Capricorn Energy
Annual Report 2019

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C R E A T I N G 
V A L U E 
R E S P O N S I B L Y

C A I R N   E N E R G Y   P L C 
A N N U A L   R E P O R T  a n d   A C C O U N T S   2 0 1 9

 
 
 
 
 
 
 
Cairn Energy PLC is an  
independent, UK-based oil and  
gas exploration, development  
and production company.

Cairn has explored, discovered, developed and produced oil  
and gas in a variety of locations throughout the world and has 
extensive experience as operator and partner in all stages of  
the oil and gas life cycle.

Creating value responsibly
Cairn is 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.

Strategic Report
At a Glance 

CEO’s Review 

Business Model 

A Responsible Approach 

United Nations Sustainable Development Goals 

UN SDGs in Action 

External Industry Overview 

Operational Review 

Our Strategy 

Risk Management 

Principal Risks to the Group in 2019–2020 

Climate Change Policy and Energy Transition 

Stakeholder Engagement 

Prioritising Issues Important to Stakeholders and Cairn 

Responsible Governance 

Behaving Responsibly to People 

Behaving Responsibly Towards the Environment 

Behaving Responsibly to Society 

Financial Review 

Leadership and Governance
Board of Directors 

Corporate Governance Statement 

Audit Committee Report 

Nomination Committee Report 

Directors’ Remuneration Report 

Directors’ Report 

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12

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32

36

39

46

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52

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60

63

66

74

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87

92

94

124

Financial Statements
Independent Auditor’s Report 

Group Income Statement 

Group Statement of Comprehensive Income 

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 Operations 

Section 3 – Working Capital, Financial Instruments  
and Long-term Liabilities 

Section 4 – Income Statement Analysis 

Section 5 – Taxation 

Section 6 – Discontinued Operations and Assets  
and Liabilities Held-For-Sale 

Section 7 – Capital Structure and Other Disclosures  

Company Balance Sheet 

Company Statement of Cash Flows 

Company Statement of Changes in Equity 

Section 8 – Notes to the Company  
Financial Statements 

Additional Information
Licence List 

Group Reserves and Resources 

Glossary 

Company Information 

130

136

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This annual report sets out the performance 
of Cairn Energy in the 2019 financial year  
and relevant non-financial information  
on environmental and social matters has 
been integrated.  

 

  Additional information can be found in 
our Corporate Responsibility Report at 
cairnenergy.com/working-responsibly

 

 Discover more at  
www.cairnenergy.com/ar2019

 
 
S T R A T E G I C   R E P O R T

2019 Highlights

Net oil production averaged (bopd)

Oil and gas sales revenue

Net cash inflow

~23,000

US$504m

US$390m

2019

2018

~23,000

17,533

2019

2018

US$504m

US$396m

2019

2018

US$229m

US$390m

Capital expenditure

Year end Group cash

US$242m*

US$147m

 

  Read more: Financial Review on P66 and 
Operational Review on P18

2019

2018

US$242m

US$284m

2019

2018

US$66m

US$147m

*  Net of US$27m tax refund and US$21m  
Nova working capital reimbursement.

Cairn Energy PLC Annual Report and Accounts 2019

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S T R A T E G I C   R E P O R T

S T R A T E G I C 
R E P O R T

At a Glance 

CEO’s Review 

Business Model 

A Responsible Approach 

United Nations Sustainable Development Goals 

UN SDGs in Action 

External Industry Overview 

Operational Review 

Our Strategy 

Risk Management 

Principal Risks to the Group in 2019–2020 

Climate Change Policy and Energy Transition 

Stakeholder Engagement 

Prioritising Issues Important to Stakeholders  
and Cairn 

Responsible Governance 

Behaving Responsibly to People 

Behaving Responsibly Towards the Environment 

Behaving Responsibly to Society 

Financial Review 

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10

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32

36

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46

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60

63

66

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Cairn Energy PLC Annual Report and Accounts 2019

S T R A T E G I C   R E P O R T

Cairn Energy PLC Annual Report and Accounts 2019

3

UK 

MAURITANIA 

SENEGAL 

CÔTE D’IVOIRE 

ISRAEL

S T R A T E G I C   R E P O R T

At a Glance

Our portfolio
Cairn's exploration activities have a geographical 
focus in North West Europe, West Africa  
and Latin America, underpinned by interests  
in production assets in the UK North Sea.  
Our headquarters are in Edinburgh, Scotland 
supported by operational offices in London, 
Senegal and Mexico. 

MEXICO 

SURINAME 

Exploration  

Development 

Production 

We hold emerging acreage 
in Senegal, Mexico, Israel and 
Mauritania; frontier acreage  
in Suriname and Côte d’Ivoire  
and mature acreage in the UK.

We hold an interest in the 
Sangomar Field (Senegal) 
development project. This was an 
exploration asset which we have 
progressed into development.

We hold non-operated interests 
in two production assets in the UK 
North Sea, Catcher and Kraken, 
which delivered first oil in 2017.

Where we operate

Suriname

Exploration

1 licence

Mexico 

Exploration

3 licences

Israel 

Exploration

8 licences

13,080 km2 acreage

1,648 km2 acreage

2,698 km2 acreage

Note: Post 2019 year end, Cairn no longer holds interests in Norway, Republic of Ireland and Nicaragua.

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Cairn Energy PLC Annual Report and Accounts 2019

 
 
MEXICO 

SURINAME 

S T R A T E G I C   R E P O R T

ISRAEL

UK 

MAURITANIA 

SENEGAL 

CÔTE D’IVOIRE 

Net oil production averaged

~23,000 bopd

2019

2018

~23,000

17,533

Côte d’Ivoire

Mauritania

Exploration

7 licences

8,621 km2 acreage

Exploration 

1 licence option

7,253 km2 acreage

Senegal

Exploration

3 licences

UK

Exploration

12 licences

7,137 km2 acreage 

3,100 km2 acreage 

Development

1 development field  
(Sangomar Field)

Production

2 producing fields  
(Catcher & Kraken)

Cairn Energy PLC Annual Report and Accounts 2019

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S T R A T E G I C   R E P O R T

CEO’s Review
Simon Thomson,  
Chief Executive Officer

C O M M I T T E D   
T O   C R E A T I N G 
V A L U E 
R E S P O N S I B L Y

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Cairn Energy PLC Annual Report and Accounts 2019

S T R A T E G I C   R E P O R T

Working Responsibly2 
Our culture is deeply rooted in our 
commitment to working responsibly. This 
means working to deliver value for our 
stakeholders in a safe, secure, environmentally 
and socially responsible manner. This is 
how we retain the trust and support of our 
stakeholders, which enables us to operate. 

Our longstanding core values are at the heart 
of our culture. They are known as the 3R’s: 
Respect, Relationships and Responsibility.

Our Code of Ethics sets out these core values 
as well as the behaviours and principles which 
we expect not only our employees, but all 
those who we work with, to apply on the 
Company’s behalf. 

Externally, adherence to key global 
agreements and standards promoting 
responsible working practices within 
business is also critical to us. This includes 
the United Nations Global Compact, the 
Extractive Industries Transparency Initiative 
and the United Nations Sustainable 
Development Goals. 

Board Changes
Cairn appointed two new independent 
non-executive directors, with Catherine 
Krajicek and Alison Wood joining the Board 
in H2 2019. Cairn today announced the 
appointment of Erik B Daugbjerg as an 
independent non-executive director with 
effect from 14 May 2020. Following this 
appointment, Todd Hunt will retire as a non-
executive director immediately following 
the Company’s Annual General Meeting on 
14 May 2020.

Simon Thomson
Chief Executive Officer

Cairn’s strong operational performance  
in 2019 was delivered through production 
and cash flow generation at the top end of 
guidance and the Group ended the year with 
an increased net cash position and undrawn 
debt facilities.

A significant milestone was achieved in 
Senegal with a Final Investment Decision taken 
for the Sangomar development. Reserve 
additions were made in both Senegal and the 
North Sea and the Company encountered 
exploration success alongside Eni in Mexico.

The sale of Cairn’s Norwegian business, 
combined with exits from exploration positions 
in Ireland and Nicaragua, demonstrate 
continued focus on capital allocation as the 
company seeks to generate further value for 
shareholders on a sustainable basis.

In the year ahead, Cairn looks forward 
to continuing its near-term exploration 
drilling programme offshore Mexico whilst 
progressing the first phase of development 
execution offshore Senegal. These activities 
are supported by strong cash flow from 
our producing assets and a continued 
fiscal discipline on balancing expenditure. 
In addition, we anticipate resolution of the 
proceedings against the Government of 
India under the UK-India Investment Treaty. 
Cairn will continue to focus on executing 
and delivering its strategy efficiently and 
responsibly as it seeks to add further value 
for shareholders.

Energy Transition1
Cairn recognises that the world is facing 
significant challenges associated with climate 
change and we acknowledge that global 
commitments to minimise temperature rises 
will require significant growth in lower carbon 
energy sources. Throughout the year the 
Board continued to focus on the associated 
risks and appropriately positioning the 
company’s strategy.

Cairn’s strategy is to play a responsible and 
competitive role in the production of oil and 
gas within this transition, providing affordable, 
sustainable energy alongside renewable 
sources. We are committed to ensuring our 
investment decisions are targeting resources 
that can play a part in the global energy 
mix and will continue to attract capital in a 
world where demand for hydrocarbons may 
be below today’s levels. We are actively 
engaged in reducing our carbon emissions 
wherever possible.

Cairn Energy PLC Annual Report and Accounts 2019
Cairn Energy PLC Annual Report and Accounts 2019

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1   Read more on P46
2   Read more on P10

S T R A T E G I C   R E P O R T

Business Model

Cairn’s business model is to hold assets 
within the oil and gas life cycle in order  
to create, add and deliver value  
for stakeholders. 

The cash flow from production assets funds 
exploration, appraisal and development 
activity, making the business model largely 
self-funding. 

Assets can be monetised at different  
points of the life cycle in order to optimise  
the portfolio.

EXPLORATION   
AND APPRAISAL

4-8 years

Identify

Explore

C R E ATI N G  VA LU E

Exploration activity, including seismic surveying and drilling,  
can create material value. 

OU R STRE N GTHS   
AN D CAPAB I LITI E S

#1 Self-funding  
business model 

Our production assets provide the cash 
flow to sustain exploration, appraisal and 
development activity. In 2012 we acquired 
non-operated interests in two UK North Sea 
development assets, Kraken and Catcher, 
to provide future cash flow for the business. 
Both assets started producing in 2017. As this 
production continues to deliver over time,  
we will seek to bring on production from new 
assets to replace it.

#2 Financial flexibility

Operating a full cycle exploration, 
development and production business gives 
us financial flexibility to deliver our strategic 
objectives, year on year. We maintain a strong 
funding position through cash flow from our 
production assets and a largely undrawn 
debt facility. This allows us to actively assess 
new venture opportunities and deliver 
immediate activity. We also apply strict 
capital discipline to our investment decisions 
and actively manage our portfolio to optimise 
capital allocation.

#3 Frontier exploration 
positions

Our exploration activity is principally in 
frontier and emerging basins where the 
greatest potential value exists. Our frontier 
exploration position in Senegal, acquired 
in 2013, has yielded material exploration 
success and we continue to feed our pipeline 

of exploration assets, acquiring exploration 
acreage in a number of new countries during 
2018 and 2019.

#4 Skills, experience  
and collective expertise  
of our workforce

Our employees, contractors and suppliers 
provide the necessary expertise and 
resources to deliver our work programmes. 
We ensure they have the right training, tools 
and knowledge in order to help us to deliver 
our strategy safely. Contractors and suppliers 
are required to work to the same high 
standards as our employees. 

#5 Responsibility  
focused culture

Cairn has an established, highly experienced 
and respected leadership team which 
is committed to working responsibly in 
delivering company strategy. We never 
compromise our operating standards. Our 
focus on delivering value in a safe, secure 
and environmentally and socially responsible 
manner is one of our strategic objectives 
and is measured through our company Key 
Performance Indicators.

WHAT CAI RN   
OFFE RS

Our responsible approach 

Our approach is governed by our 
commitment to working responsibly across 
all our activities. This means working in a 
safe, secure, environmentally and socially 
responsible manner. 

Our experience 

Cairn has over 30 years’ experience as  
an operator and partner at all stages  
of the oil and gas life cycle and has 
successfully discovered and developed 
oil and gas reserves in a number of 
international locations in partnership  
with host governments. 

Our expertise and agility

We pride ourselves on seeing value where 
others might not and on being the right 
size of organisation to move quickly and 
responsibly to pursue this value. 

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Cairn Energy PLC Annual Report and Accounts 2019

S T R A T E G I C   R E P O R T

DEVELOPMENT

PRODUCTION

2-5 years

10-25 years

Appraise

Develop

Produce

Return & reinvest

A D D I N G VA LU E

R E A LI S I N G VA LU E

Moving exploration success into development,  
or acquiring development assets, adds value.

Progressing development assets into production results in cash 
flow to reinvest or return to shareholders, realises value.

This culture of working responsibly is 
embedded throughout our business in our 
management systems and is enshrined in 
our policies and principles. We operate to 
international, leading industry standards in 
health, safety and environmental management 
and we never compromise our standards. 
We look for partners who share the same 
fundamental commitment to international 
good practice, ensuring projects are managed 
in a responsible and respectful manner.

We have a track record of safe and effective 
operations and extensive experience 
operating both onshore and offshore, in 
shallow and deep water locations, in remote 
and frontier locations and in benign and 
harsh weather environments. Our industry 
experience has included opening new oil 
basins and creating value through exploration 
success and commercialising resources 
across South Asia and most recently in  
West Africa.

Cairn created transformational growth and 
significant value through the discovery in 
2004, and subsequent development and 
production, of hydrocarbons in Rajasthan, 
India. More recently Cairn drilled the first ever 
deepwater wells offshore Senegal which 
resulted in two basin opening discoveries, 
one of which was the largest global oil 
discovery of 2014. 

CRE ATI N G VALU E   
RE S P ONS I B LY

We are committed to making a positive 
contribution, wherever we operate, 
by delivering tangible benefits to our 
stakeholders. This includes the value 

distributed through salaries, taxes, payments 
to authorities, contractors and suppliers, 
capital spending and social investment. 

Oil and gas sales revenue

Payments to governments

US$504m

US$37.8m

Capital expenditure

Social investment

US$242m*

US$483,995

Employee salaries and benefits

US$39.1m

*  Net of US$27m tax refund and US$21m Nova working capital reimbursement

 

 For more information please see our Corporate Responsibility Report: www.cairnenergy.com/working-responsibly

Cairn Energy PLC Annual Report and Accounts 2019

9

S T R A T E G I C   R E P O R T

A Responsible Approach

We strive to deliver value in a safe, secure, environmentally and socially responsible 
manner for all our stakeholders. Internally, we have in place comprehensive systems  
and standards which reinforce our culture of working responsibly. Externally, we adhere 
to key global standards promoting responsible working practices.

Leadership and strong corporate governance are key to ensuring we operate in 
accordance with these standards and systems.

 

 Read more: CEO's Review on P7 and Leadership and 
Governance on P72

Internal

Values
Our core values are known as 
the 3Rs: Respect, Relationships 
and Responsibility.

Code of Ethics
Employees and partners are required to work in 
accordance with the code which sets out our core 
values, behaviours and Business Principles. 

Revised and reissued in 2019.

 

 Read more: Business Principles on P53

Key Policies 
 – Health, Safety and Security 
 – Environment 
 – Social Responsibility 
 – Major Accident Prevention
 – People
 – Tax

Corporate Responsibility Management System
Our key management system instructs employees how 
to carry out business activities in accordance with the 
business strategy, Code of Ethics and CR Policies and  
is reviewed annually by the Board.

CRMS revised against leading global performance 
standards in 2019.

Human Rights
Our Human Rights Guidance defines how  
we identify, assess and manage potential  
human rights issues at key project stages.

Guidance updated in 2019.

Anti-Bribery and Corruption
We have a zero-tolerance position on 
ABC matters; everyone we work with 
must sign up to our ABC policy.

3 R s

UNGC

Cod e o f
Ethic s

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ABC

T C F D

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Cairn Energy PLC Annual Report and Accounts 2019

 
External

3 R s

UNGC

ABC

T C F D

Cod e o f

Ethic s

s

licie

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IF

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M SA

S T R A T E G I C   R E P O R T

United Nations Global Compact
We support this initiative for businesses committed 
to aligning their strategies with universally accepted 
principles in human rights, labour, environment  
and anti-corruption.

Participation renewed in 2019.

Extractive Industries Transparency Initiative
We participate in the EITI, the coalition  
of governments, companies and  
society promoting transparency of  
payments in oil, gas and mining sectors.

Membership renewed in 2019.

United Nations Sustainable Development Goals 
We support the 17 goals which help to guide us 
in minimising impacts and maximising benefits of 
our activities in countries where we work.

International Finance Corporation
We align our CRMS with the IFC Performance 
Standards on Social and Environmental 
Sustainability.

Modern Slavery Act
We operate in accordance with the UK MSA.  
Our selection procedure for service providers 
includes modern slavery assessments. Our MSA 
statement is available online. 

Task Force on Climate-Related  
Financial Disclosures
We continue to assess our reporting against TCFD, 
complying with a number of recommended disclosures. 

  Read more: Climate Change Policy and Energy Transition on P46

Cairn Energy PLC Annual Report and Accounts 2019

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S T R A T E G I C   R E P O R T

United Nations Sustainable Development Goals

We support the United Nations Sustainable Development Goals (UN SDGs). The SDGs are a series  
of 17 goals to promote prosperity for all while protecting the environment. 

They provide the business community with a framework for assessing the impact and value of their 
activities. We assess our contributions through civil society commentary, stakeholder enquiries and 
community engagement. Not all 17 goals can be applicable to every business. Our contributions  
to goals applicable to our business in 2019 are summarised below.

Minimise negative 
impacts

SDG

Maximise positive 
impacts

Minimise negative 
impacts

SDG

Maximise positive 
impacts

Requisite payments to host 
governments throughout our 
operations 
 

 Read more on P55 

Continued to offer employee 
health benefits across 
organisation
 

 Read more CR Report 

Developed and delivered 
health and well-being initiatives
 

 Read more CR Report 

Continued to support English 
language training for students 
at the Earth Sciences Institute 
(IST) in Senegal
 

 Read more on P65 

Joined a cross-industry 
initiative to support a 
vocational training institute 
(NATIM) in Suriname 
 Read more on P28 
 

Maintained a robust equality 
and diversity policy; increased 
female board representation 
during year
 

 Read more on P57 

Production of oil and gas 
to meet energy demands 
through the transition to a low 
carbon economy. Contribute 
to energy security for host 
nations; Senegal development 
expected to contribute 
to domestic gas supply 
substantially replacing higher 
carbon sources of electricity 
generation in Senegal
 Read more on P65 
 

Continued to implement 
policies for local procurement 
and supplier development
 

 Read more on P65 

Continued to support the 
development of a National 
Institute of Oil and Gas (INPG) 
through our joint venture in 
Senegal
 

 Read more on P65

Continued to support Invest in 
Africa in Senegal, training local 
businesses and setting up a 
portal for SMEs to access oil 
and gas contracts 
 

 Read more on P65 

Continued to support EITI 
in promoting transparent 
payments to governments  
by the extractive industry  
and promoting fair distribution 
of benefits in host nations

Attended the global EITI 
conference
 

 Read more on P55

Promoted human rights, 
environmental and safety 
standards through contracts 
and monitoring
 

 Read more on P64 

Cairn Energy PLC Annual Report and Accounts 2019

Continued to apply robust 
waste and chemical 
management plans  
throughout our operations
 

 Read more on P60 

Implemented measures to 
minimise disruption to fishing 
activities offshore Mexico, 
Suriname and the UK and 
Norway 
 

 Read more on P63 

Enhanced employee travel 
health and security risk 
management
 

 Read more on P59 

Continued to apply CRMS  
to protect health and safety  
of workers
 

 Read more on P58 

Trained employees in travel 
health and security risk 
management
 

 Read more on P59 

Implemented EIA and 
Environmental Management 
Plan measures for operations  
in Mexico, Norway, Suriname 
and the UK to protect water 
quality around our operations 
 

 Read more on P62 

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S T R A T E G I C   R E P O R T
S T R A T E G I C   R E P O R T

UN SDGs in Action

Minimise negative 
impacts

SDG

Maximise positive 
impacts

Mitigated emissions 
by minimising energy 
consumption and flaring

Endorsement of Global Gas 
Flare Reduction Partnership 
 

 Read more on P46 

Subjected all 2019 operations 
to EIA and environmental 
management measures 
in line with our CRMS and 
Environmental Policy
 Read more on P62 
 

Implemented robust 
programmes for accident 
prevention and preparedness 
and response
 

 Read more on P58 

Continued to adhere to our 
robust human rights policies to 
ensure human rights violations 
do not occur in supply chain 
 

 Read more on P64 

Improved awareness of human 
rights with a workshop and 
training 
 

 Read more on P64 

Engaged with marine 
authorities in Mexico and set up 
a local grievance mechanism
 

 Read more on P63 

Contribution to climate  
change adaption through 
social investment 
 

 Read more on P28 

Promoted deferred production 
of gas in preference to flaring 
with our non-operated 
partners 
 

 Read more on P48 

Funding provided to Heriot 
Watt university to support 
clean energy research themes

Shared findings of all ESIAs 
with government authorities
 

 Read more on P62 

Conducted biodiversity 
studies in Mexico and 
monitored sea turtles 
 Read more on P62 
 

Maintained robust ABC 
management policies and 
procedures
 

 Read more on P55 

Support to institutional training 
in Senegal
 

 Read more on P65 

EITI reporting in participating 
countries
 

 Read more on P55 

Continued to support  
the UNGC 
 

 Read more on P7 

Supported the new  
2019 EITI standard
 Read more on P55 
 

Our contribution to the UN SDGs through our activities  
in Senegal is described in detail on page 65.

Our contribution to the UN SDGs through our historic 
activities in India is described in detail on page 14. 

Cairn Energy PLC Annual Report and Accounts 2019

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S T R A T E G I C   R E P O R T

UN SDGs in Action

C A S E   S T U D Y

L A U N C H   O F   S O C I O -
E C O N O M I C   I M P A C T   S T U D Y

In November 2019 the UK India Business Council launched  
a campaign to highlight the importance of the socio-economic 
contribution that UK businesses make in India. 

The campaign is being delivered in partnership with the UN 
Development Programme to harness the resources in finance, 
innovation and strategy of the business sector in India for the 
successful implementation of the UN Sustainable Development  
Goals (SDGs). 

The SDGs are an ambitious declaration of global aspirations, ranging 
from eliminating poverty, hunger, and violence against women to 
providing legal identity and equal access to justice to every person  
in the world. Adopted unanimously by the 193 UN Member States in 
September 2015, the SDGs are meant to guide global development 
efforts for 15 years, from 2015 to 2030.

Cairn’s investment in India was presented at the launch event of  
the Socio-Economic Impact Study in Delhi as an example of British 
business working in support of the SDGs.

 “ We started Kiri Logistics 
in 2003 when Cairn came 
to Rajasthan for the first 
time. They were the ones 
who gave us this chance  
and employed local 
youth. We were able to 
use this opportunity and 
prove ourselves to reach  
this position.”

Lalit Kiri, entrepreneur and Director 
of Kiri Logistics, service providers to 
the Indian and international oil and 
gas industry.

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Cairn Energy PLC Annual Report and Accounts 2019

S T R A T E G I C   R E P O R T

C A S E   S T U D Y

I N V E S T M E N T   L E G A C Y 
I N   R A J A S T H A N

August 2019 marked the 10th anniversary 
of first oil from Mangala Oil Field in 
Rajasthan, the largest onshore discovery  
in India for more than 25 years.

From a barren desert landscape, Cairn 
discovered more than one billion barrels of 
oil which continues to generate significant 
revenues for the country with more than 
US$20 billion to the Indian Government  
to date.

Together with its joint venture partners Cairn 
invested ~US$6bn in projects that have 
benefitted the nation and local communities:

 – Rainwater harvesting, capacity to store 

more than 10 million litres of drinking water

 – Mobile health van, serving over 8,500 
people in remote local communities 
 – Enterprise Centre, training more than 

3,000 people, supporting development 
of local businesses

 – Rural dairy development, over 900  
dairy farmers registered in different 
co-operatives

Cairn Energy PLC Annual Report and Accounts 2019
Cairn Energy PLC Annual Report and Accounts 2019

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S T R A T E G I C   R E P O R T

External Industry Overview 

This industry overview, provided by Heriot-Watt 
University, gives an independent view of the 
industry in which Cairn operates.

About the authors:
Dr Julian Fennema – Honorary Associate Professor at  
Heriot-Watt University

Dr 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. The university’s Centre for Energy 
Economics Research and Policy (CEERP) research group forms  
a key point of support and collaboration with the energy industry.

Cairn has a well-established and long standing relationship with 
Heriot-Watt University, promoting the exchange of learning across 
academia and industry. Most recently Cairn has collaborated to 
support a new energy scholarship programme at Heriot-Watt. This 
programme will focus on developing future talent and research in 
subsurface and geosciences to help create a lower carbon future.

1  Based on a comparison of Stated Policies and Sustainable Development scenarios 

from IEA World Energy Outlook 2019. 

2  Primary energy demand in the OECD countries has been grown by just 0.6% over 

2008-2018 but the economies have grown by 16.6%. 

3  The current car fleet is highly inefficient, converting approximately 30% of potential 
energy into kinetic energy (the remainder is lost as heat or sound). Improvements to 
the non-electric car fleet are expected to stem over nine million barrels per day of 
growth in oil demand, three times more than that expected from the introduction of 
300 million electric vehicles to the fleet. For developing economies, with a relatively 
small passenger vehicle fleet compared to overall oil consumption there are fewer 
efficiency gains to be made, such that the growth effect again dominates the 
efficiency effect.

4  Under the IEA’s Stated Policies scenario as discussed in the World Energy  

Outlook 2019. 

5  According to OGA: https://www.ogauthority.co.uk/data-centre/data-downloads-

and-publications/well-data/

6  https://www.rystadenergy.com/newsevents/news/press-releases/upstream-

renaissance-for-the-uk-offshore-sector/

7  https://oilandgasuk.co.uk/product/economic-report/
8  These include Neptune Energy’s Seagull, Apache North Sea’s Storr, and Wintershall 

Dea’s Sillimanite, which straddles the UK-Netherlands border.

9  https://www.gazprom.com/press/news/2019/may/article480304/. These figures 

are C1 + C2, which is equivalent to proved + probable + possible reserves.

10 https://www.rystadenergy.com/newsevents/news/press-releases/operational-

production-costs-have-fallen-globally/

1 CLIMATE CHANGE POLICY 

AND ENERGY TR ANSITION

2019 has seen continuing momentum in the public discourse, from 
government and regulators to protests by individuals and focus  
groups, on the need for an energy transition to address the question  
of climate change. 

There remains, however, a gap between the high-level rhetoric and the 
detail, and between policies committed to date and those required for 
sustainable, accessible energy. According to the International Energy 
Agency (IEA), under currently planned policies the levels of carbon 
emissions in 2040 will be double those targeted by the 2016 Paris 
Agreement.1 Even the levels projected in the Sustainable Development 
Scenario do not yet meet the levels proposed in the 2018 Special 
Report on Global Warming of 1.5ᵒºC by the International Panel on 
Climate Change (IPCC).

In a growing world economy, two strong and counteracting forces act 
on the total demand for energy. The production of more goods and 
services requires increased energy consumption but, as technology 
progresses, less energy is consumed per unit of economic output.

In advanced economies, the efficiency effect dominates2. Whilst ever 
more efficient technologies are being implemented, in developing 
countries the economic growth effect outweighs the efficiency gains. 
These developing countries are expected to account for more of global 
economic growth than the advanced economies, such that overall 
global energy demand is forecast to rise by around a quarter by 2040, 
albeit with a doubling of overall output. 

The extent and composition of this energy consumption growth is 
highly uncertain, with unknown technical progress and government 
policies on climate change influencing the market supply and demand 
for different fuels.

World Energy Outlook (WEO): IEA 2019 change in energy demand 
2018-2040 by region and fuel

1,000

e
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t

500M

0

-500

China

India

Africa

Middle East

SE Asia

Japan

US

EU

Coal

Oil

Gas

Low-Carbon

Technology in a sector tends to dictate the fuel – transport accounts for 
65% of total oil consumption. Whilst the efficiency effect characterises 
the transport sector in advanced economies3 with falling oil demand 
as a result, this is counteracted by the growth effect for the developing 
economies. Under current policies, therefore, demand for oil is expected 
to plateau by 20404, with quantity reductions only occurring if new 
policy measures are introduced.

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Cairn Energy PLC Annual Report and Accounts 2019

 
S T R A T E G I C   R E P O R T

Increasing interconnections in world markets, from new pipelines  
and developments in liquefied natural gas trade, will continue to drive 
the adoption of gas as a lower carbon form of energy, in particular  
for electricity generation as a greener substitute for coal. Coal currently 
represents 27% of primary energy supply and emits the most carbon 
per unit of electricity – making it the easiest win in reducing carbon 
emissions consistent with the Paris Accord. Amongst the developing 
countries China’s substitution away from coal, however, is outweighed 
by the growth from India, although continued moves away from coal in 
advanced economies drive the expectation for a small reduction overall.

2 NORTH SE A

North Sea exploration was on the rise in 2019, with a doubling of 
UK offshore exploratory drilling after a low level of activity in 2018.5 
This level of activity is comparable to those we saw in early to mid-
2010s and is the highest since 2012. This pattern signals the capital 
commitments and portfolio adjustments in 2018 taking effect in 2019. 

Further, offshore development drilling increased by approximately 50% 
year-on-year between 2018 and 2019. This level of activity could be 
maintained in the medium term with Rystad predicting up to 38 new 
project commitments in the next three years.6 Such a development 
would pave the way for a surge of activity for contractors and service 
companies operating within the shelf. This, in conjunction with the 
evolving operator landscape in the UKCS, could breathe new life  
into the sector. 

According to Oil and Gas UK (OGUK)7, several projects in the UK 
Continental Shelf have been given the green light for investment 
in 2019.8 Hurricane’s Lincoln field in the West of Shetland remains 
the largest development at an estimated $5.4 billion.7 These come 
in addition to the buzz created by CNOOC and Total’s Glengorm 
discovery in early 2019, which is the largest gas discovery in the  
UK since Culzean in 2008. 

However, these greenfield developments do not represent the whole 
picture. Value creation through merger and acquisition activities has 
continued in 2019, amounting to over $5 billion.7 Chrysaor’s acquisition 
of the majority of ConocoPhillips’ UK portfolio topped the list at a 
value approximately half this total figure. This signals the continuation 
of the 'acquire and exploit' approach, where under-capitalised assets’ 
operational processes are streamlined to optimise production and 
lower costs. Across both greenfield and brownfield investments, the 
North Sea has had a dynamic year in 2019. 

3 GLOBAL   

E XPLOR ATION

Elsewhere, Russian arctic waters hosted exploration success with 
Dinkov and Nyarmeyskoye discoveries amounting together to nearly 
1.5 billion barrels of oil equivalent.9 Exxon’s success in the disputed 
waters of Cyprus placed the country on the map once again with  
an estimated 5-8 trillion cubic feet of natural gas that, if developed, 
could reduce European dependence on Russian gas.

In 2019, discoveries in Africa were not far behind other geographic 
hotspots. According to Rystad, top ten largest conventional discoveries 
featured Mauritania, South Africa, and Ghana. With nearly 2.3 billion 
barrels of oil equivalent, these countries jointly accounted for over  
a quarter of the global total. 

4 COST ENVIRONMENT AND 

INVESTMENT TRENDS 

IHS capital and operating cost indices through the third quarter of 2019 
show subtle signs of cost inflation in line with the trend we observed 
in 2018. Although the operating cost index appears to have stabilised 
in 2019, these indices are aggregated and, therefore, conceal regional 
divergences. For example, the unit operation costs for UKCS operators 
have declined by approximately 30% from their global high since 2014, 
while other markets have seen slight cost inflation over the same period.10

The upward pressure on the barrel price tends to have a tightening 
effect on the market for inputs to the production process, but with 
a lag, so the downward price trend we experienced in 2019 did not 
translate into declining cost indices globally. The graph below shows 
the linkages between the oil price and the capital cost (the cost of 
constructing a producing facility) and the operating cost (the ongoing 
cost of producing from this facility). 

Within the deepwater market, sustained Floating Production Storage 
Offloading (FPSO) utilisation rates and increases in offshore exploration, 
and subsequent development, are likely to drive strong demand in 
factor inputs in the short to medium term. A key determinant of this will 
be Field Investment Decisions (FIDs) being considered in boardrooms, 
especially given the uptick in exploration success in 2019. In the big 
picture, decisions in 2020 are likely to be critical in setting the scene for 
the next few years. 

IHS cost and Brent crude price indices

250

200

C
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t

I

n
d
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x

150

100

50

500

400

300 P

r
i
c
e

I

n
d
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200

100

2019 saw a surge of exploration activity and the highest discovered 
volumes since 2015, indicating that the decreased appetite for 
exploration that we observed in 2018 seems to have become a thing  
of the past. Guyana continued to bring exploration success, and Europe 
and South America offered up the most oil and gas discoveries in the 
second and third quarters of the year. 

0
2000 01 02 03 04 05 06 07 08

09 10 11

12

13 14 15 16 17 18

2019

0

Operating Costs

Capital Costs

Oil Price Index

Capital and operating cost indices from IHS Markit and oil price index (2000 = 100) 
based on Brent FOB price ($) from EIA.

Cairn Energy PLC Annual Report and Accounts 2019

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S T R A T E G I C   R E P O R T

O P E R A T I O N A L 
R E V I E W

2019 Summary
 – ᵒNet oil production averaged ~23,000 bopd, at upper end of guidance 

(2018: 17,500 bopd)

 – Oil and gas sales revenue US$504m (2018: US$396m), average  

realised oil price US$65.70/bbl; average production cost US$17.4/boe

 – Net cash inflow from oil and gas production US$390m
 – Capital expenditure was US$242m* 
 – Year end Group cash US$147m, excludes proceeds from sale of Capricorn 

Norge of ~US$108m, completed in February 2020

 – Operating profit US$155m (2018: Operating loss US$129m)
 – Net impairment reversal of US$68m (2018: charge of US$166m): Reversal 
of US$147m Kraken impairment, offset by US$79m goodwill impairment

 – ᵒIncrease 2P reserves by 150% to 142 mmboe

2020 Outlook
 – Estimated net production of 19,000 to 23,000 bopd; targeting average 

production cost