Cairn Issues Pre-close Operational and Trading Update

Cairn Energy PLC, which focuses its activities on the geographic region of South Asia, said that it plans to report its interim results for the 6 months to June 30, 2006, in early September.

Cairn has recently opened a new Indian headquarters at Gurgaon on the outskirts of Delhi to provide improved support for the Rajasthan project team and to manage the company’s business interests in India. In advance of the September 5 announcement, the company has released an update on recent operations and guidance in respect to its trading performance in 2006. Operational highlights are as follows:

--Final Government of India approval received for first four Field Development Plans (FDPs) for the Mangala, Aishwariya, Saraswati, and Raageshwari fields in Block RJ-ON-90/1, Rajasthan.
--$1 billion bank facility signed. $850 million to be allocated to funding Cairn’s share of the above field developments in Rajasthan.
--A hydraulic fracture program in Rajasthan has highlighted the potential for new reserves in low permeability reservoirs.

  • The company continues to target Q4 2006 to Q1 2007 for the partial Initial Public Offering (IPO) of the Indian business on Bombay Stock Exchange.

    “Obtaining Government approval for the Mangala, Aishwariya, Saraswati and Raageshwari fields in Rajasthan and securing finance for the first phase of the developments is a significant achievement on the path to first oil,” said Sir Bill Gammell, Cairns’ chief executive. The preliminary update follows. This information has not been audited and is subject to further review.

    Following its recent successes in India and the consequential changing nature of the business, Cairn indicated that a partial IPO of the Indian business would take place. Work on progressing the IPO is well underway and on track to allow the company to meet its aim of listing on the Bombay Stock Exchange in the last quarter of 2006 or early 2007 subject to market conditions.

    Rahul Dhir, the new CEO appointed in April 2006 to lead the Indian business, is now resident in Gurgaon, near Delhi. The formation of the management team, operations team, and organization required to run the India business on a stand-alone basis is well-advanced.

    Rajasthan RJ-ON-90/1 Overview

    Cairns’ main focus is to bring Mangala onstream at the earliest opportunity, currently scheduled for Q4 2008, followed by Bhagyam and Aishwariya approximately 1 year later. A detailed update will be provided with the Interim Results in September.

    The Government of India (GoI) has given its final approval for the Field Development Plans (FDPs) for the Mangala, Aishwariya, Saraswati, and Raageshwari fields in Block RJ-ON-90/1, Rajasthan, North West India. The FDPs were approved by the Management Committee (MC - Directorate General Hydrocarbons representing the GoI, ONGC, and Cairn) in May. This final approval follows the earlier agreement on the FDPs reached at the joint venture Operating Committee (OC - Cairn and ONGC).

    In order to fund its 70% share of the Northern Fields development project, Cairn has signed a $1 billion bank facility with the International Finance Corporation (IFC), The Royal Bank of Scotland plc, and several other international banks. This arrangement will finance the first phase of the development. Cairn expects subsequent development costs to be funded out of cash flow.

    The first commercial production from the Saraswati and Raageshwari fields is planned for Q4 2006. The initial combined target plateau rate of between 2,000 and 3,000 barrels of oil per day (bopd) will be constrained by having to export the produced oil via road tanker. However, once the Mangala export infrastructure is installed, it is planned, subject to capacity, that the Saraswati and Raageshwari fields, as well as other southern discoveries, will be tied in to the export system. Under the terms of the Production Sharing Contract (PSC) the construction of the export system is the responsibility of the GoI through its nominated buyer, MRPL (a subsidiary of ONGC).

    The Declaration of Commerciality (DoC) for the Bhagyam and Shakti fields was approved by the OC on February 1, 2006, which is the first step in the development approval process under the Production Sharing Contract (PSC). The MC is currently considering a Development Area extension to cover the Bhagyam, N-I, Shakti and N-E fields. The Bhagyam and Shakti FDP is expected to be submitted to the OC in Q4 2006 and once approved it will be submitted to the MC.

    Facilities and engineering design for Mangala is ongoing with a specialist team from Cairn working alongside the contractors, Mustang, in Houston.

    The FDP for the Guda field in the south is expected to be submitted in Q3 2006. The oil quality of the southern fields is lighter and is found in a variety of different reservoirs that are generally of poorer quality than those in the northern fields. Nevertheless, wells such as Guda 2, 3, and 7; which flowed at >1,000 bopd of 38 degree API oil, show that locally these reservoirs can be very productive for onshore wells.

    In June 2005, Cairn was granted an 18-month extension to complete its appraisal activities in three areas covering 2,884 square kilometers to the north and west of the Development Area.

    An extensive 3D seismic program is underway in the southern part of this appraisal area, south of the Barmer airbase, which is to be followed by early drilling, given the November 2006 deadline for completion of activities. Following NP-2, three appraisal wells on the northern end of the NP structure close to the airbase have been drilled with mixed results. One well encountered 19 meters of oil-bearing Fatehgarh reservoir, with a heavy 16 degree API crude. In two other wells in separate fault blocks 745 meters and 3.2 kilometers to the west, the Fatehgarh section was missing. Further drilling on and around the structure will be required to delineate the NP field.

    A program of hydraulic fracture stimulation on various lower-permeability reservoirs is nearing completion.

    Results on the Raageshwari deep gas field from a single tested zone in Raageshwari 5 indicated a two-fold increase in productivity. Testing on Raageshwari 7 is currently ongoing following a three-stage fracture stimulation treatment. Mechanical problems have curtailed the program for Raageshwari 4-Z.

    Gas from the Raageshwari wells will be utilized as fuel for the Mangala development and subsequent northern area developments.

    The first fracture stimulation of the Barmer Hill formation at Mangala was conducted on the Mangala 6 well and resulted in up to 150 bopd. Test production using a sucker rod pump has been completed, producing a total of 1,200 barrels of oil in approximately 4 weeks.

    A second fracture stimulation operation of the Barmer Hill formation at Aishwariya was conducted on the Aishwariya 4 well and resulted in initial flow rates of 400 to 500 bopd. The well has been tested for several weeks with an increasing gas oil ratio (GOR) indicating a possible gas-cap.

    The test results from the two Barmer Hill wells are very encouraging in highlighting the potential to unlock material reserves in the Mangala and Aishwariya Barmer Hill reservoirs. Additional work is needed to quantify the potential. This work is likely to be completed by September.

    The Vijaya, Vandana, N-R, and southern fields are also potential candidates for future fracture stimulation to access new reserves or accelerate production.

    The Ravva field has remained on plateau in the first half of 2006. An offshore drilling program of six Ravva infill wells and one exploration well is due to commence in September. An onshore exploration well, RX-9, is currently operating.

    Western India
    Lakshmi and Gauri production is up for the year to date, in barrels of oil equivalent (boe) terms, due to increased oil and condensate production. In view of the encouraging performance further evaluation of the oil play is planned.

    Northern India
    The ONGC operated exploration well at the Tisua prospect in the Ganga Valley is expected to spud shortly.

    The sixth Indian Government exploration bidding round, NELP VI, closes on September 15, 2006. Cairn will be an active participant in this round.

    A winter 2006/2007 offshore drilling program is being planned in Block 16 to drill Sangu infill wells, a Sangu south appraisal well, and at least one exploration well.

    Cairn continues to monitor security developments in Nepal with a view to commencing field operations at the earliest opportunity.

    Group Production
    The group estimates entitlement production for the first 6 months of 2006 to be approximately 27,301 barrels of oil equivalent per day (boepd) net to Cairn (2005: 27,909boepd). Figures below that are marked by an asterisk (*) are provisional.

    Production (boepd) to 30 June 2006 (approximate)
                           Ravva 	Sangu 	Lakshmi Total
                                            & Gauri 	 
    Gross field 	       62,700	24,200 	24,800	111,700
    Working interest       14,100	18,100	9,900	 42,100
    Entitlement interest	6,400*	10,300*	10,600*	 27,300*

    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 realized for the 6 months to June 30, 2006, is expected to be in the region of $30 per boe (H1 2005: $24.39).

    Cairn holds material exploration and production positions in west India, east India, and Bangladesh, along with new exploration rights in India and Nepal. The group’s 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 northwest of India at the beginning of 2004. Cairn has now made 18 discoveries in Rajasthan block RJ-ON-90/1.

    Cairn operates block RJ-ON-90/1 under a production sharing contract signed on May 15, 1995. The Development Area (1,858 square kilometers), which includes Mangala, Aishwariya, Saraswati, and Raageshwari, is shared between Cairn and ONGC, with Cairn holding 70% and ONGC having exercised their back in right for 30%.

    India currently imports approximately 2 million barrels of oil per day (bopd). It produces approximately 650,000 bopd itself, of which 50,000 bopd comes from the Cairn-operated Ravva field on the country’s east coast.