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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
4
6
8
10
12
14
16
18
32
36
39
46
50
52
54
56
60
63
66
74
76
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
136
137
138
139
140
144
155
165
172
177
180
183
184
185
186
193
194
195
197
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
1
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
4
6
8
10
12
14
16
18
32
36
39
46
50
52
54
56
60
63
66
2
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.
4
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
5
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
6
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
7
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.
8
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
s
licie
o
P
C
R
M
S
H
u
R
m
i
g
a
n
h
t
s
ABC
T C F D
U
N
S
D
G
s
C
IF
E
I
T
I
M SA
10
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
o
P
C
R
M
S
H
u
R
m
i
g
a
n
h
t
s
U
N
S
D
G
s
C
IF
E
I
T
I
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
11
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
12
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
13
13
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.
14
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
15
15
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
o
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.
16
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
o
s
t
I
n
d
e
x
150
100
50
500
400
300 P
r
i
c
e
I
n
d
e
x
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
17
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 99%
for five resolutions
– No resolutions with <92%
in favour
– Full Director attendance
expected
– 14 ordinary resolutions and
4 special resolutions being
proposed to shareholders
The Board uses the AGM to communicate with private and institutional
investors and welcomes their participation. It is policy for all Directors to
be present at the AGM, with the Chair of each of the Board committees
expected to attend and be prepared to answer shareholder questions
on areas within their remit. Our employees based in Edinburgh are also
invited to attend the AGM as the Directors recognise that this provides
a valuable opportunity for workforce engagement with the Board.
As part of our commitment to transparency we look to involve
shareholders fully in the affairs of the Company and to give them
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 14 May 2020 and an explanation of each resolution
can be found in the separate Notice of AGM.
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. To date, the Company has never received
20% or more of votes cast against the Board recommendation for any
resolution proposed at an Annual General Meeting of the Company.
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.
84
Cairn Energy PLC Annual Report and Accounts 2019
L E A D E R S H I P A N D
G O V E R N A N C E
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 strategic 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 international
framework for considering internal control systems. The COSO
framework seeks to help organisations develop systems of internal
control which help facilitate the achievement of business objectives
and improvements in Company performance. The COSO 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.
– Assurance maps for the Group were updated in Q1 2019 to capture
the key sources of assurance for business critical activities across
the Group. The assurance map will be updated annually;
– 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. Topics covered in 2019 included IS strategy and
Governance, Non-Operated JV Management, CRMS, and Key
Financial Controls. The Group has been working through the year
to implement any identified improvements; and
– To ensure awareness, understanding and compliance on important
governance, regulatory and security topics, mandatory e-learning
was also implemented across the Group, which included
comprehensive modules on business ethics, anti-bribery and
corruption, CMAPP and cyber security.
The following describes the key elements of the Framework and the
processes used by the Board during 2019 to review the effectiveness
of the system and the approach to be taken in 2020.
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
strategic 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 measured against
the Company’s KPIs.
The Framework has been in place for the 2019 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 systems of internal control during 2019 and will
ensure that a similar review is performed in 2020. 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 2019.
2. Operating Management
The Company operates various regional units covering different
countries and assets and with multiple 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 these teams and their remit
can be found on pages 81 and 82. 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
plan; 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.
Particular attention has been placed by the Company’s management
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 2019 to the
following key controls, business processes and procedures:
– The Board completed a risk workshop which focused on identifying
and analysing potential threats from climate change policy and
the energy transition. The objective of the workshop was to give
the Board further insight into some of the potential threats to Cairn
during the transition to a low carbon economy and to consider
some initiatives to strengthen the governance of the risks and
opportunities associated with the transition;
– The MT conducted a review of the risks, mitigations and actions
identified on the Group risk register each quarter to ensure
ownership for the risks, mitigations and actions were clearly
assigned and implementation dates for actions were tracked;
– An anti-bribery and corruption risk assessment was completed on
Mexico to identify high risk areas. A number of actions were agreed
at the workshop to further mitigate the identified risks;
– Pinsent Masons completed a review of the Group’s anti-bribery
and corruption management system. The objective of the
review was to assess the design of the bribery and corruption
compliance programme. The review concluded that the anti-
bribery programme is well designed. The report identified possible
enhancements which will further strengthen the compliance
programme. These will be actioned in 2020;
– A compliance dashboard was developed to assess compliance
with a number of key regulations impacting the Group including
UK Bribery Act, GDPR, CCO, CMAPP and modern slavery. The
dashboard was presented at each RMC meeting and annually to
the Audit Committee as part of the year end control assessment;
Cairn Energy PLC Annual Report and Accounts 2019
85
L E A D E R S H I P A N D
G O V E R N A N C E
Corporate Governance Statement continued
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
approved 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 2019, risk management updates were presented at each Board
meeting and as part of an annual process, the Board undertook
a strategic risk workshop in November 2019 (see page 85).
The RMC, which continues to meet on a quarterly basis, is currently
chaired by the Chief Executive and comprises the Executive Directors
and senior functional management. The internal auditor also attends
RMC meetings, in order to ensure integration of the Group’s internal
audit plan with the risk management process. Regular MT risk sessions
were also held during 2019 to manage and facilitate the assessment
and treatment of business risks that may affect the Company’s ability
to deliver its strategy.
Enhancements to our approach to risk management during 2019
included the following:
– The MT formally conducted a review of the risks, mitigations
and actions identified on the Group risk register each quarter to
ensure ownership for the risks. Mitigations and actions were clearly
assigned and implementation dates for actions were tracked; and
– The RMC reviewed a gross to net risk assessment of principal
risks, in order to gain a deeper understanding of high impact risks
and identify any areas where there is a reliance on controls and
mitigating actions.
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
2019 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 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 2019, 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 principal risks are 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 influenced the topics included
in the 2019 Group internal audit plan.
The Directors derived assurance from the following internal and
external controls during 2019:
– A regularly updated schedule of matters specifically reserved
for decision by the Board;
– Implementation of the Cairn Operating Standards for key
business activities;
– An appropriate organisational culture and structure;
– Control over non-operated joint venture activities through delegated
representatives;
– Specific delegations of authority for all financial transactions and
other key technical and commercial decisions;
– Segregation of duties where appropriate;
– Business and financial reporting, including KPIs;
– Functional management reviews;
– 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 any 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 any 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 the workforce.
Ian Tyler
Chairman
9 March 2020
86
Cairn Energy PLC Annual Report and Accounts 2019
Audit Committee Report
L E A D E R S H I P A N D
L E A D E R S H I P A N D
G O V E R N A N C E
G O V E R N A N C E
The Audit Committee
Members and meetings in 2019
The Audit Committee’s primary 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.
Keith Lough (Chair)
Nicoletta Giadrossi
Alison Wood1
Alexander Berger2
Meetings
attended
Member
since
05/15
05/18
07/19
03/12
1 Alison Wood was appointed a member of the Audit Committee with effect from
1 July 2019. The number of meetings she attended is stated from this date.
2 Alexander Berger retired as a Non-Executive Director on 17 May 2019. The number
of meetings he attended is stated up to that date.
Dear Shareholder
Composition and Summary of Audit Committee Meetings During
the Year
I served as Chair of the Audit Committee for the duration of the year
having been appointed Chair in 2018.
Serving with me on the Audit Committee are two of my fellow Non-
Executive Directors, Nicoletta Giadrossi and Alison Wood, who joined
the Committee with effect from 1 July 2019. Alison replaces Alexander
Berger who stepped down as a Non-Executive Director at the AGM. Both
Nicoletta and Alison are considered by the Board to be independent.
Ian Tyler also attended meetings in his capacity as Chairman of the
Cairn Energy PLC Board but is not a member of the Committee.
The members of the Committee have been chosen to provide the
wide range of financial and commercial experience needed to fulfil
these duties. Alison and I are qualified accountants with recent and
relevant financial experience. Nicoletta brings comprehensive industry
knowledge to the Committee.
At our request, the CFO, the Chief Executive (in his capacity as
executive responsible for internal audit) and senior members of the
finance and risk and compliance departments attend each meeting.
Additionally, both internal and external auditors also attend. I also met
privately with the external audit partner to discuss matters relevant to
the Group throughout the year.
The Audit Committee met four times in 2019, with meetings arranged
around the key external reporting dates. The first meeting in March
2019 focused on the 2018 year end external audit process (reported in
the 2018 Annual Report and Accounts). Meetings in June and August
both centred on the Group’s half year reporting and a November
meeting focused on planning for the 2019 year end cycle and external
audit process and the internal work programme for 2019. Subsequent
to the year end, a further meeting was held in March 2020 to conclude
the 2019 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 receives a report on the internal
audit process, tracking the progress of internal audits and reviewing
their output and recommendations.
The Audit Committee also closely monitors 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
reviews and challenges 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 and the annual review of the
Group’s policy on non-audit services and its Whistleblowing Policy.
Cairn Energy PLC Annual Report and Accounts 2019
87
L E A D E R S H I P A N D
G O V E R N A N C E
Audit Committee Report continued
Responsibilities and Activities During the Year
The Terms of Reference of the Committee take into account the requirements of the UK 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.
Financial Statements
Principal responsibilities of the Committee
Key areas formally discussed
– Monitoring the integrity of the Financial Statements
of the Group and formal announcements relating
to the Group’s financial performance;
– Going concern conclusions and linkage to the
Viability Statement;
– Significant accounting issues at the half year and year
– Reviewing any significant financial reporting
end (see below); and
judgements; and
– Reviewing the appropriateness of accounting
policies, their consistent application and disclosures
in financial statements.
– Approval of the Group’s corporate assumptions (those
impacting impairment testing are summarised in
section 2 of the Financial Statements).
External audit
– Overseeing the Group’s relationship with the external
– Reviewing the external auditors’ scope and audit plan
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.
for the 2019 year end;
– Discussing the materiality levels set by the auditors;
– Approval of the auditors’ remuneration;
– Consideration of the results of the external audit with
the auditors and management; and
– Assessment of the effectiveness of the external audit.
– Reviewing the Group’s internal financial controls
– Reviewing the Group’s corporate and operational
and internal control and risk management systems
and oversight of the Group’s Risk Management
Committee; and
risk register;
– Reviewing reports on the activities of the Risk
Management Committee;
– Monitoring and reviewing the effectiveness of
– Selection of internal audit work planned for 2020
the Group’s internal audit function.
and consideration for future years; and
Internal risk management
and assurance
Whistleblowing procedures
– Reviewing the Group’s whistleblowing 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.
– Assessment of key findings raised from internal audits
conducted in the year.
– Reviewing and approving of the Group’s
whistleblowing procedures.
Other matters
– Reviewing the Group’s policy for approval of
non-audit work to the Company’s auditors; and
– Reviewing booking of Group reserves and resources.
– Review and approval of the Group policy for approval
of non-audit work to the Company’s auditors; and
– Classification of 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. At the March 2020 meeting, the Committee specifically
considered the disclosures of the risk associated with the Group’s ability to fund its share of Senegal development costs. Management provided
an overview of the disclosure made throughout the Annual Report and Accounts and the Committee concluded that the disclosure was presented
in a fair, balanced and understandable manner.
External Audit
The current version of the UK Corporate Governance Code states that FTSE 350 companies should put the external audit contract out to tender
at least every 10 years. Cairn complied with this provision before it came into force and completed an external audit re-tendering process in 2013.
PwC were subsequently appointed as external auditors of the Group, on the recommendation of the Audit Committee at that time. The 2019 year
end audit therefore represents the seventh year of PwC’s tenure as Group auditors. Lindsay Gardiner continues as PwC’s lead audit partner on the
Cairn engagement for his second year. Lindsay was not previously involved with the audit of the Group or its subsidiaries prior to his appointment.
2019 Year End Significant Accounting Issues
At each reporting date, the Audit Committee reviews the results for the relevant period and the key assets and liabilities in the Group balance sheet,
focussing on the key estimates, assumptions and judgements that management has used in applying the relevant accounting standard.
The key issues identified at the December 2019 year end reflect changes to accounting standards, changes in Cairn’s portfolio of assets and
performance of the Group’s producing assets. Those issues identified are:
– Reserves and resources reclassification and revisions;
– Corporate assumptions and impairment testing of oil and gas assets and related goodwill, notably the Group’s producing assets in the UK North Sea;
– Lease accounting for the Kraken and Catcher FPSOs on adoption of IFRS 16; and
– Disposal of the Group’s Norwegian assets.
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Reserves and Resources Reclassification and Revisions
With the UK producing assets performing strongly during the year and approval of the Senegal Phase 1 development plan, management have
revised existing production profiles and promoted forecast production volumes to reserves during the year, directly impacting the classification
of assets and impairment reversals/charges in the Financial Statements.
Audit Committee action
Audit Committee conclusions
The Committee was satisfied that changes to reserve volumes
and production profiles were properly recorded and in accordance
with the Group’s standard operating procedures which follow industry
best practice. In particular the Committee were satisfied that the
performance improvement witnessed on Kraken during the year,
and revised expectation of future production volumes and costs,
were appropriate. The Committee also accepted management’s
reclassification of the Sangomar reserves, given the conditions that
existed at the year end.
The Committee closely monitored changes to the Group’s reserves and
resources of oil and gas and related production profiles, with emphasis
on Cairn’s two UK producing fields and the reclassification of Senegal
reserves at the year end.
During 2019, production performance on Kraken has improved
significantly and in addition the Operator has conducted more regular
well testing to improve reservoir monitoring. Consequently management
have revised production profile estimates upward to reflect this
improvement while also incorporating promoted volumes associated
with the Worcester satellite field to be developed in 2020.
In Senegal Sangomar Phase 1 oil production volumes have been
promoted to reserves at the year end with the joint operators having
approved the development plan.
The Committee sought an explanation from management as to the
reasons behind the changes in reserve estimates and classification.
The Committee also reviewed the minutes of the meeting of the Group’s
Reserves and Resources Committee.
Corporate Assumptions and Impairment Testing of Oil and Gas Assets and Goodwill
The Committee reviews and approves Group corporate assumptions which, together with reserve estimates, feed into the Group’s impairment testing.
Audit Committee action
Audit Committee conclusions
The Committee reviews and approves assumptions and estimates that
are key inputs into corporate modelling for impairment tests including,
but not limited to, oil and gas price assumptions and discount rates.
During the year, management reviewed oil price assumptions to ensure
that a single long-term, base-case oil price assumption was being
applied for all Group reporting, including investment proposals and
statutory reporting. Following this review, management reduced the
Group’s long-term oil price assumption to US$65 per bbl.
The Committee reviewed the impairment test calculations and ensured
that impairment reversals and charges are recognised in accordance
with accounting standards and in a timely manner within the Group
Financial Statements.
The Audit Committee agreed with management’s proposals to reduce the
long-term oil price assumption after seeking assurance from the external
auditors that assumptions did not significantly deviate from market consensus.
The Committee was satisfied that reversing the prior year impairment on
Kraken was appropriate given the changes to reserve estimates and the
calculation of the reversal was correct. The Committee was also satisfied
that the impairment charge of goodwill was appropriate and the
classification between continuing and discontinued operations was fair
presentation of the results for the year.
Lease Accounting for the Kraken and Catcher FPSOs on Adoption of IFRS 16
On 1 January 2019, Cairn adopted the new leasing standard, IFRS 16. The significant accounting impact of adoption was the recognition of a right-of-
use asset and lease obligation in respect of the Catcher FPSO which had previously been recorded as an operating lease.
Audit Committee action
Audit Committee conclusions
The Committee reviewed adjustments proposed by management
on adoption of IFRS 16. The Committee were satisfied that there were
no adjustments required to the Kraken lease accounting (previously
recorded as a finance lease).
The Audit Committee reviewed the accounting for the Catcher lease
liability and associated right-of-use asset and concluded that the
adjustment on adoption of IFRS had been properly recorded and that
assumptions made by management were appropriate (see note 3.4).
With the recognition of the Catcher FPSO lease obligation, the
Committee’s review focused on the key assumptions applied by
management on fixed lease payments, the interest rate applied
and the term of the lease.
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Audit Committee Report continued
Disposal of the Group’s Norwegian Assets
During the year the Group announced the sale of a 10% interest in the Nova licence in the Norwegian North Sea. Subsequently, in November 2019,
the Group announced the sale of the Group’s Norwegian business, with the sale completing in February 2020 on final approvals being received.
Audit Committee action
Audit Committee conclusions
The Committee reviewed the calculation of the gain on sale of the
10% interest in the Nova licence. With the agreed sale of the Norwegian
business the Committee reviewed the disclosures in the Financial
Statements where the assets are classified as held-for-sale at the year
end, including allocated goodwill and subsequently impaired to their
fair value less cost of disposal.
The Committee concluded that appropriate disclosures had been
made in the Financial Statements to explain the transitions entered into
impacting the Norwegian business and that the financial performance
of the discontinued operations, including the impairment charge, had
been disclosed in accordance with applicable accounting standards.
The Committee sought explanation from management on the interaction
between the gain on disposal of the 10% interest and the impairment of
the disposal group and sought assurance from the auditors that the
impairment was correctly computed and properly disclosed within
discontinued operations.
Going Concern and Viability
At each reporting date, management considers the factors relevant to support a statement of going concern included in note 1.2 to the Financial
Statements. The Audit Committee reviews and challenges 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.
The Audit Committee carefully reviewed management’s going concern conclusion based on the Group’s latest cash and debt position and the
forecast exploration and appraisal spend in the period ending 31 March 2021. While the Committee noted that if the Group failed to conclude on
additional sources of funding to support its Senegal development, an impairment of the asset may follow, the Committee confirmed that this will not
effect the Group’s ability to continue to operate as a going concern. The Audit Committee subsequently recommended to the Board that the Group
continues to use the going concern basis in preparing its Financial Statements.
The Committee also reviews and challenges management on the sensitivity analysis performed to support the Group’s Viability Statement, included
in the Strategic Report on page 37. Following this challenge, the Committee recommended approval of the Viability Statement to the Board.
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
auditor 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 page 130).
A review of the Audit Quality Inspection (“AQI”) report on our auditor
published by the FRC with particular emphasis on any 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.
Regular communications through formal papers submitted and
presentations to the Committee, including a review by the Committee
of the extent to which the auditors have challenged management.
The Committee accepted 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 was satisfied that appropriate challenge had been made
of management and that the audit process was robust.
The audit plan for the year ending 31 December 2019 was presented to
the Audit Committee in June 2019 and is summarised in the Independent
Auditors’ Report on page 130. Audit findings on significant matters are
presented to the Committee, together with the work performed by the
auditors to challenge management’s key estimates and assumptions.
Separate meetings between myself as Chair of the Audit Committee
and the lead audit engagement partner.
Separate meetings were held in advance of all Committee meetings
during the year.
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 2020. After thorough discussion, the Committee agreed with the conclusions reached
by the auditors, noting the degree of judgement around areas of significant audit risk.
The significant accounting issues identified by the Audit Committee were included in the significant matters identified by the external auditors in their
audit plan. There were no other specific areas that the Audit Committee requested the auditors to look at.
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At the end of each annual reporting cycle, the Audit Committee reflects on the quality of the audit provided by the auditors. At each Audit Committee,
the auditors present an update on their progress on the audit and where appropriate conclusion on their half year review and full year audit and
how the audit has been conducted in relation to the plan presented to the Audit Committee, with the Committee able to challenge the audit at any
point. Following conclusion of the 2018 year end audit, the Committee discussed the quality of the audit service provided, using the questionnaire
responses as a basis for the discussion. Though there were no significant matters reported, where the Committee believed improvements to the
audit process could be made, these were fed back to the engagement partner in our separate meetings. The Audit Committee did conclude that the
auditors had delivered an audit of appropriate quality. Though the formal assessment of the 2019 audit has yet to be formally undertaken, no matters
were raised at the Committee meeting held in March 2020 that would lead the Audit Committee to believe that the quality of the audit had regressed
from previous years.
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 the Audit Committee must be satisfied that the auditors’ objectivity and
independence would not be compromised in any way as a result of being instructed to carry out those services.
The policy on approval of allowable non-audit fees for the Groups’ auditors is re-approved annually. All non-audit fees should be approved by the
Audit Committee in advance of the engagement with a practical workaround of only seeking approval from the Committee Chair, rather than full
Committee, in advance for fees below an approved threshold of £100,000. This approval will then be ratified at the next meeting of the Committee.
The policy is available online on the Group’s website.
During the year, PwC provided other services including certification of the Group’s EITI submission in Senegal and support on potential corporate
transactions. A full analysis of remuneration paid to the Group’s external auditors in respect of both audit and non-audit work is provided in note 6.4
to the Financial Statements.
As an Audit Committee, we consider PwC to be independent.
Internal Audit
Following a competitive tender process, Ernst & Young LLP (“EY”) was 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 85), 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 auditor does 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 auditor does, however, attend all Committee meetings where internal audit updates are given and meets separately
with the internal auditor and the Audit Committee Chair to discuss areas of common focus in developing their audit plan.
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 and this policy is reviewed
annually by the Committee. The Group’s current version of the policy was first presented to, and approved by, the Audit Committee at the March 2018
meeting and re-approved at the December 2019 Audit Committee meeting.
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 Ethics. Regular training updates are
provided to all employees and long-term contractors in addition to the training that is provided to all new staff joining the Company. As Cairn
enters new countries, further monitoring is undertaken and training is refreshed. Further information regarding these policies can be found on the
Group’s website.
Board and Committee Performance Evaluation
The Board retains overall responsibility for implementation of its annual performance evaluation, and the process and outcomes of the 2019 internally
conducted evaluation are described in the Corporate Governance Statement on page 85. The process included a review of all Board committees and
it was concluded that the relationship between the Board and its committees is functioning well, with all committees fully meeting their remit. The
Audit Committee works together with the Board in seeking to address any performance evaluation outcomes relating to the work of the Committee.
Keith Lough
Chair of the Audit Committee
9 March 2020
Cairn Energy PLC Annual Report and Accounts 2019
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Nomination Committee Report
The Nomination Committee
Members and meetings in 2019
Ian Tyler (Chair)
Simon Thomson
Keith Lough
Peter Kallos
Nicoletta Giadrossi
Meetings
attended
Member
since
05/14
03/13
05/15
09/15
05/18
Role and Membership of the Committee
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 membership of the Committee is set out in the table above
and comprises a majority of independent Non-Executive Directors.
The Chief Executive is also a member of the Committee.
Alison Wood was also appointed as a member of the Audit Committee
with effect from 1 July 2019.
The Company instructed recruitment consultants Spencer Stuart in
connection with these appointments and Spencer Stuart provided
advice and services to the Company throughout the search, including
the preparation of both a long list and short list of candidates in respect
of each position for consideration by the Committee. Spencer Stuart has
no other connection with the Company or any of its individual directors.
The role of the Nomination Committee includes:
– Evaluating the balance of skills, knowledge, experience, diversity
and independence on the Board;
– Leading the process for Board appointments and ensuring plans
are in place for orderly succession to both Board and senior
management positions;
– Overseeing the development of a diverse pipeline for succession; and
– Working with the Board to address any performance evaluation
outcomes linked to Board composition and succession planning.
Board Changes
As disclosed in last year’s Annual Report, Jackie Sheppard retired
as a Non-Executive Director on 31 December 2018 and Alexander
Berger retired as a Non-Executive Director immediately following the
Company’s AGM on 17 May 2019. At the time of publishing last year’s
Annual Report, the Company had also disclosed that a recruitment
process to appoint two new Non-Executive Directors was well
advanced. The Company subsequently announced the appointment
of Alison Wood and Catherine Krajicek during April 2019 and both
became Non-Executive Directors with effect from 1 July 2019.
All candidates on the short list for each position were initially
interviewed by Committee members, following which Alison Wood
and Catherine Krajicek were identified as the preferred candidates, and
both were subsequently interviewed by the remaining members of
the Board. Following these interviews, the Committee recommended
to the Board that Alison and Catherine be appointed as independent
Non-Executive Directors and each appointment was unanimously
approved by the Board.
Prior to their appointment date, both Alison and Catherine were given
the opportunity to carry out due diligence on the Company and were
provided with all of the Company’s induction materials for new Directors.
As part of their induction process, Alison and Catherine also attended
a tailored programme of induction meetings with other members of
senior management and the company secretarial team. In addition,
Alison attended a separate induction session focusing on the key issues
which fall within the remit of the Audit Committee, prior to becoming a
member of that committee. Further details of our induction process are
included in the Corporate Governance Statement on page 80.
The Company has also identified a very strong candidate to replace
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Todd Hunt as a Non-Executive Director and is in the final stages of the
appointment process for this individual. Todd Hunt will therefore retire as a
Non-Executive Director immediately following the AGM on 14 May 2020.
Succession Planning and Development of Executive Pipeline
The Nomination Committee regularly evaluates the combination 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 both
appointments and succession plans should be based on merit
and objective criteria, and within this context, should promote
diversity of gender, social and ethnic backgrounds, cognitive and
personal strengths.
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 (including the Chief
Executive) 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 annually reviews 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 Executive Directors and Senior Leadership Team members
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; and
this approach was shared with the Board. 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. By way of example on how we support and
develop our people for succession, in 2019 the Company introduced a
rolling mentoring programme where senior team members and Board
members act as mentors to potential future leaders.
During 2019, the Board’s review of succession planning covered a
review of the processes used by the Company for succession planning,
key achievements since the previous review, and actions being
undertaken to address any succession risks or challenges identified.
Diversity
The Nomination Committee very much recognises the benefits of
building a diverse Board, not just in in terms of gender and social and
ethnic background, but also to promote diversity of cognitive and
personal strengths. Following the appointment of Alison Wood and
Catherine Krajicek as Non-Executive Directors, the number of women
on the Board increased from one to three with effect from 1 July 2019
(representing 33% of total membership as at 31 December 2019). The
Board remains 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 continue to monitor and consider diversity for all
future Board appointments, whilst also continuing to recruit on merit.
Beneath Board level, we are also thinking more broadly than gender
diversity in all that we do and this means taking into account diversity
in all its dimensions – national origin, age, race and ethnicity, religion/
belief, gender, marital status and socioeconomic status, as well as other
factors such as personality type, educational background, training,
sector experience, and organisational tenure. Our Group People
Policy supports this approach and one of the key principles of this is to
promote, develop and maintain an inclusive workplace and to enhance
the successful advancement of diversity in the workforce. In this
context, our people are also actively encouraged to take responsibility
for their own development, and to challenge conventional thinking and
share knowledge, as well as recognising and creating opportunities for
personal growth.
Whilst it is by no means the sole consideration, the Company does
recognise the value of developing and increasing the number
of women in senior management roles across the Group. We do
however face particular challenges in achieving this, as it is generally
recognised that more males study science, technology, engineering
and mathematics (STEM) subjects, which in turn tends to mean more
men than women applying to join oil and gas companies. Despite this,
our gender statistics compare well to our industry peers, with 12.5%
female representation on the Senior Leadership Team; 18% on the
Management Team and (perhaps most encouraging from a succession
planning perspective) 24% of all direct reports to the Senior Leadership
Team (all figures as at 31 December 2019). Further analysis of our
succession planning data has shown that for five roles on the SLT
which are considered to be key for value creation, eight of the potential
successors for these roles are women, representing 63% of all potential
successors (not all of whom are direct reports to the existing roles).
The Company has participated fully in the annual submission of gender
performance data to the UK Government as part of the Hampton-
Alexander review aimed at improving the representation of women
in leadership positions in the FTSE 350 (from 2016 to 2019 inclusive).
We are pleased to report that our ranking in the Hampton-Alexander
Review Report published in November 2019 improved markedly
compared to the previous year, from position 143 in 2018 to position 95
in 2019 (in the FTSE 250 category).
Board and Committee Performance Evaluation
The Board retains overall responsibility for implementation of its
annual performance evaluation and the process and outcomes of the
2019 internally conducted evaluation are described in the Corporate
Governance Statement on page 79. The process included a review of all
Board committees and it was concluded that the relationship between
the Board and its committees is 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
9 March 2020
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Directors’ Remuneration Report
The Remuneration Committee
Members and meetings in 2019
Nicoletta Giadrossi (Chair)
Ian Tyler
Peter Kallos
Meetings
attended
Member
since
01/17
06/13
09/15
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 2019. During the year,
we continued to apply the executive remuneration policy that was
strongly supported at the 2017 AGM. However, as this policy will expire
shortly, shareholders will be asked to approve a new framework for
directors’ pay at the forthcoming AGM.
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 under our current policy during the year
ended 31 December 2019; an overview of these items is also set out
in this introductory statement.
At this year’s AGM on 14 May 2020 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 2020 and
onwards until the 2023 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 2020 and Beyond
In anticipation of the renewal of our remuneration policy at the 2020
AGM, the committee undertook a detailed review of our existing
pay structures. This process took into account a range of different
factors, including:
– The new corporate governance landscape – the committee
carefully considered the new remuneration related provisions
that were incorporated into the 2018 UK Corporate Governance
Code and, in particular, assessed whether the Company’s
remuneration framework adequately addressed the requirements
relating to clarity, simplicity, risk mitigation, predictability,
proportionality and alignment;
– Investor feedback – whilst formulating its thinking around the
new policy, the committee undertook a programme of engagement
with a selection of the Company’s larger institutional investors and
their representative bodies in order to understand their views on
our existing approach to remuneration;
– Discussions with key employees – the committee sought feedback
from our Executive Directors and other senior employees in order
to establish whether they regarded our pay arrangements as being
effective retention and incentivisation mechanisms;
– Consultation with other relevant stakeholders – the committee
took into account feedback received from our broader stakeholder
community, including the general employee population (who were
involved in discussions around the setting of our KPIs); and
– General trends in market and best practice – the committee
recognised the need for our remuneration arrangements to reflect
best practice trends as they emerge.
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Against this background, the committee concluded that the remuneration framework that had been in operation since 2017 remained broadly fit for
purpose. In particular, it considered that Cairn’s existing approach of combining a lower weighting on annual bonus opportunity with a slightly higher
level of long-term incentive grants (when compared to other FTSE 250 companies) appropriately reflected and supported our overarching strategy
as a business.
Notwithstanding the above, a small number of changes are being proposed in relation to the new policy, largely to address the requirements of the
2018 UK Corporate Governance Code and recent changes in shareholder expectations. In particular:
Pay element
Pensions
Annual bonus
Annual bonus
2017 Long Term
Incentive Plan
2017 Long Term
Incentive Plan
Post-employment
shareholding
requirement
Proposed change in policy for 2020
Rationale for the change
For any future Executive Directors that are appointed to
the Board, the rate of pension contributions will be
capped at a level that is equal to the amount paid to the
wider UK employee population (currently 10% of salary).
For the avoidance of doubt, the policy will, for the time
being, provide for the contribution rates for the Company’s
current Executive Directors to remain at 15% of salary per
annum. Additional commentary on this point is provided
after this table.
For the annual bonus plan that will operate
in 2020 and later years, the committee will (where
possible) set a defined payment scale for achievements
against each KPI or other relevant measure. Any such
scale, details of which will be disclosed on a retrospective
basis, will include ‘threshold’, ‘target’ (which will deliver not
more than a 50% payout for the relevant element) and
‘maximum’ levels.
The circumstances in which “malus” and “clawback” can
be applied by the committee in relation to the annual
bonus scheme (including any element that is deferred into
shares) will be expanded also to include (i) cases of gross
misconduct; and (ii) corporate failure, due to the conduct
of management, which results in the appointment of a
liquidator or administrator.
Similar changes will be made to the “malus” and
“clawback” rules contained within the Company’s 2017
Long Term Incentive Plan (although these enhanced
provisions will only apply to awards vesting on or after
1 January 2020).
The committee will be given a wider discretion to override
the vesting outturn produced by the operation of the
performance conditions applied to awards granted under
this arrangement. This discretion will only be capable of
reducing the number of shares to which participants
would otherwise be entitled.
A new post-employment shareholding requirement will be
introduced. Executive directors will be obliged to build up
and maintain a holding of shares, worth 200% of salary, for
the period of two years following cessation of employment.
Compliance with the 2018 UK Corporate Governance
Code.
Addresses feedback received from institutional investors
and their proxy advisors.
Ensures that the Company’s bonus scheme for Executive
Directors is compliant with developing market practice and
gives the committee greater powers to recover previously
paid amounts where this is deemed appropriate.
As above.
In line with the 2018 UK Corporate Governance Code, this
change ensures that independent judgement and
discretion is capable of being exercised by the committee
in respect of formulaic remuneration outcomes.
Compliance with the 2018 UK Corporate Governance Code.
Full details of the new policy are set out in Part 2 of this report; pages 122 and 123 also contain a summary of how it will actually be implemented in its
first year of operation.
Although the terms of the new policy will, as noted above, provide for the pension contribution rates for both Simon Thomson and James Smith (our
current Chief Executive and CFO respectively) to remain at their existing levels, the committee is aware of the recently stated preference of investors
that the pension benefits of incumbent directors should be aligned to those applicable to the wider workforce. Over the coming year, the committee
intends to consider this issue further and its clear intention is to formulate a plan that will deliver equality of all contribution rates across the Group
by the end of 2022 at the latest. Details of the conclusions reached by the committee and an outline of its proposed approach in this area will be
included in next year’s Directors’ Remuneration Report.
In addition to the above, the committee will, during 2020, be undertaking a review of the Group KPIs which form the basis for determining award
levels under the annual bonus scheme and will, in particular, consider how to incorporate an increased focus on ESG related matters. Again, details
of the outturn from this exercise will be set out in next year’s report.
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Summary of 2019 Business Context and Key Remuneration Decisions
The work of the committee in 2019 was conducted against a backdrop of a year in which the Company made strong progress in building and
diversifying its exploration portfolio; continued to maintain a strong balance sheet with sufficient cash flow from production to fund its attractive
exploration programme; and maintained funding flexibility.
The key remuneration related decisions made by the committee in 2019 are described in more detail in the Annual Report on Remuneration
contained on pages 106 to 123 and can be summarised as follows:
Base salary
increases
At its meeting in November 2019, the committee agreed that, with effect from 1 January 2020, a base salary increase
of 1.7% would be applied to both of 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.
2019 annual bonus
Under the Executive Directors’ bonus scheme for 2019 (the overall structure of which was unchanged from the prior year),
the whole of the individuals’ entitlements were dependent on the achievement of Group KPIs.
Based purely on an assessment of the extent to which the relevant targets were achieved (being 71.2%), awards made
under the annual bonus scheme to the Executive Directors during the year (as a percentage of annual salary) would have
been 89% for both Simon Thomson and James Smith.
However, in accordance with its normal practice, the above result was subject to a further review by the committee in order
to assess whether these award levels were fair and reasonable. The conclusion reached was that, due to a number of
macro economic considerations, it would be appropriate for the committee to exercise its overarching discretion and apply
a reduction to these amounts. In particular, it decided that, for the purposes of calculating the executive directors’ actual
bonuses for 2019, the assumed level of overall achievement for the Group KPIs would be limited to 65% rather than the
above noted 71.2%. The impact of this decision was that the awards (as a percentage of salary) for both Simon Thomson
and James Smith were reduced to 81.3%.
Under the Company’s current approved remuneration policy, any part of an Executive Director’s bonus that is in excess of
100% of the individual’s base salary is deferred into Cairn shares for three years. Given that this threshold was not reached
by the above bonuses, they were paid out wholly in cash.
Further details of the way in which these awards were determined and paid are set out on pages 111 to 115 of the Annual
Report on Remuneration.
Long Term Incentive
Plan (LTIP) – lapse of
2016 awards
The performance period applicable to the LTIP awards granted in 2016 came to an end during 2019. Over this period, the
Company’s Total Shareholder Return placed it below the median position in a group of eighteen comparator companies.
This resulted in these awards lapsing in full.
LTIP – grant of 2019
awards
In March 2019, the committee made the third annual grant under the Company’s LTIP that was adopted at the 2017 AGM
(the 2017 LTIP). Details of the awards made to Executive Directors as part of this process are set out in the Annual Report
on Remuneration.
Non-Executive
Directors’ fees and
Chairman’s fee
During 2019, the committee (excluding Ian Tyler) reviewed the Chairman’s annual fee in the context of market data and the
time commitment for the role. Following this review, it was decided that the fee should be increased by 1.7% from £177,000
to £180,000 effective 1 January 2020.
The fees paid to Non-Executive Directors were also reviewed during the year by the Executive Directors and the Chairman
and it was determined that their basic annual fee would be maintained at £75,500. Similarly, no change was made to the
additional fee payable for chairing the audit and/or remuneration committee.
Details of discretions
exercised by the
committee during
2019
In 2019, the only substantive discretions exercised by the committee related to the operation of the Company’s various
share-based incentive schemes. In particular, the committee:
– determined the treatment of those members of the various LTIP comparator groups that delisted during the year
(see page 119 for details of the approach taken); and
– made various decisions in relation to the treatment of leavers (none of whom were Executive Directors or other PDMRs).
Each of the committee’s decisions described above was made in the context of the requirements of the 2018 UK Corporate Governance Code (which
applied to the Company with effect from 1 January 2019) and, in particular, after considering the various factors set out in its Provision 40. The committee
was satisfied that, during 2019, the approved remuneration policy operated as intended, both in terms of Company performance and quantum.
Feedback on Directors’ Remuneration Report
We welcome questions and feedback from all those interested on both the content and style of this report.
Nicoletta Giadrossi
Remuneration Committee Chair
9 March 2020
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Part 2 – Directors’ Remuneration Policy
Introduction
Background and Details of Approval Process
This Directors’ Remuneration Policy provides an overview of the Company’s policy on directors’ pay that it is anticipated will be applied in 2020
and will continue to apply until the 2023 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 14 May 2020 and will take effect
immediately upon receipt of such approval from shareholders.
Overview of the Decision Making Process That Was Followed for the Determination of the New Policy
As explained in the Chair’s introduction on pages 94 and 95, the new policy that shareholders are being asked to approve at the 2020 AGM was
developed by the committee following a detailed review of the Company’s existing remuneration arrangements; it also involved the committee
undertaking a consultation exercise with a variety of different stakeholders including significant investors (primarily those holding 3% or more of the
Company’s issued share capital), a number of proxy advisors and the senior Management Team.
As part of the above review and consultation process, the committee took into account the remuneration-related provisions contained in the 2018
UK Corporate Governance Code and, in particular, sought to ensure that the proposals for the new policy adequately addressed the requirements
contained in its Provision 40 (relating to clarity, simplicity, risk mitigation, predictability, proportionality and alignment).
In its deliberations, the committee received support and advice from Aon, its “independent external advisor” (see page 107 for details); it also took
into account views expressed by Deloitte, which had been appointed by the management team to provide it with guidance on various remuneration-
related issues (see page 107 for details). No other committee was involved in the decision-making process.
Although the Executive Directors (and their appointed advisor) provided the committee with a level of input in relation to the formulation of the new
policy, the final decisions around its structure were taken by the committee alone in order to avoid any conflicts of interest arising.
Significant Revisions Made to the Previous Policy
The proposed policy largely mirrors the previous policy approved by shareholders at the 19 May 2017 AGM. However, and as noted in the Chair’s
introduction on pages 94 and 95, a relatively small number of changes have been made in order to take account of the requirements of the 2018 UK
Corporate Governance Code and to reflect developments in market practice over the past three years. In particular:
– the pension policy for new Executive Director appointees has been updated so as to ensure that the levels of Company contributions they may
receive will be line with those offered to the wider UK workforce;
– when formulating the structure of the annual bonus scheme for each year, the committee will set (and disclose on a retrospective basis) a more
detailed payment scale for each measure;
– the “malus” and “clawback” provisions contained within the annual bonus and LTIP structures have been expanded to ensure that they can be
operated in cases of gross misconduct and corporate failure;
– the committee has been given broader powers to adjust downwards the formulaic vesting outcome produced by the LTIP performance
conditions where it is deemed appropriate taking into account the particular circumstances at the time; and
– a new post-employment shareholding requirement has been introduced.
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 the overall remuneration levels and incentive arrangements (including the Group-wide bonus scheme) for 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 current version of the terms of reference are available on the Company’s website.
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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.
As explained above, the process surrounding the formulation of the new policy included a programme of engagement with the Company’s largest
institutional investors (i.e. primarily those holding 3% or more of our issued share capital), and a selection of proxy agencies, in order to understand
their views on the proposed approach. A number of the features highlighted by shareholders during this exercise (including, for example, a desire
for the pension benefits for new Executive Directors to be aligned to those offered to the wider workforce and a preference for the introduction
of a post-employment shareholding requirement) were incorporated into the final policy.
Historically, the committee has not undertaken a formal consultation exercise with employees in relation to the Group’s policy on senior management
remuneration. Members of staff are, however, regularly given the opportunity to raise issues on a variety of matters, including executive pay, via a
number of mechanisms such as the Company’s “employee voice” forum (which is hosted by the Chair of the committee), the attendance of directors
at team meetings and employee engagement surveys.
Overview of Proposed Remuneration Policy
Cairn’s policy on Executive Directors’ remuneration for 2020 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
Operation
Opportunity
Framework for
assessing performance
None
Remuneration
element
Base salary
Purpose and
link to strategy
Helps recruit and
retain employees.
Reflects individual
experience and role.
Benefits
Helps recruit and
retain employees.
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. Other benefits
are intended to be market
competitive. The committee
has not set a monetary
maximum for other benefits
as the cost of these may vary
from time to time.
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.
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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Opportunity
Maximum % of salary: 125%.
Remuneration
element
Annual bonus
Purpose and
link to strategy
Operation
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.
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, if certain events occur in
the period of three years from the end
of the relevant financial year. These
include the committee becoming
aware of:
– a material misstatement of the
Company’s financial results;
– 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;
– an act committed by the relevant
participant that has (or could have)
resulted in summary dismissal by
reason of gross misconduct; or
– a corporate failure which arose
due to the conduct of management
and which has resulted in the
appointment of a liquidator
or administrator.
The detailed terms of the clawback
mechanism applicable to the cash
element of any annual bonus award
are set out in an individual agreement
entered into between the Company
and the relevant Executive Director.
This provides the committee with a
variety of alternative means by which
value can be recovered including:
– the reduction of future
bonus awards;
– the application of a reduction
in the number of shares in
respect of which share awards
would otherwise vest or be
exercisable; and
– requiring the individual to make
a cash payment to the Company.
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Framework for
assessing performance
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.
The remaining part of a
director’s bonus (if any) will
normally be based on the
achievement of personal
objectives relevant to that
individual’s role within
the business.
Where possible, a payment
scale (ranging from 0% at
‘threshold’, not more than
50% at ‘target’ and 100% at
‘maximum’) 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.
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Remuneration
element
Purpose and
link to strategy
Operation
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.
The 2017 LTIP was established by
the Company following receipt of
the necessary shareholder approvals
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.
Vesting of awards will generally
take place on the third anniversary
of grant or, if later, the date on which
the performance conditions are
assessed by the committee.
All awards that 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. The committee
also retains the discretion to adjust
award levels in circumstances where
there has been a significant movement
in the Company’s share price.
Under the rules of the 2017 LTIP,
awards may be subject to malus and/
or clawback provisions if certain events
occur after their grant but before the
expiry of the period of three years from
the end of the relevant performance
period. For awards vesting on or after
1 January 2020, these events include:
– the committee becoming aware
of a material misstatement of the
Company’s financial results;
– the committee becoming aware
of 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 relevant participant committing
an act that has (or could have)
resulted in summary dismissal by
reason of gross misconduct; or
– a corporate failure arising, due to
the conduct of management, which
has resulted in the appointment
of a liquidator or administrator.
Opportunity
Normal total maximum %
of salary: 250%.
Framework for
assessing performance
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”).
The committee retains the
discretion to reduce the
vesting level produced by
the formulaic operation
of the TSR conditions in
circumstances where,
based on its independent
judgement, it considers
it appropriate to do so
(e.g. where the outturn
from the assessment of
the prescribed targets is
not, in the Committee’s view,
a genuine reflection of the
underlying performance of
the Company).
Although the committee’s
intention is that the above
conditions will be applied
to LTIP awards granted in
2020, 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.
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Framework for
assessing performance
None
Opportunity
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.
None
For current Executive
Directors, the Company
contributes 15% of basic salary
on their behalf or pays them
a cash equivalent.
For any future appointees
to the Board, the Company’s
pension contributions will
be capped at a level that is
equal to the amount paid
to the wider UK employee
population (currently 10%
of basic salary).
Not applicable.
None
Remuneration
element
Purpose and
link to strategy
Operation
Share Incentive
Plan (or SIP)
Encourages a
broad range of
employees to
become long-term
shareholders.
Pension
Rewards sustained
contribution.
Share ownership
policy
Aligns Executive
Director and
shareholder
interests and
reinforces long-term
decision-making.
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.
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.
During their employment, Executive
Directors are obliged to build up and
maintain a target holding of shares
worth 200% of salary.
Executive Directors are also normally
required to maintain a shareholding
equal to 200% of final salary for a
period of two years following cessation
of employment.
Further details relating to both the
above requirements (including the
particular shares to which they relate
and the enforcement mechanisms
that have been put in place) are set
out on page 103.
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Remuneration
element
Purpose and
link to strategy
Operation
Non-Executive
Directors’ fees
Helps recruit and
retain high-quality,
experienced
individuals.
Reflects time
commitment
and role.
Chairman’s fees
Helps recruit and
retain the relevant
individual.
Reflects time
commitment.
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 and may be paid for other
additional responsibilities.
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.
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.
Framework for
assessing performance
None
Opportunity
Company’s Articles of
Association place a limit on
the aggregate annual level of
Non-Executive Directors’ and
Chairman’s fees (currently
£900,000).
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).
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 2020 is provided on pages 122 and 123.
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 LTIP 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 in section 4.4 of the notes to the Financial Statements on pages 168 to 170).
– Under the Company’s defined contribution pension scheme, the Company contribution for all other employees (and any new Executive Directors appointed to the Board)
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 (further details of which are provided on page 116) 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 2017 LTIP becomes exercisable, it will generally remain so until the 10th 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.
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Shareholding Policy for Executive Directors
The committee believes that a significant level of shareholding by the Executive Directors strengthens the alignment of their interests with those
of shareholders. Accordingly, the Company has a formal share ownership policy (which has been in place for a number of years) under which
the Executive Directors are required to build up and maintain a target holding of 200% of salary. In order to facilitate the achievement of the above
requirement, the share ownership policy provides that, until the necessary holding is achieved, an Executive Director is obliged to retain shares
with a value equal to 50% of the net-of-tax gain arising from any vesting or exercise under the Company’s share incentive plans.
In addition, and with effect from the date this Directors’ Remuneration Policy is approved by shareholders, Executive Directors (and certain other
senior managers) will normally be obliged to maintain a specified holding of shares for a period of two years following cessation of employment.
In particular:
– the requirement is to maintain a post-employment holding of relevant shares equal to 200% of final salary;
– if this targeted holding has not been achieved at the point employment ceases, the requirement will apply to all relevant shares held at that time;
– “relevant shares” will include all shares acquired by the individual on the exercise of awards that vest under any of the Company’s discretionary
share plans, including the LTIP and the Deferred Bonus Plan, on or after 1 January 2020 (other than those that are sold in order to satisfy tax
liabilities arising on exercise);
– shares subject to awards that vest on or after 1 January 2020 but which remain unexercised (e.g. because a holding or deferral period applies),
or which have been granted under the Deferred Bonus Plan, will also count as “relevant shares”, but on a net-of-tax basis;
– until such time as the 200% of salary target is achieved, any relevant shares acquired by an individual will be placed in a nominee structure;
– relevant shares held by or on behalf of an individual will also count towards the satisfaction of the existing share ownership policy that is
described above;
– for the avoidance of doubt, any shares acquired by an individual other than pursuant to a discretionary share plan (e.g. purchases using his/her
own resources) will not be subject to the post-employment holding requirement; and
– the committee will retain the discretion to reduce or waive the post-employment holding requirement in limited circumstances (such as on the
death of the individual or where his/her personal circumstances change).
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 that 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.
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 2020 under minimum, on-target and maximum
scenarios. A further column has also been included which illustrates the impact on the figures contained in the maximum scenario of an assumed
share price appreciation for the LTIP award of 50% over the relevant performance period.
£4,000,000
£3,000,000
£2,000,000
£3,642,274
£2,908,961
60%
£1,720,995
50%
37%
£1,000,000
£709,024
21%
25%
20%
100%
42%
25%
20%
£2,383,387
£1,906,436
£1,133,775
50%
475,582
100%
37%
21%
42%
25%
25%
60%
20%
20%
£0
Minimum On-Target Maximum Maximum
with share
price growth
Chief Executive
Minimum On-Target Maximum
CFO
Maximum
with share
price growth
Fixed elements
Annual variable
Long-term Incentives
Cairn Energy PLC Annual Report and Accounts 2019
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Directors’ Remuneration Report continued
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 2020 irrespective of
performance levels, namely base salary (at current rates), benefits (using the details set out in the 2019 single total figure table provided on page
108) and pension (calculated by applying the percentage entitlement for those individuals 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. In the case of the bonus scheme a 50% payout has been used. For on-target performance under the LTIP, the “kicker” element of the 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.
– 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 2020 over shares worth 250% of salary.
– For the “maximum with share price growth” column, share price appreciation of 50% over the relevant performance period has been assumed
for the LTIP awards. For all other columns, any post-grant share price movements have not been taken into account for the purposes of valuing
LTIP and deferred bonus awards.
– 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 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. Pension provision for any new Executive Directors will be in accordance with the terms of the policy.
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.
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.
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Executive Directors’ Service Contracts
Each of the current Executive Directors has a rolling service contract with an indefinite term that contains the key elements shown in the table below:
Provision
Remuneration
Notice period1
Termination payment
Restrictive covenants
Contract date
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 Plan, 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 6 months after leaving.
– Simon Thomson – 29 June 2011.
– James Smith – 4 February 2014.
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 2017 LTIP 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, 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.
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.
Cairn Energy PLC Annual Report and Accounts 2019
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Directors’ Remuneration Report continued
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 have
no fixed term but 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 the Company’s directors. There are no provisions
for compensation payable on termination of appointment.
The following table sets out the dates of the letters of appointment for the Chairman and the Non-Executive Directors and specifies the date on
which each individual is next subject to election or re-election:
Director
Ian Tyler
Todd Hunt
Keith Lough
Peter Kallos
Nicoletta Giadrossi
Alison Wood
Catherine Krajicek
Date of original appointment
Date when next subject to election or re-election
28 June 2013
14 May 2003
14 May 2015
01 September 2015
10 January 2017
01 July 2019
01 July 2019
14 May 2020
14 May 2020
14 May 2020
14 May 2020
14 May 2020
14 May 2020
14 May 2020
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’ and Chairman’s 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 2019
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 97 to 106 will be applied in 2020, assuming it is approved by shareholders at the AGM to be
held on 14 May 2020.
In accordance with the Regulations, this part of the report will be subject to an advisory vote at the 2020 AGM.
The Company’s auditor is 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.
On the basis that Cairn has fewer than 250 UK employees, the Company is not required to publish or report its gender pay gap information.
Operation of the Remuneration Committee During 2019
Members of the Remuneration Committee
The members of the remuneration committee during the year were as follows:
– Nicoletta Giadrossi (Chair of the committee).
– 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. Prior to her original appointment as Chair in May 2018, Nicoletta Giadrossi had served on the committee for more than
12 months.
Biographical information on the individuals that were committee members as at 31 December 2019 is shown on page 75 and details of attendance
at the committee’s meetings during 2019 are shown on page 83.
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G O V E R N A N C E
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.
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
Aon2 3
Deloitte LLP3
Ernst & Young LLP
Shepherd and Wedderburn LLP
Assistance provided to the
committee during 2019
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.
Fees for committee
assistance in 20191
£47,435
Other services provided
to the Company during 2019
Provided advice on various aspects
of remuneration practice across
the Group.
£27,867
Provided advice on various aspects
of remuneration practice across
the Group.
N/A – no advice
provided to the committee
Internal auditor of the Company
throughout the year.
£32,011
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.
2 Aon Hewitt Limited, part of Aon plc.
3 Both Aon 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. No issues relating to performance or independence were noted by the
committee during the year.
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:
Description of
resolution
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
17 May 2019
465,053,278
96.11%
18,802,383
3.89%
483,855,661
24,483
19 May 2017
465,933,235
97.96%
9,688,508
2.04%
475,621,743
7,035,403
To approve the
2018 Directors’
Remuneration
Report
To approve
2017 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 at the relevant
meetings and gave due consideration to any concerns raised by investors who did not support the resolutions.
Cairn Energy PLC Annual Report and Accounts 2019
107
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G O V E R N A N C E
Directors’ Remuneration Report continued
Payments to Past Directors During 2019 (Audited)
During the year to 31 December 2019, there were no payments to past directors of the kind which require to be disclosed in terms of the Regulations.
Single Total Figure Table for 2019 (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
+
Annual
Bonus
+
Long-term
incentives
=
Total
remuneration
Executive Directors
Fixed Remuneration
Variable Remuneration
Totals
Financial
year
Salary and
fees
Benefits1
Pension2
SIP3
paid in cash
Annual bonus4
deferred
into shares
total bonus
Long-term
incentives5
Total fixed
remuneration
Total variable
remuneration
Total
remuneration
Directors
Simon
Thomson
James
Smith
2019 £576,844 £34,376 £86,527
£7,197
£468,686
£0 £468,686
£0
£704,944
£468,686 £1,173,630
2018 £565,533
£27,930 £84,830
£7,197
£494,841
£0
£494,841
£1,023,670
£685,490
£1,518,511 £2,204,001
2019 £375,183 £36,787 £56,277
£7,197
£304,836
£0 £304,836
£0
£475,444
£304,836
£780,280
2018 £367,826
£8,681
£55,174
£7,197
£321,848
£0
£321,848
£665,800
£438,878
£987,648 £1,426,526
Notes:
1 Taxable benefits available to the Executive Directors during 2019 were a company car/car allowance, private health insurance, death-in-service benefit and a gym and fitness
allowance. This overall package of taxable benefits was largely unchanged from 2018, with the higher figures for both the Executive Directors in 2019 primarily being attributable
to increased charges for their company cars.
2 Additional disclosures relating to the pension provision for the Executive Directors during 2019 are set out on page 111.
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 2019 are set out on pages 119 and 120.
4 Under the Company’s annual bonus scheme for 2018 and 2019, any sums awarded in excess of 100% of salary are delivered in the form of deferred share awards, which normally
vest after a period of three years from grant. Further information in relation to the annual bonus scheme for 2019 is provided on pages 111 to 115. For the avoidance of doubt, the
quantum of awards made under this arrangement is not attributable, either wholly or in part, to share price appreciation.
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 2019 are provided on pages 115 to 119; confirmation of the amount of the 2018 vesting values that were attributable to share price appreciation was included in
last year’s Directors’ Remuneration Report.
6 Following the end of the year to 31 December 2019, 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.
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Non-Executive Directors
Fixed Remuneration
Variable Remuneration
Totals
Financial
year
Salary and
fees1
Benefits
Pension2 Annual bonus2
Long-term
incentives2
Total fixed
remuneration
Total variable
remuneration
Total
remuneration
Directors
Ian Tyler
Todd Hunt
Alexander Berger3
Keith Lough4
Peter Kallos
Nicoletta Giadrossi4
Alison Wood5
Catherine Krajicek5
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
£177,000
£177,000
£75,500
£75,500
£28,941
£75,500
£85,500
£81,782
£75,500
£75,500
£85,500
£81,782
£37,750
£0
£37,750
£0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£177,000
£177,000
£75,500
£75,500
£28,941
£75,500
£85,500
£81,782
£75,500
£75,500
£85,500
£81,782
£37,750
£0
£37,750
£0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£177,000
£177,000
£75,500
£75,500
£28,941
£75,500
£85,500
£81,782
£75,500
£75,500
£85,500
£81,782
£37,750
£0
£37,750
£0
Notes:
1 As disclosed in the 2018 Annual Report on Remuneration, the Chairman’s fee for 2019 was unchanged at £177,000. Similarly, the basic annual fee for Non-Executive Directors
in 2019 remained at £75,500, being the same level paid in 2018.
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 Alexander Berger retired as a director on 17 May 2019. His fees for 2019 reflect the period from the start of the year to that date.
4 A further annual fee of £10,000 was payable to both Keith Lough and Nicoletta Giadrossi for their roles as Chair of the audit committee and the remuneration committee
respectively during 2019. These individuals served as Chair of their relevant committee for part of 2018 and their share of the additional £10,000 fee for that year reflected their
respective periods in post.
5 Alison Wood and Catherine Krajicek were both appointed as Non-Executive Directors on 1 July 2019. Their respective fees for 2019 reflect the period from that date to the year end.
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 ten years. These comparisons have been chosen on the basis that: Cairn was
a constituent member of the FTSE 250 Index for the whole of 2019; and the FTSE 350 Oil & Gas Producers Index comprises companies who are
exposed to broadly similar risks and opportunities as Cairn.
The table following the graph illustrates the movements in the total remuneration of the Company’s Chief Executive during the same ten-year period.
Performance Graph – Comparison of Ten-Year Cumulative TSR on an Investment of £100
£350
£300
£250
£200
£150
£100
£50
0
Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17
Dec 18
Dec 19
FTSE 250
Cairn
FTSE 350 Oil & Gas
Cairn Energy PLC Annual Report and Accounts 2019
109
L E A D E R S H I P A N D
G O V E R N A N C E
Directors’ Remuneration Report continued
Total Remuneration of Chief Executive During the Same Ten-Year Period
Financial year
Chief Executive
Total remuneration
of Chief Executive1
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)
2019
2018
2017
2016
2015
2014
2013
2012
2011
20112
2010
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Sir Bill Gammell
Sir Bill Gammell
£1,173,630
£2,204,001
£2,992,615
£2,081,601
£1,292,167
£1,073,425
£962,765
£1,018,570
£3,405,719
£4,053,822
£7,302,533
65%
70%
76.9%
80.2%
75%
78.5%
63%
86%
82%
N/A
58%
0%
56.7%
90.8%
81.7%
23.4%
0%
0%
0%
121%
106%
113%
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 108.
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 bonus
scheme (£625,000).
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 2019 remuneration package, the percentage change from 2018 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
2%
3%2
23.08%1
(1.44%)3
(5.29%)
1.07%
Notes:
1 As highlighted on page 108, the above increase in the Chief Executive’s taxable benefits is largely attributable to higher charges for his company car.
2 The standard level of salary increase across the Group in 2019 was 2%. However, a small number of individuals received higher percentage increases which raised the average for
all employees to 3%.
3 This fall in average taxable benefits for all Group employees has arisen due to a lower level of relocation expenses being paid in 2019.
Pay Ratio Information in Relation to Chief Executive’s Remuneration
The Regulations require certain companies to disclose the ratio of the Chief Executive’s pay, using the amount set out in the single total figure table,
to that of the median, 25th and 75th percentile total remuneration of full-time equivalent UK employees.
Although the above requirement does not technically apply to Cairn (on the basis that it had fewer than 250 UK employees during 2019), the
committee felt that it would be appropriate to include the relevant disclosures this year on an entirely voluntary basis as it helps to demonstrate
the link between the Chief Executive’s pay and the remuneration of the wider workforce. A similar decision was made last year, with the result
that the following table shows the relevant ratios for both 2019 and 2018:
Year
2019
2018
Method of
calculation
adopted
Option A
Option A
25th percentile
pay ratio
(Chief Executive:
UK employees)
Median pay ratio
(Chief Executive:
UK employees)
75th percentile
pay ratio
(Chief Executive:
UK employees)
19 : 1
36 : 1
12 : 1
22 : 1
7 : 1
11 : 1
The median, 25th percentile and 75th percentile figures used to determine the above ratios were calculated by reference to the full-time equivalent
annualised remuneration (comprising salary, benefits, pension, SIP, annual bonus and long term incentives) of all UK based employees of the Group
as at 31 December 2019 (i.e. “Option A” under the Regulations). The committee selected this calculation methodology as it was felt to produce the
most statistically accurate result.
The committee considers that the median pay ratio for 2019 that is disclosed in the above table is consistent with the pay, reward and progression
policies for the Company’s UK employees taken as a whole. It reflects the fact that a greater proportion of Executive Director pay is linked to annual
performance through a higher annual bonus opportunity (a percentage of which is subject to deferral into shares). In addition, in-line with the
Company’s existing and proposed Directors’ Remuneration Policy, pension contributions available to the current executive team are higher than
for the wider workforce.
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The committee notes that each of the pay ratios for 2019 is lower than in the previous year. This is largely attributable to the fact that, unlike during
2018, no awards vested under the Company’s various discretionary share incentive plans in the period of 12 months to 31 December 2019. Given
that the Executive Directors receive a higher level of annual award (as a percentage of salary) under these arrangements than all other employees,
this absence of vesting had a greater proportionate impact on the total remuneration level of the Chief Executive. For the avoidance of doubt, the
differences in the ratios between 2019 and 2018 are not attributable to any material change in the Company’s employment models or the use of
a different calculation methodology.
Pay details for the individuals whose 2019 remuneration is at the median, 25th percentile and 75th percentile amongst UK based employees are
as follows:
Salary
Total pay and benefits
Chief Executive
25th percentile
Median
75th percentile
£576,844
£1,173,630
£37,519
£60,743
£62,271
£96,538
£116,172
£172,861
Executive Directors’ Base Salaries During 2019
Based on a review carried out in November 2018, the following salary increases for Executive Directors became effective on 1 January 2019:
2019 Annual Salary Details
Current directors
Simon Thomson
James Smith
Job title
Annual salary as at
31 December 2018
Annual salary as at
1 January 2019
% increase with effect
from 1 January 2019
Chief Executive
CFO
£565,533
£367,826
£576,844
£375,183
2%
2%
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 2019.
Executive Directors’ Pension Provision During 2019 (Audited)
As highlighted in the Directors’ Remuneration Policy described on pages 97 to 106, 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 current Executive Directors) 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 2019 are set out in the
“pension” column of the single total figure table on page 108.
Annual Bonus – 2019 Structure and Outcome (Audited)
During 2019, Cairn operated an annual bonus scheme for all employees and Executive Directors. The maximum level of bonus award for Executive
Directors and certain PDMRs for the year was 125% of annual salary.
For all participants other than the Executive Directors, 2019 bonus awards were based on achievement against a mixture of personal objectives,
project-based KPIs and Group-wide KPIs. When determining the level of award attributable to the personal performance element of these
individuals’ bonuses, consideration was also given to the extent to which they demonstrated the Company’s “high performance behaviours” during
the period and also the level of their understanding, application and compliance with the Company’s various standards and policies. The final level
of all bonuses awarded to employees below Executive Director/PDMR level was reviewed and approved by the committee.
Consistent with the approach adopted in 2018, 100% of each Executive Director’s bonus opportunity for the year to 31 December 2019 was
determined by reference to the extent to which certain Group KPIs were achieved. Taking into account commercial sensitivities around disclosure,
a summary of the relevant targets, ascribed weightings and achievement levels is set out below.
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Directors’ Remuneration Report continued
2019 Annual Bonus Scheme – Group KPI Performance Conditions (100% Weighting) and Achievement Levels
KPI measures and performance achieved in 2019
Purpose
2019 KPI
Measurement
2019 performance
Maintain licence to operate
Weighting
Bonus awarded
(as % of allocated proportion of
maximum opportunity)
KPI
remuneration
committee
decision
Deliver value in a
safe, secure and
environmentally
and socially
responsible
manner.
– Achievements of
leading indicators
linked to the four
key categories
listed.
– Lagging indicators
set in line with
IOGP targets and
guidelines.
– Demonstrate
clear progress
and achieve
defined milestones
in relation to
HSSE/corporate
responsibility (CR)
objectives, split into
four key categories
(Governance,
Society, People and
the Environment).
– Achieve lagging
HSSE indicators set
in line with IOGP
targets.
Substantially
achieved
– The Group’s lost time injury
15%
12.9%
frequency (LTIF) for operated
activity in 2019 was 0 per
million hours worked. Our
total recordable injury rate
(TRIR) for 2019 was 0.98
per million hours worked.
There were no spills to the
environment.
– Good progress made against
leading indicators, including:
• Code of Ethics revised
and issued to all staff
(including Spanish
version);
• The Group’s Corporate
Major Accident Prevention
Policy (CMAPP) was
independently reviewed
in 2019; and
• A suite of training
programmes was rolled
out across the Group
including topics such as
bribery and corruption,
CMAPP, human rights and
modern slavery.
Portfolio management
Portfolio
optimisation and
replenishment.
– Secure two
new venture
opportunities that
meet corporate
hurdles and have
risk levels consistent
with our Risk
Appetite Statement;
measured against
tests of control,
materiality and
commercial
robustness.
– Each new
opportunity secured
will be measured
against tests
of (i) control; (ii)
materiality based
on documented
NPV10 thresholds;
and (iii) commercial
robustness based
on success case
Pmean economics.
– In 2019, the Senegal JV
successfully received the
presidential decree for the
two-year exploration and
appraisal extension of FAN,
SNE North and Spica.
– Following applications in
the 2019 Norwegian APA
in September, Cairn was
awarded three licences as
operator: Mabbutt; Gough;
and Fearless.
– During 2019, Cairn also
8%
7%
Substantially
achieved
completed the farm-in to
onshore Cote d’Ivoire, made
a strategic swap of equity in
B9 and B10, offshore Mexico
and completed a bid round
licence application and was
awarded operatorship in
two zones in Israel in a joint
venture with Pharos Energy
plc and Ratio Oil Exploration.
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KPI measures and performance achieved in 2019
Purpose
2019 KPI
Measurement
2019 performance
Deliver exploration success
Weighting
Bonus awarded
(as % of allocated proportion of
maximum opportunity)
KPI
remuneration
committee
decision
– Measured by
– In 2019, three wells in
25%
11.33%
Partially
achieved
Grow the
reserves and
resources base
to provide a basis
for future growth.
– Successfully drill
and evaluate a
programme of six
exploration wells
across our portfolio.
– Discover potentially
commercial
hydrocarbons in
line with pre-drill
expectations.
– Mature six new
independent
exploration
prospects with JV
support for drilling in
the period 2020-
2021.
the execution of
the drilling and
evaluation of wells.
– Scored according
to the net 2C
potentially
commercial
resources added
from exploration
drilling and reported
in our year-end
2019 reserves and
resources report.
– Measured by
the number of
prospects approved
by joint ventures on
an operated and
non-operated basis.
Progress developments
Progress Senegal
and Nova
development
projects.
– Mature the SNE
– SNE Final
field development
project in Senegal
to Final Investment
Decision.
– Progress the Nova
development
project against key
predefined project
milestones.
Investment
Decision being
taken, finalisation
and approval
of joint venture
financing plan, and
finalisation of certain
development
contracts.
– Nova milestones
measured: (i)
complete scope
of shut-down #1
and commence
fabrication and
assembly of the
Nova module;
(ii) delivery
and offshore
installation of the
subsea umbilical;
(iii) delivery and
offshore installation
of the production,
water injection and
gas lift pipelines;
and (iv) delivery
of certain subsea
infrastructure.
Norway (Presto, Lynghaug
and Godalen), one in the UK
(Chimera) and two in Mexico
(Alom and Saasken) were
successfully drilled. The
Saasken well made a new
oil discovery on Block 10,
Mexico, and according to
preliminary estimates, may
contain between 200 and
300 million barrels of oil in
place. All other wells were
reported as dry and plugged
and abandoned.
– Prospects successfully
matured and recommended
during 2019 for drilling in
2020 or 2021 included the
Duncan prospect in Norway;
and the Diadem prospect in
the UK with other prospects
also successfully matured,
assured and recommended
for drilling, the details of
which remain commercially
sensitive at the date of this
report.
– An updated SNE Exploitation
and Development Plan was
submitted in August 2019
and approved by the Ministry
of Petroleum and Energy in
December 2019.
– Final Investment Decision
was taken by the JV and
granting of the 25-year
exploitation licence by the
Government of Senegal took
place in January 2020.
– The Nova development is
on schedule with first oil
targeted in 2021. In H1, two
subsea templates were
installed on the ocean floor.
This unlocked the next phase
of the field development
with 65km of pipelines laid
in preparation for tie-back
to the nearby Gjøa platform.
All pre-defined project
milestones for the year were
achieved.
18%
17% Substantially
achieved
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Directors’ Remuneration Report continued
KPI measures and performance achieved in 2019
Purpose
2019 KPI
Measurement
2019 performance
Weighting
Bonus awarded
(as % of allocated proportion of
maximum opportunity)
KPI
remuneration
committee
decision
Fully
achieved
Partially
achieved
Production performance
Maximise
revenues
through efficient
operations.
– Ensure production
and operating cash
flow from Kraken
and Catcher are at
or within guidance
on net production
volume and lifting
cost per barrel.
Deliver a sustainable business
– Measured against
target net oil
production volumes
and lifting cost
per barrel.
– Catcher- stretch target net
10%
10%
oil production volumes were
exceeded, at better than
target lifting costs.
– Kraken- stretch target net oil
production volumes were
exceeded, at better than
target lifting costs.
Manage balance
sheet strength.
– Implement funding
strategy to support
exploration,
appraisal and
development
activity and to
mitigate any
downside revenue
scenarios.
– Progress the
UK-India bilateral
treaty arbitration
to conclusion and
receipt of awarded
sums in event of
success.
– Ensure recovery
– Funding headroom was
24%
13%
of the award from
the international
arbitration ruling
upon receipt of
a successful award.
– Ensure adequate
sources of funding
through debt
financing, cash flow
generation, portfolio
optimisation and/or
hedging strategies
to support our
strategy, with four
pre-determined,
commercially
sensitive, tests
against which
funding levels will
be measured.
maintained throughout the
year covering the Group’s
committed forward capital
expenditure.
– The sale of 10% stake in Nova
to Dyas in November 2019
and the disposal of Capricorn
Norge AS, the Company’s
wholly owned subsidiary in
Norway, to Sval (previously
known as Solveig Gas) in
December 2019 enhanced
Group liquidity at attractive
metrics.
– Arbitration proceedings
under the UK-India Bilateral
Investment Treaty were
largely concluded in 2018. In
2019, however, the Tribunal
indicated that the issuance
of the arbitration award
would not be made until
summer 2020.
Totals
100%
71.2%
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2019 Annual Bonus Scheme – Exercise of Committee’s Overarching Discretion
In accordance with its normal practice, the above outturn from the assessment of the Group KPIs was subject to a further review by the committee in
order to assess whether the resulting level of awards that it would generate for executive directors under the annual bonus scheme structure for 2019
would be fair and reasonable. The conclusion reached was that, due to a number of macro economic considerations, it would be appropriate for the
committee to exercise its overarching discretion (contained within the approved remuneration policy in place at that time) and apply a reduction to
these amounts. In particular, it decided that, for the purposes of calculating the executive directors’ bonuses, the assumed level of overall achievement
for the Group KPIs would be limited to 65% rather than the 71.2% shown in the table above. The impact of this decision is illustrated below.
2019 Annual Bonus Scheme – Overview of Awards and Actual Payments Made
The application of (i) the outturn from the above performance condition assessments; and (ii) the subsequent exercise of the committee’s above
noted discretion, resulted in the following bonuses becoming payable to Simon Thomson and James Smith:
Weighting (as % of max. bonus opportunity)
100%
x
Simon Thomson
Group KPI measures
James Smith
Group KPI measures
100%
Award elements
Assumed achievement level (after the application of the
committee’s above noted discretionary reduction)1
Award percentage (as % of max. bonus opportunity)
=
Award calculation
Form of payment
Max. bonus opportunity (as % of salary)
x
Award percentage (as calculated above)
=
Total award (as % of salary)
Total award (as an amount)
Cash payment2
Deferred share award3
65%
65%
125%
65%
81.25%
£468,686
£468,686
£0
65%
65%
125%
65%
81.25%
£304,836
£304,836
£0
Notes:
1
In the absence of the committee’s discretionary reduction to the Group KPI achievement level, the total award (as a percentage of salary) for both Simon Thomson and James
Smith would have been 89% (i.e. 71.2% achievement x 125% of salary maximum opportunity).
2 Cash payments due under the annual bonus were paid to the relevant individuals shortly after completion of the assessment of the relevant performance measures and conditions.
3 Under the Company’s annual bonus scheme for 2019, any amounts awarded in excess of 100% of salary would have been delivered in the form of share awards granted under the
Company’s Deferred Bonus Plan.
Long-Term Incentives During 2019
Introduction
During the year to 31 December 2019, the Executive Directors participated in the Company’s 2009 LTIP (which was originally approved by
shareholders at the AGM held on 19 May 2009) and its 2017 LTIP (which was approved by shareholders at the AGM held on 19 May 2017).
Both the 2009 LTIP and 2017 LTIP enable selected senior individuals to be granted conditional awards or nil-cost options over ordinary shares,
the vesting of which is normally dependent on both continued employment with the Group and the extent to which pre-determined performance
conditions are met over a specified period of three years. Following the introduction of the 2017 LTIP during the year to 31 December 2017, no further
awards have been, or will be, granted under the 2009 LTIP, although existing entitlements under the earlier arrangement continued to subsist on their
original terms.
Overview of Performance Conditions – 2009 LTIP
In the case of all awards under the 2009 LTIP (including those granted during 2016), the performance conditions involve a comparison of the TSR
of the Company over a three-year performance period (commencing on the date of grant of the relevant award) with the TSR of a share in each
company in a comparator group (details of which are set out on page 119). At the end of this period, each company in the comparator group is listed
in order of TSR performance to produce a “ranking table”. The vesting of awards then takes place as follows:
Ranking of Company against the comparator group
Percentage of ordinary shares comprised in award that vest
Below median
Median
Upper decile (i.e. top 10%)
Between median and upper decile
0%
20%
100%
20%–100% on a straight line basis
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Directors’ Remuneration Report continued
In order to ensure that the 2009 LTIP encourages and rewards exceptional performance in terms of delivering increased growth and shareholder
value, the performance conditions attaching to awards also provide that, where the TSR of the Company produces a ranking at or above the upper
decile level in the appropriate comparator group, a participant will then be given the opportunity to increase the percentage of his/her award that
vests through the application of a ‘multiplier’ that is linked to the TSR actually achieved over the performance period. The way in which this multiplier
operates is as follows:
Multiplier applied to determine the number of ordinary shares that actually vest
TSR of the Company over the performance period
1
1.33
50% or less
100% or more
1–1.33 on a straight line basis
Between 50% and 100%
However, notwithstanding the performance of the Company against the above targets, no part of any currently outstanding award granted under
the 2009 LTIP will vest unless the remuneration 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.
Overview of Performance Conditions – 2017 LTIP
For the awards granted to Executive Directors under the 2017 LTIP during 2017, 2018 and 2019, the performance conditions are comprised of two
distinct elements, namely:
Conditions applicable to the ‘core award’
The first condition applies to that element of each award which is over ordinary shares worth 200% of the individual’s salary (the “core award”) and
involves an assessment of the Company’s TSR performance over a three-year performance period (commencing on the date of grant) relative to the
performance achieved by a pre-determined comparator group of companies in the same sector (details of which are set out on page 119). Vesting
will then take place as follows:
Ranking of Company against the comparator group
Percentage of ordinary shares comprised in core award that vest
Below median
Median
Upper quartile or above
0%
25%
100%
Between median and upper quartile
25%-100% on a straight line basis
Conditions applicable to the “kicker award”
The second condition applies to the remaining part of each grant (the “kicker award”), being an element that is granted over ordinary shares worth
50% of salary. This part of the award will vest in full if, over the same three-year measurement period (i) the Company achieves an upper quartile
ranking (or above) in the comparator group; and (ii) the TSR actually achieved by the Company is at least 100%. For the avoidance of doubt, if either
of these requirements is not satisfied, no part of the kicker award will vest.
As with the 2009 LTIP, no part of a currently outstanding award granted under the 2017 LTIP will vest unless the remuneration 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.
Summary of Vesting Terms, Holding Periods and Clawback Arrangements – 2009 and 2017 LTIPs
On any vesting of an award under the 2009 LTIP, 50% of the ordinary shares to which the holder has become entitled are released or become
exercisable immediately, with the remaining 50% normally being released or becoming exercisable after a further holding period of one year.
In the case of the grants made under the 2017 LTIP to Executive Directors, all awards will normally be subject to a holding period of two years
following vesting, at the end of which the ordinary shares to which the holder has become entitled will be released or become exercisable.
For the avoidance of doubt, this additional holding period will apply to both the kicker and core elements (see above) of these awards.
As noted in the Directors’ Remuneration Policy, awards granted under the 2009 and 2017 LTIPs are subject to clawback provisions which may be
operated by the committee where, in the period of three years from the end of the applicable performance period, it becomes aware of either
a material misstatement of the Company’s financial results or an error in the calculation of performance metrics which, had it been known at the
relevant time, would have reasonably been expected to have resulted in such lower vesting being determined. The circumstances in which clawback
can be applied in respect of awards vesting on or after 1 January 2020 will be expanded also to include cases of gross misconduct and corporate
failure, due to the conduct of management, which results in the appointment of a liquidator or administrator.
Where clawback is to be operated in respect of an award, the committee has a range of different mechanisms by which value can be recovered from
the relevant individual including the reduction of future bonuses, the application of a reduction in the number of shares over which other incentive
awards vest or are exercisable and requiring the individual to make a cash payment to the Company.
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LTIP Awards Granted During 2019 (Audited)
On 13 March 2019, the following awards under the 2017 LTIP were granted to Executive Directors:
Description
of award
Form
of award
Basis of award
granted
Share price at
date of grant3
No. of shares
over which award
originally granted
Face value
(£000) of shares
over which award
originally
granted4
% of shares over
which award
originally granted
that vest at
threshold
Vesting
determined by
performance
over
Directors
Simon Thomson
Core award
Kicker award
James Smith
Core award
Kicker award
Nil-cost
option
Nil-cost
option
Nil-cost
option
Nil-cost
option
2 x base
salary of
£576,844
0.5 x base
salary of
£576,844
2 x base
salary of
£375,183
0.5 x base
salary of
£375,183
£1.677
687,947
£1,154
25%
£1.677
171,986
£288
100%
3 years until
12 March 2022
£1.677
447,444
£750
25%
£1.677
111,861
£188
100%
3 years until
12 March 2022
Notes:
1 Details of the performance conditions applicable to the awards granted in 2019 are provided on page 116.
2 No price is payable by participants for their shares on the exercise of a nil-cost option granted under the LTIP.
3 This figure represents the closing mid-market price of a share in the Company for the dealing day immediately preceding the date of grant. (The actual closing price on 13 March
2019 was £1.709.)
4 The values shown in these columns have been calculated by multiplying the “number of shares over which the award was originally granted” by the “share price at date of grant”.
5 In the period following the grant of the above awards, no change was made to their exercise price or the date on which they will become exercisable.
LTIP – Awards Vesting During the Year (Audited)
On 15 March 2019, the three-year performance period applicable to the awards granted under the 2009 LTIP on 16 March 2016 to various
participants (including the Executive Directors) came to an end. Thereafter, the remuneration committee assessed the relevant performance
conditions. The results of this assessment, which was completed on 20 March 2019, can be summarised as follows:
Performance measure
% of award subject to measure
Performance achieved 2016-2019
% of award vested
100%
Relative TSR performance against
a comparator group of 18
companies with the opportunity for
additional multiplier of up to 1.33 to
be applied for upper decile/
absolute TSR performance.
0%
Cairn's TSR over the period placed
it between the tenth and eleventh
ranked companies in the
comparator group. As this ranking
was below median level, no part of
the relevant awards vested and
they lapsed immediately on
completion of the committee’s
above noted assessment.
Notes:
1 Further details of the performance conditions that applied to the above awards are set out on pages 115 and 116.
2 At various points in the period 16 March 2016 to 15 March 2019, the committee was required to determine (in accordance with the approved remuneration policy in place at that
time) the treatment of those comparator group companies that were the subject of takeover transactions. No other discretions were exercised by the remuneration committee
during or after the relevant performance period.
3 The TSR calculations used to inform the committee’s determinations in relation to the above awards were independently verified by Ernst & Young LLP.
The following table shows, for each of the Executive Directors, details of the 2009 LTIP awards that lapsed during the year:
Type of award
Date of grant
No. of shares
over which award
originally granted
% of award to vest as
per performance
condition assessment
No. of shares in respect
of which award lapsed
Date of lapse
Current Director
Simon Thomson
Nil-cost option
16 March 2016
James Smith
Nil-cost option
16 March 2016
856,994
557,395
0%
0%
856,994
20 March 2019
557,395
20 March 2019
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Directors’ Remuneration Report continued
LTIP – Awards Exercised During 2019 (Audited)
Details of vested LTIP awards (which are in the form of nil-cost options) that were exercised by the Executive Directors during the year to
31 December 2019 are as follows:
Current Director
Date of grant
Plan
Date of vesting
Date of exercise
Number of
ordinary shares
acquired on
exercise
Market value of
ordinary shares
at date of
exercise Gain on exercise
Exercise price
Simon Thomson
19/03/15
2009 LTIP
26/03/18
03/04/19
James Smith
19/03/15
2009 LTIP
26/03/18
03/04/19
248,464
161,602
Nil
Nil
£1.599
£1.599
£397,294
£258,402
LTIP – Other Awards Held by Executive Directors During the Year
For the sake of completeness, and in order to allow comparisons to be made with the awards granted during 2019, set out below are details of the
other unvested awards under the 2017 LTIP that were held by the Executive Directors during the year:
Date of grant
Plan
Description
of award
Form of
award
Basis of
award
granted
Share price
at date of
grant2
No. of shares
over which
award
originally
granted
Face value
(£000) of
shares over
which award
originally
granted3
% of shares
over which
award
originally
granted that
vest at
threshold
Vesting
determined
by
performance
over three
years until…
Directors
Simon Thomson
2017 LTIP
23/05/17
2017 LTIP
Core
award
Nil-cost
option
Kicker
award
Nil-cost
option
2017 LTIP
Core
award
Nil-cost
option
28/03/18
2017 LTIP
James Smith
2017 LTIP
23/05/17
2017 LTIP
Kicker
award
Nil-cost
option
Core
award
Nil-cost
option
Kicker
award
Nil-cost
option
2017 LTIP
Core
award
Nil-cost
option
28/03/18
2017 LTIP
Kicker
award
Nil-cost
option
2 x base
salary of
£559,934
0.5 x base
salary of
£559,934
2 x base
salary of
£565,533
0.5 x base
salary of
£565,533
2 x base
salary of
£364,185
0.5 x base
salary of
£364,185
2 x base
salary of
£367,826
0.5 x base
salary of
£367,826
£2.18
513,700
£1,120
25%
£2.18
128,425
£280
100%
22/05/20
£2.11
536,050
£1,131
25%
£2.11
134,012
£283
100%
27/03/21
£2.18
334,114
£728
25%
£2.18
83,528
£182
100%
22/05/20
£2.11
348,650
£736
25%
£2.11
87,162
£184
100%
27/03/21
Notes:
1 Further details of the performance conditions that apply to these awards are set out on page 116.
2 This figure represents the closing mid-market price of a share in the Company for the dealing day immediately preceding the relevant date of grant.
3 The values shown in this column have been calculated by multiplying the relevant “number of shares over which the award was originally granted” by the appropriate “share price
at date of grant”.
4 During 2019, no changes were made to the exercise prices of the above awards or the date on which they will become exercisable.
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Comparator Group Companies Applicable to LTIP Awards
The table below provides details of the comparator groups applicable to each tranche of awards granted under the 2009 and 2017 LTIPs to
Executive Directors that were outstanding during 2019.
Company
Africa Oil Corp.
Aker BP ASA (formerly named Det Norske Oljeselskap ASA)
Cobalt International Energy, Inc.*
DNO ASA
Energean Oil & Gas PLC
EnQuest PLC
Faroe Petroleum PLC*
Genel Energy PLC
Hurricane Energy PLC
Kosmos Energy Limited
Lundin Petroleum AB
Maurel & Prom
Nostrum Oil & Gas PLC
Ophir Energy PLC*
Petroceltic International PLC*
Pharos Energy PLC (formerly named SOCO International PLC)
Premier Oil PLC
Rockhopper Exploration PLC
Santos Limited
Seplat Petroleum Development Company PLC
Sound Energy PLC
Tullow Oil PLC
Comparator group applicable to LTIP awards granted on…
16/03/16
23/05/17
28/03/18
13/03/19
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
* Denotes companies that have delisted during the applicable performance period. For awards granted under the 2017 LTIP, the committee’s normal policy is to remove from the
relevant comparator group any company that has delisted less than half way through the applicable performance period. For delistings that occur after that time, the relevant
company is retained and moved in line with the remaining members of the group. For the 2009 LTIP, all delisted companies are retained in the group, regardless of when such
delisting occurs.
Participation of Executive Directors in All-Employee Share Schemes During 2019
Introduction
In order to encourage increased levels of long-term share ownership amongst its general employee population, the Company launched an HM
Revenue and Customs approved SIP in April 2010. The SIP provides eligible employees, including the Executive Directors, with the following benefits:
– “Partnership shares” – employees can authorise deductions of up to £1,800 per tax year from pre-tax salary, which are then used to acquire
ordinary shares on their behalf.
– “Matching shares” – the Company can award further free shares to all participants who acquire partnership shares on the basis of up to two
matching shares for every one partnership share purchased. For the tax year 2019/2020, the Company awarded two matching shares for every
one partnership share purchased and intends to continue using this award ratio for the tax year 2020/2021.
– “Free shares” – employees can be given up to £3,600 worth of ordinary shares free in each tax year. On 10 April 2019, an award of free shares
was made to employees, including to the Executive Directors.
As the SIP is an “all-employee” arrangement, no performance conditions are imposed in relation to any matching or free shares awarded pursuant
to its terms.
Details of Executive Directors’ SIP Participation in 2019
Details of the shares purchased by and awarded to the Executive Directors under the SIP during the course of the year are as follows:
Directors
Simon Thomson
James Smith
Free shares
awarded on
10/04/19
at a price of
£1.64 per share
Partnership
shares awarded
on 07/05/19
at a price of
£1.6018 per share
Matching shares
awarded on
07/05/19
at a price of
£1.6018 per share
Total SIP shares
held at 31/12/19
Total SIP shares
held at 01/01/19
28,972
20,677
2,195
2,195
1,123
1,123
2,246
2,246
34,536
26,241
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Directors’ Remuneration Report continued
The total number of shares held by each of the current Executive Directors under the SIP is included in their beneficial shareholdings disclosed in the
Directors’ Report on page 124.
Shareholding Guidelines for Directors (Audited)
A formal share ownership policy for Executive Directors has been in place for a number of years under which they are required, during employment,
to build up and maintain a target holding, currently equal to 200% of salary. Further details of the terms of this policy are set out on page 103.
The following table discloses the beneficial interest of each director in the ordinary shares of the Company as at 31 December 2019 (or date of
cessation of directorship, if earlier). It also highlights the fact that, on 1 January 2020, the above shareholding requirements were satisfied by both
Simon Thomson, Chief Executive, and James Smith, CFO.
Shares held
Awards over shares under the LTIP
Ordinary shares2
Ordinary shares
held in the SIP3
Total holding of
ordinary shares
Value of holding
as a % of salary
on 1 January
20204
Ordinary shares
subject to vested
but unexercised
awards5
Ordinary shares
subject to
unvested
awards6
Total interest in
ordinary shares
Executive Directors
Simon Thomson
James Smith
Non-Executive Directors
Ian Tyler
Todd Hunt
Keith Lough
Peter Kallos
Nicoletta Giadrossi
Alison Wood
Catherine Krajicek
Former Director
Alexander Berger
1,311,386
524,403
34,536
26,241
1,345,922
550,644
404%
254%
–
72,012
–
10,982
–
–
–
40,008
–
–
–
–
–
–
–
–
–
72,012
–
10,982
–
–
–
40,008
1,958,791
60,777
2,019,568
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,172,120
3,518,042
1,412,759
1,963,403
–
–
–
–
–
–
–
–
–
72,012
–
10,982
–
–
–
40,008
3,584,879
5,604,447
Notes:
1 Details of the Company’s share ownership policies for Executive Directors are set out on page 103.
2 Includes shares held by connected persons.
3 Under the rules of the SIP, certain shares awarded to participants must be retained in the plan for a specified “holding period” of up to five years. The receipt of these shares is not
subject to the satisfaction of performance conditions.
4 Share price used is the average share price over the year to 31 December 2019.
5 This column shows all vested but unexercised awards under the LTIP that were held by the Director concerned as at 31 December 2019.
6 This column shows all unvested and outstanding awards under the LTIP that were held by the Director concerned as at 31 December 2019 (i.e. including those granted during the
year). Details of these entitlements, the vesting of which is subject to the satisfaction of performance conditions, are set out on pages 117 and 118.
As highlighted on page 94, the new Directors’ Remuneration Policy described in pages 97 to 106 will, if it is approved by shareholders at the AGM to
be held on 14 May 2020, introduce an additional requirement in terms of which Executive Directors will normally be required to maintain a specified
holding of shares for a period of two years following cessation of their employment.
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Dilution of Share Capital Pursuant to Share Plans During 2019
In any ten-year rolling period, the number of ordinary shares which may be issued in connection with the Company’s “discretionary share plans”
(which includes both the LTIPs and the share option/award schemes used to incentivise less senior employees) cannot exceed 5% of the Company’s
issued ordinary share capital.
In addition, in any ten-year rolling period, the number of ordinary shares which may be issued in connection with all of the Company’s employee
share schemes (whether discretionary or otherwise) cannot exceed 10% of the Company’s issued ordinary share capital.
It should also be noted that all shares acquired by or awarded to participants under the SIP and the Deferred Bonus Plan are existing ordinary shares
purchased in the market. As a result, neither the SIP nor the Deferred Bonus Plan involves the issue of new shares or the transfer of treasury shares.
Board Appointments with Other Companies During 2019
The Board believes, in principle, in the benefits of Executive Directors accepting positions as Non-Executive Directors of other companies in order
to widen their skills and knowledge for the benefit of the Company, provided that the time commitments involved are not unduly onerous.
The Executive Directors are permitted to retain any fees paid for such appointments.
The appointment of any Executive Director to a non-executive position with another company must be approved by the nomination committee.
In the case of a proposed appointment to a company within the oil and gas industry, permission will only normally be given if the two companies
do not compete in the same geographical area.
Details of the non-executive positions with other companies that were held by Cairn’s Executive Directors during 2019, and the fees that were
payable, are as follows:
Position held
Fees received for the year to 31/12/19
Current Directors
Simon Thomson
Non-Executive Director, Graham's The Family Dairy Limited
Non-Executive Director, Edinburgh Art Festival
£35,000
£0
Relative Importance of Spend on Pay
Set out below are details of the amounts of, and percentage change in, remuneration paid to or receivable by all Group employees and distributions
to shareholders in the years ended 31 December 2018 and 2019.
Employee costs (US$m)
Distributions (US$m)1
Financial Year
2018
Financial Year
2019
38.1
0
39.1
0
% change
2.6%
0%
Note:
1 For the purposes of the above table, “Distributions” include amounts distributed to shareholders by way of dividend and share buyback.
Cairn Energy PLC Annual Report and Accounts 2019
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Directors’ Remuneration Report continued
Implementation of Remuneration Policy in 2020
The following table provides details of how the Company intends to implement the key elements of the new Directors’ Remuneration Policy
described in pages 97 to 106, assuming it is approved by shareholders at the AGM to be held on 14 May 2020.
Remuneration element
Implementation during 2020
Base salary
Both of the Executive Directors received a 1.7% increase in base salary on 1 January 2020 – this was in line with the standard
annual increase awarded to other employees on that date. After applying this increase, details of the base salaries payable
to both the current Executive Directors for the year to 31 December 2020 are as follows:
– Simon Thomson, Chief Executive – £586,650; and
– James Smith, CFO – £381,561.
Benefits
Executive directors will continue to receive the same benefits as in 2019.
Annual bonus – 2020 In accordance with the requirements of the new policy, Executive Directors will be eligible to receive a bonus of up to 125%
of base salary depending on the extent to which specified measures are satisfied over 2020. However, any bonus awarded
to an Executive Director in excess of 100% of salary will be deferred into Cairn shares for a period of three years.
The whole of the Chief Executive’s and CFO’s 2020 bonus opportunity will be based on the Group KPIs described below
(with details of the weightings specified in brackets):
– HSSE/CR (15%);
•
•
Achieve a number of specified leading indicators in relation to governance, people and society.
Achieve lagging HSSE indicators derived from IOGP targets, with threshold, target and stretch levels identified for
measurement.
• Establish a consistent methodology for estimating carbon intensity of existing and proposed new assets for use in
•
•
•
strategic decision making.
Influence JV partners in UK Continental Shelf including to target zero flaring during shutdowns.
Implement energy efficiency benchmarks for use in equipment selection for application in new operated drilling
and seismic projects.
Focus on developing our people through talent management, organisational competency and employee
engagement.
– Portfolio Management (5%);
•
Secure new venture opportunities that meet the corporate hurdles and have risk levels consistent with our Risk
Appetite Statement. Measured against tests of control, materiality and commercial robustness, with threshold, target
and stretch levels identified for measurement where appropriate.
– Exploration (35%);
•
•
•
Mature new exploration or appraisal targets with JV support for drilling in the period 2020-2022.
Successfully drill and evaluate the wells planned for the 2020 work programme.
Discover or add potentially commercial hydrocarbons with threshold, target and stretch levels identified for
measurement.
– Development (10%);
•
Achieve certain milestones on the Sangomar (formerly SNE) development in categories of subsurface, wells, subsea,
FPSO and project controls.
– Production/Cash flow (10%);
•
Deliver Group production in line with guidance for 2020, with threshold, target and stretch volumes of production
identified for measurement.
– Maintain balance sheet strength/funding (25%).
•
Ensure balance sheet strength with achievement measured across three categories: attainment of certain financial
tests in line with funding strategy; portfolio management; and resolution of Indian arbitration and recovery of proceeds
in event of success.
The overall categories and weightings for these KPIs were agreed by the Board, with the specific targets to be used for the
purposes of the 2020 bonus scheme being set by the remuneration committee (which will also be responsible for their
assessment at the end of the year). The committee has also determined a payment scale (including threshold, target and
maximum levels) for each measure that will ultimately be used to calculate the amount of an individual’s award.
Cairn does not utilise strict financial performance KPIs. Instead, relevant elements of financial performance are incorporated
more broadly into the KPI structure, including our focus on retaining balance sheet strength, delivering efficient operations
and maturing our developments.
Precise details of the targets and payment scale to be used for the 2020 plan are commercially sensitive and have
not, therefore, been set out above. However, appropriate disclosures will be included in next year’s Annual Report on
Remuneration.
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Remuneration element
Implementation during 2020
LTIP
SIP
Pension
It is intended that, during the early part of 2020, the Executive Directors will be granted awards pursuant to the rules of the
2017 LTIP. These awards will, in aggregate, be over shares worth 250% of salary and will take the following forms:
– a “core award” over shares worth 200% of salary – the vesting of which will be dependent on relative TSR performance
over a three year period versus a comparator group of peer companies (with 25% vesting for a median ranking rising on
a straight-line basis to 100% vesting for upper quartile performance); and
– a “kicker award” over shares worth 50% of salary – vesting will be conditional on achieving both an upper quartile ranking
in the comparator group and absolute TSR growth over the performance period of at least 100%.
All shares that vest in relation to an award (whether “core” or “kicker”) will be subject to an additional two year holding period.
The comparator group against which the relative performance conditions are assessed will be the same as the one used for
the purposes of the LTIP grants made in 2019.
Irrespective of whether the above awards are granted before or after the AGM on 14 May 2020, they will be subject to terms
that are compliant with the new executive remuneration policy that is to approved by shareholders at that meeting.
Executive directors will be given the opportunity to participate in the SIP on the same terms as apply to all other eligible
employees in the arrangement.
The Company will continue to contribute 15% of basic salary on behalf of the current Executive Directors or pay them an
equivalent amount of additional salary. In accordance with the new policy, the rate of pension contributions for any new
appointees to the Board will be capped at a level that is equal to the amount paid to the wider UK employee population.
Non-Executive
Directors’ fees
For 2020, both the annual Non-Executive Director fee and the additional annual fee for chairing the audit and/or
remuneration committee remain unchanged at £75,500 and £10,000 respectively.
Chairman’s fees
The annual Chairman’s fee for 2020 has been increased from £177,000 to £180,000.
The Directors’ Remuneration Report was approved by the Board on 9 March 2020 and signed on its behalf by:
Nicoletta Giadrossi
Chair of the Remuneration Committee
9 March 2020
Cairn Energy PLC Annual Report and Accounts 2019
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Directors’ Report
The Directors of Cairn Energy PLC (registered in Scotland with Company Number SC226712) present their Annual Report and Accounts for the year
ended 31 December 2019 together with the audited consolidated Financial Statements of the Group and Company for the year. These will be laid
before the shareholders at the AGM to be held on 14 May 2020. The Directors’ Report and the Strategic Report (which includes trends and factors
likely to affect future development, performance and position of the business, our Section 172 information and a description of the principal risks
and uncertainties of the Company’s Group and can be found on pages 2 to 71 and is hereby incorporated by reference), collectively comprise the
management report as required under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules.
Results and Dividend
The Group made a profit after tax of US$93.6m (2018 loss after tax of US$1.1 billion).
The Directors do not recommend the payment of a dividend for the year ended 31 December 2019.
Strategic Report
Details of the Group’s strategy and business model during the year and the information that fulfils the requirements of the Strategic Report can be
found in the Strategic Report section on pages 2 to 71 of this document, which are deemed to form part of this report by reference.
Details of Cairn’s offices and Cairn’s advisers are given at the end of this report.
Change of Control
All of the Company’s share incentive plans contain provisions relating to a change of control and further details of these plans are provided in the
Directors’ Remuneration Report on pages 94 to 123. Generally, outstanding options and awards will vest and become exercisable on a change of
control, subject to the satisfaction of performance conditions, if applicable, at that time.
On a change of control of the Company resulting in the termination of his employment, the current Chief Executive is entitled to compensation
pursuant to his service contract. Further details of the relevant provisions are set out in the Directors’ Remuneration Report on pages 105 and 106.
There are no agreements providing for compensation to the Chief Financial Officer or to employees on a change of control and no such provision
will be included in the contracts of other future appointees to the Board.
Other than the restated and amended Senior Secured Borrowing Base Facility Agreement entered into by the Company and other subsidiaries
with DnB Bank ASA and other syndicated banks dated 7 September 2018 (the ‘Facility Agreement’), there are no significant agreements to which
the Company is a party that take effect, alter or terminate in the event of a change of control of the Company. In terms of clause 9.2 of the Facility
Agreement, if there is a change of control of the Company, any lender may cancel its commitment and declare its participation in all outstanding
utilisations, together with accrued interest and all other amounts accrued immediately due and payable.
Corporate Governance
The Company’s Corporate Governance Statement is set out on pages 76 to 86 and is deemed to form part of this report by reference.
Directors
The names and biographical details of the current Directors of the Company are given in the Board of Directors section on pages 74 and 75. In addition
to those listed on those pages, during the year, Alexander Berger was a Non-Executive Director of the Board until his retirement on 17 May 2019. The
beneficial interests of the Directors in the ordinary shares of the Company are shown below:
Simon Thomson
James Smith
Ian Tyler
Todd Hunt
Keith Lough
Peter Kallos
Nicoletta Giadrossi
Alison Wood2
Catherine Krajicek3
Alexander Berger1
Notes:
1 Alexander Berger retired as a Non-Executive Director on 17 May 2019.
2 Alison Wood was appointed as a Non-Executive Director on 1 July 2019.
3 Catherine Krajicek was appointed as a Non-Executive Director on 1 July 2019.
As at
31 December 2018
Number of shares
As at
31 December 2019
Number of shares
As at
6 March 2020
Number of shares
1,211,397
461,204
0
72,012
0
10,982
0
–
–
40,008
1,345,922
550,644
1,345,922
550,644
0
72,012
0
10,982
0
0
0
–
0
72,012
0
10,982
0
0
0
–
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Cairn Energy PLC Annual Report and Accounts 2019
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G O V E R N A N C E
Details of outstanding awards over ordinary shares in the Company held by the Directors (or any members of their families) are set out in the
Directors’ Remuneration Report on pages 94 to 123.
None of the Directors has a material interest in any contract, other than a service contract, with the Company or any of its subsidiary undertakings.
Details of the Directors’ service contracts are set out in the Directors’ Remuneration Report on pages 94 to 123.
Share Capital
The issued share capital of the Company is shown in section 7 of the notes to the Financial Statements. As at 6 March 2020, 589,552,585 ordinary
shares of 231/169 pence each have been issued, are fully paid up and are quoted on the London Stock Exchange. The rights attaching to the
ordinary shares are set out in the Company’s Articles of Association. There are no special control rights in relation to the Company’s shares and the
Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or on voting rights.
Voting Rights
The following paragraph details the position in relation to voting rights attaching to shares set out in the Company’s Articles of Association. However,
the Company recognises that best practice is now to hold a poll on all shareholder resolutions. It is the Company’s current practice, therefore, to hold
a poll and it is committed to doing so going forward.
Subject to any special rights or restrictions attaching to any class of shares, at a general meeting or class meeting, on a show of hands, every member
present in person and every duly appointed proxy entitled to vote shall have one vote and on a poll, every member present in person or by proxy
and entitled to vote shall have one vote for every share held by him/her. In the case of joint holders of a share, the vote of the senior member who
tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and for this purpose seniority
shall be determined by the order in which the names stand in the register of members in respect of the joint holding. Under the Companies Act 2006,
members are entitled to appoint a proxy, who need not be a member of the Company, to exercise all or any of their rights to attend and to speak and
vote on their behalf at a general meeting or class meeting. A member may appoint more than one proxy in relation to a general meeting or class
meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A corporation which
is a member of the Company may authorise one or more individuals to act as its representative or representatives at any meeting of the Company, or
at any separate meeting of the holders of any class of shares. A person so authorised shall be entitled to exercise the same powers on behalf of such
corporation as the corporation could exercise if it were an individual member of the Company.
Restrictions on Voting
No member shall, unless the Directors of the Company otherwise determine, be entitled in respect of any share held by him/her to attend or vote
at a general meeting of the Company either in person or by proxy if any call or other sum presently payable by him/her to the Company in respect
of shares in the Company remains unpaid. Further, if a member has been served with a notice by the Company under the Companies Act 2006
requesting information concerning interests in shares and has failed in relation to any shares to provide the Company, within 14 days of the notice,
with such information, the Directors of the Company may determine that such member shall not be entitled in respect of such shares to attend or
vote (either in person or by proxy) at any general meeting or at any separate general or class meeting of the holders of that class of shares. Proxy
forms must be submitted not less than 48 hours (or such shorter time as the Board may determine) (excluding, at the Board’s discretion, any part of
any day that is not a working day) before the time appointed for the holding of the meeting or adjourned meeting or, in the case of a poll taken more
than 48 hours after it was demanded, not less than 24 hours (or such shorter time as the Board may determine) before the time appointed for the
taking of the poll at which it is to be used.
Variation of Rights
Whenever the share capital of the Company is divided into different classes of shares, all or any of the special rights attached to any class may,
subject to statute and unless otherwise expressly provided by the rights attached to the shares of that class, be varied or abrogated either with the
consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special
resolution passed at a separate general meeting of the holders of the shares of that class. At every such separate general meeting, the quorum shall
be two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class. These provisions also apply to
the variation or abrogation of the special rights attached to some only of the shares of any class as if the shares concerned and the remaining shares
of such class formed separate classes. The rights attached to any class of shares shall, unless otherwise expressly provided by the terms of issue of
such shares or the terms upon which such shares are for the time being held, be deemed not to be varied or abrogated by the creation or issue of
further shares ranking pari passu with, or subsequent to, the first mentioned shares or by the purchase by the Company of its own shares.
Transfer of Shares
Subject to any procedures set out by the Directors in accordance with the Articles of Association, all transfers of shares shall be effected by
instrument in writing in any usual or common form or in any other form acceptable to the Directors of the Company. The instrument of transfer shall
be executed by, or on behalf of, the transferor and (except in the case of fully paid shares) by, or on behalf of, the transferee. The transferor shall be
deemed to remain the holder of the shares concerned until the name of the transferee is entered in the register of members of the Company.
The Directors may, in their absolute discretion and without assigning any reason therefor, refuse to register a transfer of any share which is not a fully
paid share unless such share is listed on the Official List of the UK Listing Authority and traded on the London Stock Exchange’s main market for
listed securities. The Directors may also refuse to register a transfer of a share in uncertificated form where the Company is entitled to refuse (or is
excepted from the requirement) under the Uncertificated Securities Regulations 2001 to register the transfer and they may refuse any such transfer
in favour of more than four transferees.
The Directors may also refuse to register any transfer of a share on which the Company has a lien.
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Directors’ Report continued
The Directors may, in their absolute discretion and without assigning any reason therefor, refuse to register a transfer of any share in certificated form
unless the relevant instrument of transfer is in respect of only one class of share, is duly stamped or adjudged or certified as not chargeable to stamp
duty, is lodged at the transfer office or at such other place as the Directors may determine, is accompanied by the relevant share certificate(s) and
such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer and is in favour of not more than
four transferees jointly. If the Directors refuse to register a transfer, they shall, as soon as practicable and in any event within two months after the
date on which the transfer was lodged with the Company (in the case of a share in certificated form) or the date on which the operator instruction (as
defined in the Uncertificated Securities Regulations 2001) was received by the Company (in the case of a share in uncertificated form) (or in either
case such longer or shorter period (if any) as the Listing Rules may from time to time permit or require), send to the transferee notice of the refusal.
Major Interests in Share Capital
As at 31 December 2019 and 21 February 2020 (being the latest practicable date prior to the date of this report), the Company had received
notification that shareholdings of 3% and over were as set out in the table below.
MFS Investment Management
BlackRock
Aberdeen Standard Investments
Hotchkis & Wiley
Vanguard Group
Franklin Templeton
Aviva Investors
Kames Capital
Legal & General Investment Management
As at
31 December
2019
78,634,023
59,898,144
48,452,348
27,992,456
23,469,501
21,572,196
19,887,632
19,759,238
17,957,264
% Share Capital
13.34
10.16
8.22
4.75
3.98
3.66
3.37
3.35
3.05
As at
21 February
2020
79,980,486
58,644,948
48,529,128
26,014,738
23,639,855
20,537,589
18,661,949
19,484,415
18,949,906
% Share Capital
13.57
9.95
8.23
4.41
4.01
3.48
3.17
3.30
3.21
Political Donations
No political donations were made and no political expenditure was incurred during the year.
Greenhouse Gas Emissions
Details of the Group’s greenhouse gas emissions for the year ended 31 December 2019 can be found in the Strategic Report section on pages 60
and 61, which are deemed to form part of this report by reference.
Financial Instruments
The financial risk management objectives and policies of the Company are detailed in section 3.9 of the Financial Statements.
Acquisition of Own Shares
No shares have been repurchased by the Company in the financial year to 31 December 2019.
Appointment and Replacement of Directors
The Company’s Articles of Association provide that directors can be appointed by the Company by ordinary resolution, or by the Board. The
Nomination Committee makes recommendations to the Board on the appointment and replacement of directors. Further details of the rules
governing the appointment and replacement of directors are set out in the Corporate Governance Statement on pages 79 and 80 and in the
Company’s Articles of Association.
Directors’ Indemnities
As permitted by the Company’s Articles of Association, the Directors have the benefit of an indemnity which is a qualifying third party indemnity
provision as defined in Section 234 of the Companies Act 2006 (a ‘Qualifying Third Party Indemnity Provision’). The indemnity was in force throughout
the last financial year and is currently in force.
Powers of the Directors
Subject to the Company’s Articles of Association, UK legislation and any directions given by special resolution, the business of the Company is
managed by the Board. The Directors currently have powers both in relation to the issuing and buying back of the Company’s shares and are seeking
renewal of these powers at the forthcoming AGM.
Articles of Association
Unless expressly specified to the contrary therein, the Company’s Articles of Association may be amended by a special resolution of the Company’s
shareholders.
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Directors’ Responsibility Statement
The Directors are responsible for preparing the Annual Report and Accounts, the Directors’ Remuneration Report and the Financial Statements in
accordance with applicable laws and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law, the Directors have prepared the
Group and parent Company Financial Statements in accordance with International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board (IASB) and as adopted by the European Union (EU). Under company law, the Directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of
the Group and Company for that period. In preparing these Financial Statements, the Directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgements and accounting estimates that are reasonable and prudent;
– state whether applicable IFRS issued by the IASB and adopted by the EU have been followed, subject to any material departures disclosed and
explained in the Financial Statements; and
– prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the Financial
Statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article
4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company’s website (www.cairnenergy.com). Legislation in the United Kingdom
governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
Following careful review and consideration of the Cairn Energy PLC Annual Report and Accounts 2019 (the “Accounts”), the Directors consider that
the Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s
performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the Board of Directors section on pages 74 and 75, confirm that, to the best of their
knowledge:
– the Group Financial Statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position, and loss of the Group and loss of the Company; and
– the Strategic Report section on pages 2 to 71 of this document includes a fair review of the development and performance of the business and
the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Disclosure of Information to Auditors
Each of the Directors of the Company as at 9 March 2020, being the date this report is approved, confirm that, as far as they are aware, there is no
relevant audit information of which the Company’s auditors are unaware. In making this confirmation, the Directors have taken appropriate steps to
make themselves aware of the relevant audit information and to establish that the Company’s auditors are aware of this information.
AGM 2020
The AGM of the Company will be held in the Castle Suite of The Caledonian, a Waldorf Astoria Hotel, Princes Street, Edinburgh EH1 2AB at 12 noon
(BST) on Thursday, 14 May 2020. The resolutions to be proposed at the AGM are set out and fully explained in the Notice of AGM which has been
posted to shareholders together with this Annual Report and Accounts.
Recommendation
The Board considers that all of the resolutions to be considered at the AGM are in the best interests of the Company and its shareholders as a whole
and unanimously recommends that you vote in favour of all of the proposed resolutions, as they intend to do in respect of their own beneficial
shareholdings.
This Annual Report was approved by the Board of Directors and authorised for issue on 9 March 2020.
By order of the Board
Duncan Wood
Company Secretary
9 March 2020
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F I N A N C I A L
S T A T E M E N T S
Contents
Independent Auditors’ 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
1.1 Significant Accounting Policies
1.2 Going Concern
1.3 Adoption of IFRS 16 ‘Leases’
Section 2 – Oil and Gas Assets and Operations
2.1 Gross Profit: Revenue and Cost of Sales
2.2 Intangible Exploration/Appraisal Assets
2.3 Property, Plant & Equipment –
Development/Producing Assets
2.4 Provisions – Decommissioning
2.5 Capital Commitments
2.6 Intangible Assets – Goodwill
2.7
Impairment Testing Sensitivity Analysis
Section 3 – Working Capital, Financial Instruments
and Long-Term Liabilities
3.1 Cash and Cash Equivalents
3.2 Loans and Borrowings
3.3 Lease Liabilities
3.4 Trade and Other Receivables
3.5 Derivative Financial Instruments
3.6 Trade and Other Payables
3.7 Deferred Revenue
3.8 Financial Instruments
3.9 Financial Risk Management: Objectives and Policies
Section 4 – Income Statement Analysis
4.1 Segmental Analysis
4.2 Pre-Award Costs
4.3 Administrative Expenses
4.4 Employee Benefits: Staff Costs, Share-Based
Payments and Directors’ Emoluments
4.5 Finance Income
4.6 Finance Costs
4.7 Earnings per Ordinary Share
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138
139
140
141
141
145
147
150
152
153
153
154
155
156
157
158
159
160
161
161
163
165
167
168
168
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171
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Section 5 – Taxation
5.1 Tax Strategy and Governance
5.2 Tax Charge/(Credit) on Profit/(Loss) for the Year
5.3 Income Tax Asset
5.4 Deferred Tax Assets and Liabilities
5.5 Contingent Liability – India Tax Assessment
Section 6 – Discontinued Operations and Assets
and Liabilities Held-for-Sale
6.1 Financial Performance
6.2 Assets and Liabilities Held-for-Sale
6.3 Cash Flow Information for Discontinued Operations
Issued Capital and Reserves
Section 7 – Capital Structure and Other Disclosures
7.1
7.2 Capital Management
7.3 Guarantees
7.4 Auditors’ Remuneration
Cairn Energy PLC – Company stand-alone
primary statements
Company Balance Sheet
Company Statement of Cash Flows
Company Statement of Changes in Equity
Section 8 – Notes to the Company Financial Statements
8.1 Basis of Preparation
8.2 Investments in Subsidiaries
8.3 Derivative Financial Instruments
8.4 Trade and Other Payables
8.5 Financial Instruments
8.6 Capital Management
8.7 Related Party Transactions
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S T A T E M E N T S
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Independent Auditors’ Report to the Members of Cairn Energy PLC
Report on the audit of the financial statements
Opinion
In our opinion, Cairn Energy PLC’s Group financial statements and Company financial statements (the “financial statements”):
– give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2019 and of the Group’s profit and the Group’s
and the company’s cash flows for the year then ended;
– have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as
regards the company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and
– have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4
of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise: the Group
and Company balance sheets as at 31 December 2019; the Group income statement and statement of comprehensive income; the Group and
Company statements of cash flows; the Group and Company statements of changes in equity for the year then ended; and the notes to the financial
statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs
(UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group
or the company.
Other than those disclosed in note 7.4 to the financial statements, we have provided no non-audit services to the Group or the company in the period
from 1 January 2019 to 31 December 2019.
Our Audit Approach
Overview
Materiality
– Overall group materiality: $20.8 million (2018: $20.0 million), based on 1% of total assets.
– Overall company materiality: $20.1 million (2018: $17.9 million), based on 1% of total assets.
– The majority of audit work was performed in the UK by PwC UK, with PwC Norway and PwC Mexico
performing audit work over the Norwegian and Mexican components respectively. The group audit
team visited both locations as part of the audit process.
Audit scope
– Our audit scope covered 96% of total assets.
– Risk of impairment of intangible exploration/appraisal assets, development/producing assets (‘oil
and gas assets’) and goodwill.
Key audit
ma(cid:31)ers
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Report on the audit of the financial statements continued
The Scope of Our Audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Capability of the Audit in Detecting Irregularities, Including Fraud
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to the
wide variety of jurisdictions in which the group operates, and we considered the extent to which non-compliance might have a material effect on the
financial statement. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as
the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including
the risk of override of controls) and determined that the principal risks were related to areas of estimate in the financial statements (significantly, the
assessment of impairment of assets) and posting of inappropriate journal entries in order to improve reported performance. The group engagement
team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their
work. Audit procedures performed by the group engagement team and/or component auditors included:
– Discussion with management, internal and external legal counsel, and individuals outside the finance function, including consideration of known
of suspected instances of non-compliance with laws and regulations and fraud;
– Understanding of management’s controls designed to prevent and detect irregularities
– Review of Board minutes and Internal Audit reports;
– Challenging assumptions and judgements made by management in its significant accounting estimates, in particular in relation to assessments of
asset impairment; and
– Identifying and testing journal entries, in particular, any journal entries posted by unexpected users, journals posted at unexpected times (for
example, weekend), journals reflecting unusual account combinations or journals with descriptions containing key unexpected words.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from
the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion.
Key Audit Matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of
the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors,
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a
complete list of all risks identified by our audit.
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Report on the audit of the financial statements continued
Key audit matter
How our audit addressed the key audit matter
Risk of impairment to intangible exploration/appraisal assets,
development/producing assets (‘oil and gas assets’) and goodwill
We challenged management’s assessment of impairment triggers for
exploration assets under IFRS 6 by considering licence conditions, the
company’s budgets and plans for, and results of, drilling activities.
In determining the fair value of a CGU, management are required to
make significant judgements in relation to key assumptions such as:
– long-term oil price;
– reserves estimates;
– production volume profiles;
– cost profiles and escalation applied; and
– discount rates.
We focused on this area due to the significant values and the nature of
the judgements and assumptions management are required to make in
determining the existence of impairment triggers and the amount of any
impairment.
The group has continued to invest in its exploration/appraisal activities
with a carrying value of $245.9m at 31 December 2019. The majority of
this asset relates to Cairn’s discovery offshore Senegal in the SNE North
and FAN fields, amounting to $143.1m.
Development/producing assets of $1,026.5m reflect spend to
31 December 2019 on Catcher and Kraken in the North Sea.
Development assets of $378.8m relate to the Sangomar fields
in Senegal.
The goodwill balance that arose on the acquisitions of Agora and
Nautical Petroleum in 2012 has been fully impaired in the year.
In 2019, management has not identified any specific indicators of
impairment on their remaining assets. However, after allocating goodwill
to the Nova held-for sale asset, the goodwill balance remaining in the
North Sea CGU has been fully impaired.
In addition, due to a change in cost and production profile which led to
impairment on the Kraken asset in 2018, management has reversed
$147.3m of the previously recorded impairment. The reversal is attributed
to improved performance of the FPSO and certainty of water levels in
reserves resulting in a write-back of previously de-recognised proven
and probable (‘2P’) reserves.
Refer to notes 2.3 and 2.7 to the financial statements.
We note that the groups’ ability to fund future development activity on its
Senegal asset specifically is a key consideration of when an impairment
trigger may exist. Failure to secure sufficient funding may result in a
significant impairment to the carrying value of the asset.
We did not identify any additional triggers that had not been identified
by management.
We tested management’s impairment reviews and calculation of the
associated asset impairment reversal and goodwill impairment charge
by performing the work described below:
– Assessing the integrity and mathematical accuracy of the impairment
model;
– Comparing the assumptions used within the impairment review
models to approved budgets and business plans and other evidence
of future intentions for the relevant assets;
– We obtained reports from third party reserves auditors which we
compared to management’s assessments. Where there were
differences, we sought explanations for these. We evaluated the third
party reserves auditors’ independence and expertise and discussed
their reports directly with them;
– Benchmarking key assumptions including commodity price and
inflation against external data and recent public announcements from
other oil companies;
– Comparing the discount rates used for each asset to expected ranges
prepared by our own valuations specialists;
– Reviewing management’s sensitivities and performing additional
sensitivity analysis over key assumptions in the model in order to
assess the potential impact of a range of possible outcomes;
– Assessing the inclusion of all appropriate assets and liabilities in the
cash generating unit and in particular given that the recoverable
amount is determined based on fair value less costs of disposal, the
inclusion or exclusion of certain tax related balances; and
– Compared the carrying value of assets to certain other market
evidence.
We found certain assumptions used by the group, including the long-term
oil price and discount rate, to be at the upper end of our independently
assessed range, while other assumptions, for example the use of a 3
year forward curve, were around the median of a market benchmark
range. Our audit therefore focused on the sensitivity of the impairment
assessments to movements in the reserves and production profile and
long-term oil price.
We obtained management’s future financing plans which support future
expenditure required to maintain and enhance the value of the group’s oil
and gas assets. We considered the group’s ability to obtain the required
facilities taking into account the status of discussions with lenders and the
group’s historical funding capability.
While no impairment has been identified on the Senegalese assets, the
development is dependent on the ability of the group to secure future
funding. Any failure to fund Cairn’s ongoing share of the development
costs may result in the forfeiture of the Group’s participating interest or
mean that the development does not proceed in accordance with the
Exploitation Plan and therefore an impairment may arise.
Based on our work performed we conclude that the impairment
calculations and related disclosures in the financial statements to
be appropriate.
We determined that there were no key audit matters applicable to the company to communicate in our report.
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Report on the audit of the financial statements continued
How We Tailored the Audit Scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate.
For operational purposes, the group is structured around four segments: Senegal, UK Norway, LATAM and East Atlantic. During 2019, all of the
production activity has been in UK Norway, with the majority of the exploration and development activity occurring in LATAM and Senegal.
For accounting purposes, the group is structured into 38 reporting units (“components”) The majority of the finance function in based in Edinburgh
with the exception of the UK Norway components which were primarily accounted for in Norway, and the Mexican components which are
accounted for in Mexico. Work performed by PwC Norway and PwC Mexico was restricted to the Norwegian and Mexican statutory entities,
with all other audit work performed by our group audit team in Edinburgh.
Our group scoping was based on total assets (consistent with our approach to materiality) and identified two financially significant components which
comprised a high proportion of total group assets and as such required an audit of their complete financial information. A further six components
were subject to procedures addressing specific financial statement line items to obtain sufficient coverage.
The group team remained involved in the audit work of its two component audit teams throughout the year. For Norway, the group audit team
attended the audit planning meeting, and was directly involved in scoping and review of work performed by PwC Norway including directing areas of
audit work and maintained contact throughout the execution and completion of the audit. Senior members of the group audit team visited Norway to
perform these procedures. For Mexico, the group audit team attended the audit planning meeting by telephone and maintained contact throughout
the execution phase of the audit. This included a member of the group team reviewing audit work on site in Mexico and attending the internal
clearance meeting in person.
Our group audit approach resulted in coverage of 96% of the consolidated total assets.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall Materiality
How We Determined It
Rationale for Benchmark Applied
Group Financial Statements
Company Financial Statements
$20.8 million (2018: $20.0 million).
$20.1 million (2018: $17.9 million).
1% of total assets.
1% of total assets.
We believe that total assets is an appropriate
measure that reflects the group's portfolio of oil
and gas exploration and production assets. The
group aims to maximise the value of its assets.
The Company's purpose is to hold investments in
the subsidiaries of the group. The Company has
limited income statement transactions, therefore
we believe the appropriate benchmark for
assessing materiality is total assets.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality
allocated across components was between $0.1 million and $19.1 million. Certain components were audited to a local statutory audit materiality that
was also less than our overall group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $1.1 million (Group audit) (2018:
$1 million) and $1 million (Company audit) (2018: $0.9 million) as well as misstatements below those amounts that, in our view, warranted reporting for
qualitative reasons.
Going Concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the financial
statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting in preparing the financial
statements and the directors’ identification of any material uncertainties
to the group’s and the company’s ability to continue as a going concern
over a period of at least twelve months from the date of approval of the
financial statements.
We are required to report if the directors’ statement relating to
Going Concern in accordance with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted,
this statement is not a guarantee as to the group’s and company’s ability
to continue as a going concern. For example, the terms of the United
Kingdom’s withdrawal from the European Union are not clear, and it is
difficult to evaluate all of the potential implications on the group’s trade,
customers, suppliers and the wider economy.
We have nothing to report.
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Report on the audit of the financial statements continued
Reporting on Other Information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The
directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we
do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether
there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report
based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006
have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and
the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs
(UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for
the year ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements. (CA06)
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The Directors’ Assessment of the Prospects of the Group and of the Principal Risks That Would Threaten the Solvency or Liquidity of the
Group
We have nothing material to add or draw attention to regarding:
– The directors’ confirmation on page 36 of the Annual Report that they have carried out a robust assessment of the principal risks facing the group,
including those that would threaten its business model, future performance, solvency or liquidity.
– The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
– The directors’ explanation on page 37 of the Annual Report as to how they have assessed the prospects of the group, over what period they
have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that
the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks
facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only
consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with
the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the
knowledge and understanding of the group and company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
– The statement given by the directors, on page 127, that they consider the Annual Report taken as a whole to be fair, balanced and understandable,
and provides the information necessary for the members to assess the group’s and company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the group and company obtained in the course of performing
our audit.
– The section of the Annual Report on page 88 describing the work of the Audit Committee does not appropriately address matters communicated
by us to the Audit Committee.
– The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant provision
of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006. (CA06)
134
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Independent Auditors’ Report to the Members of Cairn Energy PLC
Report on the audit of the financial statements continued
Responsibilities for the Financial Statements and the Audit
Responsibilities of the Directors for the Financial Statements
As explained more fully in the Directors’ Responsibilities Statement set out on page 127, the directors are responsible for the preparation of the
financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also
responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
Use of This Report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of
the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to
any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 Exception Reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
– we have not received all the information and explanations we require for our audit; or
– adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not
visited by us; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– the company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were appointed by the members on 23 May 2013 to audit the financial statements for the
year ended 31 December 2013 and subsequent financial periods. The period of total uninterrupted engagement is 7 years, covering the years ended
31 December 2013 to 31 December 2019.
Lindsay Gardiner (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
9 March 2020
Cairn Energy PLC Annual Report and Accounts 2019
135
F I N A N C I A L
S T A T E M E N T S
Group Income Statement
For the year ended 31 December 2019
Continuing operations
Revenue
Cost of sales
Depletion and amortisation
Gross profit
Pre-award costs
Unsuccessful exploration costs
Other operating income
Administrative expenses
Reversal of impairment/(Impairment) of property, plant & equipment – development/producing assets
Impairment of goodwill
Operating profit/(loss)
Loss on derecognition of financial assets at fair value through profit or loss
Loss on financial assets at fair value through profit or loss
Finance income
Finance costs
Profit/(Loss) before taxation from continuing operations
Taxation
Tax (charge)/credit
Profit/(Loss) from continuing operations
Loss from discontinued operations
Profit/(Loss) for the year attributable to equity holders of the Parent
Earnings per share for profit/(loss) from continuing operations:
Profit/(Loss) per ordinary share – basic (cents)
Profit/(Loss) per ordinary share – diluted (cents)
Earnings per share for profit/(loss) attributable to equity holders of the Parent:
Profit/(Loss) per ordinary share – basic (cents)
Profit/(Loss) per ordinary share – diluted (cents)
Group Statement of Comprehensive Income
For the year ended 31 December 2019
Profit/(Loss) for the year attributable to equity holders of the Parent
Other Comprehensive Income – items that may be recycled to the Income Statement
Fair value on hedge options
Hedging (gain)/loss recycled to the Income Statement
Currency translation differences
Other Comprehensive (Expense)/Income for the year
Total Comprehensive Income/(Expense) for the year attributable to equity holders of the Parent
Note
2019
US$m
2018
(restated)
US$m
2.1
2.1
2.3
4.2
2.2
4.3
2.3
2.6
4.5
4.6
5.2
6.1
4.7
4.7
4.7
4.7
3.5
2.1
533.4
(73.1)
(217.2)
243.1
(17.2)
(107.0)
–
(32.3)
147.3
(79.0)
154.9
–
(1.8)
3.0
(36.6)
119.5
410.3
(131.4)
(171.2)
107.7
(21.5)
(5.5)
5.0
(48.4)
(166.3)
–
(129.0)
(713.1)
(352.2)
18.8
(36.1)
(1,211.6)
(0.3)
89.4
119.2
(1,122.2)
(25.6)
93.6
20.48
20.27
16.08
15.92
2019
US$m
93.6
(29.7)
(10.9)
0.4
(40.2)
53.4
(13.3)
(1,135.5)
(193.30)
(193.30)
(195.59)
(195.59)
2018
US$m
(1,135.5)
36.1
7.8
(15.6)
28.3
(1,107.2)
136
Cairn Energy PLC Annual Report and Accounts 2019
Group Balance Sheet
As at 31 December 2019
Non-current assets
Intangible exploration/appraisal assets
Property, plant & equipment – development/producing assets
Intangible assets – goodwill
Other property, plant & equipment and intangible assets
Derivative financial instruments
Current assets
Inventory
Financial assets at fair value through profit or loss
Cash and cash equivalents
Trade and other receivables
Derivative financial instruments
Income tax asset
Assets held-for-sale
Total assets
Current liabilities
Loans and borrowings
Lease liabilities/Finance lease liability
Derivative financial instruments
Trade and other payables
Deferred revenue
Provisions – other
Non-current liabilities
Provisions – decommissioning
Loans and borrowings
Lease liabilities/Finance lease liability
Deferred revenue
Deferred tax liabilities
Liabilities held-for-sale
Total liabilities
Net assets
Equity attributable to equity holders of the Parent
Called-up share capital
Share premium
Shares held by ESOP/SIP Trusts
Foreign currency translation
Merger and capital reserves
Hedge reserve
Retained earnings
Total equity
F I N A N C I A L
S T A T E M E N T S
2019
US$m
245.9
1,405.3
–
13.6
–
1,664.8
13.8
5.1
146.5
111.2
4.1
–
280.7
143.5
2018
US$m
595.1
1,022.9
125.8
7.9
7.7
1,759.4
8.2
6.9
66.3
91.2
36.7
32.8
242.1
–
2,089.0
2,001.5
–
43.1
1.6
134.6
16.9
–
196.2
141.2
–
239.8
18.7
–
399.7
37.6
633.5
26.2
18.5
–
103.1
22.0
2.8
172.6
119.1
75.5
146.9
30.8
66.5
438.8
–
611.4
1,455.5
1,390.1
12.6
489.8
(15.8)
(190.1)
296.7
0.4
861.9
12.6
489.7
(19.6)
(190.5)
296.7
41.0
760.2
1,455.5
1,390.1
Note
2.2
2.3
2.6
3.5
2.1
3.1
3.4
3.5
5.3
6.2
3.2
3.3
3.5
3.6
3.7
2.4
3.2
3.3
3.7
5.4
6.2
7.1
7.1
7.1a,b
7.1c
7.1d
7.1e
The Financial Statements on pages 136 to 182 were approved by the Board of Directors on 9 March 2020 and signed on its behalf by:
James Smith
Chief Financial Officer
Simon Thomson
Chief Executive
Cairn Energy PLC Annual Report and Accounts 2019
137
F I N A N C I A L
S T A T E M E N T S
Group Statement of Cash Flows
For the year ended 31 December 2019
Cash flows from operating activities:
Profit/(Loss) before taxation from continuing operations
Loss before tax from discontinued operations
Profit/(Loss) before tax including discontinued operations
Adjustments for non-cash income and expense and non-operating cash flow:
Release of deferred revenue
Unsuccessful exploration costs
Depreciation, depletion and amortisation
Share-based payments charge
(Reversal of impairment)/Impairment of property, plant & equipment – development/producing assets
Impairment of goodwill
Impairment of disposal group non-current assets
Loss on derecognition of financial assets at fair value through profit or loss
Loss on financial assets at fair value through profit or loss
(Gain)/Loss on disposal of oil and gas assets
Finance income
Finance costs
Adjustments for cash flow movements in assets and liabilities:
Income tax refund received relating to operating activities
Income tax paid
Inventory movement
Trade and other receivables movement
Trade and other payables movement
Other provisions movement
Net cash flows from operating activities
Cash flows from investing activities:
Expenditure on intangible exploration/appraisal assets
Expenditure on property, plant & equipment – development/producing assets
Proceeds on disposal of intangible exploration/appraisal assets
Proceeds on disposal of property, plant & equipment – development/producing assets
Income tax refund received relating to investing activities
Purchase of other property, plant & equipment and intangible assets
Interest received and other finance income
Net cash flows used in investing activities
Cash flows from financing activities:
Debt arrangement fees
Other interest and charges
Proceeds from borrowings
Repayment of borrowings
Proceeds from issue of shares
Cost of shares purchased
Lease payments
Lease reimbursements
Net cash flows (used in)/from financing activities
Net increase/(decrease) in cash and cash equivalents
Opening cash and cash equivalents at beginning of year
Foreign exchange differences
Closing cash and cash equivalents
Note
6.1
2019
US$m
119.5
(115.6)
2018
US$m
(1,211.6)
(54.4)
3.9
(1,266.0)
(17.2)
145.7
223.2
11.9
(147.3)
79.0
65.7
–
1.8
(0.7)
(3.4)
43.4
2.3
(0.5)
(5.6)
2.2
4.9
(2.8)
(21.2)
48.2
174.9
14.7
166.3
–
–
713.1
352.2
4.5
(19.2)
37.8
20.4
–
2.2
(41.6)
22.7
–
406.5
209.0
(194.6)
(75.5)
–
77.1
28.6
(5.0)
3.2
(166.2)
–
(13.9)
47.4
(134.0)
0.1
–
(59.5)
7.0
(152.9)
87.4
66.3
–
153.7
(188.0)
(109.5)
3.6
–
16.4
(2.9)
2.0
(278.4)
(10.4)
(12.6)
117.4
(31.2)
1.7
(13.6)
(7.4)
4.7
48.6
(20.8)
86.5
0.6
66.3
5.3
3.4
3.6
5.3
3.2
3.2
3.2
7.1a
3.3
3.3
3.1
138
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Group Statement of Changes in Equity
For the year ended 31 December 2019
At 1 January 2018
500.5
(10.2)
(174.9)
296.7
(2.9)
1,885.3
2,494.5
Equity
share capital
and share
premium
US$m
Shares
held by
ESOP/SIP
Trusts
US$m
Foreign
currency
translation
US$m
Merger and
capital
reserves
US$m
Hedge
reserve
US$m
Retained
earnings
US$m
Total
equity
US$m
Loss for the year
Fair value on hedge options
Hedging loss recycled to the Income Statement
Currency translation differences
Total comprehensive expense
Share-based payments
Shares issued for cash
Cost of shares purchased
Exercise of employee share options
Cost of shares vesting
At 31 December 2018
Profit for the year
Fair value on hedge options
Hedging gain recycled to the Income Statement
Currency translation differences
Total comprehensive income
Share-based payments
Exercise of employee share options
Cost of shares vesting
–
–
–
–
–
–
0.1
–
1.7
–
502.3
–
–
–
–
–
–
0.1
–
–
–
–
–
–
–
(0.1)
(13.6)
–
4.3
(19.6)
–
–
–
–
–
–
–
3.8
–
–
–
(15.6)
(15.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
36.1
7.8
–
43.9
–
–
–
–
–
(1,135.5)
–
–
–
(1,135.5)
36.1
7.8
(15.6)
(1,135.5)
(1,107.2)
14.7
–
–
–
(4.3)
14.7
–
(13.6)
1.7
–
(190.5)
296.7
41.0
760.2
1,390.1
–
–
–
0.4
0.4
–
–
–
–
–
–
–
–
–
–
–
–
(29.7)
(10.9)
–
(40.6)
–
–
–
93.6
–
–
–
93.6
11.9
–
(3.8)
93.6
(29.7)
(10.9)
0.4
53.4
11.9
0.1
–
At 31 December 2019
502.4
(15.8)
(190.1)
296.7
0.4
861.9
1,455.5
Cairn Energy PLC Annual Report and Accounts 2019
139
F I N A N C I A L
S T A T E M E N T S
Section 1 – Basis of Preparation
On 1 January 2019, Cairn adopted IFRS 16 ‘Leases’ and this section contains details of the impact
of adoption including the asset and liability recognised in relation to the Catcher FPSO. Also included
in this section are the Group’s general accounting policies applicable across the Financial Statements.
Accounting policies specific to individual notes to the accounts are embedded in the notes themselves.
1.1 Significant Accounting Policies
a) Basis of Preparation
The consolidated Financial Statements of Cairn Energy PLC (“Cairn” or “the Group”) for the year ended 31 December 2019 were authorised for
issue in accordance with a resolution of the Directors on 9 March 2020. Cairn is a limited company incorporated and domiciled in the United
Kingdom whose shares are publicly traded. The registered office is located at 50 Lothian Road, Edinburgh, Scotland, EH3 9BY. The registered
company number is SC226712.
Cairn prepares its Financial Statements on a historical cost basis, unless accounting standards require an alternate measurement basis.
Where there are assets and liabilities calculated on a different basis, this fact is disclosed either in the relevant accounting policy or in the
notes to the Financial Statements. The Financial Statements comply with the Companies Act 2006 as applicable to companies using
International Financial Reporting Standards (“IFRS”).
The Group’s Financial Statements are prepared on a going concern basis.
b) Accounting Standards
Cairn prepares its Financial Statements in accordance with applicable IFRS, issued by the International Accounting Standards Board (“IASB”)
as adopted by the EU, and interpretations issued by the IFRS Interpretations Committee (“IFRS IC”), and Companies Act 2006 applicable
to companies reporting under IFRS. The Group’s Financial Statements are also consistent with IFRS as issued by the IASB as they apply to
accounting periods ended 31 December 2019.
Effective 1 January 2019, Cairn has adopted the following standards and amendments to standards:
– Amendments to IAS 28 ‘Investments in Associates and Joint Ventures’
– Amendments to IFRS 9 ‘Financial Instruments’
– IFRS 16 ‘Leases’
– Annual improvements to IFRS 2015 – 2017 cycle
In 2018, Cairn early adopted the following interpretation issued by IFRS IC:
– IFRIC 23 ‘Uncertainty over Income Tax Treatments’
There are no new standards or amendments, issued by the IASB and endorsed by the EU, that have yet to be adopted by the Group that will
materially impact the Group’s Financial Statements.
The impact of adoption of IFRS 16 can be found in note 1.3. None of the other amendments adopted have a material impact on the Group’s
Financial Statements or disclosures.
c) Basis of Consolidation
The consolidated Financial Statements include the results of Cairn Energy PLC and its subsidiary undertakings to the balance sheet date.
Where subsidiaries follow differing accounting policies from those of the Group, those accounting policies have been adjusted to align with
those of the Group. Intercompany balances and transactions between Group companies are eliminated on consolidation, though foreign
exchange differences arising on intercompany balances between subsidiaries with differing functional currencies are not offset.
The results of subsidiaries acquired or incorporated in any year are included in the Income Statement and Statement of Cash Flows from the
effective date of acquisition while the results of subsidiaries disposed of or liquidated during the year are included in the Income Statement
and Statement of Cash Flows to the date at which control passes from the Group.
d) Joint Arrangements
Cairn is a partner (joint operator) in oil and gas exploration, development and production licences which are unincorporated joint
arrangements. All of the Group’s current interests in these arrangements are determined to be joint operations. A full list of oil and gas licence
interests can be found on pages 193 to 194.
Costs incurred relating to an interest in a joint operation other than costs relating to production are capitalised in accordance with the Group’s
accounting policies for oil and gas assets as appropriate (notes 2.2 and 2.3). All the Group’s intangible exploration/appraisal assets and
property, plant & equipment – development/producing assets relate to interests in joint operations.
Cairn’s working capital balances relating to joint operations are included in trade and other receivables (note 3.4) and trade and other
payables (note 3.6). Any share of finance income or costs generated or incurred by the joint operation is included within the appropriate
income statement account.
140
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 1 – Basis of Preparation continued
1.1 Significant Accounting Policies Continued
e) Foreign Currencies
These Financial Statements continue to be presented in US dollars (US$), the functional currency of the Parent.
In the Financial Statements of individual Group companies, Cairn translates foreign currency transactions into the functional currency at
the rate of exchange prevailing at the transaction date (or an approximation thereof where not materially different). Monetary assets and
liabilities denominated in foreign currency are translated into the functional currency at the rate of exchange prevailing at the balance sheet
date. Exchange differences arising are taken to the Income Statement except for those incurred on borrowings specifically allocable to
development projects, which are capitalised as part of the cost of the asset, though there were none in either the current or preceding year.
The Group maintains the Financial Statements of the Parent and subsidiary undertakings in their functional currency. Where applicable, the
Group translates subsidiary Financial Statements into the presentation currency, US$, using the closing rate method for assets and liabilities
which are translated at the rate of exchange prevailing at the balance sheet date and rates at the date of transactions for income statement
accounts. Cairn takes exchange differences arising on the translation of net assets of Group companies whose functional currency is
non-US$ directly to reserves.
Rates of exchange to US$1 were as follows:
GBP
NOK
Closing
2019
0.754
8.780
YTD
Average
2019
0.783
8.793
Closing
2018
0.784
8.641
YTD
Average
2018
0.749
8.133
f) Exceptional Items
Where items have a significant impact on profit or loss, occur infrequently and are not part of the Group’s normal operating cycle, such items
may be disclosed as exceptional items on the face of the Income Statement.
1.2 Going Concern
The Directors have considered the factors relevant to support a statement of going concern.
In assessing whether the going concern assumption is appropriate, the Board and Audit Committee considered the Group cash flow forecasts under
various scenarios, identifying risks and mitigants and ensuring the Group has sufficient funding to meet its current commitments as and when they
fall due for a period of at least 12 months from the date of signing these Financial Statements.
The Directors have a reasonable expectation that the Group will continue in operational existence for this 12-month period and have therefore used
the going concern basis in preparing the Financial Statements.
The Board and Audit Committee assessments of risk and mitigants to the Group’s operational existence beyond this 12-month period is included in
the Viability Statement on page 37.
1.3 Adoption of IFRS 16 ‘Leases’
Cairn has adopted IFRS 16 ‘Leases’ with effect from 1 January 2019. Cairn has chosen to apply IFRS 16 retrospectively with the cumulative effect of
initial application recognised at the date of adoption. In doing so Cairn has elected not to re-assess whether contracts contain a lease.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12
months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying
leased asset and a lease liability representing its obligation to make lease payments.
In assessing the impact of IFRS 16, Cairn identified the following assets where right-of-use assets and lease liabilities are recognised on adoption:
– Accounting for the FPSO on the UK Catcher producing asset; and
– Accounting for non-cancellable leases of the Group’s office premises in Edinburgh, London, Stavanger and Mexico City.
All other leases identified have either yet to commence on the date of adoption, are for periods of less than one year, have less than one year
remaining on the date of adoption or are for low value items which have no material impact on the Group’s Financial Statements.
In applying IFRS 16, Cairn has used the following practical expedients permitted by the standard:
– Accounting for leases with a remaining term of less than 12 months at 1 January 2019 as short-term leases; and
– The exclusion of initial direct costs for the measurement of the right-of-use assets at the date of adoption.
Cairn has also chosen to measure the right-of-use assets recognised at the amount equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments, immediately before the date of adoption for all right-of-use assets recognised. There is therefore no adjustment to
opening retained earnings.
Cairn Energy PLC Annual Report and Accounts 2019
141
F I N A N C I A L
S T A T E M E N T S
Section 1 – Basis of Preparation continued
1.3 Adoption of IFRS 16 ‘Leases’ Continued
Kraken FPSO
Under IFRS 16, the carrying amount of a right-of-use asset and lease liability for leases previously classified as finance leases is equal to the carrying
amount of the lease asset and lease liability immediately before the date of adoption. Therefore the adoption of IFRS 16 has no impact on the
right-of-use asset and lease liability previously recognised for the Kraken FPSO.
Catcher FPSO
Cairn has recognised a lease liability and a corresponding right-of-use asset of US$147.5m for the Catcher FPSO on adoption of IFRS 16. The Catcher
FPSO lease was previously classified as an operating lease under IAS 17.
The key estimates and assumptions applied in measuring the right-of-use asset and lease liability were as follows:
– The minimum lease commitment is equal to 75% of the contracted day rate with all payments in excess of the minimum being classified as
variable lease payments dependent upon performance;
– The lease term is equal to the current non-cancellable period of the lease with no reasonable plans to extend the lease contract beyond the initial
term;
– No exercise of the option to purchase at the end of the initial term; and
– The interest rate applied is equal to the Group’s incremental borrowing rate on the date of adoption rather than a rate implicit in the lease contract
which could not be readily determined.
The right-of-use asset is being amortised on a unit-of-production basis in accordance with the Group’s accounting policy.
Other Property, Plant & Equipment – Leasehold Property
The Group recognised lease liabilities and corresponding right-of-use assets of US$10.0m in relation to leasehold premises.
The key estimates and assumptions applied in measuring these right-of-use assets and lease liabilities were as follows:
– The lease term is equal to the current non-cancellable period of the lease with no reasonable plans to extend the lease contract beyond the initial
term for any of the Group’s office premises; and
– The interest rate applied is equal to the Group’s incremental borrowing rate on the date of adoption rather than a rate implicit in the lease contracts
where this could not be readily determined.
The assets will be amortised on a straight-line basis over the remaining life of the leases.
Adjustments Recognised on Adoption of IFRS 16: Reconciliation to 2018 Operating Lease Commitment
A reconciliation of operating lease commitments at 31 December 2018 to the opening lease liabilities on adoption of IFRS 16 is as follows:
Operating lease commitments
Attributable to:
Leases yet to commence
Short-term leases
Lease of low value items
Gross lease liability
Interest implicit in lease
Increase in opening lease liabilities
Right-of-use asset – tangible development/producing asset
Right-of-use assets – property, plant & equipment – other
Increase in opening right-of-use assets
Production
costs
US$m
171.6
–
–
–
171.6
(24.1)
147.5
147.5
–
147.5
Exploration/
Appraisal
assets
US$m
Development/
Producing
assets
US$m
Administrative
expenses
US$m
21.2
13.4
(20.7)
(0.5)
–
–
–
–
–
–
–
(9.5)
(3.9)
–
–
–
–
–
–
–
11.5
–
–
(0.3)
11.2
(1.2)
10.0
–
10.0
10.0
Total
US$m
217.7
(30.2)
(4.4)
(0.3)
182.8
(25.3)
157.5
147.5
10.0
157.5
The weighted average incremental borrowing rate used to discount opening lease liabilities is 5.75%.
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S T A T E M E N T S
Section 1 – Basis of Preparation continued
1.3 Adoption of IFRS 16 ‘Leases’ Continued
Impact on Financial Statements at 31 December 2019
As a result of adoption of IFRS 16, the following Income Statement line items have been impacted for the year ended 31 December 2019:
Impact on Income Statement line items:
Decrease in cost of sales
Increase in depletion and amortisation
Decrease in gross profit
Decrease in administrative expenses
Decrease in operating profit
Increase in finance costs
Decrease in profit before taxation from continuing operations
Decrease in profit after taxation from continuing operations
Decrease in profit for the year attributable to equity holders of the Parent
Impact on profit after taxation by segment:
UK & Norway
US$m
33.9
(36.7)
(2.8)
0.5
(2.3)
(7.7)
(10.0)
(10.0)
(10.0)
(10.0)
Both basic and diluted earnings per share decreased by 1.7 cents per share for the year ended 31 December 2019.
In the Cash Flow Statement, lease payments of US$36.2m, which would previously have been classified as operating cash outflows, are now
included in financing activities.
In the Group Balance Sheet at 31 December 2019, property, plant & equipment – development/producing assets have increased by US$110.9m,
other property, plant & equipment by US$7.0m and lease liabilities by US$128.8m as a result of adoption. The impact on assets and liabilities per
segment as disclosed in note 4.1 is as follows:
Increase in segment assets:
UK & Norway
Other Cairn Energy PLC Group
LATAM
Increase in segment liabilities:
UK & Norway
Other Cairn Energy PLC Group
LATAM
US$m
110.9
6.6
0.4
120.9
7.5
0.4
Cairn Energy PLC Annual Report and Accounts 2019
143
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S T A T E M E N T S
Section 2 – Oil and Gas Assets and Operations
This section contains analysis of the gross profit generated from the Group’s producing assets
in the UK North Sea and details of the Group’s capital expenditure on exploration/appraisal and
development/producing activities across the Group’s wider portfolio. Details and sensitivities
performed on the impairment tests on development/producing assets and goodwill can also
be found here.
Significant Accounting Judgements in This Section:
Impairment Testing of Oil and Gas Assets and Related Goodwill
At the year end, revised production profile estimates and additional reserve volumes booked have increased the fair value less cost of disposal of the
Kraken cash-generating unit significantly above its previously recorded net book value. As the increase in the production profile is an indicator that
the impairment charge recorded in 2018 may have reversed or decreased, impairment tests were performed and the charge has been reversed in
full after adjusting for the depletion charge that would have resulted from the increased carrying value of the asset.
Goodwill relating to the UK & Norway segment has been tested for impairment firstly on the goodwill allocated to the Capricorn Norge AS assets
held-for-sale (see section 6.2), with the remaining balance tested for impairment at the year end after recording the Kraken cash-generating unit
impairment reversal. The result of the impairment testing in the year is that goodwill has now been impaired in full.
Impairment Testing of UK Laverda Exploration/Appraisal Asset Prior to Transfer to Development/Producing Assets
Prior to transfer to development, the UK Laverda asset, a satellite field to the Catcher producing asset, was tested for impairment in accordance with
the Group’s accounting policy. While no impairment was identified, Cairn has not reversed impairments recorded in earlier years and have transferred
the net book value to development assets on approval of the field development plan.
On approving the field development plan, Cairn simultaneously completed a farm-down to align working interest shares among partners across the
Greater Catcher Area, receiving nominal consideration for the share of the Laverda asset surrendered. While the remaining carrying value of Laverda
is supported by headroom on the Catcher producing asset impairment test, there are no indications that the value of the Laverda exploration/
appraisal assets has itself increased significantly that would have allowed for a reversal of impairments recorded in earlier years.
Key Estimates and Assumptions in This Section:
Transfer of Senegal Costs to Property, Plant & Equipment – Development/Producing Assets and Impairment Testing
At 31 December 2019, Cairn has promoted a proportion of contingent resources relating to Senegal to reserves as they are now deemed to be
commercially mature under the Petroleum Resources Management System (“PRMS”) framework approved by the Society of Petroleum Engineers
as per the reserves table disclosed in the Annual Report on page 194.
The volumes promoted have been classified as reserves on the basis that they are now ‘justified for development’ following approval of the
development plan by the joint operator partners. In January 2020, FID approval was formally received from the Government of Senegal and reserves
will be reclassified as ‘available for development’ in 2020. Both ‘justified for development’ and ‘available for development’ are sub-classes of
commercial reserves defined under the PRMS.
Under Cairn’s accounting policy, costs are transferred from intangible exploration/appraisal assets to property, plant & equipment – development/
producing assets once commerciality has been confirmed and technical feasibility established through an approved development plan. With the
development plan approved by joint operator partners at the year end, costs of US$378.8m have been transferred from exploration/appraisal assets
into development/producing assets.
A formal impairment test was performed on Senegal exploration/appraisal asset prior to transfer to development assets at the year end, as
required under IFRS, but no impairment arose. Cairn’s impairment test assumes that full funding is in place to meet its net share of the development
expenditure through to project completion. At the date of this report the Company is well progressed in agreeing terms for an expanded senior
debt facility and is in discussions regarding additional sources of funding to support its Senegal development costs; however if these were to fail to
conclude and the Group could not fully fund its share of the expenditure through to completion then the value of its investment in the project and/or
its rights to participate in the project at its current equity levels may be affected which could trigger an impairment.
Estimation of Hydrocarbon Reserves and Long-Term Oil Price Assumption
Oil and gas reserve volumes and related production profiles are estimated based on Cairn’s internal process manual which follows industry best
practice. This represents Cairn’s best estimate of reserves as at the reporting date. Cairn’s Reserves and Resources Reporting Committee, which
provides oversight, advice and guidance while providing senior level review, reports to the Group’s Audit Committee before ultimately requesting
approval of annual reserve volumes by the Board. At the year end, the significantly improved production performance on the Kraken asset and more
regular well testing performed by the Operator, improving reservoir monitoring, have resulted in an upward revision to production profile estimates.
Forecast production volumes on satellite fields on both Catcher and Kraken were also promoted to reserves at the year end.
Third-party audits of Cairn’s reserves and resources are conducted annually.
A change in reserve volumes could impact depletion and decommissioning charges, impairment testing, release of deferred revenue and related
deferred tax assets and liabilities.
Cairn reduced its long-term oil price assumption from US$70 to US$65 per bbl which it believes reflects current market conditions. The Group’s
three-year short-term assumption remains linked to the forward curve.
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Section 2 – Oil and Gas Assets and Operations continued
Key Estimates and Assumptions in This Section Continued:
Impairment Testing of Intangible Exploration/Appraisal Assets and Property, Plant & Equipment – Development/Producing Assets
and Goodwill
Where it is identified that there is an indicator of impairment, or an indicator identified that a prior year impairment may have reversed or decreased,
on an intangible exploration/appraisal asset or a development/producing asset, an impairment test is conducted in accordance with the Group’s
accounting policies. The test compares either the carrying value of the asset or the carrying value of the cash-generating unit (“CGU”) containing the
asset, to the recoverable amount of that asset or CGU.
The recoverable amount of an asset represents its fair value less costs of disposal. This is based on either a verifiable third-party arm’s length
transaction from which a fair value can be obtained or, where there is no such transaction, the fair value less costs of disposal of an asset is calculated
using a discounted post-tax cash flow model over the field life of the asset. Cairn does not believe that the value in use of the asset would materially
exceed its fair value less cost of disposal.
The key assumptions used in the Group’s discounted cash flow models reflect past experience and take account of external factors. These
assumptions include:
– Short/medium-term oil price based on a three-month average forward curve for three years from the balance sheet date;
– Long-term oil price of US$65 per bbl (2018: US$70 per bbl) escalated at 2.0% (2018: 2.0%) per annum;
– Reserve estimates of discovered resource (2P and 2C) based on P50 reserve estimates;
– Production profiles based on Cairn’s internal estimates including assumptions on performance of assets;
– Cost profiles for the development and operating costs supplied by the Operator and escalated at 2.0% (2018: 2.0%) per annum; and
– Post-tax discount rates of 10% (2018: 10%).
Goodwill is allocated to the UK & Norway operating segment and tested for impairment by comparing the fair value less cost of disposal of all assets
in the segment against their combined carrying values, including the carrying value of goodwill itself.
Decommissioning Estimates
Provisions for decommissioning are based on the latest estimates provided by operators, subject to review by Cairn and adjusted where deemed
necessary. Costs provided to date are an estimate of the cost that would be incurred to remove and decommission facilities that existed at the
year end and to plug and abandon development wells drilled to that date. Costs are escalated at 2.0% per annum (2018: 2.0%) and discounted at a
risk-free rate of 2.0% (2018: 2.0%).
2.1 Gross Profit: Revenue and Cost of Sales
Accounting Policies
Revenue
Revenue from oil sales represents the Group’s share of sales, on a liftings basis, from its producing interests in the UK North Sea, at the point
in time where ownership of the oil has been passed to the buyer. This occurs when the customer takes delivery of a cargo of oil from the
FPSO as this is the point in time that the consideration due is unconditional as only the passage of time is required before payment is due.
Revenue is measured using the Brent (or estimated Brent) oil price plus or minus the applicable discount based on the quality of the oil.
Revenue from the sale of gas is recorded based on the volume of gas accepted each day by customers at the delivery point.
Revenue from royalties is calculated on production from fields in Mongolia.
Commodity price hedging
Cairn may hedge oil production for the Group’s assets in line with hedging policies approved by the Board. Where a hedging instrument
has been formally designated as a hedge for hedge accounting, changes in the intrinsic value of the hedged item and the time value of
the option are recognised within Other Comprehensive Income (where the hedge is effective) based on fair value and are reclassified
to the Income Statement when the hedged production itself affects profit or loss. Hedge effectiveness is assessed on a prospective
basis at commencement and throughout the life of the option. Any hedge ineffectiveness identified is immediately charged to the
Income Statement.
A change in the fair value of an option that is either not designated as a hedging instrument for hedge accounting or does not qualify for
hedge accounting is recognised in the Income Statement.
Cost of sales
Production costs include Cairn’s share of costs incurred by the joint operation in extracting oil and gas. Also included are marketing and
transportation costs and loss-of-production insurance costs payable over the year.
Adjustments for overlift (where liftings taken by Cairn exceed the Group’s working interest share), underlift (where liftings taken by Cairn are
less than the Group’s working interest share) and movements in inventory are included in cost of sales. Oil inventory is measured at market
value in accordance with established industry practice.
Variable lease charges represent lease payments made on leases over and above the fixed lease commitment. Variable lease costs are
charged directly to the Income Statement.
Cairn Energy PLC Annual Report and Accounts 2019
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Section 2 – Oil and Gas Assets and Operations continued
2.1 Gross Profit: Revenue and Cost of Sales Continued
Oil sales
Gas sales
Gain/(Loss) on hedge options
Release of deferred revenue (see note 3.7)
Revenue from oil and gas sales
Royalty income
Total revenue
Production costs
Oil inventory and underlift adjustment
Variable and operating lease charges
Cost of sales
Depletion and amortisation (see note 2.3)
Gross profit
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
501.6
2.6
10.9
17.2
532.3
1.1
533.4
(68.1)
20.6
(25.6)
(73.1)
(217.2)
243.1
393.2
2.5
(7.8)
21.2
409.1
1.2
410.3
(64.2)
(7.7)
(59.5)
(131.4)
(171.2)
107.7
Revenue
Cairn receives revenue from its producing assets in the UK North Sea, Kraken and Catcher. On Kraken, where only oil is sold, Cairn takes a full lifting of
crude on a scheduled basis to reflect the Group’s working interest, whereas on Catcher, Cairn receives its working interest percentage share of each
lifting of crude and the Group’s working interest share of gas sales. Payment terms are within 30 days.
Net sales volumes during the year averaged ~21,400 boepd (2018: ~16,000 boepd) for the two assets combined, realising an average sales price of
US$64.52/boe (2018: US$67.99/boe).
Commodity Price Hedging
During 2019, Cairn realised gains on hedge options of US$10.9m (2018: loss of US$7.8m) as the oil price fell below the floor on several hedge
contracts. Hedging gains and losses are recycled to the Income Statement from Other Comprehensive Income when the option matures.
Details on the Group’s hedging position at 31 December 2019 can be found in note 3.5.
Cost of Sales
Inventory of oil held at the year end is recorded at a market value of US$13.8m (2018: US$8.2m). Underlift adjustments on Kraken production volumes
were US$15.1m (2018: US$0.1m) at 31 December 2019. The total inventory and underlift increase in the year was US$20.6m (2018: decrease of
US$7.7m).
Variable lease costs on the Kraken FPSO of US$10.5m (2018: variable finance lease costs of US$22.7m) and on the Catcher FPSO of US$15.1m (2018:
operating lease charge of US$36.8m) are charged to the Income Statement. Details on leases can be found in note 3.3.
146
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Section 2 – Oil and Gas Assets and Operations continued
2.2 Intangible Exploration/Appraisal Assets
Accounting Policy
Cairn follows a successful efforts-based accounting policy for oil and gas assets.
Costs incurred prior to obtaining the legal rights to explore an area are expensed immediately to the Income Statement as pre-award costs.
Expenditure incurred on the acquisition of a licence interest is initially capitalised on a licence-by-licence basis. Costs are held, undepleted,
within intangible exploration/appraisal assets until such time as the exploration phase on the licence area is complete or commercial
reserves have been discovered and a field development plan approved.
Exploration expenditure incurred in the process of determining oil and gas exploration targets is capitalised initially within intangible
exploration/appraisal assets and subsequently allocated to drilling activities. Costs are recognised following a cost accumulation model
where any contingent future costs on recognition of an asset are recognised only when incurred. This includes where Cairn has entered into a
‘farm-in’ agreement to either acquire or part-dispose of an exploration interest.
A farm-in is an agreement in which a party agrees to acquire from one or more of the existing licencees an interest in an exploration licence,
for a consideration which may consist of the performance of a specified work obligation on behalf of the existing licencees. This obligation
may be subject to a monetary cap. Refund of full or partial costs incurred to date may also be included in a farm-in agreement. Where Cairn
has part-disposed of an exploration licence interest through a farm-in arrangement, a ‘farm-down’, the contingent consideration payable by
the third party on Cairn’s behalf is not recognised in the Financial Statements. The future economic benefit which Cairn will receive as a result
of the farm-down will be dependent upon future success of any exploration drilling.
Exploration/appraisal drilling costs are capitalised on a well-by-well basis until the success or otherwise of the well has been established.
The success or failure of each exploration/appraisal effort is judged on a well-by-well basis. Drilling costs are written off on completion of
a well unless the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial
and work to confirm the commercial viability of such hydrocarbons is intended to be carried out in the foreseeable future. Where results
of exploration drilling indicate the presence of hydrocarbons which are ultimately not considered commercially viable, all related costs are
written off to the Income Statement.
Following appraisal of successful exploration wells, if commercial reserves are established and technical feasibility for extraction
demonstrated and approved in a field development plan, then the related capitalised intangible exploration/appraisal costs are transferred
into a single field cost centre within property, plant & equipment – development/producing assets, after testing for impairment (see below).
Proceeds from the disposal or farm-down of part or all of an exploration/appraisal asset are credited initially to that interest with any excess
being credited to the Income Statement.
Impairment
Intangible exploration/appraisal assets are reviewed regularly for indicators of impairment and tested for impairment where such indicators
exist. An indicator that one of the Group’s assets may be impaired is most likely to be one of the following:
– There are no further plans to conduct exploration activities in the area;
– Exploration drilling in the area has failed to discover commercial reserve volumes;
– Changes in the oil price or other market conditions indicate that discoveries may no longer be commercial; or
– Development proposals for appraisal assets in the pre-development stage indicate that it is unlikely that the carrying value of the
exploration/appraisal asset will be recovered in full.
In such circumstances the intangible exploration/appraisal asset is allocated to any property, plant & equipment – development/producing
assets within the same CGU and tested for impairment. Any impairment arising is recognised in the Income Statement for the year. Where
there are no development assets within the CGU, the excess of the carrying amount of the exploration/appraisal asset over its recoverable
amount is charged immediately to the Income Statement.
Cairn Energy PLC Annual Report and Accounts 2019
147
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Section 2 – Oil and Gas Assets and Operations continued
2.2 Intangible Exploration/Appraisal Assets Continued
Cost
At 1 January 2018
Foreign exchange
Additions
Disposals
Transfer to development/producing assets
Unsuccessful exploration costs
Unsuccessful exploration costs – discontinued operations
At 31 December 2018
Foreign exchange
Additions
Unsuccessful exploration costs
Unsuccessful exploration costs – discontinued operations
Transfer to development/producing assets
Transfer to assets held-for-sale
Senegal
US$m
UK &
Norway
US$m
LATAM
US$m
East
Atlantic
US$m
434.5
–
28.5
–
–
-
–
463.0
–
58.9
–
–
(378.8)
–
210.2
(0.6)
102.2
(8.2)
(115.7)
(19.9)
(42.7)
125.3
(0.4)
37.3
(5.9)
(38.7)
(30.3)
(30.1)
13.1
–
19.6
–
–
-
–
32.7
–
108.3
(84.7)
–
–
–
24.3
–
(1.9)
–
–
14.4
-
36.8
–
19.5
(31.0)
–
–
–
Total
US$m
682.1
(0.6)
148.4
(8.2)
(115.7)
(5.5)
(42.7)
657.8
(0.4)
224.0
(121.6)
(38.7)
(409.1)
(30.1)
At 31 December 2019
143.1
57.2
56.3
25.3
281.9
Impairment
At 1 January 2018 and 31 December 2018
Unsuccessful exploration costs
Transfer to development/producing assets
At 31 December 2019
Net book value
At 31 December 2017
At 31 December 2018
At 31 December 2019
–
–
–
–
434.5
463.0
143.1
48.1
–
(12.1)
36.0
162.1
77.2
21.2
–
–
–
–
13.1
32.7
56.3
14.6
(14.6)
–
62.7
(14.6)
(12.1)
–
36.0
9.7
22.2
619.4
595.1
25.3
245.9
All additions to exploration/appraisal assets have been funded through cash and working capital.
Senegal
Additions in the year of US$58.9m were predominantly on pre-development activities as the joint operation partners worked towards submission of
the exploitation plan and FID approval.
At the year end costs relating to the Sangomar Phase 1 development area of US$378.8m were transferred to development/producing assets
following joint operator approval of the development plan. Formal Government of Senegal approval of the development plan was received early in
January 2020. Impairment tests were performed on the asset prior to transfer, with no impairment arising.
Remaining costs capitalised at the year end relate to costs incurred outside the current development area and include drilling costs associated with
the SNE North and FAN exploration and appraisal wells.
UK & Norway
During the year, four unsuccessful exploration wells were drilled in the UK & Norway. In Norway additions of US$25.1m relate to the drilling of the
operated PL758 Lynghaug and PL842 Godalen wells and the non-operated PL885 Presto well. In the UK additions of US$3.0m were incurred on the
operated P2312 Chimera well, with Cairn agreeing a farm-down prior to drilling reducing the Group’s capital exposure. Other exploration additions of
US$9.2m were incurred across the portfolio of licences in both countries. Additions relating to drilling in the year include US$7.7m of rig costs incurred
under short-term lease contracts.
US$44.6m charged to the Income Statement as unsuccessful costs in the year include the costs of the four wells drilled in 2019 which were all
unsuccessful and the write-off of costs on other licences where no further exploration activity is planned.
In July 2019, Cairn completed a farm-down on the UK Laverda licence, equalising the working interest shares of partners in the Catcher development
and allowing the proposed development of the Laverda and Catcher North satellite fields to proceed. Costs of US$18.2m, net of impairment
recorded in previous years, have been transferred to development/producing assets after testing for impairment (see Key Estimates and
Assumptions in this section).
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Section 2 – Oil and Gas Assets and Operations continued
2.2 Intangible Exploration/Appraisal Assets Continued
In December 2019, Cairn announced the proposed sale of its Norwegian subsidiary, Capricorn Norge AS, to Sval Energi AS. The deal completed in
February 2020. At 31 December 2019, the Group’s exploration assets in Norway were reclassified as assets held-for-sale (see note 6.2). Remaining
costs capitalised in the UK at 31 December 2019 of US$21.2m include US$18.8m relating to the 2018 Agar-Plantain discovery where Cairn is
assessing farm-down opportunities ahead of proceeding with the development of the asset.
Additions in 2018 of US$102.2m included US$25.9m incurred on pre-development costs in Nova prior to transfer into development/producing
assets. Well cost additions were US$58.2m as the Group completed exploration wells on PL1863 Agar-Plantain and P2184 Ekland in the UK North
Sea and on PL582 Tethys and PL790 Raudåsen in the Norwegian North Sea. Remaining additions of US$18.1m were incurred across remaining
licences in the portfolio. Unsuccessful exploration costs in 2018 included the costs of the Ekland, Tethys and Raudåsen wells which did not result in
the discovery of commercial hydrocarbons.
LATAM
Additions of US$108.3m, include US$70.3m in Mexico, where Cairn commenced a planned six-well exploration programme during the year,
US$30.5m in Nicaragua following a farm-in to four non-operated blocks and US$7.5m in Suriname.
Mexico
Additions of US$70.3m predominantly relate to Block 9, in the Gulf of Mexico, where US$61.6m was incurred as Cairn completed its first operated
wells in the country. The Alom-1 well was completed during the year while the Bitol-1 well was operating over the year end. Both wells were
ultimately declared unsuccessful and costs of US$54.2m were written off as unsuccessful during the year. Additions in the year in Mexico include
US$15.8m incurred under short-term lease contracts.
The carrying value of assets in Mexico at the year end of US$47.0m included US$31.1m of costs on Block 9 and US$11.4m on Block 7, where
exploration drilling is planned in 2020, with the remaining balance relating to Block 15.
Cairn has agreed farm-in and farm-down agreements with Eni, effectively creating a ‘swap’ of a 15% interest in Block 9 for a 15% non-operated
interest in neighbouring Block 10, containing the Saasken discovery. At the year end the agreements were subject to final completion of the signature
process of the revised Production Sharing Contracts to give effect to the change in the joint operators’ working interests and therefore are not
reflected in the Financial Statements.
Nicaragua
Additions in the year of US$30.5m relate to the farm-in to four non-operated blocks offshore Nicaragua. Cairn has subsequently decided to withdraw
from the licences and therefore all additions in the year were written off as unsuccessful exploration costs.
Suriname
Additions in the year of US$7.5m include US$3.8m of seismic acquisitions and all costs remain capitalised at the year end.
East Atlantic
East Atlantic additions of US$19.5m primarily relate to Côte d’Ivoire. In 2018, the credit to additions resulted from the release of remaining accruals of
US$15.4m in Western Sahara following the close out of licences, which offset spend across other assets. The release of accruals also resulted in the
reversal of prior year charges to the Income Statement through unsuccessful exploration costs.
Côte d’Ivoire
Cairn completed the farm-in to seven adjacent blocks offshore Côte d’Ivoire following an agreement with the operator Tullow, with total costs
incurred in the year of US$15.2m.
Mauritania
Costs capitalised at the year end of US$9.8m relate to Block 7. Additions in the year were minimal. Subsequent to the year end Cairn has exercised its
option to convert the licence option into a full exploration licence.
Ireland
Cairn has chosen to withdraw from its interests offshore Ireland and the remaining net costs of US$16.7m have been charged as unsuccessful,
reducing the net book value to nil at the year end.
Impairment Review
Impairment tests were conducted on assets that were reclassified from intangible exploration/appraisal assets to property, plant & equipment –
development/producing assets during the year. Refer to “Significant accounting judgements” and “key estimates and assumptions” in this section. for
full details.
At the year end, Cairn reviewed its remaining intangible exploration/appraisal assets for indicators of impairment. No indicators of impairment were
identified.
Cairn Energy PLC Annual Report and Accounts 2019
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Section 2 – Oil and Gas Assets and Operations continued
2.3 Property, Plant & Equipment – Development/Producing Assets
Accounting Policy
Costs
All costs incurred after the technical feasibility and commercial viability of producing hydrocarbons has been demonstrated and a
development plan approved are capitalised within development/producing assets on a field-by-field basis. Subsequent expenditure is
capitalised only where it either enhances the economic benefits of the development/producing asset or replaces part of the existing
development/producing asset. Any remaining costs associated with the part replaced are expensed.
Costs of borrowings relating to the ongoing construction of development/producing assets and facilities are capitalised during the
development phase of the project. Capitalisation ceases once the asset is ready to commence production.
Net proceeds from any disposal, part disposal or farm-down of development/producing assets are credited against the appropriate portion
of previously capitalised cost. A gain or loss on disposal of a development/producing asset is recognised in the Income Statement to the
extent that the net proceeds, measured at fair value, exceed or are less than the appropriate portion of the net capitalised costs.
Depletion and amortisation
Depletion is charged on a unit-of-production basis, based on proved and probable reserves on a field-by-field basis. Fields within a single
development area may be combined for depletion purposes. Where production commences prior to completion of the development, costs
to be depleted include the costs-to-complete of the facility required to extract the volume of reserves recorded. Amortisation charged on
right-of-use leased assets is also charged on a unit-of-production basis, based on proved and probable reserves.
Impairment
Development/producing assets are reviewed for indicators of impairment at the balance sheet date. Indicators of impairment for the Group’s
development assets include:
– Downward revisions of reserve estimates;
– Increases in cost estimates for development projects; or
– A decrease in the oil price or other negative changes in market conditions.
Impairment tests are carried out on each development/producing asset at the balance sheet date where an indicator of impairment is
identified. The test compares the carrying value of an asset to its recoverable amount based on the higher of its fair value less costs of
disposal or value in use. Where the fair value less costs of disposal supports the carrying value of the asset, no value-in-use calculation is
performed.
If it is not possible to calculate the fair value less costs of disposal of an individual asset, the fair value less costs of disposal is calculated for
the CGU containing the asset and tested against the carrying value of the assets and liabilities in the CGU for impairment. Where an asset can
be tested independently for impairment, this test is performed prior to the inclusion of the asset into a CGU for further impairment tests.
If the carrying amount of the asset or CGU exceeds its recoverable amount, an impairment charge is made.
Where there has been a charge for impairment in an earlier period that charge will be reversed in a later period where there has been a
change in circumstances to the extent that the recoverable amount is higher than the net book value at the time. In reversing impairment
losses, the carrying amount of the asset will be increased to the lower of its original carrying value or the carrying value that would have been
determined (net of depletion) had no impairment loss been recognised in prior years.
Decommissioning
At the end of the producing life of a field, costs are incurred in plugging and abandoning wells, removing subsea installations and
decommissioning production facilities. Cairn recognises the full discounted cost of decommissioning as an asset and liability when
the obligation to rectify environmental damage arises. The decommissioning asset is included within property, plant & equipment –
development/producing assets with the cost of the related installation. The liability is included within provisions.
Revisions to the estimated costs of decommissioning which alter the level of the provisions required are also reflected in adjustments to the
decommissioning asset. The amortisation of the asset is calculated on a unit-of-production basis based on proved and probable reserves.
The amortisation of the asset is included in the depletion charge in the Income Statement and the unwinding of discount of the provision is
included within finance costs.
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Cairn Energy PLC Annual Report and Accounts 2019
Section 2 – Oil and Gas Assets and Operations continued
2.3 Property, Plant & Equipment – Development/Producing Assets Continued
Cost
At 1 January 2018
Foreign exchange
Additions
Increase in decommissioning asset
Transfer from exploration/appraisal assets
Remeasurement of right-of-use leased asset
At 31 December 2018
Right-of-use leased asset – IFRS 16 opening balance adjustment (see note 1.3)
At 1 January 2019
Foreign exchange
Additions
Increase in decommissioning asset
Transfer from exploration/appraisal assets
Disposals
Transfer to assets held-for-sale (see note 6.2)
At 31 December 2019
Depletion, amortisation and impairment
At 1 January 2018
Depletion and amortisation charges
Impairment charge
At 31 December 2018
Depletion and amortisation charges
Reversal of impairment
At 31 December 2019
Net book value
At 31 December 2017
At 31 December 2018
At 31 December 2019
F I N A N C I A L
S T A T E M E N T S
UK &
Norway
right-of-use
leased
assets
US$m
177.4
–
–
–
–
(11.5)
UK &
Norway
US$m
1,050.2
(6.8)
51.2
5.3
115.7
–
Total
US$m
1,227.6
(6.8)
51.2
5.3
115.7
(11.5)
1,215.6
165.9
1,381.5
–
1,215.6
147.5
313.4
147.5
1,529.0
Senegal
US$m
–
–
–
–
–
–
–
–
–
–
–
–
378.8
–
–
(5.8)
66.5
15.3
18.2
(82.1)
(89.0)
–
–
2.9
–
–
–
(5.8)
66.5
18.2
397.0
(82.1)
(89.0)
378.8
1,138.7
316.3
1,833.8
–
–
–
–
–
–
–
–
–
17.6
153.0
166.3
336.9
160.7
(147.3)
350.3
3.5
18.2
–
21.7
56.5
–
78.2
21.1
171.2
166.3
358.6
217.2
(147.3)
428.5
1,032.6
878.7
173.9
144.2
1,206.5
1,022.9
378.8
788.4
238.1
1,405.3
All current year additions of US$66.5m were funded through cash and working capital and include US$3.8m of costs under short-term lease
contracts.
Nova exploration/appraisal costs were transferred to development assets during 2018, with a further US$13.6m of additions in 2018 incurred in
relation to the field. In 2019, additions were US$50.2m as development activity continued prior to the asset being transferred to assets held-for-sale
(see note 6.2).
Kraken producing asset additions of US$12.1m include the completion of the final sub surface drill centre, DC-4. 2018 additions of US$31.8m were
offset by a US$23.0m reversal of accruals following the successful renegotiation of the development drilling rig contract. Remaining additions of
US$4.2m (2018: US$28.8m) were incurred on the Catcher producing asset.
The increase in the decommissioning asset in the current year of US$18.2m primarily relates to a change in estimates for Kraken and Nova. The 2018
increase was due to a revision to the Catcher decommissioning cost estimate.
Disposals in the year relate to the sale of a 10% working interest in the Nova asset. See note 6.1.
Combined depletion and amortisation charges for the year of US$217.2m (2018: US$171.2m) were charged to the Income Statement based on
production during the year and total reserves over the life of the asset.
Cairn Energy PLC Annual Report and Accounts 2019
151
F I N A N C I A L
S T A T E M E N T S
Section 2 – Oil and Gas Assets and Operations continued
2.3 Property, Plant & Equipment – Development/Producing Assets Continued
Leased Assets
At 1 January 2019, US$147.5m, the net present value of future fixed lease payments was recorded on the Balance Sheet for the Catcher FPSO, as a
right-of-use producing asset following adoption of IFRS 16. There were no changes to the Kraken FPSO right-of-use asset on adoption.
In the second half of 2018, the Kraken FPSO lease agreement was amended resulting in a reduction of the lease liability and right-of-use asset by
US$11.5m – see note 3.3. There were no such revisions to either the Catcher or Kraken lease agreements during 2019.
Impairment Review
At 31 December 2018, impairment tests were conducted on the Group’s UK & Norway development/producing assets, resulting in an impairment
charge of US$166.3m on the UK Kraken producing asset. No impairment arose on either Catcher or Nova. The Kraken impairment followed a
reserves downgrade arising from poor performance of the asset from inception to the previous balance sheet date.
During 2019, production performance on Kraken has improved significantly and in addition the Operator has conducted more regular well testing
to improve reservoir monitoring. Consequently Cairn have revised production profile estimates upward to reflect this improvement while also
incorporating new volumes associated with the Worcester satellite field to be developed in 2020. The changes to the production profile resulting
from improved performance is an indicator that the impairment charge recorded in 2018 may no longer exist or may have decreased. The resultant
impairment test, incorporating the revised fair value of the Kraken cash-generating unit, indicated that a full reversal of the 2018 impairment charge
should be recorded, despite the reduction to the Group’s long-term oil price assumption. The reversal is capped to US$147.3m, being the original
impairment adjusted for the depletion that would have been charged in 2019 had no impairment been recorded.
Sensitivity analysis on the Group’s impairment tests can be found in note 2.7.
2.4 Provisions – Decommissioning
Exploration well
abandonment
US$m
Development/
Producing
assets
US$m
At 1 January 2018
Foreign exchange
Unwinding of discount
(Released)/Provided in the year
At 31 December 2018
Foreign exchange
Unwinding of discount (note 4.6)
Provided in the year
Released on disposal (note 6.1)
Transferred to liabilities held-for-sale (see note 6.2)
At 31 December 2019
4.2
(0.2)
–
(2.7)
1.3
0.1
–
–
–
–
1.4
Total
US$m
121.1
(6.9)
2.3
2.6
119.1
5.8
2.6
18.2
(1.8)
(2.7)
116.9
(6.7)
2.3
5.3
117.8
5.7
2.6
18.2
(1.8)
(2.7)
139.8
141.2
The decommissioning provisions at 31 December 2019 represent the present value of decommissioning costs related to the Kraken and Catcher
development/producing assets. The provisions are based on operator cost estimates, subject to internal review and amendment where considered
necessary, and are calculated using assumptions based on existing technology and the current economic environment, with a discount rate of 2.0%
per annum (2018: 2.0%). The reasonableness of these assumptions is reviewed at each reporting date to take into account any material changes
required.
A provision of US$4.5m was introduced in 2019 for development activities undertaken on Nova, which has been partially released through disposal
with the balance transferred to liabilities held-for-sale. Further provisions during the year relate to revised decommissioning estimates for Kraken
including the incorporation of provision for work undertaken during the year.
During 2018, the decommissioning estimate for Catcher increased by US$5.3m. The Kraken decommissioning estimate remained unchanged.
The decommissioning provisions represent management’s best estimate of the obligation arising based on work undertaken at the balance sheet
date. Actual decommissioning costs will depend upon the prevailing market conditions for the work required at the relevant time.
The decommissioning of the Group’s development/producing assets is forecast to occur between 2026 and 2043.
152
Cairn Energy PLC Annual Report and Accounts 2019
Section 2 – Oil and Gas Assets and Operations continued
2.5 Capital Commitments
Oil and gas expenditure:
Intangible exploration/appraisal assets
Property, plant & equipment – development/producing assets
Contracted for
F I N A N C I A L
S T A T E M E N T S
At
31 December
2019
US$m
At
31 December
2018
US$m
96.7
460.0
556.7
146.1
80.1
226.2
Capital commitments represent Cairn’s share of obligations in relation to its interests in joint operations. These commitments include Cairn’s share of
the capital commitments of the joint operations themselves.
The capital commitments for intangible exploration/appraisal assets include US$40.4m for operations in the UK. The remaining US$56.3m includes
US$37.9m of commitments in LATAM, predominantly Mexico.
The capital commitments for property, plant & equipment – development/producing assets relate principally to Senegal.
As at 31 December 2019, Cairn had the following commitments relating to short-term leases and leases yet to commence. These amounts are also
included in the total of capital commitments shown above.
Lease commitments at 31 December 2019
2.6 Intangible Assets – Goodwill
Exploration/
Appraisal
assets
US$m
Development/
Producing
assets
US$m
9.5
10.6
Total
US$m
20.1
Accounting Policy
Cairn allocates the purchase consideration on the acquisition of a subsidiary to the assets and liabilities acquired on the basis of fair value
at the date of acquisition. Any excess of the cost of acquisition over the fair value of the assets and liabilities is recognised as goodwill. Any
goodwill arising is recognised as an asset and is subject to annual review for impairment. Goodwill is written off where circumstances indicate
that the recoverable amount of the underlying CGU including the asset may no longer support the carrying value of goodwill. Any such
impairment loss arising is recognised in the Income Statement for the year. Impairment losses relating to goodwill cannot be reversed in
future years.
In testing for impairment, goodwill arising on business combinations is allocated from the date of acquisition to the group of CGUs
representing the lowest level at which it will be monitored. Cairn’s policy is to monitor goodwill at operating segment level. Currently, no
operating segments containing goodwill are combined into segments for reporting.
The recoverable amount of a CGU, or group of CGUs, within the segment is based on its fair value less costs of disposal, using estimated
cash flow projections over the licence period of the exploration assets risk-weighted for future exploration success. The key assumptions
are sensitive to market fluctuations and the success of future exploration drilling programmes. The most likely factor which will result in a
material change to the recoverable amount of the CGU is the result of future exploration drilling, which will determine the licence area’s future
economic potential.
Cairn Energy PLC Annual Report and Accounts 2019
153
F I N A N C I A L
S T A T E M E N T S
Section 2 – Oil and Gas Assets and Operations continued
2.6 Intangible Assets – Goodwill Continued
Cost
At 1 January 2018
Foreign exchange
At 31 December 2018
Foreign exchange
Transferred to assets held-for-sale (see note 6.2)
At 31 December 2019
Impairment
At 1 January 2018
Foreign exchange
At 31 December 2018
Foreign exchange
Transferred to assets held-for-sale (see note 6.2)
Impairment charge
At 31 December 2019
Net book value
At 31 December 2017
At 31 December 2018
At 31 December 2019
UK &
Norway
US$m
388.9
(4.3)
384.6
(1.4)
(82.1)
301.1
260.7
(1.9)
258.8
(0.6)
(36.1)
79.0
Total
US$m
388.9
(4.3)
384.6
(1.4)
(82.1)
301.1
260.7
(1.9)
258.8
(0.6)
(36.1)
79.0
301.1
301.1
128.2
125.8
–
128.2
125.8
–
Goodwill, net of impairment, allocated to Capricorn Norge AS has been transferred to assets held-for-sale and tested for impairment as part of the
disposal group. The subsequent impairment charged is detailed in note 6.2 and recorded in Discontinued Operations.
The remaining goodwill was tested for impairment at the year end. With the Group’s reduced long-term oil price assumption and the lack of exploration
success in the year, and the impairment reversal recorded on the Kraken development asset, the fair value of assets within the UK & Norway operating
segment (including assets and liabilities held-for-sale which are recorded at fair value following the impairment of assets held-for-sale as per note 6.2)
can no longer support the carrying value of goodwill. An impairment charge of US$79.0m has been recorded in the year through continuing operations.
2.7 Impairment Testing Sensitivity Analysis
UK & Norway
At 31 December 2019, impairment tests were conducted on the Group’s development/producing assets.
The recoverable amount for all assets is based on fair value less costs of disposal estimated using discounted cash flow modelling. The key
assumptions used in determining the fair value are often subjective, such as the future long-term oil price assumption and estimates of recoverable
hydrocarbon reserves. In 2018, Cairn downgraded Kraken reserves estimates on the back of disappointing performance of the asset and facilities
reducing future production estimates, resulting in an impairment charge. 2019 has seen much improved performance on Kraken, which together with
more regular well testing, has led to an upward revision of production profile estimates, indicating a possible reversal or decrease of impairment, and
the subsequent impairment test results in the 2018 impairment being reversed in full in the 2019 profit for the year, even though the Group’s long-
term price assumption has reduced to US$65/bbl.
Cairn has run sensitivities on its long-term oil price assumption of US$65/bbl, using alternate long-term price assumptions of US$60/bbl, US$55/
bbl and US$50/bbl. These are considered to be reasonably possible changes for the purposes of sensitivity analysis. The impact on the carrying
value of development/producing assets is shown below.
Reduction in long-term oil price assumption to:
US$60/bbl
US$m
US$55/bbl
US$m
US$50/bbl
US$m
Reduction in carrying value of development/producing assets
36.0
95.1
213.6
The Group’s proved and probable and contingent reserve estimates are based on P50 probabilities. P10 and P90 estimates are also produced but
would not provide a reasonable estimate to be used in calculating the fair value of the Group’s assets.
The reserve estimates are incorporated into production profiles which include assumptions on the performance of the asset. Cairn’s current
assumptions imply a maximum uptime for producing assets of 85%-90%. Given the improvement and stability of the performance of the assets
over 2019, Cairn does not believe reducing this assumption would provide a reasonable estimate of fair value at the year end.
154
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities
This section provides analysis of the movements in the Group’s short- and long-term liabilities
including the Reserve-Based Lending facility, which was fully repaid in the year, and the Group’s
lease liabilities including those recognised on adoption of IFRS 16. Details of the Group’s hedging
programme, showing volumes hedged at the year end, can also be found.
Significant Accounting Judgements in This Section:
Lease Classification of Kraken and Catcher FPSO Lease Agreements
The new accounting standard, IFRS 16 ‘Leases’, was effective for Cairn’s financial year beginning 1 January 2019 and resulted in the Catcher FPSO
leased asset being recognised on the Balance Sheet as a right-of-use asset. Further details are provided in note 1.3.
Prior to IFRS 16 adoption, Cairn assessed whether leases for the Group’s producing asset FPSOs should be classified as operating or finance leases.
Cairn concluded that the lease agreement for the Kraken FPSO, where it is considered reasonably certain that the FPSO will be purchased by
the joint operation towards the end of the initial term, should be classified as a finance lease. By contrast, the Catcher FPSO, with a shorter initial
lease term and with no current expectation that the joint operation shall purchase the FPSO at the end of that lease term, was determined to be an
operating lease, with substantially all risks and rewards of ownership remaining with the lessor.
As a result of this judgement, the Catcher lease right-of-use asset and liability is measured at the date of adoption of IFRS 16 on 1 January 2019, using
interest rates applicable at that date, rather than on commencement of the lease itself, in June 2017. There is no change to the measurement of the
Kraken right-of-use lease asset and liability.
Key Estimates and Assumptions in This Section:
Measurement of Catcher FPSO Lease Liability and Right-Of-Use Asset
The key assumptions used in the calculation of the Catcher FPSO lease asset and liability can be found in note 1.3.
3.1 Cash and Cash Equivalents
Cash at bank
Money market funds
At
31 December
2019
US$m
At
31 December
2018
US$m
7.0
139.5
146.5
9.1
57.2
66.3
Closing cash and cash equivalents disclosed in the Cash Flow Statement of US$153.7m include cash and cash equivalents shown above together
with US$7.2m of cash balances held by Capricorn Norge AS included in assets held-for-sale (see note 6.2).
Cash and cash equivalents earn interest at floating rates. Short-term investments are made for varying periods ranging from instant access to
unlimited, but generally not more than three months depending on the cash requirements of the Group.
At 31 December 2018 and 2019 Cairn has invested surplus funds into money market funds.
Cairn limits the placing of funds and other investments to banks or financial institutions that have ratings of A- or above from at least two of Moody’s,
Standard & Poor’s or Fitch, unless a sovereign guarantee is available from a AAA- rated government. The counterparty limits vary between
US$50.0m and US$200.0m depending on the ratings of the counterparty. No investments are placed with any counterparty with a five-year credit
default swap exceeding 250 bps. Investments in money market liquidity funds are only made with AAA rated liquidity funds and the maximum
holding in any single fund is 20% of total investments.
Cairn Energy PLC Annual Report and Accounts 2019
155
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.2 Loans and Borrowings
Cairn has two loan facilities at the year end: the Reserve-Based Lending (“RBL”) facility available to several Group companies and the Norwegian
Exploration Finance Facility (“EFF”).
Reconciliation of opening and closing liabilities to cash flow movements:
Opening liabilities
Loan advances disclosed in the Cash Flow Statement:
RBL advances in the year
EFF advances in the year
Loan repayments disclosed in the Cash Flow Statement:
RBL repayments in the year
EFF repayments in the year
Other movements in Cash Flow Statement:
Debt arrangement fees paid
Non-cash movements:
Amortisation of debt arrangement fees
Foreign exchange
Transfer of unamortised arrangement fees to prepayments
Transferred to liabilities held-for-sale (see note 6.2)
Closing liabilities
Amounts due less than one year:
EFF
Amounts due greater than one year:
RBL facility
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
101.7
20.0
27.4
47.4
(105.0)
(29.0)
(134.0)
29.8
85.0
32.4
117.4
–
(31.2)
(31.2)
–
(10.4)
1.9
(1.6)
8.5
(23.9)
–
–
–
–
–
(3.9)
–
–
101.7
26.2
75.5
101.7
Debt arrangement fees of US$10.4m paid in 2018 (2019: US$nil) relate to both the RBL (US$9.5m) and the EFF (US$0.9m). Foreign exchange
differences also relate to both facilities. Unamortised fees relating to the RBL at 31 December 2019 have been reclassified as prepayments pending
further drawdowns on the facility that are currently forecast.
Details of guarantees granted under these facilities can be found in note 7.3.
RBL
The Group’s RBL facility was undrawn at 31 December 2019 with the opening balance of cash drawings of US$85.0m, advanced during 2018, fully
repaid in the year.
Cairn signed an extension to its existing RBL facility with a syndicate of international banks, effective on 20 December 2018. Interest on outstanding
debt is charged at the appropriate LIBOR for the currency drawn plus an applicable margin. The facility remains subject to biannual redeterminations,
has a market standard suite of covenants and is cross-guaranteed by all Group companies party to the facility. Debt is repayable in line with the
amortisation of bank commitments over the period from 1 July 2022 to the extended final maturity date of 31 December 2025.
Under IFRS 9, the extension of the facility to December 2025 constituted substantially different terms from the original and as such the financial
liability relating to the original facility was extinguished on the date of the extension and replaced with a new liability based on the revised terms.
This resulted in the acceleration of the amortisation of borrowing costs relating to the previous facility, resulting in a charge of US$15.1m to the Income
Statement in 2018.
Total commitments remain unchanged at US$575.0m under the revised facility, but an accordion feature permits additional future commitments
of up to US$425.0m. The maximum available drawdown at 31 December 2019 was US$317.0m. The facility can also be used for general corporate
purposes and may also be used to issue letters of credit and performance guarantees for the Group of up to US$250.0m.
EFF
As at 31 December 2019, US$24.4m (NOK 214.2m) (2018: US$27.1m (NOK 233.8m)) was drawn under the Norwegian EFF, before offsetting capitalised
fees. The liability outstanding at 31 December 2019 has been reclassified as a liability held-for-sale (see note 6.2).
During the year, US$27.4m was drawn under the facility and US$29.0m repaid following receipt of the tax refund.
156
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.3 Lease Liabilities
Accounting Policy
Lease liabilities are measured and recorded on commencement of the asset being brought in to use. Measurement is based on the lower
of fair value of the asset or the net present value of fixed lease commitments under the contract. Lease payments made in excess of the
fixed instalments are charged direct to the Income Statement as variable lease costs.
Lease payments are allocated between capital and interest based on the rate implicit in the lease agreement. Where this is not practical
to determine, the Group’s incremental borrowing rate is used.
Where there are changes subsequent to initial recognition, adjustments are made to both the lease liability and the capitalised asset.
The interest rate used where the rate implicit in the lease is not determinable is updated at the date of the remeasurement.
No lease liability is recognised for leases where the period over which the right-of-use of an asset is obtained is forecast to be less than
12 months. Leases for low value items are not recorded as a liability but are charged as appropriate when the benefit is obtained.
Reconciliation of opening and closing liabilities to cash flow movements:
Opening finance lease liability brought forward
IFRS 16 opening balance adjustment (note 1.3)
Revised opening lease liabilities
Leases commenced and revisions to leases in year:
Revisions to lease liabilities
Lease payments disclosed in the Cash Flow Statement as financing cash flows:
Total lease payments
Variable lease payments (note 2.1)
Other movements in the Cash Flow Statement:
Reimbursements received from lessors
Non-Cash Movements:
Reimbursements due transferred (from)/to other receivables
Lease interest charges
Foreign exchange
Transferred to liabilities held-for-sale (note 6.2)
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
165.4
157.5
322.9
0.4
0.4
(85.1)
25.6
(59.5)
7.0
(3.0)
15.3
0.4
(0.6)
12.1
169.7
–
169.7
(11.5)
(11.5)
(30.1)
22.7
(7.4)
4.7
2.1
7.8
–
–
9.9
Closing liabilities
282.9
165.4
Amounts due less than one year:
Tangible development/producing assets – right-of-use assets
Other property, plant & equipment – right-of-use assets
Amounts due greater than one year:
Tangible development/producing assets – right-of-use assets
Other property, plant & equipment – right-of-use assets
Total lease liabilities
Comparative information has not been restated on adoption of IFRS 16.
41.0
2.1
43.1
234.0
5.8
239.8
282.9
18.5
–
18.5
146.9
–
146.9
165.4
Variable lease costs are disclosed in note 2.1. Amortisation charges on right-of-use assets relating to property, plant & equipment – development/
producing assets are disclosed in note 2.3. Depreciation charges on other right-of-use assets are disclosed in note 4.1. Costs relating to short-term
leases and leases of low value assets relating to exploration and development activities are disclosed in notes 2.2 and 2.3 where material. There are
no further material short-term leases or charges for leases of low value assets. Maturity analysis for lease liability is disclosed in note 3.8. The carrying
value of right-of-use development/producing assets at 31 December 2019 is US$238.1m (see note 2.3) and the carrying value of right-of-use assets
included in other property, plant & equipment is US$7.0m.
Cairn Energy PLC Annual Report and Accounts 2019
157
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S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.4 Trade and Other Receivables
Accounting Policy
Trade receivables represent amounts due from the sale of oil and gas from the Group’s UK producing assets and royalty payments
receivable from producing fields in Mongolia. Other receivables primarily represent recharges to joint operations. Joint operation receivables
relate to Cairn’s interest in its oil and gas joint arrangements, including Cairn’s participating interest share of the receivables of the joint
arrangements themselves.
Trade receivables, other receivables and joint operation receivables, which are financial assets, are measured initially at fair value and
subsequently recorded at amortised cost.
A loss allowance is recognised, where material, for expected credit losses on all financial assets held at the balance sheet date. Expected
credit losses are the difference between the contractual cash flows due to Cairn, and the discounted actual cash flows that are expected
to be received. Where there has been no significant increase in credit risk since initial recognition, the loss allowance is equal to 12-month
expected credit losses. Where the increase in credit risk is considered significant, lifetime credit losses are provided. For trade receivables a
lifetime credit loss is recognised on initial recognition where material.
Prepayments, which are not financial assets, are measured at historic cost.
Trade receivables
Other receivables
Accrued income – underlift (see note 2.1)
Prepayments
Joint operation receivables
At
31 December
2019
US$m
At
31 December
2018
US$m
22.3
9.0
15.1
14.0
50.8
111.2
39.0
12.7
0.1
4.4
35.0
91.2
Trade receivables are measured at amortised cost. Revenue is recognised at the point in time where title passes to the customer and payment
becomes unconditional.
Following the repayment of borrowings under the RBL facility in 2019, facility fees of US$8.5m have been transferred to prepayments at
31 December 2019, to be amortised over future forecast drawdowns. See note 3.2.
Where material Cairn has assessed the recoverability of trade and other receivables and no further loss allowance is recognised for expected credit
losses on all financial assets held at the balance sheet date.
Reconciliation of opening and closing receivables to operating cash flow movements:
Opening trade and other receivables
Closing trade and other receivables
Increase in trade and other receivables
Movements in joint operation receivables relating to investing activities
Movements in prepayments and other receivables relating to other non-operating activities
Other receivables transferred to assets held-for-sale (see note 6.2)
Foreign exchange
Trade and other receivables movement recorded in operating cash flows
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
91.2
(111.2)
(20.0)
17.7
10.5
(7.3)
1.3
2.2
83.1
(91.2)
(8.1)
(20.8)
(12.4)
–
(0.3)
(41.6)
The movements in joint operation receivables relating to investing activities relate to the Group’s share of the receivables of joint operations in respect
of exploration, appraisal and development activities. Cash flow movements during the year include amounts for Norway operations. Movements
relating to production activities are included in amounts through operating cash flows.
Other non-operating cash flow movements for 2019 primarily relate to the reclassification of prepaid facility fees.
In 2018, other non-operating cash flow movements primarily related to the release of prepaid facility fees. The increase in trade and other receivables
movements through operating cash flows primarily reflects the increase in trade receivables held as at 31 December 2018.
158
Cairn Energy PLC Annual Report and Accounts 2019
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
F I N A N C I A L
S T A T E M E N T S
3.5 Derivative Financial Instruments
Non-current assets
Financial assets – hedge options maturing after one year
Current assets
Financial assets – hedge options maturing within one year
Current liabilities
Financial liabilities – hedge options maturing within one year
At
31 December
2019
US$m
At
31 December
2018
US$m
–
4.1
(1.6)
2.5
7.7
36.7
–
44.4
Cairn currently has an active commodity price hedging programme in place to protect debt capacity and support committed capital programmes.
Mark-to-market gains and losses on oil price hedge options are recorded as financial assets and financial liabilities as appropriate at 31 December
2019.
At 31 December 2019 the Group had hedged ~2.8m barrels of 2020 forecast Kraken and Catcher oil production, using collar and swap structures.
~1.9m barrels of production have been hedged through collars, with a weighted average floor and ceiling price of US$62.09/bbl and US$74.89/bbl
respectively (all prices quoted relate to dated Brent). ~0.9m barrels of production have been hedged through swap options with a weighted average
strike price of US$61.85/bbl. At 31 December 2019, no production forecast beyond 31 December 2020 had been hedged.
The collars and swaps have been designated as hedges for hedge accounting. Hedge effectiveness is assessed at commencement of the option
and prospectively thereafter. At the year end, the closing Brent oil price was US$66.00/bbl (2018: US$50.70/bbl). Fair value movements on the cost
of the option are recorded in the Statement of Comprehensive Income in the year, with fair value losses of US$40.6m being offset by fair value gains
on options that matured in the year of US$10.9m. The gain on matured options has been recycled to the Income Statement. In 2018 fair value gains of
US$43.9m were offset by a loss of US$7.8m on options that matured in the year. The loss on matured options was recycled to the Income Statement.
Hedge options outstanding at the year end
Volume of oil production hedged
Weighted average floor price of options
Weighted average ceiling price of options
Weighted average strike price of swaps
Maturity dates
Effects of hedge accounting on financial position and profit/(loss) for the year
Financial assets
Financial liabilities
Accruals and other payables – accrued option costs
Hedging (loss)/gain recorded in Other Comprehensive Income
Hedging (gain)/loss recycled to Income Statement
Hedging gain/(loss) recorded in Income Statement against revenue (note 2.1)
At
31 December
2019
At
31 December
2018
2.8mmbbls
US$62.09
US$74.89
US$61.85
January 2020
– December
2020
3.2mmbbls
US$67.14
US$83.81
–
January 2019
– March
2020
2019
US$m
4.1
(1.6)
(2.1)
(29.7)
(10.9)
10.9
2018
US$m
44.4
–
(3.4)
36.1
7.8
(7.8)
Sensitivity Analysis
Sensitivity analysis has been performed on equity movements that would arise from changes in the year end oil price forward curve and the resulting
impact on the fair value of open hedge options at the year end. The sensitivity analysis considers only the impact on line items directly relating to
hedge accounting (being financial assets and liabilities and fair value gains through Other Comprehensive Income) and not the impact of the change
of other balance sheet items where valuation is based on the year end oil price, such as inventory.
Increase/(decrease) in equity
Change in year end oil price forward curve
Decrease of 10%
Decrease of 20%
Increase of 10%
Increase of 20%
At
31 December
2019
US$m
At
31 December
2018
US$m
12.4
26.6
(12.6)
(25.5)
15.3
31.5
(13.5)
(25.4)
Cairn Energy PLC Annual Report and Accounts 2019
159
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S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.6 Trade and Other Payables
Accounting Policy
Trade and other payables are non-interest bearing and are measured at fair value initially then amortised cost subsequently.
Joint operation payables are payables that relate to Cairn’s interest in its oil and gas joint arrangements, including Cairn’s participating interest
share of the trade and other payables of the joint arrangements themselves. Where Cairn is operator of the joint operation, joint operation
payables also include amounts that Cairn will settle to third parties on behalf of joint operation partners. The amount to be recovered from
partners for their share of such liabilities are included within joint operation receivables.
Trade payables
Other taxation and social security
Accruals and other payables
Joint operation payables
At
31 December
2019
US$m
At
31 December
2018
US$m
0.9
0.9
25.4
107.4
134.6
9.7
1.4
30.9
61.1
103.1
Joint operation payables include US$71.4m (2018: US$16.4m), US$5.5m (2018: US$24.3m) and US$30.5m (2018: US$20.4m) relating to exploration/
appraisal assets, development/producing assets and production costs respectively.
The increase in payables for exploration/appraisal assets in 2019 includes US$49.2m to be settled for the Mexican drilling campaign. Joint
operation payables on development/producing assets at 31 December 2019 continue to reduce for Kraken and Catcher. Last year’s closing balance
included US$9.8m relating to Nova, which was transferred to held-for-sale in 2019. Production costs have increased as oil production has improved
during 2019.
Reconciliation of opening and closing payables to operating cash flow movements:
Opening trade and other payables
Closing trade and other payables
Increase/(Decrease) in trade and other payables
Movement in joint operation payables relating to investing activities
Movement in trade payables relating to investing activities
Movements in accruals and other payables relating to non-operating activities
Trade and other payables transferred to liabilities held-for-sale (see note 6.2)
Foreign exchange
Trade and other payables movement recorded in operating cash flows
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
(103.1)
134.6
31.5
(40.4)
1.1
3.4
10.4
(1.1)
4.9
(197.8)
103.1
(94.7)
111.7
4.3
(0.9)
–
2.3
22.7
Movements above for investing activities relate to exploration, appraisal and development activities through the Group’s joint operations. Movements
relating to production activities are included in amounts through operating cash flows.
The movement in trade and other payables recorded in the Cash Flow Statement through operating cash flows primarily arise on production
activities in the UK North Sea.
160
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.7 Deferred Revenue
Accounting Policy
Deferred revenue, arising from a streaming agreement, is treated as cash received in advance of future oil sales. Revenue is recorded at the
fair value of the consideration received and is amortised to the Income Statement on a unit-of-production basis, based on expected future
volumes to which the stream provider is entitled.
FlowStream deferred revenue
At 1 January
Released during the year
At 31 December
Amounts expected to be released within one year
Amounts expected to be released after one year
Note
2.1
2019
US$m
52.8
(17.2)
35.6
16.9
18.7
35.6
2018
US$m
74.0
(21.2)
52.8
22.0
30.8
52.8
Deferred revenue relates to the stream agreement with FlowStream entered into in 2017.
3.8 Financial Instruments
Set out below is the comparison by category of carrying amounts and fair values of all the Group’s financial instruments that are carried in the
Financial Statements.
Financial Assets
Carrying amount and fair value
Financial assets at amortised cost
Cash and cash equivalents
Trade receivables
Other receivables
Joint operation receivables
Accrued underlift
Financial assets at fair value through profit or loss
Listed equity shares
Derivative financial instruments
Financial assets – hedge options
At
31 December
2019
US$m
At
31 December
2018
US$m
146.5
22.3
9.0
50.8
15.1
5.1
4.1
252.9
66.3
39.0
12.7
35.0
0.1
6.9
44.4
204.4
Due to the short-term nature of financial assets held at amortised cost, their carrying amount is considered to be the same as their fair value.
There are no material impairments of financial assets held on the balance sheet at either 31 December 2018 or 2019.
All the Group’s financial assets are expected to mature within one year. (2018: all less than one year, other than hedge options which extended
into 2020).
Cairn Energy PLC Annual Report and Accounts 2019
161
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.8 Financial Instruments Continued
Financial Liabilities
Carrying amount and fair value
Financial liabilities at amortised cost
Trade payables
Joint operation payables
Accruals and other payables
Loans and borrowings
Lease liabilities
Derivative financial instruments
Financial liabilities – hedge options
At
31 December
2019
US$m
At
31 December
2018
US$m
0.9
107.4
25.4
–
282.9
1.6
418.2
9.7
61.1
30.9
101.7
–
–
203.4
The fair value of financial assets and liabilities, other than the listed equity shares and hedge options, has been calculated by discounting the
expected future cash flows at prevailing interest rates.
Comparative information has not been restated on adoption of IFRS 16.
Maturity analysis of financial liabilities
The expected financial maturity of the Group’s financial liabilities at 31 December 2019 is as follows:
Financial liabilities at amortised cost
Trade payables
Joint operation payables
Accruals and other payables
Lease liabilities
Financial liabilities – hedge options
< 1 year
US$m
1-2 years
US$m
2-5 years
US$m
>5 years
US$m
0.9
107.4
25.4
43.1
1.6
178.4
–
–
–
43.1
–
43.1
–
–
–
123.0
–
123.0
–
–
–
73.7
–
73.7
The expected financial maturity of the Group’s financial liabilities at 31 December 2018 was as follows:
Financial liabilities at amortised cost
Trade payables
Joint operation payables
Accruals and other payables
Loans and borrowings
< 1 year
US$m
1-2 years
US$m
2-5 years
US$m
>5 years
US$m
9.7
61.1
30.9
26.2
127.9
–
–
–
–
–
–
–
–
–
–
–
–
–
75.5
75.5
162
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.8 Financial Instruments Continued
Fair Value
Cairn holds listed equity shares, being the residual shareholding in Vedanta Limited as a financial asset at fair value through profit or loss. The Group
determines and discloses the fair value by reference to the quoted (unadjusted) prices in active markets for those shares at the measurement date.
The Group also holds hedge options which are held at fair value determined by models which have observable inputs.
The Group held the following financial instruments measured at fair value:
Assets measured at fair value – Level 1
Financial assets at fair value through profit or loss
Listed equity shares
Assets measured at fair value – Level 2
Derivative financial instruments
Financial assets – hedge options
Liabilities measured at fair value – Level 2
Derivative financial instruments
Financial liabilities – hedge options
At
31 December
2019
US$m
At
31 December
2018
US$m
5.0
6.9
4.1
44.4
(1.6)
7.5
–
51.3
3.9 Financial Risk Management: Objectives and Policies
The main risks arising from the Group’s financial instruments are commodity price risk, liquidity risk, credit risk and foreign currency risk. The Board
of Cairn Energy PLC, through the Treasury Subcommittee, reviews and agrees policies for managing each of these risks and these are summarised
below.
The Group’s Treasury function and Executive Team as appropriate are responsible for managing these risks, in accordance with the policies set by
the Board. Management of these risks is carried out by monitoring of cash flows, investment and funding requirements using a variety of techniques.
These potential exposures are managed while ensuring that the Company and the Group have adequate liquidity at all times in order to meet their
immediate cash requirements. There are no significant concentrations of risks unless otherwise stated. The Group does not enter into or trade
financial instruments, including derivatives, for speculative purposes.
The primary financial assets and liabilities comprise cash, short- and medium-term deposits, money market liquidity funds, listed equity shares,
intra-group loans and other receivables and financial liabilities held at amortised cost. The Group’s strategy has been to finance its operations through
a mixture of retained profits, bank borrowings and other production-related streaming agreements. Other alternatives such as equity issues and other
forms of non-investment-grade debt finance are reviewed by the Board, when appropriate.
Commodity Price Risk
Commodity price risk arises principally from the Group’s North Sea production, which could adversely affect revenue and debt availability due to
changes in commodity prices.
The Group measures commodity price risk through an analysis of the potential impact of changing commodity prices. Based on this analysis and
considering materiality and the potential business impact, the Group may choose to hedge.
Linked to production in the UK North Sea, the Group continued to hedge during 2019 in order to protect debt capacity and support committed
capital programmes. Details of current hedging arrangements, together with oil price sensitivity analysis, can be found in note 3.5.
Transacted derivatives are designated, where possible, in cash flow hedge relationships to minimise accounting income statement volatility. The
Group is required to assess the likely effectiveness of any proposed cash flow hedging relationship and demonstrate that the hedging relationship
is expected to be highly effective prior to entering into a hedging instrument and at subsequent reporting dates.
Cairn Energy PLC Annual Report and Accounts 2019
163
F I N A N C I A L
S T A T E M E N T S
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.9 Financial Risk Management: Objectives and Policies Continued
Liquidity Risk
The Group closely monitors and manages its liquidity risk using both short- and long-term cash flow projections, supplemented by debt and equity
financing plans and active portfolio management. Cash forecasts are regularly produced and sensitivities run for different scenarios including, but not
limited to, changes in asset production profiles and cost schedules.
At the date of this report the Group is well progressed in agreeing terms for an expanded senior debt facility and is in discussions regarding additional
sources of funding to support its Senegal development costs; however if these were to fail to conclude and the Group could not fully fund its share of
the expenditure through to completion then the value of its investment in the project and/or its rights to participate in the project at its current equity
levels may be affected. The Group runs various sensitivities on its liquidity position on a quarterly basis throughout the year. Further details are noted
in the Viability Statement provided on page 37.
Details of the Group’s debt facilities can be found in note 3.2. The Group is subject to quarterly forecast liquidity tests as part of the RBL facility
agreement. The Group has complied with the liquidity requirements of this test at all times during the year.
The Group invests cash in a combination of money market liquidity funds and term deposits with a number of international and UK financial
institutions, ensuring sufficient liquidity to enable the Group to meet its short and medium-term expenditure requirements.
Credit Risk
Credit risk arises from cash and cash equivalents, investments with banks and financial institutions, trade receivables and joint operation receivables.
Customers and joint operation partners are subject to a risk assessment using publicly available information and credit reference agencies, with
follow-up due diligence and monitoring if required.
Investment credit risk for investments with banks and other financial institutions is managed by the Group Treasury function in accordance with the
Board-approved policies of Cairn Energy PLC. These policies limit counterparty exposure, maturity, collateral and take account of published ratings,
market measures and other market information. The limits are set to minimise the concentration of risks and therefore mitigate the risk of financial
loss through counterparty failure.
It is Cairn’s policy to invest with banks or other financial institutions that, firstly, offer the greatest degree of security in the view of the Group and,
secondly, the most competitive interest rates. Repayment of principal is the overriding priority and this is achieved by diversification and shorter
maturities to provide flexibility. The Board continually re-assesses the Group’s policy and updates as required.
At the year end the Group does not have any significant concentrations of bad debt risk. As at 31 December 2019 the Group had investments with
nine counterparties (2018: seven) to ensure no concentration of counterparty investment risk. The increase in the number of counterparties holding
investments reflects the Group’s increased cash balance. At 31 December 2019 and at 31 December 2018 all of these investments were instant
access.
The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the balance sheet date.
Foreign Currency Risk
Cairn manages exposures that arise from non-functional currency receipts and payments by matching receipts and payments in the same currency
and actively managing the residual net position.
The Group also aims where possible to hold surplus cash, debt and working capital balances in the functional currency of the subsidiary, thereby
matching the reporting currency and functional currency of most companies in the Group. This minimises the impact of foreign exchange
movements on the Group’s Balance Sheet.
Where residual net exposures do exist and they are considered significant, the Company and Group may from time to time opt to use derivative
financial instruments to minimise exposure to fluctuations in foreign exchange and interest rates.
The following table demonstrates the sensitivity to movements in the US$:GBP and US$:NOK exchange rates, with all other variables held constant,
on the Group’s monetary assets and liabilities. These are considered to be reasonably possible changes for the purposes of sensitivity analysis. The
Group’s exposure to foreign currency changes for all other currencies is not material.
10% increase in GBP to US$
10% decrease in GBP to US$
10% increase in NOK to US$
10% decrease in NOK to US$
At 31 December 2019
At 31 December 2018
Effect on profit
before tax
US$m
Effect on
equity
US$m
Effect on loss
before tax
US$m
(31.6)
31.6
–
–
(16.3)
16.3
0.6
(0.6)
(55.1)
55.1
0.1
(0.1)
Effect on
equity
US$m
(14.2)
14.2
13.2
(13.2)
164
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 4 – Income Statement Analysis
This section contains further Income Statement analysis, including segmental analysis, details of
employee benefits payable in the year and finance income and costs. Comparative information has
been restated where applicable following the reclassification of the results from the Group’s
Norwegian subsidiary as discontinued operations.
Significant Accounting Judgements in This Section:
Segmental Disclosures and Discontinued Operations
IFRS 8 ‘Operating Segments’ does not provide guidance as to whether segment disclosures apply to discontinued operations. Cairn’s sale of
Capricorn Norge AS to Sval Energi AS was announced in November 2019 and completed on 28 February 2020. As the Cairn Board continued
to review the results of the UK & Norway segment (including the results of Capricorn Norge AS) throughout the period under review, Cairn has
presented segmental disclosures inclusive of the results of the discontinued operation.
Key Estimates and Assumptions in This Section:
There are several key estimates and assumptions used in the calculation of the Group’s share-based payment charges. These are detailed in note 4.4 (b).
4.1 Segmental Analysis
Operating Segments
Cairn’s strategy is to create, add and realise value from a balanced portfolio within a self-funding business model. Each business unit is headed by
a Regional Director (a Regional Director may be responsible for more than one business unit) and the Board monitors the results of each segment
separately for the purposes of making decisions about resource allocation and performance assessment.
During 2019, Cairn had four reportable operating segments: Senegal, UK & Norway, LATAM (Latin America) and East Atlantic. The Senegal operating
segment is focused on the development of the Sangomar discovery. The UK & Norway segment includes exploration activity in the North Sea,
Norwegian Sea and Barents Sea and includes the Nova development asset and Kraken and Catcher producing assets. With effect from 1 January
2019, the International business unit has been separated into two: the LATAM segment includes costs of the Mexican exploration drilling programme
and exploration activity in Nicaragua and Suriname, while East Atlantic includes costs associated with interests in Ireland, Côte d’Ivoire and Mauritania.
Effective 1 January 2020, the UK & Norway segment has been separated into UK and Norway segments. Norwegian assets and liabilities were
classified as held-for-sale at 31 December 2019 (see note 6.2).
The Other Cairn Energy Group segment exists to accumulate the activities and results of the Parent and other holding companies together with other
unallocated expenditure and net assets/liabilities including amounts of a corporate nature not specifically attributable to any of the business units.
Non-current assets as analysed on a segmental basis consist of: intangible exploration/appraisal assets; property, plant & equipment –
development/producing assets; intangible assets – goodwill; and other property, plant & equipment and intangible assets.
Geographical information: non-current assets
Senegal
UK
Norway
Goodwill
UK & Norway
Mexico
Suriname
LATAM
Côte d’Ivoire
Ireland
Mauritania
Israel
East Atlantic
Other UK
At
31 December
2019
US$m
At
31 December
2018
US$m
521.9
463.0
1,047.7
–
–
1,047.7
941.9
160.3
125.8
1,228.0
49.0
9.2
58.2
15.2
–
9.8
0.3
25.3
11.7
31.0
1.7
32.7
–
14.8
7.4
–
22.2
5.8
Total non-current assets
1,664.8
1,751.7
Cairn Energy PLC Annual Report and Accounts 2019
165
F I N A N C I A L
S T A T E M E N T S
Section 4 – Income Statement Analysis continued
4.1 Segmental Analysis Continued
The segment results for the year ended 31 December 2019 are as follows:
Revenue
Cost of sales
Depletion and amortisation charges
Gross profit
Pre-award costs
Unsuccessful exploration costs
Depreciation – purchased assets
Amortisation – right-of-use assets
Amortisation of other intangible assets
Other administrative expenses/income
Reversal of impairment of property, plant & equipment –
development/producing assets
Impairment of goodwill
Profit on disposal of development assets (note 6.2)
Impairment of disposal group (note 6.2)
Operating profit/(loss)
Loss on fair value of financial assets
Interest income
Finance costs
Profit/(Loss) before taxation from continuing operations
Tax credit/(charge)
Profit/(Loss) for the year from continuing operations
Loss from discontinued operations
Profit/(Loss) attributable to equity holders of the Parent
Balances as at 31 December 2019:
Capital expenditure
Total assets
Total liabilities
Non-current assets
Senegal
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
UK &
Norway
US$m
532.3
(73.1)
(217.2)
242.0
(4.8)
(44.6)
(0.2)
(0.4)
(0.7)
(0.8)
147.3
(79.0)
0.7
(65.7)
LATAM
US$m
–
–
–
–
(5.0)
(84.7)
(0.2)
(0.1)
–
(0.1)
–
–
–
–
East
Atlantic
US$m
Other Cairn
Energy
Group
US$m
Group
adjustment
for
segments
US$m
–
–
–
–
(2.3)
(16.4)
–
–
–
–
–
–
–
–
1.1
–
–
1.1
(9.1)
–
(0.2)
(1.8)
(2.4)
(26.9)
–
–
–
–
–
–
–
–
4.0
38.7
0.2
0.4
0.7
0.2
–
–
(0.7)
65.7
Total
US$m
533.4
(73.1)
(217.2)
243.1
(17.2)
(107.0)
(0.4)
(1.9)
(2.4)
(27.6)
147.3
(79.0)
–
–
193.8
(90.1)
(18.7)
(39.3)
109.2
154.9
–
0.8
(20.8)
173.8
90.0
–
–
(0.4)
(90.5)
(0.3)
–
–
–
(1.8)
2.6
(22.2)
(18.7)
(60.7)
–
–
263.8
(90.8)
(18.7)
(60.7)
–
–
–
–
263.8
(90.8)
(18.7)
(60.7)
–
(0.4)
6.8
115.6
(90.0)
25.6
(25.6)
–
–
(1.8)
3.0
(36.6)
119.5
(0.3)
119.2
(25.6)
93.6
313.0
58.9
123.1
109.9
522.1
1,391.7
9.9
541.9
521.9
1,047.7
91.1
51.2
58.2
1.6
19.5
30.7
174.3
(120.9)
2,089.0
6.5
144.9
(120.9)
633.5
25.3
11.7
–
1,664.8
All revenue in the UK & Norway segment is attributable to the sale of oil and gas in the UK. 38% of the Group’s sales of oil and gas are to a single
customer that markets the crude on Cairn’s behalf and delivers it to the ultimate buyers.
Cairn has a cash pooling arrangement which is used to offset overdrafts in some subsidiaries with cash balances in other subsidiaries. For segmental
disclosure, the overdraft in each segment is shown as a liability and the offset is shown in the Group adjustment column.
All transactions between the segments are carried out on an arm’s length basis, other than where inter-group loans are made interest-free or at
interest rates below market value.
166
Cairn Energy PLC Annual Report and Accounts 2019
Section 4 – Income Statement Analysis continued
4.1 Segmental Analysis Continued
The segment results for the year ended 31 December 2018 were as follows:
Senegal
US$m
UK &
Norway
US$m
LATAM*
(restated)
US$m
East
Atlantic*
(restated)
US$m
Other Cairn
Energy
Group
US$m
Revenue
Cost of sales
Depletion and amortisation charges
Gross profit
Pre-award costs
Unsuccessful exploration costs
Other operating income
Loss on disposal of intangible exploration/appraisal assets
Depreciation
Amortisation of other intangible assets
Other administrative expenses
Impairment of property, plant & equipment – development/
producing assets
Operating (loss)/profit
Loss on derecognition of financial assets
Loss on fair value of financial assets
Interest income
Other finance income and costs
Profit/(Loss) before taxation from continuing operations
Tax credit
Profit/(Loss) for the year from continuing operations
Loss for the year from discontinued operations
Profit/(Loss) attributable to equity holders of the Parent
Balances as at 31 December 2018:
Capital expenditure
Total assets
Total liabilities
Non-current assets
* Previously combined as International
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
–
0.1
–
0.1
–
0.1
409.1
(131.4)
(171.2)
106.5
(6.8)
(62.6)
–
(4.5)
(0.4)
(0.4)
(1.7)
(166.3)
(136.2)
–
–
0.1
(21.9)
(158.0)
41.1
(116.9)
–
(116.9)
28.5
147.7
470.5
1,532.7
16.9
585.6
463.0
1,228.0
F I N A N C I A L
S T A T E M E N T S
Group
adjustment
for
segments
(restated)
US$m
Total
(restated)
US$m
–
–
–
–
3.9
42.7
–
4.5
0.4
0.4
1.2
410.3
(131.4)
(171.2)
107.7
(21.5)
(5.5)
5.0
–
(0.6)
(2.3)
(45.5)
–
–
–
–
(5.2)
–
–
–
–
–
(0.3)
–
–
–
–
–
(6.2)
14.4
5.0
–
–
–
(0.3)
–
1.2
–
–
1.2
(7.2)
–
–
–
(0.6)
(2.3)
(44.4)
–
–
(166.3)
(5.5)
12.9
(53.3)
53.1
(129.0)
–
–
–
–
(5.5)
–
(5.5)
–
(5.5)
19.7
42.0
2.4
32.7
–
–
–
–
12.9
–
(713.1)
(352.2)
1.5
1.6
(1,115.5)
89.4
12.9
(1,026.1)
–
–
–
–
–
1.3
54.4
(41.1)
13.3
(13.3)
(713.1)
(352.2)
1.7
(19.0)
(1,211.6)
89.4
(1,122.2)
(13.3)
12.9
(1,026.1)
–
(1,135.5)
(1.9)
0.8
–
194.8
40.4
2.2
22.2
82.2
(166.3)
2,001.5
170.6
(166.3)
611.4
5.8
–
1,751.7
All revenue in the UK & Norway segment was attributable to the sale of oil and gas in the UK. 48.7% of the Group’s sales of oil and gas were to a single
customer that marketed the crude on Cairn’s behalf and delivered it to the ultimate buyers.
4.2 Pre-Award Costs
UK
LATAM and East Atlantic (previously International)
Other
Year ended
31 December
2019
US$m
Year ended
31 December
2018
(restated)
US$m
0.8
7.3
9.1
17.2
2.9
11.4
7.2
21.5
Pre-award costs represent time costs, legal fees and other direct charges incurred in pursuit of new opportunities in regions which complement the
Group’s current licence interests and risk appetite.
Cairn Energy PLC Annual Report and Accounts 2019
167
F I N A N C I A L
S T A T E M E N T S
Section 4 – Income Statement Analysis continued
4.3 Administrative Expenses
Administrative expenses – recurring departmental expenses and corporate projects
Administrative expenses – Indian tax arbitration costs (see note 5.5)
Year ended
31 December
2019
US$m
Year ended
31 December
2018
(restated)
US$m
29.3
3.0
32.3
25.5
22.9
48.4
Operating Lease Commitments
Administration costs during 2018 included operating lease charges for land and buildings representing the costs of Cairn’s head office in Edinburgh
and subsidiary offices globally. Operating lease commitments are disclosed prior to recovery of costs through the Group’s timewriting recharges.
Administrative costs – land and buildings
Not later than one year
After one year but no more than five years
At
31 December
2019
US$m
At
31 December
2018
(restated)
US$m
–
–
–
2.4
8.4
10.8
Following adoption of IFRS 16, Cairn no longer classifies any lease agreements as operating leases. See note 1.3.
4.4 Employee Benefits: Staff Costs, Share-Based Payments and Directors’ Emoluments
a) Staff Costs
Wages and salaries
Social security costs
Other pension costs
Share-based payments
Year ended 31 December 2019
Year ended 31 December 2018
Continuing
operations
US$m
Discontinued
operations
US$m
27.5
4.7
2.3
9.6
44.1
8.6
1.5
0.7
2.3
13.1
Total
US$m
36.1
6.2
3.0
11.9
57.2
Continuing
operations
US$m
Discontinued
operations
US$m
28.5
2.3
1.5
11.8
44.1
7.4
1.2
0.7
2.9
12.2
Total
US$m
35.9
3.5
2.2
14.7
56.3
Staff costs are shown gross before amounts recharged to joint operations and include staff employed in Norway in discontinued operations. The
share-based payments charge represents amounts in respect of equity-settled options.
The monthly average number of full-time equivalent employees, including Executive Directors and individuals employed by the Group working on
joint operations, was:
Continuing operations:
UK
Mexico
Senegal
Discontinued operations:
Norway
Number of employees
Monthly
average
2019
Monthly
average
2018
154
5
3
162
41
203
148
3
5
156
32
188
168
Cairn Energy PLC Annual Report and Accounts 2019
Section 4 – Income Statement Analysis continued
4.4 Employee Benefits: Staff Costs, Share-Based Payments and Directors’ Emoluments Continued
b) Share-Based Payments
Income Statement charge
Included within gross staff costs (continuing operations):
SIP
Share Options – Unapproved Plan
LTIP
Employee Share Scheme
F I N A N C I A L
S T A T E M E N T S
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
0.6
–
7.7
1.3
9.6
0.7
0.1
9.4
1.6
11.8
Details of those awards with a significant impact on the results for the current and prior year are given below together with a summary of the
remaining awards. Disclosures shown below include both continuing and discontinued operations.
Share-based payment schemes and awards details
The Group operates a number of share award schemes for the benefit of its employees.
The number of share awards made by the Company during the year is given in the table below together with their weighted average fair value
(“WAFV”) and weighted average grant or exercise price (“WAGP/WAEP”):
SIP – free shares
SIP – matching shares
LTIP
Employee Share Scheme
Year ended 31 December 2019
Year ended 31 December 2018
WAFV
£
1.64
1.67
0.81
1.01
WAGP/
WAEP
£
1.64
1.67
1.68
1.70
Number
of shares
331,445
246,112
9,662,172
1,607,911
11,847,640
WAFV
£
2.16
2.23
0.98
1.26
WAGP/
WAEP
£
2.16
2.23
2.11
2.09
Number
of shares
251,415
183,664
7,828,845
1,131,222
9,395,146
The awards existing under the LTIP with the weighted average grant price (‘WAGP’) are as follows:
At 1 January
Granted during the year
Exercised during the year
Lapsed during the year
At 31 December
2019
2018
Number
of shares
27,336,846
9,662,172
(1,834,262)
(8,978,291)
WAGP
£
2.03
1.68
1.89
1.94
Number
of shares
28,567,535
7,828,845
(5,005,033)
(4,054,501)
26,186,465
1.94
27,336,846
WAGP
£
1.95
2.11
1.82
1.88
2.03
The weighted average remaining contractual life of outstanding awards under the LTIP at 31 December 2019 was 1.3 years (2018: 1.0 years)
The awards existing under all share schemes other than the LTIP with the weighted average of the grant price, exercise price and notional exercise
prices (“WAGP/WAEP”) are as follows:
At 1 January
Granted during the year
Exercised during the year
Lapsed during the year
At 31 December
2019
2018
Number
of shares
WAGP/WAEP
£
Number
of shares
WAGP/WAEP
£
9,595,198
2,185,468
(300,284)
(1,350,614)
10,129,768
1.99
1.68
1.96
1.94
1.93
9,550,872
1,566,301
(1,270,878)
(251,097)
9,595,198
1.99
2.12
1.96
2.85
1.99
The weighted average remaining contractual life of outstanding awards under all other schemes at 31 December 2019 was 7.0 years (2018: 7.3 years).
Cairn Energy PLC Annual Report and Accounts 2019
169
F I N A N C I A L
S T A T E M E N T S
Section 4 – Income Statement Analysis continued
4.4 Employee Benefits: Staff Costs, Share-Based Payments and Directors’ Emoluments Continued
b) Share-Based Payments continued
Assumptions and inputs
The fair value of the Cairn Energy PLC LTIP scheme awards was calculated using a Monte Carlo model. The primary inputs to the model are
consistent with those of the other share award schemes, though vesting percentages for LTIPs can be above 100%. For details on the vesting
conditions attached to the LTIPs refer to the Directors’ Remuneration Report on page 116.
The other Cairn Energy PLC share awards during 2019 were also valued using a Monte Carlo model. Awards in prior years were valued similarly.
Cairn Energy PLC share options were exercised on a regular basis throughout the year, subject to the normal employee dealing bans imposed by
the Company at certain times. The weighted average share price during the year was £1.76 (2018: £2.14).
The main inputs to the models include the number of options, share price, leaver rate, trigger points, discount rate and volatility.
– Leaver rate assumptions are based on past history of employees leaving the Company prior to options vesting and are revised to equal the
number of options that ultimately vest.
– Trigger points are based on the length of time after the vesting periods for awards in 2019: further details are below.
– The risk-free rate is based on the yield on a zero-coupon government bond with a term equal to the expected term on the option being valued.
– Volatility was determined as the annualised standard deviation of the continuously compounded rates of return on the shares of a peer group
of similar companies selected from the FTSE, as disclosed in the Directors’ Remuneration Report on page 119, over a three-year period to the date
of award.
The following assumptions and inputs apply:
Scheme name
SIP
LTIP
Employee Share Scheme
Volatility
Risk-free rate
per annum
0%
0%
31% – 37% 0.25% – 1.41%
31% – 37% 0.18% – 1.30%
Lapse due to
withdrawals
per annum
0%
0%
5%
Employee exercise trigger point assumptions
For 2019 awards, the assumption used for the Employee Share Scheme and the majority of the LTIP awards is that employees will exercise 35% in
the year following the three-year anniversary of the award, and the same in the subsequent year, then 10% in each of the three subsequent years.
The LTIP awards exercise assumption for Directors and more senior employees is that awards shall be exercised 50% at the end of the two-year
holding period, being the five-year anniversary date, and the remaining 50% on the six-year anniversary date.
c) Directors’ Emoluments and Remuneration of Key Management Personnel
Details of each Director’s remuneration, pension entitlements, share options and awards pursuant to the LTIP are set out in the Directors’
Remuneration Report on pages 94 to 123. Directors’ remuneration, their pension entitlements and any share awards vested during the year are
provided in aggregate in note 8.7.
Remuneration of key management personnel
The remuneration of the Directors of the Company and of the members of the management and corporate teams who are the key management
personnel of the Group is set out below in aggregate.
Short-term employee benefits
Post-employment benefits
Share-based payments
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
6.7
0.4
3.2
10.3
6.9
0.4
4.0
11.3
In addition, employer’s national insurance contributions for key management personnel in respect of short-term employee benefits were US$0.9m
(2018: US$0.9m).
Share-based payments shown above represent the cost to the Group of key management personnel’s participation in the Company’s share
schemes, measured under IFRS 2.
During 2019, no shares awarded to key management personnel vested under the LTIP (2018: 1,460,908).
170
Cairn Energy PLC Annual Report and Accounts 2019
Section 4 – Income Statement Analysis continued
4.5 Finance Income
Bank and other interest receivable
Gain on mark-to-market financial instruments
Exchange gain
4.6 Finance Costs
Loan interest and facility fee amortisation
Other finance charges
Unwinding of discount – provisions
Lease interest
Exchange loss
F I N A N C I A L
S T A T E M E N T S
Year ended
31 December
2019
US$m
Year ended
31 December
2018
(restated)
US$m
3.0
–
–
3.0
1.5
0.3
17.0
18.8
Year ended
31 December
2019
US$m
Year ended
31 December
2018
(restated)
US$m
10.3
3.7
2.6
15.3
4.7
36.6
23.2
2.8
2.3
7.8
–
36.1
Loan interest and facility fee amortisation includes US$1.6m (2018: US$15.1m) of facility fees relating to the RBL facilities, which are amortised over
the expected useful life of the facility. Following the extension to the facility in 2018, accounted for as a replacement of the original facility under IFRS
9, all costs of the initial facility (US$15.1m) were amortised in the preceding year.
The increase in lease interest charges results from the adoption of IFRS 16. See note 3.3.
4.7 Earnings per Ordinary Share
Basic and diluted earnings per share are calculated using the following measures of profit/(loss):
Profit/(Loss) and diluted profit/(loss) after taxation from continuing operations
Profit/(Loss) and diluted profit/(loss) attributable to equity holders of the Parent
The following reflects the share data used in the basic and diluted earnings per share computations:
Weighted average number of shares
Less weighted average shares held by ESOP and SIP Trusts
Basic weighted average number of shares
Potential dilutive effect of shares issuable under employee share plans:
LTIP awards
Approved and unapproved plans
Employee share awards
Diluted weighted average number of shares
Potentially issuable shares not included above:
LTIP awards
Approved and unapproved plans
Employee share awards
Number of potentially issuable shares
* 2018 potentially issuable shares were all anti-dilutive due to the loss for the year.
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
119.2
93.6
(1,122.2)
(1,135.5)
Number
of shares
2019
‘000
589,524
(7,728)
Number
of shares
2018
‘000
588,032
(7,502)
581,796
580,530
4,055
43
1,886
–
–
–
587,780
580,530
20,877
2,734
1,679
27,337
3,341
4,174
25,290
34,852*
Cairn Energy PLC Annual Report and Accounts 2019
171
F I N A N C I A L
S T A T E M E N T S
Section 5 – Taxation
This section highlights the Group’s taxation policies, including both the accounting policy and wider
strategy and governance policies. Details can also be found on unrecognised deferred tax assets
existing at the year end.
This section also includes details of the contingent liability relating to the Indian tax dispute where the
award from the arbitration is expected in 2020.
Significant Accounting Judgements in This Section:
Deferred Taxation
At each reporting date, Cairn reviews UK unused tax losses and allowances to assess whether it is probable that taxable profits will be available
against which the Group can utilise these losses and allowances and whether or not a deferred tax asset should be recognised.
At 31 December 2018 and 2019, Cairn concluded that no deferred tax asset should be recognised. At 31 December 2019, the goodwill impairment
test, performed over the UK & Norway operating segment, identified an impairment with the subsequent charge reducing the carrying value of
assets in the segment to their fair value. No deferred tax asset can therefore be recognised as it is unlikely that there will be further profits available
against which a deferred tax asset could be recovered. At 31 December 2018, though no impairment of goodwill was identified, the carrying value of
assets in the UK & Norway segment did not materially differ from their fair value, again preventing the recognition of any deferred tax asset for similar
reasons.
Contingent Liability – Indian Tax
Cairn continues to resolutely defend the Group’s position in India following the tax assessment order and demand notice issued by the Indian Income
Tax Department. Final hearings in the international arbitration proceedings were held in 2018 with the award of the arbitration panel expected in 2020.
Cairn remains confident that the Group will be successful in the arbitration and therefore no provision is made in the Financial Statements for any
amount demanded by the Indian Income Tax Department. Full details on the contingent liability are given in note 5.5.
Key Estimates and Assumptions in This Section:
In determining whether future taxable profits are available to recognise deferred tax assets, Cairn uses the same economic models that are used for
impairment testing. The key assumptions are therefore consistent with those detailed in section 2.
Accounting Policy
The total tax charge or credit represents the sum of current tax and deferred tax.
The current tax charge or credit is based on the taxable profit or loss for the year. Taxable profit or loss differs from net profit or loss as
reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. In Norway, tax refunds may be claimed on qualifying exploration activities and related
overhead costs; the tax refundable is included as a tax credit in the period in which the qualifying expenditure is incurred. Where there are
uncertain tax positions, Cairn assesses whether it is probable that the position adopted in tax filings will be accepted by the relevant tax
authority, with the results of this assessment determining the accounting that follows.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
Financial Statements and the corresponding tax bases used in the computation of taxable profit or loss.
Deferred tax assets are recognised for deductible temporary differences that exist only where it is probable that taxable profits will be
generated against which the carrying value of the deferred tax asset can be recovered.
Deferred tax liabilities are recognised for all taxable temporary differences except in respect of taxable temporary differences associated
with investments in subsidiaries, associates and interests in joint operations where the timing of the reversal of the temporary difference can
be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
A deferred tax asset or liability is not recognised if a temporary difference arises on initial recognition of an asset or liability in a transaction
that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. However,
where the recognition of an asset is associated with an interest in a joint operation, which applies to all Cairn’s intangible exploration/appraisal
assets and property, plant & equipment – development/producing asset additions, and Cairn is not able to control the timing of the reversal
of the temporary difference or the temporary difference is expected to reverse in the foreseeable future, a deferred tax asset or liability shall
be recognised.
Current and deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
172
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 5 – Taxation continued
5.1 Tax Strategy and Governance
The Group’s tax strategy is fully aligned with its overarching business objectives and principles. Cairn aims to be a good corporate citizen, managing
its tax affairs in a transparent and responsible manner in all the jurisdictions in which it operates. Cairn is committed to having open and constructive
relationships with all tax authorities.
Since 2017 the Group’s UK activities have included production income on the Catcher and Kraken assets. Due to the level of costs incurred in
developing the fields there are no taxable profits in 2018 or 2019 and it is unlikely that any taxable profits will be realised for several years. Taxable
profits in other jurisdictions, where Cairn’s assets are at various stages of the value creation cycle, are also minimal with cash payments of corporation
taxes made only in Mexico totalling US$0.5m (of which US$0.2m was an overpayment) during the year (2018: US$nil).
Cairn undertakes tax planning that supports the business and reflects commercial and economic activity. The Group’s policy is to not enter into
any artificial tax avoidance schemes but to build and maintain strong collaborative working relationships with all relevant tax authorities based on
transparency and integrity. The Group aims for certainty in relation to the tax treatment of all items; however, it is acknowledged that this will not
always be possible, for example where transactions are complex or there is a lack of maturity in the tax regime in the relevant jurisdiction in which the
Group is operating. In such circumstances Cairn will seek external advice where appropriate and ensure that the approach adopted in any relevant
tax return includes full disclosure of the position taken.
5.2 Tax Charge/(Credit) on Profit/(Loss) for the Year
Analysis of Tax Charge/(Credit) on Profit/(Loss) for the Year
Current tax charge:
Overseas corporation taxes
Deferred tax credit:
Deferred tax on valuation of financial assets at fair value through profit or loss
Total tax charge/(credit) on profit/(loss) from continuing operations
Year ended
31 December
2019
US$m
Year ended
31 December
2018
(restated)
US$m
0.3
0.3
–
–
0.3
–
–
(89.4)
(89.4)
(89.4)
Factors Affecting Tax Charge/(Credit) for the Year
A reconciliation of the income tax charge/(credit) applicable to the profit/(loss) before income tax to the UK statutory rate of income tax is as follows:
Profit/(Loss) before taxation from continuing operations
Year ended
31 December
2019
US$m
Year ended
31 December
2018
(restated)
US$m
119.5
(1,211.6)
Profit/(Loss) before tax multiplied by the UK statutory rate of corporation tax of 19% (2018: 19%)
22.7
(230.2)
Effect of:
Special tax rates and reliefs applying to oil and gas activities
Impact on deferred tax of adjustments in respect of prior years
Temporary differences not recognised
Disposal of financial assets held at fair value through profit or loss
Permanent items (non-taxable)/non-deductible
Other
Total tax charge/(credit) on profit/(loss) from continuing operations
64.4
(3.3)
(100.2)
–
16.6
0.1
0.3
(33.7)
–
46.8
135.5
3.6
(11.4)
(89.4)
The reconciliation shown above has been based on the average UK statutory rate of corporation tax for 2019 of 19% (2018: 19%).
The UK main rate of corporation tax is currently 19% (2018: 19%).
The applicable UK statutory tax rate applying to North Sea oil and gas activities is 40% (2018: 40%).
The effect of special tax rates and reliefs applying to oil and gas activities of US$64.4m (2018: US$(33.7)m) comprises US$68.2m (2018: US$(24.2)m)
in respect of differences between the average UK statutory rate and the special rates applying to oil and gas activities in the UK and US$(3.8)m (2018:
US$(9.5)m) in respect of the UK ring fence expenditure supplement (“RFES”) claimed in the year.
Cairn Energy PLC Annual Report and Accounts 2019
173
F I N A N C I A L
S T A T E M E N T S
Section 5 – Taxation continued
5.2 Tax Charge/(Credit) on Profit/(Loss) for the Year Continued
Factors Affecting Tax Charge/(Credit) for the Year Continued
The effect of temporary differences not recognised of US$(100.2)m (2018: US$46.8m) includes:
– a US$(125.9)m (2018: US$58.7m) movement in the year in respect of the unrecognised deferred tax asset on UK supplementary charge losses
and the deferred tax liability on UK ring fence temporary differences in respect of non-current assets;
– US$8.9m (2018: US$(2.7)m) unsuccessful exploration costs on which future tax relief is available but the expenditure has been expensed through
the Income Statement;
– US$6.7m (2018: US$2.4m) in respect of the carry forward of UK tax losses on which no deferred tax asset was recognised;
– US$10.1m (2018: US$nil) on overseas tax losses and other temporary differences arising in the period on which no deferred tax was recognised;
and
– in 2018 a US$(11.6)m (2019: US$nil) movement in the unrecognised deferred tax asset brought forward at the start of the year in respect of the
shares that the Group held in Vedanta Limited (previously Cairn India Limited).
5.3 Income Tax Asset
The income tax asset of US$27.4m (2018: US$32.8m) relates to cash tax refunds due from the Norwegian authorities on the tax value of exploration
and other qualifying expenses incurred in Norway during the year. Refunds due at 31 December 2019 of US$27.4m have been transferred to assets
held-for-sale, see note 6.2.
During 2019, a cash tax refund of US$30.9m (2018: US$36.8m) was received on prior year qualifying expenditure on exploration activities, new
venture costs and administrative expenses. US$2.3m (2018: US$20.4m) of the refund is allocated against operating activities in the Cash Flow
Statement where it relates to pre-award and administrative costs and the remaining US$28.6m (2018: US$16.4m) included as a refund in investing
activities where it relates to costs initially capitalised within intangible exploration/appraisal assets.
5.4 Deferred Tax Assets and Liabilities
Reconciliation of Movement in Deferred Tax Assets/(Liabilities):
Deferred tax assets
At 1 January 2018
Deferred tax credit/(charge) through the Income Statement
At 31 December 2018
Temporary
difference in
respect of
non-current
assets
US$m
(349.0)
105.9
(243.1)
Losses
US$m
349.0
(105.9)
243.1
Deferred tax (charge) /credit through the Income Statement
At 31 December 2019
(60.5)
(11.1)
(303.6)
232.0
Deferred tax liabilities
At 1 January 2018
Exchange difference arising
Deferred tax credit through the Income Statement
Deferred tax (charge)/credit from discontinued operations
At 31 December 2018
Exchange differences arising
Deferred tax credit/(charge) from discontinued operations
At 31 December 2019
Deferred tax liabilities analysed by country
Norway
Total deferred tax liability
(179.9)
5.1
89.4
(4.4)
(89.8)
5.7
84.1
–
15.3
(1.9)
–
8.5
21.9
(1.4)
(20.5)
–
Other
temporary
differences
US$m
Total
US$m
–
–
–
71.6
71.6
0.2
(0.3)
–
1.5
1.4
(0.1)
(1.3)
–
–
–
–
–
–
(164.4)
2.9
89.4
5.6
(66.5)
4.2
62.3
–
At
31 December
2019
US$m
At
31 December
2018
US$m
–
–
(66.5)
(66.5)
At 31 December 2019, there is an unrecognised deferred tax asset of US$6.6m (2018: US$4.7m) in respect of the shares the Group holds in Vedanta
Limited.
174
Cairn Energy PLC Annual Report and Accounts 2019
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S T A T E M E N T S
Section 5 – Taxation continued
5.4 Deferred Tax Assets and Liabilities Continued
Recognised Deferred Tax Assets
As at the balance sheet date, no net deferred tax asset or liability has been recognised in the UK (2018: no net UK deferred tax asset or liability
recognised) as other temporary differences and tax losses are only recognised to the extent that they offset the UK deferred tax liability arising on
business combinations and carried interests attributable to UK ring fence trading activity, as it is not considered probable that future profits will be
available to recover the value of the asset.
Unrecognised Deferred Tax Assets
No deferred tax asset has been recognised on the following as it is not considered probable that it will be utilised in future periods:
UK fixed asset temporary differences
UK Ring Fence Corporation Tax trading losses
UK Supplementary Charge Tax trading losses
UK other ring fence temporary differences
UK non-ring fence trading losses
UK non-ring fence pre-trade losses
UK excess management expenses
UK non-trade deficits
UK temporary differences on share-based payments
UK capital losses
UK other temporary differences
Mexico tax losses and temporary differences
Brazil tax losses
Nicaragua fixed asset temporary differences
Senegal fixed asset temporary differences
Temporary differences on financial assets held at fair value through profit or loss
Greenland tax losses
At
31 December
2019
US$m
At
31 December
2018
US$m
408.4
–
–
105.2
3.7
3.0
329.2
61.6
11.8
151.9
–
55.6
0.3
30.4
5.9
6.6
–
383.2
118.0
855.9
117.8
3.7
2.9
318.7
52.7
10.6
–
0.1
–
–
–
5.3
4.7
1,088.3
The applicable UK statutory tax rate applying to North Sea oil and gas activities of 40% is made up of Ring Fence Corporation Tax (“RFCT”) of 30%
and Supplementary Charge Tax (“SCT”) of 10%. At the balance sheet date the Group has US$601.0m RFCT losses which can be offset against RFCT
of 30% on future ring fence trading profits and US$516.7m SCT losses which can be offset against SCT of 10% on future ring fence trading profits.
In 2018 the Group had US$928.3m of RFCT and US$855.9m of SCT losses carried forward to offset against future ring fence trading profits.
A deferred tax asset has been recognised in respect of all of the RFCT and SCT losses and activated UK investment allowance and decommissioning
liabilities of US$577.5m and US$34.6m respectively, offsetting in full a deferred tax liability on ring fence temporary differences in respect of non-
current assets. No deferred tax asset has been recognised on other ring fence temporary differences of US$105.2m (2018: US$117.8m) relating to
decommissioning liabilities as it is not considered probable that these amounts will be utilised in future periods.
In 2018 a deferred tax asset was recognised in respect of US$810.3m of RFCT losses, offsetting in full the deferred tax liability on ring fence
temporary differences in respect of non-current assets. No deferred tax asset was recognised in 2018 on the remaining US$118.0m RFCT losses and
SCT losses of US$855.9m.
The deferred tax liability recognised on UK ring fence fixed asset temporary differences in respect of non-current assets of US$303.6m (2018:
US$243.1m) includes temporary differences in respect of investment allowances (previously field allowances) of US$20.2m (2018: US$759.5m) on
the Laverda and Kraken developments which will reduce future ring fence profits subject to SCT.
Cairn Energy PLC Annual Report and Accounts 2019
175
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Section 5 – Taxation continued
5.5 Contingent Liability – Indian Tax Assessment
In January 2014 Cairn UK Holdings Limited (‘CUHL’), a direct subsidiary of Cairn Energy PLC, received notification from the Indian Income Tax
Department (“IITD”) that it was restricted from selling its shareholding in Cairn India Limited (“CIL”); at that time the shareholding was approximately
10% and had a market valuation of INR 60bn (US$1.0bn). In that notification, the IITD claimed to have identified unassessed taxable income resulting
from certain intra-group share transfers undertaken in 2006 (the “2006 Transactions”), such transactions having been undertaken in order to facilitate
the IPO of CIL in 2007. The notification made reference to retrospective Indian tax legislation enacted in 2012, which the IITD was seeking to apply to
the 2006 Transactions. Following the merger in April 2017 of CIL and Vedanta Limited, CUHL’s shareholding in CIL was replaced by a shareholding of
approximately 5% in Vedanta Limited issued together with preference shares.
In addition to attaching CUHL’s shares in Vedanta Limited, the IITD seized dividends due to CUHL from those shareholdings totalling INR 11.4bn
(US$159.8m). The IITD has also notified Cairn that a tax refund of INR 15.9bn (US$222.8m) due to CUHL as a result of overpayment of capital gains
tax on a separate matter in 2011 has been applied as partial payment of the tax assessment of the 2006 Transactions. This tax refund was previously
classified as a contingent asset as the inflow of economic benefits was considered less than probable.
The IITD holds CUHL as an assessee in default in respect of tax demanded on the 2006 Transactions, and as such has pursued enforcement
against CUHL’s assets in India. To date these enforcement actions have included attachment of CUHL’s shareholding in Vedanta Limited and sale of
181,764,297 shares and seizure of the proceeds, seizure of the proceeds from the redemption of the preference shares, seizure of the US$159.8m
dividends due to CUHL as described above, and offset of a US$222.8m tax refund due to CUHL in respect of another matter. To date 99% of CUHL’s
shareholding has been liquidated by the IITD.
The assessment by the IITD of principal tax due on the 2006 Transactions is INR 102bn (US$1.4bn), plus applicable interest and penalties. Interest is
currently being charged on the principal at a rate of 12% per annum from February 2017, although this is potentially subject to the IITD’s Indian court
appeal that interest should be back-dated to 2007. Penalties are currently assessed as 100% of the principal tax due, although this is subject to appeal
by CUHL that penalties should not be charged given the retrospective nature of the tax levied.
The Group has legal advice confirming that the maximum amount that could ultimately be recovered from Cairn by the IITD, in excess of the assets
already seized, is limited to the value of CUHL’s assets, principally the remaining ordinary shares in Vedanta Limited.
In March 2015 Cairn filed a Notice of Dispute under the UK-India Bilateral Investment Treaty (the “Treaty”) in order to protect its legal position and seek
restitution of the value effectively seized by the IITD in and since January 2014. Cairn’s principal claims are that the assurance of fair and equitable
treatment and protections against expropriation afforded by the Treaty have been breached by the actions of the IITD, which is seeking to apply
retrospective taxes to historical transactions already closely scrutinised and approved by the Government of India. The IITD has attached and seized
assets to try to enforce such taxation. Cairn’s plea is therefore that the effects of the tax assessment should be nullified and that Cairn should receive
recompense from India for the loss of value resulting from the 2014 attachment of CUHL’s shares in CIL and the withholding of the tax refund, which
together total approximately US$1.4bn.
The Treaty proceedings formally commenced in January 2016 following agreement between Cairn and the Republic of India on the appointment of
a panel of three international arbitrators under the terms of the Treaty. Cairn’s statement of claim was submitted to the arbitral tribunal in June 2016
and the Republic of India submitted its statement of defence in February 2017. Further submissions and document production took place in 2017 and
2018. The main evidentiary hearing of Cairn’s claim under the Treaty took place in August 2018 in The Hague with a final hearing in December 2018.
All formal hearings and submissions have now been made and the tribunal is in the process of drafting its award. The tribunal has indicated that it
expects to be in a position to issue the award in the summer of 2020.
Based on detailed legal advice, Cairn remains confident that it will be successful in this arbitration and accordingly no provision has been made for
any of the tax or penalties assessed by the IITD.
176
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 6 – Discontinued Operations and Assets and Liabilities Held-For-Sale
In November 2019, Cairn announced the sale of the entire share capital of Capricorn Norge AS to Sval
Energi AS with the deal completing in February 2020. Consequently, the financial performance of the
subsidiary for the year ending 31 December 2019 is presented as discontinued operations (with
comparative information restated) and assets and liabilities reclassified as held-for-sale at the balance
sheet date. This section provides further details of the results of the subsidiary for the year and its net
assets at the year end.
Significant Accounting Judgements in This Section:
Transfer of Goodwill to Assets Held-For-Sale
Goodwill arising on past business combinations is allocated to the UK & Norway operating segment and has been tested for impairment annually
at this operating segment level in accordance with IAS 36 ‘Impairment of Assets’. However, IAS 21 ‘The Effects of Changes in Foreign Exchange
Rates’ requires goodwill to be expressed in the functional currency of the foreign operation acquired; therefore the goodwill was allocated between
Capricorn Norge AS (NOK functional) and Nautical Petroleum Limited (GBP at the time of acquisition, now USD functional), the two Parent entities
acquired through the business combinations.
The carrying value of goodwill allocated to Capricorn Norge AS has been included in the assets reclassified as held-for-sale and subsequently has
been fully impaired as part of the disposal group. The resultant impairment is included within the loss for the year from discontinued operations.
Key Estimates and Assumptions in This Section:
There are no key estimates or assumptions in this section.
6.1 Financial Performance
Gross Profit
Pre-award costs
Unsuccessful exploration costs
Administrative expenses
Loss on disposal of intangible exploration/appraisal assets
Gain on disposal of property, plant & equipment – development assets
Impairment of disposal group (note 6.2)
Operating loss
Finance income
Finance costs
Loss before taxation
Taxation
Current tax credit
Deferred tax credit
Deferred tax credit on disposal of property, plant & equipment – development assets
Loss from discontinued operations
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
–
(4.0)
(38.7)
(1.5)
–
0.7
(65.7)
(109.2)
0.4
(6.8)
(115.6)
27.7
26.9
35.4
(25.6)
–
(3.9)
(42.7)
(2.0)
(4.5)
–
–
(53.1)
0.4
(1.7)
(54.4)
35.5
5.6
–
(13.3)
The deferred tax credit of US$26.9m in 2019 represents the release of the remaining deferred tax provisions reflecting recovery of the asset through
sale rather than continued use.
Cairn Energy PLC Annual Report and Accounts 2019
177
F I N A N C I A L
S T A T E M E N T S
Section 6 – Discontinued Operations and Assets and Liabilities Held-For-Sale continued
6.1 Financial Performance Continued
Disposal of 10% Working Interest in Nova to ONE-Dyas Norge AS
In November 2019, Cairn completed the disposal of a 10% working interest share in the Nova development asset to ONE-Dyas Norge AS.
Consideration for the sale was US$59.5m plus working capital adjustments and notional interest from the economic effective date of 1 January 2019
to the date of completion, totalling US$80.2m. The post-tax gain on sale was US$36.1m, calculated as follows:
Proceeds on disposal
Development assets – disposals
Working capital balances at date of completion
Decommissioning provision released
Cost of disposal
Gain on disposal of property, plant & equipment – development assets
Tax credit on disposal
Post-tax gain on disposal
6.2 Assets and Liabilities Held-For-Sale
Assets held-for-sale:
Goodwill
Intangible exploration/appraisal assets
Property, plant & equipment – development assets
Other property, plant & equipment and intangible assets
Cash and cash equivalents
Trade and other receivables
Income tax asset
Liabilities held-for-sale:
Loans and borrowings
Lease liability
Trade and other payables
Provisions – decommissioning
Year ended
31 December
2019
US$m
80.2
(82.1)
3.9
1.8
(3.1)
0.7
35.4
36.1
Transferred to
held-for-sale
US$m
Impairment of
disposal group
US$m
At
31 December
2019
US$m
At
31 December
2018
US$m
46.0
30.1
89.0
2.2
7.2
7.3
27.4
209.2
23.9
0.6
10.4
2.7
37.6
(46.0)
(4.9)
(14.4)
(0.4)
–
–
–
(65.7)
–
–
–
–
–
–
25.2
74.6
1.8
7.2
7.3
27.4
143.5
23.9
0.6
10.4
2.7
37.6
–
–
–
–
–
–
–
–
–
–
–
–
–
The assets and liabilities of Capricorn Norge AS have been reclassified as held-for-sale, forming a single disposal group.
As the net assets of the subsidiary will now be realised through sale rather than recovered through use, and the gain will not be taxable in either the
UK or Norway, the remaining deferred tax provision in Capricorn Norge AS was released before reclassifying liabilities as held-for-sale.
On the date of transfer of the assets and liabilities into the disposal group, an impairment test was performed comparing the carrying value of the
disposal group against its realisable value, based on fair value less cost of disposal. As the carrying value exceeded the fair value less costs of
disposal, forecast to be US$105.9m, an impairment was recorded. In accordance with applicable IFRS, this impairment is allocated firstly against
goodwill until fully eliminated, then on a pro-rata basis across remaining non-current assets to bring the carrying value of the disposal group equal to
its fair value less costs of disposal.
The cumulative foreign exchange loss recognised in other comprehensive income in relation to Capricorn Norge AS at 31 December 2019 is
US$37.7m. The cumulative foreign exchange loss at the date of completion of the sale in 2020 was recycled to the Income Statement.
Similarly the merger reserve of US$255.9m relating to the acquisition of Capricorn Norge AS was transferred to retained earnings in 2020 on
completion of the disposal.
178
Cairn Energy PLC Annual Report and Accounts 2019
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S T A T E M E N T S
Section 6 – Discontinued Operations and Assets and Liabilities Held-For-Sale continued
6.3 Cash Flow Information for Discontinued Operations
Net cash flows (used in)/from operating activities
Net cash flows from/(used in) investing activities
Net cash flows used in financing activities
Net increase/(decrease) in cash and cash equivalents of Capricorn Norge AS
Opening (bank overdraft)/cash and cash equivalents of Capricorn Norge AS
Foreign exchange differences
Closing cash and cash equivalents of Capricorn Norge AS
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
(3.6)
19.2
(4.3)
11.3
(5.1)
1.0
7.2
15.1
(61.8)
(1.1)
(47.8)
41.5
1.2
(5.1)
Cairn Energy PLC Annual Report and Accounts 2019
179
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S T A T E M E N T S
Section 7 – Capital Structure and Other Disclosures
This section includes details of Cairn’s issued share capital and equity reserves.
Other disclosures include details on the auditors’ remuneration. Details on the Group’s policy on the
award of non-audit work to the auditors can be found in the Report of the Audit Committee.
Significant Accounting Judgements in This Section:
There are no significant accounting judgements in this section.
Key Estimates and Assumptions in This Section:
There are no key estimates or assumptions in this section.
7.1 Issued Capital and Reserves
Called-Up Share Capital
Allotted, issued and fully paid ordinary shares
At 1 January 2018
Issued and allotted to ESOP trust
Issued and allotted for employee share options
At 31 December 2018
Issued and allotted for employee share options
At 31 December 2019
Share Premium
At 1 January
Arising on shares issued for employee share options
At 31 December
Number
231/169p
ordinary
‘000
583,236
5,650
616
589,502
51
589,553
2019
US$m
489.7
0.1
489.8
231/169p
ordinary
US$m
12.5
0.1
–
12.6
–
12.6
2018
US$m
488.0
1.7
489.7
a) Shares held by ESOP Trust
The cost of shares held by the ESOP Trust at 31 December 2019 was US$7.4m (2018: US$11.7m). The number of shares held by the Trust at
31 December 2019 was 4,293,341 (2018: 6,744,138) and the market value of these shares was £8.8m/US$11.7m (2018: £10.1m/US$12.9m).
During 2019 no shares were purchased for or allotted to the ESOP Trust. During 2018, the Group purchased 4,322,325 at a cost of US$13.6m and
allotted 5,650,000 shares to the ESOP Trust in anticipation of future vestings forecast under the Group’s share-based payment schemes. During
2019, 1,950,797 (2018: 5,532,742) shares vested and 500,000 (2018: 400,000) shares were transferred from the ESOP Trust to the SIP Trust.
b) Shares held by SIP Trust
The cost of shares held by the SIP Trust at 31 December 2019 was US$8.4m (2018: US$7.9m). The number of shares held by the Trust at 31 December
2019 was 2,562,975 (2018: 2,195,930) and the market value of these shares was £5.3m/US$7.0m (2018: £3.3m/US$4.2m).
c) Foreign currency translation
Unrealised foreign exchange gains and losses arising on consolidation of non-US$ functional currency subsidiary undertakings are taken directly
to reserves. Foreign exchange differences arising on intra-group loans are not eliminated on consolidation; this reflects the exposure to currency
fluctuations where the subsidiaries involved have differing functional currencies. These intra-group loans are not considered to be an investment in a
foreign operation.
180
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 7 – Capital Structure and Other Disclosures continued
7.1 Issued Capital and Reserves Continued
d) Merger and capital reserves
The merger reserve of US$255.9m arose in 2012 on shares issued by Cairn on the acquisition of Capricorn Norge AS. On completion of the sale of
Capricorn Norge AS to Sval Energi AS in February 2020, the merger reserve was transferred to retained earnings.
Capital reserves of US$40.8m include amounts arising on various Group acquisitions and transactions and the capital redemption reserve arising
from the 2013-2014 share buy-back programme. US$0.7m of capital reserves relates directly to Cairn Energy PLC, the Company.
e) Hedge reserve
The hedge reserve at 31 December 2019 of US$0.4m (2018: US$41.0m) is a consequence of the Group’s commodity price hedging, see note 3.5 for
full details. The hedge reserve is used to recognise the effective portion of gains or losses on the derivatives that are designated for, and qualify as,
cash flow hedges.
7.2 Capital Management
The objective of the Group’s capital management structure is to ensure that there remains sufficient liquidity within the Group to carry out committed
work programme requirements. The Group monitors the long-term cash flow requirements of the business in order to assess the requirement for
changes to the capital structure to meet that objective and to maintain flexibility. The Group is subject to quarterly forecast liquidity tests as part of the
RBL facility. The Group has complied with the capital requirements of this test at all times during the year.
Cairn manages the capital structure and makes adjustments to it in light of changes to economic conditions. To maintain or adjust the capital
structure, Cairn may buy back shares, make a special dividend payment to shareholders, return capital, issue new shares for cash, repay debt, put in
place new debt facilities or undertake other such restructuring activities as appropriate. No significant changes were made in the objectives, policies
or processes during the year ended 31 December 2019.
Capital and net debt, including lease liabilities, was as follows:
Loans and borrowings
Lease liabilities/Finance lease liability
Less cash and cash equivalents
Net debt
Equity
Capital and net debt
Gearing ratio
At
31 December
2019
US$m
At
31 December
2018
US$m
–
282.9
(146.5)
136.4
1,455.5
1,591.9
9%
101.7
165.4
(66.3)
200.8
1,390.1
1,590.9
13%
2019 balances relate only to continuing operations. 2018 balances have not been restated for either discontinued operations or the adoption of IFRS 16.
7.3 Guarantees
It is normal practice for the Group to issue guarantees in respect of obligations during the normal course of business.
Details of the Group’s RBL facility can be found in note 3.2. On entering into the facility certain subsidiaries granted cross-guarantees to each of the
lenders.
The Group also provided the following guarantees at 31 December 2019:
– Various guarantees under the borrowing facility for the Group’s operational commitments for the current year of US$52.3m (2018: US$49.5m);
– Parent Company Guarantees for the Group’s obligations under joint operating agreements and other contracts.
Cairn Energy PLC Annual Report and Accounts 2019
181
F I N A N C I A L
S T A T E M E N T S
Section 7 – Capital Structure and Other Disclosures continued
7.4 Auditors’ Remuneration
Fees payable to the Group’s external auditors (including associate firms) for:
Audit fees:
Auditing of the Financial Statements of the Group and the Company
Auditing of the Financial Statements of subsidiaries
Non-audit fees:
Audit-related assurance services
Other assurance services relating to corporate finance transactions
Non-audit services not included above
Total fees
Year ended
31 December
2019
US$’000
Year ended
31 December
2018
US$’000
335
488
823
397
–
6
403
1,226
315
232
547
60
134
8
202
749
Non-audit fees for 2019 include US$169,000 relating to 2018 joint operations assurance certificates, which were late scope changes agreed during
the second half of 2019.
The Group has a policy in place for the award of non-audit work to the auditors which requires Audit Committee approval (see the Audit Committee
Report on page 91).
The split of audit fees to non-audit fees payable to the auditors is as follows:
2019 Fees to the Auditors
2018 Fees to the Auditors
Non-audit fee:
$403,000
Non-audit fee:
$202,000
Audit fee:
$823,000
Audit fee:
$547,000
182
Cairn Energy PLC Annual Report and Accounts 2019
Company Balance Sheet
As at 31 December 2019
Non-current assets
Investments in subsidiaries
Derivative financial instruments
Long-term intercompany receivables
Current assets
Cash and cash equivalents
Other receivables
Derivative financial instruments
Total assets
Current liabilities
Lease liability
Derivative financial instruments
Trade and other payables
Non-current liabilities
Lease liability
Derivative financial instruments
Total liabilities
Net assets
Equity
Called-up share capital
Share premium
Shares held by ESOP/SIP Trusts
Capital reserves
Merger reserve
Retained earnings:
At 1 January
Loss for the year
Other movements in retained earnings
F I N A N C I A L
S T A T E M E N T S
2019
US$m
1,994.6
–
4.6
2018
US$m
2,521.8
7.7
–
1,999.2
2,529.5
2.2
5.7
4.1
12.0
6.3
7.3
36.7
50.3
2,011.2
2,579.8
1.5
4.1
90.2
95.8
4.6
–
4.6
–
36.7
88.1
124.8
–
7.7
7.7
100.4
132.5
1,910.8
2,447.3
12.6
489.8
(15.8)
0.7
255.9
1,708.0
(548.5)
8.1
1,167.6
12.6
489.7
(19.6)
0.7
255.9
2,016.5
(318.9)
10.4
1,708.0
Note
8.2
8.3
8.3
8.3
8.4
8.3
7.1
7.1
7.1a,b
7.1d
7.1d
Total equity
1,910.8
2,447.3
The Financial Statements on pages 183 to 192 were approved by the Board of Directors on 9 March 2020 and signed on its behalf by:
James Smith
Chief Financial Officer
Simon Thomson
Chief Executive
Cairn Energy PLC Annual Report and Accounts 2019
183
F I N A N C I A L
S T A T E M E N T S
Company Statement of Cash Flows
For the year ended 31 December 2019
Cash flows from operating activities:
Loss before taxation
Share-based payments charge
Impairment of investment in subsidiary
Finance income
Finance costs
Other receivables movement
Trade and other payables movement
Net cash (used in)/from operating activities
Cash flows from investing activities:
Interest received
Net cash flows from investing activities
Cash flows from financing activities:
Facility fees, arrangement fees and bank charges
Facility fees reimbursed by subsidiary undertaking
Cost of shares purchased
Proceeds from exercise of share options
Lease payments
Net cash flows used in financing activities
Net (decrease)/increase in cash and cash equivalents
Opening cash and cash equivalents at beginning of year
Closing cash and cash equivalents
Note
2019
US$m
2018
US$m
(548.5)
(318.9)
4.3
534.8
(4.5)
3.9
4.6
1.1
(4.3)
4.6
4.6
(3.1)
–
–
0.1
(1.4)
(4.4)
(4.1)
6.3
2.2
5.2
299.7
(2.9)
7.2
(3.9)
20.4
6.8
2.8
2.8
(7.1)
15.1
(13.6)
1.7
–
(3.9)
5.7
0.6
6.3
7.1a
184
Cairn Energy PLC Annual Report and Accounts 2019
Company Statement of Changes in Equity
For the year ended 31 December 2019
At 1 January 2018
Loss for the year
Total comprehensive expense
Share-based payments
Shares issued for cash
Cost of shares purchased
Exercise of employee share options
Cost of shares vesting
At 31 December 2018
Loss for the year
Total comprehensive expense
Share-based payments
Exercise of employee share options
Cost of shares vesting
F I N A N C I A L
S T A T E M E N T S
Retained
earnings
US$m
2,016.5
(318.9)
(318.9)
14.7
–
–
–
(4.3)
Total
equity
US$m
2,763.4
(318.9)
(318.9)
14.7
–
(13.6)
1.7
–
–
–
–
–
–
–
–
256.6
1,708.0
2,447.3
–
–
–
–
–
(548.5)
(548.5)
11.9
–
(3.8)
(548.5)
(548.5)
11.9
0.1
–
Equity share
capital and
share
premium
US$m
Shares held
by ESOP/SIP
Trusts
US$m
Merger
and capital
reserves
US$m
500.5
(10.2)
256.6
–
–
–
0.1
–
1.7
–
502.3
–
–
–
0.1
–
–
–
–
(0.1)
(13.6)
–
4.3
(19.6)
–
–
–
–
3.8
At 31 December 2019
502.4
(15.8)
256.6
1,167.6
1,910.8
Cairn Energy PLC Annual Report and Accounts 2019
185
F I N A N C I A L
S T A T E M E N T S
Section 8 – Notes to the Company Financial Statements
This section contains the notes to the Company Financial Statements.
The issued capital and reserves of the Company are largely consistent with Cairn Energy PLC Group
Financial Statements. Refer to note 7.1 of the Group Financial Statements.
Key Estimates and Assumptions in This Section:
Impairment Testing of Investments in Subsidiaries
The Company’s investment in Capricorn Oil Limited has been tested for impairment by comparison against the fair value of intangible exploration/
appraisal, property, plant & equipment – development/producing assets and working capital, including cash and cash equivalents and intercompany
receivables, held within the Capricorn Oil Limited sub-group. The fair value of oil and gas assets are calculated using the same assumptions as noted
in section 2.
8.1 Basis of Preparation
The Financial Statements have been prepared in accordance with IFRS as adopted by the EU.
The Company applies accounting policies consistent with those applied by the Group. To the extent that an accounting policy is relevant to both
Group and Company Financial Statements, refer to the Group Financial Statements for disclosure of the accounting policy. Material policies that
apply to the Company only are included as appropriate.
Cairn has used the exemption granted under s408 of the Companies Act 2006 that allows for the non-disclosure of the Income Statement of the
Parent company.
The net assets in the Company Balance Sheet remain in excess of the Group’s total net assets. At 31 December 2019, the Company continues to
carry its investment in Cairn UK Holdings Limited at the historic cost of US$387.7m. This carrying value is supported by the Company’s confidence,
based on detailed legal advice, that it will be successful in the Indian Tax arbitration (see note 5.5) and the value will ultimately be recovered.
Adoption of IFRS 16 ‘Leases’
Other Property, Plant & Equipment – Leasehold Property
The Company recognised a lease liability for the Group’s head office in Edinburgh. The lease costs are recharged to Capricorn Energy Limited where
all head office overhead costs are settled, creating a sub-lease between Cairn Energy PLC and Capricorn Energy Limited for the right to use the
asset in its entirety. There is therefore no right-of-use asset recognised in the Balance Sheet of Cairn Energy PLC, rather a receivable from Capricorn
Energy Limited over the lease term appropriately recorded as either short or long term.
The key estimates and assumptions applied in measuring the lease liability were as follows:
– The lease term is equal to the current non-cancellable period of the lease with no reasonable plans to extend the lease contract beyond the initial
term;
– The interest rate applied is equal to the Group’s incremental borrowing rate on the date of adoption of 5.75% rather than a rate implicit in the lease
contracts where this could not be readily determined.
186
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 8 – Notes to the Company Financial Statements continued
8.2 Investments in Subsidiaries
Accounting Policy
The Company’s investments in subsidiaries are carried at cost less provisions resulting from impairment. In testing for impairment the
carrying value of the investment is compared to its recoverable amount, being its fair value less costs of disposal. The fair value includes the
discounted future net cash flows of oil and gas assets held by the subsidiary, using estimated cash flow projections over the licence period.
For exploration assets, estimated discounted cash flows are risk-weighted for future exploration success.
Discounted future net cash flows are calculated using an estimated short-term oil price based on the forward curve and long-term oil price
of US$65 per bbl (2018: long-term oil price of US$70 per bbl), escalation for prices and costs of 2.0% (2018: 2.0%) and a discount rate of 10%
(2018: 10%). Full details on the assumptions used for valuing oil and gas assets can be found in section 2.
Cost
At 1 January 2018
Additions
At 31 December 2018
Additions
At 31 December 2019
Impairment
At 1 January 2018
Impairment charge
At 31 December 2018
Impairment charge
At 31 December 2019
Net book value
At 31 December 2017
At 31 December 2018
At 31 December 2019
Subsidiary
undertakings
US$m
3,676.4
9.5
3,685.9
Total
US$m
3,676.4
9.5
3,685.9
7.6
7.6
3,693.5
3,693.5
864.4
299.7
1,164.1
534.8
864.4
299.7
1,164.1
534.8
1,698.9
1,698.9
2,812.0
2,521.8
2,812.0
2,521.8
1,994.6
1,994.6
Additions during the year of US$7.6m (2018: US$9.5m) relate to the Company’s investment in Capricorn Oil Limited. These represent share awards
made by the Company to the employees of Capricorn Energy Limited (a principal subsidiary of Capricorn Oil Limited).
At the year end, investments in subsidiaries were reviewed for indicators of impairment and impairment tests conducted where indicators were
identified. Following this review, the Company’s investment in Capricorn Oil Limited was impaired to reflect the fair value of the underlying assets
of the Capricorn Oil Group. A charge of US$534.8m was made to the Income Statement in 2019 (2018: US$299.7m). The fall in the value of the
underlying assets of the Capricorn Oil Group principally reflects a reduction in the recoverable value of the Senegal development asset.
Cairn Energy PLC Annual Report and Accounts 2019
187
F I N A N C I A L
S T A T E M E N T S
Section 8 – Notes to the Company Financial Statements continued
8.2 Investments in Subsidiaries Continued
The Company’s subsidiaries as at the balance sheet date are set out below. The Company holds 100% of the voting rights and beneficial interests in
the ordinary shares of the following companies:
Direct Holdings
Business
Country of
incorporation
Country of
operation
Registered office address
Capricorn Oil Limited
Holding company
Capricorn Senegal (Holding) Limited Holding company
Scotland
England
Scotland
Scotland
Cairn UK Holdings Limited
Holding company
Scotland
Scotland
50 Lothian Road, Edinburgh, EH3 9BY
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
50 Lothian Road, Edinburgh, EH3 9BY
Indirect Holdings
Agora Oil and Gas (UK) Limited
Alba Resources Limited
Business
Exploration
Exploration
Country of
incorporation
Country of
operation
Registered office address
Scotland
Scotland
UK
UK
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Capricorn Americas Limited
Capricorn Americas Mexico S. de
R.L. de C.V.
Capricorn Brasil Petróleo e Gás Ltda Exploration
Holding company
Exploration
Scotland
Mexico
Scotland
Mexico
Brazil
Brazil
50 Lothian Road, Edinburgh, EH3 9BY
Torre Mayor, Av. Paseo de la Reforma 505, Cuauhtémoc,
CP 06500, CDMX, México
Praia de Botafogo 228, 16th floor, suite 1601
Zip Code 22250-040 Rio de Janeiro, Brazil
Cairn Côte d’Ivoire Limited
Capricorn Energy Limited
Capricorn Energy Mexico S. de R.L.
de C.V.
Capricorn Energy Search Limited
Capricorn Exploration and
Development Company Limited
Capricorn Exploration Limited1
Capricorn Greenland Exploration 1
Limited
Capricorn Ireland Limited
Exploration
Holding company
Exploration
Scotland
Scotland
Mexico
Exploration
Exploration
Scotland
Scotland
Côte d’Ivoire 50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
Av. Paseo de la Reforma 295, Cuauhtémoc, CP 06500,
Mexico
CDMX, México
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
Morocco
Non-trading
Holding company
Scotland
Scotland
Non-trading 50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
Capricorn Malta Limited
Capricorn Mauritania Limited
Capricorn Nicaragua BV
Exploration
Exploration
Exploration
Capricorn Norge AS2
Exploration and
development
Exploration
Exploration
Scotland
50 Lothian Road, Edinburgh, EH3 9BY
Republic
of Ireland
50 Lothian Road, Edinburgh, EH3 9BY
Malta
Mauritania
50 Lothian Road, Edinburgh, EH3 9BY
Non-trading 50 Lothian Road, Edinburgh, EH3 9BY
Norway
Jåttåvågveien 7, 4020 Stavanger, Norway
Scotland
Scotland
The
Netherlands
Norway
Capricorn Offshore Exploration
Limited
Capricorn Oil and Gas Tunisia GmbH3 Non-trading
Capricorn Petroleum Limited
Capricorn Resources Management
Limited
Capricorn Senegal Limited
Exploration
Holding company
Royalty interest
Scotland
Israel
50 Lothian Road, Edinburgh, EH3 9BY
Switzerland Non-trading Gubelstrasse 5, Postfach 1524, CH-6301 Zug, Switzerland
Scotland
Scotland
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
Mongolia
Scotland
Senegal
50 Lothian Road, Edinburgh, EH3 9BY
Capricorn Spain Limited
Capricorn Suriname BV
Exploration
Exploration
Nautical Holdings Limited
Holding company
Scotland
The
Netherlands
England
UK
Spain
Suriname
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Nautical Italia SRL3
Nautical Petroleum AG3
Nautical Petroleum Limited
Transunion Petroleum Italia SRL3
UAH Limited
Non-trading
Production
Exploration and
production
Non-trading
Holding company
Italy
Italy
Switzerland UK
UK
England
Italy
England
Italy
UK
1 Exempt from audit under Section 480 of the Companies Act
2 The sale of the company completed on 28 February 2020
3 Company is in the process of liquidation
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
Piazza Pietro Merolli n. 2, 00151 Roma, Italy
Baarerstrasse 8, 6300 Zug, Switzerland
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
Piazza Pietro Merolli n. 2, 00151 Roma, Italy
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
188
Cairn Energy PLC Annual Report and Accounts 2019
Section 8 – Notes to the Company Financial Statements continued
8.3 Derivative Financial Instruments
Non-current assets
Financial assets – hedge options maturing after more than one year
Current assets
Financial assets – hedge options maturing within one year
Current liabilities
Financial liabilities – hedge options maturing within one year
Non-current liabilities
Financial liabilities – hedge options maturing after more than one year
F I N A N C I A L
S T A T E M E N T S
At
31 December
2019
US$m
At
31 December
2018
US$m
–
4.1
7.7
36.7
(4.1)
(36.7)
–
–
(7.7)
–
Mark-to-market gains and losses on commodity derivatives are recorded as financial assets and liabilities. Cairn Energy PLC enters into option
contracts with third parties and back-to-back contracts with a subsidiary on the same date, with the same terms. Therefore there are equal financial
assets and liabilities. Details of Group hedging can be found in note 3.5.
8.4 Trade and Other Payables
Trade and other payables
Amounts payable to subsidiary undertakings
Accruals
At
31 December
2019
US$m
At
31 December
2018
US$m
0.4
86.9
2.9
90.2
0.2
83.2
4.7
88.1
8.5 Financial Instruments
Set out below is the comparison by category of carrying amounts and fair values of all the Company’s financial instruments that are carried in the
Financial Statements. The fair value of financial assets and liabilities, other than those relating to hedge options, has been calculated by discounting
the expected future cash flows at prevailing interest rates. Hedge options are valued using models with observable inputs.
Financial assets
Carrying amount and fair value
Financial assets at amortised cost
Cash and cash equivalents
Other receivables – amounts receivable from subsidiary undertakings
Other receivables – other
Long-term intercompany receivables
Derivative financial instruments
Financial assets – hedge options
At
31 December
2019
US$m
At
31 December
2018
US$m
2.2
1.8
3.9
4.6
4.1
16.6
6.3
2.5
4.5
–
44.4
57.7
For all financial assets held at amortised cost, their carrying amount is considered to be the same as their fair value.
Cairn Energy PLC Annual Report and Accounts 2019
189
F I N A N C I A L
S T A T E M E N T S
Section 8 – Notes to the Company Financial Statements continued
8.5 Financial Instruments Continued
Maturity analysis of financial assets
The expected financial maturity of the Company’s financial assets at 31 December 2019 is as follows:
Financial assets at amortised cost
Cash and cash equivalents
Other receivables – amounts receivable from subsidiary undertakings
Other receivables – other
Long-term intercompany receivables
Financial assets – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
2.2
1.8
3.9
–
4.1
12.0
–
–
–
1.6
–
1.6
–
–
–
3.0
–
3.0
–
–
–
–
–
–
The expected financial maturity of the Company’s financial assets at 31 December 2018 was as follows:
Financial assets at amortised cost
Cash and cash equivalents
Other receivables – amounts receivable from subsidiary undertakings
Other receivables – other
Financial assets – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
6.3
2.5
4.5
36.7
50.0
–
–
–
7.7
7.7
–
–
–
–
–
–
–
–
–
–
Financial liabilities
Carrying amount and fair value
Financial liabilities at amortised cost
Trade and other payables
Accruals
Amounts payable to subsidiary undertakings
Lease liability
Derivative financial instruments
Financial liabilities – hedge options
Comparative information has not been restated on adoption of IFRS 16.
At
31 December
2019
US$m
At
31 December
2018
US$m
0.4
2.9
86.9
6.1
4.1
100.4
0.2
4.7
83.2
–
44.4
132.5
190
Cairn Energy PLC Annual Report and Accounts 2019
F I N A N C I A L
S T A T E M E N T S
Section 8 – Notes to the Company Financial Statements continued
8.5 Financial Instruments Continued
Maturity analysis of financial liabilities
The expected financial maturity of the Company’s financial liabilities at 31 December 2019 is as follows:
Financial liabilities at amortised cost
Trade and other payables
Accruals
Amounts payable to subsidiary undertakings
Lease liability
Derivative financial instruments
Financial liabilities – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
0.4
2.9
86.9
1.5
4.1
95.8
–
–
–
1.6
–
1.6
–
–
–
3.0
–
3.0
–
–
–
–
–
–
The expected financial maturity of the Company’s financial liabilities at 31 December 2018 was as follows:
Financial liabilities at amortised cost
Trade and other payables
Accruals
Amounts payable to subsidiary undertakings
Derivative financial instruments
Financial liabilities – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
0.2
4.7
83.2
36.7
124.8
–
–
–
7.7
7.7
–
–
–
–
–
–
–
–
–
–
Financial Risk Management: Risk and Objectives
The Company’s financial risk management policies and objectives are consistent with those of the Group detailed in note 3.9.
The Company is not exposed to material foreign currency exchange rate risk.
8.6 Capital Management
Capital and net debt were made up as follows:
Continuing operations
Amounts payable to subsidiary undertakings
Lease liability
Less cash and cash equivalents
Net debt
Equity
Capital and net debt
Gearing ratio
At
31 December
2019
US$m
At
31 December
2018
US$m
86.9
6.1
(2.2)
83.2
–
(6.3)
90.8
1,910.8
76.9
2,447.3
2,001.6
2,524.2
5%
3%
Cairn Energy PLC Annual Report and Accounts 2019
191
F I N A N C I A L
S T A T E M E N T S
Section 8 – Notes to the Company Financial Statements continued
8.7 Related Party Transactions
The Company’s subsidiaries are listed in note 8.2. The following table provides the Company’s balances which are outstanding with subsidiary
undertakings at the balance sheet date:
Amounts payable to subsidiary undertakings
Amounts receivable from subsidiary undertakings
The amounts outstanding are unsecured, repayable on demand and will be settled in cash.
The following table provides the Company’s transactions with subsidiary undertakings recorded in the loss for the year:
Amounts invoiced to subsidiaries
Amounts invoiced by subsidiaries
At
31 December
2019
US$m
At
31 December
2018
US$m
(86.9)
1.8
(85.1)
(83.2)
2.5
(80.7)
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
10.4
10.6
37.2
5.8
Directors’ Remuneration
The remuneration of the Directors of the Company is set out below. Further information about individual Directors’ remuneration is provided in the
audited section of the Directors’ Remuneration Report on pages 94 to 123.
Emoluments
Share-based payments
Year ended
31 December
2019
US$m
Year ended
31 December
2018
US$m
3.3
–
3.3
3.4
2.4
5.8
Pension contributions of US$0.2m (2018: US$0.2m) were made on behalf of Directors in 2019.
No LTIP share awards to Directors vested during 2019 (2018: 820,131). Share-based payments disclosed for 2018 above represent the market value at
the vesting date of these awards in that year.
Other Transactions
During the year the Company did not make any purchases in the ordinary course of business from an entity under common control (2018: US$nil).
192
Cairn Energy PLC Annual Report and Accounts 2019
A D D I T I O N A L
I N F O R M A T I O N
Licence List
As at 31 December 2019
Country
Asset name
Cote D'Ivoire
CI-301
Cote D'Ivoire
CI-519
Cote D'Ivoire
CI-518
Cote D'Ivoire
CI-302
Cote D'Ivoire
CI-522
Cote D'Ivoire
CI-521
Cote D'Ivoire
CI-520
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
BLOCK 39
BLOCK 40
BLOCK 45
BLOCK 46
BLOCK 47
BLOCK 48
BLOCK 52
BLOCK 53
Mexico
BLOCK 7
Mexico
BLOCK 9
Mexico
BLOCK 15
Nicaragua
Nicaragua
Nicaragua
Nicaragua
C-1
C-2
C-3
C-4
Licence
CI-301
CI-519
CI-518
CI-302
CI-522
CI-521
CI-520
LICENCE NO. 39
LICENCE NO. 40
LICENCE NO. 45
LICENCE NO. 46
LICENCE NO. 47
LICENCE NO. 48
LICENCE NO. 52
LICENCE NO. 53
CNH-R02-L01-A7.
CS-2017
CNH-R02-L01-A9.
CS-2017
CNH-R03-L01-G-
TMV-01-2018
EQUINOR-1
EQUINOR-2
EQUINOR-3
EQUINOR-4
Block(s)
CI-301
CI-519
CI-518
CI-302
CI-522
CI-521
CI-520
39
40
45
46
47
48
52
53
7
9
15
C-1
C-2
C-3
C-4
Operator
Tullow Cote D'Ivoire Onshore Limited (60%)
Tullow Cote D'Ivoire Onshore Limited (60%)
Tullow Cote D'Ivoire Onshore Limited (60%)
Tullow Cote D'Ivoire Onshore Limited (60%)
Tullow Cote D'Ivoire Onshore Limited (60%)
Tullow Cote D'Ivoire Onshore Limited (60%)
Tullow Cote D'Ivoire Onshore Limited (60%)
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
Capricorn Offshore Exploration Limited
ENI (45%)
Capricorn Energy Mexico
Capricorn Energy Mexico
Equinor Asa (49.9%)
Equinor Asa (49.9%)
Equinor Asa (49.9%)
Equinor Asa (49.9%)
DUNCAN UPDIP
PL248J
Part of 35/11
Capricorn Norge AS (60%)
SKARFJELL SOUTH PL378
NOVA
PL418
NOVA EXTENSION PL418B
35/12
35/8, 35/9
35/8, 35/10
Wintershall Norge AS (75.76%)
12.12
Wintershall Norge AS (45%)
Wintershall Norge AS (45%)
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Norway
Republic of
Ireland
Senegal
Senegal
INCA
LYNGHAUG
GRANNES
HAVHEST
GODALEN
BYHAUGEN
ROSSI
FLIPPER
DUNCAN
AGAT
PRESTO
(STJERNESKUDD)
CARAMEL
SUNSTONE
PL722
PL758
PL800
PL828
PL842
PL844
PL853
PL854
PL880
PL884
PL885
PL927
PL943
7322/6, 7323/4
Equinor Energy AS (45%)
6508/1, 6608/10, 6608/11
Capricorn Norge AS (50%)
6508/1, 6508/2
Capricorn Norge AS (50%)
36/4
Equinor Energy AS (50%)
6608/10, 6608/11, 6608/12
Capricorn Norge AS (40%)
6609/5, 6609/6, 6609/8, 6609/9 INEOS E&P Norge AS (40%)
7322/9
7322/3, 7323/1
35/8
35/3
35/3, 36/1
Lundin Norway AS (60%)
Equinor Energy AS (40%)
Capricorn Norge AS (60%)
Wellesley Petroleum AS (50%)
Equinor Energy AS (20%)
35/7, 35/10
Wintershall Norge AS (50%)
6507/1, 6507/2, 6607/10, 6607/11,
6607/12
Equinor Energy AS (40%)
SPANISH POINT
FEL 2/04
35/8, 35/9
Capricorn Ireland
RUFISQUE
OFFSHORE
SANGOMAR
OFFSHORE
SANGOMAR-
RUFISQUE
SANGOMAR-
RUFISQUE
N/A
N/A
Woodside Pet Ltd (35%)
Woodside Pet Ltd (35%)
Cairn
Energy
interest (%)
30
30
30
30
30
30
30
33.34
33.34
33.34
33.34
33.34
33.34
33.34
33.34
30
65
50
35.1
35.1
35.1
35.1
60
10
10
15
50
50
40
40
20
40
40
60
30
30
50
30
38
40
40
193
Cairn Energy PLC Annual Report and Accounts 2019
A D D I T I O N A L
I N F O R M A T I O N
Licence List continued
Country
Asset name
Licence
Senegal
SANGOMAR DEEP
OFFSHORE
SANGOMAR-
RUFISQUE
Suriname
BLOCK 61
BLOCK 61
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
KRAKEN
CATCHER
AGAR-PLANTAIN
LAVERDA
CHIMERA
WOODSTOCK
MANHATTAN
PEPPERMINT
BONNEVILLE
P1077
P1430
P1763
P2070
P2312
P2379
P2381
P2393
P2453
LAVERDA TEMPLATE P2454
MANE
EAST ORKNEY
BASIN
P2466
P2468
Block(s)
N/A
61
9/2b
28/9a
9/9d, 9/14a
28/4a
3/16a, 3/17a
Operator
Woodside Pet Ltd (35%)
Capricorn Suriname B.V.
Enquest Heather Ltd (70.5%)
Premier Oil UK Ltd (50%)
Apache Beryl Ltd (50%)
Premier Oil UK Ltd (54%)
Nautical Petroleum
22/11b, 22/12b, 22/16b, 22/17c
Nautical Petroleum
22/13c, 22/18d
28/10a
28/9c
28/9d
Nautical Petroleum
Nautical Petroleum
Premier Oil UK Ltd (50%)
Premier Oil UK Ltd (54%)
3/16b, 3/21a, 3/22a
13/10, 13/3, 13/4, 13/5, 13/8, 13/9,
14/1, 14/6, 6/28, 6/29
No Operator
No Operator
Note
Post 2019 year end Cairn no longer holds interests in Norway, Republic of Ireland or Nicaragua.
Group Reserves and Resources
As at 31 December 2019
Group Proven Plus Probable Oil and Gas Reserves 2P
31 December 2018
Additions of reserves in place
Revisions of previous estimates
Disposals
Production
31 December 2019
2P Reserves by Country at 31 December 2019
UK
Norway
Senegal
Total
Group Contingent Oil and Gas Resources 2C
31 December 2018
Revisions of previous estimates
Promotion to Reserves
31 December 2019
All contingent resources at 31 December 2019 relate to Sangomar in Senegal
EI
WI
Entitlement Interest
Working Interest
WI basis
mmboe
56.3
101.3
8.4
(7.6)
(8.7)
149.7
WI basis
mmboe
43.1
7.6
99.0
149.7
Cairn
Energy
interest (%)
40
100
29.5
20
25
20
45
100
40
60
20
20
100
50
EI basis
mmboe
56.3
93.8
8.4
(7.6)
(8.7)
142.2
EI basis
mmboe
43.1
7.6
91.4
142.2
WI basis
Mmboe
188.8
22.0
(101.4)
109.4
194
Cairn Energy PLC Annual Report and Accounts 2019
Glossary
The following are the main terms and abbreviations used in this report:
2C
2D
3D
2P
P10
P50
P90
3Rs
ABC
AGM
ALARP
APA
API
AQI
bbl
bbls
BIA
bn
boe
boepd
bopd
bps
BRINDEX
BST
Capex
CCO
CDS
CEO
CERT
CFO
CHA
CIL
CMAPP
CO2
COO
COP21
COS
CR
CRMS
CSL
CSR
CUHL
Defra
E&A
EBL
EIA
EITI
ELT
ERP
ESG
ESIA
ESOP
ESOS
EU
EU ETS
EVF
EY
FAN
Denotes best estimate scenario of contingent resources
two dimensional
three dimensional
Proved plus probable reserves, denotes best estimate scenario
Value with a 10% probability of being equal or exceeded, low
degree of certainty
Value with a 50% probability of being equal or exceeded,
medium degree of certainty
Value with a 90% probability of being equal or exceeded, high
degree of certainty
Cairn core values: Respect, Relationships and Responsibility
anti bribery and corruption
annual general meeting
as low as reasonably practicable
Awards in Predefined Areas
American Petroleum Institute
Audit Quality Inspection
barrel
barrels
biodiversity impact assessment
billion
barrels of oil equivalent
barrels of oil equivalent per day
barrels of oil per day
basis points
the Association of British Independent Oil Exploration
Companies
British Standard Time
capital expenditure
Corporate Criminal Offence
credit default swap
Chief Executive Officer
Crisis and Emergency Response Team
Chief Financial Officer
critical habitat assessment
Cairn India Limited
Corporate Major Accident Prevention Policy
carbon dioxide
Chief Operating Officer
2015 Paris Climate Conference
Cairn Operating Standards
corporate responsibility
Corporate Responsibility Management System
Capricorn Senegal Limited
corporate social responsibility
Cairn UK Holdings Limited
Department for Environment, Food and Rural Affairs
exploration and appraisal
environmental baseline
Environmental Impact Assessment
Extractive Industries Transparency Initiative
Exploration Leadership Team
enterprise resource platform
Environmental, Social and Governance
Environmental and Social Impact Assessment
employee share option plan
Energy Savings Opportunity Scheme
European Union
EU Emissions Trading Scheme
Employee Voice Forum
Ernst & Young LLP
FAN oil discovery, Senegal
A D D I T I O N A L
I N F O R M A T I O N
field development plan
front end engineering design
Field Investment Decision
FDP
FEED
FID
FlowStream FlowStream Thruer Ltd
FPSO
FRC
Ft
G&G
GAAP
GBP
GDPR
GHGs
GRI
GWP
H1/2
HR
HRIA
HSE
HSSE
IAS
IASB
ICSA
IEA
IFC
IFRS
IIP
IITD
IMT
INDC
INPG
INR
IOGP
IP
IPCC
IPIECA
floating production storage and offloading
Financial Reporting Council
foot
geology and geophysics
Generally Accepted Accounting Principles
Great British Pound
General Data Protection Regulation
greenhouse gases
Global Reporting Initiative
global warming potential
first/second half (of a year)
Human Resources
human rights impact assessment
heath, safety and environment
health, safety, security and environment
International Accounting Standards
International Accounting Standards Board
The Chartered Governance Institute
International Energy Agency
International Finance Corporation
International Financial Reporting Standards
Investors in People
Indian Income Tax Department
Incident Management Team
intended national determined contribution
National Institute for Oil and Gas (Senegal)
Indian rupee
International Association of Oil and Gas Producers
investment proposal
International Panel on Climate Change
International Petroleum Industry Environmental Conservation
Association
initial public offering
Information Systems
invitation to tender
joint venture
key performance indicator
Latin America
London Interbank Offered Rate
Liquefied Natural Gas
lost time injury frequency
long term incentive plan
million
million barrels of oil
million barrels of oil equivalent
IPO
IS
ITT
JV
KPI
LATAM
LIBOR
LNG
LTIF
LTIP
m
mmbbls
mmboe
mmbopd million barrels of oil per day
MSA
MSG
MT
NDC
NGO
NIBOR
NOK
NPV
OGUK
opex
OSPAR
Modern Slavery Act
multi stakeholder group
Management Team
National Determined Contributions
non-governmental organisation
Norwegian Interbank Offered Rate
Norwegian Krone
Net Present Value
Oil and Gas UK
operating expenditure
Oslo/Paris convention (for the Protection of the Marine
Environment of the North-East Atlantic)
Cairn Energy PLC Annual Report and Accounts 2019
195
A D D I T I O N A L
I N F O R M A T I O N
Glossary continued
PDMR
PDP
PSC
PwC
RBL
RMC
RWDC
SASB
SASISOPA
person discharging managerial responsibility
project delivery process
Production Sharing Contract
PricewaterhouseCoopers LLP
reserves based lending
Risk Management Committee
restricted workday case
Sustainability Accounting Standards Board
Industrial Safety, Operational Safety and Environmental
Protection Administration System
United Nations sustainable development goals
Safety and Environment Critical Element
social impact assessment
Senior Independent Director
share incentive plan
Senior Leadership Team
small and medium-sized enterprises
SNE development, Senegal
Task Force on Climate-Related Financial Disclosure
The Hunger Project
total recordable injury rate
total reward statement
total shareholder return
United Kingdom
United Kingdom continental shelf
United Nations
United Nations Educational, Scientific and Cultural Organization
United Nations Convention on Climate Change
United Nations Global Compact
United States Dollar
World Energy Outlook
working interest
SDGs
SECE
SIA
SID
SIP
SLT
SMEs
SNE
TCFD
THP
TRIR
TRS
TSR
UK
UKCS
UN
UNESCO
UNFCCC
UNGC
US$
WEO
WI
Woodside Woodside Energy Ltd.
year end
YE
year to date
YTD
196
Cairn Energy PLC Annual Report and Accounts 2019
A D D I T I O N A L
I N F O R M A T I O N
Company Information
Financial Advisers
Rothschild & Co
New Court
St Swithin’s Lane
London
EC4N 8AL
Secretary
Duncan Wood LLB
Solicitors
Shepherd and Wedderburn LLP
1 Exchange Crescent
Conference Square
Edinburgh
EH3 8UL
Auditor
PricewaterhouseCoopers LLP
144 Morrison Street
Edinburgh
EH3 8EB
Stockbrokers
Morgan Stanley
20 Bank Street
Canary Wharf
London
E14 4AD
J.P. Morgan Cazenove
25 Bank Street
Canary Wharf
London
E14 5JP
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
UK Shareholder
Helpline Number
T: 0371 384 2660
Overseas Shareholder
Helpline Number
T: +44 121 415 7047
Textel Helpline Number
T: 0371 384 2255
Shareview Dealing
Helpline Number
T: 0345 603 7037
www.shareview.co.uk
Printed on FSC-recognised paper, produced from sustainably managed
forests. This report was printed with vegetable oil-based inks by an FSC-
recognised printer that holds an ISO 14001 accreditation.
These materials contain forward-looking statements regarding Cairn,
our corporate plans, future financial condition, future results of operations,
future business plans and strategies. All such forward-looking statements
are based on our management’s assumptions and beliefs in the light of
information available to them at this time. These forward-looking statements
are, by their nature, subject to significant risks and uncertainties and actual
results, performance and achievements may be materially different from
those expressed in such statements. Factors that may cause actual results,
performance or achievements to differ from expectations include, but are
not limited to, regulatory changes, future levels of industry product supply,
demand and pricing, weather and weather-related impacts, wars and acts
of terrorism, development and use of technology, acts of competitors and
other changes to business conditions. Cairn undertakes no obligation to
revise any such forward-looking statements to reflect any changes in Cairn’s
expectations with regard thereto or any change in circumstances or events
after the date hereof.
Cairn Energy PLC Annual Report and Accounts 2019
197
Head Office
50 Lothian Road
Edinburgh
EH3 9BY
T: +44 131 475 3000
F: +44 131 475 3030
E: pr@cairnenergy.com
www.cairnenergy.com
Senegal
Immeuble Focus One
14 avenue Birago Diop
1er etage, Point E
Dakar, Senegal
London
4th Floor
Wellington House
125 Strand
London
WC2R 0AP
Mexico
Capricorn Americas México
Torre Mayor
Avienda de la Reforma 505
Piso 36
Colonia Cuauhtémoc
Delegación Cuauhtémoc
06500 Ciudad de México
www.cairnenergy.com/ar2019
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