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6
Delivering a
balanced business
from exploration and development
Cairn Energy PLC Annual Report and Accounts 2016
Strategic
Report
Introduction to Cairn
The Year at a Glance
Business Model & Strategy
Our Culture
Industry Overview
CEO’s Review
Cairn in the UK & Norway
Cairn in Senegal
Key Performance Indicators
How We Manage Risk
Financial Review
Working Responsibly
Human Resources
Leadership
and Governance
Board of Directors
Corporate Governance Statement
Audit Committee Report
Nomination Committee Report
Directors’ Remuneration Report
Directors’ Report
Financial
Statements
Independent Auditors’ Report
Group Income Statement
01
02
04
10
12
14
22
24
34
39
48
52
72
76
78
91
96
98
125
129
135
Group Statement of Comprehensive Income 135
Group Balance Sheet
Group Statement of Cash Flows
Group Statement of Changes in Equity
Section 1 – Basis of Preparation
Section 2 – Oil and Gas Assets
and Decommissioning Provisions
Section 3 – Financial Assets
and Working Capital
Section 4 – Results for the Year
Section 5 – Taxation
Section 6 – Capital Structure
and Other Disclosures
Company Balance Sheet
Company Statement of Cash Flows
Company Statement of Changes in Equity
Section 7 – Notes to the
Company Financial Statements
Additional
Information
Licence List
Glossary
136
137
138
139
141
149
154
161
166
169
170
171
172
177
179
Company Information
Inside back cover
Corporate Offices
Back cover
Cairn Energy PLC is an independent, UK-based oil
and gas exploration and development company.
Cairn has explored, discovered, developed and
produced oil and gas in a variety of locations
throughout the world with more than 20 years’
experience as operator and partner in all stages
of the oil and gas lifecycle. Cairn is listed on the
London Stock Exchange with its headquarters
in Edinburgh and offices in London, Norway
and Senegal.
Cairn’s strategy is to deliver value for stakeholders
by building and maintaining a balanced portfolio of
exploration, development and production assets within
the oil and gas lifecycle. Cairn’s exploration focus is on
frontier and emerging basins acreage from which the
greatest value can be created. The Group’s production
assets provide the cash flow to sustain exploration and
development activity.
Development
and future
production focus
UK & Norway
Kraken & Catcher
~25,000 boepd
peak net targeted production
to Cairn
51.5 mmboe
2P reserves (as at 31.12.16)
Exploration
focus
Senegal
6 wells
drilled (as at 31.12.16)
201.4 mmboe
2C resources (as at 31.12.16)
discover more at
cairnenergy.com/ar2016
Introduction to Cairn
“We are committed to working
responsibly as part of our strategy
to deliver value for all stakeholders.
This means working in a safe,
secure, environmentally and socially
responsible manner.
During 2016, we made good
progress against our strategic
objectives, increasing the recently
discovered, significant Senegal
resource base and progressing our
North Sea developments through
to first oil and future cash flow
in 2017 and beyond.”
IAN TYLER
Chairman
01
The Year at a Glance
Building
a portfolio
of exploration,
development
and production
assets
02
Cairn Energy PLC Annual Report and Accounts 2016
48
Maintaining
a strong
balance sheet
to fund future
exploration
and appraisal
48
Read more: Financial Review
on P48-51
Strategic Report 14
Active and successful
exploration and
appraisal drilling
in Senegal
14
Read more: CEO’s Review
on P14-21
52
A culture
of working
responsibly
52
Read more: Working Responsibly
on P52-71
14
Nearing cash
flow and first oil
from North Sea
development
assets
14
Read more: CEO’s Review
on P14-21
03
Business Model & Strategy
Working responsibly and managing risk are a key part of our strategy
Business
model
To create, add and realise value for stakeholders through
the exploration, development and production of oil and
gas within a self-funding business model. Exploration
offers material value upside potential to stakeholders and
production provides the cash flow to sustain exploration
and development.
Strategy
To deliver value for stakeholders by building and maintaining a
balanced portfolio of exploration, development and production assets.
To maximise value, exploration is focused on frontier and emerging basins acreage from
which the greatest value can be created. Cairn is currently focused on growing its Senegal
resource base, and on progressing its North Sea developments to first oil and cash flow
which is targeted in 2017.
Strategic
objectives
Annual Key Performance Indicators (KPIs) identify the
Company’s strategic objectives and how they can be met,
enabling the Company to measure its delivery of strategy.
34
Read more: Key Performance Indicators
on P34-38
Managing risk
39
Read more: How We Manage Risk
on P39-47
Cairn has a robust risk management process in place
to identify, monitor and mitigate risk and to identify
opportunities. This means first determining risk
appetite, and then identifying the key risks.
Working
responsibly
52
Read more: Working Responsibly
on P52-71
The ‘Maintain licence to operate’ KPI measures the Company’s
ability to work responsibly and means delivering value in a safe,
secure, environmentally and socially responsible manner. Working
responsibly means identifying and managing issues that are material
not only to the Company but also to stakeholders.
04
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report
Create Value
Cairn identifies assets it can add value
to through exploration activity including
3D seismic and drilling as part
of a focused exploration strategy.
If successful, exploration activity
can create material value.
Add Value
In order to add value Cairn looks
to progress existing exploration assets
through the appraisal and development
stages or can acquire new assets at this
point in the oil and gas lifecycle.
Realise Value
Cairn realises value by progressing
development assets through
to production and/or realising value through
asset sales and either reinvesting the
proceeds into the business to fund
exploration and development activity
or returning cash.
Identify
Explore
Appraise
Develop
Produce
Return & Reinvest
Value growth within the oil and gas lifecycle
Exploration
Frontier and emerging basin exploration
acreage offshore Senegal, Morocco,
the Republic of Ireland, Norway and Malta;
mature exploration acreage in the UK
and Norway
Development
Non-operated interest in two
development projects in the North Sea
(Kraken and Catcher)
Production
Kraken and Catcher, two of the largest
UK North Sea development projects,
are targeting production in 2017
Read more: CEO’s Review
on P14-21
Read more: CEO’s Review
on P14-21
Read more: CEO’s Review
on P14-21
2017 strategic objectives
Deliver
exploration
and appraisal
success
Purpose: Grow the
resources and reserves
Portfolio
management
Purpose: Active portfolio
management and acreage
optimisation
Deliver
operational
excellence
Purpose: In all 2016
activities
Maintain licence
to operate
Purpose: Deliver value
in safe, secure,
environmentally and
socially responsible
manner
Deliver a
sustainable
business
Purpose: Maintain
a self-funding
business plan
2016/2017 principal risks
Exploration and appraisal
Sustained low oil and gas price
Securing new
venture opportunities
Health, safety, environment
and security
Delay in Catcher and Kraken
production start-up schedule
Restriction on ability to sell
CIL shareholding
Stakeholder reaction
to operations
Fraud, bribery and corruption
Operational and project
performance
Reliance on JV operators for
asset performance
Political and fiscal uncertainties
Access to internal
or external funding
Staff recruitment and retention
Economics
and funding
Contractors and
supply chain
2016 material issues
Ethics, anti-
bribery and
corruption and
transparency
Social and
economic
benefit
Human rights
Major accident
prevention
and safety
Climate change,
emissions and
discharges
05
Historically, Cairn focused on South Asia
where it created significant value for
shareholders and stakeholders, particularly
through its discovery, development and
production of oil in Rajasthan, India. This was
the largest onshore discovery in India for
more than 25 years with the potential to
provide more than 30% of India’s daily crude
oil production and generate many billions of
US dollars in revenue for India. In 2006 the
Indian business was listed on the country’s
stock exchanges and in 2012 Cairn sold
the bulk of its interests in India and set
about rebuilding the portfolio. Between
2006 and 2012 Cairn returned US$4.5bn
to shareholders.
Today, Cairn continues to offer growth
opportunities through its frontier exploration
success in Senegal and through future cash
flow from its North Sea development assets
which are targeting production in H2 2017
and which will fund future exploration and
growth of the business.
Business Model & Strategy continued
Rebuilding the business:
2012-2017
Cairn’s strategy is to build a balanced portfolio of
exploration, development and production assets in
order to create, add and realise value for shareholders.
UK & Norway
exploration, development
and future production
Republic
of Ireland
exploration
Malta
exploration
Morocco
exploration
Senegal
exploration and
development
06
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Cairn’s development and production
focus is on the mature basins of the UK
and Norwegian North Sea. In 2012 Cairn
acquired non-operated interests in two of
the largest developments in the North Sea,
Kraken and Catcher, which are targeting
first oil and cash flow in 2017.
In order to deliver maximum value Cairn
continues to actively manage its portfolio
of assets, with the constant evaluation of
new exploration opportunities as well as
opportunities to acquire and trade assets
within the existing portfolio to ensure they
are delivering optimum value.
Cairn also holds exploration acreage in the
UK and Norway including the Barents Sea
which is believed to have high potential
for commercial oil discoveries. The mix
of mature and emerging basins along the
UK and Norwegian continental shelves
provides good opportunities for balanced
portfolio growth and operational synergies.
They also form part of an active market for
the trading of assets, an important part of
optimising value within the portfolio.
Senegal – a new source of resource
and future production
Since selling down the Indian business
Cairn’s exploration focus has been on
frontier acreage along the Atlantic Margin.
The Atlantic Margin was formed millions
of years ago when the supercontinent
‘Pangaea’ broke up to form the continents
as they are known today and provides
a range of underexplored and mature
hydrocarbon basins with common
geology and promising opportunities
for organic growth.
Between 2009 and 2010 Cairn drilled
eight wells in Greenland which failed to
find commercial quantities of hydrocarbons.
In 2014 Cairn made a significant discovery
offshore Senegal thereby opening a new
hydrocarbon basin. Cairn was the first to
drill in deepwater offshore Senegal which
remains relatively underexplored with only
25 wells drilled offshore to date. Cairn is
currently pursuing further exploration and
appraisal of this significant resource base.
Along the Atlantic Margin Cairn also holds
exploration acreage offshore the Republic
of Ireland and Morocco.
Cairn made
a significant
discovery offshore
Senegal in 2014,
thereby opening
a new hydrocarbon
basin.
Norway
24 Licences
Acreage
5,458km2
2C resources 1
20.2 mmboe
Geographic focus
Senegal
UK
1 Production Sharing Contract
12 Licences
Acreage
7,100km2
2C resources1
201.4 mmboe
Acreage
792km2
2P resources 1
51.5 mmboe
2C resources 1
3 mmboe
Morocco
Republic of Ireland
Malta
1 Production Sharing Contract
3 Licences
1 Exploration Study Agreement
Acreage
33,748km2
1 As at 31.12.16.
Acreage
2,399km2
2C resources 1
14.6 mmboe
Acreage
6,412km2
07
Business Model & Strategy continued
Track record of exploration, development and production
Cairn is an experienced oil
and gas explorer, developer
and producer.
Cairn has operated in a variety of locations around the
world, making its biggest discovery in Rajasthan, India which
it went on to develop and produce. In 2012 Cairn sold its
Indian business and returned cash to shareholders as part
of its business model to create, add and realise value for
shareholders. Since then Cairn has focused on rebuilding
the business to create, add and realise value once again
through exploration, development and production. Today
Cairn is focused on its recent frontier exploration discoveries
in Senegal and its development projects in the North Sea
which are targeting first oil and cash flow in 2017.
Exploration
Senegal
2013 Farm-in as operator to frontier acreage
offshore Senegal
2015 3D seismic acquired, drilling
recommences
2014 Two wells drilled, two oil discoveries,
one of which is largest global oil discovery
of 2014
2016 Four successful wells drilled,
independently verified contingent in
place gross oil resource upgrade to
>2.7bn bbls
2017 Third phase of drilling commences
08
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Development
UK & Norway
2012 Future production and cash flow
secured through acquisition of two UK
& Norway focused companies bringing
Kraken and Catcher developments,
Skarfjell discovery, near term exploration
drilling, >30 licences
2013 Kraken Field Development Plan (FDP)
approved, successful Skarfjell appraisal well
2014 Catcher FDP approved, Kraken
Floating Production, Storage and
Offloading (FPSO) construction starts
2015 Catcher FPSO construction starts,
Kraken and Catcher development
drilling starts
2016 Nearing cash flow and production
from Kraken and Catcher, targeted in 2017
Exploration,
development
and production
track record
Rajasthan, India
1997 Acquired interest in Rajasthan
from Shell
1999 First Rajasthan discovery
2003 Second Rajasthan discovery
2004 Three major oil discoveries by
2004 including Mangala, the largest
onshore oil find in India in 25 years
2007 Value realisation from Indian
business following Initial Public
Offering of Cairn India Limited (CIL)
on Indian Stock Exchanges, US$1bn
returned to shareholders
2009 Production commenced from
Mangala field, Mangala Processing
Terminal opened (~16,000 people
involved at height of construction)
2010 World’s longest pipeline taking
oil to market completed
2012 Sale of 40% of CIL to Vedanta
Resources Limited, US$3.5bn returned
to shareholders; 10% interest in CIL
retained
09
Our Culture
Delivering value in a safe,
secure, environmentally and
socially responsible manner
for our stakeholders is a key part
of our strategy and ensures we
maintain our licence to operate.
At the heart of this is our culture which is based around
a commitment to working responsibly. We measure
our ability to work responsibly through our Key
Performance Indicators, one of which (‘Maintain licence
to operate’) is dedicated to working responsibly. It is
also measured through our people management
process which incorporates certain behaviours
identified as critical to ensuring this culture exists.
A culture based on working responsibly
means having the right values, principles
and policies in place, that they are
embedded throughout the organisation in
our systems and processes and that they
are upheld by our people. At the heart of
our culture are our core values which are
known as the 3Rs, and which stand for
building respect, nurturing relationships
and acting responsibly.
These core values are underpinned by our
Business Principles, our Code of Business
Ethics and a number of Corporate
Responsibility policies.
Read more information at
www.cairnenergy.com/responsibility
The Business Principles identify the
behaviours we expect and the Code of
Business Ethics identifies the standards
of business ethics and conduct which we
expect. Both the Business Principles and the
Code of Business Ethics must be applied not
only by employees but by all other parties
that work on the Company’s behalf including
contractors, suppliers and partners. They are
integrated into our systems and processes
of which the key ones include the Corporate
Responsibility Management System (CRMS),
the Cairn Operating Standards, the Group
Risk Management Procedure and the
Internal Control and Assurance Framework.
Our core values
Our behaviours
At the heart of our culture are our core values which are known as the 3Rs,
and which stand for:
The behaviours we expect from our people
are based on the 3Rs:
Building
Respect
Nurturing
Relationships
Acting
Responsibly
10
Cairn Energy PLC Annual Report and Accounts 2016
Be Safe
Be Entrepreneurial
Be Focused
Be a Leader
Be Collaborative
Be Open
Be Empowered
Strategic Report This culture of
working responsibly
is also built upon
global standards
which we uphold and
which consequently
inform how we
deliver strategy.
The behaviours we expect from our people
are based on the 3Rs and are known as our
High Performance Behaviours. They identify
the behaviours we expect to see exhibited
by our people in everything that we do, day
to day. They are well promoted throughout
the organisation and they ensure that
everyone understands how they are
expected to contribute to the success
of the business.
They are:
• Be Safe
• Be Entrepreneurial
• Be Focused
• Be a Leader
• Be Collaborative
• Be Open
• Be Empowered
To further ensure these behaviours are
adopted by our people and embedded
in our culture, this year we included them
as part of our performance management
process with all individuals in the
organisation measured on their performance
against each of these behaviours.
This culture of working responsibly is
also built upon global standards which
we uphold and which consequently inform
how we deliver strategy. These standards
are part of valuable, global initiatives which
promote responsible corporate behaviour
and working practices.
We uphold and support the ten principles
of the United Nations Global Compact,
an initiative for businesses committed to
aligning their strategies with ten universally
accepted principles in the areas of human
rights, labour, environment and anti-
corruption. We are also committed to
working to International Finance Corporation
(IFC) Performance Standards on Social and
Environmental Sustainability which are in line
with the UN Global Compact principles.*
The Board has ultimate responsibility
for ensuring this culture of working
responsibly exists within the organisation
and our assurance processes help the
Board to ensure this. We have three levels
of assurance within the organisation: firstly,
our values, policies and principles and
our processes and systems with which all
employees are required to comply; secondly,
internal oversight of their application by key
committees including our Senior Leadership
Team which includes our Chief Executive,
Chief Financial Officer and Chief Operating
Officer; and thirdly, external assurance
audits and opinions. Our culture of working
responsibly is embedded at the very heart
of this assurance process in our values,
policies and principles.
* The IFC, a member of the World Bank Group,
is the largest global development institution
focused exclusively on the private sector in
developing countries.
11
Frontier
exploration
Activity in the
North Sea
COP21/
stranded assets
Industry Overview
Putting our
industry in
context
This industry overview provides an
independent view of the industry
context in which Cairn operates.
Energy intensity will increase and accelerate,
such that each energy unit will produce ever
more output, but also the mix of energy
carriers will shift towards those emitting less
carbon. It is expected that renewables will
grow fastest among all the energy carriers
but that, given the much higher starting point,
fossil fuels will be the largest contributors to
the required growth in energy supply. Gas,
emitting the least carbon per energy unit,
is therefore expected to be the main source
of this, at the expense of coal, and to a lesser
extent oil 1.
Oil consumption is expected to continue to
grow, but at a lower rate than total energy
consumption, such that its relative share
in the energy mix continues its long-term
decline. This is not a view shared by all – in
late 2016 Royal Dutch Shell issued another
warning of peak oil over the next 5 to 15
years, signalling an important switch to
demand becoming the binding constraint,
rather than supply. Overall, therefore, the
uncertainties around climate change and
geopolitical considerations evolved rapidly
through 2016, with the implications for the
oil and gas industry still open to debate.
Introduction
World economic growth remained weak
in 2016, with uncertainties such as the US
elections, the UK Brexit vote, Eurozone
financial fragility and Chinese economic
rebalancing weighing heavily on the system.
This in turn constrains the demand for oil,
with oil supply continuing to exceed demand
and producing another year of weak oil
prices, with Brent crude averaging US$44
per barrel over 2016 after reaching a 12-year
low of US$28 in January.
The end of the year saw a response to this
in the form of an agreement in November
to restrict production by both OPEC and
certain non-OPEC producers, delivering
cuts of 1.2 million barrels per day over the
next 6 months (almost 1.5% of global output).
Commencing in January 2017 this heralds a
return to market price management, rather
than share management. Futures prices for
2017 rose by more than US$10 per barrel in
reaction to this potential crude deficit.
2016 saw significant policy movement
towards a reduction in global carbon
emissions, with the Paris agreement gaining
sufficient signatories to enter force by
November. Although unlikely to be enough
to deliver the target global warming ceiling
of 2°C, suggesting more policy changes to
follow, this marks an important step change
in the energy transition. With global energy
demand expected to rise by over 30% in the
next two decades, government and market
incentives will be required to reduce the
carbon impact.
12
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report The current oil price, and the future of oil
demand, have continued to suppress the
exploration spend, with 2016 levels down
by 20% against the previous year and
60% against the high of 2014. The push
for capital discipline and portfolio risk
reduction has driven down exploration
costs, such that the net effect on activity
is not as deep as these numbers suggest.
However almost all of this expenditure
was on activity already contractually fixed
with very little new, discretionary, spend.
Despite this gloomy background those
companies with the balance sheet and
risk appetite to open up new acreage are
taking advantage of the opportunities
associated with low contracting costs.
Significant finds have been made in
the US in shale oil, indeed the largest
ever single US deposit of oil and gas
was reported, but elsewhere the gas
dominance of recent years has continued.
The recovery in North Sea production
visible in 2015 continued into 2016,
rising by over 6% year on year, driven by
several new fields coming on stream and
a reduction in maintenance downtime
on existing facilities. However it is more
appropriate to look behind the production
numbers since a new regulatory regime
requiring stakeholders to maximise
economic recovery, rather than simply
total volume, came into force in 2016.
Total operating costs for the North Sea
have fallen by almost 27% since the highs
of 2014, the most visible effect of which is
the reduction in industry headcount. This
reduction in expenditure, combined with
the increase in production, resulted in a
45% fall in operating costs per barrel.
On the other hand, total capital
expenditure has also fallen, and by further
(40% since 2014), such that the medium-
to long-term outlook is less positive.
This is also reflected in the significant
proportion of assets up for sale with
relatively few interested parties, partly
a reflection of the complex challenge
of apportioning the costs of end-of-life
decommissioning.
The new regime brings in a more
powerful regulatory body as well as
closer collaboration with government
on fiscal terms, but also will require, to a
considerable extent, companies operating
in the UK sector of the North Sea to make
investment decisions for the benefit
of the “oil province as a whole” and not
solely their own economic benefit. This
will mean companies cooperating and
collaborating to maximise recovery or
minimise costs throughout the project
cycle in order to improve the long-
term outlook.
The increasing policy stance to limit global
temperature rise creates considerable
uncertainty over the long term, but the
medium-term effect is muted. The key
target date of the Paris agreement is
2030, but IHS estimates suggest that
80% of the market value of the large
international oil companies results from
the proved reserves to be produced in
the next 10 to 15 years 2. Similarly, these oil
companies control a minority of world oil
reserves, with an average production-to-
reserves ratio of 13 years as compared to
a global average of 50 years 3. Therefore,
the main production and value proposition
of these oil and gas companies lies within
the transition period to a low carbon future
rather than after it.
Over the longer term, however, current
estimates 4 are that already discovered
fossil fuel reserves would produce almost
three times more carbon than permissible
under the scenario for a maximum 2°C
of global warming. This implies that
a significant proportion will remain
unexploited, or unexploitable – the
problem of the ‘stranded asset’. Whilst
much debate has focused on the global
energy mix required to meet the COP21
objectives, the real complexity for policy
makers will lie in the inherent tension
between these objectives and the role
that fossil fuel extraction and consumption
can play in the economic growth of
developing countries.
The recovery in
North Sea production
visible in 2015
continued into 2016,
rising by over 6%.
About the authors
Dr Julian Fennema
Honorary Associate Professor
at Heriot-Watt University.
Erkal Ersoy
Assistant Professor
at Heriot-Watt University
Centre for Energy Economics
Research and Policy.
Heriot-Watt University is one of the
UK’s leading universities for business
and industry and has a reputation for
innovative education, enterprise, and
leading-edge research. Energy research is
a core activity within Heriot-Watt University,
and the Centre for Energy Economics
Research and Policy (CEERP) is the latest
evidence of the University’s commitment
to research in energy, economics, and
policy. CEERP is based within the Institute
of Petroleum Engineering at Heriot-Watt
University, but forms a key point of support
and collaboration among the University’s
Schools with affiliates from the School of
Energy, Geoscience, Infrastructure, and
Society; School of Social Sciences; and
the Energy Academy as well as honorary
academics outwith the University.
1 BP Energy Outlook 2035, January 2017.
2
IHS Energy, Do Investments in Oil and Gas
Constitute Systemic Risk?, October 2016.
3 Stevens, P., International Oil Companies –
The Death of the OId Business Model,
Chatham House, May 2016, page 24.
4 McGlade, C & Elkins, P., “The geographical
distribution of fossil fuels unused when limiting
global warming to 2°C”, Nature, Vol. 517, January
2015, pages 186 to 190.
13
Over the last five years, the business has
been considerably reshaped and advanced
to establish a balanced exploration and
production company. The year ahead will be
eventful with a number of material catalysts
which have potential to add further value to
the company.
We have created a strong platform for
future growth with active positions in six
countries in almost 50 licences providing
significant acreage positions of technical
and commercial value. The discovery of the
SNE field offshore Senegal in 2014 marked
a return to exploration success for Cairn and
provides an opportunity to implement our
strategy of creating, adding and realising
value for shareholders through a balanced,
well-funded and sustainable company.
In Senegal, we have confirmed the scale
and potential of this world class asset,
and following the appraisal success and
contingent resource upgrade in 2016, we
have now commenced the third phase of
evaluation activity. The JV also has plans
for future exploration drilling.
CEO’s Review
Positive
progress
Cairn continues to deliver positive progress
across its balanced portfolio.
2017 will see first oil from our North Sea
developments and progression of an
exciting ongoing exploration and appraisal
drilling programme in Senegal, all against
a backdrop of increased financial flexibility.
The company remains well-positioned to
deliver further value for shareholders from
multiple catalysts within the portfolio.
Working responsibly is a
key part of our strategy
We can only deliver value for all
stakeholders by operating in a safe,
secure and environmentally and socially
responsible way. At the heart of this culture
are our core values, the 3Rs, which stand
for building respect, nurturing relationships
and acting responsibly.
In practice, we implement the 3Rs by
adhering to our robust Corporate
Responsibility Management System
(CRMS). Our values are also underpinned
by internal policies and procedures,
including our Business Principles and our
Code of Business Ethics, as well as
continuing external commitments to the
Extractive Industries Transparency Initiative
(EITI), the UN Global Compact and
recognition of the UN Sustainable
Development Goals.
To help shape our Corporate Responsibility
(CR) strategy we identify issues material
to the business through internal and
external engagement as well as our risk
management process. In 2016, our material
issues were identified as:
• Economics and funding
• Contractors and supply chain
• Ethics, Anti-bribery and corruption and
transparency
• Social and economic benefit
• Human rights
• Major accident prevention and safety
• Climate change, emissions and
discharges
Across all our operations we recognise
the need to prepare for the unlikely
possibility of a high-impact event and
have robust plans in place to manage
potential incidents. We invest heavily in
memberships to gain access to specialist
equipment and techniques, and expertise
that would be needed in such an event.
During the year Cairn has been focused on
growing its significant Senegal resource
base as operator and on progressing its
North Sea developments as non-operator.
Our most significant drilling activity during
the year took place in Senegal. Our robust
policies, including our Code of Business
Ethics, of importance wherever we operate,
ensure that we conduct risk-based due
diligence on contractors in line with our
zero-tolerance approach to bribery
and corruption.
As part of our approach wherever we
operate, we are committed to bringing
lasting and positive social and economic
benefits through new support industries,
employment, training and improved
education. We believe a successful oil and
gas industry could generate significant
income in Senegal. This could be used
to support the country’s development,
improving infrastructure, providing
affordable energy, driving inward
investment and reducing reliance
on solid fuels.
14
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report I would like to recognise and thank all our
employees and contractors working both
offshore and in our four international
locations for their efforts, commitment and
hard work during 2016 in what has been an
extremely busy year. We look forward to
another exciting year ahead.
SIMON THOMSON
Chief Executive
7 March 2017
In the UK and Norway, we have high quality
assets and have made significant progress
in the last year. Both the Kraken and Catcher
development projects are below budget and
on schedule to target first oil this year. The
start up of these developments is significant,
as it will mark Cairn’s first production since
2012 when we sold the majority stake in our
Indian business and returned the proceeds
to shareholders. The mature and emerging
basins of the UK and Norway provide
balance to Cairn’s frontier exploration
portfolio and will deliver the cash flow
to sustain future exploration.
With a fully funded balance sheet,
the company is well positioned to the
prevailing oil price environment which
presents challenges to the industry but
also opportunities to allocate capital to
value enhancing projects while benefitting
from reduced operational costs.
We are taking advantage of the lower
industry cost environment as we continue to
shape the business for the future. We actively
assess new ventures within the context of our
balanced offering whether they be potential
additions to our portfolio of future exploration
opportunities or cash flow generating assets.
Corporate Responsibility remains at the heart
of our business. During 2016, we continued
to prioritise the health, safety, security and
wellbeing of our people while promoting
safe behaviours of contractors and partners.
We remain committed to protecting the
environment in the areas where we operate.
Good governance is also important and we
are committed to meeting all our obligations
in a responsible and transparent manner.
We announced the appointment of Eric
Hathon as Director of Exploration earlier
this year. Eric has more than 25 years’
industry experience and will join in April
from Marathon Oil Corporation. Eric will
succeed Richard Heaton who is retiring after
23 years’ service with the company. I would
like to welcome Eric and thank Richard for his
significant contribution over his long career
at Cairn where he has been a core member
of the senior team. I was also delighted to
welcome a new independent non-executive
Director to the Board early this year: Nicoletta
Giadrossi brings a wealth of international
senior management and oil and gas industry
experience to Cairn.
During 2016 we continued to work closely
with our joint venture partners on our North
Sea developments to progress them towards
targeted first oil and cash flow in 2017. As
non-operator our focus is on ensuring joint
venture operations are rigorously assessed
against our CRMS and associated regulatory
requirements.
We will continue to set CR objectives each
year guided by the most material issues
which are issues important not only to Cairn
but also to our stakeholders, in keeping with
our commitment to working responsibly.
“ As part of our
approach wherever
we operate, we
are committed to
bringing lasting and
positive social and
economic benefits.”
52
Read more: Working Responsibly
on P52-71
15
Cairn’s strategy is to deliver value for
stakeholders by building and maintaining
a balanced portfolio of exploration,
development and production assets. Our
exploration focus in on frontier and emerging
basin acreage from which the greatest value
can be created. The Group’s production
assets provide the cash flow to sustain
future exploration and development activity.
We have made good progress against our
strategic objectives, increasing the recently
discovered resource base in Senegal and
progressing our North Sea developments
through to first oil and future cash flow.
Senegal – opening a
new hydrocarbon basin
Cairn was the first company to drill
deepwater wells offshore Senegal,
which remains a relatively underexplored
region of the world. The success of the
Cairn discoveries has attracted the attention
of the global oil industry with a number of
high profile new entrants to Senegal during
the year.
The management of Health, Safety,
Security and Environment remains a high
priority and we are aiming to build on our
good performance in Senegal in the year
ahead. Cairn has enjoyed excellent support
from local services such as Dakar port where
the company has now established a shore
base facility to aid the growth of the oil sector
in Senegal.
CEO’s Review continued
Operational review
Highlights of 2016
Senegal
Exploration & Appraisal
Seven successful wells drilled to date in Senegal: two
discoveries, four wells in 2016 and a further appraisal
well just completed.
SNE-5 appraisal well operations safely and successfully
completed ahead of schedule and under budget.
Stena DrillMAX drill ship is moving location to shortly
commence operations on the Vega-Regulus (VR-1) well,
~5 km to the west of the SNE-1 discovery with the exploration
target underlying the SNE field.
VR-1 will also provide further appraisal data on the SNE field
and results will help narrow field volumes and allow the Joint
Venture (JV) time to integrate the results of SNE-5 prior to
moving to SNE-6 to complete the planned interference test.
Current 2C in place resources more than 2.7 billion barrels
and the ongoing programme will further define the recovery
potential of the field.
Multiple exploration prospects have been identified:
Cairn estimates further block wide exploration potential
of ~500 mmbbls gross mean risked resource.
Prospect inventory includes numerous material targets across
four play types identified within a 30 kilometres (km) tie back
radius to SNE field.
Senegal
Development
Decision on development concept selection expected in 2017,
current plans include a phased development to capture the
potentially extensive resource base.
From 2018 onwards, Cairn and JV partners plan to submit the
Exploitation Plan and proceed to a Final Investment Decision
with first oil expected in the period 2021-2023.
Woodside Petroleum Ltd (Woodside) entered the JV in 2016
bringing extensive experience in developing and operating
floating production, storage and offloading (FPSO) facilities.
16
Cairn Energy PLC Annual Report and Accounts 2016
In 2016 Cairn opened a new supply
base in Dakar international port.
Strategic Report Cairn and its JV partners submitted a three
year evaluation work plan to the Government
of Senegal in 2015. As part of this plan, we
currently anticipate an outline timetable for
development with an Exploitation Plan to
be submitted in 2018, a Final Investment
Decision within twelve months thereafter and
first oil expected in the period 2021-2023.
Cairn (Operator) has a 40% Working Interest
(WI) in the three blocks offshore Senegal
(Sangomar Deep, Sangomar Offshore,
Rufisque Offshore) alongside partners:
Woodside 35% WI, Far Ltd 15% WI and the
Senegal National Oil Company, Petrosen
10% WI.
Since the two initial basin opening
discoveries in 2014, we have drilled five
successful wells in the area. During 2016,
subsurface data gathering was successfully
completed on four wells, SNE-2, SNE-3,
BEL-1 and SNE-4. With better than expected
drilling performance and the lower cost
environment, these four wells were
essentially drilled and evaluated on the SNE
field for the original budget of three wells.
In 2017, the third phase of evaluation is
underway which is intended to improve the
definition of the project and confirm volumes,
connectivity and productivity. Operations
and testing of the first of the appraisal wells,
SNE-5, have recently been successfully
completed, ahead of schedule and under
budget. The well has been plugged and
abandoned and the Stena DrillMAX has
moved location to commence operations
on the Vega-Regulus (VR-1) well. VR-1
will target the Vega-Regulus exploration
prospect in the Aptian Carbonates underlying
the SNE field which has potential gross mean
consolidated prospective resource of more
than 100 mmbbls. In addition, the well will
provide further appraisal on the SNE field
targeting potential incremental resources.
The results will narrow the range of SNE field
volumes and also allow the JV time to fully
integrate the results of SNE-5 prior to moving
to appraisal well SNE-6 to complete the
planned interference test.
The prospectivity of Cairn’s Senegal
acreage, an area of more than 7,000 km2
under licence, has high potential; the success
of both the SNE discovery and follow on
appraisal of the SNE field has proven there
is a prolific source rock, excellent reservoir
development and a good working seal.
The new 3D seismic data has improved our
ability to map traps along the extension of the
SNE trend. Numerous, prospects have been
identified in a wide variety of play types.
The JV has endorsed the foundation
development concept of a standalone FPSO
with subsea wells and expansion capability.
This is established and proven technology
in areas where Cairn can add value through
recent experience in the Kraken and Catcher
North Sea developments. The potential
around SNE for further exploration success
would transform the project into a multi-
phase development.
The focus of the remaining appraisal activity
is on improving our estimates of the scale
and phasing of the overall field development
including the balance between the number
of drilling centres, type and number of wells
and the subsea infrastructure.
H.E. Thierno Alassane Sall, Minister of Energy
Senegal, on board Ocean Rig Athena drill
ship used during Cairn’s 2015/2016 Senegal
drilling campaign.
17
CEO’s Review continued
Operational review continued
Highlights of 2016
UK & Norway
Catcher (Cairn 20% WI) and Kraken (Cairn 29.5% WI)
developments in the UK North Sea on track for first oil
from 2017; peak net production to Cairn of ~25,000 boepd.
Skarfjell (Cairn 20% WI) development in Norway, subsea
tie-back to nearby GjØa platform selected by JV as
development concept.
Five new licences awarded in Norway in Q1 2016, including
Cairn’s first licence as Operator.
Entry to the Barents Sea, Norway with three new licences
awarded in Q2 2016, including one as Operator; region
believed to have high potential for commercial oil discoveries.
Seven new licences awarded in Norway in Q1 2017, including
two as Operator and two existing licence extensions.
Participated in two non-operated exploration wells: Aurelia
in the Barents Sea (Cairn 10% WI) was unsuccessful and
Laverda in the UK (Cairn 36% WI) successful, though
subsequently impaired.
Operated Licence application in the UK 29th Licensing Round,
awards expected shortly.
UK & Norway
The mix of mature and emerging basins
along the UK and Norwegian continental
shelves provides good opportunities for
balanced portfolio growth and operational
synergies. Cairn has built a strong position in
the UK and Norway by acquiring exploration,
appraisal and development assets and
participating in licensing rounds.
The UK and Norway are a key region of
focus for the Group and during 2016 we
have expanded the team and added 13 new
licences and four licence extensions. The
strategy is to maintain and grow a strong
prospect inventory capable of increasing
resources and reserves, providing material
exploration upside and bringing discoveries
into production. We are also looking to
identify new venture opportunities and
manage the portfolio in an active market
for asset transactions.
Developments
Kraken and Catcher are two of the largest
ongoing development projects in the UK
North Sea. Both are core development
projects along with the Skarfjell discovery
in Norway, where the development concept
has been selected. These three projects
are a key part of our strategy to build
steady future cash flows to sustain
the business model and fund future
international exploration.
Simon Thomson, Cairn Chief Executive, visiting
the Kraken FPSO in Rotterdam, 2017.
Catcher FPSO.
Brita Holstad, Regional Director for UK & Norway,
and Paul Mayland, Chief Operating Officer,
visiting the Kraken FPSO in Singapore, 2016.
18
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report We have made significant progress on the
UK developments in 2016 and both the
Kraken and Catcher projects are below
budget and remain on schedule to target
first oil in 2017. Re-establishing a new cash
generative production base is an important
milestone for Cairn in 2017.
Kraken
In 2016, the Kraken development progressed
well, finishing the year ahead of budget and
the Operator targeting first oil in Q2 2017.
Most significantly, through a combination
of release of contingencies, contract
re-negotiations and some reduction in
scope, the Operator is now forecasting
total gross capex at US$2.5bn which is
~22% lower than the sanctioned estimate.
At the year end, four producers and five
injectors had been satisfactorily drilled and
completed. The 2016 subsea scope was
completed without any issues. The FPSO
was essentially mechanically complete with
the vast majority of systems commissioned.
The vessel left the deep water anchorage
of Singapore and arrived in the North Sea in
early 2017, having completed its journey as
scheduled. The vessel berthed in Rotterdam
to make final preparations prior to sailing
offshore to hook up the Submerged Turret
Production (STP) buoy mooring system, risers
and umbilicals. Handover of FPSO systems
from commissioning to operations continued
in Rotterdam prior to sailing away. On arrival
at the field, the hook up of the STP buoy
mooring system was completed and a
full rotation test performed to ensure the
vessel was on station and securely moored.
Commissioning work will continue on the
topsides. Reconstruction of the turret area
pipework and connection of the risers
and umbilicals to the swivel stack is being
undertaken followed by commissioning of
the subsea infrastructure.
Catcher
The Catcher project progressed well in
2016, with the Operator targeting start-up
and first oil in Q4 2017. The Operator is
now forecasting total project capex at
US$1.6bn which is ~29% lower than
sanctioned estimate.
The drilling programme made excellent
progress in 2016; efficient execution together
with a well-executed subsea installation
campaign, were key factors in the project
capex reductions. To minimise rig moves
during the winter months, the schedule was
adjusted so that at the year end, four wells on
Catcher, two wells on Burgman and two
wells on Varadero were successfully drilled
and tested with all wells coming in at, or
better than, prognosis in terms of reservoir
quality and well deliverability. Due to these
good well results and well placement
optimisation, the well count required to
deliver the base plan has reduced to 20 firm
wells, delivering further significant reductions
to the forecast development capex.
Very good progress was made with the
FPSO in the second half of the year, with
the joining of the two hull ‘mega blocks’ and
installation of the living quarters in Singapore.
All of the topside modules were also safely
lifted on and very good progress made with
the topsides integration.
The majority of the project’s subsea
installation scope was also completed in
2016. Only short subsea campaigns will be
required in 2017-19 to tie-in the new wells
drilled and to support the hook up of the
FPSO. The project focus is now on final
mechanical completion of the FPSO and the
pre-commissioning/commissioning work
scopes. FPSO sail-away from Singapore is
expected to be around mid-year 2017.
Skarfjell
The JV has selected a development concept
for the Skarfjell field. Under the proposed
solution, the reservoir will be connected to
the nearby Gjøa platform via a subsea
tie-back. The Operator has submitted the
development concept to the Norwegian
Ministry of Petroleum and Energy and now
enters the define phase of the project,
refining the technical and economic plan
before committing to a final investment
decision, planned for Q1 2018. Based on
the proposed plan, hydrocarbons from the
Skarfjell reservoir will be developed with
two subsea templates tied back to the Gjøa
platform for processing and export. Gjøa will
also provide lift gas to the field and water
injection for pressure support. Several studies
will be conducted before the final investment
decision and the plan for development and
operation can be submitted to the Ministry.
Exploration
In 2016, Cairn secured three licences in
the Barents Sea, including one as Operator.
We believe the Barents Sea is a potential
core exploration opportunity and our
experience from operations in the Arctic
will be relevant in the region. According
to the Norwegian Petroleum Directorate,
the region may contain as much as half the
country’s unexplored resources with yet-
to-find hydrocarbon potential of 8.8 billion
boe. In 2016, Cairn participated in two
non-operated exploration wells (Aurelia in
the Barents Sea 10% WI and Laverda in the
UK 36% WI). Aurelia was unsuccessful in
finding commercial quantities of oil at the
primary horizon. Laverda did find potentially
commercial quantities of oil at the primary
horizon but was unsuccessful at the
secondary target of the well.
19
CEO’s Review continued
Operational review continued
Highlights of 2016
International
Western Sahara: Boujdour Maritime new Petroleum
Agreement (Cairn 20% WI) with Operator Kosmos Energy,
3D seismic acquisition commences in 2017.
Ireland – Cairn awarded Licence Option (LO) 16/18 in the
Atlantic Ireland Licencing Round in H1 2016. Additional farm-
in to a 70% WI and Operatorship in the adjacent LO 16/19
with Europa Oil & Gas with plans for 3D seismic in 2017. Cairn
farm-in to a 30% WI in Frontier Exploration Licence (FEL) 2/14
in Southern Porcupine Basin with Providence Resources and
Sosina; with one firm well in 2017.
International
Cairn’s exploration focus is on the Atlantic
Margin where, in addition to Senegal, we
have key interests offering the potential for
material discoveries and high prospectivity.
In Western Sahara, we signed a new
Petroleum Agreement with Operator Kosmos
in 2016 and are acquiring 3D seismic in 2017.
In Mauritania, we relinquished a licence in
2016, although we continue to be interested
in exploring the region.
In Ireland, there have been a number of
developments: Cairn agreed a farm-in to
LO 16/19 with 70% WI and Operatorship with
Europa Oil & Gas with plans for 3D seismic
in 2017. Cairn has previously been awarded
adjacent LO 16/18 in the Atlantic Licensing
Round in H1 2016. The acquisition of 3D
seismic is planned to be acquired over both
licence option blocks in 2017 and processed
in 2018. Cairn also agreed a farm-in to FEL
2/14 in the Southern Porcupine Basin
with partners Providence Resources Plc
(Providence) and Sosina. An exploration well
will be drilled in 2017. The 53/6-A well is
planned to spud in June 2017, subject to the
necessary regulatory consents, using the
Stena IceMAX drill ship targeting both large
stratigraphic traps, Druid and the deeper
independent Drombeg target.
Catcher FPSO.
20
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report This will result in the planned well, in
2,200m water depth, being deepened
from ~3,900m to ~5,200m. As a result
of the proposed transaction, the equity
interests in FEL 2/14 will be Providence
(Operator 56%), Cairn (30%) and Sosina
(14%). Both agreements are subject to
approval of the Government of Ireland.
Outlook
During 2017, Cairn will commence
production, continue to deliver future
development as well as define and explore
significant growth opportunities from
Senegal. We will continue to advance the
business to create a balanced exploration
portfolio across emerging and frontier basins
in the Atlantic Margin and Barents Sea
alongside mature basins in the North Sea.
The Group will continue to evaluate new
venture and growth opportunities to allow
us to create value through successful
exploration and discovered resources.
Group Booked Reserves
and Resources
A total of 51.5 mmboe were booked
as 2P Reserves and 239.1 mmboe as 2C
Resources at 31 December 2016 on a net
working basis.
Net 2P Reserves
UK
Totals
Net 2C Contingent Resources
UK
Ireland
Norway
Senegal
Totals
31.12.15
mmboe
Revisions
mmboe
Production
mmboe
31.12.16
mmboe
49.5
49.5
1.5
14.6
25.3
155.1
196.5
2.0
2.0
1.5
0.0
(5.1)
46.3
42.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
51.5
51.5
3.0
14.6
20.2
201.4
239.1
The reserves revisions in the UK included the acquisition of an additional 4.5% working interest in Kraken
from First Oil and changes to corporate oil price assumptions.
The revisions in Norway included updates in Skarfjell and the relinquishment of Titan.
The Senegal resources increased following the appraisal campaign in 2016.
21
Cairn in the UK & Norway
Nearing
production
and cash
flow
When the Kraken development comes on
stream in 2017, it will be the culmination of a
project that began more than 30 years ago.
Dave Beck, Cairn’s Development Manager, explains some of the history behind the
Kraken development and Cairn’s role in bringing it on stream. (Operator, EnQuest;
Cairn 29.5% Working Interest).
Tell us about the history of
the Kraken development.
The field was first discovered by
Occidental Petroleum in 1985, but it was
by accident rather than by design. It was
not the discovery they were chasing.
Occidental were targeting something
deeper and drilled through the shallower
Kraken discovery while looking for it. Their
target turned out not to be there and so
the well was abandoned. This was a time
when companies were looking for the
big, easy discoveries and heavy oil was
considered difficult.
More recently a combination of
fiscal incentives by the government to
encourage investment and activity on
smaller licences in the UK North Sea as
well as the development of new industry
technology have made the Kraken project
very attractive and resulted in a small
exploration company, Nautical Petroleum,
picking up the acreage.
Nautical drilled the first new appraisal
well in 2007. That was a success but was
followed by another one that was not. I think
that was the point when there was doubt
about whether Kraken could be developed,
but we went ahead and drilled a further
two appraisal wells with side tracks of both.
Fortunately, those were very successful
and proved to us that the field could be
commercial, and could be profitably and
successfully developed.
By this time, the technology that the industry
had access to had moved on significantly
and with most of the bigger fields already
operating, there was a lot more focus on
other overlooked parts of the North Sea
where there had been significant finds
in the past.
How did Cairn get involved
in Kraken and what is your role?
Nautical farmed out a majority stake in the
project to EnQuest in 2012, and later the
same year, Nautical itself was acquired by
Cairn, which assumed its stake and became
a partner working with EnQuest, as operator,
to develop the project.
As Cairn is non-operator, my role is to
protect our investment and to make sure
that Cairn’s interests are aligned with
the operator. In practice that means
collaborating with them, discussing
options and priorities, making sure that
the development and the construction
of the FPSO (Floating Production Storage
and Offloading) vessel in Singapore is
proceeding well and according to schedule.
22
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report What have been some of the greatest
challenges in bringing Kraken on stream?
One of the greatest challenges for the
project was the development of the FPSO,
the Armada Kraken. Each vessel is made
bespoke to the field and the conditions it will
be operating in and each is a fantastic feat of
engineering. Making sure we got that right
was a key part of the development.
The Kraken vessel will be one of the largest
operating in the North Sea, with 90 beds and
around 60 crew members aboard at any one
time during normal operations. The vessel,
which has already left the yard in Singapore
where it was built, will remain in the same
spot for the whole 25-year life of the Kraken
field until all the recoverable oil has been
extracted. The vessel can store 600,000
barrels of oil in its tanks at a time, ready for
onward transportation once at capacity.
“Kraken is currently
one of the biggest
developments in
the UK North Sea.”
What is the significance of Kraken to
Cairn and to the UK Continental Shelf?
Kraken sits in the East Shetland basin,
approximately 125 km east of the Shetland
Islands, and it is currently one of the biggest
developments in the UK North Sea. The
project features 25 wells on the seabed in
four clusters, which will collectively pump
around 50,000 barrels of oil per day to the
FPSO at peak production. That will present a
significant contribution to UK oil production,
currently running at around 750,000 barrels
of oil per day.
It’s a shallow reservoir, which means the
pressure is relatively low. That’s why this
will be only the second field in the world to
use hydraulic submersible pumps. To add to
that, when completed it will be the first fully
subsea heavy oil development anywhere in
the world.
The field will also have a meaningful
economic impact. It is estimated that the
Kraken development will support more
than 20,000 UK jobs during the construction
period of the project and an average of
approximately 1,000 operational jobs in the
UK for each year of the project’s 25-year life.
How does Kraken compare to other
developments that you have worked on?
I am a petroleum engineer by profession and
have been in the industry for more than 30
years. During that time I have worked on
developments as far afield as Syria, Ukraine,
Kazakhstan, Sakhalin, and Venezuela. One of
the striking things about working back in the
UK has been the stringent regulations and
the resources available that ensure such
developments meet strict health, safety
and environmental requirements.
When the project comes on stream, there
will be a feeling of pride in a job well done.
Of all the people currently working on the
project, I’m the one who has been on it the
longest, so yes it will be a real achievement
when the project is completed.
What are the next big opportunities
in the North Sea?
I’m confident in the future prospects for
the North Sea. There are plenty of areas –
particularly in the Norwegian North Sea
and in the Barents – that are underexplored.
There is still a lot to play for.
23
Cairn in Senegal
Senegal:
discovering
a new oil
frontier
In 2012 Cairn embarked upon a frontier exploration drilling
programme focused on the Atlantic Margin resulting in
the discovery of oil in Senegal in 2014 which constituted
the largest global offshore oil discovery of 2014. Cairn has
now completed two drilling programmes in Senegal with
a third underway and is focused on additional exploration
and appraisal activity to further increase this already
significant resource base.
Working in Senegal
Working in
the Dakar office
27
Read more on P27
Working with
the national
oil company,
Petrosen
27
Read more on P27
24
Cairn Energy PLC Annual Report and Accounts 2016
Working with
local contractors
29
Read more on P29
Strategic Report Social Investment
Helping women
in rural communities
Supporting local
entrepreneurship
32
Read more on P32
31
Read more on P31
Supporting
local business
32
Read more on P32
25
Cairn in Senegal continued
Working
in Senegal
Cairn’s strategy is to deliver value for our
stakeholders from the oil and gas lifecycle.
As part of this Cairn is committed to delivering
lasting and positive social and economic
benefits in countries where it operates.
S E N E G A L
Delivering value for
stakeholders in Senegal
Stakeholders are those affected by
Cairn’s activities including employees,
communities, contractors and suppliers
and the government. Social and economic
benefits include energy security, revenues
from oil and gas activities, employment,
development of infrastructure and social
investment. As Cairn’s operational activity
in Senegal progresses so too does the level
of its investment which has both direct and
indirect benefits for local stakeholders.
Cairn’s belief is that the discovery and
development of sustainable oil production in
Senegal would greatly benefit the national
economy and therefore the local population.
To date Cairn has invested US$330.3million
through its activities in Senegal.
In order to deliver the Company’s operational
programmes in Senegal Cairn has an office
in Dakar and a recently built supply base in
the international port of Dakar. This is part of
Cairn’s approach to operations in any country
to deliver value in the country by maximising
local participation which includes employing
local people and working with local
companies wherever possible.
Given that oil and gas activities are relatively
new to Senegal, local industry expertise
is just starting to develop and as such
developing capacity through training and
education is a key part of our operations.
Not only does this develop the opportunity
to participate in the international oil and gas
business but it is important for promoting
working responsibly.
As part of this, in our Dakar office we have
offered a number of training opportunities
including English language training,
HSE training and organised visits to our
headquarters in Edinburgh to reinforce
our culture and to improve communications
and cultural understanding.
We have provided training to more than 162
officers of the relevant regulatory authorities
to support the oil and gas regulatory
environment in Senegal. This training
covered oil and gas industry awareness,
HSE awareness, offshore safety, offshore
emergency response including oil spill
response, waste management and English
language training. We have also provided
English language training to 46 geoscience
and technical students at the University of
Dakar; this is part of our aim to build local
participation for the future.
We have engaged local companies
in logistics and supply base support,
waste management services, aircraft
handling services, transport services,
fishing liaison, administration,
accommodation and environmental
and social consultancy services.
Cairn Dakar office team.
26
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report In Senegal people are becoming
excited about the recent discoveries
and the benefits they could bring to our
country including new support industries,
employment and improved education.
Transparency in this new industry is
therefore important for the country and
initiatives like the EITI (Extractive Industries
Transparency Initiative) are a good thing.
There are high expectations that the oil
and gas industry will bring social and
economic growth and one of our biggest
challenges is helping communities
understand how the oil and gas industry
works and the timescales and stages
involved. I think the biggest challenge for
the industry will be achieving our goals to
the satisfaction of government, partners
and communities and we are working
hard to manage expectations.
Much of my role is concerned with
facilitating these training initiatives and
engaging with the local companies we
work with, promoting our high standards
of responsible working practices and
helping to ensure they are met.
Saraou Kombo, Co-ordinator,
Capricorn Senegal Limited,
Dakar office
Working in the
Dakar office
I joined Cairn in December 2015 as
co-ordinator in our Dakar office as the
second phase of exploration and appraisal
drilling started. Previously I spent a number
of years working for the British Embassy
in Senegal. This is the first time I have
worked in the oil and gas industry. At first
it seemed difficult, with so much new to
learn, understanding how the industry
works, new regulations and new faces
to get to know. But new things are also
exciting. I have been pleased to find that so
much of how we worked in the embassy is
also true in a UK company – the emphasis
on anti-bribery and corruption, behaviours
based on honesty and integrity and
compliance with rules and regulations.
A lot of my work has been focused on
building good relationships with many
of our stakeholders, communicating how
we work with respect and responsibility.
This is very important for the progress of
Cairn in Senegal.
Saraou Kombo.
We have both been working at Petrosen
as geologists for more than three years
after studying in Morocco and Senegal
respectively. We are a small team of eight
geologists and two geophysicists and as
the only national oil and gas company we
work with all the oil and gas companies
operating in Senegal. Petrosen has been
waiting for a significant discovery for many
years and people are very excited about
the recent discoveries made by Cairn and
its joint venture partners. Local people are
excited because they see the opportunities
for using income from oil and gas activities
to support our economy and industries
such as agriculture and our education
system. Our biggest challenge at work is
learning all about the industry which our
partners help us with. We have received
much training in the last few years.
Mohamed Sonko and Daouda Tigampo
Working with
the national
oil company,
Petrosen
Daouda Tigampo
and Mohamed Sonko.
“A lot of my work
has been focused
on building good
relationships
with many of our
stakeholders,
communicating
how we work
with respect and
responsibility.”
One of the highlights was in 2014 when
we went to London with Petrosen to visit
a core lab. We have also received English
language training through Cairn and the
British Council. During 2016 we spent two
weeks at Cairn’s headquarters in Edinburgh
trying to learn as much as possible in
petrophysics, seismic data, modelling and
software used in the industry. For us drilling
is the most exciting part of the oil and gas
lifecycle so we are looking forward to Cairn
resuming drilling in 2017!
27
Cairn in Senegal continued
Working in Senegal continued
New supply base at Dakar port
Establishing a
permanent facility
In September 2015 we opened a new
supply base on the quayside of Dakar port
to better meet our increasing operational
needs in Senegal. The new supply base
gives us a number of operational advantages
including a dedicated quayside which
means we are able to work uninterrupted
in what is one of the biggest ports on the
coast of West Africa. Its proximal location
to our offshore acreage (approximately
60 nautical miles/111km in distance and six
hours in travel time by vessel; helicopters
transit from Dakar international airport with
a flight time of around 25 minutes) is also a
significant advantage. This new facility also
demonstrates our commitment to working
in Senegal and our increasing investment
in the country. Oil and gas is an emerging
industry for Senegal and this is the first time
that a dedicated, permanent supply base
infrastructure has been built in Dakar port.
The process took 18 months and was
handled by our key, local contractor
Necotrans Senegal, a subsidiary of the
international logistics and transport
conglomerate Necotrans.
“The supply base is
the main hub for our
activities in Senegal
and is the main point
of contact for our
many contractors and
our activities during
and in preparation
for drilling.”
Working with Necotrans is part of our
approach to maximising local content
wherever we work. We employ, on a
permanent basis, 16 Necotrans contractors
and much of our work on the base focuses
on training them to support our operations
as well as to enable them to participate in
the oil and gas industry in the longer term.
The supply base is the main hub for our
activities in Senegal and is the main point of
contact for our many contractors during and
in preparation for drilling. We store critical
equipment on site including oil spill response
equipment and carry out activities including
loading and unloading of offshore support
vessels which supply our drill ships. In the
handling of this equipment and the
management of these activities specialist
knowledge, oversight and a focus on safety
at all times are required. As such one of our
main focuses at the base is on health, safety
and environment (HSE).
New Cairn supply base,
Dakar port.
Simon Thomson, Chief Executive and
Paul Mayland, Chief Operating Officer
visiting Cairn supply base in Dakar port.
28
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Training is a big part of our activities.
We have received training in lifting,
banksman and slinging, oil spill response,
risk assessment, fire extinguishing and
first aid. One of the biggest focuses
in our day-to-day work is on HSE and
understanding that people are more
important than the job. If we identify
a hazard, a danger to anyone, we
understand that we can stop the job
we are doing at any time.
As a Senegalese I am excited about the
oil and gas industry in Senegal because
I think it is a great opportunity for my
country. Of course there are concerns that
the development of this industry must be
managed in a proper and transparent way
and our country’s leaders know they need
to listen to the needs and concerns of their
people. It is an opportunity to create a new
sector in the country’s economy, a source
of energy and jobs for the young. I am
proud to be one of the Senegalese people
involved in this new sector.
Working with so many contractors means
careful management and providing
training to ensure our HSE standards are
met. This is overseen by our experienced
team of industry experts on site which is
made up of two supply base managers,
two logistics supervisors, and one HSE
adviser. All contractors are inducted on
arrival at the supply base in our ten
‘Life-Saving Rules’ which they are obliged
to apply and follow at all times and they
are also required to attend morning
meetings, pre-job ‘toolbox talks’, weekly
safety review meetings and monthly
‘Safety focus’ meetings.
This supply base was built to and
operates to UK Oil and Gas guidelines.
For many of those who are working
with us this is the first time they have
had exposure to working in these types
of conditions and they are acquiring
valuable skills which we hope will benefit
them in the future. As our key contractor
Necotrans have been trained and
mentored by our supply base team in
activities including basic yard operations
such as oil field inventory recognition,
handling and inspection; boat loading;
and discharging. We have also brought
in external experts to provide training
including North Sea Lifting, Oil Spill
Response, St John Ambulance and
the Dakar fire service.
Amadou Sakhir Gaye,
Logistics Co-ordinator, Necotrans
Working with
local contractors
I have worked with Cairn since their first
drilling campaign in Senegal in 2014. I first
worked as an HSE Supervisor within the
logistics team but in 2015 I was promoted
to logistics co-ordinator. Necotrans
provides logistics support to Cairn in
the port of Dakar and I am the key link
between the two companies. I am in
charge of a team of stevedores, crane
operators, fork lift truck operators, truck
drivers and HSE supervisors who ensure
Cairn’s requests are met to their high
standards – on time and in a safe manner.
Prior to working for Cairn I was a
teaching assistant at a university,
delivering HSE courses. As part of my
BA, I had completed a dissertation on
Corporate Social Responsibility but I
had no oil and gas experience. As a
result of my experience with Cairn I was
able to complete my MA in Business
Administration and HSE with a project on
‘Risk Analysis in the Oil and Gas Industry’.
As an international oil and gas company
Cairn has a lot of experienced people
who are always happy to help me if I have
any questions. This gives me confidence
to do things I may not have done before
because I can always find guidance.
The support goes both ways; we work
to deliver what Cairn needs and they
help us to deliver it.
“As a Senegalese
I am excited
about the oil and
gas industry in
Senegal because
I think it is a great
opportunity for
my country.”
Amadou Sakhir Gaye
29
Cairn in Senegal continued
Sharing Benefits
in Senegal
In 2015, world leaders committed to the UN Sustainable Development
Goals (SDGs) which set out 17 prioritised areas including ending poverty,
ensuring access to energy, protection of ecosystems, addressing climate
change and responsible working practices.
Although all SDGs may not be relevant to every
company, we recognise a responsibility to look at
our activities to identify both where our business
adds value for society and where we may need to
mitigate for potential negative impacts across
environmental, social and governance
related issues.
In June 2016, we commissioned a review based
on the SDGs to identify, where relevant, any of
our activities which could impact on or support
any of these goals. This helped to inform our
approach to delivering benefits for our stakeholders
in Senegal and is set out in the three strands
shown below.
Supporting Economic
Growth and
Good Governance
To deliver:
Energy source
Foreign investment
Transparent payments
to government
Common principles
Informed regulators
Shared knowledge
Approach
Institutional capacity building
EITI
UNGC
2016 Performance
208 Institutional stakeholders participated
in CSL sponsored capacity building
US$5.1 million payments to the
Senegalese Government
ICONS
ICONS
Part of EITI MSG
17 ICONS: COLOUR VERSION INVERSED
Promoting
Local Participation
Social
Investment
To deliver:
Local employment
Local business development
Decent work standards
Improved infrastructure
Approach
Recruitment policy
Procurement policy
Contractor and supplier capacity building
Workforce skills development
Partnerships
2016 Performance
93% of Dakar office personnel were
Senegalese nationals
ICONS
22% of project staff in or offshore Senegal
were Senegalese nationals
17 ICONS: COLOUR VERSION INVERSED
ICONS
50
50
ICONS
ICONS
Link to SDGs
QUALITY
EDUCATION
GENDER
EQUALITY
8. Decent work and
economic growth
CLEAN WATER
AND SANITATION
NO
POVERTY
AFFORDABLE AND
ZERO
CLEAN ENERGY
HUNGER
Proactive contributions or actions we take
to help bring benefits to communities
where we operate
Approach
Social investment plan
Education and training
Enterprise development
Community development
Charitable giving partnerships
2016 Performance
US$137,839 social
investment expenditure
ICONS
ICONS
50
NO
POVERTY
ZERO
HUNGER
GOOD HEALTH
AND WELL-BEING
QUALITY
EDUCATION
ICONS
50
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
QUALITY
EDUCATION
REDUCED
GENDER
INEQUALITIES
EQUALITY
SUSTAINABLE CITIES
CLEAN WATER
AND COMMUNITIES
AND SANITATION
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
17 ICONS: COLOUR VERSION INVERSED
50
ICONS
Link to SDGs
ICONS
3. Good health
and well-being
17 ICONS: COLOUR VERSION INVERSED
NO
POVERTY
50
ICONS
ICONS
GENDER
EQUALITY
4. Quality education
NO
POVERTY
AFFORDABLE AND
ZERO
CLEAN ENERGY
HUNGER
CLEAN WATER
AND SANITATION
DECENT WORK AND
GOOD HEALTH
ECONOMIC GROWTH
AND WELL-BEING
ZERO
HUNGER
GOOD HEALTH
AND WELL-BEING
QUALITY
EDUCATION
GENDER
EQUALITY
CLEAN WATER
AND SANITATION
ICONS
50
DECENT WORK AND
GOOD HEALTH
ECONOMIC GROWTH
AND WELL-BEING
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
QUALITY
EDUCATION
REDUCED
GENDER
INEQUALITIES
EQUALITY
17 ICONS: COLOUR VERSION INVERSED
SUSTAINABLE CITIES
CLEAN WATER
AND COMMUNITIES
NO
AND SANITATION
POVERTY
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
AFFORDABLE AND
ZERO
CLEAN ENERGY
HUNGER
5. Gender equality
CLIMATE
DECENT WORK AND
GOOD HEALTH
ACTION
ECONOMIC GROWTH
AND WELL-BEING
LIFE BELOW
INDUSTRY, INNOVATION
QUALITY
WATER
AND INFRASTRUCTURE
EDUCATION
LIFE
REDUCED
GENDER
ON LAND
INEQUALITIES
EQUALITY
PEACE AND JUSTICE
SUSTAINABLE CITIES
CLEAN WATER
STRONG INSTITUTIONS
AND COMMUNITIES
AND SANITATION
PARTNERSHIPS
RESPONSIBLE
FOR THE GOALS
CONSUMPTION
AND PRODUCTION
17 ICONS: COLOUR VERSION INVERSED
17 ICONS: COLOUR VERSION INVERSED
NO
POVERTY
ZERO
HUNGER
GOOD HEALTH
AND WELL-BEING
NO
QUALITY
POVERTY
EDUCATION
ZERO
GENDER
HUNGER
EQUALITY
GOOD HEALTH
CLEAN WATER
AND WELL-BEING
AND SANITATION
Link to SDGs
AFFORDABLE AND
CLEAN ENERGY
7. Affordable and
clean energy
DECENT WORK AND
ECONOMIC GROWTH
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
AFFORDABLE AND
REDUCED
CLEAN ENERGY
INEQUALITIES
DECENT WORK AND
SUSTAINABLE CITIES
ECONOMIC GROWTH
AND COMMUNITIES
INDUSTRY, INNOVATION
RESPONSIBLE
AND INFRASTRUCTURE
CONSUMPTION
AND PRODUCTION
REDUCED
INEQUALITIES
SUSTAINABLE CITIES
AND COMMUNITIES
9. Industry, innovation
and infrastructure
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
AFFORDABLE AND
CLEAN ENERGY
CLIMATE
DECENT WORK AND
ACTION
ECONOMIC GROWTH
LIFE BELOW
INDUSTRY, INNOVATION
WATER
AND INFRASTRUCTURE
LIFE
REDUCED
ON LAND
INEQUALITIES
PEACE AND JUSTICE
SUSTAINABLE CITIES
STRONG INSTITUTIONS
AND COMMUNITIES
PARTNERSHIPS
RESPONSIBLE
FOR THE GOALS
CONSUMPTION
AND PRODUCTION
AFFORDABLE AND
CLEAN ENERGY
Each icon can ONLY be used inversely over a white background.
CLIMATE
ACTION
DECENT WORK AND
ECONOMIC GROWTH
LIFE BELOW
WATER
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
LIFE
REDUCED
ON LAND
INEQUALITIES
The icon may not be used inversely over a black nor a coloured
background.
PEACE AND JUSTICE
SUSTAINABLE CITIES
STRONG INSTITUTIONS
AND COMMUNITIES
PARTNERSHIPS
RESPONSIBLE
FOR THE GOALS
CONSUMPTION
AND PRODUCTION
Do not alter the colours of the SDG icons.
CLIMATE
ACTION
16. Peace, justice and
strong institutions
LIFE BELOW
WATER
LIFE
ON LAND
CLIMATE
PEACE AND JUSTICE
ACTION
STRONG INSTITUTIONS
LIFE BELOW
PARTNERSHIPS
WATER
FOR THE GOALS
LIFE
ON LAND
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
CLIMATE
ACTION
Each icon can ONLY be used inversely over a white background.
LIFE BELOW
WATER
LIFE
ON LAND
The icon may not be used inversely over a black nor a coloured
background.
Do not alter the colours of the SDG icons.
Each icon can ONLY be used inversely over a white background.
Each icon can ONLY be used inversely over a white background.
The icon may not be used inversely over a black nor a coloured
background.
Do not alter the colours of the SDG icons.
Each icon can ONLY be used inversely over a white background.
The icon may not be used inversely over a black nor a coloured
background.
The icon may not be used inversely over a black nor a coloured
background.
Do not alter the colours of the SDG icons.
Do not alter the colours of the SDG icons.
30
Cairn Energy PLC Annual Report and Accounts 2016
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
CLIMATE
ACTION
Each icon can ONLY be used inversely over a white background.
LIFE BELOW
WATER
LIFE
ON LAND
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
The icon may not be used inversely over a black nor a coloured
background.
Do not alter the colours of the SDG icons.
Each icon can ONLY be used inversely over a white background.
The icon may not be used inversely over a black nor a coloured
background.
Do not alter the colours of the SDG icons.
Strategic Report
Social
Investment
Targeted social investment is a big part of our activity
in Senegal in keeping with our wider Group strategy
to deliver value for all stakeholders.
We seek to make a positive social impact
in every area that we work. We have a
group Corporate Social Responsibility
Policy which states that Cairn ‘will assist
in the development of local community
programmes where it operates, in
consultation with local government, the
public and stakeholders’. As part of this
we have developed a social investment
plan specific to Senegal which supports
the four areas the business has identified
for social investments across the Group,
being: enterprise development; education
and training; environment, health and
well-being; and charitable giving and
humanitarian aid.
As well as providing English language and
oil and gas awareness training we have
also supported the following community
projects: the British Council’s Great
Entrepreneur project, a competition for
local projects with training and coaching
for the winner; ECOBAG, a local business
which collects plastic waste and recycles
it into plastic pellets for onward sale;
and The Hunger Project, a women-led
microfinance project. During 2016 our
social investment expenditure in Senegal
amounted to US$137,839.
Great Entrepreneur competition
Supporting local
entrepreneurship
In 2015 we supported a project
sponsored by the British Council called
the Great Entrepreneur competition
with a contribution of US$30,000 which
went towards the 2016 competition.
This competition selects a shortlist of
projects in Senegal whose winners
are then given a range of training and
coaching opportunities to build their
business. From these an eventual winner
is chosen. The aim of the competition
is to promote opportunities for young
entrepreneurs in Senegal and develop
their skills to progress their ideas. This is
in line with some of the attributes we look
to promote amongst our own workforce,
namely the high performing behaviour
‘Be Entrepreneurial’.
In 2016 the winner of the competition
was Marieme Mbaye from Greenwash
Africa who was awarded approximately
US$14,000. Marieme co-founded
Greenwash Africa which is an eco-friendly
car wash that uses no water, uses only
biodegradable products and also cleans
home furnishings. It aims to reduce water
consumption and improve environmental
awareness in Africa. It also aims to help
street car washers, thereby contributing
to job creation. The aim is to grow the
business to offer a service in other African
countries including Mali and Cote d’Ivoire.
Since winning the Great Entrepreneur
competition Greenwash has increased its
number of clients significantly due to the
publicity it has received.
Marieme Mbaye.
31
Cairn in Senegal continued
Social Investment continued
The Hunger Project
Helping
women in rural
communities
The Hunger Project (THP) is a global,
non-profit, organisation committed to
ending hunger and poverty with sustainable,
women-led solutions. We have supported
THP in Senegal since 2015.
Senegal was the first country of intervention
for THP in Africa which has been working
there since 1991. In Africa, The Hunger
Project works to build sustainable
community-based programmes through
epicentres which are community buildings
around which communities can organise
and provide central services.
ECOBAG
Supporting
local business
Cairn first became involved in the Great
Entrepreneur competition through its
support of the ECOBAG project. ECOBAG
won the Great Entrepreneur competition
in 2014. ECOBAG collects plastic waste
from neighbourhoods and recycles it into
plastic pellets to sell on to producers of
plastic products. The project promotes
waste recycling and a community refuse
collection system. Cairn committed to
support ECOBAG in 2015 up to the value
of US$25,000. Cairn’s funding contributed
to the purchase of machines to wash and
crush the plastic waste in 2016. With our
support the founder of ECOBAG, Amy
Mbengue, has succeeded in growing the
business, increasing plastic pellet production
from one to three tons per month and
going from employing five workers to
employing an additional 15 workers,
80% of whom are female.
The epicentre brings together clusters of
rural villages giving them more influence
with local government than a single village is
likely to have and increasing a community’s
ability to collectively utilise resources and
access basic services. In Senegal THP
have been working with 10 epicentres that
cumulatively serve a population of over
178,000 people and over 200 villages.
Part of our support for THP goes towards
their programme to create a women-led
microfinance programme that includes
financial management training for the
whole community, training facilitators,
rural bank lenders and technical staff and
provides savings facilities and microloans for
income-generating activities based around
small-scale trading and farming.
With the initial funding received from Cairn,
THP have been able to run this microfinance
programme (incorporating funding and
capacity building) in all the Senegal
epicentres. The focus is to develop the
microloans programme into a genuinely
Amy Mbengue, founder of ECOBAG
I started ECOBAG at the end of 2014 with the
aim of tackling the environmental problems
facing Senegal, especially those caused by
plastic. ECOBAG’s objective is to develop a
circular waste economy and to fight against
youth unemployment. Cairn was a critical
financial and non-financial support for
ECOBAG, helping me to build the business
through the acquisition of new equipment.
I came up with the idea of ECOBAG in 2011.
We were able to start the business almost
four years later despite the many difficulties
along the way. It was a big challenge for me.
Today I feel a great sense of pride when I
see my dream come true even if there is
still so much more I want to achieve with
ECOBAG. My parents and my family feel
great pride also.
The workers I employ have a job that allows
them to take charge of themselves and
which especially allows the empowerment
of women.
My goal is to extend ECOBAG at a national,
regional and international level but also to
start the second phase of development.
32
Cairn Energy PLC Annual Report and Accounts 2016
member-owned and operated initiative,
recognised by the government or regulatory
body as a financial cooperative. THP’s aim
is to support the rural epicentres to become
self-reliant. In 2016, one of the 10 epicentres
reached self-reliance. Cairn has committed
to support THP in 2017 to support further
progress towards self-reliance for the
remaining nine epicentres. Cairn has
contributed a total of US$116,790 to
THP over the course of 2015 and 2016.
“In Senegal THP
have been working
with 10 epicentres
that cumulatively
serve a population
of over 178,000
people and over
200 villages.”
ECOBAG team on site.
“The workers I
employ have a job
that allows them
to take charge of
themselves and
which especially
allows the
empowerment
of women.”
Amy Mbengue, founder of ECOBAG
Strategic Report “With the advice
of the manager of
the rural bank of
Namarel I took out my
first loan in order to
generate income.”
Madame Bolo Sow, Namarel Epicenter, Senegal
Recipient of funding
from The Hunger Project
Madame Bolo Sow,
Namarel Epicentre, Senegal
I first became involved in the Namarel
epicentre in 2012. With the advice of the
manager of the rural bank of Namarel I took
out my first loan in order to generate income.
I bought four sheep and after nine months
of livestock farming I sold them at a profit.
During the period I succeeded in paying off
my credit and saving my profit before taking
out a new loan. I continue to be involved in
livestock activity but I am also now involved
in trading detergent products in the villages
and surrounding settlements and with a new
loan I have started to sell women’s shoes
ordered from Dakar. The Hunger Project is
an organisation which really helps women,
empowering them to take charge of their
own affairs and giving them access to
credit in isolated areas where there are
no financial institutions.
Bolo Sow.
What next?
Further exploration
and appraisal drilling
Drilling offshore Senegal resumed in
January 2017 as part of Cairn’s third phase
of the exploration and appraisal campaign in
Senegal. As Cairn’s activities in Senegal develop,
acting responsibly in all our relationships with
local stakeholders remains a key focus for
the business in order to progress and deliver
value from the significant resource base
discovered offshore Senegal alongside
Cairn’s joint venture partners.
33
Key Performance Indicators
2016
2016 Key Performance Indicators (KPIs)
Cairn has both financial and non-financial KPIs
in place which are used to monitor progress
in delivering the Group’s strategy.
The 2016 KPIs, which were set out on page
24 of the Annual Report and Accounts 2015,
related to delivering exploration and appraisal
success, portfolio management, delivering
operational excellence, maintaining licence
to operate and delivering a sustainable
business.
The final scoring of the 2016 KPIs was made
at the Remuneration Committee meeting in
March 2017 and subsequently approved by
the Board.
Strategic objective:
Deliver exploration and appraisal success
Purpose Grow the resources and reserves base to provide a basis for future growth
2016 KPI and measurement
2016 performance
KPI Remuneration
Committee decision
Progress the Senegal SNE discovery through the
prudent investment of capital funds, de-risking
the path to commerciality in a cost-effective
and timely manner.
2C resource valuation;
3C/1C ratio;
Cumulative E&A investment divided by the 2C resources
(US$/bbl).
Invest in exploration opportunities with due
consideration to finding efficiency.
Invest E&A funds within budgetary guidance to
add new volumes at industry leading finding costs.
Four wells successfully drilled and evaluated on the SNE
field for a cost within the original three well budget;
Substantially
achieved
Net resources upgraded from 155.1 mmboe to 201.4 mmboe
at year-end;
P10/P90 gross resources ratio narrowed;
E&A investment level at <$4/bbl.
14
Read more: CEO’s Review
on P14-21
Bellatrix-1 dual-target exploration and appraisal well
was unsuccessful at primary target but discovered gas
in shallower horizons;
Laverda exploration well encountered 13ft net oil pay in a
single Tay sand with recoverable P50 volumes estimated at
between 2 and 3 mmbbls. The deeper Fulmar play was dry;
Farm-in to the Aurelia prospect in Barents Sea. The well
failed on reservoir quality and hydrocarbon type.
14
Read more: CEO’s Review
on P14-21
Not achieved
34
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report
Strategic objective:
Portfolio management
Purpose Active portfolio management and acreage optimisation
2016 KPI and measurement
2016 performance
KPI Remuneration
Committee decision
Develop an inventory of exploration and appraisal
opportunities, including prospects and leads which
meet Cairn’s technical and commercial criteria
and can provide drilling opportunities for the
period 2017 onwards.
Mature a minimum of four new independent ‘drill-ready’
prospects which meet investment criteria and which
could be considered for drilling in 2016 or 2017.
Awarded seven blocks, including two as operator, in the 2016
APA (offshore Norway);
Partially
achieved
Award of one licence option in 2015 Atlantic Margin Oil and
Gas Exploration Licensing Round in the Porcupine Basin,
offshore Ireland;
Target of securing/maturing four or more new independent
opportunities that met our investment criteria was not
achieved.
14
Read more: CEO’s Review
on P14-21
Strategic objective:
Deliver operational excellence
Purpose Deliver operational excellence in all 2016 activities
2016 KPI and measurement
2016 performance
KPI Remuneration
Committee decision
Deliver all operated and non-operated E&A projects
(technical studies, surveys and seismic) on schedule
and budget, with full data recovery.
Projects and products delivered to the quality required,
on schedule and within budget.
Progress North Sea development projects,
on time and budget.
Ensure projects remain within capital guidance and
first oil schedule remains within base case estimates
with key milestones met.
Four wells successfully drilled and evaluated on the SNE field
for the original budgeted price of three;
Substantially
achieved
Sangomar-Rufisque 3D seismic on schedule for delivery in
Q1 2017;
Boujdour Maritime 3D seismic completed;
Final interpreted volumes for the Horda 3D in Norway and the
West of Kraken 3D in UK completed.
14
Read more: CEO’s Review on P14-21
and Financial Review on P48-51
Kraken development remains on schedule with first oil
anticipated in H1 2017. The latest capex estimate is over
10% lower than the sanction estimate (>US$300m);
Key milestones on Kraken set for 2016 have been
accomplished including the completion of four producer
and four injector wells; full subsea installation; safety case
approval; and the FPSO sail-away from the shipyard in
Singapore for UK waters;
Operator is targeting first oil in H2 2017 on Catcher;
Significant progress has been made on Catcher including
the completion of eight wells with further drilling ongoing;
substantial completion of the offshore installation; and the
FPSO hull has been delivered and fabrication of the topside
modules is progressing well;
Provided input and assurance to Operator on concept
selection decision on Skarfjell.
14
Read more: CEO’s Review on P14-21
and Financial Review on P48-51
Substantially
achieved
35
Key Performance Indicators continued
2016 continued
Strategic objective:
Maintain licence to operate
Purpose Deliver value in a safe, secure and environmentally and socially responsible manner
2016 KPI and measurement
Minimise injuries and environmental incidents
in 2016 operated activities:
Total Recordable Injury Rate (TRIR) target
of less than 2.0 TRI/million hours.
No oil spills to the environment.
Achieve targets for HSE leading performance
indicators (LPIs) linked to elements of the HSE
culture framework.
Progress against HSE LPIs.
Further embedding of HSE culture and behaviours.
KPI Remuneration
Committee decision
Partially
achieved
Substantially
achieved
2016 performance
TRIR of 1.04;
Approximately 1 bbl of oil was released to the environment
during testing of SNE appraisal wells in Senegal.
52
Read more: Working Responsibly
on P52-71
Improvements made to the CRMS with revision of
CR policies, emergency and business continuity plans
and travel risk assessments, security and support;
OSPAR reverification completed without issue;
Work ongoing on HR People Management Manual
and roll out of management training.
52
Read more: Working Responsibly
on P52-71
Strategic objective:
Deliver a sustainable business
Purpose Maintain a self-funding business plan
2016 KPI and measurement
2016 performance
Maintain liquid reserves including undrawn
committed banking facilities to meet planned
funding commitments plus a cushion at all times.
Development of a funding strategy to ensure ability
to execute value-generative plan, maintaining liquid
reserves to meet planned commitments whilst
retaining a funding cushion.
Funding headroom cushion maintained at all times;
Significant cost reductions or deferrals achieved from original
2016 work programme will allow enlarged drilling programme
and pursuit of new venture opportunities to be fully funded.
48
Read more: Financial Review
on P48-51
KPI Remuneration
Committee decision
Substantially
achieved
Make tangible progress on Cairn India Limited
(CIL) shares freeze by progress of action under
the UK-India Investment Treaty.
Milestones in the arbitration including filing of the
Statement of Claim and India’s filing of its Statement
of Defence.
Statement of claim submitted on schedule;
India’s statement of defence submitted in February 2017;
Agreement of Indian tax office in December 2016 that
dividends are not restricted.
Substantially
achieved
48
Read more: Financial Review
on P48-51
36
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report
Key Performance Indicators continued
2017
2017 Key Performance Indicators (KPIs)
The 2017 Group KPIs in the table below
were set by the Board in December 2016
and are based on the Group’s current portfolio,
prospects and objectives set out in the 2017
Business Plan.
Strategic objective:
Deliver exploration and appraisal success
Purpose Grow the resources and reserves base to provide a basis for future growth
Objective
2017 KPI
Maximise value
in Senegal
Achieve exploration
success through
discovery or addition
of commercial
hydrocarbons in 2017
Safely, cost effectively and successfully drill, evaluate and flow test
appraisal wells on the SNE field in Senegal to allow preparation of
the Evaluation Report and update our estimate of resources and
capital required to develop the field in a timely manner.
Efficiently discover commercial quantities of hydrocarbons through
maturation and drilling of select exploration and appraisal wells
across the portfolio.
Measured by: new commercial discoveries based on 2C resources
found; cumulative net volumes found versus group target; and
finding efficiency expressed in US$/bbl versus industry benchmarks.
Risks to the achievement of KPI
Exploration and appraisal
Operational and project performance
Political and fiscal uncertainties
Reliance on JV operators for asset performance
Staff recruitment and retention
39
Read more: How We Manage Risk
on P39-47
Strategic objective:
Portfolio management
Purpose Active portfolio management and acreage optimisation
Objective
2017 KPI
Portfolio optimisation
and replenishment
Develop an inventory and timeline of exploration and appraisal
opportunities which meet Cairn’s technical and commercial criteria.
Measured by increasing the prospect inventory by securing or
maturing new independent opportunities from within or outwith
our portfolio.
Risks to the achievement of KPI
Securing new venture opportunities
Access to internal or external funding
Sustained low oil and gas price volatility
39
Read more: How We Manage Risk
on P39-47
37
Key Performance Indicators continued
2017 continued
Strategic objective:
Deliver operational excellence
Purpose Deliver operational excellence in all 2017 activities
Objective
2017 KPI
Successfully
complete operated
and non-operated
2017 work
programme
Successfully progress our development and production projects
against key milestones including, as appropriate, capex, opex and
sales volume targets.
Strategic objective:
Maintain licence to operate
Purpose Deliver value in a safe, secure and environmentally and socially responsible manner
Objective
2017 KPI
Deliver activities with
a focus on the safety
of people and the
environment
Achieve leading HSSE indicators linked to four categories within the
Group’s Corporate Responsibility Management System (Business
Relationships, Society & Communities, People and the Environment).
Achieve lagging HSSE indicators linked to the International
Association of Oil & Gas Producers (IOGP) targets and guidelines.
Investing in People & Systems.
Strategic objective:
Deliver a sustainable business
Purpose Maintain a self funding business plan
Objective
2017 KPI
Manage balance
sheet strength
Develop and implement a funding strategy that allows a value
generative plan to be executed and ensures a minimum headroom
cushion from existing sources of funding is maintained.
Make tangible progress under the UK-India bilateral treaty arbitration.
Risks to the achievement of KPI
Delay in Kraken and Catcher production
start-up schedule
Operational and project performance
Reliance on JV operators for asset performance
Staff recruitment and retention
39
Read more: How We Manage Risk
on P39-47
Risks to the achievement of KPI
Health, safety, environment and security
Stakeholder reaction to operations
Fraud, bribery and corruption
Staff recruitment and retention
39
Read more: How We Manage Risk
on P39-47
Risks to the achievement of KPI
Political and fiscal uncertainties
Delay in Kraken and Catcher production
start-up schedule
Access to internal or external funding
Sustained low oil and gas price
Restriction on ability to sell CIL shareholding
39
Read more: How We Manage Risk
on P39-47
38
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report
How We Manage Risk
Managing business risks
Managing risks and opportunities is a key
consideration in both determining and
delivering the strategy. This approach to risk
management is not intended to eliminate
risk entirely, but provide a means to identify,
prioritise and manage risks and opportunities
and enable the Group to effectively deliver
its strategic objectives in line with the Group’s
appetite for risk.
Strategic objectives in the form of KPIs are
set annually. Determining the level of risk the
Group is willing to accept in the pursuit of
these objectives and then identifying and
managing these risks and opportunities
to an acceptable level is a fundamental
component of the Group’s risk management
framework. As outlined below, the
management of risk and opportunity
plays a key role in the successful delivery
of the Group’s strategy.
Group’s risk management
framework
Outline the strategy
Set a sustainable strategy to achieve Cairn’s
short and long-term goals.
Define strategic objectives
Set clear strategic objectives in the
form of KPIs.
Define risk appetite
Determine the level of risk the Group is
willing to accept in the pursuit of the
strategic objectives and document this in the
Group Risk Appetite Statement.
Identify key risks
Identify key risks and opportunities to the
achievement of strategic objectives through
discussions at a Board, Risk Management
Committee, Management Team, Regional
and functional level.
Apply risk assessment
process
Apply the Group risk assessment process to
ensure the ongoing management of key
risks to our objectives.
Deliver strategic objectives
Delivery of strategic objectives through
informed risk based decision making.
Risk governance
The Group’s framework for risk management
promotes a bottom-up approach to risk
management with top-down support and
challenge. The risk register is central to the
risk management process and forms the
basis for capturing and discussing risk
throughout the organisation. Risks and
opportunities are identified, assessed
and managed at an asset (e.g. Catcher),
project (e.g. new ventures opportunity) and
functional level (e.g. information systems
team). Reporting of these risks within the
organisation is structured so that risks
are escalated through various internal
management and Board committees
and, when appropriately material, to the
Board itself.
The Board has overall responsibility for
ensuring the Group’s risk management and
internal control frameworks are appropriate
and embedded throughout the organisation.
Principal risks are reviewed at each Board
meeting and, at least once a year, the Board
undertakes a risk workshop to complete a
robust assessment of the principal risks. This
includes determining and setting the Group’s
risk appetite and associated tolerance levels
which are considered acceptable in the
pursuit of strategic objectives. This integrated
approach to risk management has been and
continues to be critical to the delivery of
strategic objectives.
Risk governance framework
Top-down: Oversight, accountability, monitoring and assurance
The Board
Set strategic
objectives and
defines risk
appetite
Set the tone
and influences the
culture of risk
management
Completes
robust assessment
of principal
risks
Overall
responsibility for
the Group’s risk
management and
internal control
systems
Risk Management
Committee
Audit
Committee
Management
Team
Chaired by CEO in 2016
Chaired by Iain McLaren in 2016
Chaired by COO in 2016
Responsibility for setting the
direction for risk management
Facilitates continual
improvement of the risk
management system
Monitors and reviews the scope
and effectiveness of the
Company’s systems of risk and
internal control
Reviews output from the
RMC meetings
Performs a quarterly ‘deep-dive’
review of the Group risk register
Asset/Project/Function level
Risk identification,
assessment and
mitigation completed at
asset, project and
functional level
Risk management
system embedded and
integrated throughout
the Group
Risk culture influencing
all business activities
Bottom-up: Identification of risks and mitigating actions for assets, projects and functions
39
How We Manage Risk continued
Responding to the changing risk
environment in 2016
As part of the Group’s commitment to
ensuring risk continues to be managed
effectively, it seeks to continually improve our
risk management system. As part of this, the
following activities were completed in 2016.
•
the Board, as it has in previous years,
completed a risk workshop to undertake
a robust assessment of the principal risks
and opportunities impacting the delivery
of the Group’s strategic objectives. As part
of the workshop, the Board confirmed
that the risk appetite and supplementary
risk tolerance levels remained appropriate;
•
•
the Group’s risk management policy and
procedure were revised and updated
to ensure risks are being managed in
a consistent manner across the Group,
regardless of geography. The procedure
was rolled out in Q1 2016;
the Group’s three regions (Senegal, UK &
Norway and International) held monthly
risk review meetings to consider risks,
mitigations and actions;
• a more rigorous and standardised
approach to managing risks was adopted
across the Group with a focus on
performing more detailed reviews on
those risks requiring further treatment.
This review focused on ensuring actions
were being implemented and tracked;
•
the Group undertook a review of potential
risk management software suppliers with
the remit of assessing the benefits of
implementing a software application
across the Group. The purpose of the
application is to make the process more
systematic and structured and further
enhance the Group’s bottom-up approach
to risk management; and
• EY, the Group’s internal auditor, delivered
the annual internal audit plan which
consisted of a number of risk areas
identified from the risk register. The Group
has been working through the year to
implement the identified improvements.
Viability Statement
Strategy, business model and context
The Group’s strategy and business model
are described on page 4 of this report.
Following the significant oil discovery
offshore Senegal in 2014 the group is
focused on appraising this significant
resource base and from 2018 onwards,
Cairn plans to submit the exploitation
plan. This exploitation plan will set out a
proposed development scheme for the
Senegal discovery and an anticipated
timeline to first production.
The Group also holds interests in two
UK North Sea developments where
production is forecast to commence in
H1 2017. This production will generate
significant operating cash flows which
will be deployed, in the near term, on
the continued appraisal of Senegal and
across the Group’s wider exploration
and appraisal portfolio.
Assessment process and
key assumptions
The Group’s prospects are assessed
primarily through its annual business
planning process. This process includes
a Board strategy session, led by the
Senior Leadership Team, at which the
performance and prospects of the
business are examined and capital
allocation decisions are made. The
outputs from the business planning
include a set of Key Performance
Objectives, the group risk matrix, the
anticipated future work programme and
a set of financial forecasts that consider
the sources of funding available to the
Group against the capital requirements
of the anticipated future work
programme (the base plan).
Key assumptions which underpin the
annual business planning process include
forecast oil and gas prices, forecast cost
levels for oil & gas services and capital
projects, production profiles of the UK
North Sea development projects and
the availability of debt under the Groups
lending facilities.
The Board recognises that a significant
part of the anticipated work programme
is dependent on the results of future
exploration or appraisal activity and
also that it is the Group’s strategy to
actively manage its licence portfolio to
optimise its planned capital allocation.
Consequently, reflecting this inherent
variability in the longer term work
programme, the Board has determined
that three years is the appropriate
period over which to assess the
Group’s prospects.
Viability
The Principal risks and uncertainties that
affect the board’s assessment of the
Group’s viability in this period are:
• development project schedule and
•
•
•
budget risk;
the effect of sustained lower oil prices
on the business and on our partners
financial position;
restriction on ability to sell Cairn India
shareholding; and
lack of exploration or appraisal
success.
The base plan incorporates assumptions
that reflect the impact of these Principal
risks as follows:
• material budget contingencies
and allowances are included for
development projects as well as
appropriate delay assumptions;
• projected operating cash flows
assume oil and gas prices in line
with the current forward curve;
• whilst the resolution of the Cairn India
dispute remains a strategic priority,
the funding plan does not include
monetisation of the Group’s shares
in Cairn India Limited; and
lack of exploration or appraisal
success would impact on the delivery
of Cairns strategy but would not be
expected to impact on the Groups
ability to fund its committed work
programme.
•
The Board also considers further
scenarios around the base plan. These
primarily reflect a more severe impact
of the principal risks, both individually
and in aggregate, as well as the additional
capital requirements that would result
from future exploration or appraisal
success or the acquisition of new assets.
The directors consider the impact that
these Principal risks could, in certain
circumstances, have on the company’s
prospects within the assessment period,
and accordingly assess the opportunities
to actively manage its licence portfolio
and planned capital allocation as well as
to bring in additional sources of funding
at key milestones in asset development.
Based on the actions available to
them, the directors have a reasonable
expectation that the Group will be able
to continue in operation and meet its
liabilities as they fall due over the three
year period of their assessment.
40
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report How We Manage Risk continued
Principal risks to the Group in 2016/2017
Principal risks & uncertainties
During 2016, through a number of internal
forums such as the Group Risk Management
Committee and Management Team, the
Group regularly reviewed the risks which
could adversely impact on the achievement
of strategic objectives. The Board also
receive a risk report, highlighting the
key risks and movements in risks, at each
Board meeting. The tables below provide a
summary overview of the principal risks to
the Group at the end of 2016, the potential
impacts, the mitigation measures, the risk
appetite and the KPIs or strategic objectives
the risks may impact on.
The Board confirm that a robust assessment
of the principal risks facing the Company,
including those that would threaten the
business model, future performance,
solvency or liquidity was completed in 2016.
Strategic objective: Deliver exploration and appraisal success
Principal risk: Exploration and appraisal
Owner: Director of Exploration
2015-2016 movement
No change
Risk appetite
High – Exposure to exploration and appraisal failure is inherent in accessing the significant upside potential of
a successful discovery and this has been, and remains, a core value driver for Cairn. The Group invests in data
and exploits the strong experience of Cairn’s technical teams to mitigate this risk.
Impact
Mitigation
Risk information
2017 KPI objectives
Maximise value in Senegal
Achieve exploration success through
discovery or addition of commercial
hydrocarbons in 2017
Loss of investor
confidence
Limited or no
value creation
Failure of the
balanced portfolio
business model
Active programme for high-grading
new areas through licence rounds,
farm-ins and other transactions.
Inventory of prospects and leads that
offer opportunities with a balance of
geological and technical risks.
Highly competent team applying
a thorough review process of
prospects and development
opportunities and a team of
geoscientists with a track record
of delivering exploration success.
Establishment of Exploration
Leadership Team to undertake
peer reviews and assurance.
Completion of four successful
appraisal and exploration wells in
the SNE field in H1 2016 which led
to an increase in the estimated
gross recoverable oil resource.
Exploration and appraisal wells
completed in the UK North Sea
Greater Catcher Area and the
Barents Sea.
The Group will continue to assess
and rank opportunities for future
drilling in 2017 and beyond.
Principal risk: Sustained low oil and gas price
Owner: Chief Financial Officer
2015-2016 movement
No change
Risk appetite
Medium – Exposure to commodity prices is fundamental to the Group’s activities. However, the Group manages its
investment programme to ensure that a threshold economic return is delivered and the business model is funded
even in sustained downside price scenarios.
Impact
Mitigation
Risk information
2017 KPI objectives
Reduction in
future cash flow
Value impairment of
development projects
JV partner capital
constraints
Sensitivity analysis conducted to
assess robustness of projects and
development decisions.
The low oil price has driven down
industry costs for both development
and exploration projects.
Manage balance sheet strength
Portfolio optimisation
and replenishment
Operators’ cost initiatives delivering
material cost reductions on
development projects.
Debt available under the Group’s
RBL facility remains at a level
consistent with the end of 2015.
Exploit the low service cost
environment for E&A activities.
Cairn increased its working interest
in Kraken by 4.5% to 29.5%. Cairn
acquired the increased interest from
First Oil plc for a nominal amount and
assumed working capital liabilities of
US$16m.
41
How We Manage Risk continued
Principal risks to the Group in 2016/2017 continued
Strategic objective: Portfolio management
Principal risk: Securing new venture opportunities
Owner: Director of Exploration
2015-2016 movement
Increased
Risk appetite
Medium – Building and maintaining a balanced portfolio of current and future exploration, development and
production assets is core to the Group’s strategy. New opportunities must first meet the Group’s strict investment
criteria and successfully securing them will be dependent on the prevailing competitive environment.
Impact
Mitigation
Risk information
2017 KPI objectives
Portfolio optimisation
and replenishment
Loss of investor
confidence
Loss of competitive
edge
Failure to replenish
the portfolio
Geoscience, new ventures and
commercial teams work closely
to review and identify prospects.
Experience and knowledge
throughout the organisation
in recognising prospective
opportunities.
Risk assessments and due diligence
process undertaken on all potential
new country entries.
Development of discretionary
capital allocation and opportunity
ranking system.
Pre-qualified as an Operator in
Norway in late 2015 and were
awarded the Group’s first
operated licence in H1 2016.
Awarded seven blocks, including
two as Operator, in the 2016 APA
and one licence option in the
2015 Atlantic Margin Oil and Gas
Exploration Licensing Round.
Several new prospects and
leads have been matured in
existing acreage in Senegal.
Despite the low oil price
environment, acquiring quality new
venture opportunities has been
competitive and it is anticipated that
this will remain the same for 2017.
42
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Strategic objective: Maintain licence to operate
Principal risk: Health, safety, environment and security
Owner: Chief Executive
2015-2016 movement
No change
Risk appetite
Low – The Group continuously strives to reduce risks that could lead to an HSSE incident to as low as reasonably
practicable.
Impact
Mitigation
Risk information
2017 KPI objectives
Deliver activities with a focus
on the safety of people and
the environment
The Group’s safety performance has
been effective overall in 2016 and
achieved Total Recordable Injury
Rate (TRIR) of 1.05. The Group’s
target was less than 2.0 per million
hours. The rate in 2015 was 0 per
million hours.
Approximately 1 bbl of oil was
released to the environment during
testing of appraisal wells.
With ongoing operations in a number
of countries in 2017, the Group will
continue to work responsibly as part
of our strategy to deliver value for
all stakeholders.
Serious injury or death
Environmental impacts
Reputational damage
Regulatory penalties
and clean-up costs
Effectively managing health, safety,
security and environmental risk
exposure is the first priority for the
Board, Senior Leadership Team
and Management Team.
HSE training is included as part of
all staff and contractor inductions.
Detailed training on the Group’s
Corporate Responsibility
Management System (CRMS) has
been provided to key stakeholders
to ensure processes and procedures
are embedded throughout the
organisation and all operations.
Process in place for assessing an
operator’s overall operating and HSE
capabilities, including undertaking
audits to determine the level of
oversight required.
OSPAR reverification completed
in 2016.
Emergency and oil spill response
procedures and equipment are
maintained and regularly tested to
ensure the Group is able to respond
to an emergency quickly, safely and
effectively.
Third party specialists in place to
assist with security arrangements
and travel risk assessments.
HSE Leading Performance Indicators
and targets developed in line with
industry guidelines.
Findings from ‘Lessons learned’
reviews are implemented from
other projects.
43
How We Manage Risk continued
Principal risks to the Group in 2016/2017 continued
Strategic objective: Maintain licence to operate continued
Principal risk: Stakeholder reaction to operations
Owner: Director of Corporate Affairs
2015-2016 movement
No change
Risk appetite
Medium – The Group’s strong reputation and licence to operate are core assets for the Group. However, where
stakeholder objectives are not aligned, the Group seeks to balance these conflicting objectives when considering
investment decisions in line with the Group’s strategy.
Impact
Mitigation
Risk information
2017 KPI objectives
Reputational damage
Loss of investor
confidence
Loss of licence
to operate
Delays in work
programmes
Cairn’s aim is to operate with integrity
at all times, recognising that in doing
so the Company will maintain the
trust of investors, governments,
local communities, JV partners
and other stakeholders.
Norge Bank divested their interest
in Cairn as a result of the Group’s
operations in Western Sahara.
The Group continues to engage
with all stakeholders to address
any concerns.
Deliver activities with a focus
on the safety of people and
the environment
Comprehensive stakeholder
management and communication
plans have been developed and
executed for all operations.
Work closely with JV partners
to ensure transparency and
social responsibility.
Actively monitor steps being taken
by regulators and industry through
participation in industry bodies such
as the International Association of Oil
& Gas Producers and Oil & Gas UK.
Principal risk: Fraud, bribery and corruption
Owner: Chief Executive
2015-2016 movement
No change
Risk appetite
Impact
Legal fines
Criminal prosecution
Reputational damage
Low – Cairn is committed to maintaining integrity and high ethical standards in all of the Group’s business dealings.
The Group has no tolerance for conduct which may compromise its reputation for integrity.
Mitigation
Risk information
2017 KPI objectives
Business Code of Ethics and
bribery and corruption policies
and procedures.
Due diligence process and
questionnaire developed for
assessing potential third parties.
Annual training programme for
all employees, contractors and
selected service providers.
Extensive financial procedures in
place to mitigate against fraud.
Group Code of Business Ethics and
ABC procedures updated in 2016.
Bribery and corruption e-learning
training module rolled out across
the Group and bespoke bribery and
corruption training delivered to the
Board in 2016.
The Group’s Code of Business Ethics
will continue to be applied to all
operations across the Group.
Deliver activities with a focus
on the safety of people and
the environment
44
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Strategic objective: Deliver operational excellence
Principal risk: Delay in Catcher and Kraken production start-up schedule
Owner: Regional Director, UK & Norway
2015-2016 movement
Decreased
Risk appetite
Low – Operating cash flow from Kraken and Catcher will provide the Group with funding to sustain future
exploration and development activity. The Group works closely with all JV partners to mitigate the risk and
impact of any operational delay.
Impact
Mitigation
Risk information
2017 KPI objectives
Successfully complete
operated and non-operated
2017 work programme
Delay or reduction
in future cash flow
Increased costs
Portfolio
replenishment
Reduction in
debt capacity
Actively engage with all our JV
partners early to ensure highly
effective working relationships.
Actively participate in technical
meetings to challenge, apply
influence and/or support our
partners to establish a cohesive
JV view and ensure operational
activity is executed in a safe and
secure manner.
Frequent site visits to key contractor
sites to increase focus on quality
assurance performance.
Work closely with the Kraken and
Catcher operators to monitor and
review progress of key milestones.
Kraken development remains on
schedule with first oil anticipated in
H1 2017. Key milestones on Kraken
set for 2016 have been accomplished
including the completion of four
producer and four injector wells;
full subsea installation; safety case
approval; and the FPSO sail-away
from the shipyard in Singapore for
UK waters.
Catcher is targeting first oil in H2 2017.
Significant progress has been
made on Catcher and several key
milestones have been achieved.
Principal risk: Operational and project performance
Owner: Chief Operating Officer
2015-2016 movement
No change
Risk appetite
Low – Delivering operational excellence in all the Group’s activities is a strategic objective for the Group. The Group
has a low appetite for operational risks which may lead to delays and/or increased costs.
Impact
Mitigation
Risk information
2017 KPI objectives
Increased well costs
Project delays
HSE incident
Reputational damage
Comprehensive set of criteria that
must be met before contracting
and accepting any rig.
Significant operational milestones
achieved in the Group’s development
projects and Senegal drilling.
Successfully complete
operated and non-operated
2017 work programme
Work closely with the rig contractors
to exert influence and impose our
performance expectations.
Management and influence of
drilling contractors to ensure Cairn
management systems are fully
embedded in operations.
Positive and regular engagement
with JV operators and partners to
share knowledge and offer support.
Seismic processing successfully
completed in Senegal (Sangomar-
Rufisque), Western Sahara (Boujdour
Maritime), Norway (Horda) and the
UK (Kraken West).
There are potential operational
threats in 2017 due to the level
of the Group’s operations and
the number of rigs on hire (Stena
Drillmax in Senegal, Transocean
Leader in Kraken and the Ensco-100
in Catcher).
Deliver activities with a focus
on the safety of people and
the environment
45
How We Manage Risk continued
Principal risks to the Group in 2016/2017 continued
Strategic objective: Deliver operational excellence continued
Principal risk: Reliance on JV operators for asset performance
Owner: Chief Operating Officer
2015-2016 movement
No change
Risk appetite
Medium – The Group seeks to operate assets which align with the Group’s core areas of expertise but recognise
that a balanced portfolio will also include non-operated ventures. The Group accepts that there are risks associated
with a non-operator role and will seek to mitigate against these risks by working with partners of high integrity and
experience and maintaining close working relationships with all JV partners.
Impact
Mitigation
Risk information
2017 KPI objectives
Cost/schedule
overruns
Poor performance
of assets
HSE performance
Delay in first oil from
development projects
Impact on asset value
Actively engage with all JV partners
early to establish good, trusting
working relationships.
Actively participate in technical
meetings to challenge, apply
influence and/or support partners
to establish a cohesive JV view.
Application of the Group risk
management processes and non-
operated ventures procedure.
Active engagement with supply
chain providers to monitor
performance and delivery.
The sustained low oil price
continues to have a financial
impact across the industry and
the risk remains that the Group’s
JV partners may not be able to
fund work programme expenditures
and/or reprioritise projects.
The Group’s two development
projects and several exploration
projects are operated by joint
venture partners and the ability to
influence can sometimes be limited.
The Group continues to work closely
with a number of partners in the UK
& Norway, Senegal and International
regions.
Successfully complete
operated and non-operated
2017 work programme
Deliver activities with a focus
on the safety of people and
the environment
Strategic objective: Deliver a sustainable business
Principal risk: Restriction on ability to sell CIL shareholding
Owner: Chief Financial Officer
2015-2016 movement
No change
Risk appetite
Medium – The Group faces an uncertain macroeconomic and regulatory environment in some countries of operation.
The Group is willing to invest in countries where political and/or fiscal risks may occur provided such risks can be
adequately managed to minimise the impact where possible.
Impact
Mitigation
Risk information
2017 KPI objectives
Restriction in the
funding capacity
of the Group
Committed work programme is
fully funded from existing sources
of funding, principally Group cash
and committed debt facilities.
Continued engagement with the
Indian Government.
Initiation of arbitration proceedings.
Restriction on monetising assets
in India remains in place.
Arbitration proceedings have
commenced to resolve the Indian tax
dispute and a number of milestones
have been achieved including the
appointment of an arbitration panel;
the filing of the statement of claim;
and India’s filing of its statement
of defence.
Manage balance sheet strength
46
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Principal risk: Political and fiscal uncertainties
Owner: Chief Financial Officer
2015-2016 movement
No change
Risk appetite
Medium – The Group faces an uncertain macroeconomic and regulatory environment in some countries of operation.
The Group is willing to invest in countries where political and/or fiscal risks may occur provided such risks can be
adequately managed to minimise the impact where possible.
Impact
Mitigation
Risk information
2017 KPI objectives
Loss of value
Uncertain financial
outcomes
Operate to the highest industry
standards with regulators and
monitor compliance with the
Group’s licence, Production Sharing
Contract and taxation requirements.
Cairn has not entered into any new
territories in 2016 so the risk has
remained static. The Group will
continue to monitor changes in fiscal
regimes in the areas of operation.
Manage balance sheet strength
External specialist advice consulted
on legal and tax issues as required.
Maintain positive relationships with
governments and key stakeholders.
Ongoing monitoring of the political
and regulatory environments in
which we operate.
Principal risk: Access to internal or external funding
Owner: Chief Financial Officer
2015-2016 movement
No change
Risk appetite
Low – The Group seeks to develop and implement a funding strategy that allows a value generative plan to be
executed and ensures a minimum headroom cushion from existing sources of funding is maintained.
Impact
Mitigation
Risk information
2017 KPI objectives
Manage balance sheet strength
Work programme
restricted by reduced
capital availability
Loss of value
Committed work programme is
fully funded from existing sources
of funding, principally Group cash
and debt funding.
Disciplined allocation of capital
across portfolio.
Continue to assess other forms
of financing and pursue release
of Indian assets.
Non-core E&A expenditure has been
deferred, development costs for
future production base have been
reduced and Cairn has secured
significantly lower costs for ongoing
exploration activity.
Continued to rationalise the portfolio
with the disposal of non-core assets.
Debt available under the Group’s
RBL facility remains at a level
consistent with the end of 2015.
Principal risk: Staff recruitment and retention
Owner: Group HR Manager
2015-2016 movement
Decreased
Risk appetite
Low – The Group relies on motivated and high quality employees to deliver the Group’s strategic objectives and is
committed to developing and supporting all employees.
Impact
Mitigation
Risk information
2017 KPI objectives
Inadequate resource
to deliver work
programme
Loss of key knowledge
and experience
Regional Directors and Departmental
Heads agree resource requirements
as part of the annual work
programme and budget processes.
Staff retention remains strong,
providing stability and consistency
in the delivery of current and
future projects.
Successfully complete
operated and non-operated
2017 work programme
Prevailing market conditions have
allowed the Group to attract a
number of highly experienced
personnel for key positions in
the Group.
As an accredited Investor in People,
we support continuous professional
development through technical,
professional, management and
behavioural skills courses as well
as mentoring and educational
assistance schemes.
Succession planning is in place
for all areas of the business.
Rewarding performance process
and benefits programme.
47
Overview
Subsequent to year-end, Cairn executed two
financing arrangements further enhancing
the Group’s liquidity.
A NOK 500 million (~US$60m) Exploration
Finance Facility allows the Company to
borrow against any Norwegian tax refunds
from future exploration.
Related to the additional 4.5% Kraken
working interest acquired in 2016, the
Group also secured funding of US$75m from
FlowStream in exchange for the proceeds
from 4.5% of Kraken production. FlowStream’s
entitlement to Kraken production reduces to
1.35% if FlowStream achieves a 10% return
and reduces to 0.675% after FlowStream
achieves a 15% return. An additional tranche
of US$125m in return for a further proceeds
from production across Kraken and Catcher
is available, subject to mutual consent, at
Cairn’s option. FlowStream’s sole recourse
for the funding is to its production rights
from the assets.
Confirmation received via the international
arbitration that accrued dividends of US$51m
are no longer restricted, immediate release
of this sum has been requested from CIL.
Financial Review
James Smith, Chief Financial Officer
Significant
progress
Significant progress has been made on the Group’s
two North Sea development projects and, with the
Kraken FPSO now on location, first oil production is
targeted for Q2 2017. Cairn successfully completed
a four well programme in 2016 in Senegal and a
further exploration and appraisal programme is
currently underway.
Highlights of 2016
Financial
US$335 million (m) Group net cash at 31 December 2016.
Norwegian tax receivable of US$26m at 31 December
2016.
Reserve Based Lending bank facility remains undrawn
with peak availability expected to reach US$350m to
US$400m.
Forecast development expenditure on Catcher and
Kraken for 2017 is US$150m and committed drilling
E&A expenditure for 2017 is estimated at US$170m,
predominantly in Senegal. At 31 December 2016,
remaining cash outflows in respect of activities
undertaken in 2016 were expected to be US$37m.
Subsequent to year end:
US$75m funding from FlowStream Commodities Ltd
(FlowStream) in exchange for the proceeds from 4.5%
of Kraken production, stepping down to 1.35% after 10%
return achieved.
NOK 500m (~US$60m) three year Norwegian Exploration
Finance Facility, allowing the company to borrow against
future Norwegian exploration tax refunds.
48
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Cash
Cairn had cash and cash equivalents of
US$335m at 31 December 2016, representing
a net cash outflow of US$268m over the year.
Cash outflows in the period included Senegal
exploration costs of US$105m related to the
completion of a four well exploration and
appraisal programme which commenced
in 2015.
Development expenditure primarily related
to costs of the Kraken development as
Cairn’s share of capital expenditure on
Catcher remained carried throughout
the year.
Forecast development expenditure for
2017, taking the UK development projects
through to cashflow generation, is US$150m;
and remaining currently committed drilling
exploration and appraisal expenditure
for 2017 is estimated at US$170m,
predominantly in Senegal.
Cairn remains fully funded to meet all
existing commitments at the balance
sheet date. Cairn’s Reserve Based Lending
bank facility remains undrawn, with peak
availability expected to reach US$350m to
US$400m.
Cash
2016 Net Funds Movements
US$m
650
600
550
500
450
400
350
300
603
(18)
(149)
(125)
36
(16)
4
Opening cash
and cash
equivalents
Pre-award
costs
Exploration
expenditure
Development
expenditure
Norwegian
tax refund
Administration
and finance costs
Foreign exchange
movements
335
Closing cash
and cash
equivalents
Increase in assets
Decrease in assets
Analysis of the cash flow movements on assets to additions in the financial statements is
as follows:
Exploration
Development
Senegal
US$m
102
3
–
105
UK &
Norway
US$m
International
US$m
41
3
(5)
39
7
(2)
–
5
Total
US$m
150
4
(5)
149
UK &
Norway
US$m
277
(87)
(65)
125
Additions
Working capital and
provisions movements
Carried (non-cash)
Cash outflow
Oil and Gas Assets
2016 Movements in Oil and Gas assets
US$m
1,450
1,350
1,250
1,150
1,050
950
850
277
(42)
(28)
(11)
(14)
(129)
1,206
7
41
102
1,003
Opening
oil and gas
assets
Exploration
additions –
Senegal
Exploration
additions –
UK &
Norway
Exploration
additions –
International
Development
additions –
UK &
Norway
Unsuccessful
exploration
costs –
International
Unsuccessful
exploration
costs –
UK &
Norway
Impairment
of exploration
costs -
UK & Norway
Impairment
of exploration
costs -
International
Foreign
exchange
movements
Closing
oil and gas
assets
Increase in assets
Decrease in assets
49
Exploration and Appraisal Assets
Senegal
Additions in 2016 included US$78m of
drilling costs predominantly relating to the
SNE-2, SNE-3, SNE-4 and BEL-1 appraisal
wells completed in the year. A further US$5m
was incurred in advance of the 2017 SNE-5
and SNE-6 appraisal wells.
UK & Norway
Cairn completed two exploration wells
in the UK and Norway region during 2016.
The UK Laverda exploration well, located
in the Greater Catcher Area, successfully
discovered commercial volumes of
hydrocarbons, though these were not
sufficient to support previously capitalised
costs and an impairment of US$11m was
charged in the year. Cairn’s share of cash
expenditure of the Laverda well was carried.
The second well, the Aurelia exploration
well in the Norwegian Barents Sea was
unsuccessful and costs of US$10m have
been charged to the income statement.
Further charges of US$10m were made
on licences to be relinquished and costs
of US$8m on the prior year Kraken West
appraisal well were written off as the
discovery is no longer considered
commercially viable.
International
During 2016, the Group relinquished the
C-19 licence in Mauritania and expensed
previously capitalised costs of US$32m.
Further costs of US$14m relating to the
Spanish Point appraisal prospect were
impaired. The Group’s remaining assets
in the International segment are located
in Ireland, Malta and Boujdour Maritime,
Western Sahara where exploration activity
remains at an early stage.
Development Assets
In Kraken, Cairn acquired an additional
4.5% working interest in January for nominal
consideration bringing the Group’s total
working interest to 29.5%. US$16m is included
within additions representing working capital
balances related to the 4.5% increase. Further
Kraken additions in the year were US$165m,
including an increase of US$26m in the
decommissioning asset.
Financial Review continued
Highlights of 2016
Resources & Reserves
A total of 51.5 mmboe booked as 2P reserves and 239
mmboe booked as 2C Contingent Resources on a net
working interest basis at 31 December 2016.
India Tax Dispute
Confirmation received via the international arbitration
that dividends of US$51m due from Cairn India Limited
(CIL) are no longer restricted, Cairn has requested the
immediate release of the sum from CIL.
International arbitration proceedings are progressing
in respect of Cairn’s claim under the UK-India Bilateral
Treaty with the main Statement of Claim and the
Statement of Defence now submitted.
50
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Cairn’s share of capital expenditure on the
Catcher development was carried by Dyas
BV under the terms of the 2015 farm down.
Thus additions of US$96m were largely
non-cash and also include an increase of
US$27m in the decommissioning asset.
Administrative expenses and other costs
The year-on-year increase in administrative
expenses and other costs reflected
costs incurred on the CIL arbitration and
an increase in non-cash share-based
payment charges.
The Group’s development assets were tested
for impairment, with the Group reducing its
long term oil-price assumption to US$70 per
barrel. The Group’s three year short term
assumption remains linked to the forward
curve. No impairment charge was recorded.
Taxation
As the Group’s activities continue to focus
on assets in the exploration, appraisal and
development phases, the Group currently
generates no production income and as such
no corporation tax was payable in the year.
The Group’s development assets are
held in a GBP functional subsidiary, which
is translated to US$ on consolidation. With
the fall in GBP following the EU referendum
result, significant foreign currency exchange
losses of US$121m are recorded on
development assets.
Available-for-Sale Financial Asset –
Cairn India Investment and Dividends
Cairn is currently unable to access the
value in its ~10% residual shareholding in
Cairn India Limited valued at US$656m at
31 December 2016, though the Company
is seeking remittance of accrued dividend
payments due of US$51m.
International arbitration proceedings are
progressing in respect of the Group’s claim
under the UK-India Bilateral Investment
Treaty. Cairn is seeking restitution for losses
resulting from the attachment of its shares in
CIL and failure to treat the Company and its
investments fairly and equitably. Cairn has a
high level of confidence in its case under the
Treaty and, in addition to resolution of the
retrospective tax dispute, its statement of
claim to the arbitration panel is seeking
damages equal to the value of Group’s
residual shareholding in CIL at the time it
was attached (approximately US$1 billion).
Unsuccessful exploration costs
Unsuccessful exploration costs of
US$28m in the UK and Norway region
included the cost of two wells (Aurelia,
Barents Sea and Kraken West, UK North
Sea) and relinquished licences. Further
unsuccessful exploration costs in the
International region of US$42m included
US$32m of costs in Mauritania and a US$7m
charge following the relinquishment of
acreage offshore Ireland. The remaining
US$3m represented costs incurred closing
licences in Morocco and Greenland.
The Group’s tax credit for the year consisted
of a UK deferred tax credit of US$43m and
net Norwegian tax credits of US$13m, linked
to the tax refund. The UK tax credit followed
the recognition of deferred tax assets to
offset deferred tax liabilities arising on
development asset additions under the
Catcher carry. UK deferred tax assets are
recognised only to the extent that they
offset liabilities and no net UK deferred
tax asset or liability exists at the year end.
At 31 December 2016, Cairn had total UK
ring fence losses of US$683m. US$514m
of losses were recognised as deferred tax
assets to fully offset deferred tax liabilities
of US$206m. The remaining US$169m
of losses represented an unrecognised
deferred tax asset of US$68m. With no
taxable income and a tax charge distorted
by balance sheet additions, the effective
tax rate of the Group does not provide a
meaningful measure of Cairn’s current tax
position: the effective tax rate of the Group
was 37.3% in the year (2015: (3.5)%).
2016
US$m
2015
US$m
(18)
(70)
(35)
13
(35)
(97)
(31)
37
A cash tax refund is received in Norway in
respect of 78% of qualifying exploration and
overhead spend. US$36m was received
during the current period, with a further
US$26m receivable based on 2016
qualifying expenditure. Norwegian deferred
tax liabilities at the year-end of US$63m
reflect timing differences on the carrying
value of exploration assets where a tax
refund has been claimed.
Results for the Year
Pre-award costs
Unsuccessful exploration costs
Administrative expenses and other costs
Related tax credit
Operational and administrative expenses
(110)
(126)
Net finance costs
Impairment of financial asset
Related tax credit
CIL investment and impairment
Gain in disposal of oil and gas assets
Impairment of oil and gas assets
Asset related tax credit/(charge)
Oil and gas asset sales and impairment
Loss for the year
(3)
–
–
–
–
(25)
43
18
(95)
(1)
(319)
10
(309)
27
(43)
(64)
(80)
(516)
51
Working Responsibly
Introduction
Working responsibly
to deliver our strategy
Our commitment to
working responsibly is a
key part of our strategy,
which is to deliver value
for our stakeholders
by building a balanced
portfolio of exploration,
development and
production assets within
the oil and gas lifecycle.
Ensuring we work responsibly is embedded
in our strategy. This means delivering value
in a safe, secure and environmentally and
socially responsible manner.
In order to deliver our strategy we set a series
of Key Performance Indicators (KPIs) annually.
There are elements of working responsibly
in each of those KPIs with one of them, the
Maintain Licence to Operate KPI, dedicated
to working responsibly.
In order to support achievement of the
Maintain Licence to Operate KPI, we have
a series of Corporate Responsibility (CR)
objectives; CR is how we describe our
working responsibly practices. Our CR
objectives are set annually and are grouped
under four themes, being: Business
Relationships; Society and Communities;
People; and Environment. These are
illustrated on page 54.
Working responsibly means identifying
issues that are material not only to the
business but also to stakeholders. We do
this through our risk management process
which identifies the issues that are material
to the business and our stakeholder
engagement processes which identify
those material to stakeholders.
52
Cairn Energy PLC Annual Report and Accounts 2016
How we assess
material issues
One of our CR objectives this year was to
further improve the transparency of the
methodology used to identify our material
issues for the year. To do so we compiled
a list of 15 potentially material issues to
Cairn and our stakeholders based on
IOGP, UN Sustainable Development
Goals and GRI international reporting
requirements. Each of those 15 issues
has linked sub-issues each of which was
ranked to indicate its level of importance
to Cairn and to stakeholders (high,
significant, medium, low, insignificant).
The importance to Cairn used the latest
risk register and Cairn risk criteria. The
worst-case sub-issue linked to an issue
ranking was used as the overall ranking
for the issue as a whole.
The rankings for importance to
stakeholders were based on objective
criteria which include Cairn’s experiences
and communications with stakeholders
during the course of the year. In 2015
a cohort of stakeholders was used to
validate the stakeholder classifications;
this will be repeated every other year
based on specialist advice.
An external specialist 1 reviewed the
issues in 2016 and feedback from the
review of methodology and stakeholder
expectations was incorporated with
actions for improvement into our
CR Objectives.
The materiality process is discussed
in more detail on our website
www.cairnenergy.com/materiality
1
Julie McDowell, former head of Standard Life
Sustainability team.
Stakeholder Engagement
Delivering value for our stakeholders
is at the core of our approach to working
responsibly. Therefore understanding who
our stakeholders are and engaging with
them to understand what their concerns
and priorities are is important.
us to identify and assess issues amongst
our stakeholders and then address and
respond to them. We do this through
tailored engagement with specific
stakeholders, disclosure of information
and monitoring of stakeholder opinions
and actions.
We have well-structured stakeholder
engagement procedures in place at a
corporate and project level which enables
When considering a new project and
involvement in a country where we have
not worked previously, identifying our
Strategic Report Seven issues were found to be of high or significant
importance to both Cairn and stakeholders and
thereby deemed material. These issues are analysed
in detail in this Working Responsibly section.
How we assess
material issues
Materiality Matrix
We plot issues important to Cairn
and important to stakeholders on
a materiality matrix.
High materiality
Medium materiality
Low materiality
The 15 potentially material issues
appearing on the materiality matrix
are listed on page 54, grouped into the
four themes identified in our business
principles. This has changed some of
the issue titles from last year.
Compared to 2015 we have seen an
increasing emphasis on business ethics,
human rights, climate change and social
and economic benefits for our business
and stakeholders.
Economics and Funding
Employees
Health and Well-being
Communities
Security
Contractors and
Supply Chain
Human Rights
Social and
Economic Benefit
Major Accident Prevention
and Safety
Ethics, ABC
and Transparency
Equality and Diversity
Resource Use
Climate Change, Emissions
and Discharges
Biodiversity
n
r
i
a
C
o
t
e
c
n
a
t
r
o
p
m
I
h
g
H
i
t
n
a
c
i
f
i
n
g
S
i
i
m
u
d
e
M
w
o
L
t
n
a
c
i
f
i
n
g
i
s
n
I
Product Stewardship
Insignificant
Low
Medium
Significant
High
Importance to Stakeholders
stakeholders is one of our priorities and
we undertake a stakeholder identification
exercise. We draw on the knowledge of
our local staff, corporate staff and external
agencies, partners and consultants to
do this. Using this knowledge we then
develop a Public Consultation and
Disclosure Plan (PCDP). PCDPs identify
stakeholder concerns and issues, the
materiality of issues and the associated
risks to the business. This enables us to
identify actions to mitigate those risks
and this also forms part of the PCDP.
Stakeholder engagement plans are
bespoke to each project and regularly
updated to reflect changing stakeholders
and their concerns around a project.
Our stakeholder engagement model
follows the principles of ‘Materiality’,
‘Inclusivity’ and ‘Responsiveness’ as
defined in AccountAbility‘s AA1000
Accountability Principles Standard
(AA1000 APS). AccountAbility is a
global organisation providing solutions
to challenges in corporate responsibility
and sustainable development. This ensures
that we engage with internal and external
stakeholders, identify and assess our most
important CR issues, and address and
respond to them in a structured way.
53
Working Responsibly continued
Our Corporate Responsibility Priorities
15 potentially material issues
7 were found to be of high
or significant importance
The fifteen potentially material issues are listed below,
grouped into the four themes.
Business
Relationships
Economics
and Funding
– Funding
– Investment
– Reserves valuations
and capital expenditures
H
Contractors
and Supply Chain
– Culture and leadership
– Selection
– Competency, training and education
H
H
Ethics, ABC and
Transparency
– Principles, policies, CRMS
– Risk and material issues
– Strategy and operations
– Accountability and responsibility
– Advocacy and lobbying
– Cairn ABC practices
– Contractors and suppliers
– Government and authorities
– Whistleblowing
– Communications
– Remuneration
– Tax and payments to government
– Fines and prosecutions
– Non-operated joint ventures and
international investments
Society and
Communities
Social and
Economic Benefit
– Shared value
– Benefits and impacts
to communities
– Local content
– Social investment
– Government relations
Human Rights
– Working conditions/T&Cs
– Freedom of association
– Modern slavery/security
– Complicity
– Grievance
– Non-discrimination
Communities
– Local community
– Stakeholders
– Indigenous peoples
– Local labour
– Community health
– Cultural heritage
– Displacement
H
H
M
People
Environment
Major Accident
Prevention
and Safety
– Asset integrity
– Major accident prevention
– Major oil spill prevention
– Workplace safety
Health and
Well-being
– Workplace health
– Infectious diseases
– Well-being and health support
Security
– Office
– Personnel
– Local assets
– Travel
– Cyber security
Employees
– Culture and leadership
– Selection
– Succession
– Workforce planning
H
M
M
M
Equality
and Diversity
– Anti-discrimination
– Equal pay
– Equal opportunities and diversity
M
H
Climate Change,
Emissions and
Discharges
– Energy use and alternative sources
– GHGs
– Other emissions
– Flaring and venting
– Strategic carbon risk
– Discharges/disposals to
water and land
– Spills
– Reuse. recycling and waste
management
– Stranded assets
Biodiversity
– ESIA, environmental surveys
M
and ecosystem services
– Biodiversity action plans
Resource Use
– Water abstraction and use
– Local resources
– Materials
Product
Stewardship
– Oil and gas sales and impacts
M
L
Materiality significance (see page 53)
Key:
High
Medium
Low
54
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report
Business Relationships
Material issue 1 of 7: Economics and Funding
Maintaining CR standards
The sustained low oil price continues to be
one of our principal risks. This means that
the business remains focused on delivering
opportunities to cut costs across operations.
However, in pursuing cost reductions in this
environment we do not compromise our
commitment to working responsibly.
In Senegal we identified and implemented
initiatives during the year to reduce our
operational cost. These included extensive
assessment of rig and other contractors
to achieve the most cost-effective solution
for further exploration and appraisal of
our Senegal blocks. However, before
commercial bids were assessed, CR and
technical requirements had to be fulfilled.
Our joint venture partners in the North Sea,
EnQuest and Premier Oil, were also diligent
in delivering cost reductions on our Kraken
and Catcher projects by taking advantage
of improved contractor market conditions
all the while maintaining a focus on safe
delivery and working responsibly. We
monitor this through formal joint venture
meetings and special working groups,
promoting our business principles and
sharing lessons learned.
In September we opened a new supply
base in Dakar to meet our operational
needs in Senegal. This supply base, which
is developed to a UK regulatory standard,
could have been completed at a lesser cost
but at the expense of meeting the standards
we set for ourselves. Previously our supply
base arrangements were focused around a
number of storage yards and shared facilities
with associated road hazards, access and
handling issues. The new base not only
reduces safety and environmental risks
associated with our previous supply base
arrangements, but will also improve
equipment handling and save time,
ultimately being cost-effective.
28
Read more: Establishing a permanent facility,
P28 Cairn in Senegal
Evaluating new opportunities
We continue to assess new venture
opportunities within the context of our
existing financial commitments to our key
projects in Senegal and the North Sea and
in a low oil price environment which means
restricted funding is an issue for the oil and
gas industry as a whole. Some opportunities
may be financially attractive, but
unacceptable due to associated ethical,
safety or environmental concerns.
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Delivering exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Operational and project performance
Delay in Catcher and Kraken
production start-up schedule
Securing new venture opportunities
Sustained low oil and gas price
Access to internal or external funding
Political and fiscal uncertainties
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Strengthen link between CRMS
and business risk management
Improve CR risk register
Annual CRMS audit
Enhance CR content of Investment
Proposals and support new ventures
55
Working Responsibly continued
Our Corporate Responsibility Priorities continued
Business Relationships continued
Material issue 1 of 7: Economics and Funding continued
Evaluation process for new ventures
Through our CRMS we rigorously assess new
venture opportunities. As part of the Cairn
Operating Standards we develop Investment
Proposals (IPs) which identify and evaluate
the risks associated with the investment;
these risks include any CR related concerns.
All significant new venture projects require
Board approval and are considered relative
to the Group strategy and risk appetite. All IPs
submitted in 2016 included appropriate
assessment of CR considerations.
In 2016 we were
awarded operatorship
of one block and
non-operated
interests in additional
blocks in Norway,
which has stringent
HSE regulatory
requirements.
Using high standards
to secure opportunity
Investors continue to scrutinise not only
our financial position, but also our working
responsibly practices and we continue to
communicate how we achieve this and how
we manage CR and the benefits of doing
so. Our commitment to working responsibly,
and our strong track record in this area,
assists in retaining investment and securing
opportunities when considering a new
venture or licence application.
In 2016 we were awarded operatorship of
one block and non-operated interests in
additional blocks in Norway, which has
stringent HSE regulatory requirements. We
hold exploration interests in the Republic of
Ireland where as an oil and gas operator we
are required to meet the high environmental
management standards of the Oslo/Paris
Convention for the Protection of the Marine
Environment of the North-East Atlantic
(OSPAR) as a licence to operate prerequisite,
and under which we retained our verification
(to OSPAR recommendation 2003/5) in 2016.
Stena drillMAX drill ship contracted for Cairn’s
2017 drilling campaign offshore Senegal.
56
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Business Relationships continued
Material issue 2 of 7: Contractors and Supply Chain
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Deliver exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Health, safety, environment
and security
Operational and project
performance
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Run contractor workshops
in Senegal with themes including
Life-Saving Rules and MSA
Support other programmes
planned across the Group
Our business is highly reliant on the use of
specialist contractors and suppliers, typically
not retained in house due to variation in
demand and high cost, and as such they
contribute to the delivery of our strategy.
In 2016 61% of our workforce were contractor
personnel amounting to 64% of hours
worked. Good management of contractors
and suppliers, and ensuring they meet our
high standards of responsible working
practices, is therefore critical in maintaining
those standards. Where we can we seek to
maximise local participation in the workforce
and supply chain.
Wherever we operate we look to work
with local companies as part of our
commitment to delivering value for
our stakeholders. This commitment to
maximising local participation where possible
is made without compromising our high
standards of CR. Our recruitment policies
seek to employ personnel local to our host
countries where they are suitably qualified
and we encourage our contractors to do
the same. We also give preference to local
suppliers through our contracting and
procurement policies and procedures where
they are able to meet our CR requirements.
In addition, we are looking to build local
capacity through partnership with local
organisations and academic institutions (see
also Social and Economic Benefit). Our
stakeholders continue to take an interest in
opportunities for local contracting services
and we anticipate that this interest will grow in
the coming years. We are pleased to be able
to report, at these early stages of the Senegal
project, that local personnel in Senegal
represented 22% of our workforce.
Rigorous selection process
We continue to consider responsible
working in the entire contracting lifecycle
from selection and management of our
contractors to applying lessons learned in
new programmes. In 2016 we concluded
the second phase of our exploration and
appraisal programme in Senegal and
planning commenced for the third phase.
Our contractor selection process was
reviewed at the end of phase two and
lessons learned were applied by further
embedding CR matters, including human
rights issues (see also Human Rights), as
pre-qualifying requirements for all key
contractors. Based on IOGP good practice
the phase three contractor assessment
process consisted of initial review against key
criteria and the issue of a CR questionnaire
alongside invitations to tender (ITTs).
Returned ITTs were assessed to determine
whether our standards were met. Contractors
which passed this assessment progressed
to the next round and were subject to further
follow-up including site visits to verify
responses before further assessment
and selection.
57
Working Responsibly continued
Our Corporate Responsibility Priorities continued
Business Relationships continued
Material issue 2 of 7: Contractors and Supply Chain continued
Effective management and control
We commissioned independent specialists
to audit rigs, vessels and aviation before we
contracted them for the phase three Senegal
programme to ensure effective management
was in place before operations commenced
in January 2017. Some operational activities
are managed directly by Cairn whereas
others are the responsibility of the contractor,
although the contractor remains accountable
to Cairn at all times. For example rig
contractors perform drilling activities under
agreed procedures whereas Cairn retains
assurance processes including, reporting,
performance measures, audits and reviews.
The allocation of duties and responsibilities
is part of our Project Delivery Process and
bridging arrangements. These are in place
to ensure our CR management systems and
those of our contractors remain effective
and clarify which party maintains primacy
over an activity.
We continue to encourage our contractors
where performance can be improved
including proactive engagement and
follow-up of incidents and issues. This
included a comprehensive review of
accident and emergency incidents during
the construction of the Catcher and Kraken
FPSO units. Findings from this review were
shared with the Board, which allowed lessons
to be learned and shared across the Group.
Health and safety triangles, Senegal operations
October 2015 – June 2016
Number of preventative
health and safety
actions undertaken
36
HSE Audits
44
Management Visits
597
Safety Drills & Training
8,881
Job Risk Assessments | Time Outs for Safety | Toolbox Talks
Number of health
and safety incidents
that occurred
53,379
Safety Observations
0
Fatalities
1
Lost Work Day Case
0
Restricted Work Day Cases | Medical Treatment Cases
0
First Aid Cases
35
Near Misses
58
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Business Relationships continued
Material issue 3 of 7: Ethics, Anti-bribery and Corruption and Transparency
Our ability to do business relies on
developing trust with our stakeholders
including investors, governments, business
partners, suppliers and broader society. This
means we work in an ethical and transparent
way and take a zero-tolerance approach to
bribery and corruption. We are committed
to ensure that those who work for us or on
our behalf do not, in any way, offer to give or
receive bribes. Moreover this commitment
extends to being transparent in all our
payments. We are also obliged under UK
legislation to implement anti-bribery and
corruption (ABC) mechanisms. This approach
is defined in our values and business
principles to which we hold ourselves
accountable, and within the procedures
we adopt and the people who work
on our behalf as described on pages
10 and 11 (Our Culture).
10
Read more: Our Culture
on P10-11
Code of Business Ethics
We have a Group Code of Business Ethics
(the Code), which describes our standards
of business ethics and conduct expected of
everyone who carries out work for us on our
behalf, including contractors. The Code is
regularly updated along with our Business
Principles, which identify the behaviours we
expect from our personnel. These were both
updated at the end of 2016 and reissued.
Application of the Code throughout the
business is ensured by the highest level of
management, the Board. The Board’s Audit
Committee is responsible for appointing an
internal auditor to regularly conduct internal
audits of Cairn’s compliance with the Code.
All levels of management at Cairn, including
executive and non-executive directors,
regional directors, general managers and
heads of departments, are responsible for
ensuring consistent application of the Code.
All personnel must abide by the Code and
promote its use in all business activities. All
employees are required to sign up to the
Code as part of their employment conditions.
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Deliver exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Stakeholder reaction
to operations
Fraud, bribery and corruption
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Continue to improve our
Code of Business Ethics
and Business Principles
Enhance the gifts and
hospitality register
ABC training targeted
at high risk areas
Simon Thomson, Chief Executive, and Ian Tyler, Chairman, on board Ocean Rig
Athena drill ship used during Cairn’s 2015/2016 Senegal drilling campaign.
59
Working Responsibly continued
Our Corporate Responsibility Priorities continued
Business Relationships continued
Material issue 3 of 7: Ethics, Anti-bribery and Corruption and Transparency continued
The Code includes our commitments to:
• Legal and regulatory compliance;
• A zero-tolerance approach to bribery
and corruption;
• Respect human rights;
• Not make contributions to political parties,
organisations or individuals engaged in
politics or political lobbying, as a way
of obtaining advantage in business;
• Provide a workplace free from
discrimination and harassment; and
• Financial integrity and reporting.
Through our whistleblowing procedure,
employees are encouraged to report any
incident they believe may compromise our
Code of Business Ethics.
Read more information at
www.cairnenergy.com/responsibility
Measuring performance
0
Incidents of non-compliance
with the Code
0
Employee dismissals for non-compliance
with the Code
Anti-bribery and corruption
As part of our ongoing commitment to
establishing a culture of zero tolerance to
bribery and corruption, in 2016 we required
all personnel, including contractors, to
complete a bespoke e-learning module
to ensure their continued understanding
and application of our anti-bribery and
corruption policies and procedures.
Read more information at
www.cairnenergy.com/responsibility/ABC
Management System
Measuring performance
90.6%
Employees trained in Cairn’s anti-corruption
policies and procedures
Monitoring and responding
to ethical Issues
Throughout the year we tracked emerging
ethical issues of importance to our business
and the industry by monitoring: emerging
legislation; guidance and agreements; press
commentary; stakeholder enquiries; and
through focused stakeholder engagement.
In 2016 we reviewed our potential
contribution towards the UN Sustainable
Development Goals (see Sharing benefits
in Senegal p30), our readiness to report
against The Modern Slavery Act 2015 (see
Human Rights p64) and the implications
of the COP21 Climate Change agreement
(see Climate Change, Emissions and
Discharges p69).
Western Sahara
In 2016 a key focus of stakeholder enquiries
and activity was our involvement in Western
Sahara, although in 2016 we had no active
operations in the region. We hold a 20%
non-operated interest in the Boujdour
Maritime contract area offshore Western
Sahara with a commitment for 3D seismic to
be acquired by 2020 which will be conducted
by the operating partner, Kosmos Energy.
In June 2016, the Norway Government Global
Pension Fund announced its decision to
exclude both Cairn and Kosmos Energy from
their fund. The decision on exclusion was
made on the basis of the recommendation of
the Council on Ethics. In October 2016, BMO
Global Asset Management (an investment
fund management organisation) decided,
on the basis of the same report, to exclude
Cairn from the investible universe of BMO’s
Responsible Fund range.
Western Sahara has been classified since
1961 as a ‘Non-Self-Governing Territory’, by
the United Nations. Both Morocco and the
Saharawi Arab Democratic Republic claim
Western Sahara as their sovereign territory.
Cairn believes that hydrocarbon exploration
offshore of the territory is consistent with
international law. Resolution of the territorial
status is not required for exploration as the
UN 2002 Legal Opinion views Morocco as
the territory’s administering authority and
as such it can issue permits for resource
development. The UN continues to mediate
a process to resolve the dispute between
Morocco and the Saharawi Arab Democratic
Republic. In 2013, Morocco’s Economic,
Social and Environmental Council, an
independent constitutional body, launched
Ocean Rig Athena drill ship used during Cairn’s
2015/2016 Senegal drilling campaign.
60
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report
In 2016 we required all personnel,
including contractors, to complete a
bespoke e-learning module to ensure
their continued understanding and
application of our anti-bribery and
corruption policies and procedures.
intensive consultations in the region on
how to properly manage the development
of the region. Initial oil and gas industry
activities in the area are focused solely on
exploration and do not involve the removal of
resources. The region remains economically
underdeveloped. Cairn believes that the
exploration for hydrocarbon resources will
enhance economic development prospects
for all people of the territory, with the
possibility of greater private sector
investment and job creation.
Responsible resource development
can proceed in parallel with the UN-led
discussions on the region’s future and
the 2002 UN Legal Opinion provides for
resource development to co-exist with
the political process, as long as any such
resource development is conducted for
the benefit of the people of the territory.
The Joint Declaration of Principles signed
by Kosmos Energy and the Government
of Morocco states that local populations
will benefit efficiently, effectively and
transparently from production of
hydrocarbons if commercially viable
reserves are discovered.
Read more information at
www.cairnenergy.com/responsibility
Transparency
Cairn is committed to being open and
transparent in all aspects of its business
and this includes in its communications
with stakeholders and in its reporting.
Communicating with shareholders
Shareholders are important stakeholders,
and they are key to our funding position,
consequently we invest significant resource
in effective shareholder communications.
We respond promptly to correspondence
from shareholders and our website
www.cairnenergy.com includes a
dedicated investor relations section.
In order to ensure that the Board maintains
an up-to-date understanding of the views
of major shareholders, there is a focused
and structured programme of regular
shareholder dialogue. The Board is kept
informed of any issues raised by
shareholders through Board papers
where shareholder concern is a standing
agenda item, through feedback at pre-
Board meetings and following significant
announcements. In addition, we maintain an
investor relations database, which details all
meetings between Cairn and its investors.
Transparent reporting
We are committed to responsible and
transparent reporting and have been
recognised for the quality of our work in this
area, being nominated in 2014 and 2015 by
the Investor Relations Society in the Best
Annual Report category among FTSE 250
companies and in 2015 shortlisted for Best
Audit and Risk disclosure in the FTSE 250
at the Institute of Chartered Secretaries
and Administrator (CSA) Excellence in
Governance Awards. In 2016, our 2015
Annual Report was highly commended in
the PwC Building Trust in Corporate Report
Awards for ‘excellence in reporting in the
FTSE 250’. We apply global standards to
ensure our reporting is of the highest quality.
We use the Global Reporting Initiative 1
Sustainability Reporting Standards at a
‘Core’ level. We follow the content principles
of materiality, stakeholder inclusiveness,
sustainability context and completeness;
and its quality principles of balance,
comparability, accuracy, timeliness, clarity
and reliability. See our Responsibility
webpages.
We received a series of questions from
FRC in response to the ClientEarth complaint
in late 2016 alleging we had failed to
adequately disclose climate change risks
to our investors along with routine questions
in other areas. We responded in full to all FRC
questions in January 2017.
In terms of transparency on climate change
risk in 2015 we judged the risk to Cairn
business as ‘medium’ based on exposures
across the portfolio. This included
consideration of the absence of production,
fully funded nature of non-operated
developments and economic and social
benefit to our countries of operation such as
Senegal, in combination with the status of
external developments on climate change.
We also acknowledged the rising importance
of climate change to some of our
stakeholders as ‘significant’ and rising given
the outcome of COP21. Our position was
ground-truthed with a cohort of stakeholders,
as reported in 2015, and the overall
assessment of climate change in terms of CR
materiality was rated as ‘medium’ based on
our assessment criteria. Consequently, we
believe that at the close of 2015 the potential
impact of climate change on the Company
was fairly considered and appropriately
represented in our 2015 Annual Report.
We normally report on climate change
in the working responsibly section of
our Annual Report and on our website
www.cairnenergy.com/responsibility. This
year is no exception and assessment of risk
and CR materiality in 2016 is reported in the
section on Climate Change, Emissions and
Discharges on page 69.
Payments to governments
Cairn supports transparency around how
revenues from the natural resources extractive
industry are used and the transparency of
tax contributions and other payments to
governments by oil and gas companies. Cairn
reports payments to governments annually,
which are published in its Annual Reports,
in compliance with EU legislation and as part
of its voluntary commitment to the Extractive
Industries Transparency Initiative (EITI). The
EITI is a voluntary international initiative which
governments commit to. It requires companies
to publish what they pay to governments, and
governments to publish what they receive
from companies. We became a participating
company of the EITI in September 2013.
As a listed company operating within the
European Union, the EU Accounting Directive
applies to Cairn and requires companies to
disclose certain payments to governments
on a country-by-country basis. Our initial
report in this area was issued in July 2016.
1 GRI is an international independent organisation
that helps businesses, governments and other
organisations understand and communicate the
impact of business on critical sustainability issues
such as climate change, human rights, corruption
and many others.
61
Working Responsibly continued
Our Corporate Responsibility Priorities continued
Society and Communities
Material issue 4 of 7: Social & Economic Benefit
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Delivering exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Stakeholder reaction
to operations
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Continue to develop our impact
benefit plan in Senegal
Standardise our approach to impact
benefit planning across the group
and linkage to UN SDG’s
Delivering social and economic benefit
Our strategy is to deliver value for our
stakeholders through the oil and gas life
cycle. This means generating social and
economic benefit through our presence in
any given area. Our stakeholders are a broad
group and there are many ways in which we
can deliver value for them, both economic
and non-economic. Our key stakeholders
associated with a project include host
governments which grant our oil and
gas licences and regulate our activities,
communities affected by our operations
and those who work on our behalf including
personnel and contractors.
The economic contributions which can
be associated with our activities include
the following:
• Affordable energy and revenue for
local populations through the discovery,
appraisal and delivery of oil and gas to
meet energy demands
• Distribution of operating expenditure
through exploration and appraisal phases
of a project and through payments to our
contractors and suppliers including locally
and internationally based companies
• De-risking state oil company investments
by paying all exploration costs on
behalf of state oil companies who
are only required to invest if and
when a commercial discovery
is confirmed
• Payments to our workforce, including
local employees
• Payments to government which may
include licence fees, taxes, duties and
training allowances
Investment in local institutional and
community development
•
In addition we make non-economic
contributions which can lead to local
benefits and include:
• Capacity building amongst our
contractors and suppliers, in particular
amongst local companies or individuals
to help them meet the technical, HSE and
CR standards required to work with us
• Training and development of our
local workforce
• Sharing of knowledge (e.g. environmental,
geological) with national and local bodies
for the benefit of local communities and
national authorities
• Capacity building within government
institutions to develop understanding and
knowledge of the oil and gas industry
• Upholding high standards of governance,
ethics and anti-corruption through, for
example, our commitment to the UN
Global Compact and the Extractive
Industries Transparency Initiative (EITI).
Read more information at
www.cairnenergy.com/responsibility
In 2015, world leaders committed to the
UN Sustainable Development Goals (SDGs)
which set out 17 prioritised areas including
ending poverty, ensuring access to energy,
protection of ecosystems, addressing climate
change and responsible working practices.
We recognise a responsibility to look at our
activities to identify both where our business
adds value for society and where we may
need to mitigate for potential negative
impacts across environmental, social and
governance related issues. In June 2016, we
commissioned a review based on the SDGs
to identify where our activities could impact
on or support any of these goals. This helped
to inform our approach to delivering benefits
for our stakeholders in Senegal. See Sharing
Benefits in Senegal on page 30.
62
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Our stakeholders are a broad group
and there are many ways in which
we can deliver value for them.
During 2016, we continued to support social
investment programmes, which are part of
the Impact Benefit Plan for Senegal. Those
programmes included:
• Promoting understanding and awareness
of the oil and gas industry to Senegalese
institutions through awareness seminars,
English language training and support
to national emergency planning
• Developing English language skills and
awareness of the oil and gas industry
among students of the University of Dakar
• Developing entrepreneurship in young
people through sponsorship of the Great
Entrepreneur Competition, an initiative
of the British Council in Dakar
• Supporting a previous winner of the Great
Entrepreneur Competition to establish
a plastics recycling business through
provision of equipment and mentoring
• Supporting a women-led microfinance
project in rural communities by partnering
with an international NGO called The
Hunger Project.
More information about our Social
Investment Programme is available at
www.cairnenergy.com/responsibility
Contractors
& Suppliers
Workforce
Communities
Government
Shareholders
Economic Contributions 2016
Capital
Spend
US$428.4 million 1
Staff
Costs
US$38.6 million 2
Social
Investment
US$137,839
Payments
to Government
US$25.7 million 3
Value
Growth
Non-economic Contributions 2016
Capacity
Building
25 trained
Training and
Development
36 average hours
/employee
Knowledge
Sharing
Capacity
Building
162 trained
EITI Support
Notes:
1 Net share across the Group.
2 Excludes share-based payment charges which are non-cash.
3 Refunds from governments, in 2016, were US$40.4 million.
63
Working Responsibly continued
Our Corporate Responsibility Priorities continued
Society and Communities continued
Material issue 5 of 7: Human Rights
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Deliver exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Stakeholder reaction
to operations
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Further develop MSA safeguards
Deliver MSA training
Develop MSA statement for 2017
Respecting human rights is part of our
commitment to delivering value for
all stakeholders. We are committed to
respecting human rights in all our activities
and this commitment is embedded in
our Business Principles and includes our
support for the United Nations’ Universal
Declaration of Human Rights. Human rights
are particularly important to certain of our
key stakeholders including our employees
and communities in which we operate.
Our rights aware approach
In order to ensure respect for human
rights in all our activities we have a human
rights policy which is integrated within
our Corporate Social Responsibility (CSR)
Policy. It requires us to respect and support
internationally recognised human rights
standards; identify, assess and manage
human rights risks, and; ensure that
appropriate mechanisms are in place
for those affected by our operations
to raise and address grievances.
Our Corporate Responsibility Standard
Operating Procedures and Human
Rights Guidelines clarify what needs to be
done, and the tools available to support
implementation of our human rights policy
across the business.
Over the years we have implemented
a ‘rights aware approach’ which means
identifying potential human rights issues in
our activities, assessing if we have influence
over the issues and defining appropriate
action to be taken by the business.
Before entering a new country as an operator
we apply human rights screening as part of
our comprehensive due diligence process.
Before operating activities we assess human
rights impacts as part of an Environmental
and Social Impact Assessment (ESIA) or
where necessary, we undertake a Human
Rights Impact Assessment (HRIA). If,
following these assessments, any potential
human rights issues are identified we
consider the most effective way to manage
them through engagement with potentially
affected communities. When considering a
non-operated joint venture, we identify and
check any human rights issues and establish
any risks requiring management by the
operator before proceeding.
Respect for our employees
We believe that by promoting a work
environment in which people are treated
with dignity and respect, we can maintain
a loyal, motivated and effective workforce.
This includes ensuring fair and just rewards
for employees’ contributions and supporting
opportunities for professional development
(see Human Resources page 72).
We also have policies in place covering
recruitment, grievance, harassment and
equal opportunities, which seek to ensure
that all current and potential employees are
treated fairly. We expect our contractors to
treat their employees in the same way.
We respect the rights of freedom of
association and collective bargaining.
Although we do not have any employees
who are unionised or have any collective
agreements in place, we do consult our
workforce on organisational issues on a
regular basis and through a variety of means.
We respect those contract employees who
work with us and their membership of unions
which we consider during our contracting
activities (see Our culture on page 10).
In 2016 we undertook a revision of
our People Management Policies
and Procedures and we aim to roll
out the updated requirements in 2017.
(See also Human Resources page 72).
64
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Employees or contractors can raise
any concerns they might have around
human rights, and indeed any other
issues, through a variety of means
including the Company’s whistle-
blowing procedure.
Respect for communities
A fundamental respect for human rights
is critical to maintaining good working
relationships with the local communities with
which we interact. Our CRMS sets out our
approach to managing potential community
impacts in accordance with the International
Finance Corporation’s (IFC) Performance
Standard 5 1, requiring the development of
action plans in cases where activities could
lead to economic or physical displacement.
Our operated and non-operated assets
are principally based offshore. As such,
the potential for our activities to impact
negatively on the human rights of local
communities is limited. In 2016, our operated
drilling operations were carried out offshore
Senegal, with relatively limited onshore
support operations in established ports.
No physical displacement of individuals,
or any identified economic displacement
of individuals or communities resulted from
our operations.
1
IFC Environmental and Social Performance
Standard 5 – Land Acquisition and Involuntary
Resettlement. January 1, 2012.
However, we recognised the potential for our
activities to limit the ability of local fishermen
to exploit the waters in which we work. We
worked with local fishermen to minimise
disruption through communication of our
day-to-day and forward operations and
implemented a mechanism whereby they
were able to provide us with feedback. In
addition, and as part of the development
of our Impact Benefit Plan in Senegal (see
Social and Economic Benefit page 62),
we continue to work with an international
NGO in Senegal to engage with and identify
specific challenges facing fishermen along
the coastal areas closest to our operations.
Grievances
Occasionally, during the lifetime of a
project, unforeseeable human rights or other
stakeholder issues can arise. We provide and
promote a ‘grievance procedure’ by which
individuals or representatives of communities
affected by our operations can present their
grievances and to which we aim to respond
within 30 days.
Team at Cairn supply
base in Dakar port.
Employees or contractors can also raise any
concerns they might have around human
rights, and indeed any other issues, through
a variety of means including the Company’s
whistleblowing procedure.
In 2016, there were no reported grievances
or breaches reported through the whistle-
blowing procedure.
Modern Slavery Act 2015
In 2016 the Modern Slavery Act came into
force in the UK. This Act requires companies
with turnover greater than £36 million to
produce a statement of their assessment and
management of their supply chain in respect
of forced, compulsory, bonded and child
labour or any form of human trafficking.
Although Cairn was not required, under the
Act’s turnover qualification level, to produce a
statement in 2016, preparations commenced
to better understand the objectives and
implications of the Act. We analysed our
current Corporate Social Responsibility policy
and procedures against the requirements
of the Act to identify any discrepancies.
Although we do not foresee any major
risks in this area it has been discussed by
the board and our CSR policy adjusted
www.cairnenergy.com/responsibility
We have also started work to better assess
any vulnerable areas within our supply
chain and will implement any required
improvements in 2017.
Measuring performance
0
Total human rights grievances
and incidents of discrimination
More information about our Approach to
protecting Human Rights is available at
www.cairnenergy.com/responsibility
65
Working Responsibly continued
Our Corporate Responsibility Priorities continued
People
Material issue 6 of 7: Major Accident Prevention and Safety
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Delivering exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Health, safety, environment
and security
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Implement safety campaigns
on Life-Saving Rules
Further train our crisis and
emergency personnel, improve
plans and perform exercises
Prevention
Preventing major accidents and ensuring that
our assets are fit to carry out their intended
purpose, in this case preventing escape of
fluids or other hazardous substances from
wells and equipment, remains a material
issue industry wide. We ensure effective
engineering control barriers are in place and
maintain our capability to respond in the
event of a major accident or emergency.
As in previous years our focus remains on
major accident risk avoidance and prevention,
a key part of which includes the assurance
of well design and contractor competence.
The assurance process is detailed in our
Operating Standards and in the Project
Delivery Process.
Project Delivery Process
Our Project Delivery Process (PDP) is the
well-established method by which we
can ensure we understand and can control
risks at key stages in our projects. During
the oil and gas life cycle the PDP helps
us maintain focus on what is important
to the Company and apply good practice
through the application of local and
international standards.
We use the Cairn PDP to manage CR issues
and apply these standards for all operated
projects under our control. Specific project
types (e.g. seismic, drilling) must meet
defined criteria at designated ‘stage gates’.
Each stage gate has defined actions and
deliverables, which must be available
and signed off by a ‘gatekeeper’ who is
independent of the project. In this way,
project integrity and performance are
reviewed throughout the process and, where
they deviate from standards, corrective
actions are identified and implemented.
Emergency and oil spill
response preparedness
Cairn continues to maintain emergency
and oil spill response preparedness over
a wide range of scenarios which could
occur. Oil spill in particular remains a
high-profile stakeholder concern, and
we remain committed to applying the
IPIECA-IOGP Joint Industry Practice 1
which continued to issue good practice
guides in 2016. These are described in
our Annual Report and Accounts 2015 on
page 56 and the Oil Spill Resources website
http://www.oilspillresponseproject.org/.
This initiative is recognised across
the industry as the most effective and
up-to-date response guidance on oil spill.
1 The IPIECA-IOGP Oil Spill Response JIP (OSR-JIP)
was set up to implement learning opportunities
in respect of oil spill preparedness and response
following the April 2010 well control incident in the
Gulf of Mexico. As part of this effort, the OSR-JIP
has produced more than 20 good practice guides.
IPIECA is the global oil and gas industry association
for environmental and social issues.
Project Delivery Process
Why
Identify
How
Assess
Ready
Define
Finished
Execute
Learn
Evaluate
Why are we
doing this
project?
How could
we do this
project?
Are we
ready to
sanction
the work?
Have we
finished all
we needed
to do?
What do
we learn
and achieve?
66
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Our focus remains on major
accident risk avoidance
and prevention.
Engaging with partners
We continued to work closely with our joint
venture partners, in a non-operator capacity,
on our Kraken and Catcher North Sea
development projects and progressing them
towards first oil and cash flow in 2017. This
included working closely with the operators
of both projects on the development of
their Safety Cases. These document and
demonstrate that safety and environmental
critical risks of any installation (production
platform or rig) have been reduced to As
Low As Reasonably Practicable (ALARP).
All fixed and mobile installations in the North
Sea must hold a Safety Case, a requirement
of the 2015 UK Offshore Installation (Offshore
Safety Directive) (Safety Case) Regulations,
which came into force following the
implementation of the EU Offshore
Safety Directive in 2015.
UK authorities required our partners in
Kraken to submit a Safety Case. As a prudent
partner we supported and reviewed the
development of the Safety Case information
and document to assure ourselves, of
progress and completion, and also to identify
lessons learned. Lessons learned from the
process were shared with our partners for
development of the Safety Case for the
Catcher development. Such lessons learned
will also prove helpful should an FPSO
be the solution of choice, subject to
Senegalese legislation, for a development
scenario in Senegal.
We continued to progress development
of the management systems for our other
operated and non-operated activities in
the UK and Norway with ongoing dialogue
with Norwegian regulators who require
that non-operators assure themselves
of the adequacy of their partners’
operating standards.
On board the Ocean Rig Athena drill ship used during
Cairn’s 2015/2016 Senegal drilling campaign.
67
Changes to response capability
In 2016 we completed the second phase
of our exploration and appraisal drilling
programme in Senegal and commenced
planning for the third phase. With a change
in contracting arrangements for rigs, vessels
and aviation, we required revision of our
emergency response arrangements. This
included increasing local capability in our
Dakar office by improving the management
of our Senegal Incident Management Team
(IMT) and also improving the management of
our Edinburgh-based Crisis and Emergency
Response Team (CERT). We revised our
Senegal Emergency Response and Oil Spill
Contingency Plans and also made revisions
to a number of documents previously
submitted to Senegal regulators including:
Environmental and Social Impact
Assessment; hazard study; hazardous
installation document; and, emergency plan
description. In the Dakar office we have an
Emergency Co-ordination Centre from which
the IMT operates; this centre was refitted
to improve communications, including
communication with our new supply base
in Dakar and head office in Edinburgh, and
improved communications technology.
Measuring performance
4 spills
totalling
167 litres
Oil/fuel spills in 2016
We continued to run CERT and IMT exercises
for various emergency scenarios during
the year increasing the range of potential
situations to which our personnel may be
exposed. Prior to commencing the third
phase of our activities in Senegal the IMT
personnel were given role specific training,
including desk-top training and a scenario-
based exercise involving the drilling rig
and the CERT. Our supply base personnel
and our vessel and helicopter crews were
also given specialist training for oil spill
management purposes.
Working Responsibly continued
Our Corporate Responsibility Priorities continued
People continued
Material issue 6 of 7: Major Accident Prevention and Safety continued
Occupational safety
Management of occupational safety,
which refers to the management of day-
to-day safety hazards, uses a number of
mechanisms to promote the implementation
and effectiveness of working procedures.
This includes management visits, audits,
permit to work, toolbox talks, safety drills
and training which are monitored through
our leading safety indicators.
The lagging data below shows we
experienced a Lost Time Injury 1 in which
a member of our Senegal supply base
contract crew suffered damage to three
fingers as a result of entrapment during pipe
handling in April. A thorough investigation
was completed and findings were discussed
by the Board in May alongside incidents
suffered in non-operated assets and in the
industry as a whole. Our new supply base
operations have been designed to reduce
occupational safety risks (e.g. lifting) based
on industry good practice and lessons learnt
from our operations at our previous supply
base. (see Establishing a permanent facility
on page 28). As part of this revision we
placed emphasis on application of the IOGP
Life-Saving Rules and in 2017 intend to hold
focused sessions on application and auditing.
See also Our culture on pages 10 and 11.
Our web pages discuss Health
and Well-Being; Security; Equality
& Diversity, and Employees
www.cairnenergy.com/responsibility
Lost Time Injury Frequency (LTIF)
(Lost time injuries per million hours worked)
4.0
3.0
2.0
1.0
0
2.52
1.04
0.48
0.45
0.00
0.65
0.36
0.00
0.29
n/a
2012
2013
2014
2015
2016
Cairn total for employees and contractors
IOGP benchmark
Total Recordable Injury Rate (TRIR)
(Total recordable injuries per million hours
worked)
8.0
6.0
4.0
5.04
3.88
2.0
1.74
1.60
1.54
0.00
1.21
1.04
0.00
n/a
0
2012
2013
2014
2015
2016
Cairn total for employees and contractors
IOGP benchmark
Notes:
IOGP is the International Association of Oil and
Gas Producers. We have included overall IOGP
benchmark figures (average of onshore and offshore
for employees and contractors). IOGP benchmark
figures are not yet available for 2016.
1 A fatal injury or any work related injury, which
results in a person being unfit for work on any day
after the day of occurrence of the occupational
injury. ‘Any day’ includes rest days, weekend days,
leave days, public holidays, or days after ceasing
employment (IOGP).
Cairn TRIR and LTIF statistics can be higher than the
IOGP benchmark after only one incident, or a small
number of incidents, because our exploration activities
often last for only a short time period, so there are
relatively few hours worked compared with on-going
production and other long term operations.
68
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Environment
Material issue 7 of 7: Climate Change, Emissions and Discharges
Success in this area directly contributes
to deliver against the following
Strategic Objectives
Shown in bold
Delivering exploration
and appraisal success
Portfolio management
Deliver operational excellence
Maintain licence to operate
Deliver a sustainable business
4
Read more: Business Model and Strategy
on P4-5
These issues have the potential to
impact our mitigation of these
Principal Risks
Shown below
Health, safety, environment
and security
Operational and project performance
41
Read more: Risk Management
on P41-47
Our 2017 plans to manage this material
issue are set out in these 2017
CR Objectives
Provide baseline work and impact
assessment for other blocks in
our Senegal portfolio
Support environmental work
in other assets in support of
applications and activities
Continue to track risks arising
from Climate Change treaties
and legislation including COP21
and COP22
Climate change review
Our industry as a whole recognises the
potential risks as global energy transitions
to a less carbon intense economy. This
includes issues such as the potential for:
future restriction of funding shareholder
position and, stranded assets. We also
recognise that balancing the need for
energy and reducing GHG emissions will
require efficient use of energy and the full
utilisation of both conventional and innovative
sources of energy into the foreseeable future,
particularly if this is to remain affordable and
accessible in developed and developing
countries. Other global factors too remain
important in relation to our industry including
growing demand for energy and provision
of energy security in individual countries.
The International Energy Agency (IEA) World
Energy Outlook 2016 considers a number of
transition scenarios to a low carbon economy,
the most challenging of which (IEA 450)
restricts global temperature rise to 1.5°C.
In this instance nearly 60% of the power
generated in 2040 is projected to come from
renewables, almost half of this from wind and
solar photovoltaics. Even in this scenario, IEA
considers there to be ‘no reason to assume
widespread stranding of upstream oil assets,
as long as governments give clear signals
of their intent and pursue consistent policies
to that end’. IEA goes on to indicate that
‘Investment in developing new upstream
projects is an important component of a
least-cost transition, as the decline in output
from existing fields is much larger than the
anticipated fall in demand’.
One of our 2016 CR Objectives was to further
examine the implications arising from the UN
Intergovernmental Panel on Climate Change
(IPCC) Conference of the Parties which took
place in Paris at the end of 2015 as described
in our 2015 Annual Report and Accounts.
We have followed the progress of ratification
during 2016 by major greenhouse gas
emitting countries such as the USA and
China, among others, and we recognise
that climate change issues present potential
risks to our future activities. In 2016 we
conducted a review to better understand
those potential risks.
This included a review of the Intended
Nationally Determined Contribution (INDC) 1
reports for all locations in our portfolio.
Potential strategic issues include emissions
control restrictions (e.g. trading and
permitting, levies), potential for stranded
assets, securing access to finance, licence
to operate and adaptation by countries and
communities (e.g. due to rising sea levels,
or change in environmental conditions
affecting communities) to the impact from
climate change. Our review was presented
to the Board in September and actions
for inclusion in our 2017 CR Objectives
were identified. Climate change in the
context of the oil and gas industry is further
discussed in the Industry Overview section
of this report (pages 12 and 13). Cairn
continues to track risk in all locations in which
we operate including climate change and
believes that for the foreseeable future oil
and gas will be important in the energy mix
to meet demand and of particular benefit for
wealth generation and delivery of affordable
energy if managed in an ethical manner.
We acknowledge the rising importance of
climate change to some of our stakeholders
and, in 2016, we have assessed this as ‘high’
within our CR materiality assessment (see
Materiality matrix page 53). This year,
we have continued to judge the risk to the
Cairn Business from climate change as
‘medium’ based on exposures across the
portfolio, which cover mature basins and
developing locations.
1 Countries across the globe adopted a historic
international climate agreement at the UN
Framework Convention on Climate Change
(UNFCCC) Conference of the Parties (COP21)
in Paris in December 2015. In anticipation of
this moment, countries publicly outlined what
post-2020 climate actions they intended to take
under the new international agreement, known as
their Intended Nationally Determined Contributions
(INDCs). The climate actions communicated in
these INDCs largely determine whether the
world achieves the long-term goals of the Paris
Agreement: to hold the increase in global average
temperature to well below 2°C, to pursue efforts
to limit the increase to 1.5°C, and to achieve net
zero emissions in the second half of this century.
69
Working Responsibly continued
Our Corporate Responsibility Priorities continued
Environment continued
Material issue 7 of 7: Climate Change, Emissions and Discharges continued
are unlikely to be a significant issue in respect
of climate change alone. There are likely to
be more significant issues relating to cost
of delivery of a project in remote or poor
infrastructure areas affecting the overall
value of the project.
At the end of 2016 our principal asset of this
type is the Senegal appraisal and exploration
project. The project is still relatively early in
the value chain but has substantial potential
both economically and socially for Senegal.
Development and delivery will be less than
10 years and in the medium term the climate
change risks relating to investment, stranded
assets and carbon cost are considered low.
This is due to the need for development and
affordable reliable energy in Senegal linked
to its status as a ‘United Nations Least
Developed Country’.
In 2016 we reviewed the potential risks,
status under the Kyoto Protocol and the
Intended National Determined Contributions
(INDCs) submitted as part of COP21 in
developing locations in which we have an
interest such as Senegal. Senegal aims to
generate income to improve infrastructure
and deliver benefits to communities and
society. The Senegal National Committee
on Climate Change has identified priorities
such as the energy sector describing
mitigation and adaption aspects from a
climate change perspective. Key actions
identified are replacement of solid fuels,
rural electrification, use of renewable energy
sources and infrastructure improvement in
particular. A successful oil and gas industry
could assist in generating significant income,
which could aid country development,
provide affordable energy and inward
investment in the medium term, and reduce
reliance on solid fuels.
Mature basins
In areas where the oil and gas industry is
considered mature, such as the UK and
Norway, there is clear legislation around
climate change and the oil and gas industry
including EU Emissions Trading Scheme
Regulations 2 with ongoing emission
reduction targets by individual countries
and collectively by the EU. As such climate
change risks pertaining to our assets in
the UK and Norway, which include our
non-operated development projects Kraken
and Catcher, are well understood. Future
exploration in the UK and Norway appears to
be secure against the background of UK and
Norwegian reduction commitments and cost
of carbon (carbon allowances are allocated
under trading schemes to restrict emissions,
allowances can be traded at market rate). A
short-term challenge is economic downturn
and its impact on oil price with implications
for the industry as a whole (see Economics
and Funding pages 55 and 56). Ongoing
monitoring of risk will be required as these
mature locations seek to continue oil and gas
activity and reduce emissions simultaneously
while providing energy security in an
affordable manner.
Access to funding is not seen as an issue in
the short to medium term given government
policies and known legislation and
timescales for the sector, indeed our Kraken
and Catcher non-operated developments
remain fully funded. Short term the marginal
cost of carbon is not seen as a significant
issue, although it may play a part as assets
age and production declines in the medium
to long term, precipitating marginally earlier
decisions to cease production. We do not
foresee funding or carbon cost as impacting
shareholder value overall in our mature area
portfolio at the end of 2016.
2 The EU Emissions Trading Scheme Regulations
require regulated activities such as many offshore
installations to restrict emissions of carbon (as
carbon dioxide and methane emissions among
others). This is achieved by allocation of allowances
which must be maintained and surrendered in line
with strict requirements of the regulations.
The likelihood of stranded assets due
to climate change in mature areas is not
regarded as an issue in the short or medium
term. There continues to be considerable
promotion of exploration and production in
mature areas due to the benefits, including
economic and social, and recognition that
the transition will take some decades. In
the short to medium term, asset risks such
as proximity to infrastructure and size of
discovery outweigh most other risks to
project viability and delivery of shareholder
value. Longer-term climate change is also
likely to drive innovation and improvement
in equipment including during the design
and selection stages of projects to remove
and optimise emissions. For example,
long-term innovation may take the form
of low emissions technology and carbon
capture. We do not use an internal cost of
carbon on the basis that it is not material
to our projects at this time but we continue
to factor costs into our due diligence and
investment proposal processes as necessary.
It is an area we continue to monitor to ensure
we understand trends and implications.
Given that much of the UK HSE related
legislation is based on EU Regulations and
Directives, including the area of climate
change, the UK’s exit from the EU following
the 2016 referendum has also been identified
as an event to monitor. This may impact not
only climate change issues but other CR
issues of interest, as the details of ‘Brexit’
become clearer.
Senegal and developing locations
Transition risks in developing locations
are closely tied to the need for economic
growth to provide local benefits such as
employment and social and economic
development. Such countries tend to have
much lower aspirations in terms of carbon
reduction and will be dependent on
investment funds. Market based mechanisms
also tend to play a less central role (e.g.
projects under the Clean Development
Mechanism of the Kyoto Protocol). Access
to investment for companies is often linked
to demonstrating a responsible position (in
terms of both environmental and social
performance e.g. under IFC guidance). Again
in the short to medium term stranded assets
70
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report Physical risks
Physical risks include potential for extreme
weather, sea level rise and water scarcity.
The likelihood of impact on Cairn’s business
as with other companies is highly location
and infrastructure specific. In terms of our
infrastructure, as at the end of 2016 Cairn had
no permanent installations; all our activities
involved offshore mobile equipment.
Local people in our areas of activity may
be adversely affected by sea-level rise
or degradation in fishing quality/quantity,
availability of water or farming. These are
social issues which are essentially in the
government domain; however, Cairn has
a long history of both social responsibility
and social investment. For example, water
supply issues in India in the location of our
land operations were the subject of a major
aquifer management programme developed
by Cairn.
Emissions, discharges and wastes
In March 2016 we completed the second
phase of our exploration and appraisal
programme in Senegal and commenced
planning for the third phase which started
in 2017. As such our operations in 2016
were relatively limited in terms of emissions,
discharges and wastes. We expect
emissions, discharges and wastes to
be broadly similar to 2016 based on an
anticipated programme of two firm wells in
2017. However, the third phase programme
includes a number of optional wells, which,
if executed, would increase our emissions,
discharges and wastes. It remains difficult
to set specific reduction targets when levels
of activity vary from year to year, but we are
committed to minimising our environmental
impact from operations and to reporting fully
and transparently on this matter.
GHGs form a part of our operational
environmental footprint. We monitor and
manage the GHGs emitted during our
activities and disclose them in accordance
with industry requirements and standards.
In 2016, we conducted a review of the
methods and factors used in the calculation
of our GHG emissions, and adjustments were
made in line with best practice. We disclose
on an ‘operational control’ basis, which
means we report emissions from those
assets that are operated by us and not those
controlled by our partners. With no operated
production facilities in 2016, our direct GHG
emissions occurred primarily from the
combustion of fuel on the rig, vessels and
aviation, and from flaring during well testing.
The graph Total and normalised GHG
emissions (scopes 1, 2 and 3) indicates
that our GHG emissions over the last five
years are heavily dependent on the level of
operational activity in any given year given
the absence of any steady state production.
This makes it difficult to identify baseline
information and set meaningful targets for
total GHG reduction over time. We have
therefore chosen to adopt a methodology
for calculating GHG emissions intensity with
reference to the number of hours worked,
as this provides a direct relationship with the
At the end of the phase two exploration and
appraisal campaign in Senegal, unanticipated
residual wastes from the drill rig tanks
required specific treatment as hazardous
waste in accordance with EU classification.
We achieved successful treatment by filter
pressing and dry residues were packaged
and sent ashore, prior to onward shipment to
Spain under the Basel Convention due to the
absence of suitable waste management sites
in Senegal.
Biodiversity, product stewardship and resource
use are discussed on our website
www.cairnenergy.com/responsibility
levels of activity and provides a mechanism
for engaging with our contractors on energy
efficiency. The quantity of GHG emissions
from our activities has reduced in 2016 from
2015 despite an increase in hours worked.
Consequently, GHG intensity per thousand
hours worked has improved substantially.
We experienced four minor spills of
hydrocarbon in 2016, which arose for
‘flare-out’ incidents during well testing
in the phase two drilling programme in
Senegal. These arose as a consequence of
ineffective rig orientation to the prevailing
weather, seawater salting of the flare nozzle
and setting the water deluge too high. These
issues were addressed early in the campaign
and no further problems occurred. A total of
167 litres we spilled to sea, however, the oil
dispersed and evaporated rapidly and was
considered to have a low environmental
impact. All escapes were reported to
the authorities.
Total and normalised GHG emissions (scopes 1, 2 and 3)
60,000
45,000
30,000
e
2
O
C
s
e
n
n
o
T
15,000
0
5
9
3
9
5
,
41
53
5
3
4
2
3
,
33
7
8
4
9
2
,
36
2
7
9
4
2
.
7
8
5
1
,
0
5
3
1
,
9
0
8
2
2012
3
9
7
2
,
0
2
4
2013
7
2
1
3
,
2
0
4
2014
6
0
6
2
,
1
5
3
2015
0
4
1
2
,
5
5
3
2016
T
o
n
n
e
s
C
O
2
e
p
e
r
,
1
0
0
0
h
o
u
r
s
w
o
r
k
e
d
60
45
30
15
0
Scope 1 1 tonnes CO2e
Scope 2 2 (location-based) tonnes CO2e
Scope 3 3 tonnes CO2e
Scope 1, 2 (location-based) and
3 normalised tonnes CO2e per
1,000 hours worked
We calculate our GHG emissions in accordance with the GHG Protocol Corporate Accounting and Reporting Standard.
1 For calculating Scope 1 (direct) GHG emissions we use emission factors from the API Compendium 2009
(fuel combustion), EEMS 2008 (flaring) and the GHG Protocol 2014 (waste incineration).
In 2016 we carried out a review of our Scope 1 GHG emissions calculations. As a result of this we updated to the
latest published Global Warming Potentials (GWPs) for CO2, CH4 and N20 from the Intergovernmental Panel
on Climate Change (IPCC) Fifth Assessment Report (AR5). We also made minor changes to the emission factors
we use from API 2009 by selecting ones that align more accurately to the fuel types we use, and introduced an
additional two categories to our waste incineration data. We applied these changes across all of our Scope 1 GHG
data, past and present, and so are restating all Scope 1 GHG figures in this report. In addition to this, we have
updated our 2015 Scope 1 GHG emissions figure to incorporate flaring data that was not available when we
produced our 2015 end of year reports. Our 2015 normalised GHG emissions have increased in line with this.
N.B. 2015 flaring data was included in Cairn’s 2016 ‘Half Year Corporate Responsibility Update’ but has since
been recalculated with amended gas densities and is restated in this report.
2 We report Scope 2 (purchased electricity) GHG emissions in line with GHG Protocol Scope 2 Guidance, i.e. in two
ways: according to a location-based method and a market-based method. (Transmission and distribution losses
are excluded.) For the location-based method we use emission factors from the IEA (International Energy Agency)
Report ‘CO2 emissions from Fuel Combustion Highlights’ (2013 Edition). These are grid average emission factors for
each country. For district heating and cooling we use location-based emission factors from DEFRA 2015. For the
market-based method we use emission factors, where available, in the following order of preference:
a. Supplier-specific emission factors – obtained from Cairn offices’ electricity suppliers.
b. Residual mix emission factors – obtained from the RE-DISS II document ‘European Residual Mixes 2014’,
last updated in June 2015.
c. Location-based emission factors. These are the same IEA and DEFRA emission factors that we use for
calculating location-based emissions.
We have provided location-based Scope 2 figures in this report. Our market-based Scope 2 figures, and further
details about our GHG emissions data and calculations, are available on our website.
3 For calculating Scope 3 (business travel) GHG emissions we use the DEFRA methodology, including its
recommendation to include an uplift for the influence of radiative forcing in air travel emissions. We updated
to DEFRA 2016 emission factors this year (see http://www.ukconversionfactorscarbonsmart.co.uk/).
4 Limited assurance of our 2016 GHG data (Scopes 1, 2 and 3 and normalised) has been provided independently
by RPS which, within the scope of the limited assurance engagement, has found that the GHG emissions reported
are materially correct and a fair representation of available information. A full assurance statement detailing the
verification undertaken and its limitations is available on our website.
71
Human Resources
Helping people
to deliver strategy
We remain committed to supporting and
incentivising our people in their delivery of
Group strategy, all the while ensuring that
a culture of working responsibly is embedded
in everything that they do in their pursuit of the
Company’s strategic objectives.
We do this by ensuring that we have the right
people in place with the right competencies,
that they have the right training and development
opportunities and that the right systems and tools
are at their disposal. We insist that our people
exhibit the high performance behaviours which
we have identified as part of our culture of working
responsibly. In our pursuit of strategy we also
need to make sure Cairn is an attractive place
to work in order to retain talent and attract new
talent, to ensure we are preforming to the best
of our abilities.
Focused on leadership
We recognise that the actions and
behaviours of senior leadership are key
to our success. As such we focused on a
number of initiatives during the year to
strengthen the skills of people in senior
leadership and management positions as
well as continuing to work on succession
planning.
Senior Leadership Team 360° feedback
At Cairn we have a Senior Leadership Team
(SLT) which includes our Chief Executive,
Chief Financial Officer, Chief Operating
Officer, Director of Exploration and our
Regional Directors ensuring that the key
management get together at least six times
a year to discuss delivery of strategy and
provide leadership throughout the business.
We understand that those on our SLT are
role models for our company values (the
3Rs) and our High Performance Behaviours
and that championing these, along with clear
The 3Rs
Building
Respect
Nurturing
Relationships
Acting
Responsibly
10
Read more: Our Culture
on P10-11
Diversity within
the workforce
We are committed to equality
and diversity and understand the
importance of a diverse workforce
in broadening our skill base, bringing
different approaches, perspectives
and ideas, challenging norms and
encouraging creativity, all of which
support the business in delivering
its strategy.
72
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report and regular communication and clarity of
strategy, remains fundamental in maintaining
both a strong company culture and high
level of employee engagement. The 3Rs
stand for building respect, nurturing
relationships and acting responsibly and
our High Performance Behaviours are the
behaviours we have identified as part of
our commitment to working responsibly
in a safe, secure, environmentally and
socially responsible manner. As a means
of achieving against their goal of being role
models, specifically in listening and personal
development, and showing commitment to
acting upon feedback received from across
the business, each member of the SLT
participated in a 360° feedback exercise
in 2016 which was facilitated by an
external party.
The exercise aimed to identify strengths
and development areas both for individual
leaders and for the leadership team as
a whole. Each member was required to
solicit feedback from a range of internal
stakeholders with whom they interact
including their own line managers, their
peers from across the Group, and those
reporting to them. Feedback was then
provided to each SLT member on a 1-1 basis,
with individual action plans derived from this.
The next step, which we are now focusing
on, is to review the feedback holistically to
understand both strengths and areas for
development for the team as a whole and
communicate the feedback to staff across
the Group.
Management Bootcamp
Work continued on our Management
Bootcamp throughout 2016 with the aim of
further developing the management skills
of all our managers in the business to best
deliver results through people by providing
practical ‘how to’ management tips and
techniques. The Bootcamp is structured to
be energising, inclusive, challenging and
thought provoking. It considers the effect
of behaviour on people and performance,
the skills and tools needed to encourage the
right behaviours and how these will impact
positively on the performance of Cairn’s
teams and business deliverables. The
programme consists of seven modules:
recognition and feedback, coaching,
building relationships, delegation and
empowerment, developing teams,
managing change and managing conflict.
Delegates are also provided with a pre-
course 1-1 coaching session to help set out
their objectives for the course and to put
the development into a personal context.
The feedback from those who have
attended the course has been very positive.
“As the Management Bootcamp
programme has been developed for Cairn
based on feedback from managers within
the business, the training sessions are
targeted to cover areas relevant to our
business right now and this is extremely
beneficial following a period of significant
change within the company. I like the short,
modular in-house approach as this gives
me an opportunity to take some time
out of a busy schedule to focus on my
professional development which will be of
benefit to me, my team and the company.”
Managing succession planning
As part of our annual succession planning
review, the Board was presented with an
updated Group Succession Plan in June.
The review confirmed that we had made
good progress in several of the development
areas identified through the prior year’s
succession planning, with the Group talent
pool enhanced during the year through a
combination of external resourcing and
internal promotions.
While we recognise that some succession
risks exist, the review provided a crucial
means of identifying where the key focus
areas are and the resource, skills and
capability gaps that need to be addressed
to mitigate these risks.
Other positive outcomes of the review
included:
• The new regional structure, as finalised
in 2015, is working well.
• Staff retention remains strong, providing
stability and consistency in the delivery
of current and future projects.
• We have been able to benefit from
quality, external talent available as a
result of the challenges being faced by
the industry as a whole, and this proved
advantageous for us in building some
in-house capacity where our internal
resource pool had historically been low.
• Our Management Bootcamp programme
will support the business in developing
the future succession pipeline.
At year-end 2016:
48%
4%
of Cairn staff were women
of Cairn staff had a disability
10%
43
of Cairn staff worked part-time
average age at Cairn
100%
33%
of employees that took parental leave returned
to work
of management roles were held by women
16
11%
different nationalities were employed at Cairn
1 member of the Board was a woman
73
the business from exploration, a reflection
of our Group strategy to deliver value for
stakeholders by building and maintaining
a balanced portfolio of exploration,
development and production assets
within the oil and gas lifecycle.
We also ran an e-learning training course on
anti-bribery and corruption (ABC) which all
of our staff were required to complete and
pass. This ABC training course is part of
ensuring our strategy to deliver value in a
safe, secure, environmentally and socially
responsible manner and was designed to
further raise awareness and understanding
of bribery and corruption. The training
course covered all of the key issues relating
to bribery and corruption, including the UK
Bribery Act 2010.
Technical conference:
“From Volumes to Value”
In addition to our suite of annual geological
fieldtrips which included Utah, Ireland and
one in the local Edinburgh area in 2016, the
Company held a Technical Conference
in September 2016, attended by our
geoscience, engineering, commercial and
new ventures functions from across our
business. The conference was designed
to ensure alignment in the way we work,
with a particular focus on the methods of
assessing value. Workshop sessions were
organised utilising industry software aimed
at identifying the ‘value of information’ –
critical for optimising investment decisions
in exploration, appraisal and development
activities, such as seismic surveys, wells and
appraisal programmes.
Mixed teams from across the business
worked together to critically assess our
areas of relative strength and weakness in
each of five areas – New Ventures, Asset
& Licence Management, E&A Decision
Making, Value Creation and Data & Tools.
The aim was to identify key actions in our
drive to continually improve in all that we
do and to explore ways to collaborate and
share knowledge and techniques across
We believe the revisions will:
• Develop more cohesive teams which
are clear on their annual objectives,
through the implementation of a team
performance element
• Encourage, reward and emphasise the
importance of project management,
collaboration and teamwork
• Ensure that all staff have an element of
their reward based on their own individual
performance and merits, including their
application of our High Performance
Behaviours and People Management
Accountabilities
Feedback so far from staff on the revisions
has been positive.
Learning and
development
Learning and development is a key,
ongoing part of human resources activity
and is clearly an important part of supporting
our delivery of strategy. During the year
we focused on two key learning and
development initiatives. We held a technical
conference focused on creating value for
Human Resources continued
Linking performance
to strategy
We recognise the importance of linking
the performance of our people to the
delivery of strategy to ensure our people
are aligned with our strategic objectives
and incentivised to deliver them. Changes
to our performance management process
during the year included measuring High
Performance Behaviours and linking them
to remuneration, further strengthening our
working responsibly culture.
Revisions to Discretionary
Cash Bonus scheme
In April, the Company rolled out some
enhancements to our Performance
Management process and related
Discretionary Cash Bonus scheme. The
Company wanted to adopt a standardised
approach, ensuring consistency in how
performance is assessed and rewarded
through the application of a common,
open and transparent system for all staff,
irrespective of location.
The proposed solution is a powerful
combination of:
• Group KPIs, which set out the
strategic objectives for the company
as a whole
• Project performance objectives,
recognising the importance
of collaboration within a team, collective
problem solving to meet an objective
and project management skills to deliver
these objectives in a timely manner
• Personal performance objectives,
recognising individual achievement
against objectives including the
importance of demonstrating the right
behaviours consistently and working
to the Group’s standards to achieve
their objectives
Cairn team at 2016 Geological Society
Careers Day, Edinburgh.
74
Cairn Energy PLC Annual Report and Accounts 2016
Strategic Report the geoscience, engineering, commercial,
exploration and new ventures functions.
The results have been shared with the
Management Team and Senior Leadership
Team and are being incorporated in to our
2017 plans. The conference was hosted by
Paul Mayland, Chief Operating Officer and
Richard Heaton, Director of Exploration. It
was attended by over 60 members of staff
including our regional directors and staff
based in our Stavanger and London offices.
Equipping our people
with the right tools
As well as having the right people in place
and ensuring they have access to the right
training to perform to the best of their
abilities, we need to have the right tools in
place. In late 2015, management requested
a review of the suitability of our current
business systems with a view to moving
to a single Group-wide business system.
This was on the basis that multiple systems
were in use across the Group which had
the potential to create risks and process
inefficiencies. By business system we mean
the system used throughout the business
to manage day-to-day functions.
At the end of 2015 a project commenced
to formally define, document and review
Cairn’s Enterprise Resource Platform
(ERP) requirements. Requirements were
assessed against available platforms,
future strategy and the risks and process
inefficiencies we had already identified.
At the end of that review, a decision was
reached to move to a single, new ERP more
suited to Cairn’s current business. Work
remains underway to design and build the
new system with planned implementation
during 2017.
External recognition
of our people management
It is important to us to ensure we are
managing people in the right way and
in line with international standards. As
such we are pleased to have external
validation in the form of accreditation
from the internationally recognised
standard Investors in People (IIP).
Investors in People is a global standard
for people management held by over
14,000 organisations in 75 countries.
The standard defines what it takes to
lead, support and manage people
well for sustainable results. We are
delighted to have been an accredited
Investor in People since 2004, and in
April, to have been reaccredited by
an independent assessor from IIP
Scotland. This accreditation identifies
both what we are doing well and areas
for improvement.
As part of the assessment our assessor
met with a randomly selected 10% of
employees from across the Group and
we were delighted that following her
review, our assessor found that she
was “satisfied beyond any doubt that
Cairn Energy PLC continues to meet
the requirements of the Investors in
People Standard”.
The assessment found that there was
a tremendous team spirit, a clear sense
of company strategy and the Group
KPIs with a focus on creating value, an
understanding and appreciation of the
new structure of the business into three
defined geographical regions and a
clear sense of staff willing to share
knowledge and information with each
other so that they can continuously
improve.
Other key areas of best practice
highlighted by the assessment
included:
• Staff are very loyal to the Company
and are committed to its future
success. There is a sense of
ownership and pride in working
for the Company
• The Company is very clear on its
future strategy and the business
planning process is very sound
• The Company is very committed
to the learning and development of
its staff and the on-the-job training,
including shadowing and informal
coaching of staff, are of a high
standard
• The Company’s revised appraisal
and informal feedback process is
very solid
• Members of staff feel very valued
and appreciated for the work they
undertake in the Company. There
is a strong culture of praise, thanks
and encouragement
• Decision-making and team working
are major strengths in the company
• Members of staff believe that the
company is a great place to work.
The one key area for development
highlighted by the assessment was a
greater focus needed in the area of
return on investment in learning and
development, to be able to more fully
appreciate the full impact of learning
and development in the company.
This will be considered through 2017.
This Strategic report has been approved by the Board and is signed on their behalf by.
SIMON THOMSON
Chief Executive
7 March 2017
Book Cliffs, Utah field trip.
75
Board of Directors
Simon
Thomson
Chief Executive
(51)
James
Smith
Chief Financial Officer
(40)
Ian
Tyler
Non-Executive Chairman
(56)
Todd
Hunt
Non-Executive Director
(64)
Committee membership
Senior Leadership Team – Chair
Senior Leadership Team
Nomination committee – Chair
Nomination committee
Governance committee
Governance committee
Attends remuneration committee
by invitation
Attends audit committee
by invitation
Group Risk Management
Committee
Remuneration committee
Attends audit committee
by invitation
James was appointed
to the Board in May 2014
as Chief Financial Officer.
Ian was appointed as an
independent non-executive
director in June 2013 and
became non-executive
Chairman in May 2014.
Todd was appointed as an
independent non-executive
director in May 2003. Given
his length of tenure, he is
no longer considered to be
independent in terms of the UK
Corporate Governance Code.
Attends remuneration
committee by invitation
Attends part of each audit
committee by invitation
Group Risk Management
Committee – Chair
Term of office
Simon was appointed to the
Board in November 2006 as
Legal and Commercial Director
and became Chief Executive
in July 2011.
Independent
Not applicable
Skills and experience
Iain
McLaren
Senior Independent
Non-Executive Director
(66)
Audit committee – Chair
Nomination committee
Remuneration committee
Alexander
Berger
M. Jacqueline
Sheppard QC
(50)
(61)
Keith
Lough
(58)
Peter
Kallos
(57)
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Nicoletta
Giadrossi
(50)
Audit committee
Remuneration committee – Chair
Audit committee
Remuneration committee
Remuneration committee
Governance committee
Governance committee – Chair
Nomination committee
Nomination committee
Governance committee
Iain was appointed as an
independent non-executive
director in July 2008.
Alexander was appointed as
an independent non-executive
Jackie was appointed as an
independent non-executive
director in May 2010.
director in May 2010.
Keith was appointed as an
independent non-executive
director in May 2015.
Peter was appointed as an
independent non-executive
director in September 2015.
Nicoletta was appointed as an
independent non-executive
director in January 2017.
Not applicable
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
MBA Rotterdam School
BA and MA in Jurisprudence
MSc in Finance, London
Degree in Petroleum Engineering,
MBA, Harvard Business School
of Management
from University of Oxford
Business School
Heriot Watt University
LLB, McGill University
Alexander Berger is
chief executive officer of
Oranje-Nassau Energie B.V.,
a private Dutch exploration
and production company
based in Amsterdam.
Jackie Sheppard was executive
Keith Lough was Finance Director
Peter Kallos has held a number of
Nicoletta Giadrossi spent 10 years
vice president, corporate and
legal at Talisman Energy Inc
of British Energy PLC from 2001
posts at Enterprise Oil including
at GE where she became General
to 2004 before becoming a
Head of Business Development,
Manager for GE’s Oil and Gas,
from 1993 to 2008 and appointed
founder shareholder and Chief
CEO Enterprise Italy and General
Refinery & Petrochemicals
Queen’s Counsel for the Province
Executive of Composite Energy
Manager of the UK business
Division. Subsequently, she spent
of Alberta in 2008.
Ltd, a privately owned coal-bed
before his appointment in 2002
a number of years in private
methane focused business. He
as Executive Vice President
held this post until 2011, when
Composite was divested to
Dart Energy.
International and Offshore at
Petro-Canada. In 2010, Peter
became Chief Executive of
Buried Hill Energy.
equity ahead of being appointed
VP and General Manager, EMEA
at Dresser-Rand. She later joined
Aker for two years before taking
up the role of President (Region
A, Europe, Africa, Middle East,
Russia & India) at Technip, a role
she held from 2014 to 2016.
Non-executive director
of Fincantieri S.p.A.
Non-executive director
or Bureau Veritas Group
Non-executive director
of Faively Transport
LLB (Hons), Aberdeen University
BA (Hons), University of Oxford
Diploma in Legal Practice,
Glasgow University
Bachelor of Commerce,
Birmingham University
Batchelor of Business
Administration, University
of Texas
BA in Accountancy and Finance,
Heriot Watt University
Masters in Petroleum
BA, Memorial University
MA Economics, University
Degree in Applied Physics,
Engineering, Delft University
of Newfoundland
of Edinburgh
Strathclyde University
BA in Mathematics and
Economics, Yale University
Todd Hunt has more than
40 years’ experience in the oil
and gas industry. He is president
and joint owner of Atropos
Exploration Company and
Atropos Production Company
based in Dallas, Texas.
Iain McLaren is a chartered
accountant and was formerly
senior partner of KPMG in
Scotland. He is also a past
president of the Institute
of Chartered Accountants
of Scotland.
President and joint owner
of Atropos Exploration
Company and Atropos
Production Company
Chairman of Investors
Capital Trust plc
Non-executive director of
Baillie Gifford Shin Nippon plc
Non-executive director of
Edinburgh Dragon Trust plc
Non-executive director of Ecofin
Water & Power Opportunities plc
Non-executive director of
Jadestone Energy Inc
Chief executive officer of
Oranje-Nassau Energie B.V.,
and a director of Oranje-Nassau
Energie UK Limited and
Oranje-Nassau Energy
Petroleum Limited
Non-executive director of
Discover Exploration Limited
Non-executive chair
of Emera Inc.
Director of the general partner
of Pacific NorthWest LNG LP
Founder, lead director and chair
of the audit committee of Black
Swan Energy Inc.
Director of Seven Generations
Energy Corporation
Chief Executive of
Buried Hill Energy
Senior Independent non-
executive director of
Rockhopper Exploration PLC
Non-executive director of
the UK Gas and Electricity
Markets Authority
Non-executive director of
Gulf Keystone Petroleum Ltd.
Non-executive director of Papau
Mining PLC until November 2016
Non-executive director of
Rock Solid Images Inc. until
November 2016
Simon Thomson was
appointed Chief Executive
in July 2011 having been Legal
and Commercial Director since
2006 and holding various posts
across the organisation including
head of assets. Simon originally
joined Cairn in 1995.
James Smith joined Cairn in
March 2014 from Rothschild
where he was a director of the
energy and power team with
15 years’ experience advising
E&P companies, oil majors and
national oil companies on their
M&A transactions and equity
and debt market financing.
Key external appointments
Non-executive director
of Graham’s The Family
Dairy Limited
Member of the advisory Board
of the Winning Scotland
Foundation until March 2017
No external appointments
Ian Tyler qualified as a
chartered accountant with
Arthur Andersen in 1987,
subsequently holding a
number of senior finance
and operational positions
within listed companies
before being appointed
chief executive of Balfour
Beatty plc from 2005 to 2013.
During this time, he took the
company from being primarily
a UK construction business,
to a global infrastructure
services business.
Non-executive director
of BAE Systems plc
Non-executive chairman
of Bovis Homes Group PLC
Independent chairman of
AWE Management Limited
Senior independent
non-executive director of
Mediclinic International plc
until February 2017
Executive Directors
Non-Executive Directors
76
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Alexander
Berger
Non-Executive Director
(50)
M. Jacqueline
Sheppard QC
Non-Executive Director
(61)
Keith
Lough
Non-Executive Director
(58)
Peter
Kallos
Non-Executive Director
(57)
Nicoletta
Giadrossi
Non-Executive Director
(50)
Audit committee
Remuneration committee – Chair
Audit committee
Remuneration committee
Remuneration committee
Governance committee
Governance committee – Chair
Nomination committee
Nomination committee
Governance committee
Alexander was appointed as
an independent non-executive
director in May 2010.
Jackie was appointed as an
independent non-executive
director in May 2010.
Keith was appointed as an
independent non-executive
director in May 2015.
Peter was appointed as an
independent non-executive
director in September 2015.
Nicoletta was appointed as an
independent non-executive
director in January 2017.
Yes
Yes
Yes
Yes
Yes
Masters in Petroleum
Engineering, Delft University
BA, Memorial University
of Newfoundland
MA Economics, University
of Edinburgh
Degree in Applied Physics,
Strathclyde University
BA in Mathematics and
Economics, Yale University
MBA Rotterdam School
of Management
BA and MA in Jurisprudence
from University of Oxford
MSc in Finance, London
Business School
Degree in Petroleum Engineering,
Heriot Watt University
MBA, Harvard Business School
LLB, McGill University
Alexander Berger is
chief executive officer of
Oranje-Nassau Energie B.V.,
a private Dutch exploration
and production company
based in Amsterdam.
Jackie Sheppard was executive
vice president, corporate and
legal at Talisman Energy Inc
from 1993 to 2008 and appointed
Queen’s Counsel for the Province
of Alberta in 2008.
Keith Lough was Finance Director
of British Energy PLC from 2001
to 2004 before becoming a
founder shareholder and Chief
Executive of Composite Energy
Ltd, a privately owned coal-bed
methane focused business. He
held this post until 2011, when
Composite was divested to
Dart Energy.
Peter Kallos has held a number of
posts at Enterprise Oil including
Head of Business Development,
CEO Enterprise Italy and General
Manager of the UK business
before his appointment in 2002
as Executive Vice President
International and Offshore at
Petro-Canada. In 2010, Peter
became Chief Executive of
Buried Hill Energy.
Chief executive officer of
Oranje-Nassau Energie B.V.,
and a director of Oranje-Nassau
Energie UK Limited and
Oranje-Nassau Energy
Petroleum Limited
Non-executive director of
Discover Exploration Limited
Non-executive chair
of Emera Inc.
Director of the general partner
of Pacific NorthWest LNG LP
Founder, lead director and chair
of the audit committee of Black
Swan Energy Inc.
Director of Seven Generations
Energy Corporation
Chief Executive of
Buried Hill Energy
Senior Independent non-
executive director of
Rockhopper Exploration PLC
Non-executive director of
the UK Gas and Electricity
Markets Authority
Non-executive director of
Gulf Keystone Petroleum Ltd.
Non-executive director of Papau
Mining PLC until November 2016
Non-executive director of
Rock Solid Images Inc. until
November 2016
Nicoletta Giadrossi spent 10 years
at GE where she became General
Manager for GE’s Oil and Gas,
Refinery & Petrochemicals
Division. Subsequently, she spent
a number of years in private
equity ahead of being appointed
VP and General Manager, EMEA
at Dresser-Rand. She later joined
Aker for two years before taking
up the role of President (Region
A, Europe, Africa, Middle East,
Russia & India) at Technip, a role
she held from 2014 to 2016.
Non-executive director
of Fincantieri S.p.A.
Non-executive director
or Bureau Veritas Group
Non-executive director
of Faively Transport
77
Non-Executive Directors
Corporate Governance Statement
Chairman’s Introduction
Operating
with integrity
at all levels,
at all times.
Dear Shareholder,
At Cairn, we operate with integrity at all times, recognising that in doing
so the Company will maintain the trust of its many stakeholders. We
are committed to working responsibly as part of our strategy to deliver
value for all stakeholders. This means working in a safe and secure,
as well as environmentally and socially responsible manner.
The Cairn Board is committed to promoting high standards of
corporate governance and understands that an effective, challenging
and diverse Board is essential to enable the Company to deliver its
strategy in line with shareholders’ and other stakeholders’ long-term
interests, whilst also generating confidence that the business is
conducting itself in a responsible manner. Further information on our
governance, culture, strategy and business model and commitment
to working responsibly can be found in the Strategic Report section
of this Annual Report and Accounts.
We are cognisant of the Financial Reporting Council’s ongoing valuable
work in relation to corporate culture and the important role of boards
in influencing and shaping corporate culture. As a relatively small but
long established company with fewer than 250 employees, we have a
culture based on acting responsibly at all times. This means having the
right values, principles and policies in place, that they are embedded
throughout the organisation, and that the right people are in place to
implement and uphold our values. At Cairn, our culture is underpinned
by a core set of values which reflect how we do business and the
behaviours expected of our people. We communicate these
throughout the business as ‘the three Rs’, which stand for Building
Respect, Nurturing Relationships and Acting Responsibly (see below).
During the year the Board has also placed much focus on operational
delivery and risk management. An open and balanced review of our
business performance has been covered in the Strategic Report on
pages 2 to 75. During the year, the Board regularly discussed our
strategic priorities, operational delivery and the associated key
business risks and their ongoing management. We provide further
information on these activities on pages 34 to 47 of this report.
Our core values
Building
Respect
Nurturing
Relationships
We build respect by communicating
openly with each other and our
stakeholders, listening effectively
and providing feedback and
recognition in a constructive way.
We work closely with our stakeholders –
colleagues, local communities, contractors,
suppliers, governments, regulators,
non-governmental organisations,
industry partners and shareholders.
10
Read more: Our Culture
on P10-11
10
Read more: Our Culture
on P10-11
78
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance There has also been a continuing focus by both the Board and
nomination committee in relation to succession planning throughout
2015 and 2016 (and subsequently) with the aim of assessing the
executive, non-executive and senior succession pipeline at Cairn,
and identifying what skills are needed to support our strategy and
business for the long term. This will continue to be a key area of
focus for the Board in future years. I am delighted to report that we
have further strengthened and diversified our Board through the
appointment of Nicoletta Giadrossi as an independent non-executive
director on 10 January 2017. We provide further information in relation
to this appointment and our succession planning in the separate
Nomination Committee Report on pages 96 and 97.
“ At Cairn, our culture is
underpinned by a core
set of values which reflect
how we do business and
the behaviours expected
of our people.”
IAN TYLER
Chairman
7 March 2017
Acting
Responsibly
We act with honesty and integrity to
ensure all our operations are carried
out safely and empower our people
to achieve their goals and contribute
to the wider performance of the
business in a responsible manner.
10
Read more: Our Culture
on P10-11
79
Corporate Governance Statement
continued
Compliance with the UK Corporate Governance Code
As a company incorporated in the UK with a Premium Listing on
the London Stock Exchange, Cairn is required to report against the
UK Corporate Governance Code (as published by the Financial
Reporting Council and available on its website at www.frc.org.uk).
This statement reports compliance with the version of the Code
published in April 2016.
Cairn is fully committed to achieving compliance with the principles
and provisions set out in the Code and the Board is responsible for
ensuring that an appropriate framework is in place to do so.
The information in this statement, together with the audit committee
report, nomination committee report and Directors’ Remuneration
Report, describe the manner in which the Company has applied the
main principles of governance set out in the Code and complied
with the individual Code provisions. It is the Board’s view that the
Company has fully complied with the Code throughout 2016.
The Board
Cairn’s business is international in scope and carries political,
commercial and technical risks. Accordingly, particular attention is
paid to the composition and balance of the Board to ensure that it
has wide experience of the industry and regulatory environment in
which Cairn operates, and appropriate financial, operational and risk
management skills. In each Board appointment, whether executive
or non-executive, objectivity and integrity, as well as skills, experience,
ability and diversity, assist the Board in its key functions, and are
prerequisites for appointment. This also applies to senior management
appointments below Board level and to our succession planning.
Following the appointment of two non-executive directors in 2015 and
one new non-executive director in January 2017, the Board currently
comprises the Chairman, two executive directors and seven non-
executive directors. The current directors of the Company as at the
date of this report are set out in the table opposite. Further information
about our directors is included in the Board of Directors section on
pages 76 and 77.
Board diversity
The mix in our membership.
Board diversity, by age (years)
Board diversity, by nationality
55
average
6:4
40-54
4
55-60
3
61-70
3
British
Other
Board diversity, by tenure (years)
Board diversity, by gender
5.5
average
8:2
0-2 years
3
3-6 years
2
7-9 years
3
>9 years
2
M
F
80
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Name
Role
Date of
appointment
(in current role)
Date of last
re-election
Simon Thomson
Chief Executive
July 2011
12 May 2016
James Smith
Ian Tyler
Todd Hunt
Iain McLaren
Chief Financial
Officer
Non-executive
Chairman
Non-executive
director
Non-executive
director
May 2014 12 May 2016
May 2014 12 May 2016
May 2003 12 May 2016
July 2008 12 May 2016
Alexander Berger Non-executive
May 2010 12 May 2016
Jackie Sheppard
Keith Lough
Peter Kallos
director
Non-executive
director
Non-executive
director
Non-executive
director
Nicoletta Giadrossi Non-executive
director
May 2010 12 May 2016
May 2015 12 May 2016
September
2015
January
2017
12 May 2016
N/A
The Company considers ongoing refreshment of the non-executive
directors on the Board to be positive as it brings new thinking to the
Company as well as ensuring there is a healthy level of independent
challenge to management and that the Board’s collective skills and
experience equip it to direct the Company’s strategy and meet its
business needs as they evolve over time.
The Board is also mindful however that an appropriate balance
between directors who can bring a new perspective and those
who provide continuity is essential for a business like Cairn’s.
Further information on succession planning at Cairn is included
in the Nomination Committee Report on pages 96 and 97.
Diversity is a key element of the Cairn Board, with emphasis placed
not only on gender but also on culture, nationality and experience.
The Board currently has two female non-executive directors and
continues to demonstrate diversity in a wider sense, with directors
from the Netherlands, the USA, Canada, and Italy as well as the UK,
bringing a range of domestic and international experience to the
Board. The Board’s diverse range of experience and expertise covers
not only a wealth of experience of operating in the oil and gas industry
but also extensive technical, operational, financial, governance, legal
and commercial expertise. Further information on diversity within Cairn
is included in the Nomination Committee Report on pages 96 and 97
and in the Strategic Report section of this Annual Report and Accounts.
Division of responsibilities between
Chairman and Chief Executive
The Company has a clear division of responsibilities between the
Chairman and the Chief Executive, which is set out in writing and
agreed by the Board.
Chairman: key responsibilities
Chief Executive: key responsibilities
Managing the business and
proposing and developing the
Company’s strategy and overall
objectives in consultation with
the Board.
Driving the successful and
efficient achievement of
the Company’s KPIs and
strategic objectives.
Leading the Senior Leadership
Team in ensuring the effective
implementation of decisions of
the Board and its committees.
Providing strong and coherent
leadership of the Company
and effectively communicating
the Company’s culture, values
and behaviours internally
and externally.
Engagement with shareholders
and other stakeholders.
Leading the Board in an ethical
manner and promoting effective
Board relationships.
Ensuring that the Board plays a
full and constructive part in the
determination and development
of the Company’s strategy.
Building a well balanced Board,
considering Board composition
and Board succession.
Ensuring the effectiveness of the
Board and individual directors.
Overseeing the annual Board
evaluation and acting on
its results.
Ensuring appropriate induction
and development programmes
for directors.
Setting the Board agenda,
chairing Board meetings and
overseeing implementation
of the Board’s decisions.
Engagement with shareholders
and other stakeholders
when appropriate.
Senior independent director
Iain McLaren continues to be Cairn’s senior independent non-executive
director. The main responsibilities of the senior independent non-
executive director are as follows:
•
•
•
to provide a sounding board for the Chairman and to serve as
an intermediary with other directors when necessary;
to be available to shareholders if they have concerns which contact
through the normal channels of Chairman, Chief Executive or Chief
Financial Officer has failed to resolve or for which such contact is
inappropriate; and
to meet with the other non-executive directors without the
Chairman present, at least annually, in order to appraise the
Chairman’s performance.
Performance evaluation
The Board continually strives to improve its effectiveness and
recognises that the performance evaluation process represents
an annual opportunity to enhance overall Board effectiveness.
In 2015, the Company conducted its second externally facilitated Board
evaluation (the first was in 2012). The 2015 evaluation resulted in some
important recommendations for improving the Board’s effectiveness,
which have subsequently been implemented, including enhancements
to Board papers and to the Board risk management process.
This year, in view of the externally facilitated evaluation carried
out in 2015, it was agreed that an internal Board performance
evaluation would be most beneficial to the Company. The Chairman
and Company Secretary subsequently discussed how best to facilitate
this and it was decided that the Company Secretary should prepare a
questionnaire for this purpose.
81
Corporate Governance Statement
continued
The questionnaire was approved by the Chairman and this was
subsequently completed by all directors to evaluate the performance
of the Board, each of its committees, and individual Board members.
A separate questionnaire in respect of the Chairman’s performance
was prepared by the Company Secretary and approved by the senior
independent non-executive director.
Following completion of the questionnaires, the Chairman held a series
of one-to-one meetings with each of the directors in late November
and early December 2016 in order to discuss the outcomes of the
evaluation. In addition, the senior independent non-executive director
met with the non-executive directors (excluding Ian Tyler) in order to
discuss and appraise the performance of the Chairman.
The main action points arising from the 2016 performance evaluation
include the following:
Key actions
Implementation
Potential amendments to running
order of pre-Board and
committee meetings
Consider ongoing requirement
for Governance Committee
Enhancements to annual Board
strategy session
Consideration will be given to
adjusting the running order of
pre-Board and Board committee
meetings in order to maximise
the Board’s time efficiency.
Consideration will be given
to whether the Governance
Committee continues to be
required as the Board and other
committees are ensuring
compliance with all relevant
governance requirements.
The Chairman has proposed
some amendments to the
structure of this annual session
to facilitate a more focused
Board discussion of strategic
goals and past performance.
As explained above, some improvements have been identified and
have already been implemented or will be addressed during 2017.
Following the Board performance evaluation process conducted in
2016, the Board and the Board committees are satisfied that they are
operating effectively and that each director has performed well in
respect of that director’s role on the Board and its committees. The
Board believes that all of the directors’ performance continues to be
effective and that they each demonstrate commitment to their role.
The executive directors also have their performance reviewed by
the remuneration committee against the Group KPIs which are set
annually (further details of the KPIs can be found in the KPI section
on pages 34 to 38). The 2016 bonuses payable to the executive
directors under the Company’s cash bonus scheme (described further
in the Directors’ Remuneration Report on pages 114 to 117) were linked
directly to the Group’s performance against these KPIs. As the KPIs set
out our strategic objectives, this ensures that executive performance is
directly linked to Group strategy.
Independence of non-executive directors
The Board considers the independence of each of the non-executive
directors on an ongoing basis, taking into account their integrity, their
objectivity and their contribution to the Board and its committees.
The Board is of the view that the following behaviours are essential
for a director to be considered independent:
• provides an objective, robust and consistent challenge to the
assumptions, beliefs and views of senior management and
the other directors;
82
Cairn Energy PLC Annual Report and Accounts 2016
• questions intelligently, debates constructively and challenges
rigorously and dispassionately;
• acts at all times in the best interests of the Company and its
shareholders and other stakeholders;
• has a detailed and extensive knowledge of the Company’s business
and of the market as a whole which provides a solid background
against which they can consider the Company’s strategy objectively
and help the executive directors develop proposals on strategy; and
• has no close ties or material relationships with the Company, either
directly or indirectly.
Having reviewed the independence of each of the non-executive
directors against these criteria, the Board concluded that all non-
executive directors demonstrated each of the required competencies
to a high level and are, therefore, each considered independent by
the Board.
The Board recognises that, in view of the characteristics of
independence set out in the UK Corporate Governance Code,
length of service is an important factor when considering the
independence of non-executive directors and that directors having
served for longer than nine years may not be considered independent.
The Board is however satisfied that Todd Hunt’s judgement has
remained independent and that he has consistently displayed all of
the behaviours expected of our independent non-executive directors.
Moreover, the Board is of the view that Mr Hunt brings an extremely
valuable level of insight and challenge to Board discussions and that
his extensive industry experience continues to be of significant benefit
to the Company.
Re-election of directors
In accordance with the UK Corporate Governance Code, all of the
Company’s directors are subject to annual re-election by shareholders.
As such, each of the directors will seek re-election at the AGM to be
held on 19 May 2017.
Induction and development
New directors receive a full and appropriate induction on joining the
Board. This involves meetings with other Board members (in particular
the Chairman), senior management and the Company’s principal
advisers. In addition, new directors are provided with a comprehensive
induction pack which contains a wide range of materials including:
Board
Board papers and minutes of previous meetings;
schedule of matters reserved to the Board;
financial delegations of authority; list of Board
and committee members and dates of
appointment; and schedule of dates
for Board and committee meetings.
Committees
Terms of reference for all Board committees.
Risk
Key policies
Terms of reference for Risk Management
Committee and minutes of last meeting;
current Group Risk Matrix and Risk Appetite
Statement; FRC Guidance on Risk Management,
Internal Control and Related Financial and
Business Reporting.
Group Corporate Responsibility Business
Principles; Group Code of Business Ethics;
Anti-Bribery-and-Corruption (ABC) Management
System; ABC Business Partner Due Diligence
Procedure; Dealing Code; Procedures, Systems
and Controls for Compliance with the Market
Abuse Regulation, the Listing Rules and the
Disclosure Guidance and Transparency Rules.
Organisation
Group Structure Chart; latest Annual Report
and Accounts.
Leadership and Governance
Governance
UK Corporate Governance Code; all supporting
FRC Guidance; FRC Feedback Statement on UK
Board Succession Planning and FRC Report
Corporate Culture and the Role of Boards; GC100
Directors’ Remuneration Reporting Guidance.
Legal/regulatory
Memorandum for directors on their
responsibilities and obligations as directors.
Insurance
Full details of directors’ and officers’ liability cover.
The Company also provides, on an ongoing basis, the necessary
resources for developing and updating its directors’ knowledge and
capabilities. In particular, the Company is committed to the provision
of continuing professional development training for its directors. In
2016, the Company continued with its practice of providing a directors’
education programme consisting of a number of seminars for Board
members, which are presented by the Company’s external advisers/
guest speakers/members of senior management, on subjects
appropriate to the Company’s business, including changes to
legislation, regulation and market practice. During 2016, the subjects
covered by these seminars included:
Directors’ and officers’ liability insurance
The Company has directors’ and officers’ liability insurance in place.
Conflicts of interest
The Board has in place a procedure for the consideration and
authorisation of conflicts or possible conflicts with the Company’s
interests. All directors are aware of the requirement to submit details to
the Company Secretary or Deputy Company Secretary of any current
situations (appointments or otherwise) which may give rise to a conflict,
or potential conflict, of interest. The Board will continue to monitor and
review potential conflicts of interest on a regular basis.
Matters reserved to the Board and delegation of authority
The Board has a formal schedule of matters specifically reserved
to it for decision. The Board conducted an in-depth review of this
in 2015 and adopted an updated schedule of matters reserved
which is divided into categories covering different types of decisions,
including: corporate; Board/directors; financial/operational; and
legal/regulatory.
By way of example, some of the matters which the Board considered
and/or approved during 2016 and Q1 2017 were:
• an expert-led session on general global economics and macro-
Corporate
Board/Directors
economic trends;
• a corporate governance and legal regulatory update delivered
by the Deputy Company Secretary;
• a pre-implementation seminar on the requirements of the new
Market Abuse Regulation presented by Morgan Stanley;
• an anti-bribery-and-corruption update delivered by Pinsent Masons;
•
and
various asset presentations by senior management at pre-Board
meetings (further information on pre-Board meetings is included
on page 84).
These seminars are held prior to Board meetings and are attended by
all directors present at such meetings as well as the Chief Operating
Officer and Director of Exploration (the Company keeps a record of
attendance). Any director may request that a particular subject is
covered in a seminar. In addition, all media articles relating to the
Company and all analyst reports relating to the Company are
distributed to all directors.
The Company also provided additional training and information for
all of its PDMRs (Persons Discharging Managerial Responsibility)
regarding their revised obligations and responsibilities as a result
of the implementation in July 2016 of the Market Abuse Regulation.
Information and support
The Board has full and timely access to all relevant information to
enable it to discharge its duties. Under the direction of the Chairman,
the Company Secretary is responsible for ensuring good information
flows within the Board and its committees and between management
and non-executive directors, as well as facilitating induction and
assisting with professional development as required. The Company
Secretary ensures the presentation of high-quality information to the
Board and its committees and that all papers and information are
delivered in a timely fashion. Board and committee papers are
delivered securely through an electronic platform.
The Company Secretary and Deputy Company Secretary are
responsible for advising the Board, through the Chairman, on all
corporate governance matters, and each director has access to the
advice and services of the Company Secretary and Deputy Company
Secretary. The governance committee also supports the Board in
relation to corporate governance matters and further information
on the role of this committee is provided on page 87.
There is also a procedure agreed by the Board for directors, in
furtherance of their duties, to take independent professional
advice if necessary, at the Company’s expense.
The Company’s 2015 Annual
Report and Accounts and
2016 Half-Yearly Report
The appointment of a new
non-executive director
The Company’s 2016
AGM circular
The Company’s Risk
Appetite Statement
Appointments to
Board committees
Detailed review of
succession planning
Financial/Operational
Legal/Regulatory
The appropriateness of the
Group going concern sign-off
for the 2015 full year accounts
and 2016 interim accounts
The Company’s
viability statement
Oversight of the arbitration
process seeking resolution
of the Indian tax issue
Implementation of new policies
and procedures to comply with
the Market Abuse Regulation
The Company’s annual work
programme and budget
Group Reserves and Resources
The Company’s HSE Policy
Selection of a mobile offshore
drilling unit and well management
services for the 2016/2017
Senegal drilling programme
Approval of Group funding
strategy and related financing
arrangements
In addition to the above, the Board conducts an annual review of
the effectiveness of the Company’s internal controls (with ongoing
monitoring of this throughout the year); an annual detailed strategy
meeting; and an annual ‘deep-dive’ session on risk management.
The Board also has an approved set of financial delegations of
authority to ensure clarity throughout the business concerning the
distinction between financial matters which require Board approval
and those that can be delegated to senior management.
The senior executive management structure at Board level and
beneath remains unchanged from that disclosed in last year’s
corporate governance statement, with the Senior Leadership Team
(SLT) and Management Team (MT) continuing to play a key role in
supporting the Board.
83
Corporate Governance Statement
continued
Board and management committee structure
Board of Directors
Audit
Committee*
Remuneration
Committee*
Nomination
Committee*
Governance
Committee*
Risk Management
Committee (RMC)
Chief Executive
Senior Leadership Team (SLT)
Management Team (MT)
Exploration Leadership Team (ELT)
* Further information on our Board committees is contained later in this statement and
in the separate audit committee report, nomination committee report and directors’
remuneration report.
The SLT comprises the Chief Executive, the Chief Financial Officer,
the Chief Operating Officer (COO), the Director of Exploration, the
Company’s two Regional Directors and the General Manager, Senegal.
The SLT is chaired by the Chief Executive and meets six times per year
with those meetings scheduled in advance of Board meetings.
Key elements of the SLT’s role include the following:
• devise and generate the Company’s strategy to be proposed to the
Board for approval and implement and communicate this strategy
across the business;
implement the business plan, the key performance indicators and
annual work programme and budget following their approval by
the Board;
•
• consider business development and new venture projects prior
to submitting these to the Board; and
• provide leadership and guidance to the Company on vision,
strategy, culture, corporate governance, corporate responsibility
and HSE matters.
The members of the SLT are also members of the RMC, which
identifies and reviews key business risks – further information
on the role of the RMC is contained in the internal control section
of this statement on page 89.
The MT comprises the COO (chair), the Director of Exploration, the
Deputy Finance Director, two Regional Directors, the General Manager,
Senegal, and four functional managers (Human Resources Manager,
Legal Manager, HSE Manager and Business Development and New
Ventures Manager).
The MT meets formally six to nine times per year with four of those
meetings focusing on a quarterly performance review of the business.
The key elements of the MT’s role include the following:
• develop and implement a Business Plan, which will deliver the
Company’s strategic objectives (these will be reflected in annual
KPIs, including HSE);
• critically assess and determine the mitigation plans for key business
risks and ensure that all risks are captured and reviewed regularly in
the Company’s risk register;
• coordinate operations and licence management along with
resource allocation and organisational alignment to ensure timely
and cost-effective delivery against approved budgets;
84
Cairn Energy PLC Annual Report and Accounts 2016
• oversee the Company’s commitment to working responsibly; and
•
review and approve the Company’s Standard Operating Procedures.
The Exploration Leadership Team (ELT), which is chaired by the Director
of Exploration, comprises the Group Geoscience Manager, the Chief
Geologist, the Chief Geophysicist, three regional Exploration Managers
and a representative from new ventures/new business.
The ELT meets on a monthly basis to facilitate alignment, consistency,
best practice and teamwork in the following areas:
• ensuring exploration, appraisal and new venture opportunities
align with the Company’s Business Plan;
• ensuring consistent screening and ranking of exploration
opportunities prior to detailed assessment, thereby utilising the
significant knowledge and experience of the ELT;
• developing and implementing new geosciences technology and
techniques where appropriate for application within the Company
to reduce subsurface uncertainty and/or risks; and
• ensuring appropriate representation at resource assessment
reviews and other internal subsurface peer reviews.
Board meetings
During 2016, six scheduled meetings of the Board were held, with all
of these meetings taking place over two consecutive days. The first
day includes a Chief Executive’s lunch with the non-executive directors
and a Board education session followed by a pre-Board meeting
and a Board dinner in the evening. The pre-Board meeting includes a
detailed presentation from senior management on key projects, assets
or matters to be considered at the Board meeting and thereby provides
an excellent opportunity for a technically rigorous discussion. It also
allows the Board to more fully understand any risks or challenges to
the business plan and strategy and allows exposure to talent within
the Company.
The Company’s Board meetings are then held on the second day
and followed by a Board lunch. Board committee meetings are
held on either the first or second day or, depending on the number
of committee meetings required, on both days. All Board committee
meetings take place prior to the main Board meeting so that the chair
of each committee can provide a report to the Board.
Three of the Board meetings during 2016 were held at the Company’s
registered office in Edinburgh, two were held at the Company’s office in
London and one was held at the Company’s office in Stavanger. Details
of attendance at each of those Board meetings, and at meetings of
each of the Board committees, are set out on page 86. Any director
who is physically unable to attend Board and committee meetings is
given the opportunity to be consulted and comment in advance of the
meeting by telephone or in writing. Video and telephone conferencing
facilities are used in the unlikely event that directors are not able to
attend meetings in person.
The annual timetable for Board and committee meetings is
discussed at least 18 months prior to its commencement allowing the
directors to plan their time accordingly. The Board and committees
have agreed dates for all scheduled meetings in 2017 and 2018. This
process ensures that the Chairman can be comfortable that each
director is able to devote sufficient time and resources to their role
on the Board and, where relevant, its committees.
The formal agenda for each scheduled Board meeting, which
regularly includes presentations from senior management, is set by the
Chairman in consultation with the Chief Executive and the Company
Secretary. The system for establishing agenda items means that the
Chairman, the Board and each of the board committees have the
confidence that all required items are included on their agenda at
the most appropriate time of the year and that there is sufficient
time allocated for discussion, allowing the directors to discharge
their duties effectively.
Leadership and Governance Formal minutes of all Board and committee meetings are circulated
to all directors prior to the next Board meeting and are considered
for approval at that Board meeting. In addition, the members of the
Board are in frequent contact between meetings to progress the
Group’s business. There is also a procedure in place to allow Board
meetings to be convened at short notice where required to deal with
specific matters which need to be considered between scheduled
Board meetings.
The non-executives have a practice of meeting informally before and
after each Board meeting without executive directors being present.
At these non-executive forums, the non-executive directors are invited
by the Chairman to bring forward any matter pertaining to the business
of the Board that they believe would benefit from discussion in such
forum. This practice also applies after Board committee meetings
(in particular the audit, remuneration and nomination committees)
to ensure that non-executive directors can discuss any relevant
issues arising from those meetings without executive management
being present.
Overseas Board Meetings
A valuable opportunity for the Board to enhance its knowledge and
understanding of the business by combining one meeting in the annual
Board cycle with visits to overseas offices and site visits to key assets.
Senegal: December 2015
The Board spent three days in Senegal in early December 2015
including an offshore visit to the drilling rig operating at that time.
The Board and committee meetings were held in the Dakar
office and the Board also met with a number of Senegalese
government ministers at a reception hosted by the British
Ambassador to Senegal.
Stavanger: June 2016
The Board spent two days in Stavanger in June 2016 – in addition
to the Board and committee meetings held in the Stavanger
office, the Board held a half-day strategy session and had a
detailed presentation on the Group’s North Sea assets from
the Stavanger management team.
Board visit to Ocean Rig Athena drill ship used during
Cairn’s 2015/2016 Senegal drilling campaign.
85
Corporate Governance Statement
continued
Directors’ attendance at Board and committee meetings
The table below sets out the attendance record of each director at scheduled Board and Board committee meetings during 2016.
Board meeting attendance
Meetings held
during 2016 1
Executive Directors
Simon Thomson (Chief Executive)
James Smith (CFO)
Non-Executive Directors
Ian Tyler (Chairman)
Iain McLaren
(Senior Independent Director)
Todd Hunt
Alexander Berger
Jackie Sheppard
Keith Lough
Peter Kallos
Board
6
Audit
Committee
Remuneration
Committee
Nomination
Committee
Governance
Committee
4
6
3
2
Meetings attended
Meetings attended
Meetings attended
Meetings attended
Meetings attended
n/a 2
n/a 3
n/a 2
n/a
n/a 4
5
n/a 6
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Notes:
n/a not applicable (where a director is not a member of the committee).
1
2
During 2016, certain directors who were not committee members attended meetings of the audit committee, remuneration committee, nomination
committee and governance committee by invitation. These details have not been included in the table.
Simon Thomson is not a member of the remuneration committee but attends its meetings by invitation (other than parts of meetings where he would
be conflicted). Mr Thomson also attends part of each audit committee meeting by invitation (to participate in discussions on risk and internal control only).
James Smith is not a member of the audit committee but attends its meetings by invitation.
Ian Tyler is not a member of the audit committee but attends its meetings by invitation.
3
4
5 Whilst Ian Tyler was unable to attend the first remuneration committee meeting held in 2016, he submitted detailed comments prior to the meeting to both
the chair of the committee and the Chief Executive (the meeting had been convened to consider one agenda item, namely performance against the Group’s
2015 KPIs),
Todd Hunt is not a member of the remuneration committee but attends its meeting by invitation.
Nicoletta Giadrossi was appointed as a non-executive director of the Company on 10 January 2017 and did not attend any meetings during 2016.
6
7
86
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance
Board committees
Board committee structure
Further information on the role, responsibilities and work of the
remuneration committee is included in the Directors’ Remuneration
Report on pages 98 to 124.
Board of Directors
Nomination committee
Audit
Committee
Remuneration
Committee
Nomination
Committee
Governance
Committee
The members of the nomination committee during the year were
as follows:
The Board has established an audit committee, a remuneration
committee, a nomination committee and a governance committee,
each of which has formal terms of reference approved by the Board.
Copies of the terms of reference, which satisfy the requirements
of the UK Corporate Governance Code, are available on the
Company’s website.
Each of the Board committees is provided with all necessary resources
to enable them to undertake their duties in an effective manner. The
Company Secretary acts as secretary to all Board committees with
the exception of the audit committee, where the Deputy Company
Secretary undertakes this role. The minutes of all committee meetings
are circulated to all directors.
In line with best practice, more detailed reports from the audit
and nomination committees are presented as separate reports
(on pages 91 to 97) rather than including these in the Corporate
Governance Statement. In addition, full details of the Company’s
remuneration policy are given in the separate Directors’ Remuneration
Report on pages 98 to 124.
Audit committee
The members of the audit committee during the year were as follows:
•
Iain McLaren (Chair);
• Alexander Berger; and
• Keith Lough
The audit committee met four times during 2016 and currently
comprises three independent non-executive directors. The Chairman is
not a member of the committee but attends its meetings by invitation.
Further information on the role, responsibilities and work of the audit
committee is included in the Audit Committee Report on pages
91 to 95.
Remuneration committee
The members of the remuneration committee during the year were
as follows:
Jackie Sheppard (Chair);
•
Iain McLaren;
•
•
Ian Tyler; and
• Peter Kallos
The remuneration committee met six times during 2016 and currently
comprises four independent non-executive directors. The Chief
Executive is not a member of the committee but attends its meetings
by invitation. The committee’s remuneration advisers, New Bridge
Street, also attended some of the committee’s meetings. None of the
members of the committee, nor the Chief Executive nor the Chairman,
participated in any meetings or discussions relating to their own
remuneration. The committee has established a practice of meeting
informally without any executive directors or advisers present after
each committee meeting to allow the non-executives to discuss any
matter which has arisen in the meeting (or relating to the duties of
the committee) which they believe would benefit from discussion
in such a forum.
Ian Tyler (Chair);
•
•
Iain McLaren;
• Simon Thomson;
• Keith Lough; and
• Peter Kallos
The nomination committee met three times in 2016. The Chairman
and three of the Company’s independent non-executive directors are
members of the committee. In addition, to ensure continuing executive
input on nomination matters, the Chief Executive is also a member of
the committee.
Further information on the role, responsibilities and work of the
nomination committee is included in the separate Nomination
Committee Report on pages 96 and 97.
Governance committee
The members of the governance committee during the year were
as follows:
Jackie Sheppard (Chair);
•
• Alexander Berger;
•
• Keith Lough; and
James Smith
•
Ian Tyler;
The governance committee met twice in 2016 and is comprised of a
majority of non-executive directors. In addition, to ensure continuing
executive input on governance matters, the CFO is also a member of
the committee.
The role of the governance committee includes:
•
reviewing and approving changes to the Board’s corporate
governance practices and policies;
• monitoring the Company’s compliance with the UK Corporate
Governance Code and with all applicable legal, regulatory and
listing requirements; and
reviewing developments in corporate governance generally
and advising the Board periodically with respect to significant
developments in the law and practice of corporate governance.
•
Relations with shareholders
Communications with shareholders are given high priority by
the Board. The Company has implemented the provisions of the
Companies Act 2006 regarding electronic communication with its
shareholders, in order to give shareholders more choice and flexibility
in how they receive information from the Company. Cairn responds
promptly to correspondence from shareholders and its website
contains a wide range of information on the Company, including
a dedicated investor relations section.
In order to ensure that the members of the Board develop an
understanding of the views of major shareholders, there is regular
dialogue with institutional shareholders, including meetings with
executive management after the announcement of the year-end and
half-yearly results. The Chairman is available to attend a number of
these meetings. The Board is kept informed of any issues raised by
shareholders both as a standing agenda item in Board papers and
through feedback at pre-Board meetings and following results or
other significant announcements.
87
Corporate Governance Statement
continued
AGM Details (2016 and 2017)
Overview
2016 AGM: held on Thursday 12 May 2016
The Caledonian Waldorf Astoria Hotel, Edinburgh
• Full director attendance
• At least 96.79% of votes received for the re-election
2017 AGM: to be held on Friday 19 May 2017
The Caledonian Waldorf Astoria Hotel,
Edinburgh (full details in Notice of AGM)
of all directors
• Highest votes in favour 99.99% for four resolutions
• Lowest votes in favour: 96.55% to approve 14 days’ notice
of general meetings
• Full director attendance expected
• New remuneration policy to be tabled for approval
•
18 Ordinary Resolutions and 4 Special Resolutions being
proposed to shareholders
In addition, the Company maintains an investor relations database
which details all meetings between the Company and its investors
or other related stakeholders. All analyst reports relating to the
Company are also distributed to the Board.
A list of the Company’s major shareholders can be found in the
Directors’ Report on page 127. The Company recognises that the
success of the comply-or-explain approach under the UK Corporate
Governance Code depends on an ongoing and open dialogue
with shareholders, and remains committed to communicating with
shareholders, as well as proxy voting agencies, on any matter which
they wish to discuss in relation to the Company’s governance.
During 2016, the Company undertook a comprehensive programme
of engagement with a selection of Cairn’s larger institutional investors
and their representative bodies in order to understand their views
on a number of proposed changes to the Company’s remuneration
arrangements. Shareholders were given an early opportunity to raise
any questions, and certain suggestions made by shareholders were
included in the final remuneration structure set out in the Directors’
Remuneration Report.
Annual General Meeting (AGM)
The Board uses the AGM to communicate with private and institutional
investors and welcomes their participation. It is policy for all of the
directors to attend the AGM. Whilst this may not always be possible
for business or personal reasons, in normal circumstances the chair
of each of the Board committees will be available to attend the AGM
and be prepared to answer questions.
As part of our commitment to transparency we look to involve
shareholders, as one of our key stakeholder groups, fully in the
affairs of the Company and to give shareholders the opportunity
at the AGM to ask questions about the Company’s performance and
activities. Details of resolutions to be proposed at the AGM on 19 May
2017 can be found in the Notice of Annual General Meeting which is
contained in the shareholder circular posted with this Annual Report
and Accounts. Further explanation of each of the resolutions can
also be found in the circular.
The proxy votes for and against each resolution, as well as abstentions,
will be counted before the AGM and the results will be made available
following the meeting after the shareholders have voted in a poll on
each resolution. Both the Form of Proxy and the poll card for the AGM
include a ‘vote withheld’ option in respect of each resolution, to enable
shareholders to abstain on any particular resolution. It is explained on
the Form of Proxy that a ‘vote withheld’ is not a vote in law and will
not be counted in the calculation of the proportion of the votes ‘for’
or ‘against’ a resolution.
88
Cairn Energy PLC Annual Report and Accounts 2016
Information pursuant to the Takeover Directive
The Company has provided the additional information required
by the Disclosure and Transparency Rules of the UK Listing rules
(and specifically the requirements of DTR 7.2.6 in respect of directors’
interests in shares; appointment and replacement of directors; powers
of the directors; restrictions on voting rights and rights regarding control
of the Company) in the Directors’ Report.
Internal control
The Board has overall responsibility for the Group’s system of internal
control, which includes all material controls, including financial,
operational and compliance controls and related risk management,
and for regularly reviewing its effectiveness. The system of internal
control is designed to identify, evaluate and manage significant risks
associated with the achievement of the Group’s objectives. Because
of the limitations inherent in any system of internal control, Cairn’s
system is designed to meet its particular needs and the risks to which
it is exposed, with a focus on managing risk rather than eliminating
risk altogether. Consequently it can only provide reasonable and not
absolute assurance against material misstatement or loss.
The Company has in place an Integrated Internal Control and
Assurance Framework (the ‘framework’), which plays a critical role
in setting out how the Company manages and assures itself that the
risks relating to the achievement of corporate vision, strategy and
objectives are effectively controlled. The framework is based on
the Committee of Sponsoring Organisations (COSO) framework and
its five key components, which is a commonly used and recognised
framework for considering internal control systems. The COSO
framework, which was first released in 1992 and updated in 2013,
seeks to help organisations develop systems of internal control
which help facilitate the achievement of business objectives and
improvements in Company performance. The framework also
supports organisations in adapting to increasingly complex business
environments and managing risks to acceptable levels with the aim
of safeguarding shareholders’ interests and Company assets.
The framework has been in place for the 2016 financial year and up
to the date of approval of the Annual Report and Accounts. The Board,
supported by the audit committee, has carried out a review of the
effectiveness of the system of internal controls during 2016 and will
ensure that a similar review is performed in 2017. In so doing, the Board
and audit committee took into account the assurance provided by the
Chief Executive in respect of the effectiveness of the Group’s system
of internal control. The Board is accordingly satisfied that effective
controls are in place and that risks have been mitigated to a tolerable
level across the Group in 2016.
Leadership and Governance Cairn seeks to create value through oil and gas exploration and
production while at the same time safeguarding the environment
and respecting and contributing to the communities it is a part of. In
order to achieve this, Cairn’s core values of building respect, nurturing
relationships and acting responsibly are at the core of the business,
informing how the Company operates. These values are promoted
to Cairn’s employees, partners and contractors. Cairn’s licence to
operate depends on transparent relationships and active stakeholder
engagement programmes with our many stakeholders including
governments, communities, partners, shareholders and suppliers
globally. The directors believe that this commitment to strong
governance generates trust and ensures consistent global standards
and is critical to the Company’s success.
Particular attention has been placed by the Company’s management
during 2016 on ensuring that an effective system of internal control
has been maintained during the year in relation to the key risks in the
Company’s business activities. Enhancements have been made during
2016 to the following key controls, business processes and procedures:
•
•
•
•
•
the Group developed a Cairn Operating Standards Manual of core
business processes which outlines ‘the Cairn way’ for executing key
processes. The Manual was rolled out across the Group in 2015 and
a further three chapters were added to it in 2016. Compliance with
the business standards became mandatory from Q1 2016;
the suite of policies and procedures which form the Group’s
Corporate Responsibility Management System (CRMS) were
enhanced to achieve continued alignment with the Cairn Operating
Standards and the latest International Association of Oil and Gas
Producers (IOGP) guidance. This included the Group Code of
Business Ethics and the Group’s CR policies;
the Group Risk Management Procedure was updated to incorporate
a number of recommendations from a recent risk management
audit and to include some emerging practices in risk management.
The procedure was rolled out across the Group in Q1 2016;
the Group Business Continuity Plan was revised in 2016 to
determine if the existing business continuity recovery strategy
remained appropriate. A test of the Business Continuity Plan is
planned for Q4 2017; and
the Group plans to implement a new Enterprise Resource Planning
(ERP) solution to replace the existing Oracle e-business suite.
The aim of this project is to enhance levels of engagement and
compliance through the implementation of an intuitive system
interface. This would provide a single global ERP platform for
Cairn, facilitating consistent, transparent processes in Edinburgh,
Stavanger, Dakar and London.
The following describes the key elements of the framework and the
processes used by the Board during 2016 to review the effectiveness
of the system and the approach to be taken in 2017.
1. Strategic Direction
The Company’s strategy and business plan are proposed by the SLT
and approved by the Board. The Chief Executive is responsible for
managing the Company’s business and implementing the Company’s
strategy and overall commercial objectives in consultation with
the Board and SLT. The Chief Executive is also responsible for
implementing the decisions of the Board and its committees and
driving performance against the Company’s KPIs.
2. Operating Management
The Company operates three regional units covering different
countries and assets and with various partners on both an operated
and non-operated basis. The assets within each region are the principal
focus for our regional managers, who are tasked with delivering the
strategic objectives for their particular region, with a combination of
operational and technical teams as well as functional departments
providing support to each of the assets. The implementation of the
Cairn Operating Standards supports this process, providing assurance,
standards and consistency in the delivery of our strategic objectives.
The executive directors continue to be supported by the SLT as well
as by the MT and ELT. Further information on the composition of these
teams and their remit can be found earlier in this statement on page 84.
There are also a number of functional department heads whose roles
include providing expert input and challenge to the Company’s work
programmes, budgets and business plans; and supplying the directors
with full and accurate information with which to make statements on
the adequacy of internal control.
The Company refreshes its Business Plan, work programme and
budget on an annual basis in line with its overall strategy. These
documents start at asset level before being consolidated at regional
and Company levels. The Business Plan sets out detailed objectives
and KPIs for each asset and supporting functional departments, and is
consolidated into the Company’s strategic planning. After an iterative
process, the annual Business Plan, work programme and associated
budget are presented to the Board for approval.
The asset management teams then have the required authority
to implement the Business Plan and to deliver the agreed work
programmes within the approved budget and delegations of
authority, and in accordance with the internal control framework.
3. Risk Management
The Board is responsible for maintaining sound risk management and
internal control systems across the Cairn Group. The Board must satisfy
itself that the significant risks faced by the Group are being managed
appropriately and that the system of risk management and internal
control is sufficiently robust to respond to internal or external changes
in the Group’s business environment.
The RMC continues to be responsible for the development of risk
management strategy and processes within the Company and for
overseeing the implementation of the requirements of this strategy.
It does this by ensuring that the framework for the identification,
assessment, mitigation and reporting on all areas of risk is fit for
purpose and that appropriate assurance arrangements are in place
in relation to these risks to bring them within the Risk Appetite
Statement agreed by the Board.
To supplement the role of the RMC, the Group Risk Management
Procedure defines the processes through which Cairn seeks to
systematically identify, analyse, assess, treat and monitor the business
risks faced by the Group. The Group Risk Management Procedure also
identifies the risk management organisational structure through which
business risks are managed and regularly reviewed at operating, asset,
country and Company levels. Asset, project, country and functional
level risk registers are used to capture, assess, monitor and review risks
before the principal risks are consolidated into the Group Risk Register.
In 2016, risk management updates were presented at each Board
meeting and as part of an annual process, the Board undertook
a strategic risk workshop which analysed the key threats and
opportunities which could impact on achievement of the Group’s
strategic objectives. This was completed in December 2016.
The RMC, which meets on a quarterly basis, was chaired by the CEO
in 2016 and comprises the executive directors and senior functional
management. The internal auditor also attends RMC meetings, in order
to ensure internal audit’s integration with the risk management process.
Regular MT risk meetings were also held during 2016 to manage and
facilitate the assessment and treatment of business risks that may
affect the Company’s ability to deliver its strategy.
89
• control over non-operated joint venture activities through
•
functional management reviews;
delegated representatives;
specific delegations of authority for all financial transactions and
other key technical and commercial decisions;
segregation of duties where appropriate and cost-effective;
•
• business and financial reporting, including KPIs;
•
• an annual ‘letters of assurance’ process, through which asset and
functional managers review and confirm the adequacy of internal
financial and non-financial controls and their compliance with
Company policies, and report any control weaknesses identified in
the past year and actions taken in respect of weaknesses identified
in the prior year;
• a ‘letter of assurance’ from the Chief Executive confirming the
adequacy of internal controls within the Company in line with its
policy, and reporting of any control weaknesses identified in the
past year and actions taken in respect of weaknesses identified
in the prior year;
•
•
• an annual internal audit plan, which is approved by the audit
committee and Board and is driven by risks and key controls;
reports from the audit committee and RMC;
reports from the external auditor on matters identified during its
statutory audit;
reports from audits by host governments and co-venturers;
independent third party reviews; and
the skills and experience of all employees.
•
•
•
IAN TYLER
Chairman
7 March 2017
Corporate Governance Statement
continued
Enhancements to our approach to risk management during 2016
included the following:
•
•
the Group Risk Appetite statement was reviewed and approved
by the Board. The Board is satisfied that the current level of risk
the Group is willing to take in pursuit of its strategic objectives is
appropriate;
the Group Risk Management Procedure was revised and rolled
out across the Group in Q1 2016; and
• a project was undertaken to review the merit of implementing a
risk solution to enhance the risk management system. A number
of systems were evaluated and work continues on determining the
value of implementing a risk solution. A final decision is expected
in Q1 2017.
The RMC reports on the Company’s risk profile to both the audit
committee and the Board. Additionally, the audit committee and the
Board receive internal reviews of the effectiveness of internal controls
relative to the key risks. The conclusion of the Board following these
reviews during 2016 is that the internal controls in respect of key risks
are effective.
4. Assurance
The ‘three lines of defence’ framework adopted by the Board provides
three levels of assurance against the risks facing the Company: first of
all at the operational level; secondly through overview by functional
management and the RMC; and thirdly through internal, external or
joint venture audits.
The integrated internal control and assurance framework document
includes a description of the Company’s business and assurance
models and of its organisation and committee structure, and defines
the relevant roles and responsibilities. The framework defines the key
policies and procedures which govern the way in which Cairn conducts
its business and is therefore a core part of its system of internal control.
During 2016, the directors reviewed the effectiveness of the Company’s
system of financial and non-financial controls, including operational
and compliance controls, risk management and high-level internal
control arrangements through the completion of internal control
self-assessment questionnaires. These questionnaires, which are
tailored to each region or function, are designed to provide an internal
assessment of the effectiveness of key controls for the Group’s
principal risks.
Additionally, assurance maps for the principal risks are being
developed, which outline the key sources of assurance across
the three lines of defence. The three lines of defence model is a
method of assessing different sources of assurance the Group can
rely on when analysing key risks and controls. Assurance is gained
through the application of the business management system which
directs the day-to-day running of the business (first line), the oversight
functions within Cairn which provide challenge to the risk and control
environment (second line) and any third party reviews the Group
instructs to assess the status of a risk/control (third line). The assurance
maps help identify potential areas of control weakness and/or
ineffective use of assurance resources across the Group, which
has influenced the topics included in the 2017 Internal Audit Plan.
The Directors derived assurance from the following internal and
external controls during 2016:
• a regularly updated schedule of matters specifically reserved for
•
a decision by the Board;
implementation of policies and procedures for key business
activities;
• an appropriate organisational structure;
90
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Audit Committee Report
The Audit Committee
The audit committee continued to support the Board in
its responsibilities which include setting the Company’s
strategic aims, providing the leadership to put them into
effect, supervising the management of the business and
reporting to shareholders on their stewardship. As part of
this, the committee’s responsibilities include the integrity
of the Group’s financial statements, the effectiveness
of the Group’s risk management and internal assurance
processes and related governance and compliance
matters, including assessment of going concern and
longer-term viability.
Meetings
attended
Members and meetings in 2016
Iain McLaren
(Chairman)
Alexander Berger
Keith Lough
Member
since
07/08
03/12
05/15
Dear Shareholder,
Composition and summary of audit
committee meetings during the year
During the year under review, I served as Chair of the audit committee
alongside two of my fellow non-executive directors; Alexander Berger
and Keith Lough. Both Alexander and Keith are considered by the
Board to be independent. Ian Tyler also attended meetings in his
capacity of Chairman of the Cairn Energy PLC Board.
The members of the committee have been chosen to provide the wide
range of financial and commercial experience needed to fulfil these
duties. Keith and I are Chartered Accountants with recent and relevant
financial experience. Alexander brings comprehensive industry
knowledge to the committee.
At our request, the CFO, the Chief Executive (in his capacity of Chair
of the Group’s Risk Management Committee) and senior members
of the Finance and Risk and Compliance departments attended each
of these meetings. Additionally, both internal and external auditors
also attended each meeting. I also regularly met privately with the
external audit partner to discuss matters relevant to the Group
throughout the year.
The audit committee met four times in 2016, with meetings arranged
around the key external reporting dates. The first meeting in March
2016 focused on the 2015 year-end external audit process (reported in
the 2015 Annual Report and Accounts). Meetings in June and August
both centred on the Group’s half-year reporting and a December
meeting on planning for the 2016 year-end cycle and external audit
process and internal work programme for 2017. Subsequent to the
year-end, a further meeting was held in March 2017 to conclude on
the 2016 audit and significant issues.
At each meeting the committee receives an updated report from
the external auditors which either explains their plans and scope
for a forthcoming audit or review, or contains the conclusions from
that audit or review. The audit committee also monitors the internal
audit process, tracking the progress of internal audits and reviewing
their output and recommendations.
The audit committee also closely monitor Cairn’s Risk Management
system, reviewing the activities of the Group’s Risk Management
Committee and the Group’s risk management project plan with further
review and challenge of the Group’s risk registers and opportunity
matrix at each committee meeting.
Other business covered by the committee includes the annual
approval of corporate assumptions, the Group’s policy on non-audit
services and the Group’s Whistleblowing Policy.
FRC Corporate Reporting Review
During the year the FRC’s Conduct Committee raised a number of
points on the Company’s 2015 Annual Report. The Committee has
reviewed the correspondence between the Company and the FRC,
noting that the Company has responded to all of the initial points raised.
The Committee are supportive of the Company’s response to date.
As a result of the initial correspondence, additional disclosures are
included in the 2016 financial statements in respect of the Group’s
oil and gas assets and segmental reporting. The Committee also
noted the Company’s commitment to consider the need for further
disclosures on the impact of climate change as appropriate. The
Committee is aware of continuing communication, with the FRC
seeking additional detail on the Company’s assessment on the
impact of climate change and further clarification regarding the
Group’s tax disclosures.
91
Audit Committee Report
continued
Responsibilities and activities during the year
The Terms of Reference of the committee take into account the requirements of the Corporate Governance Code and are available for inspection
on the Group’s website. A summary of the committee’s principal responsibilities and activities during the year is set out below.
Principal responsibilities of the committee:
Key areas formally discussed:
Financial statements
• Monitoring the integrity of the financial
statements of the Group and formal
announcements relating to the Group’s
financial performance;
reviewing any significant financial reporting
judgements; and
reviewing the appropriateness of accounting
policies, their consistent application and
disclosures in financial statements.
•
•
External audit
• Overseeing the Group’s relationship with
Internal risk management and assurance
the external auditors, including:
– making recommendations to the Board
as to the appointment or reappointment
of the external auditors;
– reviewing their terms of engagement and
engagement for non-audit services; and
– monitoring the external auditors’
independence, objectivity and
effectiveness.
• Reviewing the Group’s internal financial
controls and internal control and risk
management systems and oversight of the
Group’s Risk Management Committee; and
• monitoring and reviewing the effectiveness
of the Group’s internal audit function.
• Going concern conclusions and linkage
•
to the viability statement;
significant accounting issues at the
interim and year-end (see below); and
• approval of the Group’s corporate
assumptions (those impacting impairment
testing are summarised in section 2 of the
financial statements).
• Reviewing the external auditor’s scope
and audit plan for the 2016 year-end;
• discussing the materiality levels set by
the auditors;
• approval of the auditor’s remuneration;
• consideration of the results of the external
audit with the auditors and management; and
• assessment of the effectiveness of the
external audit (see below).
• Reviewing the Group’s corporate and
•
•
operational risk register;
reviewing reports on the activities of the
Risk Management Committee;
selection of internal audit work planned for
2017 and consideration for future years; and
• assessment of key findings raised from
internal audits conducted in the year.
Whistleblowing procedures
• Reviewing the Group’s whistleblowing
• Reviewing and approving of the Group’s
procedures and ensuring that arrangements
are in place for the proportionate and
independent investigation of possible
improprieties in respect of financial reporting
and other matters and for appropriate
follow-up action.
whistleblowing procedures.
Other matters
• Reviewing the Group’s policy for approval
• Classification of reserves and resources
of non-audit work to the Company’s
auditors; and
reviewing booking of Group reserves
and resources.
•
for disclosure in the Annual Report.
The review of the Annual Report and Accounts for fair, balanced and understandable presentation and disclosure, while considered by the Audit
Committee, is formally performed and approved by the full Cairn Energy PLC Board.
External audit
The current edition of the UK Corporate Governance Code states that FTSE 350 companies should put the external audit contract out to tender at
least every ten years. Cairn not only adopted this policy but complied with this provision early and completed an external audit re-tendering process
in 2013. PricewaterhouseCoopers LLP (PwC) were subsequently appointed as external auditor of the Group, on our recommendation. The 2016
year-end audit therefore represents the fourth year of PwC’s tenure as Group auditor.
92
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance 2016 year-end significant accounting issues
The Group’s ongoing focus on growing its significant Senegal resource base and on progressing its North Sea developments to first oil and cash flow
in 2017 within a continuing low oil price environment provide the backdrop for the significant accounting issues that were reviewed by the committee
during the year.
Carrying value of exploration assets
Audit committee action
Audit committee conclusions
The committee reviewed the carrying value of the Group’s exploration
and appraisal assets, challenging management where costs remain
capitalised for assets where no exploration drilling has taken place.
After challenging management, the committee are satisfied that
exploration costs remaining in the Group’s exploration and appraisal
assets are appropriately capitalised.
The committee also reviewed the exploration assets impairment tests
performed by management on the Group’s key exploration assets in
the Senegal and UK & Norway regions, noting and challenging the
key assumptions included within fair value models.
The committee were satisfied that impairment tests performed by
management were conducted in accordance with Cairn’s accounting
policy, agreeing with the impairment charge recognised. The committee
were satisfied that the Group’s key corporate assumptions on which the
impairment tests were based are appropriate.
Impairment testing on oil and gas assets and goodwill
Audit committee action
Audit committee conclusions
The committee review and approve the Group’s corporate
assumptions set by management, which include short and long term
oil price. In challenging those assumptions, the committee benchmark
against market trends, observed independently by the Group’s auditors,
seeking assurance that the assumptions used by management are
comparable with those applied in the sector. These assumptions are
key inputs into the impairment testing of the Group’s oil and gas related
assets, which is the most significant accounting issue in the current year.
Further the committee consider asset specific assumptions applied by
management in impairment models, including reserve volumes and
production commencement dates.
The committee reviewed managements conclusion on the
impairment test and the impairment subsequently recorded in
the income statement, seeking assurance from the auditors that
impairment has been disclosed correctly between exploration and
development assets and related goodwill.
The audit committee were satisfied that appropriate corporate
assumptions were adopted by management, as key inputs into
financial models used in the impairment calculations. The committee
continue to monitor these assumptions at each meeting. The committee
also were satisfied with the reserve volumes booked by management,
taking assurance from independent reserve reports which support
management’s approach. As production nears on the Group’s
development assets, the committee were satisfied that commencement
dates for production applied in the impairment models were consistent
with current expectations.
The committee were satisfied that the correct impairment charge was
recorded in the financial statements and that this was appropriately
disclosed by category of asset.
Other recurring accounting issues
There were two further material accounting issues where the audit committee challenged the judgement of management.
Indian taxation arbitration
The audit committee continue to monitor progress in the ongoing arbitration with the Government of India. In line with prior years, the committee
were satisfied that no provision is required in the financial statements in relation to the Indian tax proceedings. The committee support management’s
disclosure of this issue as a contingent liability.
Recognition of deferred tax assets on UK tax losses
The audit committee examined management’s conclusion that it remained inappropriate to recognise deferred tax assets at the balance sheet date.
The committee were satisfied that the approach management had taken to assess the likelihood of future profit available to offset tax losses was
appropriate and that suitable sensitivity analysis had been performed to support management’s conclusion.
Going concern and viability
At each reporting date, management consider the factors relevant to support a statement of going concern (see page 140). The audit committee
review and challenge management’s conclusions so that we may, in turn, provide comfort to the Board that management’s assessment has been
considered, challenged and is appropriate.
Given the continuing low price environment facing the oil and gas industry, the audit committee carefully reviewed management’s going concern
conclusion based on the Group’s latest net cash position and the forecast exploration and appraisal spend in the period ending 31 March 2018. This
confirmed that the Group is fully funded to meet its work programme and firm commitments over this period. The audit committee subsequently
recommended to the Board that the Group continues to use the going concern basis in preparing its financial statements.
With the viability statement now in its second year (included on page 40), the audit committee took advice on how the Company’s implementation
of this new reporting requirement compared with other reporters and what improvements the Company could make in preparing the viability
statement for the current Annual Report.
At the March 2017 meeting the committed reviewed and queried management on the sensitivity analysis prepared to support their conclusions
reached. Following this review, the committee recommended approval of the viability statement to the Board.
93
Audit Committee Report
continued
Assessment of external audit process
The committee has an established framework to assess the effectiveness of the external audit process. This comprises:
Audit committee action
Audit committee conclusion
A review of the audit plan including the materiality level set by the
auditors and the process they have adopted to identify financial
statement risks and key areas of audit focus (summarised in the
Independent Auditor’s Report on pages 129 to 133).
A review of the Audit Quality Inspection (AQI) Report on our auditors
published by the Financial Reporting Council with particular emphasis
on those key messages applicable to Cairn.
A review of the final audit report, noting key areas of auditor judgement
and the reasoning behind the conclusions reached.
The Committee agreed with the level of materiality set by the auditors.
There were no matters raised in the AQI report that caused concern for
the audit committee.
The audit committee reviewed findings on the key audit issues identified.
The committee were satisfied that appropriate challenge had been made
of management and that the audit process was robust.
Regular communications through formal papers submitted and
presentations to the committee and meetings between myself as
Chair of the audit committee and the lead audit engagement partner.
The audit plan for the year ending 31 December 2016 was presented to
the audit committee in June 2016 and is summarised in the Independent
Auditor’s Report on pages 129 to 133.
A formal questionnaire issued to all audit committee members and
senior Cairn management who are involved in the audit covering the
robustness of the audit process, the quality of delivery, the quality
of reporting and the quality of the auditor’s people and service.
No matters of significance were reported.
Of particular focus for the Committee is the assessment of the judgement applied by PwC during each stage of the audit process including
setting audit materiality, identifying the risks to the financial statements, evaluating audit findings and communicating those areas of judgement
to the committee.
The audit committee noted the level of planned materiality and agreed on the levels of misstatements to be reported to the committee. The final
audit report was presented to the audit committee in March 2017. After thorough discussion, the committee agreed with the conclusions that the
auditors had reached noting the degree of judgement around the areas of significant audit risk.
Auditor independence and provision of non-audit services
We have a long-established policy in relation to the supply of non-audit services by the external auditors. The Group will engage an external
adviser to provide non-audit services on the basis of the skills and experience required for the work, where benefit will be derived as a result of
the third party’s knowledge of the Group and at a reasonable cost. These advisers may include the Group’s external auditors, under a restricted
set of circumstances, although, before the engagement commences, Cairn must be satisfied that the auditor’s objectivity and independence would
not be compromised in any way as a result of being instructed to carry out those services.
The Group’s current policy for approval of non-audit services was reviewed and re-approved by the audit committee in December 2016. Full details
of the Group’s policy can be found on the Company’s website.
During the year, PwC provided other services including certification of the Group’s EITI submission in Senegal and providing the accountant’s report
on the circular requesting approval for the sell-down of the Group’s holding in Cairn India Limited should the current restriction be lifted.
A full analysis of remuneration paid to the Group’s external auditor in respect of both audit and non-audit work is provided in note 6.4 to the
financial statements.
Internal audit
Following a competitive tender process, Ernst & Young LLP (EY) were appointed as the Group’s internal auditor with effect from July 2013. Prior to
the beginning of each year, an internal audit plan is developed by the internal auditor, in consultation with senior management, based on a review of
the outcome of the previous year’s internal audits, the outcome of the annual assessment of effectiveness of internal control (refer to page 88), the
results of historical audits of fundamental business processes and the significant risks in the Group Risk Matrix and identified mitigation measures.
The plan is then presented to the audit committee for review and approval. The internal auditor also participates in meetings of the Group Risk
Management Committee to maintain an understanding of the business activities and associated risks and to update the Group Risk Management
Committee on the internal audit work plan. The audit committee also receives updates on the internal audit work plan on an ongoing basis. The
external auditors do not place any reliance on the work undertaken by the Group’s internal audit function due to the nature of the scope and the
timing of their work. The external auditors do, however, attend all committee meetings where internal audit updates are given and meet separately
with the internal auditors to discuss areas of common focus in developing their audit plan.
94
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Working responsibly – whistleblowing and related policies
The Group is committed to working responsibly as part of its strategy to deliver value for all stakeholders. This means delivering value in a safe,
secure, environmentally and socially responsible manner.
As part of this the audit committee is responsible for ensuring the Group has a robust Whistleblowing Policy in place. This policy is reviewed regularly
by the audit committee, with the last review in December 2016. An independent review of the Group’s Whistleblowing Policy and procedures was
also undertaken earlier in 2016.
The committee is also responsible for and is satisfied that arrangements are in place for the proportionate and independent investigation of possible
improprieties in respect of financial reporting and other matters and for appropriate follow-up action.
The Group has in place a comprehensive Anti-Bribery-and-Corruption Management System and Code of Business Ethics. During 2016 a Group
wide initiative was undertaken to provide a training update to all employees and long-term contractors in addition to the training that is provided to
all new staff joining the company. Bespoke training was also provided to the Board during 2016. As Cairn enters new countries, further monitoring is
undertaken and training is continued. Further information regarding these policies can be found on the Group’s website.
IAIN MCLAREN
Chair of the audit committee
7 March 2017
95
Nomination Committee Report
The Nomination Committee
Members and meetings in 2016
Cairn recognises that the role of its nomination committee,
working together with the Board as a whole, is key to
promoting effective board succession and the alignment
of board composition with the Company’s culture, values
and strategy. The Company reviewed the results of the
work undertaken by the Financial Reporting Council
in 2015 and 2016 in relation to UK Board succession
planning and revisited the role of the Board and nomination
committee in this context to ensure it remains appropriate.
The membership of the committee is set out in the corporate
governance statement and comprises a majority of non-executive
directors; the Chief Executive is also a member of the committee.
The role of the nomination committee includes:
• evaluating the balance of skills, knowledge, experience, diversity
•
and independence on the Board;
supporting the process for Board appointments and making
recommendations to the Board in respect of new appointments;
• working with the Board to address any performance evaluation
outcomes linked to Board succession planning; and
• oversight of the executive pipeline of talent beneath Board level.
Ian Tyler
(Chairman)
Simon Thomson
Iain McLaren
Keith Lough
Peter Kallos
Member
since
05/14
03/13
03/13
05/15
09/15
Meetings
attended
Board changes
The Company appointed two new non-executive directors during
2015 and fully described the process for these appointments in last
year’s Corporate Governance Statement.
During 2016, the Company commenced a search for one additional
new non-executive director resulting in the appointment of Nicoletta
Giadrossi in January 2017. The Company instructed recruitment
consultants Spencer Stuart in connection with this appointment.
Spencer Stuart provided independent advice and services to the
Company throughout the search, including the preparation of
both a long and short list of candidates for consideration by the
nomination committee.
All candidates on the short list were initially interviewed by the
Chairman and Chief Executive following which Nicoletta Giadrossi
was selected as the preferred candidate. Following selection and prior
to her appointment, Nicoletta met individually with all other members
of the Board and the Company Secretary in December 2016. The
feedback from these meetings was very positive, as a result of which
the nomination committee recommended to the Board that Nicoletta
be appointed as a non-executive director of the Company and the
proposed appointment was unanimously approved by the Board.
Prior to her appointment, Nicoletta was given the opportunity to, and
subsequently did, carry out due diligence on the Company. She was
also provided with the Company’s induction pack for new directors
(further details of the Company’s induction process are included in
the Corporate Governance Statement on pages 82 and 83). Nicoletta
was appointed on 10 January 2017 and also became a member of
the remuneration committee with effect from that date. She will seek
re-election by shareholders at the AGM to be held on 19 May 2017.
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Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Succession planning and development of executive pipeline
The nomination committee regularly evaluates the balance of skills, experience, independence and knowledge of the Company on the Board and
makes recommendations to the Board as appropriate. In so doing, the committee fully supports the principle that any new appointments to the
Board should be made on merit, against objective criteria, and with due regard for the benefits of diversity on the Board, including gender.
The Board and nomination committee work together with the aim of maintaining a comprehensive succession plan for appointments to the Board
and to senior management, so as to maintain an appropriate balance of skills and experience within the Company and on the Board and to ensure
progressive refreshing of the Board. The Company’s succession planning also includes contingency plans for the sudden or unexpected departure
of executive directors and other senior managers.
The Board has also carefully considered the significance of succession planning and human resource management to the Company’s strategy
and will be annually reviewing this at Board level.
The key positions covered in our succession plan include the executive directors, regional directors and a number of other senior functional and
technical managers. The Board considered succession planning for each of the key positions, analysed any succession gaps or risks identified
and considered how best to continue to develop the succession pipeline of executive talent. As a result, the Board has a deep understanding of
succession planning across the Company and the range of measures being used to continue to develop and recruit talented senior employees.
During 2016, the Board’s review of succession planning covered an executive summary, a review of the process used by the Company for
succession planning, key achievements since the previous review, analysis of the succession plan for each key position over various time horizons,
an organisational capability assessment and ‘health-check’, and actions being undertaken to address any succession risks or challenges identified.
Diversity
The nomination committee very much takes into account the benefits of diversity on the Board, including gender. Following the recent appointment
of Nicoletta Giadrossi, the Company currently has two female non-executive directors (representing 20% of total membership) and the Board is
very diverse in terms of the range of culture, nationality and international experience of its members. The directors’ diverse range of experience
and expertise covers not only a wealth of experience of operating in the oil and gas industry but also extensive technical, operational, financial,
governance, legal and commercial expertise. The committee will further monitor and consider diversity for future Board appointments, whilst
continuing to recruit on merit.
Beneath Board level, the Company also aims to develop and increase the number of women in senior management roles across the Group. There is
currently one woman on the Senior Leadership Team (representing 14% of total membership) and there are two women on the Management Team
(representing 20% of total membership).
The Company operates a range of measures which support diversity at Cairn, including succession planning, training and development, and flexible
working policies. The pipeline of younger talent within the Group is also diverse and bodes well for the future.
Board and committee performance evaluation
The Board retains overall responsibility for implementation of its annual performance evaluation and the process and outcomes of the 2016
evaluation are described in the Corporate Governance Statement on pages 81 and 82. The process included a review of all Board committees
and it was concluded that the relationship between the Board and its committees was functioning well, with all committees fully meeting their
remit. The nomination committee works together with the Board in seeking to address any performance evaluation outcomes relating to Board
composition and succession planning.
IAN TYLER
Chair of the nomination committee
7 March 2017
97
Directors’ Remuneration Report
The Remuneration Committee
Members and meetings in 2016
Jackie Sheppard
(Chair)
Ian Tyler
Iain McLaren
Peter Kallos
Meetings
attended
Member
since
10/11
06/13
05/10
09/15
98
Cairn Energy PLC Annual Report and Accounts 2016
Part 1 – Annual statement
from the Chair of the committee
Dear shareholder,
As the Chair of Cairn’s remuneration committee, I am pleased to
present our Directors’ Remuneration Report for 2016. During the year,
we continued to apply the executive remuneration policy that was
originally put in place in 2014. However, as this policy will expire shortly,
shareholders will be asked to approve a new framework for directors’
pay at the forthcoming Annual General Meeting.
An overview of the new policy is set out below, with full details being
provided in the Directors’ Remuneration Policy that forms Part 2 of
this report. Part 3 contains our Annual Report on Remuneration which
identifies the various elements of pay that were actually delivered to
the Company’s directors during the year ended 31 December 2016; an
overview of these items is also set out in this introductory statement.
At this year’s AGM on 19 May 2017 shareholders will be asked to
vote on the contents of the new Directors’ Remuneration Policy – if
approval is received, the policy will immediately become binding and
it is anticipated that it will be operated during the remainder of 2017
and onwards until the 2020 AGM. Shareholders will also be invited to
pass an advisory vote in relation to the Annual Report on Remuneration.
The committee hopes that our shareholders will be supportive of both
these resolutions.
Our new remuneration policy for 2017 and beyond
As highlighted in my introductory letter to last year’s
directors’ remuneration report, the committee commenced
its review of pay arrangements across the organisation
during the course of 2015. This process has involved
a critical examination of each element of executive
compensation in the context of the following principles:
• Alignment with strategy – our remuneration
policy should actively support an alignment with
the Company’s strategy and business model and
should incentivise executives to deliver our long-term
strategic objectives for the benefit of shareholders;
• Simplicity – our pay structures should be simple
and transparent, thereby improving line of sight for
participants and increasing clarity for investors; and
• Best practice – it is important that our remuneration
arrangements appropriately reflect shareholders’
expectations and include best practice themes as
they develop.
Against this background, the committee has formulated a
new remuneration framework which is intended to provide
a better balance between driving short-term performance
and rewarding long-term success. The restated policy does,
however, maintain an emphasis on longer-term shareholder
alignment and introduces a number of additional features
that reflect changes to best practice since 2014.
Full details of the new policy are set out in Part 2 of this
report; pages 123 and 124 also contains a summary of how
it will actually be implemented in its first year of operation.
However, the main differences between the revised
approach and the Company’s 2014 policy can be
highlighted as follows:
Leadership and Governance Pay element
Annual bonus
Long Term Incentive Plan –
normal award limits
Long Term Incentive Plan –
exceptional award limits
Long Term Incentive Plan –
performance conditions
Current (2014) policy
New (2017) policy
Bonus opportunity of up to 100% of salary
with any amounts awarded to an individual
being paid out immediately in full.
Awards based on relative Total Shareholder
Return (TSR) normally limited to 300% of salary,
plus a multiplier (see below) that can increase
awards up to 400% of salary for outstanding
absolute TSR performance.
LTIP awards may be made up to 400%
of salary (532% including multiplier) in
exceptional circumstances (e.g. recruitment).
No awards have been granted using this
exceptional circumstances limit under
the 2014 policy.
Vesting of awards based on relative TSR
performance against a sector peer group,
with 20% vesting for achieving a median
ranking, rising on a straight-line basis to 100%
vesting for upper decile performance.
If an upper decile relative TSR is achieved, a
multiplier of up to 1.33 applies to the award
based on Cairn’s absolute TSR performance.
Maximum opportunity increased to 125% of
salary. However, any bonus earned in excess
of the previous 100% of salary limit will be
deferred into Cairn shares for three years.
Awards based on relative TSR limited to 200%
of salary, plus a ‘kicker’ of 50% of salary for
outstanding absolute performance (see below).
No ability to grant awards in excess of normal
annual limits.
For 2017, it is anticipated that two forms of
LTIP award will be granted to each executive
director, namely:
• a ‘core’ award (200% of salary) – dependent
on relative TSR performance against a
comparator group, with 25% vesting for
median ranking, rising on a straight-line
basis to 100% vesting for achievement of
upper quartile level; and
• a ‘kicker’ award (50% of salary) – conditional
on Cairn’s TSR performance delivering
at least 100% growth and an upper quartile
comparator group ranking.
A two year holding period will apply to all the
shares in respect of which a ‘core’ or ‘kicker’
award vests.
Long Term Incentive Plan –
holding periods
A one year holding period applies to 50% of
the shares over which an LTIP award vests.
Taken together, and as illustrated in the following table, the proposed changes will deliver a reduction in the overall maximum incentive opportunity
available to executive directors:
Incentive arrangement
Annual bonus
Long Term Incentive Plan – ‘core’ award
Long Term Incentive Plan – multiplier/‘kicker’ award
Total
Maximum normal opportunity
(as a % of base salary) under….
Current (2014) policy New (2017) policy
100%
300%
100%
500%
125%
200%
50%
375%
The committee is aware that the combined effect of the above variations will be to increase the proportion of the overall remuneration policy that
is directly linked to short term performance. Although we believe that this re-balancing is appropriate given the maturing nature of the business, we
remain confident that there will continue to be a high level of alignment with long-term share price performance, particularly through the introduction
of the new bonus deferral feature and the extended LTIP holding periods. In addition, and subject to the new policy being approved, the committee
has decided that it will increase the shareholding guidelines which apply to executive directors from 100% of salary to 200%.
In order to give effect to certain elements of this revised approach to executive pay, it will also be necessary for the Company to establish a new
Long Term Incentive Plan that will replace the corresponding arrangement that was adopted by shareholders in 2009. Full details of this plan
(which requires the approval of shareholders prior to its introduction) are contained in the circular accompanying this year’s notice of AGM.
As part of the process surrounding the design of our new policy, we consulted extensively with the Company’s major investors and their
representative bodies in order to understand their views on our proposed changes. Those we consulted with were generally supportive
of the proposed changes, and certain suggestions made by these shareholders were included in the final structure set out in this report.
We firmly believe that the new policy described above represents a responsible and cohesive approach to executive remuneration that will
support our strategy and appropriately reward our senior executives for delivering value to our shareholders.
99
Directors’ Remuneration Report
continued
Remuneration in 2016
The work of the committee in 2016 was conducted against a backdrop of a year in which the Company fulfilled its objective of operating with a focus
on safety, building a business with appropriate exposure to material frontier and mature basin exploration whilst maintaining balance sheet strength
and financial flexibility.
Its key decisions relating to remuneration in 2016 are described in more detail in the Annual Report on Remuneration contained on pages 110 to 124
and can be summarised as follows:
Base salary increases
At its meeting in November 2016, the committee agreed that, with effect from 1 January 2017, a base salary increase of 1% would be applied to both
the Company’s executive directors (being Simon Thomson and James Smith).
The above increase was consistent with the level of standard annual salary increase awarded to other employees at that time.
Annual bonus
Based on an assessment of the extent to which the relevant targets were achieved during 2016, payments made under the annual bonus scheme
to the executive directors during the year (as a percentage of annual salary) were 80.16% for Simon Thomson and 78.50% for James Smith. Further
details of the way in which these awards were determined are set out on pages 114 to 117 of the Annual Report on Remuneration.
Long Term Incentive Plan (LTIP)
The performance period applicable to the LTIP awards granted in 2013 came to an end during 2016. Over this period, the Company’s TSR was
sufficient to place it above the median level in the applicable comparator group with the result that these awards vested in respect of 81.68% of
the shares over which they were granted.
As part of the above vesting process, the LTIP’s rules required the committee to review the Company’s overall performance over the three years from
the grant of the awards. After due and careful consideration, the committee concluded that there had been a sustained improvement in such overall
performance during that time.
Non-executive directors’ fees and Chairman’s fee
During 2016 the committee reviewed the Chairman’s annual fee in the context of market data and the time commitment for the role. Following this
review the fee was increased from £160,000, as set on his appointment in May 2014, to £175,000 effective 1 January 2017.
The fees paid to non-executive directors were also reviewed during the year by the Board (excluding non-executive directors). Following this review
it was determined that the basic annual fee would be maintained at £74,900. Similarly, no change was made to the additional fee payable for chairing
the audit and/or remuneration committees.
Feedback on Directors’ Remuneration Report
We welcome questions and feedback from all those interested on both the content and style of this report.
M. JACQUELINE SHEPPARD QC
Remuneration committee chair
7 March 2017
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Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance
Part 2 – Directors’ Remuneration Policy
Introduction
This Directors’ Remuneration Policy provides an overview of the Company’s policy on directors’ pay that it is anticipated will be applied in 2017 and
will continue to apply until the 2020 AGM. It sets out the various pay structures that the Company will operate and summarises the approach that
the committee will adopt in certain circumstances such as the recruitment of new directors and/or the making of any payments for loss of office.
In accordance with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as
amended) (the ‘Regulations’), the policy contained in this part will be subject to a binding vote at the AGM to be held on 19 May 2017 and will
take effect immediately upon receipt of such approval from shareholders.
As discussed in the Chair’s introduction, the proposed policy includes a number of changes from the previous policy approved by shareholders
at the 15 May 2014 AGM:
•
•
•
Increased maximum annual bonus opportunity from 100% to 125% of salary.
Introduction of annual bonus deferral for any bonus earned over 100% of salary. Deferral would be into Cairn shares for a three year period.
Introduction of a replacement long-term incentive plan (the 2017 LTIP). Under this plan the total normal annual opportunity would be reduced
from 300% of salary (400% including the absolute TSR multiplier) to 200% of salary (250% including the ‘kicker’). For 2017 awards this would
include up to 200% of salary for relative TSR performance and up to 50% of salary for a mix of absolute and relative TSR performance.
• Under the relative TSR element, the vesting schedule has changed from 20% vesting for median TSR performance and 100% for upper decile
TSR performance to 25% vesting for median TSR performance and 100% for upper quartile TSR performance.
• The absolute TSR element will be made more challenging and will only vest if the Company’s relative TSR is at least upper quartile and three year
absolute TSR performance is at least 100%. Under the 2014 policy, the multiplier started to apply if the relative TSR hurdle had been achieved and
if absolute three year TSR performance was at least 50%.
• The holding period has been strengthened so that all vested shares (whether arising from the relative or absolute TSR elements) are subject to a
two year holding period.
Purpose and role of the remuneration committee
The remuneration committee determines and agrees with the Board the overall remuneration policy for the executive directors and the Group’s
PDMRs (Persons Discharging Managerial Responsibilities). Within the terms of this agreed policy, the committee is also responsible for:
• determining the total individual remuneration package for each executive director and the PDMRs;
• determining the level of awards made under the Company’s LTIPs and employee share award schemes and the performance conditions which
are to apply;
• determining the KPIs used to measure performance for the annual bonus scheme;
• determining the bonuses payable under the Company’s annual bonus scheme;
• determining the vesting levels of awards under the Company’s LTIPs and employee share award schemes; and
• determining the policy for pension arrangements, service agreements and termination payments for executive directors and PDMRs.
The committee also reviews and approves the overall remuneration levels of employees below senior management level, but does not set individual
remuneration amounts for such individuals. This oversight role allows the committee to take into account pay policies and employment conditions
within the Group as a whole when designing the reward structures of the executive directors and PDMRs. For example, the committee considers
the standard increase applied to basic pay across the Group when setting executive directors’ base salaries for the same period.
The committee operates within written terms of reference agreed by the Board. These are reviewed periodically to ensure that the committee
remains up-to-date with best practices appropriate to Cairn, its strategy and the business and regulatory environment in which it operates. The
terms of reference of the remuneration committee are available on the Company’s website.
Consultation with relevant stakeholders
The committee is always keen to ensure that, in carrying out its mandate, it takes into account the views and opinions of all the relevant stakeholders
in the business.
During 2016, the committee undertook a comprehensive programme of engagement with a selection of the Company’s larger institutional investors
and their representative bodies in order to understand their views on a number of proposed changes to the executive directors’ remuneration
arrangements. Shareholders were given an early opportunity to raise any questions. In developing these proposed changes the committee was
minded to include a number of features, such as bonus deferral, extended holding periods for LTIP awards and increased shareholding guidelines,
which are aligned with shareholders’ interests.
Although the committee does not undertake a formal consultation exercise with employees in relation to the Group’s policy on senior management
remuneration, members of staff are regularly given the opportunity to raise issues on a variety of matters, including executive pay, via a number
of mechanisms.
101
Directors’ Remuneration Report
continued
Overview of proposed remuneration policy
Cairn’s policy on executive directors’ remuneration for 2017 and subsequent financial years is to ensure that it appropriately incentivises individuals
to achieve the Group’s strategy to deliver value for stakeholders by building and maintaining a balanced portfolio of exploration, development and
production assets, whilst offering a competitive package against the market.
A description of each of the elements comprised in the pay packages for Cairn’s directors under its remuneration policy is as follows:
Policy Table – elements of directors’ remuneration package
Remuneration element
Purpose and link to strategy
Operation
Opportunity
Framework for assessing performance
None
Whilst the committee
has not set a monetary
maximum, annual increases
will not exceed the level of
standard increase awarded
to other employees except
that more significant
increases may be awarded
at the discretion of the
committee in connection
with:
• an increase in the scope
and responsibility of
the individual’s role; or
the individual’s
development and
performance in the role
following appointment; or
•
• a re-alignment with
market rates.
None
Company cars up to a
value of £70,000 (or, as an
alternative, an annual car
allowance of up to £8,771)
may be provided. Whilst
the committee has not set
a monetary maximum for
other benefits, they will
be in line with the market
as determined by the
committee.
Base salary
Helps recruit and
retain employees.
Reflects individual
experience and role.
Normally reviewed annually
(with changes taking effect
on 1 January) and/or when
otherwise appropriate,
including when an individual
changes position or
responsibility.
Aim is to provide a
competitive base salary
relative to the market
(although the committee
does not place undue
emphasis on benchmarking
data and exercises its own
judgement in determining
pay levels).
Decision influenced by:
•
role and experience;
•
• average change in
broader workforce
salaries;
individual performance;
and
remuneration practices
in companies of a broadly
similar size and value
and relevant oil and
gas exploration and
production companies.
•
Benefits
Helps recruit and
retain employees.
Directors are entitled to a
competitive package of
benefits. For UK executives,
the major elements include
a company car, permanent
health insurance, private
health insurance, death-in-
service benefit and a gym
and fitness allowance.
The committee reserves
the right to provide
further benefits where
this is appropriate in the
individual’s particular
circumstances (for example
costs associated with
relocation as a result of
the director’s role with
the Company). Executive
directors are also eligible
for other benefits which
are introduced for the
wider workforce on
broadly similar terms.
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Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Remuneration element
Purpose and link to strategy
Operation
Opportunity
Framework for assessing performance
Annual bonus
Rewards the achievement
of annual KPIs and/or other
objectives linked to the
Company’s strategic goals.
Bonuses are awarded by
reference to performance
against specific targets
measured over a single
financial year.
Maximum % of salary: 125%.
Any amounts awarded
to an individual under this
arrangement up to 100%
of salary are paid out in full
shortly after the assessment
of the performance targets
has been completed. The
remainder of the bonus will
be deferred into an award
of shares for a three year
period, or such other period as
determined by the committee.
Annual bonuses may be
subject to clawback, and the
extent to which deferred
share awards vest may be
reduced, where, in the period
of three years from the end of
the relevant financial year, the
committee becomes aware of
a material misstatement of the
Company’s financial results
or an error in the calculation
of performance targets
which, had it been known at
the relevant time, would have
reasonably been expected to
have resulted in a lower award
being made.
The measures and targets
applicable to the annual bonus
scheme (and the different
weightings ascribed to each of
them) are set annually by the
committee in order to ensure they
are relevant to participants and take
account of the most up-to-date
business plan and strategy.
All, or a significant majority, of the
bonus opportunity will normally
be determined by reference to
performance against demanding
Group KPIs such as:
• exploration and new venture
objectives;
• development and production
targets; and
• HSE.
Any remaining part of a
director’s bonus will normally
be based on the achievement of
personal objectives relevant to that
individual’s role within the business.
A payment scale (ranging from 0%
to 100% of the opportunity) for
different levels of achievement
against each KPI and/or other
objective is specified by the
committee at the outset of
each year.
The committee has discretion to
vary the measures and weightings
during the year if events arise which
mean that it would be inappropriate
to continue with the originally
prescribed structure. The
committee expects that this
discretion will only be exercised
in exceptional circumstances and
not to make the bonus scheme
for that year less demanding than
when it was originally set.
In addition, the committee has
discretion to ensure that the
ultimate bonus payment for a
financial year is fair and reasonable
and properly reflects performance
over that period.
103
Directors’ Remuneration Report
continued
Remuneration element
Purpose and link to strategy
Operation
Opportunity
Framework for assessing performance
2017 Long Term
Incentive Plan
(or 2017 LTIP)
Incentivises executive
directors to deliver long-
term performance for the
benefit of shareholders,
thereby aligning the interests
of the directors with those
of the Company’s investors.
Normal total maximum %
of salary: 250%.
Cairn is seeking shareholder
approval for a new LTIP at
the 2017 AGM.
Awards will normally be
made annually with vesting
dependent on achievement
of performance conditions
chosen by the committee
that are measured over a
period of at least three years.
All awards which vest will
normally be subject to a
holding period in terms of
which the relevant shares
will only be released/
become exercisable after
a further period of at least
two years has expired from
the vesting date.
The committee reviews the
quantum of awards annually,
taking into account factors
such as market rates and
overall remuneration.
Awards may be subject
to clawback where, in the
period of three years from
the end of the relevant
performance period, the
committee becomes aware
of a material misstatement
of the Company’s financial
results or an error in the
calculation of performance
conditions which, had it
been known at the relevant
time, would have reasonably
been expected to have
resulted in a lower vesting
being determined.
Vesting of awards granted under
the 2017 LTIP will be determined
by the growth in Total Shareholder
Return (TSR) of Cairn over a
performance period of at least
three years.
Awards up to 200% of salary (the
‘core award’) will be subject to TSR
performance measured relative to
a comparator group selected by the
committee, with no more than 25%
vesting at median and 100% for at
least upper quartile performance.
In order to focus on exploration
success which leads to a material
increase in the share price, once
performance for the ‘core award’
has been fully achieved, an
additional element of up to 50% of
salary can be earned if absolute
TSR growth over the same
performance period equals or
exceeds 100% (the ‘kicker award’).
No part of any award will vest
unless the committee is satisfied
that there has been an overall
satisfactory and sustained
improvement in the performance
of the Company as a whole over
the performance period.
Although the committee’s intention
is that the above conditions will be
applied to LTIP awards granted
in 2017, it may decide to impose
different (but equally challenging)
conditions in future years. The
committee will consult with major
shareholders prior to making any
such decision and will ensure that
the vesting of at least 50% of all
awards granted under the LTIP
continues to be determined by
reference to the Company’s
TSR performance.
104
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Remuneration element
Purpose and link to strategy
Operation
Opportunity
Framework for assessing performance
2009 Long Term
Incentive Plan
(or 2009 LTIP)
Incentivises executive
directors to deliver superior
levels of long-term
performance for the benefit
of shareholders, thereby
aligning the interests of
the directors with those of
the Company’s investors.
Share Incentive
Plan (or SIP)
Encourages a broad range
of employees to become
long-term shareholders.
Normal maximum % of
salary: 300% (400%
including multiplier).
Exceptional circumstances
maximum % of salary: 400%
(532% including multiplier).
Vesting is determined by
comparing the growth in Total
Shareholder Return (TSR) of
Cairn over a performance period
of three years from grant with the
TSR of a comparator group of
international oil and gas companies
that is selected by the committee
prior to each grant, with 20% vesting
at median, 100% at upper decile
and on a straight line sliding scale
in between.
In order to encourage exceptional
performance, the above condition
provides that, at upper decile levels,
a multiplier of up to 1.33 is applied
if absolute TSR growth is between
50% and 100% (or more). It also
states that no part of any award
will vest unless the committee is
satisfied that there has been an
overall satisfactory and sustained
improvement in the performance
of the Company as a whole over
the performance period.
None
Participation limits are
those set by the UK tax
authorities from time to
time. These limits are
currently as follows:
• Partnership shares: up to
£1,800 per tax year can
be deducted from salary.
• Matching shares: up to
two matching shares for
every one partnership
share purchased.
• Free shares: up to £3,600
worth in each tax year.
It is not proposed that
further awards will be
granted to executive
directors under this plan.
Awards vest dependent
on achievement of
performance conditions
measured over a three-
year period.
On vesting of an award,
50% of the shares to which
the holder has become
entitled are released/
become exercisable
immediately, with the
remaining 50% normally
being released/becoming
exercisable after a further
period of one year.
Awards may be subject
to clawback where, in the
period of three years from
the end of the relevant
performance period, the
committee becomes aware
of a material misstatement
of the Company’s financial
results or an error in the
calculation of performance
conditions.
The Company established
an HM Revenue and
Customs approved share
incentive plan in April 2010.
It allows the Company to
provide eligible employees,
including the executive
directors, with some or all
of the following benefits:
• partnership shares
acquired using
deductions from salary;
• matching shares
awarded to those
employees who
purchase partnership
shares on the basis
of a ratio specified
by the Company; and
free shares.
•
Matching and free shares
awarded under the SIP must
normally be held in the plan
for a specified period.
105
Directors’ Remuneration Report
continued
Remuneration element
Purpose and link to strategy
Operation
Opportunity
Framework for assessing performance
Pension
Rewards sustained
contribution.
Non-executive
directors’ fees
Helps recruit and
retain high-quality,
experienced individuals.
Reflects time commitment
and role.
Company contributes 15%
of basic salary on behalf of
executive directors or pays
them a cash equivalent.
None
None
Company’s Articles of
Association place a limit
on the aggregate annual
level of non-executive
directors’ and Chairman’s
fees (currently £900,000).
The Company operates
a defined contribution
group personal pension
plan in the UK. The scheme
is non-contributory and all
UK permanent employees,
including the executive
directors, are eligible to
participate.
The Company contributes
a specified percentage
of basic annual salary for
senior employees, including
executive directors.
Where an executive director
has an individual personal
pension plan (or overseas
equivalent), the Company
pays its contribution to
that arrangement.
If an executive director’s
pension arrangements are
fully funded or applicable
statutory limits are reached,
an amount equal to the
Company’s contribution
(or the balance thereof)
is paid in the form of
additional salary.
Non-executive directors’
fees are considered annually
and are set by the executive
members of the Board and
the Chairman taking into
account a range of relevant
factors including:
• market practice;
•
•
time commitment; and
responsibilities
associated with the roles.
Additional fees are payable
to the Chairs of the audit and
remuneration committees.
Expenses incurred in
the performance of
non-executive duties
for the Company may
be reimbursed or paid
for directly by the Company,
including any tax due on
the expenses.
106
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Remuneration element
Purpose and link to strategy
Operation
Opportunity
Framework for assessing performance
Chairman’s fees
Helps recruit and retain
the relevant individual.
Reflects time commitment.
None
Company’s Articles of
Association place a limit
on the aggregate annual
level of non-executive
directors’ and Chairman’s
fees (currently £900,000).
The Chairman’s fee is
considered annually
and is determined in
light of market practice,
the time commitment and
responsibilities associated
with the role and other
relevant factors.
Expenses incurred in
the performance of the
Chairman’s duties for
the Company may be
reimbursed or paid for
directly by the Company,
including any tax due on
the expenses.
Notes:
1 A description of how the Company intends to implement the policy set out in this table during the financial year to 31 December 2017 is provided on pages 123 and 124.
2 The following differences exist between the Company’s above policy for the remuneration of directors and its approach to the payment of employees generally:
• Participation in the LTIPs is typically aimed at the executive directors and certain selected senior managers. Other employees are eligible to participate in the Employee Share
Award Scheme (details of which are provided on pages 158 and 159.
• Under the Company’s defined contribution pension scheme, the Company contribution for less senior employees is 10% of basic annual salary.
• A lower level of maximum annual bonus opportunity applies to employees other than the executive directors and certain PDMRs.
• Benefits offered to other employees generally comprise permanent health insurance, private health insurance, death-in-service benefit and gym and fitness allowance.
In general, these differences arise from the development of remuneration arrangements that are market competitive for the various categories of individuals. They also reflect
the fact that, in the case of the executive directors and PDMRs, a greater emphasis is placed on variable pay.
3 The TSR performance conditions applicable to the 2017 LTIP and 2009 LTIP (further details of which, in the latter case, are provided on page 118) were selected by the committee
on the basis that they improve shareholder alignment and are consistent with the Company’s objective of delivering superior levels of long-term value to shareholders. Under
the terms of these performance conditions, the committee can specify the basis on which TSR for any company is calculated and has the discretion to make adjustments to this
methodology to take account of exceptional circumstances, including share capital variations. Where any company becomes unsuitable as a member of the comparator group
as a result of, for example, a change of control or delisting, the committee has the discretion to treat that company in such manner as it deems appropriate (including replacing it
with another organisation).
4 Where a nil-cost option award under the 2009 LTIP or 2017 LTIP becomes exercisable, it will generally remain so until the tenth anniversary of the date on which it was granted.
5 The choice of the performance metrics applicable to the annual bonus scheme reflect the committee’s belief that any incentive compensation should be tied to appropriately
challenging measures of both the overall performance of the Company against its strategic KPIs and (where appropriate) those areas that the relevant individual can directly
influence.
6 The legislation applicable to the SIP does not allow performance conditions to be applied in relation to partnership or matching shares and, given that the SIP is an ‘all-employee’
arrangement, the Company has decided that it is currently not appropriate to apply performance conditions to free shares awarded under it, although the committee retains the
discretion to apply performance conditions to future awards.
Common terms of share awards
Awards under any of the Company’s discretionary share plans referred to in this report may:
• be granted as conditional share awards or nil-cost options or in other such form that the committee determines has the same economic effect;
• have any performance conditions applicable to them amended or substituted by the committee if an event occurs which causes the committee
•
to determine an amended or substituted performance condition would be more appropriate and not materially less difficult to satisfy;
incorporate the right to receive an amount (in cash or additional shares) equal to the value of dividends which would have been paid on the shares
under the award that vest up to the time of vesting (or, where the award is subject to a holding period, release). This amount may be calculated
assuming that the dividends have been reinvested in the Company’s shares on a cumulative basis;
• be settled in cash at the committee’s discretion; and
• be adjusted in the event of any variation of the Company’s share capital or any demerger, delisting, special dividend or other event that may affect
the Company’s share price.
Legacy awards
The committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions
available to it in connection with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the
payment were agreed (i) before 15 May 2014 (the date the Company’s first shareholder-approved directors’ remuneration policy came into effect);
(ii) before the policy set out above came into effect, provided that the terms of the payment were consistent with the shareholder-approved directors’
remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a director of the Company and,
in the opinion of the committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes
‘payments’ includes the committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment
are ‘agreed’ at the time the award is granted.
107
Directors’ Remuneration Report
continued
Remuneration scenarios relating to the above policy
Cairn’s pay policy seeks to ensure that the overall package of the executive directors is generally weighted more towards variable pay and,
within such variable pay element, that greater emphasis is placed on the delivery of long-term performance through the award of long-term
incentives. In the chart below, we show the make-up of remuneration of the current executive directors in 2017 under minimum, on-target and
maximum scenarios.
£3,000,000
£2,500,000
£2,000,000
£1,816,148
£1,500,000
£1,000,000
£675,282
34%
29%
£2,775,035
50%
26%
£500,000
100%
37%
24%
£1,809,626
£1,185,958
50%
34%
29%
37%
£443,932
100%
26%
24%
£0
Minimum
On-Target
Maximum
Minimum
On-Target
Maximum
Chief Executive
CFO
Fixed Elements
Annual Variable
Long-term Incentives
In developing the above scenarios, the following assumptions have been made:
• The ‘minimum’ columns are intended to show the fixed level of remuneration to which the executive directors are entitled in 2017 irrespective of
performance levels, namely base salary (at current rates), benefits (using the details set out in the 2016 single-figure table provided on page 112)
and pension (calculated by applying the percentage entitlement set out in the policy table against latest confirmed salary).
• The ‘on-target’ scenario seeks to illustrate the remuneration the executive directors would receive if performance was in line with expectation.
In addition to the fixed elements summarised above, it assumes a specified level of payout/vesting under the annual bonus scheme and 2017
LTIP. Given that neither of these incentive arrangements explicitly stipulate an ‘on-target’ amount, the assumed levels for this scenario are:
– in the case of the LTIP, for on-target performance the ‘kicker’ award would not vest. Therefore the illustration is based on 55% vesting of the
‘core award’ of 200% of salary. This vesting level is broadly equal to the percentage applied in determining the grant date ‘fair value’ of an
LTIP award for the purposes of the Company’s share-based payment charge; and
– in the case of the annual bonus, a payout of 75% of maximum opportunity (being the approximate average of such payouts for all executive
directors over the five years up to and including 2016).
• The ‘maximum’ columns demonstrate total remuneration levels in circumstances where the variable elements pay out in full, namely an annual
bonus payment of 125% of salary (with 100% of salary paid in cash and the balance delivered in the form of a deferred share award) and 100%
vesting of LTIP awards to be granted in 2017 over shares worth 250% of salary.
• For the purposes of valuing the LTIP and deferred bonus awards, any post-grant share price movements have been ignored.
• The executive directors are entitled to participate in the SIP on the same basis as other employees. The value that may be received under this
arrangement is subject to legislative limits and, for simplicity, has been excluded from the above chart.
Recruitment policy
Base salaries
Salaries for any new director hires (including internal promotions) will be set to reflect their skills and experience, the Company’s intended pay
positioning and the market rate for the role. Where it is appropriate to offer a below-market salary initially, the committee will have the discretion
to allow phased salary increases over time for newly appointed directors, even though this may involve increases in excess of the rate for the wider
workforce and inflation.
Benefits
Benefits and pensions for new appointees to the Board will normally be provided in line with those offered to other executive directors and
employees taking account of local market practice, with relocation expenses/arrangements provided for if necessary. Tax equalisation may
also be considered if an executive is adversely affected by taxation due to their employment with Cairn. Legal fees and other reasonable costs
and expenses incurred by the individual may also be paid by the Company.
Variable pay
For external appointments, the committee will ensure that their variable remuneration arrangements are framed in accordance with the terms of,
and are subject to the limits contained in, the Company’s existing policy.
The committee may however, in connection with an external recruitment, offer additional cash and/or share-based elements intended to
compensate the individual for the forfeiture of any awards under variable remuneration schemes with a former employer. The design of these
payments would appropriately reflect the value, nature, time horizons and performance requirements attaching to the remuneration foregone.
Shareholders will be informed of any such arrangements at the time of appointment.
Where an individual is appointed to the Board, different performance measures may be set for the year of joining the Board for the annual bonus,
taking into account the individual’s role and responsibilities and the point in the year the executive joined.
For an internal appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out according to its terms, adjusted
as relevant to take into account the appointment.
108
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance Chairman and non-executive directors
On the appointment of a new Chairman or non-executive director, the fees will be set taking into account a range of relevant factors including
market practice, time commitment and the responsibilities associated with the role. Where specific cash or share arrangements are delivered to
non-executive directors, these will not include share options or other performance-related elements.
Executive directors’ service contracts
The current executive directors’ service contracts contain the key terms shown in the table below:
Provision
Remuneration
Notice period 1
Termination payment
Restrictive covenants
Detailed terms
• Salary, pension and benefits.
• Company car or cash allowance.
• Permanent health insurance.
• Private health insurance for director and dependants.
• Death-in-service benefits.
• 30 days’ paid annual leave.
• Participation in annual bonus plan, subject to plan rules.
• Participation in deferred bonus, LTIP and SIP, subject to plan rules.
•
12 months’ notice by the director or by the Company.
• See separate disclosure below.
• During employment and for 12 months after leaving.
Note:
1 The committee believes that this policy on notice periods provides an appropriate balance between the need to retain the services of key individuals who will benefit the
business and the need to limit the potential liabilities of the Company in the event of termination.
The executive directors’ service contracts are available for inspection, on request, at the Company’s registered office.
Exit payment policy for executive directors
Executive directors’ contracts allow for termination with contractual notice from the Company or termination with a payment in lieu of notice, at the
Company’s discretion. The contracts also allow for phased payments to be made on termination with an obligation on the individual to mitigate loss.
Neither notice nor a payment in lieu of notice will be given in the event of gross misconduct. The committee’s approach when considering payments
in the event of termination is to take account of the individual circumstances including the reason for termination and the contractual obligations of
both parties as well as the relevant share plan and pension scheme rules.
In the event of termination by the Company, an executive director would be entitled to receive an amount representing base salary and the value
of benefits and pension contributions due under the individual’s service contract for the notice period. Directors are not entitled to participate in any
additional redundancy scheme. The committee will have the authority to settle legal claims against the Group (e.g. for unfair dismissal, discrimination
or whistle blowing) that arise on termination. The committee may also authorise the provision of outplacement services and pay reasonable legal
expenses associated with the termination.
On termination of employment, the committee has discretion as to the amount of bonus payable in respect of the current year. The bonus paid
would reflect the Company’s and the individual’s performance during that period. However, any bonus payable (in cash and/or share awards as
determined by the committee) on termination would not exceed a pro-rated amount to reflect the period for which the individual had worked in
the relevant year.
As a general rule, if an executive director ceases employment, all unvested share awards granted pursuant to the Company’s deferred bonus
arrangements will lapse immediately. However, if such cessation occurs by reason of death, injury, permanent disability, or because the individual’s
employing company or part of the business in which he/she is employed is transferred out of the Group, retirement with the agreement of the
Company, or in any other circumstances determined by the committee other than where an individual has been summarily dismissed (in each
case, a ‘good leaver’), those awards will not lapse and will normally continue to vest at the end of the original vesting period. The committee may
determine that a deferred bonus award should vest before the normal time in certain circumstances, for example where an individual has died.
The committee also has the discretion to time pro-rate any awards held by such a good leaver.
As a general rule, if an executive director ceases employment, all unvested awards granted pursuant to the Company’s long-term incentive
arrangements under the 2009 LTIP and 2017 LTIP will lapse immediately. However, if such cessation occurs by reason of death, injury, permanent
disability (or, for 2009 LTIP awards, redundancy), or because the individual’s employing company or part of the business in which he/she is
employed is transferred out of the Group, or in any other exceptional circumstances determined by the committee (in each case, a ‘good leaver’),
those awards will not lapse and will normally continue to vest at the end of the original performance period but only if, and to the extent that, the
applicable performance conditions are satisfied. The committee may determine that an award should vest before the normal time in certain
circumstances, for example where an individual has died. It is the remuneration committee’s normal policy to time pro-rate any awards held by
such a good leaver, although it retains the discretion to refrain from doing so in exceptional circumstances. Any holding period attached to the
share awards would normally continue to apply.
If an executive director ceases employment, 2017 LTIP awards subject to a holding period will normally be released (or if structured as nil-cost
options, become exercisable) on the original timescales. These awards will, however, lapse where cessation occurs due to the individual’s gross
misconduct, or if the committee considers it appropriate, the individual’s bankruptcy. The committee has the discretion to accelerate the release
of shares in certain circumstances, for example death. For 2009 LTIP awards subject to a holding period at the time an executive director ceases
employment, awards will normally be released on cessation of employment.
109
Directors’ Remuneration Report
continued
On a change of control of the Company resulting in the termination of his employment, the current Chief Executive is entitled to compensation
of a sum equal to his annual basic salary as at the date of termination of employment. As noted and explained in previous reports, the committee
recognises that this provision is no longer in accordance with best practice. It was not included in the contract of the CFO that was entered into on his
appointment in 2014, and will not be included in the contracts of other future appointees to the Board; however, it continues to apply to the current
Chief Executive.
In the event of a change of control or winding up of the Company, treatment of share awards will be in accordance with the relevant plan rules.
The committee has the discretion to disapply time pro-rating in the event of a change of control.
If there is a demerger or special dividend, the committee may allow awards to vest on the same basis as for a change of control.
Non-executive directors’ letters of appointment
None of the non-executive directors nor the Chairman has a service contract but all have letters of appointment that set out their duties and
responsibilities, the time commitment expected by the Company, and the basis on which their fees will be paid. These letters of appointment can
be terminated with immediate effect by either the director concerned or the Company and are subject to the Company’s Articles of Association,
which provide for the annual election or re-election by shareholders of all of the Company’s directors. There are no provisions for compensation
payable on termination of appointment.
None of the non-executive directors nor the Chairman participates in any of the Company’s share schemes and they are not entitled to a bonus
or pension contributions.
The non-executive directors’ letters of appointment are available for inspection, on request, at the Company’s registered office.
Part 3 – Annual Report on Remuneration
Introduction
This Annual Report on Remuneration provides details of the way in which the committee operated during the financial year to 31 December 2016
and explains how Cairn’s approved Directors’ Remuneration Policy that was in force during that period was implemented. It also summarises how the
new Directors’ Remuneration Policy set out on pages 101 to 110 will be applied in 2017, assuming it is approved by shareholders at the AGM to be held
on 19 May 2017.
In accordance with the Regulations, this part of the report will be subject to an advisory vote at the above noted AGM.
The Company’s auditors are required to report to Cairn’s shareholders on the ‘auditable parts’ of this Annual Report on Remuneration (which have
been highlighted as such below) and to state whether, in their opinion, those parts have been properly prepared in accordance with the Regulations
and the Companies Act 2006.
Operation of the remuneration committee during 2016
Members of the remuneration committee
The members of the remuneration committee during the year were as follows:
• M. Jacqueline Sheppard QC (Chair of the committee);
•
Iain McLaren;
Ian Tyler; and
•
• Peter Kallos.
The individuals who served on the committee, each of whom is an independent non-executive director of the Company, had no personal
financial interest (other than as shareholders) in the matters decided, no potential conflicts of interest from cross-directorships and no day-to-day
involvement in running the business. Biographical information on the committee members is shown on pages 76 and 77 and details of attendance
at the committee’s meetings during 2016 are shown on pages 86 and 98.
Internal assistance provided to the committee
The Chief Executive is not a member of the remuneration committee but may attend its meetings by invitation and is consulted in respect of
certain of its proposals. The Chief Executive is not involved in any discussions in respect of his own remuneration. During the year, the committee
also received material assistance and advice on remuneration policy from the Company Secretary.
110
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance
External assistance provided to the committee
As and when the remuneration committee considers it appropriate, it takes external advice on remuneration from a number of sources. During the
year, it received the following assistance:
Adviser
New Bridge Street 2,3
Deloitte LLP 3
Ernst & Young LLP
Shepherd and Wedderburn LLP
Assistance provided to
the committee during 2016
Fees for committee assistance in 2016 1
Other services provided to
the Company during 2016
Appointed by the committee
to give periodic advice on
various aspects of the directors’
remuneration packages. Also
assisted with the preparation of
the Directors’ Remuneration Report
and provided support on a number
of miscellaneous remuneration
related projects (including the
formulation of the new policy).
Appointed by the Company’s
management team but provided
assistance to the committee
in relation to the design,
communication and
implementation of the new policy.
Appointed by the Company
to carry out an independent
verification of its achievement
against performance conditions
applicable to the Company’s
LTIPs and share option schemes.
Appointed by the Company to
carry out regular calculations in
relation to the LTIP performance
conditions. Also assisted with
the preparation of the Directors’
Remuneration Report.
£54,797
None
£74,943
Provided advice on various
aspects of remuneration
practice across the Group.
N/A – no advice provided
to the committee
Internal auditors of the Company
throughout the year.
£28,019
General legal services to the
Group throughout the year.
Notes:
1 The bases for charging the fees set out in the table were agreed by the committee at or around the time the particular services were provided and, in general, reflected the
time spent by the adviser in question on the relevant matter.
‘New Bridge Street’ is a trading name of Aon Hewitt Limited, part of Aon plc.
2
3 Both New Bridge Street and Deloitte LLP are members of the Remuneration Consultants Group and their work is governed by the Code of Conduct in relation to executive
remuneration consulting in the UK.
4 The committee reviews the performance and independence of all its advisers on a continuous basis.
Statement of shareholder voting at general meetings
The table below shows the voting outcome at the last general meeting(s) at which shareholders were asked by the Company to approve a resolution
relating to its Directors’ Remuneration Report and Directors’ Remuneration Policy:
Date of general
meeting
Number of
votes ‘For’ and
‘Discretionary’
% of votes cast
Number of
votes ‘Against’
% of votes cast
Total number
of votes cast
Number of
votes ‘Withheld’ 1
12 May 2016
423,241,645
98.80%
5,138,296
1.20%
428,379,941
26,717,122
15 May 2014
379,512,480
98.06%
7,495,533
1.94%
387,008,013
1,045,923
Description of resolution
To approve the 2015 Directors’
Remuneration Report
To approve Directors’
Remuneration Policy
Note:
1 A vote withheld is not a vote in law.
The committee welcomed the endorsement of both the above resolutions that was shown by the vast majority of shareholders and gave due
consideration to any concerns raised by investors who did not support the resolutions.
Payments to past directors during 2016 (audited)
Dr Mike Watts and Jann Brown stood down as executive directors on 15 May 2014 and subsequently ceased employment with the Group on
17 October 2014. As explained in the Annual Report on Remuneration for the year ended 31 December 2014, both of these individuals were treated
as ‘good leavers’ for the purposes of the Company’s incentive schemes and were, therefore, allowed to retain their outstanding awards under the
2009 LTIP (subject to time pro-rating). Details of these awards that vested and/or were exercised during 2016 have been included in the relevant
sections of this part of the report.
No other payments were made to past directors during the year to 31 December 2016.
111
Directors’ Remuneration Report
continued
Single total figure table for 2016 (audited)
The tables below set out the remuneration received by executive directors and non-executive directors during the year in the following categories.
Salary
+
Benefits
+
Pension
+
SIP
+
Bonus
+
Long-Term
Incentive
=
Total
Remuneration
Executive directors
Directors
Fixed elements of pay
Pay for performance
Financial
year
Salary
and fees
Benefits 1
Pension 2
SIP 3
Fixed
element
subtotal
Bonus 4
Long-term
incentives 5
Performance
element
subtotal Total remuneration
Simon Thomson
2016 £554,390
£31,358
£83,159
£7,200 £676,107
£444,399 £961,095 £1,405,494
£2,081,601
2015
£546,197
£29,217
£81,930
£7,200 £664,544
£409,648
£217,975
£627,623
£1,292,167
James Smith
2016 £360,579
£25,119
£54,087
£7,196
£446,981 £283,055
2015
£355,250
£27,840
£53,288
£7,200
£443,578
£266,438
–
–
£283,055
£730,036
£266,438
£710,016
Notes:
1 Taxable benefits available to the executive directors during 2016 were a company car/car allowance, private health insurance, death-in-service benefit and a gym and fitness
allowance. This package of taxable benefits was unchanged from 2015.
2 Additional disclosures relating to the pension provision for the executive directors during 2016 are set out on page 114.
3 This column shows the face value (at date of award) of matching and free shares provided to the executive directors under the SIP during the relevant period. Further details
on the way in which the SIP was operated during 2016 are set out on page 121.
4 This column shows the amount of bonus paid or payable in respect of the year in question. Further information in relation to the annual bonus scheme for 2016 is provided on
pages 114 to 117.
5 This column shows the value of shares that vested in respect of LTIP awards with performance conditions that ended during the period in question. Further details of the LTIP’s
operation during 2016 are provided on pages 117 to 121.
6 Following the end of the year to 31 December 2016, the committee considered whether there were any circumstances that could or should result in the recovery or withholding
of any sums pursuant to the clawback arrangements contained within the Company’s remuneration policy. The conclusion reached by the committee was that it was not aware
of any such circumstances.
Non-executive directors
Directors
Ian Tyler
Todd Hunt
Iain McLaren
Alexander Berger
M. Jacqueline Sheppard QC
Keith Lough
Peter Kallos
Fixed elements of pay
Pay for performance
Financial
year
Salary
and fees 1
Benefits
Pension 2
Fixed
element
subtotal
Bonus 2
Long-term
incentives 2
Performance
element
subtotal Total remuneration
2016 £160,000
2015 £160,000
2016
£74,900
2015
£74,900
2016
£84,900
2015
£84,900
2016
£74,900
2015
£74,900
2016
£84,900
2015
£84,900
2016
£74,900
20153
£47,341
2016
£74,900
20153
£25,555
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– £160,000
– £160,000
–
–
–
–
–
–
–
–
–
–
–
–
£74,900
£74,900
£84,900
£84,900
£74,900
£74,900
£84,900
£84,900
£74,900
£47,341
£74,900
£25,555
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£160,000
£160,000
£74,900
£74,900
£84,900
£84,900
£74,900
£74,900
£84,900
£84,900
£74,900
£47,341
£74,900
£25,555
Notes:
1 The annual fee for each of the non-executive directors (other than the Chairman) for 2016 was £74,900. In addition, a further annual fee of £10,000 was payable to both
Iain McLaren and M. Jacqueline Sheppard QC for their roles as Chair of the audit committee and the remuneration committee respectively.
2 The non-executive directors do not participate in any of the Company’s long-term incentive arrangements and are not entitled to a bonus or pension contributions.
3 Keith Lough and Peter Kallos were appointed as directors on 14 May 2015 and 1 September 2015 respectively. Their fees for 2015 reflect the period from those dates
to the year end.
112
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance FTSE 250
FTSE 350 Oil & Gas
Cairn Energy
TSR performance graph and further information on Chief Executive pay
Introduction
The following chart demonstrates the growth in value of a £100 investment in the Company and an investment of the same amount in both the
FTSE 250 Index and the FTSE 350 Oil & Gas Producers Index over the last eight years. These comparisons have been chosen on the basis that:
Cairn was a constituent member of the FTSE 250 Index for the whole of 2016; and the FTSE 350 Oil & Gas Producers Index comprises companies
who are exposed to broadly similar risks and opportunities as Cairn.
The table beneath the graph illustrates the movements in the total remuneration of the Company’s Chief Executive during the same eight-
year period.
Performance graph – comparison of eight-year cumulative TSR on an investment of £100
350
300
250
200
150
100
50
0
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
FTSE250
Cairn
FTSE350 Oil & Gas
Total remuneration of Chief Executive during the same eight-year period
Financial year
Chief Executive
Total remuneration
of Chief Executive 1
Annual variable element
award rates for Chief Executive
(as % of max. opportunity)
Long term incentive vesting
rates for Chief Executive
(as % of original award level)
2016
2015
2014
2013
2012
2011
20112
2010
2009
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Sir Bill Gammell
Sir Bill Gammell
Sir Bill Gammell
£2,081,601
£1,292,167
£1,073,425
£962,765
£1,018,570
£3,405,719
£4,053,822
£7,302,533
£962,757
80.2%
75%
78.5%
63%
86%
82%
N/A
58%
54%
81.7%
23.4%
0%
0%
0%
121%
106%
113%
0%
Notes:
1 The amounts disclosed in this column have been calculated using the same methodology prescribed by the Regulations for the purposes of preparing the single total figure
table shown on page 112.
2 Sir Bill Gammell stood down as Chief Executive on 30 June 2011 and was replaced by Simon Thomson (who had previously been Legal and Commercial Director) with effect
from that date. Sir Bill Gammell’s ‘total remuneration’ for 2011 shown in the above table reflects the amount of salary, benefits and pension paid to him in respect of the period
to 30 June 2011. However, during the year to 31 December 2011, Sir Bill Gammell also received, in connection with the termination of his employment and in settlement of his
contractual entitlements, a payment of salary and benefits in lieu of his contractual notice period of one year (£770,000) and a cash bonus under the Company’s annual cash
bonus scheme (£625,000).
113
Directors’ Remuneration Report
continued
Percentage annual change in Chief Executive’s remuneration elements compared to all Group employees
The table below illustrates, for various elements of the Chief Executive’s 2016 remuneration package, the percentage change from 2015 and
compares it to the average percentage change for all the Group’s employees in respect of that same period.
Chief Executive
All Group employees
% change in
base salary
% change in
taxable benefits
% change in
annual bonus
1.50%
1.92%2
7.33% 1
0.01%
8.48%
14.83%
Notes:
1 The above increase in the Chief Executive’s taxable benefits is largely attributable to a rise in the costs of his company car provision for 2016.
2 The standard level of salary increase across the Group in 2016 was 1.5%. However, a small number of individuals received higher percentage increases which raised the average
for all employees to 1.92%.
Executive directors’ base salaries during 2016
Based on a review carried out in December 2015, the following salary increases for executive directors became effective on 1 January 2016:
2016 Annual salary details
Job title
Current directors
Simon Thomson
Chief Executive
James Smith
CFO
Annual salary as at
31 December 2015 Annual salary as at 1 January 2016
% increase with effect from
1 January 2016
£546,197
£355,250
£554,390
£360,579
1.5%
1.5%
The increases shown in the above table for both Simon Thomson and James Smith were consistent with the level of standard annual salary increase
awarded to other employees on 1 January 2016.
Executive directors’ pension provision during 2016 (audited)
As highlighted in the Directors’ Remuneration Policy described on pages 101 to 110, the Company operates a defined contribution, non-contributory
group personal pension plan which is open to all UK permanent employees. The Company contributes 10% of basic annual salary (15% in respect of
senior executives) on behalf of all qualifying employees. The Company also has a pension committee which meets on a regular basis to assess the
performance and suitability of the Company’s pension arrangements.
James Smith is a member of the Company scheme and, during the year, received Company contributions up to his statutory annual allowance.
The balance of his 15% of basic salary entitlement was paid as additional salary.
During the year, Simon Thomson received an amount equal to 15% of his annual basic salary in the form of additional salary as his pension
arrangements have already reached the relevant lifetime limit.
Details of the actual amounts of pension contributions/additional salary that were paid to the executive directors during 2016 are set out in the
‘pension’ column of the single total figure table on page 112.
Annual bonus – 2016 structure and outcome (audited)
During 2016, Cairn operated annual cash bonus schemes for all employees and executive directors. The maximum level of bonus award for
executive directors and certain PDMRs for 2016 was 100% of annual salary (as at date of award).
For all participants other than the executive directors, 2016 bonus awards were based on individual, project-based and Company performance
measures. Individual and project-based performance was measured through the Company’s performance management system and Company
performance conditions were based on annually defined KPIs.
As highlighted in last year’s Annual Report on Remuneration, 90% of each executive director’s bonus opportunity for 2016 was determined by
reference to the extent to which certain Group KPIs were achieved, with the remaining 10% being dependent on the satisfaction of personal
objectives. Taking into account commercial sensitivities around disclosure, a summary of the relevant targets, ascribed weightings and
achievement levels is set out below.
114
Cairn Energy PLC Annual Report and Accounts 2016
Leadership and Governance
2016 annual cash bonus scheme – Group KPI performance conditions (90% weighting) and achievement levels
KPI measures and performance achieved in 2016
Purpose
2016 KPI
Measurement
2016 performance
Deliver exploration and appraisal success
Grow the reserves
and resources base
to provide a basis
for future growth.
Progress the Senegal
SNE discovery through
the prudent investment
of capital funds, de-risking
the path to commerciality
in a cost-effective and
timely manner.
• 2C resource valuation;
• 3C/1C ratio; and
• Cumulative E&A
investment divided
by the 2C resources
(US$/bbl).
• Four wells successfully drilled
and evaluated on the SNE field
for a cost within the original three
well budget;
• Net resources upgraded from
155.1 mmboe to 201.4 mmboe
at year-end;
• P10/P90 gross resources ratio
narrowed; and
• E&A investment level at
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