Cairn Energy Provides Preview of Preliminary Results
Cairn intends to announce its preliminary results for the year to December 31, 2004 on Tuesday, April 19, 2005. In advance of these results, Cairn is providing an update on recent operations and guidance in respect of the Group's trading performance in 2004. The information contained herein has not been audited and is subject to further review.
The major focus of the company over the last few months has continued to be in Rajasthan.
Rajasthan Block RJ/ON-90/1
Bill Gammell, Chief Executive said:
"2004 was an excellent year of discovery and growth for Cairn. The more we progress Rajasthan the better we feel about it.
We are continuing to focus on a very active seismic and drilling campaign while exploring the development opportunities to maximize the value of Mangala, Aishwariya and other discoveries."
Rajasthan N-V Oil Discovery and Extension Area
The N-V extension area of 856 square kilometers was awarded to Cairn by the Indian Government in January 2005 on the basis of the N-V-1 oil discovery made in August 2004. The first appraisal well, which is an extended reach well N-V-1ST, is currently operating and has been drilled 750 meters from the discovery well.
The N-V-1ST well has confirmed that the field extends into the extension area. This highly deviated well has encountered 320 meters of net high quality Fatehgarh oil pay sands, which equates to 104 meters of true vertical net oil pay. It has a common oil water contact with the discovery well.
A test program is presently being prepared and the N-V-1ST well is expected to be suspended as a potential future producer. A further two appraisal wells are planned on this structure. An update will be available with end of year results in April.
Elsewhere in the extension area a 2D seismic survey is currently under way and a minimum of two additional wells are planned before the end of May 2005.
Rajasthan Development Area
The Development Area covers 1858 square kilometers on the block under long term contract. This area includes the Mangala and Aishwariya fields discovered last year, several other fields and discoveries, and the future exploration potential over the entire Development Area.
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 became a 30% participant in the Development Area in January 2005. The experience and knowledge of ONGC, gained from its major developments in the Cambay basin to the south, is invaluable in assisting the joint venture's selection of the commercial development options. Cairn expects to submit a Field Development Plan on behalf of the joint venture to the Indian Government in May.
Other activity within the Development Area continues apace. A 450km² 3D seismic survey has been completed across the Mangala and Aishwariya fields. The interpretation of this data is under way and preliminary results are encouraging. As a result of the 3D seismic over Aishwariya an up dip well has been programmed to confirm the crest of the field. A further 3D seismic survey over the N-R-1 and N-R-2 discoveries is nearing completion. Current drilling activity is focused on the deep gas play at Raageshwari, in the southern part of the area.
Potentially large in place volumes of gas have been established at Raageshwari in non conventional volcanic reservoirs. The Raageshwari-5 well tested 1 mmscfd of gas from the volcanic section and 1.5 mmscfd from the Fatehgarh. This well will shortly be placed on long term test. A further down-dip appraisal well, Raageshwari-6, will core the Fatehgarh section and is designed to confirm additional in place gas volumes in the Fatehgarh.
To enhance our understanding of potential recovery factors, well stimulation studies are continuing. Future fraccing of Raageshwari wells may enable the optimal deliverability to be determined before reserve assessments can be made.
Rajasthan Exploration Area
A significant portion of the remaining exploration acreage out with the Development Area is un-appraised. Cairn will be seeking a 30 month extension of the appraisal period beyond May 2005.
Rajasthan - Overall Drilling Activity
Cairn has drilled five additional wells in Rajasthan since the December update.
Exploration wells W-A-1, which was 35 km south east of Mangala and W-B-1, which was 64km south west, were plugged and abandoned.
GR-F-2 and Guda-3 both appraised previous oil discoveries in the Thumbli formation. The Thumbli oil play has significant oil in place potential and productivity trials along with stimulation tests indicate the potential for commercial production. Various development options for the Thumbli oil are currently being reviewed.
The exploration well GR-A-2 is currently drilling 150 km south of Mangala.
Near term drilling activity will focus on the N-V area, prospects around Mangala and Aishwariya, and exploration for the deep gas potential in the south of the Rajasthan block.
Other Producing Properties in India (Ravva, Lakshmi and Gauri)
Ravva continues to perform well and additional infill wells are planned later this year, subject to required regulatory approvals, to maintain plateau production. At Lakshmi four out of five infill wells have so far been drilled, three of which have been completed and put on production. Currently the Lakshmi and Gauri fields are producing in excess of 100 mmscfd of gas.
Following the acquisition of an additional 37.5% equity interest and the Operatorship from Shell on 30 June 2004, Cairn has implemented a second phase of development drilling at Sangu, which consists of an additional three development wells.
Two of these development wells have been drilled and completed, with the third well in the process of being completed. This takes the number of active development wells from four to seven and will help provide greater flexibility in meeting the field deliverability requirements.
The three new development wells have 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 will be adopting the lower material-balance derived estimates and re-categorizing the difference in the "possible" reserve category.
As domestic market demand for gas becomes increasingly strong and historic Sangu payment delays are largely resolved, Cairn is now considering recommencing active exploration in Bangladesh.
In accordance with Cairn's previously stated intention, an independent assessment of its reserves estimates on all its fields in Bangladesh and India has been conducted by an internationally-recognised firm of reservoir engineers, DeGolyer and MacNaughton, using information available as at December 2004.
2004 PRE CLOSED PERIOD TRADING STATEMENT
Average 2004 production is outlined in the table below:
* Cairn sold its only remaining North Sea interest during May 2004
As stated in the Interim Results, well intervention and infill drilling programs to enhance production on both the Sangu and Lakshmi gas fields commenced in the latter part of 2004 and are ongoing. As a consequence, gross production in 2005 is expected to exceed that achieved in 2004.
In accordance with the terms of the respective Production Sharing Contracts ("PSCs"), Cairn's production entitlement from both the Ravva and Sangu fields decreased in 2004.
Following the October Arbitration Hearing award in relation to the interpretation of the Ravva PSC, first quarter 2004 production from the field has been revised to reflect a higher Government share during this period. Production acquired pursuant to the acquisition of Shell's interests in Bangladesh has been recognized from the transaction completion date (June 30, 2004).
Although principally a US$ business, the Group reports in Sterling and therefore the financial results have been impacted by the weakening of the US$ against Sterling from $1.79 to $1.92 during 2004.
The average price realized by the Group for 2004 is anticipated to be in the region of $24 per boe compared with $22.86 per boe for 2003. The average cost of sales per barrel is expected to be in the region of £7 to £7.50 per boe compared to £6.39 per boe in 2003. The increase in the average cost of sales per barrel reflects a revision to the remaining entitlement reserves due to a reduction in the estimate of gross remaining proved plus probable reserves, primarily from the Sangu field and the impact of higher oil price assumptions when calculating Cairn's share of future production.
With work ongoing to determine the optimal development plan for Mangala and Aishwariya, the associated Rajasthan proved plus probable reserves will be disclosed but are unlikely to be booked in the year end financial statements.
Gross profit, pre exceptional items, for 2004 is expected to be in the region of £45m to £52m. Operating profits, pre exceptional items, are anticipated to be approximately £28m to £33m.
As stated in the announcement made in October, following findings of the Arbitration Hearing in respect of the interpretation of the Ravva PSC, the Group has reviewed its provisioning in respect of this liability. As a consequence, the Group is expected to report an additional exceptional charge net of tax of approximately £8m to £10m.
Capital expenditure for the Group in 2004 was approximately £127m, comprising £90m exploration/appraisal expenditure, £35m development expenditure, and £2m other fixed assets.
At the year end the Group had no gearing and net funds of circa £70m. In addition, pre tax proceeds of approximately $135m from the previously announced ONGC transaction are expected to be received in early 2005. The Group currently has $240m of unutilized unsecured revolving credit facilities.
The 2004 financial statements are being prepared in accordance with the principles of UK GAAP. Reporting under International Financial Reporting Standard (IFRS) is mandatory for the Group for periods ending after 1 January 2005 with restatement of 2004 comparatives resulting. Guidance on the impact of IFRS on Cairn's financials will be provided to analysts as part of the transition process.
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