue in excess of $830m.
Results and Financial Performance
Production for the year, on an entitlement interest basis, has decreased by 13% to 24,523 boepd (2005: 28,240 boepd). This is primarily due to reduced gross field production at Sangu with entitlement further impacted by reduced development expenditure incurred in 2006. A breakdown of production is shown in the table in the Operational Review on page 16.
The Group's production mix continues to be gas biased (approximately 73% on an entitlement basis). This, combined with contractual gas price caps, resulted in an average price realized by the Group for the year of $31.84 per boe (2005: $25.44 per boe). The increase was mainly due to higher oil prices achieved. Cairn's exposure to world oil prices will increase significantly when production commences from Rajasthan.
Revenue for the year was $286.3m (2005: $262.6m).
Operating profit (pre exceptional items) and operating cash flows were $6.9m and $207.2m respectively (2005: $55.6m and $139.6m). The Group made a loss after tax of $82.0m (2005 profit: $79.1m), mainly due to the exceptional oil and gas write down of $71.5m as a result of the downward reserves revision on Sangu.
On 9 January 2007, Cairn's Indian business was floated on the Bombay Stock Exchange and the National Stock Exchange of India, pursuant to Cairn's strategy of increasing the autonomy of that business and of realizing value for shareholders.
The total proceeds raised in the flotation were $1.98bn and on 27 February 2007, the Company announced the proposed return of £481m (approximately $940m) of this cash to shareholders of Cairn Energy PLC (equivalent to £3 per share). Cairn India has retained $600m, with the remainder of the proceeds currently being held to fund Cairn's ongoing business held by its wholly owned subsidiary Capricorn. This provides financial flexibility to support the growth of Capricorn, with the aim of creating and realizing further value for shareholders in the future.
The expected $1.1bn gain on disposal of the 31% interest in Cairn India in the IPO will be included in the results for 2007.
The Group signed a $1bn syndicated revolving credit facility on 27 June 2006 ($845m unutilized at 31 December 2006). Following the IPO, the $150m corporate facility was cancelled and the remaining $850m transferred to Cairn India to finance the Rajasthan development.
At the year end the Group had net cash of $701.3m, including funds raised in the pre IPO placing of $751.8m (2005: net cash $95.5m).
Cairn's gross operated production across South Asia during 2006 was 105,028 boepd (net entitlement 24,523 boepd).
Operational activity has been largely focused on the continued appraisal of Block RJ-ON-90/1 in Rajasthan. There are now a total of 20 discoveries in this block including the world class Mangala and Bhagyam oil fields in the northern part of the acreage. FDPs have been approved or are pending on 6 of these 20 discoveries.
An independent report prepared by DeGolyer and McNaughton in August 2006 estimates 3.4 billion boe in place in the combined discoveries in the Rajasthan block. Cairn currently estimates there to be at least 3.6 billion boe hydrocarbons in place, of which 2.2 billion are under active development planning, with the remaining 1.4 billion identified in other fields under review.
The Mangala, Aishwariya, Saraswati, Raageshwari Oil and Raageshwari Deep Gas fields all have GoI development approval, while work on approvals for the development of other discoveries, in particular Bhagyam and Shakti, is ongoing. It is planned to submit FDPs for Bhagyam and Shakti in Q2 2007. The remaining discoveries require further appraisal or evaluation.
Ongoing drilling campaigns are taking place in Eastern India and Bangladesh while the other operated and non-operated exploration blocks in India and elsewhere in South Asia are at various stages of evaluation.
RAJASTHAN BASIN - North West India
Development Area (Cairn India 70% (Operator); ONGC 30%)
Civil construction work is now underway to meet the planned first oil production from Mangala in 2009. FDPs for the Mangala, Aishwariya, Saraswati and Raageshwari fields have been agreed by the GoI and, in addition to the retained IPO proceeds, bank funding has been secured for the development. The first phase of development drilling on Saraswati has been completed and development drilling is now underway on the Raageshwari Oil field.
All the permits and permissions required to begin major construction work have been granted and Cairn India is in the process of procuring the major items of long lead equipment required to establish the production facilities. It is planned to contract three purpose built rigs which will be used to drill the development wells. These state of the art rigs will allow the drilling of the Mangala wells (some horizontal) and running completions which Cairn India intends to use to deliver the first phase of the target production rate of 150,000 bopd for the Rajasthan fields.
The detailed engineering design for the Mangala development is progressing in Houston; the design team comprises Cairn India personnel working alongside consultants from Mustang Engineering. The assessment of the impact of the severe flooding in Rajasthan last year on field development design and activities is ongoing. Work carried out to date confirms the future viability of the current design and facilities locations provided that reasonable flood protection measures are implemented as a contingency (these are currently being designed).
The GoI has approved the Declaration of Commerciality for Bhagyam, the second largest field in Block RJ-ON-90/1, along with the Shakti field. These fields are contained within a second development area of 430 km2. It is currently anticipated that the final FDPs for Bhagyam and Shakti will be submitted to the GoI in Q2 2007. The current 2P base case for Bhagyam envisages a plateau production rate of 40,000 bopd.
Two more recent small scale discoveries (Shakti North East and N-1-North) have been retained within the Bhagyam/Shakti development area, together with the N-I, N-E, N-P and Bhagyam South discoveries.
Enhanced Oil Recovery
Work is also ongoing to establish optimal EOR techniques in the Rajasthan block with a view to extending plateau production and increasing ultimate recovery of oil. Laboratory work is currently underway to establish the potential of these technologies to facilitate early implementation of a field scale pilot project at Mangala, the largest of the Rajasthan fields.
Northern Appraisal Area (Cairn India 100%)
In June 2005, Cairn was granted an 18 month extension (until 14 November 2006) to complete its activities in the northern appraisal area to the north and west of the Development Area. However, the work program in this area was interrupted by the severe flooding in Rajasthan in 2006. Cairn India has ceased operations in this area and is in discussions with the GoI for a further extension of part of this acreage to complete its planned work program. As at 31 December 2006, expenditure incurred in this area was approximately $24m.
Reservoir Stimulation Program
A program of hydraulic fracture stimulation on various lower permeability reservoirs was completed in 2006. The hydraulic fracture program highlighted the potential for new reserves in the lower permeability reservoirs. The currently estimated hydrocarbons in place associated with these reservoirs is in excess of 1 billion boe.
Test results from two Barmer Hill wells highlighted the potential to unlock material oil resources in this reservoir at two of the three main fields. Additional work is required to quantify the potential of the Barmer Hill formation and will be addressed during the development drilling program at Mangala and Aishwariya.
Results on the Raageshwari deep gas field from a single tested zone in Raageshwari-5 indicated a two-fold increase in productivity. Gas from the Raageshwari wells will be utilized as fuel for the Mangala development and subsequent northern area developments.
The Vijaya, Vandana, N-R and southern fields are also potential candidates for future fracture stimulation to access new reserves and/or accelerate production.
In the south of the Rajasthan block, first commercial production by trucking from the Saraswati field is ready to start and will begin as soon as an arrangement for oil sales has been finalized with the GoI. First commercial production from the Raageshwari oil field is expected to commence within 12 months of Saraswati. The first phase of development drilling has recently been successfully completed at Saraswati and development drilling is currently underway in Raageshwari.
Block RJ-0NN-2003/1 (Cairn India 30%, ENI Operator)
In early January 2007, the operator commenced acquisition of a 3D seismic survey on this Rajasthan block, which was awarded in NELP V.
CAMBAY BASIN - Western India
Block CB/OS-2: Lakshmi and Gauri Gas Fields (Cairn India 40% (Operator))
Average gross production from the Lakshmi and Gauri fields for the year 2006 was 21,176 boepd, including 3,452 bopd.
The gas sales contracts (GSCs) with the buyers (GTCL and GPEC) have been successfully re-negotiated whereby the contractual terms for volume commitment and price have been reset and the Gauri gas field volume committed to the current buyers under the new pricing scheme.
The CB/OS-2 joint venture is focused on further development of the field with a planned offshore four well infill development drilling program and also the conversion of three wells into oil producing wells following the continuing success of the Gauri-3 oil producer. The infill development drilling program is scheduled to commence in H2 2007.
Engineering studies to upgrade the oil handling facilities at Gauri to 9,000 bopd have been completed and this upgrade is scheduled for completion in Q3 2007. During 2006 oil sales to private buyers from Gauri averaged 3,452 bopd.
The onshore CB-X well has been completed and the pipeline installation is in progress to deliver planned first gas in Q2 2007.
CB-ONN-2001/1 (Cairn India 30%, ONGC Operator)
Following the acquisition of an 89 km2 3D seismic program two wells were drilled on this block in 2006 - one encountered sub-commercial quantities of oil and the other was dry. One further well is currently operating prior to making a decision on whether to proceed to the next phase.
CB-ONN-2002/1 (Cairn India 30%, ONGC Operator)
Following the acquisition of a 100 km2 3D seismic program on this block, three wells are scheduled to be drilled during 2007.
GS-OSN-2003/1 (Cairn India 49%, ONGC Operator)
The operator is currently acquiring a 3D marine seismic program on this block.
KRISHNA-GODAVARI BASIN - Eastern India
Ravva (Cairn India 22.5% (Operator))
Average gross production from the Ravva field for the year 2006 was 61,595 boepd (comprising average oil production of 49,695 bopd and average gas production of 71.4 mmscfd).
The ceiling prices under each of the Ravva GSCs have been increased following re-negotiation with the buyer (GAIL). The ceiling price for associated gas has increased by 18% and the ceiling price for non-associated gas has increased by 30%.
An onshore exploration well (RX-9), spudded in June 2006, was plugged and abandoned after encountering non-commercial quantities of hydrocarbons.
An extensive offshore infill, appraisal and exploration drilling program on Ravva commenced in October 2006. The first appraisal well (RD-7) encountered oil and gas in the main producing intervals at Ravva with 38 meters of net oil pay. The second well (RD-8), an appraisal well on one of the main Ravva fault blocks, encountered 16 m net oil pay. In addition a 3.5 meters thick unprognosed sand was encountered in an oil leg in RD-8. Production from RD-7 commenced in December 2006 and from RD-8 in January 2007.
The RC-5 well has been completed and commenced production in March 2007. A subsequent workover well on RC-3 was also successfully carried out in March 2007. The rig is currently operating on a further infill well (RE-4).
Two exploration prospects (MM 301 & LM 403) are scheduled to be drilled in Q2 2007.
KG-DWN-98/2 (Cairn India 10%, ONGC (Operator))
Three exploration wells were drilled in water depths of 600 meters to 1200 meters during 2006. Two discovered gas, one of which flowed at a rate of approximately 9 mmscfd and the third was dry. In addition, 1,208 km2 of 3D Q-marine seismic data was acquired on this block.
The UD-1 ultra-deep water exploration well, located 140 km south of Ravva, was spudded in late September 2006 in 2,841 meters water depth after the acquisition and interpretation of an additional 255 km of 2D seismic data. The well encountered gas in a secondary objective and options for further appraisal are currently under consideration.
KG-ONN-2003/1 (Cairn India 49% ONGC (Operator))
Plans are underway to commence a seismic acquisition program of 2D and 3D data on this block in late 2007.
Cairn India has secured an interest in two new exploration blocks in India - PR-OSN-2004/1 and KK-DWN-2004/1 - in NELP VI.
There was an unprecedented level of interest in this latest licensing round, with 165 bids submitted for 52 blocks and a total of 68 companies bidding, 20 of which were foreign firms participating in NELP for the first time.
To date, 80% of the 26 basins identified in India are under-explored and Cairn India intends to apply for further acreage that may be offered in forthcoming licensing rounds.
HIMALAYAN FORELAND BASIN - Northern India
GV-ONN-2002/1 (Cairn India 50% (Operator), Capricorn 50%)
An aeromagnetic survey commenced in January 2007 and is expected to be completed in April 2007. This will be followed by a 2D seismic acquisition program.
GV-ONN-97/1 (Cairn India 15%, Capricorn 15%; ONGC Operator)
The first exploration well in the Himalayan Foreland Basin in which Cairn India and Capricorn participated (Tisua-1) was plugged and abandoned after encountering residual oil shows.
GV-ONN-2003/1 (Cairn India 24% (Operator), Capricorn 25%)
Subject to receipt of the requisite approvals, a 2D seismic acquisition program is scheduled to commence in Q4 2007 or early 2008.
VN-ONN-2003/1 (Cairn India 24% (Operator), Capricorn 25%)
Seismic reprocessing is underway and a 2D seismic acquisition program is expected to commence in 2008.
HIMALAYAN FORELAND BASIN - Nepal
Blocks 1,2,4,6 & 7 (Capricorn 100% (Operator))
Assuming continued improvement in the political climate in Nepal, it is anticipated that Capricorn will be in a position to commence seismic field operations in early 2008, subject to agreement with the Government to cease the contractual force majeure currently in place in respect of these blocks.
In addition, Capricorn has reached agreement with Texana for the acquisition of a 100% interest in Blocks 3 and 5 in Nepal, subject to contract and required Government approvals.
During 2006, a new office was established in Kathmandu in readiness for proposed operational activity in country.
BENGAL BASIN - Bangladesh
Sangu (Capricorn 75% (Operator))
The Sangu gas field, although now in decline, has produced in excess of 400 bscf since commencement of production in 1998. To date, the Sangu joint venture has generated gross revenue in excess of $830m.
A planned three well offshore drilling program in Bangladesh commenced in January 2007, comprising one appraisal well (South Sangu-3), one development well (Sangu-10, which is targeted at a potentially undrained compartment in the main Sangu field) and one exploration well (Hatia-1).
South Sangu-3 encountered non-commercial quantities of gas and was plugged and abandoned. The South Sangu discovery will now not be developed.
The Sangu-10 well is currently operating behind schedule and as a result, the Hatia-1 exploration well cannot be drilled in the current weather window. A separate potentially high impact exploration drilling campaign targeting both the Hatia and Magnama prospects is therefore being planned for late 2007/early 2008.
In addition to the above, well intervention work has been undertaken on some of the existing producing wells at Sangu, increasing production by approximately 10%.
Blocks 5 & 10 (Capricorn 90% (Operator)).
A 392 km 2D seismic survey has recently been completed on Block 10 and a further 296 km 2D survey has been completed on Block 5. Processing of this data is close to completion.
Block 7 (Capricorn 45%)
A 2D seismic survey of 1,054 km was acquired during 2006 and evaluation of the potential of this block is ongoing.
The Group's average entitlement production for 2006 was 24,523 boepd net to Cairn compared to 28,240 boepd in 2005.
Gross field 61,595 21,176 22,257 105,028 Working interest 13,859 8,470 16,693 39,022 Entitlement interest 6,504 8,088 9,931 24,523
Cairn's current production is 73% gas: 27% oil. This high gas weighting, combined with contractual caps on the gas price received means that the average price per boe in 2006 was $31.84. On commencement of oil production from Rajasthan, the majority of Group production will be oil (currently estimated to be approximately 90%). As a direct consequence of this, the Group will become much more highly geared to prevailing world oil prices.
The table below shows reserves information at the end of 2006 on an entitlement basis for the Group. For accounting and reserves purposes, the Group has used an oil price assumption of $30 per bbl (real) (2005: $20 per bbl).
Reserves Produced in Additions in Revisions in Reserves 2006 2006 2006 31.12.05 mmboe mmboe mmboe 31.12.06 mmboe mmboe India 208.4 (5.3) 0.1 (17.5) 185.7 Bangladesh 29.5 (3.6) 0.0 (15.6) 10.3 Total 237.9 (8.9) 0.1 (33.1) 196.0
On a direct working interest basis, reserves as at 31 December 2006 totaled 230.5 mmboe (2005: 275.7 mmboe), comprising 216.0 mmboe in India and 14.5 mmboe in Bangladesh.
Cairn continues to be well placed financially with a strong balance sheet, positive operating cash flows, a $850m syndicated revolving credit facility, and cash generated from the flotation of the Indian business to drive forward the Rajasthan development and pursue opportunities in other business areas.
PROFIT AND LOSS
Production for the year on an entitlement interest basis has decreased by 13% to 24,523 boepd (2005: 28,240 boepd). This is primarily due to reduced gross field production at Sangu, with entitlement also impacted by reduced development expenditure incurred in 2006.
The Group's production mix continues to be gas biased (approximately 73% on an entitlement basis) with contractual caps on the prices realized. This results in an average price realized by the Group for the year of $31.84 per boe (2005: $25.44 per boe). The increase is due to a higher oil price environment and a revision of the pricing for gas sold from Ravva and CB/OS-2.
Revenue for the year was $286.3m (2005: $262.6m).
Cost of sales for the year was $222.4m (2005: $168.8m). This includes a write off of unsuccessful exploration costs and general exploration expenditures of $62.0m (2005: $26.9m) in accordance with the Group's successful efforts based accounting policies. The increase is partly due to the write off of expenditure on relinquished areas in Rajasthan.
Production costs for the year were $56.9m (2005: $50.2m) with the increase due mainly to stock movements. Production costs for 2006 were $6.36 per boe compared to $4.87 per boe in 2005. Production costs also include pre-exploration costs that are expensed.
The average Group rate for depletion and decommissioning has increased by 29.9% to $11.56 per boe (2005: $8.90 per boe), mainly as a result of the downward reserves revision at the year end for Sangu.
The Group generated a gross profit of $63.9m (2005: $93.7m).
Profit for the Year
Administrative expenses for the year were $60.3m (2005: $41.2m). This includes a charge of $18.5m (2005: $10.0m) for share based payments in accordance with IFRS 2 (including IPO related awards to certain senior executives of Cairn India) and associated national insurance contributions. Administrative expenses were also increased by one-off reorganization costs in connection with the IPO.
Net finance costs for the year were $26.0m (2005: net finance income $30.3m), including a foreign currency exchange loss of $13.0m (2005: gain $27.1m) and a $9.7m (2005: nil) fair value charge in respect of foreign exchange options entered into to manage the currency exposure on funds raised in the IPO, which have since been unwound. Realized exchange rate losses arose primarily due to the treatment under IFRS of exchange movements on intra-group funding arising from the weakening of the US dollar against Sterling in the year.
The $8.6m tax credit (2005: $22.1m charge) arises principally due to the exceptional oil and gas write down, increased depletion and decommissioning charges and the write off of unsuccessful exploration costs, all of which reduce the deferred tax provision.
The exceptional oil and gas write down of $71.5m relates to impairment on Sangu arising under IAS 36 due to the downward reserves revision at the year end (as outlined in the Chief Executive's Review on page 8). The prior year exceptional gain of $15.3m relates to the gain arising on the sale of assets to ONGC.
After the exceptional charge, the Group made a loss for the year of $82.0m (2005: profit $79.1m).
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