RESPONSIBLE.
READY.
REFOCUSED.
CAIRN ENERGY PLC
ANNUAL REPORT AND ACCOUNTS 2020
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CAIRN ENERGY PLC IS AN
INDEPENDENT, UK-BASED ENERGY
COMPANY, FOCUSED ON OIL AND
GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION.
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
across the oil and gas life cycle.
RESPONSIBLE.
READY.
REFOCUSED.
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Positioned to create value. After a year of effective and proactive
portfolio management, the Group has the strategic flexibility to capture
further opportunities for near-term development, growth and cash flow.
36
It’s always the right time to do the right thing. We continue to develop
our responsible approach, ensuring the sustainability of our business
and delivering our commitments to our stakeholders and the
communities where we operate.
Fiscal discipline and financial
flexibility. Active portfolio
management has enabled
return of cash to shareholders,
whilst retaining the ability to
invest through the cycle and
expand and diversify our
production base to support
long-term value creation.
A balanced approach to
exploration. A focus on
‘advantaged barrels’ targets
attractive resources with
optimised development
timelines, scale and supportive
fiscal environments, with strong
alignment with our ESG priorities.
We will continue to maintain
exposure and readiness to
capture select larger, more
frontier opportunities with
attractive growth potential.
Strategic Report
AtaGlance
Chair’sStatement
OurStrategy
BusinessModel
BusinessContext
StakeholdersandS172Statement
CEO’sReview
OurStoryin2020:
StrategicDeliveryfromaResilientPortfolio
OurStoryin2020:
FiscalDisciplineandFinancialFlexibility
MeasuringOurProgress
OurStoryin2020:
OurResponsibleApproach:ESGPriorities
OurStoryin2020:
FlexibleExplorationPortfolio
RiskManagement
BehavingResponsiblytoPeople
BehavingResponsiblyTowardstheEnvironment
BehavingResponsiblytoSociety
OperationalReview
FinancialReview
Leadership and Governance
BoardofDirectors
ResponsibleGovernance
CorporateGovernanceStatement
AuditCommitteeReport
NominationCommitteeReport
Directors’RemunerationReport
Directors’Report
Financial Statements
IndependentAuditors’Report
GroupIncomeStatement
GroupStatementofComprehensiveIncome
GroupBalanceSheet
GroupStatementofCashFlows
GroupStatementofChangesinEquity
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Section1–BasisofPreparationandContingentAsset
138
Section2–OilandGasAssetsandOperations
Section3–WorkingCapital,FinancialInstruments
andLong-termLiabilities
Section4–IncomeStatementAnalysis
Section5–Taxation
Section6–DiscontinuedOperations
Section7–CapitalStructureandOtherDisclosures
CompanyBalanceSheet
CompanyStatementofCashFlows
CompanyStatementofChangesinEquity
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Section8–NotestotheCompanyFinancialStatements181
Section9–EventsAftertheBalanceSheetDate
188
Additional Information
LicenceList
GroupReservesandResources
Glossary
Appendix:GHGEmissionsCalculation
CompanyInformation
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This annual report sets out the performance
of Cairn Energy in the 2020 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 www.cairnenergy.com/
working-responsibly
Discover more at
www.cairnenergy.com/ar2020
2020 Highlights
Net oil production averaged (bopd)
~21,000
2020
2019
Oil and gas sales revenue
US$324m
2020
2019
Net cash inflow
US$239m
2020
2019
Year end Group cash
US$570m
2020
2019
India arbitration award in Cairn’s favour of
US$1.2bn
plus interest and costs
~21,000
~23,000
US$324m
US$504m
US$239m
US$390m
US$570m
US$147m
Returned to shareholders from Senegal proceeds
US$250m
Special dividend of 32 pence per ordinary eligible share paid on 25 January 2021
Readmore:OperationalReviewp62andFinancialReviewp66
Cairn Energy PLC Annual Report and Accounts 2020
1
STRATEGIC
REPORT
At a Glance
Chair’s Statement
Our Strategy
Business Model
Business Context
Stakeholders and S172 Statement
CEO’s Review
Our Story in 2020:
Strategic Delivery from a Resilient Portfolio
Our Story in 2020:
Fiscal Discipline and Financial Flexibility
Measuring Our Progress
Our Story in 2020:
Our Responsible Approach: ESG Priorities
Our Story in 2020:
Flexible Exploration Portfolio
Risk Management
Behaving Responsibly to People
Behaving Responsibly Towards the Environment
Behaving Responsibly to Society
Operational Review
Financial Review
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Cairn Energy PLC Annual Report and Accounts 2020
Cairn Energy PLC Annual Report and Accounts 2020
3
1 Strategic Report234 At a Glance
OUR
PORTFOLIO
Cairn’s exploration activities are focused on North West Europe,
West Africa and Latin America. Our production assets are
located in the UK North Sea. Cairn’s headquarters are
in Edinburgh, Scotland supported by operational offices
in London and Mexico.
UK
ISRAEL
MEXICO
SURINAME
CÔTE D’IVOIRE
EXPLORATION
AND APPRAISAL
DEVELOPMENT
PRODUCTION
4-8 years
2-5 years
10-25 years
Identify
Explore
Appraise
Develop
Produce
Return & reinvest
CREATING VALUE
ADDING VALUE
REALISING VALUE
Exploration activity, including seismic
surveying and drilling, can create
material value.
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.
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Cairn Energy PLC Annual Report and Accounts 2020
UK
ISRAEL
MEXICO
SURINAME
CÔTE D’IVOIRE
Where we operate
Suriname
Mexico
Israel
1 licence
13,080 km2 acreage
3 licences
1,648 km2 acreage
8 licences
2,698 km2 acreage
Côte d’Ivoire
UK
3 licences
3,975 km2 acreage
13 licences
3,179 km2 acreage
2 producing fields
(Catcher & Kraken)
Note: Post 2020 year end, Cairn no longer holds interests in UK licences P1763 and P2312.
Cairn Energy PLC Annual Report and Accounts 2020
5
1 Strategic Report234
Chair’s Statement
RESPONSIBLE
PORTFOLIO
MANAGEMENT
Nicoletta Giadrossi
Chair
I have taken on the role of Chair at Cairn Energy at a very exciting time. Our industry is
in transition, with structural changes that represent challenges but also opportunities.
As we look to the future, we do so from a position of strength and with all the building
blocks for success in place: we are a resilient, flexible company with a breadth of
technical knowledge and a great team. We have shown our capacity to deliver value
to our shareholders and to integrate the expectations of our stakeholders in our
everyday work.
This is testament to my predecessor Ian Tyler
and I would like to thank him for his service to
Cairn. It is due to Ian and the strength of the
Executive Team that the Company can look
to the future with confidence.
The External Environment
I believe that there are two key issues that
we have to face: we have to define how
we play in the landscape of the energy
transition, balancing the expectations of our
stakeholders, and we have to continue to
deliver value for our shareholders. Against a
backdrop of changing risk appetite in capital
markets, it will be increasingly important to
differentiate ourselves, providing a unique
value proposition based on solid financial
management, technical know-how and
active portfolio management.
Partnerships and Responsible Governance
It is becoming increasingly important to
describe how we integrate environmental,
social and governance (ESG) considerations
into everything we do. ESG considerations
have always been an integral element of
Cairn’s thinking and approach and as a
result we have 30 years of experience in
stakeholder management on these issues.
For Cairn, this means finding the best ways to
work closely with key partners, for example
in our production sharing contracts and
Joint Ventures, furthering our goals through
influence and dialogue and continuously
engaging with governments, local
communities, environmental organisations
or regulators. Recognising the importance
of these priorities, ESG considerations are
now a standing agenda item for the Board, as
well as an important KPI in the determination
of Management Variable Remuneration.
to them? How do we respond to that and
make sure that we can do it in a way
that is successful both for them and for
the Company?
I take on this role as the Company further
develops as a sustainable hydrocarbon
operator that must acknowledge ongoing
change and play a responsible part in the
energy transition. I look forward to supporting
the Company in this area and building on an
existing strong track record, for example: the
Environmental Impact Assessments carried
out prior to beginning new operations; our
recent involvement in Carbon Capture,
Utilisation and Storage; our endeavours to
build sustainable supply chains; as well as our
commitment to comply with the Task Force
on Climate-related Financial Disclosures
(TCFD) framework. It is critical that we explain
effectively to our stakeholders what we are
doing and what we plan to do to improve in
these areas. This is a journey, and my job will
be to ensure that the business continues to
be positioned for sustainable success.
It is ever more important to make sure that
we understand different stakeholder views.
I see part of my role as ensuring we integrate
these different voices in our thinking. It has
helped me to be leading the Employee Voice
Forum where I have gained insight into our
employees’ priorities going forward. I have
also been close to our engagement initiatives
with local communities, having worked in
several of our exploration geographies such
as Africa and Latin America. What is critical
Establishing what local communities need
is vital if we are to work successfully in
partnership. It helps us to demonstrate the
value that Cairn can bring and the positive
impact that we can have, through sustainable
long-term local programmes. For example,
in Suriname during 2020 we were delighted
to participate in a sector wide initiative to
improve technical skills and prospects in
the oil industry through our support of
educational establishments in the capital
Paramaribo, alongside support for a
mangrove rehabilitation programme
designed to protect low lying regions and
communities along the coast.
As a mid-sized company, some people may
question how much influence we can truly
have, but by playing on our own experience
and skills, and effectively focusing our
initiatives, we can and do have real impact.
Capital
Cairn’s ability to compete for capital will
become increasingly important in a more
selective investors base. I believe we are
differentiated in the way that we have been
able to deliver value. We have always
ensured that we retain balance sheet
strength and flexibility, and that has enabled
us to be one of the few of our peers to
be able to return capital to shareholders
6
Cairn Energy PLC Annual Report and Accounts 2020
I think that the role of any leader is to get the best out of
people in the pursuit of a common goal. That is my focus
at Cairn. I want to build on a great foundation to ensure the
Board continues to engage, challenge and support.”
Nicoletta Giadrossi, Chair
Nicoletta Giadrossi was appointed Chair
from 1 January 2021, having first been
appointed to the Cairn Energy Board in
January 2017.
Nicoletta has extensive experience
in oil, gas and other energy markets
in both executive and non-executive
roles, including wide engagement
on environmental, social and
governance issues.
ReadmoreaboutNicolettainBoardof
Directorsp72
in recent times. This comes from making sure
that we have got the risk equation right and
that we remain an active and responsible
steward of our shareholders’ funds.
Over time, that risk equation has changed.
The energy transition and constrained
commodity prices mean our efforts are
increasingly focused on what we call
‘advantaged barrel’ exploration; targeting
high value and/or low-cost resources,
primarily through optimised development
timelines, scale and supportive fiscal
environments. Our focus is on basins where
we can extract significant value, where we
see a path to reduced environmental impact,
and on the carbon footprint of potential
new discoveries.
Readmoreaboutourflexibleexplorationportfolio
onp40
People
Whatever challenges or opportunities we face,
the key to our success in meeting them will be
our people. Our employees are at the heart of
Cairn and it is imperative that we continue to
recognise this.
Our people are talented and skilled and have
choices as to where they work. To retain their
skills and expertise, we need to ensure that
people see the broader value of the work they
do by properly communicating our sense of
purpose as a company and how we fit in a
changing industry. We also need to continue
being a workplace which recognises and
promotes diversity in all its forms. We need to
ensure our employees can own the mission of
Cairn as a responsible hydrocarbon producer.
I joined Cairn as a Non-Executive Director in
2017 having worked in various executive roles
within the industry at companies such as
Technip, Aker Solutions, Siemens and GE,
at different stages of the energy value chain.
This has given me a view on how we can
create value across this landscape and how
it is important to engage with different
stakeholders to enhance this.
I think that the role of any leader is to get the
best out of people in the pursuit of a common
goal. That is my focus at Cairn. I want to build
on a great foundation to ensure the Board
continues to engage, challenge and support.
We bring different views and perspectives that
are relevant and important to our operations:
we are a diverse group with a variety of skills
and expertise, whether those be geographic,
strategic or functional.
The Future
It is an exciting time to be taking the Company
to the next stage. We look forward to
managing the portfolio with a continued focus
on delivering value for all our stakeholders,
with an emphasis on advantaged barrels and
stable cash flow.
The past year was a difficult one for
everyone, but I have been incredibly
impressed with how the Company has
responded to the COVID-19 crisis. It is a
tribute to the management that whilst
focusing on the safety of our people and
those that we work with, we have kept
the momentum on our main initiatives
throughout: the sale of our Senegal
interests demonstrated effective portfolio
management, and the finalisation of the India
arbitration resulted in a unanimous award in
Cairn’s favour. The Board has written to the
Government of India regarding adherence
to the ruling. These significant achievements
have been delivered while our people
have been adhering to all the health
recommendations with the significant
majority working from home since last March.
We have not resorted to furlough or other
government help and the feedback of our
employees on our handling of the crisis has
been very positive.
It is this resilience and adaptability that gives
me confidence that we will be as successful
in the future as we have been in the past.
Cairn Energy PLC Annual Report and Accounts 2020
7
1 Strategic Report234 Our Strategy
Our key strategic goals are all about driving shorter investment cycles and ensuring
low break-even costs across our asset base. In order to deliver this, we maintain
a balance sheet that is resilient to price shocks and volatility; we invest to target
resources that can be competitive and relevant through the energy transition; and,
ultimately, we differentiate ourselves by returning capital to shareholders.
PORTFOLIO
MANAGEMENT
– Monetise for returns
and reinvestment
– Flexible and balanced
capital allocation
SUSTAINABLE
CASH FLOW BASE
– Diversify and extend
production base
– Ensure low full-cycle
break-even economics
SHAREHOLDER
RETURNS
– Key differentiator
– Competition for capital
between reinvestment
and returns
All investment
decisions assessed
against multiple
externally assured
energy transition
scenarios
BALANCE SHEET
FLEXIBILITY
– Capital structure resilient
to price shocks
– Controllable and flexible
capital programme
SELECTED
EXPLORATION
– Core area exploration
to sustain production
– Select transformational exploration
Cairn has always sought to be a proactive
portfolio manager in order to optimise capital
allocation and retain the appropriate flexibility
in its portfolio. This enables us to do two
things: firstly, to return cash to shareholders
which we see as a key differentiator of the
Cairn investor story. We will continue to
ensure that every major capital allocation
decision is a competition between
reinvesting in the business and returning cash
to shareholders. Secondly, it enables us to
invest in the sustainability of our cash
flow-generating asset base. That is a key
strategic focus for us – there are follow-on
opportunities in our existing producing
assets, but we will also actively seek to
diversify and bolster our production base,
ultimately putting us in the best position
to support future shareholder returns.
We seek to build the portfolio in a way that
maintains balance sheet flexibility. We have,
and we will maintain, a capital structure that
is resilient, and we aim to ensure we are in
control of our capital programme so that we
can focus on delivering value to the equity
side of the balance sheet.
Exploration will remain a core part of Cairn’s
DNA, both to support the future cash flow
base through organic reserves replacement,
and to generate the potential for
transformational events to create further
shareholder value. Our allocation of capital
to exploration will absolutely be with energy
transition relevance as a core focus. We need
to ensure that the resources we are targeting
through exploration can have a competitive
role in a future where global oil demand is
projected to be lower than today.
We are positioning ourselves for growth and
expansion, but we are committed to doing so
in a way that is disciplined, sustainable and
relevant against the backdrop of a changing
energy mix over time.
8
Cairn Energy PLC Annual Report and Accounts 2020
EXECUTING OUR STRATEGY RESPONSIBLY
At Cairn, working responsibly means
striving to deliver value in a safe, secure
and environmentally responsible manner
for all our stakeholders. Cairn’s Corporate
Responsibility strategy spans efforts to
protect the environment and transition
to more sustainable energy sources; support
society by creating value for employees,
suppliers, shareholders and communities;
and use sound governance structures to
ensure we conduct our business ethically
and manage risks effectively. Our long-
established set of Business Principles is
integrated into our systems and processes.
They determine how we work, helping
us to behave responsibly to people, to the
environment and to society.
RESPONSIBLE GOVERNANCE
Readmoreonp74
BUSINESS PRINCIPLES
RELEVANT MATERIAL ISSUES
CONTRIBUTION TO SDGS
– We manage risk and seek
to continually improve.
– We behave honestly, fairly
and with integrity.
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Readmoreaboutourmaterial
corporateresponsibilityissuesonp15
To behave responsibly, we seek to identify and effectively manage the risks that are most significant to our business. These are recorded in a risk
register which, along with stakeholder engagement, help us to prioritise issues.
RISKS
Readmoreonp42
BEHAVING RESPONSIBLY
TO PEOPLE
BEHAVING RESPONSIBLY
TOWARDS THE ENVIRONMENT
BEHAVING RESPONSIBLY
TO SOCIETY
BUSINESS PRINCIPLES
BUSINESS PRINCIPLES
BUSINESS PRINCIPLES
– We develop the potential of
our people.
– We take a precautionary approach
to our effect on the environment.
– We foster a workplace that
respects personal dignity and
rights, is non-discriminatory
and provides fair rewards.
– We provide a healthy, safe and
secure work environment.
Readmoreonp52
– We strive to prevent and minimise
our impact on the environment.
Readmoreonp56
– We seek to make a positive
social impact in every area
where we work.
– We respect the rights and
acknowledge the aspirations
and concerns of the communities
in which we work.
Readmoreonp59
RELEVANT MATERIAL ISSUES
RELEVANT MATERIAL ISSUES
RELEVANT MATERIAL ISSUES
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CONTRIBUTION TO SDGS
CONTRIBUTION TO SDGS
CONTRIBUTION TO SDGS
EXTERNAL FRAMEWORKS
Cairn Energy PLC Annual Report and Accounts 2020
9
1 Strategic Report234
Business Model
We are an oil and gas company focused on driving down emissions in our operations.
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. Assets can be monetised at different
stages of hydrocarbon exploration, development and production in order to optimise
the portfolio and create the opportunity for further cash returns to shareholders.
OUR STRENGTHS AND CAPABILITIES
WHY CAIRN ENERGY?
#1 Self-funding business model
Our production assets provide the cash flow to sustain exploration, appraisal and
development activity. This is delivered by our non-operated interests in two UK North Sea
assets, Kraken and Catcher, which began production in 2017. As this production continues
to deliver over time, we will seek to add production from new assets to replace it.
Our expertise and agility
We pride ourselves on seeing value where
others might not. We have the ability to
move quickly and responsibly to pursue
opportunities, underpinned at all times
by our financial flexibility.
#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, cash in hand and undrawn
debt capacity. This allows us to actively assess new venture opportunities and deliver
immediate activity. We apply strict capital discipline to our investment decisions and
actively manage our portfolio to optimise capital allocation.
#3 Exploration
The energy transition and constrained commodity prices mean our activity increasingly
focuses on ‘advantaged barrel’ exploration alongside exposure to select large, more
frontier opportunities with transformational potential. The resources we target must be
able to be discovered, developed and produced competitively in a lower oil demand
future, with alignment to our ESG priorities.
#4 Life cycle approach and operating capability
Our employees, contractors and suppliers provide the necessary expertise and resources
to deliver our work programmes agreed within our Joint Ventures. Over the last decade,
the company has operated multiple 2D & 3D seismic and geotechnical surveys,
drilled over 19 exploration and appraisal wells in mid and deepwater settings and has
successfully participated in development planning to take five major projects to Final
Investment Decision (FID). Through these projects, our subsurface, operational,
commercial and financial teams have further developed their skillsets and capabilities
for future application.
#5 Responsible culture
Our established, highly experienced and respected leadership team 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. Contractors and suppliers are required
to work to the same high standards as our employees.
Our experience
With more than 30 years’ experience as
an operator and partner at all stages of the
upstream oil and gas life cycle, we have
successfully discovered and developed
oil and gas reserves in a number of
international locations in partnership
with host governments.
Our responsible approach
We commit to working responsibly across
all our activities. This means working in a
safe, secure, environmentally and socially
responsible manner.
10
Cairn Energy PLC Annual Report and Accounts 2020
Our established track record of creating
significant growth and value was
demonstrated most recently through our
basin opening discoveries offshore Senegal,
including the world’s largest oil discovery
of 2014. A multi-billion dollar development
project is now underway. Following the sale
of its Senegal assets, Cairn returned
US$250m to shareholders.
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, creating value through exploration
success, as well as taking assets to
production and development across South
Asia and most recently, in West Africa.
Our approach to working responsibly is
embedded throughout our business in
our management systems and enshrined
in our policies and principles. We operate
to international, leading industry standards
in health, safety and environmental
management. We never compromise our
standards and we look for partners who
share our commitment to international good
practice, ensuring projects are managed
in a responsible and respectful manner.
CREATING VALUE RESPONSIBLY FOR STAKEHOLDERS
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.
Investors
Employees
Business partners
and suppliers
Governments and
regulators
Local Community/
Interest Groups
Oil and gas sales revenue
US$324m
Employee salaries and benefits
US$49m
Capital expenditure
US$125m
Payments to governments
US$19.9m
Social investment
US$0.9m
FormoreinformationpleaseseeourCorporateResponsibilityReport:www.cairnenergy.com/working-responsibly
Cairn Energy PLC Annual Report and Accounts 2020
11
1 Strategic Report234 Business Context
In a year dominated by a global pandemic, Ben Conley, Cairn’s
Strategy and Business Development Director, examines the
context and impacts on the oil and gas industry.
Oil Price, COVID-19
and Demand Impact
The short-term disruption to commodity
prices caused by the COVID-19 pandemic
was extreme, even in the context of
heightened commodity price volatility over
the past decade. The reaction of commodity
prices to governmental pandemic responses
is instructive as to the role of hydrocarbons
in the interconnected global economy. While
the commodity price dip caused by the
pandemic has been swift and severe, its
impact will be limited on energy system
capital allocation decisions which are taken
on multi-year, multi-decade planning
horizons. Long-term energy demand
fundamentals, coupled with the climate and
energy transition challenges are of greater
relevance to Cairn and its shareholders.
Governmental actions in 2020 to reduce
global mobility temporarily removed an
estimated 20 million barrels per day of oil
demand from the market1. At the same time,
OPEC+ failed to agree supply cuts and
appeared to switch to a market share versus
non-OPEC supply strategy2. The challenge of
finding a new equilibrium oil price saw Brent
prices decline by 80% from US$69/bbl in
early January to US$14/bbl in mid-April 2020
and saw West Texas Intermediate moving
into negative territory. Whilst a more stable
pattern was established through the second
half of 2020, the volatility of spot oil prices
reinforces the importance of Cairn’s prudent
approach to balance sheet risk management
to be able to weather and possibly benefit
from extreme short-term cycles.
Forecasters offer a range for the expected
return to pre-pandemic oil demand levels,
between H2 2021 and mid 2022, with a best
case of recovery similar to that shown in
China, which reached pre-lockdown air travel
and oil demand levels by October 20203
and has seen a return to accelerating
economic growth4 to a more gradual
recovery5. Significant spare oil supply
capacity is available to meet near-term
demand recovery and to dampen possible
price spikes. Protecting the price at the
bottom of the range is likely to come from
continuing OPEC+ cohesion for a price
support strategy, rather than market share
strategy. OPEC’s Secretary General Barkindo
stated in October 2020, that compliance with
production targets was at record highs and
that members had learned that there is more
to gain from cohesion than competition6.
meet affordable energy needs of the coming
decade and beyond, providing ongoing
opportunity for nimble, responsible
producers of hydrocarbons such as Cairn.
Where the impact of the COVID-19
pandemic on supply/demand fundamentals
appears relatively short lived, the large fiscal
stimulus deployed by governments and
central banks may be more significant. The
immediate impact has been increasing
financial asset prices, particularly those with
long-term growth potential. However, the
unprecedented scale and timing of this
stimulus may also drive inflationary
pressures, in turn supporting commodity
and related asset prices.
When considering the fundamental market
outlook over a four to seven-year period,
the supply/demand picture appears more
constructive for oil prices. Recent industry
reinvestment rates are estimated to be
materially below that required to sustain
current production levels. Analysts model
2019 reinvestment in upstream capacity,
being the capital investment required to
sustain production rates given natural
decline, of 64% compared to a long-term
average of ~87%7. JP Morgan estimated in
October 2020 that the upstream industry
has under-invested by some US$650billion
in the capacity required to sustain current
production of ~90 mmbpd, or by up to
US$1trillion in the capacity required to sustain
peak 2019 production rates of 105 mmbpd8.
The medium-term supply/demand balance
suggests that underinvestment may leave
the oil market structurally short through the
2020s, with analysts suggesting that prices in
the range of US$60-65/bbl are needed to
support investment levels that can balance
supply with demand9.
Demand for gas in specific growth markets
will continue to drive strong regional
investment levels, especially where there is
a need for gas to replace other fuels such
as coal in order to reduce carbon intensity,
albeit the scale of large gas discoveries
globally in recent years may mean a
near-term oversupply in LNG markets, before
gas demand ramps up as part of the energy
transition. Current investment trends illustrate
a balance between the needs of future
energy systems alongside the need to
Energy Transition
and Medium-term
Market Outlook
2020 provided several interesting
perspectives and milestones on the journey
to a low carbon energy system required to
mitigate climate risks. The scale of emissions
reduction associated with the pandemic
response was estimated to match the annual
reduction required to meet the Paris
aspiration of a 1.5ºC warming scenario10. The
IEA also published a Net Zero Emissions
2050 scenario for the first time which
showed that low carbon electricity equal to
the entire demand of India, the world’s fourth
largest power market, must be added to the
energy system every three years to achieve
net zero energy emissions by 205011. Such
data points make clear the true scale of
the challenge ahead. Perhaps the most
significant milestone during the year was
China’s September 2020 statement that it
would seek to reach net zero emissions by
2060. With the largest emitter making this
commitment, and the second largest emitter,
the US, re-joining the Paris Agreement upon
President Biden’s inauguration, there should
be renewed emphasis and focus on how to
deliver the transition.
A critical consideration for energy companies
and governments is how to marry the transition
with competing priorities of developing nations’
societal ambitions, including those targeted in
the UN Sustainable Development Goals (SDGs).
The availability of affordable energy, including
from indigenous hydrocarbon resources, will be
central to the delivery of these goals. Therefore,
responsible stewardship of hydrocarbon
production, including reduction of Scope 1 and
2 emissions and eventually sequestration of
their combustion emissions, will remain a critical
component of energy systems. Whilst
companies, investors and lenders seek to
prioritise low carbon energy, it will also be critical
to recognise the need to maintain responsible
stewardship of certain hydrocarbon production
to provide the energy and economic bridge to a
low carbon energy system.
International Energy Agency (2020), World Energy Outlook 2020, IEA, Paris.
1 Goldman Sachs, August 2020 International Energy Agency (2020), World Energy Outlook 2020, IEA, Paris.
2 Reuters: www.reuters.com/article/uk-oil-opec-survey/opec-april-oil-output-surges-to-13-month-high-before-new-cut-deal-idUKKBN22C2NK.
3 Commodities Trading Corporation.
4 FT 18.1.21; China’s economy expands at faster rate than before coronavirus.
5
6 OPEC Secretary General Barkindo, at JP Morgan conference.
7 Bernstein Energy; 2020 Global Marginal Cost.
8 JP Morgan.
9 Bernstein Energy; 2020 Global Marginal Cost.
10 Le Quere et al; Temporary reduction in daily global CO2 emissions during the COVID-19 forced confinement; Nature; www.nature.com/articles/s41558-020-0797-x.
12
Cairn Energy PLC Annual Report and Accounts 2020
Forecasters see a different future for oil
demand after 2020 (barrels/day)12
2019 outlook
2020 outlook
Regardless of the specific date or rate
of peak oil demand12 (see chart from
BloombergNEF), forecast natural decline
rates of existing oil production means that
approximately one third of global oil supply
by 2035 (see chart below)13 will come from
new, currently unsanctioned projects, likely
requiring equilibrium oil prices between
US$55-65/bbl14.
Forecasters expect gas to roughly maintain
its relative share of energy demand up to
2050, therefore probably increasing in
absolute terms15,16. The expectation that gas
plays a key transition role has driven an
expansion of global LNG capacity, with LNG
likely to have spare capacity through much
of the 2020s17. Thereafter, consensus
expectations are that gas demand will catch
up with supply, potentially with additional
demand for the provision of steam reformed
hydrogen, which may provide an alternate
route to market.
The expectation that significant additional
liquid and gas hydrocarbon resources will
be required over the coming decades places
a responsibility on upstream companies
to provide a differentiated proposition to
investors and creditors to facilitate the
required capital investment. As well as
maintaining the capital discipline required to
deliver sustainable returns to all investor
groups, businesses will need to target those
hydrocarbon resources that can be produced
responsibly and in fulfilment of multiple
UN SDGs. Companies will increasingly
target projects which meet the so-called
‘advantaged barrels’ criteria, defined by
Wood Mackenzie as those barrels of oil or
molecules of gas, that can be produced
economically with low associated emissions
in stable regimes. In delivering affordable and
reliable energy, best efforts must be made to
reduce the emissions intensity of upstream
operations and to facilitate solutions that allow
all economies to sequester CO2 emissions
both from upstream operations and also in
future from industrial combustion sources.
As well as continuing with a selective
approach to exploration and production,
targeting advantaged barrels in support of the
UN SDGs, Cairn is evaluating potential CO2
capture and sequestration schemes (CCUS),
to understand how these can be built up and
deployed beyond the current areas of focus.
Continued upstream investment required to offset declines from existing oilfields13.
mb/d
120
100
80
60
40
20
0
Additional new fields in the STEPS
New fields in the SDS
Supply with investment
in existing fields
Supply with no new investment
2028
peak
2045
2035
2040
2035
2045
2040
Rystad
115M
95
75
2020
Wood MacKenzie
115M
95
75
2020
BloombergNEF
115M
95
75
2020
OPEC
115M
95
75
2020
2045
2010
2015
2020
2025
2030
2035
2040
Note: No 2019 forecast available for BloombergNEF.
Note: mb/d = million barrels per day.
Sources: Rystad Energy, Wood MacKenzie,
BloombergNEF, OPEC.
International Energy Agency (2020), World Energy Outlook 2020, IEA, Paris. STEPS is the IEA Stated Policies scenario: SDS is the IEA Sustainable Development scenario.
International Energy Agency (2020), World Energy Outlook 2020, IEA, Paris.
11
12 BloombergNEF.
13
14 Bernstein, McKinsey, proprietary forecasts.
15
16 Shell; Future Energy Scenarios.
17
International Energy Agency (2020), World Energy Outlook 2020, IEA, Paris.
International Energy Agency (2020), World Energy Outlook 2020, IEA, Paris.
Cairn Energy PLC Annual Report and Accounts 2020
13
1 Strategic Report234 We continue to challenge our partners
on emission reduction opportunities, and
in 2020, we joined NECCUS, an alliance
of industry, government, technology
providers and academic experts
committed to driving change and
supporting the programmes needed to
reduce carbon emissions from industrial
sources in Scotland and beyond. We also
help our communities adapt to physical
risks, for example, through our investment
in a mangrove rehabilitation project in
Suriname, see page 60.
Current and emerging legislation
continues to present both risks and
opportunities. In the UK, our non-operated
assets were subject to the EU Emissions
Trading Scheme (ETS) and, after Brexit, the
new UK ETS. No compliance issues were
raised during the year.
Readmoreaboutthesetopics,metrics
andtargets,carbonintensityand
energyefficiencybenchmarkingin
ourCorporateResponsibilityReport:
www.cairnenergy.com/working-responsibly
Business Context continued
Climate Risk and Energy Transition
Climate risk and energy transition is considered a principal
risk to our business. During 2020, we examined our business
model and actions to date, to improve our strategy and set
a clearer path towards net zero.
Global Energy Transition
In 2021, we anticipate a greater emphasis
on global energy transition, with investors
and businesses increasingly acting to
limit temperature rise and governments
furthering their commitments under
the Paris Agreement. Nonetheless, the
continued use of hydrocarbon fuels will
be required for decades to come, albeit
with technologies and mechanisms for
reducing the emissions associated with
their use.
We assess the resilience of our key
assets against several transition scenarios,
including the International Energy
Agency’s Sustainable Development
Scenario. In 2020 we reviewed the likely
impact of COVID-19 on demand and oil
price. We also analysed the medium-term
market outlook as a result of energy
transition including implications of the IEA
Net Zero Emissions 2050 scenario which
points to the scale of the carbon reduction
challenge ahead.
Governance
Our new Executive Committee, which
replaces the Senior Leadership Team,
reviews climate and energy transition
issues, including the overall understanding
of Cairn’s position, as well as international
and stakeholder drivers, and risk
and opportunities.
We remain committed to reporting
consistently and meeting investor needs.
In 2020, we conducted an independent
review of our Corporate Responsibility
(CR) reporting as part of our continual
improvement process and agreed with
the Board that greater transparency on
compliance with requirements of the
Task Force on Climate-related Financial
Disclosures (TCFD) and the Sustainable
Accounting Standards Board (SASB)
will be included in future years. As part
of this journey, this year we have prepared
a TCFD and SASB Index which signposts
all relevant available disclosures
within our reporting. Read more at
www.cairnenergy.com/working-responsibly
We continue to make annual disclosures
on climate change-related matters to CDP,
improving our rating in 2020 from B- to B
(management band), and we also submitted
the CDP Water Security questionnaire at
a basic level for the first time.
Strategy
Our responsible approach remains
fundamentally unchanged, although our
Corporate Responsibility philosophy now more
closely embraces initiatives that contribute to
the UN SDGs, including Affordable Clean
Energy (SDG 7), Climate Action (SDG 13) and
other climate-related goals.
Strategically, we are focused on driving down
emissions in our operations over the short,
medium and long term, and expect to play
a meaningful role in energy transition by
producing hydrocarbons responsibly,
dedicating resources to emissions reduction
opportunities and investigating investment
opportunities in carbon capture, utilisation
and storage (CCUS).
Risk and Opportunity Management
Each project, department and corporate
group assesses risks and opportunities
using the Cairn risk procedure over the
short, medium and long-term. These are
assimilated into a risk register and used to
assess material issues for reporting purposes.
In 2020, climate risk and energy transition
was considered ‘high’ in terms of overall
materiality assessment.
Where fixed installations are in place
for production, modelling helps our
understanding of physical risks and impacts
associated with climate change and
predicted severe weather events with safety
implications. We had no operated fixed
production installations in 2020, but our
partners who operate in the UKCS apply
a similar approach in both design and
operation. Cairn’s standard operating
procedures can also be adapted to mitigate
these physical risks, such as by using mobile
drilling units capable of performing in the
expected environmental conditions.
14
Cairn Energy PLC Annual Report and Accounts 2020
Facilitating the development of cost effective
CCUS systems that can partner with the
electrification of upstream operations in
support of the responsible development of
emerging market hydrocarbon resources will
be a key enabler to sustainable growth. As
the wider debate on delivering the energy
transition matures and evolves, it is likely that
the challenges and costs of rapidly growing
alternative energy systems will become
more widely understood and the critical
requirement to find, develop and responsibly
produce hydrocarbons to provide a bridge to
a lower carbon future will become clearer.
Cairn is committed to transparency and
we assess our reporting against the
recommendations of the Task Force on
Climate-related Financial Disclosure.
Identifying Material
Corporate Responsibility
Issues
To manage risk effectively and to operate
with the support of our stakeholders,
we need to understand the corporate
responsibility issues that matter to them and
are most significant to our business. We do
this by conducting an annual assessment.
This assessment considers and classifies
relevant issues, determined from international
reporting frameworks including IPIECA18,
GRI19 and SASB20. Issues are classified to
indicate their importance to Cairn based on risk
and their importance to stakeholders based
on stakeholder and investor engagement.
The results of this materiality assessment are
presented to the Board on an annual basis
and reviewed in detail by Executive Board
members.
The issues identified as material to both
stakeholders and Cairn are shown in the
matrix below.
We address the issues deemed to be of
‘high’, ‘significant’ and ‘medium’ importance
in our Corporate Responsibility Report at
www.cairnenergy.com/working-responsibly.
WHAT’S IMPORTANT TO OUR STAKEHOLDERS
The 60 issues identified as material to both
stakeholders and Cairn are shown in the matrix
below. This represents their relative positions
after any adjustments were made to our
assessment of the ‘importance to stakeholders’,
in line with expert review.
Governance
People
1
2
3
4
5
6
Advocacy and Lobbying
Anti-Competitive
Behaviour
Business Partners
Alignment on CR Issues
Cairn ABC Practices
Climate Change Policy
and Planning
Contractors and
suppliers ABC
7 CR Governance
8 Data Protection
9 Fines and Prosecutions
10 Funding
11
12
Global Energy Transition
Government ABC
Practices
Ineffective
Whistleblowing
Investment (Home
& Overseas)
JV Partners and
Funding
Management of
Material Issues
Operations in Sensitive
and Complex Locations
Remuneration
Reserves Valuations &
Capital Expenditure
Tax and Payments
to Governments
13
14
15
16
17
18
19
20
Environment
21
22
23
Biodiversity and
Sensitive Areas
Discharges to Sea,
Land and Sound
Energy Use and
Alternative Sources
24 Freshwater Use
GHG Emissions
25
(Including Venting
and Flaring)
26 Materials Use
27 Product Stewardship
Reuse, Recycle and
28
Waste Management
29 Use of Local Resources
Anti-discrimination
30
31 Assets Security
32
Contractor Selection,
Capacity and
Leadership
33 Cyber Security
34
35
Equal Pay, Equal
Opportunity
Human Capital
Development
Infectious Diseases
Major Accident
Prevention
38 Office Security
39
36
37
Personnel Security
and Travel
Talent Attraction
Workplace Health
and Well-Being
40
41
42 Workplace Safety
Society
43
Anti-Discrimination
(Beyond Employees)
47
48
49
44 Community Health
45 Cultural Heritage
46
Demonstrating
Value Created
Economic or Physical
Displacement
Freedom of Association
Grievances and
Grievance
Mechanisms
Human Rights
Management
Indigenous People’s
Rights
Local Community
Stakeholders
Local Content and
Local Procurement
53
51
50
52
54 Local Energy Access
55 Local Hiring Practices
56
Local Workforce
Development
57 Modern Slavery
58
Security and Human
Rights
59 Social Investment
60
Working Conditions/
Ts and Cs
)
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r
n
o
d
e
s
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b
(
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r
i
a
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t
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t
r
o
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m
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g
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i
t
n
a
c
i
f
i
n
g
S
i
i
m
u
d
e
M
w
o
L
t
n
a
c
i
f
i
n
g
i
s
n
I
10
14
3
9
12
8
32
33
15
17
18
19
35
38
41
21
31
36
5
11
16
37
39
42
52
4
6
20
22
25
30
34
46
50
51
53
54
55
56
58 60
7
23
24
59
40
47
48
57
1
26
13 27
28
29
44
49
45
43
2
Insignificant
Low
Medium
Significant
High
Importance to Stakeholders
Theme Governance Environment People Society
Materiality High Medium Low
IPIECA Oil and Gas Industry Voluntary Guidance on Sustainability Reporting, 3rd edition, 2016.
18
19 Global Reporting Initiative.
20 Sustainability Accounting Standards Board.
Cairn Energy PLC Annual Report and Accounts 2020
15
1 Strategic Report234
Stakeholders and S172 Statement
Continuous engagement with stakeholders is an integral part of our day to day
business. Their support is a fundamental component of our ability to operate.
Following the review of our Corporate Responsibility Management System (CRMS) and reporting in relation to the AA1000 Accounting
Principles (2018), we have strengthened the link between our stakeholder engagement activities, our materiality process and our
decisions and strategy. To ensure that the Directors are aware of stakeholder engagement activities carried out by senior management
and other employees, regular updates are given to the Board both through the Board meeting process and ongoing Board communications
from the Executive Directors. This allows the Directors to be assured that they are aware of stakeholder considerations when making
key decisions.
The Board is aware of the importance of their role in: understanding stakeholder interests and concerns; balancing these fairly between
the stakeholders of the company; and responding to them as part of their Board responsibilities. Importantly, we use stakeholder
engagement to help us identify and prioritise issues most material to the business.
Stakeholder
Why it is important
to engage?
How management and/or Directors engaged
What were the key topics
Examples of the impact of such
of engagement
engagement and responses taken
COVID-19 considerations
Investors
– Our strategic and operational
decision-making is influenced
by our investors’ views
– We are dependent on access
to funding
– We are accountable to our
shareholders
– Comprehensive annual investor programme, which during 2020 was
predominantly managed using virtual technologies, and included:
– Holding 164 investor meetings including one to ones and attending
five roadshows or conferences. This number was lower than previous
years due to the COVID-19 pandemic
– Conducting regular financial reporting
– Responding in a timely manner to investor and analyst enquiries
– As the AGM in 2020 was a closed meeting in accordance with
measures put in place by the UK and Scottish Governments to help
tackle the COVID-19 pandemic, shareholders were offered the
opportunity to submit any questions by email in advance of the meeting
– Strategy and performance
– Presentation on ‘ESG and the evolution of expectations
Communication and transparency of our
– Corporate governance
– ESG matters including
energy transition
– Board composition
from investors and the public’ provided at the Board
COVID-19 strategic response: capital and
meeting in June 2020 (discussed on page 80)
portfolio management and reassurance
– Board position changes (discussed on page 92)
on business continuity
– Regular reviews of corporate objectives
Governments
– We are responsible to them
for compliance with local
and/or international laws
– Their permissions are required
for us to access acreage and
operate
– Meetings with Heads of State, UK and Country Ambassadors, Ministers
– Legal Compliance
– Continued monitoring of responsible performance
Building on our longstanding pandemic and
and Civil Servants
– Major accident prevention
at Board meetings and annual review of CRMS and
crisis response plan, we deployed a nine-step
Business
partners,
peers and
contractors
– Their performance directly
– For the majority of 2020, engagement was carried out using virtual
impacts our financial, operational
and responsible performance
– We are reliant on viable partners
in joint ventures
– We are commercially responsible
to contractors, suppliers and
partners
technologies and included meetings with partners, peers and contractors
with Board members and senior executives in addition to regular joint
venture and operations planning meetings
– Maintaining membership of industry bodies
– Active management of key projects and assets (including alignment
of project deliverables)
16
Cairn Energy PLC Annual Report and Accounts 2020
– Investment and
economic growth
– ESG matters
objective KPI setting
plan in April 2020 to ensure all business-critical
– KPIs include performance against leading and lagging
activities were unaffected, in line with the
indicators for health, safety and environmental protection
controls and advice set out by host governments
and are reviewed at all Board meetings (discussed on
in our operating locations and multi-national
pages 30 to 33)
organisations such as the WHO. The pandemic
– Reviewing feedback and commentary from government
steering group of Oil and Gas UK (advised by
and regulatory bodies regarding performance expectation
Health Protection Scotland) has also proved to
(see our responsible approach discussed on page 10)
be a useful source of industry-driven information
and recommendations
– Policies and standards
– Industry reputation
– Working with peers and partners by joining NECCUS,
With the help of local partners, all survey work
the alliance committed to driving the changes needed
and vessel inspections were managed remotely.
– Investment opportunities
to reduce carbon emissions (discussed on page 37)
We have also monitored how non-operating
for growth
– Careful selection of contractors (discussed on page 55)
partners have conducted drilling campaigns
– Long-term relationships
– Continued membership of IOGP Security Committee
during the pandemic, ensuring that best practice
– ESG matters
(performance against IOGP benchmarks discussed
has been followed
on page 54)
– Ongoing close collaboration with JV partners to
successfully deliver objectives (discussed on page 50
in respect of operations on Kraken and Catcher)
Supporting Section 172
Section 172 of the Companies Act 2006 sets out that a director should have regard to stakeholder interests when discharging their duty
to promote the success of the Company.
The Directors of Cairn, both individually and together, consider, in good faith, that they have acted in a way that would be most likely to
promote the success of the Company for the benefit of its members as a whole (having regard to the stakeholders and matters set out
in s172 (1)(a)-(f) of the Companies Act 2006 (set out in the table below) in the decisions taken.
This approach ensures that all decision-making is adequately informed and is supportive of a Director’s duty under Section 172.
Investors
– Our strategic and operational
– Comprehensive annual investor programme, which during 2020 was
decision-making is influenced
predominantly managed using virtual technologies, and included:
by our investors’ views
– Holding 164 investor meetings including one to ones and attending
– We are dependent on access
five roadshows or conferences. This number was lower than previous
– We are accountable to our
to funding
shareholders
years due to the COVID-19 pandemic
– Conducting regular financial reporting
– Responding in a timely manner to investor and analyst enquiries
– As the AGM in 2020 was a closed meeting in accordance with
measures put in place by the UK and Scottish Governments to help
tackle the COVID-19 pandemic, shareholders were offered the
opportunity to submit any questions by email in advance of the meeting
for compliance with local
and/or international laws
– Their permissions are required
for us to access acreage and
operate
Stakeholder
Why it is important
How management and/or Directors engaged
to engage?
What were the key topics
of engagement
Examples of the impact of such
engagement and responses taken
COVID-19 considerations
– Strategy and performance
– Corporate governance
– ESG matters including
energy transition
– Board composition
– Presentation on ‘ESG and the evolution of expectations
from investors and the public’ provided at the Board
meeting in June 2020 (discussed on page 80)
– Board position changes (discussed on page 92)
– Regular reviews of corporate objectives
Communication and transparency of our
COVID-19 strategic response: capital and
portfolio management and reassurance
on business continuity
Governments
– We are responsible to them
– Meetings with Heads of State, UK and Country Ambassadors, Ministers
and Civil Servants
– Legal Compliance
– Major accident prevention
– Investment and
– Continued monitoring of responsible performance
at Board meetings and annual review of CRMS and
objective KPI setting
economic growth
– ESG matters
Business
partners,
peers and
contractors
– Their performance directly
– For the majority of 2020, engagement was carried out using virtual
impacts our financial, operational
technologies and included meetings with partners, peers and contractors
and responsible performance
with Board members and senior executives in addition to regular joint
– We are reliant on viable partners
venture and operations planning meetings
in joint ventures
– Maintaining membership of industry bodies
– We are commercially responsible
– Active management of key projects and assets (including alignment
– Policies and standards
– Industry reputation
– Investment opportunities
for growth
– Long-term relationships
– ESG matters
to contractors, suppliers and
of project deliverables)
partners
– KPIs include performance against leading and lagging
indicators for health, safety and environmental protection
and are reviewed at all Board meetings (discussed on
pages 30 to 33)
– Reviewing feedback and commentary from government
and regulatory bodies regarding performance expectation
(see our responsible approach discussed on page 10)
– Working with peers and partners by joining NECCUS,
the alliance committed to driving the changes needed
to reduce carbon emissions (discussed on page 37)
– Careful selection of contractors (discussed on page 55)
– Continued membership of IOGP Security Committee
(performance against IOGP benchmarks discussed
on page 54)
– Ongoing close collaboration with JV partners to
successfully deliver objectives (discussed on page 50
in respect of operations on Kraken and Catcher)
Building on our longstanding pandemic and
crisis response plan, we deployed a nine-step
plan in April 2020 to ensure all business-critical
activities were unaffected, in line with the
controls and advice set out by host governments
in our operating locations and multi-national
organisations such as the WHO. The pandemic
steering group of Oil and Gas UK (advised by
Health Protection Scotland) has also proved to
be a useful source of industry-driven information
and recommendations
With the help of local partners, all survey work
and vessel inspections were managed remotely.
We have also monitored how non-operating
partners have conducted drilling campaigns
during the pandemic, ensuring that best practice
has been followed
Cairn Energy PLC Annual Report and Accounts 2020
17
1 Strategic Report234 Stakeholders and S172 Statement continued
Continuous engagement with stakeholders is an integral part of our day to day
business. Their support is a fundamental component of our ability to operate.
Stakeholder
Why it is important
to engage?
How management and/or Directors engaged
What were the key topics
Examples of the impact of such
of engagement
engagement and responses taken
COVID-19 considerations
Local
communities
and interest
groups
– We have an ethical responsibility
to minimise impact on livelihoods
and the environments in which
we operate
– They provide a diverse
perspective leading to new
understanding of situations and
the mitigation of tensions
– Community meetings
– Social investment (discussed on page 60 in respect of Suriname)
– Senior management visits
– Media monitoring
– Protection of resources
– Community investment focus to include adaption
– As part of our efforts to support the
and livelihoods
to climate change (discussed on page 60 in relation
communities where we operate, we made
– Community development
to Suriname)
several financial donations to increase social
and social investment
– Continued membership of the Extractive Industries
and economic benefits
– Access to employment and
Transparency Initiative (EITI)
– In Senegal, we provided US$50,000 through
business opportunities
– Supporting Invest in Africa to build skills and capacity
our joint venture to help the Ministry of Health
– Transparency of payments
among SMEs in Senegal to increase their potential
combat the pandemic, while in Suriname
of being awarded contracts in the industry (discussed
we donated US$50,000 to a national fund
to government
– Biodiversity
on page 61)
Employees
– We are dependent on
employees’ performance and
that of the wider workforce
– We have a legal and ethical
responsibility to their well-being
– They bring a diverse perspective
to the identification of
opportunities and ways of
working
– Regular staff meetings
– Monthly pulse surveys
– Twice-yearly Employee Voice Forum (EVF) meetings (discussed on page 76)
– General Meetings
– Exit interviews
– Staff focus groups
– Strategy
– Ways of working
– Enhanced communication of our strategic priorities
– We ensured our office-based workers had
and performance
what they needed to operate efficiently from
– Lessons learned from projects
– Team workshops held to heighten cross-functional
home and our CEO personally called every
– Internal communication
collaboration
individual in the Company. When restrictions
– Collaboration across teams
– Health and well-being initiatives developed and
extended into 2021, he repeated this.
– Remuneration and benefits
delivered
focused on the provision of vital intensive
care equipment. An additional US$50,000
donation went to Fundacion para la Salud
(Funsalud), a healthcare not-for-profit
organisation in Mexico, to support its
comprehensive COVID-19 relief efforts
Relevant policies were adapted, business
travel restricted and COVID-19 safe office
space inductions were provided to those
unable to work from home, in line with
government guidelines. Additionally, online
channels were used to maintain dialogue and
support good mental health. We established
a Return to Office (RTO) Steering Committee
to oversee the safe return for office-based
employees, with risk assessments and new
protocols regarding social distancing and
deep cleaning implemented
18
Cairn Energy PLC Annual Report and Accounts 2020
Stakeholder
Why it is important
How management and/or Directors engaged
to engage?
What were the key topics
of engagement
Examples of the impact of such
engagement and responses taken
COVID-19 considerations
– We have an ethical responsibility
– Community meetings
to minimise impact on livelihoods
– Social investment (discussed on page 60 in respect of Suriname)
and the environments in which
– Senior management visits
– Media monitoring
Local
communities
and interest
groups
we operate
– They provide a diverse
perspective leading to new
understanding of situations and
the mitigation of tensions
– Protection of resources
– Community investment focus to include adaption
– As part of our efforts to support the
and livelihoods
– Community development
and social investment
– Access to employment and
business opportunities
– Transparency of payments
to government
– Biodiversity
to climate change (discussed on page 60 in relation
to Suriname)
– Continued membership of the Extractive Industries
Transparency Initiative (EITI)
– Supporting Invest in Africa to build skills and capacity
among SMEs in Senegal to increase their potential
of being awarded contracts in the industry (discussed
on page 61)
communities where we operate, we made
several financial donations to increase social
and economic benefits
– In Senegal, we provided US$50,000 through
our joint venture to help the Ministry of Health
combat the pandemic, while in Suriname
we donated US$50,000 to a national fund
focused on the provision of vital intensive
care equipment. An additional US$50,000
donation went to Fundacion para la Salud
(Funsalud), a healthcare not-for-profit
organisation in Mexico, to support its
comprehensive COVID-19 relief efforts
Employees
– We are dependent on
employees’ performance and
that of the wider workforce
– Regular staff meetings
– Monthly pulse surveys
– We have a legal and ethical
– General Meetings
responsibility to their well-being
– Exit interviews
– They bring a diverse perspective
– Staff focus groups
to the identification of
opportunities and ways of
working
– Twice-yearly Employee Voice Forum (EVF) meetings (discussed on page 76)
– Strategy
– Ways of working
– Lessons learned from projects
– Internal communication
– Collaboration across teams
– Remuneration and benefits
– Enhanced communication of our strategic priorities
– We ensured our office-based workers had
and performance
– Team workshops held to heighten cross-functional
collaboration
– Health and well-being initiatives developed and
delivered
what they needed to operate efficiently from
home and our CEO personally called every
individual in the Company. When restrictions
extended into 2021, he repeated this.
Relevant policies were adapted, business
travel restricted and COVID-19 safe office
space inductions were provided to those
unable to work from home, in line with
government guidelines. Additionally, online
channels were used to maintain dialogue and
support good mental health. We established
a Return to Office (RTO) Steering Committee
to oversee the safe return for office-based
employees, with risk assessments and new
protocols regarding social distancing and
deep cleaning implemented
Cairn Energy PLC Annual Report and Accounts 2020
19
1 Strategic Report234 CEO’s Review
CEO’S REVIEW
Simon Thomson
Chief Executive Officer
Cairn’s strategic execution during 2020 has
been delivered against the backdrop of a
global pandemic. Our people and those who
work with Cairn have successfully adopted
new ways of working to ensure business
continuity and momentum on all activities.
We thank them for their effort and
commitment. Cairn has not accessed any
Government business support schemes.
Energy transition
As an exploration and production business,
Cairn’s role in the transition to lower net
carbon energy is to responsibly produce
hydrocarbons in support of the UN
Sustainable Development Goals. The
company is committed to driving down
emissions in its operations wherever possible
and has committed to the World Bank global
gas flaring reduction initiative. During 2020,
Cairn invested in the NECCUS project,
which is examining proof-of-concept
industrial carbon capture projects: an
engineered solution to helping businesses
and governments achieve CO2 abatement on
the path to net zero. Cairn also assesses its
reporting against the Task Force on Climate-
related Financial Disclosure and is committed
to complying with its framework.
Financial flexibility to rebuild
a balanced portfolio
Financial flexibility is integral to Cairn’s
strategy. At the onset of the pandemic, swift
action was taken to proactively manage the
capital programme without risking future
activity and opportunity. Active portfolio
management saw completion of the sale
of the Group’s interests in Norway in Q1, and
of its Senegal interests in Q4, eliminating
significant, long term capital commitments
totalling US$1.7bn and enabling a US$250m
special dividend to shareholders, which was
paid in January 2021.
With balance sheet strength, Cairn is well
positioned to fund growth and we
announced in March 2021, the proposed
acquisition of 50% of Shell’s production,
development and exploration upstream
interests in the Western Desert, Egypt for
a purchase price of US$323m net to Cairn,
with additional contingent consideration
20
Cairn Energy PLC Annual Report and Accounts 2020
of up to US$140m net to Cairn if certain
requirements are met. The remaining 50%
of the interests will be acquired by Cairn’s
consortium partner Cheiron, an experienced
local operator. Cheiron will operate the
production and development assets and two
exploration concessions, with Cairn operating
three exploration concessions.
The acquisition is in line with Cairn’s strategy
of expanding and diversifying the production
base. The assets provide low-cost production,
near-term development and exploration
growth potential and enhance the contribution
of gas within Cairn’s portfolio.
Transaction highlights:
– Adds WI 2P reserves of 113 mmboe
as at 31 December 2020
– Adds low-cost 2021 forecast WI
production of between 33,000-38,000
boepd with an opex/bbl of 99%
for nine resolutions
– No resolutions with
<91% in favour
2021 AGM: to be held on Tuesday,
11 May 2021 at 50 Lothian Road,
Edinburgh, EH3 9BY
(full details, including restrictions
in place due to COVID-19 are set
out in the Notice of AGM)
– Director attendance will be
dependent upon UK and
Scottish Government
restrictions in place due to
COVID-19
– 13 ordinary resolutions and
four special resolutions being
proposed to shareholders
The Board uses the AGM to communicate with private and institutional
investors and has always welcomed their participation in annual
general meetings. However, as a result of the COVID-19 pandemic
and the measures that the UK and Scottish Governments had put in
place restricting public gatherings of more than two people and all but
essential travel, for the safety of our shareholders, our employees, our
advisers and the general public, attendance at the 2020 AGM in person
was unfortunately not possible and as such, just the Executive Directors
were present, in order to constitute the quorum of two shareholders
required for the meeting to be held, and to deal with the formal
business of the meeting.
The Notice of AGM sent to shareholders on 14 April 2020, which was also
published on the Company’s website, fully explained these arrangements
to shareholders and recommended that shareholders submit their votes
on each of the resolutions being proposed by proxy in advance of the
meeting, or to authorise the Chair of the meeting to vote on their behalf.
The Company also enabled shareholders to submit any questions in
advance of the meeting. These arrangements were implemented in line
with regulatory guidance published in relation to holding AGMs during the
COVID-19 pandemic, as well as the approach adopted by other FTSE
companies in order to safely conduct their AGMs.
Under normal circumstances, it is policy for all Directors to be present
at the AGM, with the Chair of each of the Board committees also
expected to attend and be prepared to answer shareholder questions
on areas within their remit. Our employees based in Edinburgh are also
normally invited to attend the AGM as the Directors recognise that this
provides a valuable opportunity for workforce engagement with the
Board. In 2020, given employees were not able to attend the AGM,
the Company held a virtual staff meeting immediately after the AGM.
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 11 May 2021 and an explanation of each resolution can
be found in the separate Notice of AGM Circular accompanying this
Annual Report and Accounts.
Cairn Energy PLC Annual Report and Accounts 2020
83
Corporate Governance Statement continued
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 AGM.
Information Pursuant to the Takeover Directive
The Company has provided the additional information required
by the Disclosure and Transparency Rules of the UK Listing rules
(and specifically the requirements of DTR 7.2.6 in respect of directors’
interests in shares; appointment and replacement of directors; powers
of the directors; restrictions on voting rights and rights regarding control
of the Company) in the Directors’ Report.
Internal Control
The Board has overall responsibility for the Group’s system of internal
control, which includes all material controls, including financial,
operational and compliance controls and related risk management,
and for regularly reviewing its effectiveness. The system of internal
control is designed to identify, evaluate and manage significant risks
associated with the achievement of the Group’s 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.
The Framework has been in place for the 2020 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 2020 and will
ensure that a similar review is performed in 2021. 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 2020.
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 2020 to
the following key controls, business processes and procedures:
– The Board completed a risk workshop which focused on further
understanding potential cyber threats to the business. The objective
of the workshop was to provide the Board further insight into the
growing threats from cyber risk, with a focus on the changing risk
environment resulting from the increase in home working. The
workshop was facilitated by EY who provided an external view
on some of the projects identified as priorities from our peers;
84
Cairn Energy PLC Annual Report and Accounts 2020
– 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;
– A compliance dashboard, developed in 2019 to assess compliance
with a number of key regulations impacting the Group including
UK Bribery Act, GDPR, CCO, CMAPP and modern slavery was
presented at each RMC meeting and is presented annually to the
Audit Committee as part of the year end control assessment;
– Assurance maps for the Group were updated in Q1 2020 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 2020 included New Ventures, Tax
Governance, Mexico Operations and IT general 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 modern slavery, anti-bribery and
corruption and cyber security.
The following describes the key elements of the Framework and the
processes used by the Board during 2020 to review the effectiveness
of the system and the approach to be taken in 2021.
1. Strategic Direction
The Company’s strategy and business plan are proposed by the
ExecCo 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
ExecCo. 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.
2. Operating Management
The Company operates two regional units covering different countries
and assets and with multiple partners on both an operated and
non-operated basis, with a further operating unit responsible for UK
production assets. 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 ExecCo as
well as by the MT and ELT. Further information on these teams and their
remit can be found on pages 80 and 81. 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.
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-level, project-
level, country-level 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 2020, the Board carried out a robust assessment of the emerging
and principal risks facing the Company, details of which can be found
on pages 42 to 51. 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 2020.
The RMC, which meets 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 2020 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 2020
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 Group implemented a new risk management and incident
management software solution. The solution will facilitate improved
reporting on all operational and corporate risks to the Group and will
provide a more systematic process for the management of risks,
controls and actions across the business.
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 2020 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: firstly
at the operational level; secondly through overview by functional
management and the RMC; and thirdly through internal or joint
venture audits.
1
2 Leadership and Governance
3
4
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 2020, 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 2020 Group internal audit plan.
The Directors derived assurance from the following internal and
external controls during 2020:
– A 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.
Nicoletta Giadrossi
Chair
8 March 2021
Cairn Energy PLC Annual Report and Accounts 2020
85
Audit Committee Report
Keith Lough, Chair of the Audit Committee
In a year of unprecedented global
uncertainty and volatile commodity
prices, the Audit Committee’s strong
focus on the Group’s risk management
process and the implications on
financial reporting are key for ensuring
that it delivers on its responsibilities
to shareholders.
86
Cairn Energy PLC Annual Report and Accounts 2020
Members and Meetings in 2020
Keith Lough (Chair)
Nicoletta Giadrossi
Alison Wood
Member
since
05/14
05/18
07/19
Meetings
attended
Dear Shareholder
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.
Composition and Summary of Audit Committee Meetings in 2020
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 during 2020 were two fellow
Non-Executive Directors; Nicoletta Giadrossi and Alison Wood. From
1 January 2021, Nicoletta stepped down from the Committee following
her appointment as Chair of the Board and was replaced by Catherine
Krajicek. 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. Both Nicoletta and Catherine bring
comprehensive industry knowledge. Nicoletta, Alison and Catherine
are considered by the Board to be Independent.
During 2020, Ian Tyler also attended meetings in his capacity as Chair
of the Board but was not a member of the Committee. Similarly,
Nicoletta attended the March 2021 meeting in her new role as Chair
but was not a member of the Committee.
At our request, the Chief Executive (in his capacity as executive
responsible for internal audit) and CFO along with senior members
of the finance and risk and compliance departments attend each
meeting. Both internal and external auditors also attend. I also met
with the external audit partner to discuss matters relevant to the
Group throughout the year.
The Audit Committee met four times in 2020 with meetings arranged
around the key external reporting dates. The first meeting in March
focused on the 2019 year-end external audit process (reported in the
2019 Annual Report and Accounts). Meetings in June and August both
centred on the Group’s half year reporting and the November meeting
focussed on planning for the 2020 year-end, external audit process
and the internal auditors work programme for 2021. Subsequent to the
year end, a meeting was held in March 2021 to conclude the 2020
audit and any significant issues.
1
2 Leadership and Governance
3
4
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 on the
Group’s website. A summary of the Committee’s principal responsibilities and activities during the year are set out below.
Principal Responsibilities of the Committee
Activities during the year
Key areas formally discussed
Financial Statements
– Monitoring the integrity of the
– March 2020: 2019 Financial
Financial Statements of the Group
and formal announcements
relating to the Group’s financial
performance;
– Reviewing any significant financial
reporting judgements; and
– Reviewing the appropriateness of
accounting policies, their
consistent application and
disclosures in Financial
Statements.
External audit
– Overseeing the Group’s
relationship with the external
auditors, including:
• making recommendations to
the Board on the appointment
or reappointment of the
external auditor;
reviewing their terms of
engagement and engagement
for non-audit services; and
•
• monitoring the external
auditors' independence,
objectivity and effectiveness.
– Reviewing the Group’s internal
financial controls and internal
control and Risk Management
systems and oversight of the
Group’s Risk Management
Committee; and
– Monitoring and reviewing the
effectiveness of the Group’s
internal audit function.
– 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.
Internal risk
management
and assurance
Whistleblowing
procedures
Statements approval (included in
2019 Annual Report and
Accounts).
– June 2020: Half-year key
accounting issues, estimates and
assumptions.
– September 2020: Approval of
half-year financial statements.
– November 2020: Year-end key
accounting issues, estimates and
assumptions.
– March 2021: Approval of 2020
year-end financial statements.
– At each meeting, the Committee
receives an updated report from
the external auditor which either
explains the plans and scope for
the forthcoming audit or review or
contains the conclusions from the
work performed.
– Going concern conclusions and
linkage to the viability statement;
and
– Significant accounting issues
at the half-year and year-end
(see below);
– Reviewing the external auditors'
scope and audit plan for the 2020
year-end;
– Discussing the materiality levels
set by the auditor;
– Approval of the auditors'
remuneration;
– Consideration of the results of the
external audit with the auditor and
management; and
– Assessment of the effectiveness
of the external audit (see overleaf).
– At each meeting, the Audit
Committee receives:
• An update from management
on the latest Risk and
Assurance Committee
meetings and Risk
Management process; and
• a report from the internal
– Reviewing the Group’s Corporate
and Operational risk register;
– Reviewing reports on the
activities of the Risk Management
Committee;
– Selection of internal audit work
planned for 2021 and consideration
for future years; and
auditors, tracking the progress
of internal audits and their
output and recommendations.
– Assessment of key findings raised
from internal audits conducted
in the year.
– In November, the Audit
Committee agreed on the
proposed programme of internal
audit for 2021.
– The Committee’s annual review
and approval of the Group’s
Whistleblowing Procedures
was performed at the November
meeting.
– Reviewing and approving
of the Group’s whistleblowing
procedures.
Other matters
– Reviewing the Group’s policy
– The Committee’s annual review
for approval of non-audit work
to the Company’s auditor; and
– Reviewing booking of Group
reserves and resources.
and approval of the Group’s policy
for approval of non-audit work
was undertaken at the November
meeting.
– Review and approval of the Group
policy for approval of non-audit
work to the Company’s auditor;
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 Board of Directors.
Cairn Energy PLC Annual Report and Accounts 2020
87
Audit Committee Report continued
Financial Statements
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 judgments that management has used in applying the relevant accounting standard.
The key issues identified at the December 2020 year end were the sale of Cairn’s interests in Senegal, impairment testing on the Group’s
remaining oil and gas assets, notably the two UK producing assets, and accounting for the award under the Indian Tax arbitration. As always,
the assessment of the ability of the Group to continue to operate as a going concern is also considered by the Audit Committee.
2020 Year-End Significant Accounting Issues:
Sale of Cairn’s Interests in Senegal
Cairn announced that it had reached agreement to sell its interest in Senegal in July 2020. The timing of the transaction had implications for the
carrying value in the Group’s half-year financial statements where an initial impairment was recorded, before recording a loss on disposal in the
full-year financial statements.
Audit Committee action
Audit Committee conclusions
The Audit Committee reviewed the initial accounting for the Group’s
interests in Senegal at the half-year in June and September 2020 and
concluded on the accounting treatment for the sale of the assets on
completion in November 2020.
Key for the Audit Committee was ensuring that the presentation in the
half-year and year-end Financial Statements was consistent with the
principal risks to successfully completing the sale assessed at each
reporting date.
During the year, the Audit Committee concluded that at the 30 June 2020
Balance sheet date, the proposed sale of the Senegal assets was not
sufficiently progressed to allow the assets to be reclassed as ‘held-for-
sale’ as at the half year reporting date. The Committee reviewed and
agreed with the impairment charge recorded by management at that time.
Subsequent to completion of the sale in the second half of 2020, the Audit
Committee reviewed and agreed with management’s calculation of the
loss on disposal, noting the differing treatment of the fair value of deferred
consideration which was included in half-year impairment tests, but not
recognised as consideration on completion of the sale in accordance with
the applicable accounting standard.
Impairment Testing on Oil and Gas Assets
The Committee review and, in conjunction with the full Board, approve Group corporate assumptions which, together with reserve estimates,
feed into the Group’s impairment tests produced by management and reviewed by the Committee.
Audit Committee action
Audit Committee conclusions
During 2020, management proposed changes to the Group’s corporate
assumptions, reducing the forward-curve based short-term oil price
assumption period from three to two years and reducing the Group’s
long-term oil price assumption to be used in impairment test valuations
to US$55/bbl, with future price escalation removed. The Committee
reviewed all changes proposed and compared against analysis
provided by the auditor on the market range of assumptions.
The Committee agreed with the approach that management had
adopted in determining the appropriate valuation method for measuring
the recoverable value of the Group’s assets.
The Committee were satisfied that the Group Corporate assumptions
were correctly applied in the Group's impairment tests, where no
impairment was recorded, and in measuring the impairment charges
recorded in the Financial Statements of the Company.
Subsequent impairment test calculations were reviewed by the
Committee, noting the key assumptions that management had
highlighted including the approach for determining fair value and the
interaction of deferred tax on asset carrying values. This review
included both the Group impairment test on producing assets and
the Company’s impairment of investment in subsidiaries.
Accounting for the Award Under the India Tax Arbitration
In December 2020, the tribunal established to rule on Cairn’s claim against the Government of India ruled unanimously in Cairn’s favour. Damages
of US$1.2 billion plus interests and costs are now payable to Cairn.
Audit Committee action
Audit Committee conclusions
The Committee carefully considered the accounting implications of the
award under the arbitration.
While the Audit Committee acknowledged the robustness of the award
in the Company’s favour and the strength of the enforcement rights
afforded to it, there was significant debate as to whether the recognition
criteria under the accounting standards had been met.
The Committee concluded that, while both negotiations with the
Government of India over settlement and legal processes to enforce
the award in various jurisdictions had commenced, neither recovery
route was sufficiently advanced to allow the Committee to conclude
that the “virtually certain” requirement required by the accounting
standards for realising income and therefore recognising an asset,
had been achieved. Therefore, the Committee agreed that it was
appropriate for the asset to remain classified as a contingent asset
at this time.
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Cairn Energy PLC Annual Report and Accounts 2020
1
2 Leadership and Governance
3
4
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, including the implications of the completion of the Shell Western
Desert acquisition within the conditions of the associated financing facilities for which the Group has obtained Commitment letters from external
lenders. This year, the assessment included the increased risks associated with COVID-19 and the mitigating actions that management has taken.
This review confirmed that the Group has the necessary funding agreed to meet its work programme and firm commitments over the period of
12 months from the date of signing the Financial Statements. 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 43. Following this challenge, the Committee recommended approval of the Viability Statement to the Board.
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 ten 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 2020 year-
end audit therefore represents the eighth year of PwC’s tenure as Group auditors.
Lindsay Gardiner continued as PwC’s lead audit partner on the Cairn engagement for a third year. Lindsay, who was not previously involved with the
audit of the Group or its subsidiaries, indicated that he intended to step-down from his role as lead audit partner at the end of the 2020 audit. Lindsay
will be replaced by Bruce Collins, who was previously Director on the Cairn audit engagement between 2013 and 2015. Bruce was not involved in the
Cairn audit between 2015 and 2020 and therefore is not precluded from accepting the role of lead audit partner.
Cairn will re-tender for the role of Group auditors at the end of the 2022 year-end audit, complying with the Competition and Markets Authority 2014
Order requiring a mandatory tender after ten years.
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
An assessment of the independence of the auditors.
The Audit Committee consider PwC to be independent.
A review of the Audit Plan including the materiality level set by the
auditors and the process they have adopted to identify Financial
Statement risks and key areas of audit focus summarised in the
Independent Auditors' Report on pages 128 to 133.
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 2020 was presented
to the Audit Committee in June 2020 and is summarised in the
Independent Auditors' Report on pages 128 to 133. 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 auditors' 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 level of mis-statements to be reported to the Committee. The final
Audit Report was presented to the Audit Committee in March 2021. 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.
Cairn Energy PLC Annual Report and Accounts 2020
89
Audit Committee Report continued
At the end of each annual reporting cycle, the Audit Committee reflect on the quality of the audit provided by the auditors. At each Audit Committee
meeting, the auditor presents an update on their progress and, where appropriate, conclusions 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 2019 year-end audit, the Committee discussed the quality of the audit service provided, using the questionnaire
responses as a basis for the discussion. Although 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. The formal assessment of the 2020 audit has yet to be formally undertaken.
Internal Risk Management and Assurance
The Audit Committee reviews the Group’s principal risks at each meeting. The Group Risk Management Committee meet in advance of the Audit
Committee and minutes are reviewed by the Audit Committee and follow-up queries addressed with management. The Group’s Risk Management
project plan is also presented, with the Audit Committee closely monitoring the close-out of recommendations raised during completed internal
audits, as well as noting progress of ongoing audits and plans for future audits, ensuring they remain on schedule. The Audit Committee also
complete an annual review of management’s formal internal controls assessment.
The Group’s principal risk dashboard is updated in advance of every meeting and changes to operational and corporate risks noted and discussed.
The Audit Committee will challenge management on the classification of risks where further clarification is sought on either the assessment of the
likelihood of a risk materialising or the estimated financial impact. During the current period, risks were reviewed against a back-drop of falling
commodity prices and the ongoing COVID-19 pandemic, together with the ability of the Group to successful monetise its interests in Senegal.
Internal Audit
Following a competitive tender process, Ernst & Young LLP (‘EY’) were appointed as the Group’s internal auditors with effect from July 2013.
Prior to the beginning of each year, an internal Audit Plan is developed by the internal auditors, 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 pages 128 to 133), 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 auditors also participate
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 receive 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.
During 2020, the Group’s internal auditors conducted audits on the Group’s new venture activities, tax governance, Mexico operations and IT general
controls. No high risk findings were identified across the audits conducted.
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.
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
most recently re-approved at the November 2020 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 employees joining the Company.
As Cairn enters new countries, monitoring is undertaken and training is refreshed. Further information regarding these policies can be found
on the Group’s website.
Other Matters:
Provision of Non-Audit Services
We have a long-established policy in relation to the supply of non-audit services by the external auditor. 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 auditor, 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 non-audit fees for the Group’s auditor is re-approved annually. All non-audit fees should be approved by the Audit
Committee in advance of the engagement with a practical work around of only seeking approval from the Committee Chair, rather than seeking
full Committee approval, 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.
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Cairn Energy PLC Annual Report and Accounts 2020
1
2 Leadership and Governance
3
4
During the year, PwC undertook significant work on the Circular to shareholders associated with the disposal of the Group’s interests in Senegal.
What was initially expected to be a relatively routine transaction, became a more complex working capital exercise due to the lengthy negotiations
with the potential acquirer, the COVID-19 pandemic and pre-emption of the transaction by the current operator. Consequently, the non-audit fees
payable to the auditors associated with this work exceeded the 70% fee-cap based on the average of fees paid in the last three consecutive financial
years for the audit of the Group and its subsidiaries. Cairn sought and received authorisation from the FRC for an exemption from this fee-cap for the
current year. As this reflects a one-off transaction for the Group, the fees are also expected to be one-off.
PwC also provided other services during the year including certification of the Group’s EITI submission in Senegal and non-statutory audits of the
Group’s time writing recharges to operated assets.
A full analysis of remuneration paid to the Group’s external auditor in respect of both audit and non-audit work is provided in note 6.4 to the
Financial Statements.
Board and Committee Performance Evaluation
The Board retains overall responsibility for implementation of its annual performance evaluation and the process and outcomes of the 2020
internally conducted evaluation are described in the Corporate Governance Statement on pages 78 and 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 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
8 March 2021
Cairn Energy PLC Annual Report and Accounts 2020
91
Nomination Committee Report
Nicoletta Giadrossi, Chair of the Nomination Committee
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 at the
top of the next column and comprises a majority of independent
Non-Executive Directors. The Chief Executive is also a member
of the Committee.
The role of the Nomination Committee includes:
– Evaluating the balance of skills, knowledge, experience, diversity
and independence on the Board;
– 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.
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Cairn Energy PLC Annual Report and Accounts 2020
Members and Meetings in 2020
Ian Tyler (Chair)1
Nicoletta Giadrossi2
Peter Kallos
Keith Lough
Simon Thomson
Member
since
05/14
05/18
09/15
05/15
03/13
Meetings
attended
1
Ian Tyler was Chair of the Committee during the year until his retirement on
31 December 2020.
2 Nicoletta Giadrossi became Chair of the Committee with effect from
1 January 2021.
Board Changes
As disclosed in last year’s Annual Report, Alison Wood and Catherine
Krajicek were appointed as Non-Executive Directors with effect from
1 July 2019. The process in respect of each of these appointments was
described in last year’s Nomination Committee Report. At the time of
publishing last year’s report, the Company also disclosed that it was
in the final stages of the appointment process for one further Non-
Executive Director to replace Todd Hunt. The Company subsequently
announced in March 2020 that Erik B. Daugbjerg would be appointed
as a Non-Executive Director with effect from 14 May 2020. Todd Hunt
retired as a Non-Executive Director immediately following the AGM
on 14 May 2020.
The Company did not instruct an independent recruitment consultant
in connection with the appointment of Erik B. Daugbjerg and, as such,
the Committee confirms that there are no circumstances in existence
which are likely to impair, or could appear to impair, Mr Daugbjerg’s
independence. Following his identification by the Company as a
suitable candidate, Mr Daugbjerg was interviewed by the Committee
and by all other members of the Board. Following these interviews,
the Committee recommended to the Board that Mr Daugbjerg
be appointed as an independent Non-Executive Director and his
appointment was unanimously approved by the Board. As with
Alison Wood and Catherine Krajicek, Mr Daugbjerg was also given
the opportunity to carry out due diligence on the Company prior
to his appointment and was provided with the Company’s induction
materials for new directors, as well as attending a tailored programme
of induction meetings with other members of senior management
and the company secretarial team.
Chair Succession
The Company announced in May 2020 that Ian Tyler intended to step
down as Non-Executive Chair of the Company within the following
12 months, having served on the Board for seven years including six
as Chair. Following a thorough and comprehensive succession process,
which was led by one of the Company’s independent Non-Executive
Directors, Cairn announced in November 2020 that I would be
appointed Chair with effect from 1 January 2021. The Chair succession
process and subsequent period of handover during 2020 has enabled
a highly effective and seamless transition of the leadership of the
Board. As disclosed in the Corporate Governance Statement on
pages 82 and 83, the composition of the various Board Committees
has also been refreshed with effect from 1 January 2021 in line with
Code recommendations.
Succession Planning and Development of Executive Talent
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.
Working together, the Board and Nomination Committee maintain
a comprehensive succession plan for appointments to the Board
ensuring there is an appropriate balance of skills and experience that
continues to align with our strategic aims. During 2020, we worked
with a strategic partner to undertake an extensive talent development
exercise to support succession plans for a key executive role and,
as a result, the participants have robust development plans in place.
We have also made very good progress on our talent development
programme for other value-creating and value-enabling roles across
the business which is shared annually with the Board.
Our mentor programme, which launched in May 2019, continues
to provide invaluable support to colleagues whose aspirations are
to grow and develop into senior roles within the business. We have
partnered colleagues with some of our Board members as well as
senior managers so that they gain strategic and tactical insights.
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 roles, which is reviewed
by the Board.
Following the sale of the Sangomar asset in Senegal in 2020,
the Company undertook an internal reorganisation to ensure the
organisation was set up appropriately to best implement the
Company’s strategy and support the changed asset base. Details
of this reorganisation were shared with the Board.
Consequently, the Board has a deep understanding of our talent
management and succession planning processes across the Company
as well as knowledge of the range of measures being used to continue
to develop and recruit talented senior employees.
Diversity
The Nomination Committee very much recognises the benefits of
building a diverse Board, not just 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 2020 and
37.5% from 1 January 2021 following Ian Tyler’s retirement from the
Board on 31 December 2020). The Board remains diverse in terms of
the range of culture, nationality and international experience of its
members. The directors’ diverse range of practise and expertise cover
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.
1
2 Leadership and Governance
3
4
Whilst it is by no means the sole consideration, the Company
recognises the value of developing and increasing the number of
women in senior management roles across the Group. Like others in
our sector, we do face 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 apply to join energy companies.
Following the internal reorganisation described above, the Board
decided to replace the Senior Leadership Team with a smaller, more
focused Executive Committee comprising the two Executive Directors,
the Chief Operating Officer and the Director of Exploration. This change
took effect from 1 December 2020. There are currently no women on
the Executive Committee. As at 31 December 2020, of the 20 roles
directly reporting to the newly formed Executive Committee, 5% are
female, however, of the value-creating and value-enabling roles
identified in our talent management programme, 38% of the talent pool
are female. The gender split of our management population is
two-thirds male to one-third female and looking at our broader talent
pool, the gender diversity of our employee population is 50.2% female
and 49.8% male.
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 2020 inclusive).
It should be noted that the data submitted by the Company by the
required deadline in November 2020 reflected the position prior to
the new organisational structure taking effect on 1 December 2020.
Our ranking in the Hampton-Alexander Review Report published in
February 2021 improved compared to the previous year, from position
95 following the 2019 submission to position 89 following the 2020
submission (in the FTSE 250 category).
Cairn will continue to promote diversity in its widest possible sense and
the Board and Nomination Committee remain committed to ensuring
that our policies and practices support this approach, with a view to
harnessing the potential of our workforce and driving the success of
the business.
Board and Committee Performance Evaluation
The Board retains overall responsibility for implementation of its
annual performance evaluation and the process and outcomes of the
2020 internally conducted evaluation are described in the Corporate
Governance Statement on pages 78 and 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.
Nicoletta Giadrossi
Chair of the Nomination Committee
8 March 2021
Cairn Energy PLC Annual Report and Accounts 2020
93
Directors’ Remuneration Report
Alison Wood, Chair of the Remuneration Committee
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 2020.
At last year’s Annual General Meeting, shareholders were asked to
vote separately on our ‘Annual Report on Remuneration’ for the year
to 31 December 2019 and a new ‘Directors’ Remuneration Policy’ to be
applied in 2020 and later years. The committee was delighted by the
strong support for both resolutions shown by the Company’s members,
with 91.20% of votes cast being in favour of the former and 93.01% in
favour of the latter.
Part 2 of this report, which contains our Annual Report on Remuneration,
explains how the overall executive remuneration framework that was
approved at the meeting on 14 May 2020 was subsequently applied
throughout the remaining part of the year. It also sets out how the same
policy will be operated in 2021. The Annual Report on Remuneration will
be subject to an advisory vote at the AGM to be held on 11 May 2021.
Although shareholders are not being asked to approve a new Directors’
Remuneration Policy at the 2021 AGM, the substantive provisions of
the policy adopted at last year’s Annual General Meeting are repeated
in Part 3 of this report for ease of reference.
94
Cairn Energy PLC Annual Report and Accounts 2020
Members and meetings in 2020
Nicoletta Giadrossi
(Chair during 20201)
Peter Kallos
Ian Tyler2
Member
since
01/17
09/15
06/13
Meetings
attended
1 Nicoletta Giadrossi was Chair of the Committee during 2020. From
1 January 2021, she sits on the Committee as a member. Alison Wood was
appointed Chair of the Committee from 1 January 2021.
2 Ian Tyler was a member of the Committee until his retirement from the
Board on 31 December 2020.
New Chair of the Committee
On 1 January 2021 I joined the committee and, with effect from that
date, replaced Nicoletta Giadrossi as its Chair. I would like to express my
thanks to Nicoletta for leading the committee so effectively over the
past few years and wish her well as she takes on her new role as Chair
of the Company.
Summary of 2020 Business Context and Key Remuneration Decisions
The work of the committee in 2020 was conducted against a backdrop
of a year in which the Company continued to progress its main
initiatives, including portfolio management and retaining a resilient
balance sheet, whilst striving to deliver value in a safe, secure,
environmentally and socially responsible manner for all of our
stakeholders. The sale of the Company’s interests in Senegal;
announcing a subsequent return of cash to shareholders; and obtaining
the final India arbitration award (which found unanimously in Cairn’s
favour) clearly demonstrated the Company’s positive response to the
challenges that were faced in 2020.
The committee was also mindful of the potential impact of COVID-19
on the business and, at the start of the crisis, conducted a full review
of the Company’s remuneration structures for executive directors with
the aim of ensuring that the pay arrangements and outcomes for our
senior leadership team appropriately reflected the experience of the
Company’s shareholders and its wider employee population during
this difficult time. The committee’s deliberations on this issue took into
account relevant guidance issued by institutional investors and their
representative bodies. They also reflected the fact that the Company
was less impacted by the COVID-19 crisis than many other
organisations and, in particular, that:
– the Company did not access any UK Government loan scheme;
– Cairn did not make any use of the UK Government’s furlough
scheme; and
– given the resilience of the business, there was no need to impose
salary reductions across the Group’s wider workforce.
Against this background, the key remuneration related decisions made
by the committee in 2020 (including those influenced by COVID-19)
are described in more detail in the Annual Report on Remuneration
contained on pages 97 to 111 and can be summarised as follows:
– Standard base salary increases
In accordance with its normal practice, the base salaries of the
Company’s Executive Directors (being Simon Thomson and James
Smith) were reviewed by the committee at its meeting in November
2020 and it was agreed that an increase of 1% would be applied to
both individuals with effect from 1 January 2021.
The above increase was consistent with the level of standard annual
salary increase awarded to other employees at that time.
– Alignment of pension contributions
During the year, and in satisfaction of the commitments given in the
Directors’ Remuneration Report for the year ended 31 December
2019, the committee carried out a detailed review of pension
provision across the Group. This review took into account the now
wide spread preference of investors that pension benefits for
executive directors (including those currently in post) should be
aligned to those applicable to the wider workforce. The conclusion
reached by the committee was that this alignment should be
delivered by:
•
increasing the contribution rates applicable to the wider
workforce from 10% of salary to 12.5% of salary; and
reducing the contribution levels of the incumbent executive
directors from their current level of 15% of salary to 12.5%
of salary.
•
The committee is of the view that the above changes, which will
be implemented with effect from 1 January 2023, will result in
the Company’s pension arrangements becoming aligned with
both market practice and institutional investors’ guidelines. For
the avoidance of doubt, and in accordance with the terms of the
Company’s approved remuneration policy, if a new executive
director were to be appointed prior to the above implementation
date, their pension contribution would immediately be capped
at a level that was equal to the amount paid to the wider UK
employee population from time to time.
– 2020 annual bonus – structure
Under the Executive Directors’ bonus scheme for 2020 (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.
The above KPIs, and their respective weightings for the purposes
of the bonus scheme, were set by the committee in advance of
the start of the year and, in accordance with normal practice, were
thereafter regularly reviewed in order to ensure that they remained
appropriate. In 2020, this process led the committee to exercise its
discretion and make an adjustment to the weightings ascribed to
two KPIs part way through the period. In particular, the committee
decided that, in order to reflect the significant re-calibration of
the Company’s overall strategy that took place during the year (in
terms of which a greater emphasis was placed on expanding the
production base and reducing the overall exploration investment),
it would be appropriate to reduce the weighting applicable to the
exploration related KPIs (from 35% of total bonus opportunity to 25%)
and apply a corresponding increase to the KPIs relating to balance
sheet strength (from 25% of total bonus opportunity to 35%).
The committee is of the view that the above decision, which was
made in accordance with the terms of the Company’s approved
remuneration policy, was appropriate in light of the change of
strategic emphasis and reflected the particular circumstances
(including the oil price environment) that existed at the time the
committee's discretion was exercised. The committee is also
clear that this change to the weightings was not implemented to
make the bonus scheme for 2020 less demanding than when the
structure of the plan was originally set.
Throughout the year, the committee also considered whether the
ongoing impact of the COVID-19 crisis required further adjustments
to be made to the structure of the bonus scheme. The conclusion
reached was that, notwithstanding the exceptional circumstances
that prevailed over the majority of 2020, the terms of the arrangement
(as adjusted in the manner described above) remained appropriate on
the basis that they helped ensure that there was an enhanced level
of focus on the financial stability of the business during a period of
significant economic uncertainty.
– 2020 annual bonus – outturn
Based on an assessment of the extent to which the relevant targets
were achieved, awards made under the annual bonus scheme to
the Executive Directors during the year (as a percentage of annual
salary) were 93.75% for both Simon Thomson and James Smith.
1
2 Leadership and Governance
3
4
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 102 and 103 of the Annual Report on
Remuneration.
– Long Term Incentive Plan (LTIP) – partial vesting of 2017 awards
The performance period applicable to the LTIP awards granted in
2017 came to an end during 2020. Over this period, the Company’s
Total Shareholder Return was sufficient to place it between the
eighth and ninth positions in a group of 17 comparator companies
with the result that:
•
the ‘core’ elements of these awards vested in respect of 34.29%
of the shares over which they were granted; and
• no part of the ‘kicker’ elements of these awards vested and they
lapsed in full.
As part of the above vesting process, the LTIP’s rules required
the committee to review the Company’s overall performance over
the three years from the grant of the awards. After due and careful
consideration, the committee concluded that there had been
a sustained improvement in such overall performance during
that time.
The vested awards held by the Executive Directors are subject
to a further two-year holding period during which they cannot
normally be exercised and any shares that are ultimately acquired
by them will constitute ‘relevant shares’ for the purposes of the post-
employment shareholding requirement described on page 118.
– LTIP – grant of 2020 awards
During 2020, the committee made the fourth annual grant under
the Company’s LTIP that was adopted at the 2017 AGM.
Normally, LTIP awards are granted by the committee in March of
each year. However, as a result of the significant market uncertainty
that existed in March 2020 due to the COVID-19 crisis, it was
decided that it would be appropriate to defer the grant process until
there was some degree of stability in the Company’s share price.
As a result, the 2020 awards under the LTIP were granted on
28 July 2020.
Notwithstanding the above deferral of the award process, the
committee was also aware that these grants were still being made
at a time when, along with many other listed companies, Cairn had
experienced a material fall in its share price (when compared to the
‘pre-COVID 19’ level). The Company’s remuneration policy makes it
clear that any such share price movement should be considered by
the committee at the time any grants under the 2017 LTIP are being
formulated, principally to mitigate against the risk of participants
realising a ‘windfall’ gain on their subsequent vesting. As a result, the
committee determined that a 20% reduction should be applied to
the number of ordinary shares over which each individual’s award
would otherwise have been granted if Cairn’s standard approach
had been adopted on that occasion. In the case of the Executive
Directors, this resulted in awards being granted with a face value
equal to 2 x base salary (rather than the 2.5 x base salary awards
envisaged by the policy). The quantum of this reduction in the size
of awards reflects general market practice in these circumstances
and was arrived at by the committee after taking independent
advice. For the avoidance of doubt, no change was made to the
overall structure or weightings of the performance conditions that
were applied to the above grants.
The committee is also conscious of the fact that the Company’s
remuneration policy (and the terms on which recent awards under
the 2017 LTIP have been granted) gives it a broad discretion to
reduce the vesting levels that arise from the formulaic operation of
the performance conditions applicable to the above awards where
Cairn Energy PLC Annual Report and Accounts 2020
95
Each of the committee’s decisions described above was made in the
context of the requirements of the 2018 UK Corporate Governance
Code and, in particular, after considering the various factors set out in
its Provision 40. For example, the decision to amend the weightings
ascribed to certain Group KPIs for the purposes of the 2020 annual
bonus scheme was based on a desire to ensure that the Company’s
incentive schemes encouraged behaviours that were consistent with
the Company’s purpose, values and strategy. Similarly, the decision to
defer the grant of the 2020 LTIP awards and apply a reduction to their
overall quantum reflected an intention to mitigate reputational and
other risks from excessive rewards. The committee was satisfied that,
during 2020, the approved remuneration policy operated as intended
and delivered outcomes that fairly reflected the resilient nature of the
business and its achievements over the year.
Applying the Policy in 2021
An overview of the way in which the current remuneration policy will be
applied in 2021 is set out on pages 110 and 111 in the Annual Report on
Remuneration. In summary:
– on 1 January 2021, the above noted increases to the base salaries
of the Chief Executive and CFO came into effect;
– the Group KPI measures used for the annual bonus scheme
(and their respective weightings and payment scales) have been
reformulated for 2021 in order to ensure consistency with the
Company’s strategic priorities for the period. In particular, the
selected KPIs reflect the Company’s increased focus on its business
within the energy transition whilst delivering value for our
shareholders. They also encourage delivery of a unique value
proposition that is supported by strong financial management
in a responsible manner; and
– no material changes have been made to the manner in which the
LTIP will operate in 2021.
When administering executive pay throughout 2021, the committee
will continue to monitor wider business performance and the ongoing
impact of the COVID-19 crisis.
Feedback on Directors’ Remuneration Report
We welcome questions and feedback from all those interested on both
the content and style of this report. We also look forward to receiving
your support for the Directors’ Remuneration Report at the AGM to be
held on 11 May 2021.
Alison Wood
Remuneration Committee Chair
8 March 2021
Directors’ Remuneration Report continued
it is deemed appropriate to do so. The question of windfall gains
is one factor that will be considered by the committee at the expiry
of the relevant performance measurement periods.
Full details of the awards made to Executive Directors in July 2020
are set out in the Annual Report on Remuneration.
– Share Incentive Plan (SIP) – operation during 2020
As explained on page 108, the Company operates a tax-
advantaged, all-employee SIP that is used on an annual basis to
provide a range of different share related benefits to the Group’s
employees. Although the Executive Directors were eligible to
participate in the ‘free share’ and ‘matching share’ elements of this
scheme during the first half of 2020, they elected not do so in light
of the Company’s share price performance at that time.
– Non-Executive Directors' fees and Chair's fee
During 2020, the Committee (excluding Nicoletta Giadrossi)
reviewed the Chair’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 for 2021 should be maintained at the level paid in 2020.
The fees paid to Non-Executive Directors were also reviewed
during the year by the Executive Directors and the Chair and it was
determined that their basic annual fee would be maintained at
£75,500 for 2021. Similarly, no change was made to the additional
fee payable for chairing the audit and/or remuneration committee.
– Details of additional discretions exercised by the Committee
during 2020 in relation to Executive Directors’ pay
In early 2020, the Committee exercised its overarching discretion
in relation to the 2019 annual bonus scheme and reduced the
amount of the awards that would otherwise have been paid to the
Executive Directors for the levels of achievement delivered against
the Group KPIs for that period. This decision, which reflected a
number of macro economic considerations, was made as part
of the committee’s established practice of reviewing all variable
remuneration awards to ensure they are fair and reasonable in
the circumstances which exist at the relevant time. Appropriate
details of this reduction were included in last year’s Directors’
Remuneration Report.
The only other additional substantive discretions exercised by
the committee during 2020 related to the operation of the
Company’s various share-based incentive schemes. In particular,
the committee:
• exercised its discretion to disapply “dividend equivalent” rights
attaching to 2017 LTIP awards in relation to the special dividend
paid to shareholders as part of the return of cash that was
approved by shareholders on 8 January 2021 (see page 105
for further details);
• decided to give participants in the SIP the ability, if they so
wished, to reinvest the above noted special dividend that
was paid in respect of their plan holding in further “dividend
shares”; and
• made various decisions in relation to the treatment of a small
number of leavers (none of whom were Executive Directors).
– Consideration of remuneration arrangements
for the wider workforce during 2020
In accordance with the terms of the Company’s approved
remuneration policy, the committee regularly reviewed the
remuneration levels and incentive arrangements for employees
below senior management level. This exercise was particularly
relevant in the context of the above noted decisions around the
alignment of pension contributions across the Group that will
come into effect on 1 January 2023.
During the year, members of staff were also given the opportunity
to raise issues on a variety of matters, including executive pay, via a
number of mechanisms, including the Company’s Employee Voice
Forum which, throughout 2020, was hosted by Nicoletta Giadrossi.
96
Cairn Energy PLC Annual Report and Accounts 2020
1
2 Leadership and Governance
3
4
Part 2 – 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 2020
and explains how Cairn’s approved Directors’ Remuneration Policy that is described on pages 113 to 117 was implemented during that period. It also
summarises how that policy will be applied in 2021.
In accordance with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
(as amended) (the “Regulations”), this part of the report will be subject to an advisory vote at the 2021 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 2020
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.
In anticipation of her joining the committee and taking on the role of its Chair with effect from 1 January 2021, Alison Wood was invited to attend
a number of the committee’s meetings throughout the year.
Biographical information on the individuals that were committee members as at 31 December 2020 is shown on pages 72 and 73 and details of
attendance at the committee’s meetings during 2020 are shown on page 82.
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 4
Alvarez & Marsal
Taxand, LLP3 4
Deloitte LLP4
Assistance provided to the committee during 2020
Appointed by the committee to give periodic
advice during the period to 31 May 2020 on
various aspects of the directors’ remuneration
packages. Also assisted with a number of
miscellaneous remuneration-related projects
(including the impact of COVID-19 on Executive
Director pay).
Appointed by the committee to give periodic
advice during the period from 1 June 2020 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.
Fees for committee
assistance in 20201
£8,910
Other services provided to the Company during 2020
Provided advice on various aspects of
remuneration practice across the Group
in the period to 31 May 2020.
£8,286
Provided advice on various aspects of
remuneration practice across the Group
in the period from 1 June 2020.
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 approved at
the 2020 AGM.
£1,188
Provided advice on various aspects of
remuneration practice across the Group.
Ernst & Young LLP
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.
N/A – no advice
provided to the
committee
Shepherd and
Wedderburn LLP
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.
£24,351
Internal auditor of the Company throughout
the year.
General legal services to the Group throughout
the year.
Cairn Energy PLC Annual Report and Accounts 2020
97
Directors’ Remuneration Report continued
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 Cairn’s advisory team at Aon transferred to Alvarez & Marsal Taxand, LLP on 1 June 2020. With effect from that date, the committee appointed Alvarez & Marsal Taxand, LLP as its
independent advisor in place of Aon.
4 Each of Aon, Alvarez & Marsal Taxand, LLP and Deloitte LLP are (or were when providing advice to the committee) 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.
5 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:
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
14 May 2020
409,788,514
91.20%
39,547,428
8.80%
449,335,942
19,676
14 May 2020
417,923,175
93.01%
31,405,942
6.99%
449,329,117
26,501
Description of resolution
To approve the 2019 Directors’
Remuneration Report
To approve the 2020 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.
Payments to Past Directors During 2020 (Audited)
During the year to 31 December 2020, 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 2020 (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
Annual bonus4….
Totals
Financial
year
Salary
and fees
Benefits1
Pension2
SIP3
…paid in
cash
…deferred
into shares
…..total
bonus
Long-term
incentives5
Total
remuneration
Total fixed
remuneration
Total
variable
remuneration
Directors
Simon
Thomson
James
Smith
2020 £586,650
£35,291
£87,998
£0 £549,984
£0 £549,984 £219,808 £1,479,731
£709,939
£769,792
2019 £576,844
£34,376
£86,527
£7,197 £468,686
£0 £468,686
£0 £1,173,630
£704,944
£468,686
2020 £381,561
£38,611
£57,234
£0 £357,713
£0 £357,713 £142,965
£978,084
£477,406 £500,678
2019
£375,183
£36,787
£56,277
£7,197 £304,836
£0 £304,836
£0 £780,280
£475,444
£304,836
Notes:
1 Taxable benefits available to the Executive Directors during 2020 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 2019, with the higher figures for both the Executive Directors in 2020 primarily being attributable
to increased costs for private health insurance cover.
2 Additional disclosures relating to the pension provision for the Executive Directors during 2020 are set out on page 101.
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 2020 are set out on page 108.
4 Under the Company’s annual bonus scheme for 2019 and 2020, 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 2020 is provided on pages 102 to 104. 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 2020, including how the level of award was determined, confirmation of the amount (if any) of the above vesting value that was attributable to share price
appreciation and a summary of any discretions that were exercised, are provided on pages 105 to 108.
6 Following the end of the year to 31 December 2020, 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.
98
Cairn Energy PLC Annual Report and Accounts 2020
1
2 Leadership and Governance
3
4
Non-Executive Directors
Fixed Remuneration
Variable Remuneration
Totals
Financial year
Salary and
fees1
Benefits
Pension2
Annual
bonus2
Long-term
incentives2
Total
remuneration
Total fixed
remuneration
Total variable
remuneration
Directors
Nicoletta Giadrossi3
2020
£85,500
Keith Lough3
Peter Kallos
Alison Wood4
2019
£85,500
2020
£85,500
2019
£85,500
2020
£75,500
2019
£75,500
2020
£75,500
2019
£37,750
Catherine Krajicek4
2020
£75,500
Erik B. Daugbjerg5
Former directors
Todd Hunt6
2019
£37,750
2020
£47,527
2019
£0
2020
£28,071
2019
£75,500
Ian Tyler (former Chair)7
2020 £180,000
2019
£177,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£85,500
£85,500
£85,500
£85,500
£85,500
£85,500
£85,500
£85,500
£75,500
£75,500
£75,500
£75,500
£75,500
£75,500
£37,750
£37,750
£75,500
£75,500
£37,750
£37,750
£47,527
£47,527
£0
£0
£28,071
£28,071
£75,500
£75,500
£180,000
£180,000
£177,000
£177,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Notes:
1 As disclosed in the 2019 Annual Report on Remuneration, the Chairman’s fee for 2020 was increased from £177,000 to £180,000. The basic annual fee for Non-Executive
Directors in 2020 remained at £75,500, being the same level paid in 2019.
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 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 and 2020.
4 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.
5 Erik B. Daugbjerg was appointed as a Non-Executive Director on 14 May 2020. His fees for 2020 reflect the period from that date to the year end.
6 Todd Hunt retired as a director on 14 May 2020. His fees for 2020 reflect the period from the start of the year to that date.
7
Ian Tyler retired as Non-Executive Chair of the Company on 31 December 2020.
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 2020; 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 10-year period.
Performance Graph – Comparison of 10-Year Cumulative TSR on an Investment of £100
£300
£250
£200
£150
£100
£50
0
Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18
Dec 19
Dec 20
FTSE 250
Cairn
FTSE 350 Oil & Gas
Cairn Energy PLC Annual Report and Accounts 2020
99
Directors’ Remuneration Report continued
Total Remuneration of Chief Executive During the Same 10-year Period
Financial year
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
20113
Chief Executive
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Simon Thomson
Sir Bill Gammell
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)
£1,479,731
£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
75%
65%
70%
76.9%
80.2%
75%
78.5%
63%
86%
82%
N/A
27.4%2
0%
56.7%
90.8%
81.7%
23.4%
0%
0%
0%
121%
106%
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 98.
2 As explained on page 106, Simon Thomson’s 2017 LTIP award vested in respect of 34.29% of its “core” award (being the element granted over ordinary shares worth 2 x base
salary). This represents 27.4% of the total award (i.e. “core” plus “kicker” awards) that was granted over shares worth 2.5 x salary.
3 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).
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 2020), 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 for the last two years,
with the result that the following table shows the relevant ratios for each of 2020, 2019 and 2018:
Year
2020
2019
2018
Method of calculation adopted
25th percentile pay ratio
(Chief Executive :
UK employees)
Median pay ratio
(Chief Executive :
UK employees)
75th percentile pay ratio
(Chief Executive :
UK employees)
Option A
Option A
Option A
22 : 1
19 : 1
36 : 1
14 : 1
12 : 1
22 : 1
8 : 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 2020 (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 2020 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).
The committee notes that each of the pay ratios for 2020 is higher than in the immediately preceding year. This is largely attributable to the fact that,
unlike during 2019, awards vested under the Company’s various discretionary share incentive plans in the period of 12 months to 31 December 2020.
Given that the Executive Directors receive a higher level of annual award (as a percentage of salary) under these arrangements than almost all other
employees, this 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 2020 and 2019 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 2020 remuneration is at the median, 25th percentile and 75th percentile amongst UK based employees are
as follows:
Chief
Executive
25th
percentile
Median
75th
percentile
Salary
Total pay and benefits
£586,650
£36,869
£59,959 £130,000
£1,479,731
£66,646
£107,062
£192,234
100
Cairn Energy PLC Annual Report and Accounts 2020
1
2 Leadership and Governance
3
4
Percentage Annual Change in Directors’ Remuneration Elements Compared to all Group Employees
The table below compares the percentage change in various elements of the Directors’ remuneration between 2019 and 2020 with the percentage
change in the remuneration of all the Group’s employees in respect of that same period.
All Group employees
Executive Directors
Simon Thomson
James Smith
Non-Executive Directors
Keith Lough
Peter Kallos
Nicoletta Giadrossi
Alison Wood5
Catherine Krajicek5
Erik B. Daugbjerg6
Former directors
Todd Hunt7
Ian Tyler8
% change in base
salary/fees
% change in
taxable benefits
% change in
annual bonus
3.0%1
(0.4)%2
2.2%
1.7%
1.7%
0%
0%
0%
100%
100%
N/A
(62.8%)
1.7%
2.7%3
5.0% 3
17.3%4
17.3%4
0%
0%
0%
0%
0%
0%
0%
0%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Notes:
1 The standard level of salary increase across the Group in 2020 was 1.7%. However, a small number of individuals received higher percentage increases which raised the average
for all employees to 3%.
2 This fall in average taxable benefits for all Group employees has arisen due to a lower level of relocation expenses being paid in 2020.
3 As explained on page 98, the above increases in the taxable benefits for both the Executive Directors was primarily attributable to increased costs for private health insurance cover.
4 The above noted percentage change in annual bonus for Simon Thomson and James Smith has been impacted by the fact that, as highlighted on page 96, the committee
exercised its overarching discretion in relation to the 2019 annual bonus scheme and reduced the amount of the awards that would otherwise have been paid to members of the
Executive Committee for the levels of achievement delivered against the Group KPIs for that period. No such reduction was applied to the Group KPI elements of the 2019 bonus
awards made to the general employee population.
5 Alison Wood and Catherine Krajicek were both appointed as Non-Executive Directors on 1 July 2019.
6 Erik B. Daugbjerg was appointed as a Non-Executive Director on 14 May 2020.
7 Todd Hunt retired as a director on 14 May 2020.
8 Ian Tyler retired as Non-Executive Chair of the Company on 31 December 2020.
9 The Non-Executive Directors are not eligible to participate in the annual bonus scheme.
Executive Directors’ Base Salaries During 2020
Based on a review carried out in November 2019, the following salary increases for Executive Directors became effective on 1 January 2020:
2020 Annual Salary Details
Current directors
Simon Thomson
James Smith
Job title
Chief Executive
CFO
Annual salary as at
31 December 2019
Annual salary
as at 1 January 2020
% increase with effect from
1 January 2020
£576,844
£375,183
£586,650
£381,561
1.7%
1.7%
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 2020.
Executive Directors’ Pension Provision During 2020 (Audited)
In accordance with the terms of the Directors’ Remuneration Policy described on pages 113 to 117, the Company operates a defined contribution,
non-contributory Group personal pension plan which is open to all UK permanent employees. During 2020, the Company contributed 10% of basic
annual salary (15% in respect of current Executive Directors) on behalf of all qualifying employees.
As explained in the Chair’s Annual Statement on pages 94 and 95, the committee has decided that, with effect from 1 January 2023, the above
contribution rates will be aligned so that all employees and Executive Directors will benefit from an annual Company pension contribution of 12.5%
of basic salary.
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 2020 are set out in the
“pension” column of the single total figure table on page 98.
Cairn Energy PLC Annual Report and Accounts 2020
101
Directors’ Remuneration Report continued
Annual bonus – 2020 structure and outcome (audited)
During 2020, 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, 2020 bonus awards were based on achievement against a mixture of personal objectives 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 2019, 100% of each Executive Director’s bonus opportunity for the year to 31 December 2020 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, payment scales and achievement levels is set out below.
2020 Annual Bonus Scheme – Group KPI Performance Conditions (100% Weighting) and Achievement Levels
Purpose
2020 KPI
Maintain licence to operate
KPI measures and performance achieved in 2020
Measurement
and payment scale
2020 performance
Weighting
Bonus
awarded
(as % of allocated proportion
of maximum opportunity)
KPI
remuneration
committee
decision
13.5% Substantially
achieved
– OSPAR audit completed in
15%
2020 with no major findings.
– CSR projects (Suriname
mangrove rehabilitation and
NATIN) on course at end of
2020 despite COVID-19.
Additional programme
development for Mexico
commenced.
– No LTIs or recordable
incidents in 2020.
– No recordable spills above
the IOGP level.
– Energy efficiency
methodology for the Group's
operated E&A activities has
been developed.
Deliver value
in a safe,
secure and
environmentally
and socially
responsible
manner.
– Achievement of leading
indicators linked to the
categories listed.
– Lagging indicators set in
line with IOGP targets
and guidelines.
– 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
Portfolio
optimisation
and
replenishment.
– Secure new venture
opportunities that meet
the corporate hurdles and
have risk levels consistent
with our Risk Appetite
Statement.
– Each new opportunity
will be measured
against tests of control,
materiality and
commercial robustness.
– Following Tullow giving
5%
3.5%
notice that they intended
to withdraw from six out of
seven blocks in Côte d'Ivoire.
Cairn opened negotiations
with Tullow and subsequently
took Operatorship in blocks
C1-301 and C1-302.
Partially
achieved
102
Cairn Energy PLC Annual Report and Accounts 2020
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2 Leadership and Governance
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4
Purpose
2020 KPI
Deliver exploration success
KPI measures and performance achieved in 2020
Measurement
and payment scale
2020 performance
Weighting
Bonus
awarded
(as % of allocated proportion
of maximum opportunity)
KPI
remuneration
committee
decision
– Measured by the
– Four prospects were
25%1
9%
Partially
achieved
Grow the
reserves and
resources base
to provide a
basis for future
growth.
– 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.
number of prospects
progressed to 'drill-
ready' status on an
operated and non-
operated basis.
– Measured by 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
2020 reserves and
resources report.
Progress developments
Progress
Senegal
development
projects.
– Achieve certain milestones
on the Sangomar (formerly
SNE) development in
categories of subsurface,
wells, subsea, FPSO and
project controls.
– Measured against
pre-set project
milestones relating to
specific aspects of the
development of
Sangomar.
Production performance
– Deliver Group production in
line with guidance for 2020.
Maximise
revenues
through
efficient
operations.
Deliver a sustainable business
– Production delivery
assessed against
production guidance
communicated to the
market in January 2020
of between 19,000 and
23,000 bopd net to
Cairn.
Manage
balance sheet
strength.
– 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.
– Ensure adequate sources
of funding through debt
financing, cash flow
generation, portfolio
optimisation and/or
hedging strategies to
support our committed
expenditure.
– Receipt of award in Cairn’s
favour in the Indian
arbitration.
matured to 'drill-ready' status:
Diadem and Jaws in the UK
Continental Shelf; and Saasil
and Sayulita in Mexico.
– In 2020, two wells were
successfully drilled in Block 7
(Ehecatl) and Block 9 (Bitol) in
Mexico, Both wells reached
their planned subsurface
targets and gathered the
appropriate data. The cost of
the Ehecatl well was at AFE
level but the cost of the Bitol
well was over the AFE level.
– No new contingent resources
were added in 2020 as both
of the above wells were
unsuccessful in finding
hydrocarbons.
Prior to the sale of Sangomar:
– Three of the five project
execution milestones relating
to subsea, FPSO and project
controls were fully met.
– Two remaining milestones,
subsurface and wells, were
substantially met.
10%
9% Substantially
achieved
– Out-turn production from
10%
6%
Kraken and Catcher during
2020 was within guidance at
approximately 21,350 bopd net
to Cairn.
Partially
achieved
– Funding headroom was
35%1
maintained throughout the
year covering the Group’s
committed forward capital
expenditure.
34% Substantially
achieved
– Sale of Sangomar asset with
cash received at completion
of ~US$525 million provided
capital to allow both a return
of capital of ~US$250m to
shareholders and a further
strengthening of the balance
sheet.
– The tribunal ruled unanimously
in Cairn's favour in the Indian
arbitration, awarding damages
to Cairn of US$1.2 billion plus
interest and costs, which
became immediately payable.
The total due at the year-end
was US$1.7 billion.
Totals
100%
75%
Notes:
1 As explained in the Chair’s Annual Statement on page 95, the committee exercised its discretion during 2020 and adjusted the weightings ascribed to the “Deliver exploration
success” and “Deliver a sustainable business” KPIs. The weighting for the former was decreased from 35% to 25% and, in the case of the latter, it was increased from 25% to 35%.
These adjustments reflected a significant re-calibration of the business’s overall strategy that occurred during the year and were intended to ensure that there was an increased
focus on financial stability.
Cairn Energy PLC Annual Report and Accounts 2020
103
Directors’ Remuneration Report continued
2020 Annual Bonus Scheme – Overview of Awards and Actual Payments Made
The application of the outturn from the above performance condition assessments resulted in the following bonuses becoming payable to Simon
Thomson and James Smith:
Simon Thomson
James Smith
Group KPI measures
Group KPI measures
Weighting (as % of max. bonus opportunity)
x
Award elements
Achievement level
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 payment1
Deferred share award2
100%
75%
75%
125%
75%
93.75%
£549,984
£549,984
£0
100%
75%
75%
125%
75%
93.75%
£357,713
£357,713
£0
Notes:
1 Cash payments due under the annual bonus scheme were paid to the relevant individuals shortly after completion of the assessment of the relevant performance measures
and conditions.
2 Under the Company’s annual bonus scheme for 2020, 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.
Before the above bonuses were finalised, the award levels produced by the application of the various targets were reviewed by the committee
in the context of the Company’s overall financial and operational performance during 2020. The conclusion reached was that the amounts to be
paid to participants were appropriate and fairly reflected the resilient nature of the business and its achievements over the year. As a result, there
was no requirement for the committee to make any adjustments pursuant to its overarching discretion under the annual bonus scheme, details
of which are set out in the Directors’ Remuneration Policy.
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2 Leadership and Governance
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4
Long Term Incentives During 2020
Introduction
During the year to 31 December 2020, the Executive Directors participated in the Company’s 2017 LTIP (which was approved by shareholders at the
AGM held on 19 May 2017).
The 2017 LTIP enables 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.
Overview of Performance Conditions
For the awards granted to Executive Directors under the 2017 LTIP during 2017, 2018, 2019 and 2020, 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% (160% in the case of the 2020 grants) 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 108). 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% (40% in the case of the 2020 awards) 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.
No part of an award granted under the 2017 LTIP during 2019 and earlier years 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. In the case
of awards granted in 2020 and later years, the committee retains the discretion to reduce the vesting level produced by the formulaic operation of
the performance conditions described above 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).
Summary of Vesting Terms, Holding Periods and Clawback Arrangements
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 applies to both the core and kicker awards (see above).
As noted in the Directors’ Remuneration Policy, awards granted under the 2017 LTIP 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 a lower vesting percentage being determined. The circumstances in which clawback can
be applied in respect of awards vesting on or after 1 January 2020 were 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.
All outstanding awards under the 2017 LTIP have been granted on terms that participants will receive a payment (in cash and/or shares) on or shortly
following the settlement of their awards, of an amount equivalent to the dividends that would have been payable on the shares acquired between
the date of grant and the expiry of any applicable holding period. Where required, the committee will decide the basis on which the value of such
dividends shall be calculated, which may assume the reinvestment of dividends. The rules of the 2017 LTIP also give the committee the discretion
to disapply these provisions in relation to all or part of any special dividend. As highlighted in the Chair’s Annual Statement on page 96, this discretion
was exercised by the committee in relation to the special dividend paid by the Company on 25 January 2021 on the basis that the economic
position of participants in the 2017 LTIP was effectively preserved through the operation of the share consolidation that formed part of the return
of cash mechanism.
Cairn Energy PLC Annual Report and Accounts 2020
105
Directors’ Remuneration Report continued
LTIP Awards Granted During 2020 (Audited)
On 28 July 2020, the following awards under the 2017 LTIP were granted to Executive Directors:
Description of
award
Form of award
Basis of award
granted3
Share price at
date of grant4
No. of shares over
which award
originally granted
Face value
(£‘000) of shares
over which award
originally granted5
% of shares over
which award
originally granted
that vest at
threshold
Vesting
determined by
performance over
Directors
Simon Thomson
Core award Nil-cost option
Kicker award Nil-cost option
James Smith
Core award Nil-cost option
Kicker award Nil-cost option
1.6 x base
salary of
£586,650
0.4 x base
salary of
£586,650
1.6 x base
salary of
£381,561
0.4 x base
salary of
£381,561
£1.323
709,478
£939
25%
£1.323
177,369
£235
100%
£1.323
461,449
£611
25%
£1.323
115,362
£153
100%
3 years until
27 July 2023
3 years until
27 July 2023
Notes:
1 Details of the performance conditions applicable to the awards granted in 2020 are provided on page 105.
2 No price is payable by participants for their shares on the exercise of a nil-cost option granted under the LTIP.
3 Cairn’s normal practice is to grant awards on the basis of 2 x salary (in the case of the “core” award) and 0.5 x salary (for the “kicker” award). These reduced grant levels in 2020
reflect the decision of the committee that is outlined in the Chair’s Annual Statement on page 95.
4 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 28 July
2020 was £1.354.)
5 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”.
6 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 22 May 2020, the three-year performance period applicable to the awards granted under the 2017 LTIP on 23 May 2017 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 28 May 2020, can be summarised as follows:
Award
Performance measure
to measure Performance achieved 2017-2020
% of award vested
% of award subject
Core award
Relative TSR performance against a
comparator group of 17 companies.
100% Cairn’s TSR over the period placed it
34.29%
between the eighth and ninth highest
ranked companies in the comparator group.
After a careful consideration of a variety of
factors, the committee also concluded that
there had been a sustained improvement in
the overall performance of the Company
over the three years in question.
Kicker award
For any part of the kicker award to vest, (i)
the Company must achieve at least an
upper quartile ranking in the above
comparator group; and (ii) the TSR actually
achieved by the Company must be at least
100%.
100% As Cairn’s ranking in the comparator group
0%
was below upper quartile, no part of the
kicker award vested and it 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 page 105.
2 At various points in the period 23 May 2017 to 22 May 2020, 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 delisted. No other discretions relating to the vesting of the awards 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.
106
Cairn Energy PLC Annual Report and Accounts 2020
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2 Leadership and Governance
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4
The following table shows, for each of the Executive Directors, details of the 2017 LTIP awards that vested during the year:
Form of award
Date of grant
granted Date of vesting
No. of shares
over which
award originally
% of award to
vest as per
performance
condition
assessment
No. of shares
that vested1
Value of shares
vesting2
Amount of
vesting value
attributable to
share price
appreciation3
Description
of award
Current Director
Simon
Thomson
Core award Nil-cost option
23/05/17
513,700
28/05/20
34.29%
176,128
£219,808
Kicker award Nil-cost option
23/05/17
128,425
28/05/20
0%
0
£0
James Smith Core award Nil-cost option
23/05/17
334,114
28/05/20
34.29%
114,555
£142,965
Kicker award Nil-cost option
23/05/17
83,528
28/05/20
0%
0
£0
£0
£0
£0
£0
Notes:
1 Following their vesting, the above awards became subject to a two-year holding period during which they cannot normally be exercised.
2 The values shown in this column (which are included in the single total figure table for 2020) have been calculated by multiplying the number of shares that vested by £1.248,
being the closing mid-market price of a share in the Company on the day such vesting occurred.
3 On the basis that the price of an ordinary share was lower at the date of vesting of these awards (£1.248) than at their date of grant (£2.18), no part of the vesting value is attributable
to share price appreciation.
4 No discretions were exercised in relation to the awards set out in the above table as a result of share price appreciation or depreciation.
LTIP – Awards Exercised During 2020 (Audited)
No LTIP awards were exercised by the Executive Directors during the year to 31 December 2020.
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 2020, 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
28/03/18
2017 LTIP
Core
award
Nil-cost
option
Kicker
award
Nil-cost
option
2017 LTIP
Core
award
Nil-cost
option
13/03/19
2017 LTIP
James Smith
2017 LTIP
28/03/18
2017 LTIP
Kicker
award
Nil-cost
option
Core
award
Nil-cost
option
Kicker
award
Nil-cost
option
2017 LTIP
Core
award
Nil-cost
option
13/03/19
2017 LTIP
Kicker
award
Nil-cost
option
2 x base
salary of
£565,533
0.5 x base
salary of
£565,533
2 x base
salary of
£576,844
0.5 x base
salary of
£576,844
2 x base
salary of
£367,826
0.5 x base
salary of
£367,826
2 x base
salary of
£375,183
0.5 x base
salary of
£375,183
£2.11
536,050
£1,131
25%
£2.11
134,012
£283
100%
27/03/21
£1.677
687,947
£1,154
25%
£1.677
171,986
£288
100%
12/03/22
£2.11
348,650
£736
25%
£2.11
87,162
£184
100%
27/03/21
£1.677
447,444
£750
25%
$1.677
111,861
£188
100%
12/03/22
Notes:
1 Further details of the performance conditions that apply to these awards are set out on page 105.
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 2020, no changes were made to the exercise prices of the above awards or the date on which they will become exercisable.
Cairn Energy PLC Annual Report and Accounts 2020
107
Directors’ Remuneration Report continued
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 2017 LTIP to Executive Directors
that were outstanding during 2020.
Company
Africa Oil Corp.
Aker BP ASA (formerly named Det Norske Oljeselskap ASA)
DNO ASA
Energean PLC (formerly named Energean Oil & Gas PLC)
EnQuest PLC
Faroe Petroleum PLC*
Genel Energy PLC
Hurricane Energy PLC
Kosmos Energy Limited
Lundin Energy AB (formerly named Lundin Petroleum AB)
Nostrum Oil & Gas PLC
Ophir Energy 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….
23/05/17
28/03/18
13/03/19
28/07/20
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.
Participation of Executive Directors in All-Employee Share Schemes During 2020
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 2020/2021, the Company awarded two matching shares for every
one partnership share purchased and intends to continue using this award ratio for the tax year 2021/2022.
– “Free shares” – employees can be given up to £3,600 worth of ordinary shares free in each tax year. On 15 April 2020, an award of free shares
was made to employees.
In certain circumstances, the rules of the SIP also allow participants to reinvest dividends paid on their plan shares in further “dividend shares”.
As highlighted in the Chair’s Annual Statement, the Company’s Executive Directors elected not to receive any benefit from the SIP during 2020.
In particular, they opted-out of the free share award made on 15 April 2020 and chose not to make any partnership share acquisitions (with the result
they did not receive any award of corresponding matching shares).
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 2020
Details of the shares purchased by and awarded to the Executive Directors under the SIP during the course of the year are as follows:
Total SIP shares
held at 01/01/20
Free shares awarded
during 2020
Partnership shares
awarded during 2020
Matching shares
awarded during 2020
Total SIP shares
held at 31/12/20
Directors
Simon Thomson
James Smith
34,536
26,241
0
0
0
0
0
0
34,536
26,241
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 122.
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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. In addition, and with effect from 14 May 2020, being the date the Directors’
Remuneration Policy set out on pages 113 to 117 was approved by shareholders, Executive Directors (and certain other senior managers) are normally
obliged to maintain a specified holding of shares for a period of two years following cessation of employment. Further details of the terms of this
policy are set out on page 118.
The following table discloses the beneficial interest of each Director in the ordinary shares of the Company as at 31 December 2020 (or date of
cessation of directorship, if earlier). It also highlights the fact that, on 1 January 2021, the “in service” element of the above shareholding requirements
were satisfied by both Simon Thomson, Chief Executive, and James Smith, CFO.
Shares held
Awards over shares under the LTIP
Compliance with
shareholding requirements
In service
requirement
Post-cessation
requirement
Ordinary
shares2
Ordinary shares
held in the SIP3
Total holding of
ordinary shares
Ordinary shares
subject to
vested but
unexercised
awards4
Ordinary shares
subject to
unvested
awards5
Total interest in
ordinary shares
Value of holding
as a % of salary
on 1 January
20216 7
Value of holding
as a % of salary
on 1 January
20216 8
1,311,386
524,403
34,536
1,345,922
26,241
550,644
176,128
114,555
2,416,842
3,938,892
1,571,928
2,237,127
387%
253%
25%
25%
–
–
10,982
–
–
–
72,012
–
–
–
–
–
–
–
–
–
–
–
10,982
–
–
–
72,012
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10,982
–
–
–
72,012
–
1,918,783
60,777
1,979,560
290,683
3,988,770
6,259,013
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Executive Directors
Simon Thomson
James Smith
Non-Executive Directors
Nicoletta Giadrossi
Keith Lough
Peter Kallos
Alison Wood
Catherine Krajicek
Erik B. Daugbjerg
Former director
Todd Hunt9
Ian Tyler
Notes:
1 Details of the Company’s share ownership policies for Executive Directors are set out on page 118.
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 This column shows all vested but unexercised awards under the LTIP that were held by the director concerned as at 31 December 2020.
5 This column shows all unvested and outstanding awards under the LTIP that were held by the director concerned as at 31 December 2020 (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 106 and 107.
6 Share price used is the average share price for the period of 90 days up to and including 31 December 2020.
7 This holding includes (i) all shares currently held by the individual; and (ii) the net-of-tax number of all shares subject to vested but unexercised LTIP awards.
8 This holding includes the net-of-tax number of all shares subject to vested but unexercised LTIP awards.
9 Todd Hunt retired as a director on 14 May 2020 and the disclosure in the above table represents his beneficial interest in the ordinary shares of the Company as at that date.
Dilution of Share Capital Pursuant to Share Plans During 2020
In any 10-year rolling period, the number of ordinary shares which may be issued in connection with the Company’s “discretionary share plans” (which
includes the LTIP 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 10-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 2020
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.
Cairn Energy PLC Annual Report and Accounts 2020
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Directors’ Remuneration Report continued
Details of the non-executive positions with other companies that were held by Cairn’s Executive Directors during 2020, and the fees that were
payable, are as follows:
Position held
Fees received for the year to 31/12/20
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 2019 and 2020.
Employee costs (US$m)
Distributions (US$m)2
Financial Year
2019
Financial Year
2020
39.1
0
33.6
0
% change
(14.1)%1
0%
Note:
1 This fall in employee costs during 2020 is largely attributable to the headcount reduction that resulted from the disposal of Capricorn Norge AS.
2 For the purposes of the above table, “Distributions” include amounts distributed to shareholders by way of dividend and share buyback.
Implementation of Remuneration Policy in 2021
The following table provides details of how the Company intends to implement the key elements of the current Directors’ Remuneration Policy
described in pages 113 to 117 during the year to 31 December 2021.
Remuneration element
Implementation during 2021
Base salary
Both of the Executive Directors received a 1% increase in base salary on 1 January 2021 – 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 2021 are as follows:
– Simon Thomson, Chief Executive – £592,517; and
– James Smith, CFO – £385,377.
Benefits
Executive Directors will continue to receive the same benefits as in 2020.
Annual bonus
In accordance with the requirements of the 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 2021. 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 2021 bonus opportunity will be based on the Group KPIs described below
(with details of the weightings specified in brackets):
– ESG and HSSE (17.5%);
• Achieve a number of specified leading indicators that support Company policies and standards in relation to HSSE
and corporate responsibility; focusing on matters identified in our materiality matrix, governance and people.
• Achieve lagging HSSE indicators derived from IOGP targets.
• Complete Phase 1 of CCUS (carbon capture, utilisation and storage) application and evaluation.
• Further develop the framework, in line with the UN SDGs, for the social investment plans across the Group, including
quantifying the overall impact of the programme(s).
• Communicate our climate change performance and our processes for governance, risk management and target
setting using the CDP, SASB & TCFD frameworks.
– New Ventures (20%);
• Mature prospects achieving commercial thresholds that can be considered for future exploration drilling.
• Conduct our operated and non-operated exploration and appraisal activities successfully, on time and on budget.
• Add new commercial resources to replace reserves and grow value.
– Production (20%);
• Convert resources to reserves.
• Deliver net production and operating costs within guidance targets.
– Financial Performance (25%);
• Demonstrate balance sheet strength reflected in three categories: meeting financial tests in line with funding strategy;
portfolio management; and recovery of Indian arbitration proceeds.
– Corporate Projects (17.5%)
• Develop and execute corporate projects to enhance the portfolio, consistent with the Group Risk Appetite Statement.
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 2021 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. The choice
of metrics for 2021 and their weightings reflects Cairn's focus on the upstream stages of the oil and gas lifecycle.
In line with this focus, 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 2021 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 2021
LTIP
SIP
Pension
It is intended that, during the early part of 2021, 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 2020.
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.
During 2021, 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 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 2021, both the annual Non-Executive Director fee and the additional annual fee for chairing the audit and/or
remuneration committees remain unchanged at £75,500 and £10,000 respectively.
Chair's fees
The annual Chair’s fee for 2021 has been maintained at £180,000, being the same level that was paid in 2020.
Cairn Energy PLC Annual Report and Accounts 2020
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Directors’ Remuneration Report continued
Part 3 – Directors’ Remuneration Policy
Introduction
At the AGM held on 14 May 2020, shareholders overwhelmingly approved a new Directors’ Remuneration Policy for the Company. This policy, which
specifies the various pay structures operated by the Company 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, became effective immediately on receipt of that
approval and was applied by the committee during 2020. This policy will also be operative throughout 2021.
Although not required by the Regulations, the substantive terms of the above Directors’ Remuneration Policy are repeated in this Part 3 for ease of
reference. However, any details that were specific to 2020 or earlier years (including, for example, any disclosures relating to the decision-making
process that was followed for determining the new policy and the illustrative remuneration scenarios set out on page 119) have, where applicable,
either been omitted or updated to reflect the current position. The policy as originally approved by shareholders can be found on pages 97 to 106
of the 2019 Annual Report and Accounts, a copy of which is available on the Company website.
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.
Consultation with Relevant Stakeholders
The committee is always keen to ensure that, in carrying out its mandate, it takes into account the views and opinions of all the relevant stakeholders
in the business.
During the early part of 2020, the committee continued to engage with a selection of the Company’s larger institutional investors (i.e. primarily
those holding 3% or more of our issued share capital), and a selection of proxy agencies, in relation to the new Directors’ Remuneration Policy that
was approved at the AGM held on 14 May 2020. 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, during 2020, was hosted by Nicoletta Giadrossi), the attendance
of Directors at team meetings and employee engagement surveys.
Overview of Current Remuneration Policy
Cairn’s current policy on Executive Directors’ remuneration, which became effective on 14 May 2020 and which is set out below, 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:
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Policy Table – Elements of Directors’ Remuneration Package
Remuneration
element
Base salary
Purpose and link to strategy Operation
Opportunity
Helps recruit and
retain employees.
Reflects individual
experience and role.
Normally reviewed annually (with
changes taking effect on 1 January)
and/or when otherwise appropriate,
including when an individual changes
position or responsibility.
Framework for
assessing performance
None
Benefits
Helps recruit and
retain employees.
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.
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.
Cairn Energy PLC Annual Report and Accounts 2020
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Directors’ Remuneration Report continued
Remuneration
element
Annual bonus
Purpose and link to strategy Operation
Opportunity
Maximum % of salary: 125%
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.
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
2017 Long Term
Incentive Plan
(or 2017 LTIP)
Purpose and link to strategy Operation
Opportunity
Normal total maximum %
of salary: 250%.
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.
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 2021, 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.
Cairn Energy PLC Annual Report and Accounts 2020
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Directors’ Remuneration Report continued
Purpose and link to strategy Operation
Opportunity
Framework for
assessing performance
None
Remuneration
element
Share Incentive
Plan (or SIP)
Encourages a broad
range of employees
to become long-term
shareholders.
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
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 118.
Pension
Rewards sustained
contribution.
Share ownership
policy
Aligns executive
director and
shareholder interests
and reinforces
long-term decision-
making.
116
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2 Leadership and Governance
3
4
Framework for
assessing performance
None
Remuneration
element
Non-Executive
Directors’ fees
Purpose and link to strategy Operation
Opportunity
The Company's Articles of
Association place a limit on
the aggregate annual level of
non-executive directors’ and
Chair’s fees (currently
£900,000).
Helps recruit and
retain high-quality,
experienced
individuals.
Reflects time
commitment and role.
Non-executive directors’ fees are
considered annually and are set by
the executive members of the Board
and the Chair 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.
Chair’s fees
Helps recruit and
retain the relevant
individual.
Reflects time
commitment.
The Chair’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.
The Company’s Articles of
Association place a limit on
the aggregate annual level of
non-executive directors’ and
Chair’s fees (currently
£900,000).
None
Expenses incurred in the
performance of the Chair’s
duties for the Company may be
reimbursed or paid for directly
by the Company, including any
tax due on the expenses.
Notes:
1 A description of how the Company intends to implement the policy set out in this table during the financial year to 31 December 2021 is provided on pages 110 and 111.
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 165 and 166.
– 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 105) 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.
Cairn Energy PLC Annual Report and Accounts 2020
117
Directors’ Remuneration Report continued
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 14 May 2020, being the date this Directors’ Remuneration Policy was approved by shareholders, Executive Directors
(and certain other senior managers) are normally 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.
118
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2 Leadership and Governance
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4
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 2021 under minimum, on-target and maximum
scenarios. A further row 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.
Chief Executive
CFO
0
£1,000,000
£2,000,000
£3,000,000
£4,000,000
0
£1,000,000
£2,000,000
£3,000,000
£4,000,000
Minimum
£716,686
100%
Minimum
£481,795
100%
On-Target
Maximum
Maximum
with share
price growth
42%
21%
37%
42%
21%
37%
£1,738,777
On-Target
£1,146,570
25%
25%
50%
25%
25%
50%
£2,938,624
Maximum
£1,926,958
20%
20%
£3,679,271
60%
Maximum
with share
price growth
20%
20%
£2,408,680
60%
Fixed elements
Annual Variable
Long-Term Incentives
In developing the above scenarios, the following assumptions have been made:
– The “minimum” rows are intended to show the fixed level of remuneration to which the Executive Directors are entitled in 2021 irrespective
of performance levels, namely base salary (at current rates), benefits (using the details set out in the 2020 single total figure table provided
on page 98) 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” rows 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 2021 over shares worth 250% of salary.
– For the “maximum with share price growth” row, share price appreciation of 50% over the relevant performance period has been assumed for the
LTIP awards. For all other rows, 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.
Cairn Energy PLC Annual Report and Accounts 2020
119
Directors’ Remuneration Report continued
Chair and Non-Executive Directors
On the appointment of a new Chair or Non-Executive Director, the fees will be set taking into account a range of relevant factors including
market practice, time commitment and the responsibilities associated with the role. Where specific cash or share arrangements are delivered
to Non-Executive Directors, these will not include share options or other performance-related elements.
Executive Directors’ Service Contracts
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
Detailed terms
Remuneration
– 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.
Notice period1
– 12 months’ notice by the Director or by the Company.
Termination payment
– See separate disclosure below.
Restrictive covenants
– During employment and for 6 months after leaving.
Contract date
– 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 whistleblowing) 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.
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2 Leadership and Governance
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4
On a change of control of the Company resulting in the termination of his employment, the current Chief Executive is entitled to compensation
of a sum equal to his annual basic salary as at the date of termination of employment. As noted and explained in previous reports, the committee
recognises that this provision is no longer in accordance with best practice. It was not included in the contract of the CFO that was entered into on his
appointment in 2014, and will not be included in the contracts of other future appointees to the Board; however, it continues to apply to the current
Chief Executive.
In the event of a change of control or winding up of the Company, treatment of share awards will be in accordance with the relevant plan rules.
The committee has the discretion to disapply time pro-rating in the event of a change of control.
If there is a demerger or special dividend, the committee may allow awards to vest on the same basis as for a change of control.
Non-Executive Directors’ Letters of Appointment
None of the Non-Executive Directors nor the Chairman has a service contract but all have letters of appointment that set out their duties and
responsibilities, the time commitment expected by the Company, and the basis on which their fees will be paid. These letters of appointment 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 Chair and each of the current Non-Executive Directors and specifies the
dates on which those individuals are next subject to election or re-election:
Director
Nicoletta Giadrossi
Keith Lough
Peter Kallos
Alison Wood
Catherine Krajicek
Erik B. Daugbjerg
Date of original appointment
Date when next subject to election or re-election
10 January 2017
14 May 2015
01 September 2015
01 July 2019
01 July 2019
14 May 2020
11 May 2021
11 May 2021
11 May 2021
11 May 2021
11 May 2021
11 May 2021
None of the Non-Executive Directors nor the Chair 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 Chair’s letters of appointment are available for inspection, on request, at the Company’s registered office.
The Directors’ Remuneration Report was approved by the Board on 8 March 2021 and signed on its behalf by:
Alison Wood
Chair of the Remuneration Committee
8 March 2021
Cairn Energy PLC Annual Report and Accounts 2020
121
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 2020 together with the audited consolidated Financial Statements of the Group and Company for the year. These will be laid
before shareholders at the AGM to be held on 11 May 2021. 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 Statement and a description of the principal risks and
uncertainties of the Company’s Group and can be found on pages 2 to 69 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 loss after tax of US$393.8 million (2019: profit after tax of US$93.6 million).
On 17 December 2020, the Company announced that, following completion of the sale of all of its interests in Senegal to Woodside, it would
be paying a special dividend of approximately £188 million to shareholders in January 2021. Save for this special dividend, the Directors do not
recommend the payment of a dividend for the year ended 31 December 2020.
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 69 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 121. 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 120 and 121.
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 85 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 72 and 73. In addition
to those listed on those pages, during the year, Todd Hunt was a Non-Executive Director of the Board until his retirement on 14 May 2020 and Ian
Tyler was a Non-Executive Director and Chair of the Board until his retirement on 31 December 2020. The beneficial interests of the Directors in the
ordinary shares of the Company are shown below:
Simon Thomson
James Smith
Nicoletta Giadrossi
Keith Lough
Peter Kallos
Alison Wood
Catherine Krajicek
Erik B. Daugbjerg3
Todd Hunt4
Ian Tyler5
As at
31 December 2019
Number of shares
1
As at
31 December 2020
1
Number of shares
As at
8 March 2021
2
Number of shares
1,345,992
550,644
0
0
1,345,992
550,644
0
0
1,145,089
465,928
0
0
10,982
10,982
9,292
0
0
–
72,012
0
0
0
0
–
–
0
0
0
–
–
Notes:
1 This number of shares reflects the shareholding of the director prior to the 11 for 13 ordinary share capital consolidation that took place with effect from 11 January 2021 and
represents ordinary shares of 231/169 pence each that were in issue at the date noted.
2 This number of shares reflects the 11 for 13 ordinary share capital consolidation that took place with effect from 11 January 2021 and represents ordinary shares of 21/13 pence
each currently in issue.
3 Erik B. Daugbjerg was appointed as a Non-Executive Director on 14 May 2020.
4 Todd Hunt retired as a Non-Executive Director on 14 May 2020.
5 Ian Tyler retired as Chair and Non-Executive Director on 31 December 2020.
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 121.
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4
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 121.
Share Capital
The issued share capital of the Company is shown in section 7.1 of the notes to the Financial Statements. As at 8 March 2021, 499,267,656 ordinary
shares of 21/13 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.
The Directors may, in their absolute discretion and without assigning any reason therefore, 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.
Cairn Energy PLC Annual Report and Accounts 2020
123
Directors’ Report continued
Major Interests in Share Capital
As at 31 December 2020 and 19 February 2021 (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
Vanguard Group
Fidelity International
Aegon Asset Management UK
Legal & General Investment Management
Franklin Templeton
As at
31 December
2020*
82,658,216
71,884,411
39,950,674
23,102,391
23,039,693
19,302,258
19,253,235
17,693,212
% Share Capital
14.02
12.19
6.78
3.92
3.91
3.27
3.27
As at
19 February
2021+
69,638,921
57,138,877
34,042,821
20,131,276
17,243,465
15,679,260
13,407,559
3.00
14,915,377
% Share Capital
13.95
11.45
6.82
4.03
3.45
3.14
2.69
2.99
Notes:
* This number of shares reflects the shareholding prior to the 11 for 13 ordinary share capital consolidation that took place with effect from 11 January 2021 and represents ordinary
shares of 231/169 pence each that were in issue at the date noted.
+ This number of shares reflects the 11 for 13 ordinary share capital consolidation that took place with effect from 11 January 2021 and represents ordinary shares of 21/13 pence
each currently in issue.
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 can be found in the Strategic Report section on pages 56 and 57, which are deemed to form part
of this report by reference. Our response to the Streamlined Energy and Carbon Reporting (SECR) framework has been provided on page 192 of this
Annual Report and Accounts and in our CR Data Appendix (see www.cairnenergy.com/working-responsibly).
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 2020.
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 page 79 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.
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 accounting standards in conformity with the requirements of the
Companies Act 2006. Additionally, the Financial Conduct Authority's Disclosure Guidance and Transparency Rules require the Directors to prepare
the Group Financial Statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002
as it applies in the European Union. 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 for the Group and Company, international accounting standards in conformity with the requirements of the Companies Act 2006
and, for the Group, international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European
Union 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.
124
Cairn Energy PLC Annual Report and Accounts 2020
1
2 Leadership and Governance
3
4
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 2020 (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 72 and 73, 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 69 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 8 March 2021, 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 2021
The AGM of the Company will be held at 50 Lothian Road, Edinburgh EH3 9BY at 12 noon on Tuesday, 11 May 2021. 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. Restrictions put in place by the UK and Scottish Governments in response to the COVID-19 pandemic will impact how the AGM is held
in 2021. Full details are included in the Notice of AGM.
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 8 March 2021.
By order of the Board
Anne McSherry
Company Secretary
8 March 2021
Cairn Energy PLC Annual Report and Accounts 2020
125
FINANCIAL
STATEMENTS
Financial Statements
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
and Contingent Asset
1.1 Significant Accounting Policies
1.2 Going Concern
1.3 Restatement of Comparative Information
1.4 Contingent Asset
128
134
134
135
136
137
138
139
139
140
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 Costs
4.6 Earnings per Ordinary Share
126 Cairn Energy PLC Annual Report and Accounts 2020
142
144
146
148
149
149
150
151
152
153
154
155
156
157
157
159
161
163
164
164
167
167
Section 5 – Taxation
5.1 Tax Strategy and Governance
5.2 Tax Charge on Profit for the Year
5.3 Deferred Tax Assets and Liabilities
Section 6 – Discontinued Operations
6.1 Loss from Discontinued Operations
6.2 Cash Flow Information for
Discontinued Operations
6.3 Assets and Liabilities Held-For-Sale
6.4 Gain on Disposal of Property, Plant & Equipment
– Development Assets
Section 7 – Capital Structure
and Other Disclosures
7.1
Issued Capital and Reserves
7.2 Capital Management
7.3 Guarantees
7.4 Auditors’ Remuneration
169
169
170
172
173
174
174
175
176
176
177
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 Cash and Cash Equivalents
8.4 Derivative Financial Instruments
8.5 Trade and Other Payables
8.6 Financial Instruments
8.7 Capital Management
8.8 Related Party Transactions
178
179
180
181
181
184
184
184
184
186
187
Section 9 – Events After the Balance Sheet Date
9.1 Return of Cash to Shareholders
9.2 Proposed Acquisition of Exploration,
Development and Production Interests in the
Western Desert, the Arab Republic of Egypt
9.3 Sale of Cairn’s Interests in the Catcher
and Kraken Producing Assets
188
188
188
1
2
3 Financial Statements
4
Cairn Energy PLC Annual Report and Accounts 2020
127
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 2020 and of the group’s loss and the group’s
and company’s cash flows for the year then ended;
– have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act
2006; and
– have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report, which comprise: the Group and Company Balance Sheets as at
31 December 2020; the Group Income Statement and Group Statement of Comprehensive Income, the Group and Company Statements of Cash
Flows, and 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.
Separate Opinion in Relation to International Financial Reporting Standards Adopted Pursuant to Regulation (EC) No 1606/2002
as It Applies in the European Union
As explained in note 1 to the group financial statements, the group, in addition to applying international accounting standards in conformity with
the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
In our opinion, the group financial statements have been properly prepared in accordance with international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
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.
Other than those disclosed in note 7.4 to the financial statements, we have provided no non-audit services to the group in the period under audit.
Our Audit Approach
Context
Cairn Energy PLC is an independent, UK-based energy company, focused on oil and gas exploration, development and production. Cairn’s
exploration activities are focused on North West Europe, West Africa and Latin America. Its production assets are located in the UK North Sea.
Cairn’s headquarters and finance team are in Edinburgh supported by a small finance team in Mexico.
Overview
Audit scope
– We conducted audit work on 10 components. 2 of these components were subject to a full scope audit, the remaining 8 were specified scope.
– All audit work was performed in the UK by PwC UK, with the exception of the Mexican component which was audited by PwC Mexico.
– Our audit scope covered 98% of total assets.
Key audit matters
– Accounting for the Indian arbitration award (group).
– Valuation of intangible exploration/appraisal assets and development/producing assets (‘oil and gas assets’) (group).
– Implications of COVID-19 (group and company).
Materiality
– Overall group materiality: US$16,000,000 (2019: US$20,800,000) based on 1% of total assets excluding the arbitration award asset.
– Overall company materiality: US$14,400,000 (2019: US$20,100,000) based on 1% of total assets capped at 90% of group materiality.
– Performance materiality: US$12,000,000 (group) and US$10,800,000 (company).
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
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities,
outlined in the Auditors’ responsibilities for the audit of the financial statements section, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
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 statements. 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 and
128
Cairn Energy PLC Annual Report and Accounts 2020
1
2
3 Financial Statements
4
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 audit, internal and external legal counsel, and individuals outside the finance function, including
consideration of known or suspected instances of non-compliance with laws and regulations and fraud.
– Understanding 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 the recognition
and valuation of the arbitration award and assessments of oil and gas asset impairment; and
– Identifying and testing journal entries, in particular, any journal entries posted by unexpected users, journals posted at unexpected times, journals
reflecting unusual account combinations or journals with descriptions containing key unexpected words.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws
and regulations that are not closely related to events and transactions reflected in the financial statements. 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.
Accounting for the Indian arbitration award and Implications of COVID-19 are new key audit matters this year. Otherwise, the key audit matters below
are consistent with last year.
Key audit matter
How our audit addressed the key audit matter
Accounting for the Indian arbitration award (group)
As disclosed in note 1.4 of the financial statements, on 23 December
2020 the group announced that the Tribunal established under the
registry of the Permanent Court of Arbitration to rule on its claim against
the Government of India (GoI) had found unanimously in the group’s
favour. The group’s claim was brought under the terms of the UK-India
Bilateral Investment Treaty which awarded the group compensation of
US$1.2 billion plus interest and costs.
Management has concluded that, due to the uncertainty around both
the amount (including interest) and timings of the actual settlement,
they are unable to reliably estimate the value of the award. Therefore,
the receivable under the award has been classified and disclosed as
a contingent asset as required under IAS 37 “Provisions, Contingent
Liabilities and Contingent Assets”.
In assessing management’s position on the accounting treatment for the
Indian arbitration award, our procedures included:
– Obtaining and reviewing the award of the Tribunal to confirm the
decision and compensation awarded;
– Assessing the ability of the group to enforce the award;
– Holding inquiries with the group’s internal and external legal counsel;
– Obtaining written representations from external legal counsel on the
matter and assessing their professional qualifications;
– Assessing management’s analysis and compliance with the
requirements of IAS 37 and specifically considering whether the
timing and amount of expected settlement was virtually certain
or whether treatment of the receivable as a contingent asset was
appropriate;
– Discussing the accounting treatment with senior management and
the Audit Committee; and
– Considering the appropriateness of the related disclosures in note 1.4
Refer to note 1.4 of the financial statements for further information.
to the financial statements.
Our procedures did not identify any inconsistencies that suggest that
this award should not be considered to be a contingent asset or that the
circumstances were not appropriately disclosed.
Cairn Energy PLC Annual Report and Accounts 2020
129
Independent Auditors’ Report to the Members of Cairn Energy PLC continued
Key audit matter
How our audit addressed the key audit matter
Valuation of intangible exploration/appraisal assets and
development/producing assets (‘oil and gas assets’) (group)
The group has continued to invest in its exploration and appraisal
activities with a carrying value of $112.1m at 31 December 2020.
The majority of this asset relates to LATAM and East Atlantic fields,
amounting to $69.2m and $34.9m respectively.
Development and producing assets of $849.8m reflects spend to
31 December 2020 on Catcher and Kraken in the North Sea.
Significant judgement and estimation is involved in valuing the group’s
oil and gas assets, including;
– long term oil price;
– reserve levels;
– production volume profiles;
– cost profiles and level of price escalation; and
– discount rates.
Refer to notes 2.2 and 2.3 to the financial statements.
Implications of COVID-19 (group and parent company)
The COVID-19 pandemic has caused significant global disruption and
economic uncertainty, including increased volatility in commodity prices
which has impacted the group’s results and resulted in the deferral of
capital expenditure.
The uncertainty caused by the pandemic could have a direct impact on
the recoverability of assets and on the going concern of the group and
company. Additionally, there is a heightened risk of the group’s controls
being bypassed with employees working remotely.
Refer to Business Context and Risk Management sections of the Annual
Report.
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Cairn Energy PLC Annual Report and Accounts 2020
We challenged management’s assessment of impairment triggers for
exploration and appraisal assets under IFRS 6 by considering licence
conditions, the company’s budgets and plans for, and results of, drilling
activities.
We did not identify any additional triggers that had not been identified
by management.
We tested management’s analyses of the carrying values of
development/producing assets at 31 December 2020 by performing
the work described below:
– assessed the integrity and mathematical accuracy of the
impairment model;
– compared the assumptions used within the impairment review
models to approved budgets and business plans and other evidence
of future intentions for the relevant assets;
– 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;
– benchmarked key assumptions including comparing the commodity
price and discount rates used to expected ranges prepared by our
own valuation experts;
– considered the global focus on clean energy transition and climate
change in the context of impairment and key assumptions made;
– reviewed 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;
– assessed the inclusion of all appropriate assets and liabilities in
the cash generating unit and 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 inflation rate to be at the lower end of our
independently assessed market benchmark range. We found that the
discount rates for the North Sea assets were towards the higher end of
our expected range. Our audit therefore focused on the sensitivity of
the impairment assessments to movements in the long-term oil price,
inflation as well as in the reserves and production profile.
We assessed the disclosure in the financial statements for compliance
with IAS 1 ‘Presentation of Financial Statements’ and IAS 36 ‘Impairment
of Assets’.
We have reviewed management’s cash flow forecasts in support of the
going concern and asset impairment reviews. We have corroborated
these forecasts to latest Board approved budgets and confirmed the
mathematical accuracy of underlying calculations.
We have assessed forecast assumptions used in the base and severe
but plausible downside scenarios and the impact of COVID-19 on these
forecasts and concluded that these were reasonable.
We considered the group’s liquidity and availability of financing to
support the going concern and viability assessments.
We have tested journal entries posted to underlying support with
consideration to the risk of management override of controls. In respect
of the control environment, we did not observe any degradation in the
operation of controls during our audit.
We considered the disclosures made by management to address the
impact of COVID-19 and disclosures made in respect of going concern
and viability, and found them to be appropriate.
Further details of our work on going concern is included later in this report.
1
2
3 Financial Statements
4
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 five segments: Senegal (up until disposal), UK, Norway (up until disposal), LATAM and East
Atlantic. During 2020, all of the production activity has been in UK, with the majority of the exploration and development activity located in LATAM
and East Atlantic.
For accounting purposes, the group is structured into 31 reporting units ("components"). The majority of the finance function in based in Edinburgh
with the exception of the Mexican components which are accounted for in Mexico. Work performed by PwC Mexico covered the Mexican statutory
entities, with all other audit work performed by our group audit team in Edinburgh. Due to COVID-19 restrictions, the audits of all components were
performed remotely.
When scoping the audit, we focused 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 10
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 component audit team throughout the year. We maintained contact with PwC Mexico
throughout the audit and conducted formal planning and year end video conferences.
Our group audit approach resulted in coverage of 98% 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
Financial statements – group
Financial statements – company
US$16,000,000 (2019: US$20,800,000).
US$14,400,000 (2019: US$20,100,000).
1% of total assets excluding the Indian arbitration
award.
We believe that total assets excluding the Indian
arbitration award is an appropriate measure
that reflects the group's portfolio of oil and gas
exploration and production assets.
1% of total assets capped at 90% of group materiality.
The company's purpose is to hold investments in
the subsidiaries of the group. The company has
limited income statement transactions, therefore 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 $250,000 to $14,400,000. Certain components were audited to a local statutory audit materiality that was also
less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and
extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance
materiality was 75% of overall materiality, amounting to US$12,000,000 for the group financial statements and US$10,800,000 for the company
financial statements.
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and aggregation risk
and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $800,000 (group audit) (2019:
$1,100,000) and $720,000 (company audit) (2019: $1,000,000) as well as misstatements below those amounts that, in our view, warranted reporting
for qualitative reasons.
Conclusions Relating to Going Concern
Our evaluation of the directors’ assessment of the group's and the company’s ability to continue to adopt the going concern basis of accounting
included:
– Obtaining and examining management’s base case forecasts and downside scenarios, checking that the forecasts have been subject to board
review and approval;
– Considering the historical reliability of management forecasting for cash flow and net debt by comparing budgeted results to actual performance;
– Reviewing the key inputs into the model, such as commodity prices and production forecasts, to ensure that these were consistent with our
understanding and the inputs used in other key accounting judgements in the financial statements;
– Performing our own independent sensitivity analysis to understand the impact of changes in cash flow on the resources available to the group;
– Reviewing agreements for acquisitions and disposals entered into subsequent to year end, considered availability of funding; and
– Reading management’s paper to the Audit Committee in respect of going concern, and agreeing the forecasts set out in this paper to the
underlying base case cash flow model.
Cairn Energy PLC Annual Report and Accounts 2020
131
Independent Auditors’ Report to the Members of Cairn Energy PLC continued
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively,
may cast significant doubt on the group's and the company's ability to continue as a going concern for a period of at least twelve months from when
the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the company's ability
to continue as a going concern.
In relation to the company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going
concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
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 our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as
described below.
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 2020 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
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.
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.
Corporate Governance Statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate
governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other
information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement
is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw
attention to in relation to:
– The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
– The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation
of how these are being managed or mitigated;
– The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting
in preparing them, and their identification of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at
least twelve months from the date of approval of the financial statements;
– The directors’ explanation as to their assessment of the group's and company’s prospects, the period this assessment covers and why the period
is appropriate; and
– The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its
liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications
or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted
of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant
provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our
knowledge and understanding of the group and company and their environment obtained in the course of the audit.
132
Cairn Energy PLC Annual Report and Accounts 2020
1
2
3 Financial Statements
4
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our knowledge obtained during the audit:
– The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the
information necessary for the members to assess the group’s and company's position, performance, business model and strategy;
– The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
– The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when 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.
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, 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.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However,
it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular
items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the
population from which the sample is selected.
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 obtained 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 8 years, covering the years ended
31 December 2013 to 31 December 2020.
Lindsay Gardiner (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
8 March 2021
Cairn Energy PLC Annual Report and Accounts 2020
133
Group Income Statement
For the year ended 31 December 2020
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 of property, plant & equipment – development/producing assets
Impairment of goodwill
Operating (loss)/profit
Gain/(Loss) on financial assets at fair value through profit or loss
Finance income
Finance costs
(Loss)/Profit before tax from continuing operations
Taxation
Tax charge
(Loss)/Profit from continuing operations
Loss from discontinued operations
(Loss)/Profit for the year attributable to equity holders of the Parent
Earnings per share for (loss)/profit from continuing operations:
(Loss)/Profit per ordinary share – basic (cents)
(Loss)/Profit per ordinary share – diluted (cents)
Earnings per share for (loss)/profit attributable to equity holders of the Parent:
(Loss)/Profit per ordinary share – basic (cents)
(Loss)/Profit per ordinary share – diluted (cents)
Group Statement of Comprehensive Income
For the year ended 31 December 2020
(Loss)/Profit for the year attributable to equity holders of the Parent
Other Comprehensive Income – items that may be recycled to the Income Statement
Fair value gain/(loss) on hedge options
Hedging gain recycled to the Income Statement
Currency translation differences
Currency translation differences recycled on disposal of subsidiary
Other Comprehensive Income/(Expense) for the year
Note
2020
US$m
2019
US$m
2.1
2.1
2.3
4.2
2.2
4.3
2.3
2.6
4.5
5.2
6.1
1.3, 4.6
1.3, 4.6
1.3, 4.6
1.3, 4.6
3.5
2.1
6.1
394.7
(115.5)
(215.7)
63.5
(12.1)
(78.8)
1.4
(41.1)
–
–
(67.1)
0.1
0.8
(51.2)
(117.4)
(0.1)
(117.5)
(276.3)
(393.8)
(20.16)
(20.16)
(67.58)
(67.58)
2020
US$m
(393.8)
52.2
(56.0)
14.7
44.6
55.5
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
(0.3)
119.2
(25.6)
93.6
20.47
20.26
16.08
15.91
2019
US$m
93.6
(29.7)
(10.9)
0.4
–
(40.2)
Total Comprehensive (Expense)/Income for the year attributable to equity holders of the Parent
(338.3)
53.4
Total Comprehensive (Expense)/Income from:
Continuing operations
Discontinued operations
(99.7)
(238.6)
(338.3)
77.6
(24.2)
53.4
134
Cairn Energy PLC Annual Report and Accounts 2020
Group Balance Sheet
As at 31 December 2020
Non-current assets
Intangible exploration/appraisal assets
Property, plant & equipment – development/producing assets
Other property, plant & equipment and intangible assets
Current assets
Inventory
Financial assets at fair value through profit or loss
Cash and cash equivalents
Trade and other receivables
Derivative financial instruments
Assets held-for-sale
Total assets
Current liabilities
Lease liabilities
Derivative financial instruments
Trade and other payables
Deferred revenue
Non-current liabilities
Provisions – decommissioning
Lease liabilities
Deferred revenue
Liabilities held-for-sale
Total liabilities
Net assets
Equity attributable to equity holders of the Parent
Called-up share capital
Share premium
Shares held by ESOP/SIP Trusts
Foreign currency translation
Merger and capital reserves
Hedge reserve
Retained earnings
Total equity
1
2
3 Financial Statements
4
Note
2.2
2.3
2.1
3.1
3.4
3.5
6.3
3.3
3.5
3.6
3.7
2.4
3.3
3.7
6.3
7.1
7.1
7.1a,b
7.1c
7.1d
7.1e
2020
US$m
112.1
849.8
11.5
973.4
12.3
5.2
569.6
74.6
0.2
661.9
–
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
1,635.3
2,089.0
43.2
3.2
91.6
4.8
142.8
153.2
196.8
16.9
366.9
–
509.7
1,125.6
12.6
490.1
(13.4)
(130.8)
40.8
(3.4)
729.7
43.1
1.6
134.6
16.9
196.2
141.2
239.8
18.7
399.7
37.6
633.5
1,455.5
12.6
489.8
(15.8)
(190.1)
296.7
0.4
861.9
1,125.6
1,455.5
The Financial Statements on pages 134 to 177 and page 188 were approved by the Board of Directors on 8 March 2021 and signed on its behalf by:
James Smith
Chief Financial Officer
Simon Thomson
Chief Executive
Cairn Energy PLC Annual Report and Accounts 2020
135
Group Statement of Cash Flows
For the year ended 31 December 2020
Cash flows from operating activities:
(Loss)/Profit before tax from continuing operations
Loss before tax from discontinued operations
(Loss)/Profit before tax including discontinued operations
Adjustments for non-cash income and expense and non-operating cash flows:
Release of deferred revenue
Unsuccessful exploration costs
Depreciation, depletion and amortisation
Share-based payments charge
Reversal of impairment of property, plant & equipment – development/producing assets
Impairment of goodwill
Impairment of disposal group non-current assets
(Gain)/Loss on financial assets at fair value through profit or loss
Gain on disposal of oil and gas assets
Finance income
Finance costs
Adjustments to operating cash flows for movements in current 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
Expenditure on other property, plant & equipment and intangible assets
Proceeds on disposal of oil and gas assets
Costs incurred on disposal of oil and gas assets
Proceeds on disposal of subsidiary
Costs incurred on disposal of subsidiary
Cash and cash equivalents included in assets of subsidiary disposed of
Income tax refund received relating to investing activities
Interest received and other finance income
Net cash flows from/(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 financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents at beginning of year
Foreign exchange differences
Closing cash and cash equivalents
136
Cairn Energy PLC Annual Report and Accounts 2020
Note
6.1
6.2
3.4
3.6
6.1
6.1
6.1
6.1
6.1
6.2
3.2
3.2
3.2
7.1a
3.3
3.3
3.1
2020
US$m
(117.4)
(2.1)
(119.5)
(13.9)
78.8
223.1
9.1
–
–
–
(0.1)
–
(0.8)
51.5
–
–
1.5
16.6
11.6
–
2019
US$m
119.5
(115.6)
3.9
(17.2)
145.7
223.2
11.9
(147.3)
79.0
65.7
1.8
(0.7)
(3.4)
43.4
2.3
(0.5)
(5.6)
2.2
4.9
(2.8)
257.9
406.5
(126.7)
(271.4)
(2.7)
524.8
(1.7)
105.2
(0.5)
(2.2)
–
0.8
225.6
(5.3)
(7.8)
139.6
(139.6)
0.3
(1.0)
(59.5)
4.0
(69.3)
414.2
153.7
1.7
569.6
(194.6)
(75.5)
(5.0)
77.1
–
–
–
–
28.6
3.2
(166.2)
–
(13.9)
47.4
(134.0)
0.1
–
(59.5)
7.0
(152.9)
87.4
66.3
–
153.7
1
2
3 Financial Statements
4
Group Statement of Changes in Equity
For the year ended 31 December 2020
At 1 January 2019
502.3
(19.6)
(190.5)
296.7
41.0
760.2
1,390.1
Equity
share capital
and share
premium
US$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
Profit for the year
Fair value on hedge options
Hedging gain recycled to the Income Statement
Currency translation differences
Total comprehensive income/(expense)
Share-based payments
Exercise of employee share options
Cost of shares vesting
At 31 December 2019
Loss for the year
Fair value on hedge options
Hedging gain recycled to the Income Statement
Currency translation differences
Currency translation differences recycled on disposal
of subsidiary
Total comprehensive income/(expense)
Merger reserve transferred to retained earnings
Share-based payments
Exercise of employee share options
Cost of shares purchased
Cost of shares vesting
–
–
–
–
–
–
0.1
–
–
–
–
–
–
–
–
3.8
–
–
–
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
–
502.4
(15.8)
(190.1)
296.7
0.4
861.9
1,455.5
–
–
–
–
–
–
–
–
0.3
–
–
–
–
–
–
–
–
–
–
–
(1.0)
3.4
–
–
–
14.7
44.6
59.3
–
–
–
–
–
–
–
–
–
–
–
(255.9)
–
–
–
–
40.8
–
52.2
(56.0)
–
(393.8)
–
–
–
(393.8)
52.2
(56.0)
14.7
–
–
44.6
(3.8)
(393.8)
(338.3)
–
–
–
–
–
255.9
9.1
–
–
(3.4)
–
9.1
0.3
(1.0)
–
(3.4)
729.7
1,125.6
At 31 December 2020
502.7
(13.4)
(130.8)
Cairn Energy PLC Annual Report and Accounts 2020
137
Section 1 – Basis of Preparation and Contingent Asset
This section includes 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. This section also includes details of the Contingent Asset in regard to the Arbitration Award
due from the Government of India.
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 2020 were authorised
for issue in accordance with a resolution of the Directors on 8 March 2021. 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”). Accounting policies have been applied consistently across all periods disclosed.
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”)
and interpretations issued by the IFRS Interpretations Committee (“IFRS IC”) in conformity with the requirements of the Companies Act 2006
and pursuant to Regulation (EC) No 1606/2002 as it applies to the European Union, and further requirements under the 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 2020.
Effective 1 January 2020, Cairn has adopted the following amendments to standards:
– Amendments to IAS 1 "Presentation of Financial Statements" and IAS 8 "Accounting Policies"
– Amendments to IFRS 3 "Business Combinations"
– Amendments to IFRS 9 "Financial Instruments", IAS 39 "Financial Instruments: Recognition and Measurement" and IFRS 7 "Financial
Instruments: Disclosures"
– Revised Conceptual Framework for financial reporting
The adoption of the amendments above has had no material impact on Cairn's results or financial statement disclosures.
There are no new standards or amendments, issued by the IASB and endorsed under the Companies Act, that have yet to be adopted
by the Group that will materially impact the Group’s Financial Statements.
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 page 189.
Costs incurred relating to an interest in a joint operation other than costs relating to production activities 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.
138
Cairn Energy PLC Annual Report and Accounts 2020
1
2
3 Financial Statements
4
Section 1 – Basis of Preparation and Contingent Asset continued
1.1 Significant Accounting Policies continued
e) Foreign Currencies
These Financial Statements continue to be presented in US dollars (US$), the functional currency of the Parent.
In the Financial Statements of individual Group companies, Cairn translates foreign currency transactions into the functional currency at
the rate of exchange prevailing at the transaction date (or an approximation thereof where not materially different). Monetary assets and
liabilities denominated in a foreign currency are translated into the functional currency at the rate of exchange prevailing at the balance
sheet date. Exchange differences arising are taken to the Income Statement except for those incurred on borrowings specifically allocable to
development projects, which are capitalised as part of the cost of the asset, though there were none in either the current or preceding year.
The Group maintains the Financial Statements of the Parent and subsidiary undertakings in their functional currency. Where applicable, the
Group translates subsidiary Financial Statements into the presentation currency, US$, 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
Closing
2020
0.731
YTD
Average
2020
0.779
Closing
2019
0.754
YTD
Average
2019
0.783
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 approval of the Financial Statements. These forecasts assume completion of the Shell
Western Desert acquisition within the conditions of the associated financing facilities for which the Group has obtained commitment letters from
external lenders. Additionally, these forecasts also include scenarios that take account of a prolonged economic downturn as a result of COVID-19
which has led to volatility in oil prices across 2020.
The Directors have a reasonable expectation that the Group will continue in operational existence for a period of at least 12 months from the date of
approval of the Financial Statements 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 43.
1.3 Restatement of Comparative Information
Following the sale of the Group's interests in Norway, which completed in February 2020, comparative information has been restated where
appropriate to separate the UK & Norway operating segment into geographical components. This impacts comparative disclosures in notes 2.2, 2.3
and 4.1.
Disclosures in note 4.4 were restated to reclassify costs and employee numbers relating to Senegal operations as discontinued.
As detailed in notes 4.6 and 9.1, the weighted average number of shares used in both basic and diluted earnings per share calculations, disclosed on
the Income Statement, was adjusted to reflect the share consolidation in January 2021.
Cairn Energy PLC Annual Report and Accounts 2020
139
Section 1 – Basis of Preparation and Contingent Asset continued
1.4 Contingent Asset
Arbitration Award Settlement Due from the Government of India
On 23 December 2020, Cairn announced that the tribunal established to rule on its claim against the Government of India ("GoI") had found unanimously
in Cairn's favour. Cairn's claim was brought under the terms of the UK-India Bilateral Investment Treaty (the "Treaty"), the legal seat of the tribunal was
the Netherlands and the proceedings were under the registry of the Permanent Court of Arbitration.
The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and that compensation
was due.
Addressing the jurisdiction of the arbitration, the tribunal ruled that the dispute was within the scope of the Treaty and other relevant legal parameters.
It further ruled that the application to Cairn of the retrospective tax amendment introduced by the GoI was “grossly unfair”, discriminatory and in
breach of the “Fair and Equitable Treatment" standard of the Treaty.
The Tribunal therefore ordered the withdrawal of the tax demand in India and awarded to Cairn compensation equal to the value of the shares held
in Cairn India Limited (subsequently merged with Vedanta Limited) seized by India in 2014 and withheld tax refunds due on other matters, totalling
US$1,223m plus interest and costs, which is now payable. Interest is payable based on US$ six-month LIBOR plus a semi-annual margin of 1.375%,
accruing from 2014, and the costs awarded totalled US$22m. The total amount due to Cairn at 31 December 2020 was US$1,725m.
Cairn has engaged directly with the GoI regarding satisfaction of the award, and it is also enforceable against Indian-owned assets in over 160
countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Cairn has
already taken steps to have the award recognised in certain major jurisdictions in which Indian sovereign assets have been identified.
Cairn is extremely confident that satisfaction of the award will be achieved either by negotiated settlement or by enforcement against Indian assets
(with potential financing and risk sharing options available to accelerate access to cash recovered through enforcement). However, at the date of this
report, neither route to recovery is sufficiently well defined in terms of the timing and amount of expected settlement to provide the virtual certainty
required by IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" which would allow recognition of an asset on the Balance Sheet. The
receivable under the award therefore remains classified as a contingent asset at this time.
.
140
Cairn Energy PLC Annual Report and Accounts 2020
Section 2 – Oil and Gas Assets and Operations
1
2
3 Financial Statements
4
This section contains analysis of the gross profit generated by the Group’s producing assets
in the UK North Sea and details of the Group’s capital expenditure on exploration/appraisal assets,
with drilling in Mexico during 2020, and impairment test sensitivities on the Group's UK producing
assets.
Significant Accounting Judgements in This Section:
Impairment Testing of Oil and Gas Assets
Cairn has reviewed its long-term economic assumptions, focussing on the forecast impact a move from hydrocarbons towards renewable sources
of energy will have on demand for oil and gas and associated prices, concluding that peak oil demand will be followed by structurally lower prices.
At the year end, Cairn revised its oil price assumptions reducing the Group's long-term oil price assumption from US$65/bbl to US$55/bbl and
removing future escalation of prices. Updated production profile estimates, reflecting this change in assumption, have led to downward reserve
revisions and combined with lower forecast prices have reduced the fair value less cost of disposal of producing asset cash-generating units. As the
reduction in the oil price assumption is an indicator that impairment may exist impairment tests were performed. No impairment was recorded.
Key Estimates and Assumptions in This Section:
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.
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$65/bbl to US$55/bbl flat also removing future price escalation which it believes
reflects long-term market conditions. The Group’s short-term assumption remains linked to the forward curve but has been shortened from
three to two years.
Impairment Testing of Intangible Exploration/Appraisal Assets and Property, Plant & Equipment – Development/Producing Assets
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 six-month average forward curve for two years from the balance sheet date (2019: three-month average
forward curve for three years from the balance sheet date);
– Long-term oil price of US$55/bbl unescalated (2019: US$65/bbl escalated at 2.0%);
– 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 operators and escalated at 0.5% (2019: 2.0%) per annum; and
– Post-tax discount rates of 10% (2019: 10%).
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 0.5% per annum (2019: 2.0%) and discounted at risk-free
rates between 0.0% and 0.7% (2019: 2.0%).
Cairn Energy PLC Annual Report and Accounts 2020
141
Section 2 – Oil and Gas Assets and Operations continued
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 either when the customer takes delivery of a cargo of
oil from the FPSO or at the contracted delivery point whichever is determined to be the point in time that the consideration due becomes
unconditional and 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 premium or 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 and inventory
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.
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
323.7
0.8
56.0
(0.1)
13.9
394.3
0.4
394.7
(75.9)
(16.6)
(23.0)
(115.5)
(215.7)
63.5
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
Oil sales
Gas sales
Gain on hedge options designated for hedge accounting
Loss on hedge options not designated for hedge accounting
Release of deferred revenue (note 3.7)
Revenue from oil and gas sales
Royalty income
Total revenue
Production costs
Oil inventory and underlift (decrease)/increase
Variable lease charges (note 3.3)
Cost of sales
Depletion and amortisation (note 2.3)
Gross profit
142
Cairn Energy PLC Annual Report and Accounts 2020
Section 2 – Oil and Gas Assets and Operations continued
1
2
3 Financial Statements
4
2.1 Gross Profit: Revenue and Cost of Sales continued
Revenue
Cairn receives revenue from its two producing assets in the UK North Sea, Kraken and Catcher. On Kraken, where only oil is sold, Cairn took a full
lifting of crude on a scheduled basis to reflect the Group’s working interest until a change in the marketing of Kraken crude during the second half of
2020 which results in Cairn now receiving its working interest percentage share of each lifting of crude. This now aligns with Catcher where the Group
receives its working interest share of each lifting of crude and its working interest share of Catcher gas sales. Payment terms are within 30 days.
Net sales volumes during the year averaged ~21,000 boepd (2019: ~21,400 boepd) for the two assets combined, realising an average sales price of
US$42.23/boe (2019: US$64.52/boe).
COVID-19 contributed to pricing volatility during 2020 but had no significant impact on production levels.
Commodity Price Hedging
During 2020, Cairn realised gains on hedge options designated for hedge accounting of US$56.0m (2019: US$10.9m) as the oil price fell below the
floor on several hedge contracts. Hedging gains and/or losses on hedge options designated for hedge accounting are recycled to the Income
Statement from Other Comprehensive Income when the option matures.
Details on the Group’s hedging position at 31 December 2020 can be found in note 3.5.
Cost of Sales and Inventory
Inventory of oil held at the year end is recorded at a market value of US$12.3m (2019: US$13.8m). Underlift adjustments on Kraken production
volumes of US$15.1m at 31 December 2019 fully unwound during 2020 following the change in the marketing of the crude. There is now no overlift or
underlift adjustment on either Catcher or Kraken. The total inventory and underlift decrease in the year was US$16.6m (2019: increase of US$20.6m).
Variable lease costs on the Kraken FPSO of US$10.6m (2019: US$10.5m) and on the Catcher FPSO of US$12.4m (2019: US$15.1m) are charged to the
Income Statement. Details on leases can be found in note 3.3.
Cairn Energy PLC Annual Report and Accounts 2020
143
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.
144
Cairn Energy PLC Annual Report and Accounts 2020
Section 2 – Oil and Gas Assets and Operations continued
1
2
3 Financial Statements
4
2.2 Intangible Exploration/Appraisal Assets continued
Cost
At 1 January 2019
Foreign exchange
Additions
Unsuccessful exploration costs
Unsuccessful exploration costs – discontinued operations
Transfer to development/producing assets
Transfer to assets held-for-sale (note 6.3)
At 31 December 2019
Additions
Unsuccessful exploration costs
Disposals
At 31 December 2020
Impairment
At 1 January 2019
Unsuccessful exploration costs
Transfer to development/producing assets
At 31 December 2019 and 31 December 2020
Net book value
At 31 December 2018
At 31 December 2019
At 31 December 2020
Senegal
US$m
UK
(restated)
US$m
Norway
(restated)
US$m
LATAM
US$m
East
Atlantic
US$m
463.0
–
58.9
–
–
(378.8)
–
143.1
2.6
–
(145.7)
–
–
–
–
–
463.0
143.1
–
89.5
–
3.9
(5.9)
–
(30.3)
–
57.2
8.9
(20.6)
(1.5)
44.0
48.1
–
(12.1)
36.0
41.4
21.2
8.0
35.8
(0.4)
33.4
–
(38.7)
–
(30.1)
–
–
–
–
–
–
–
–
–
35.8
–
–
32.7
–
108.3
(84.7)
–
–
–
56.3
59.5
(46.6)
–
69.2
–
–
–
–
32.7
56.3
69.2
36.8
–
19.5
(31.0)
–
–
–
25.3
21.2
(11.6)
–
34.9
14.6
(14.6)
–
–
22.2
25.3
34.9
Total
US$m
657.8
(0.4)
224.0
(121.6)
(38.7)
(409.1)
(30.1)
281.9
92.2
(78.8)
(147.2)
148.1
62.7
(14.6)
(12.1)
36.0
595.1
245.9
112.1
Additions to intangible exploration/appraisal assets were funded through cash and working capital other than a further US$0.7m provided in relation
to well abandonment provisions and US$0.9m of additions relating to asset swaps.
Cairn completed the sale of its Norwegian business in February 2020 and disposed of its 40% working interest in its Senegal exploration assets
in December 2020. See note 6.1.
UK
Additions in the year include the acquisition and subsequent costs on the non-operated licence P2380 containing the Jaws prospect. A 50% interest
in this licence was obtained through a swap for a 50% interest in the licence P2379 containing the Diadem prospect. During the year US$4.2m and
US$2.3m were incurred on the Jaws and Diadem prospects respectively with remaining additions of US$2.4m incurred across the rest of the UK
portfolio of licences.
US$20.6m was charged to the Income Statement as unsuccessful costs in the year, including US$19.4m on the Agar-Plantain licence which was
relinquished early in 2021 after concluding that the discovery was not commercially viable in a lower oil-price environment.
LATAM
Additions of US$59.5m include US$56.0m in Mexico and US$4.2m in Suriname, offset by accrual reversals in Nicaragua of US$0.7m.
In Mexico the Block 9 Bitol-1 and Block 7 Ehecatl-1 exploration wells were drilled during the year with additions of US$30.2m and US$17.1m incurred
respectively. Both wells were declared unsuccessful and US$47.3m charged to the Income Statement. Remaining additions in Mexico of US$8.7m
were not directly attributable to either well. The carrying value of assets in Mexico at the year end was US$55.7m, with US$38.8m of costs on Block 9,
US$11.7m on Block 7 and US$5.2m relating to Block 15. The 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, have not yet been completed due to COVID-19
delays. Additions in 2020 include US$14.8m incurred under short-term lease contracts.
Suriname additions in the year were US$4.2m and total costs of US$13.5m remain capitalised at the year end.
East Atlantic
East Atlantic additions of US$21.2m primarily relate to Mauritania and Côte d’Ivoire.
In 2020 Cairn became operator of blocks CI-301 and CI-302 offshore Côte d’Ivoire and agreed to relinquish blocks CI-518, CI-519, CI-521 and CI-522.
Cairn Energy PLC Annual Report and Accounts 2020
145
Section 2 – Oil and Gas Assets and Operations continued
2.2 Intangible Exploration/Appraisal Assets continued
Cairn retains a non-operated interest in block CI-520. Additions in the year of US$8.6m were incurred across the seven blocks. On relinquishment
of the four blocks, US$11.6m was charged to the Income Statement as unsuccessful costs. Costs of US$12.2m remain capitalised at the year end.
Costs capitalised in Mauritania at the year end of US$21.0m relate to Block 7. The initial licence has expired following the operator’s withdrawal,
but Cairn has applied for a new licence on the same acreage. Cairn are confident that this application shall be successful, thus costs continue
to be carried in the Balance Sheet. Additions in the year of US$11.3m primarily relate to the farm-in payment to the original licence.
Impairment Review
At the year end, Cairn reviewed its remaining intangible exploration/appraisal assets for indicators of impairment. No indicators of impairment
were identified.
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.
146
Cairn Energy PLC Annual Report and Accounts 2020
1
2
3 Financial Statements
4
Section 2 – Oil and Gas Assets and Operations continued
2.3 Property, Plant & Equipment – Development/Producing Assets continued
Senegal
US$m
UK
(restated)
US$m
UK
right-of-use
leased
assets
US$m
Norway
(restated)
US$m
Cost
At 1 January 2019
Foreign exchange
Additions
Increase in decommissioning asset
Transfer from exploration/appraisal assets
Disposal
Transfer to assets held-for-sale (note 6.3)
At 31 December 2019
Additions
Increase in decommissioning asset
Disposals
At 31 December 2020
Depletion, amortisation and impairment
At 1 January 2019
Depletion and amortisation charges
Reversal of impairment
At 31 December 2019
Depletion and amortisation charges
At 31 December 2020
Net book value
At 31 December 20181
At 31 December 2019
At 31 December 2020
–
–
–
–
378.8
–
–
378.8
223.2
–
(602.0)
1,093.4
–
16.3
10.8
18.2
–
–
1,138.7
35.6
3.4
–
313.4
–
–
2.9
–
–
–
316.3
–
–
–
–
–
–
–
–
–
–
–
378.8
–
1,177.7
316.3
336.9
160.7
(147.3)
350.3
166.7
517.0
756.5
788.4
660.7
21.7
56.5
–
78.2
49.0
127.2
144.2
238.1
189.1
Total
US$m
1,529.0
(5.8)
66.5
18.2
397.0
(82.1)
(89.0)
1,833.8
258.8
3.4
(602.0)
1,494.0
358.6
217.2
(147.3)
428.5
215.7
644.2
122.2
(5.8)
50.2
4.5
–
(82.1)
(89.0)
–
–
–
–
–
–
–
–
–
–
–
122.2
1,022.9
–
–
1,405.3
849.8
1 The 2018 net book value excludes the IFRS 16 opening balance adjustment of US$147.5m recorded on 1 January 2019
The Group's UK producing assets contain two cash generating units; the Kraken development area, including the Worcester satellite field, and the
Greater Catcher and Laverda development areas which form a single unit.
Additions during the year of US$258.8m relate to development activity funded through cash and working capital and include US$10.4m of costs
under short-term lease contracts.
Additions of US$223.2m were incurred in Senegal prior to disposal of the development asset, see note 6.1. These costs principally related to the
FPSO facility and subsea construction for the Sangomar field development.
In the UK, additions of US$35.6m consist of Kraken costs of US$18.2m, including drilling costs of the Worcester well, and Catcher spend of US$17.4m,
where the Varadero infill well and subsea installation were completed in the year. Drilling of the Catcher North and Laverda development wells have
been delayed due to COVID-19 uncertainties.
The increase in the decommissioning asset in the current year of US$3.4m relates to changes in estimates for both Kraken and Catcher. The 2019
increase was due to a change in estimate for Kraken in the UK and for Nova in Norway.
Disposals and transfers to assets held-for-sale during 2019 relate to the sale of a 10% working interest in the Nova asset and subsequent disposal
of the Norwegian business respectively. See notes 6.1 and 6.4.
Combined depletion and amortisation charges for the year of US$215.7m (2019: US$217.2m) were charged to the Income Statement.
Leased Assets
There were no changes to the Kraken or Catcher FPSO lease terms during the current or previous year.
Cairn Energy PLC Annual Report and Accounts 2020
147
Section 2 – Oil and Gas Assets and Operations continued
2.3 Property, Plant & Equipment – Development/Producing Assets continued
Impairment Review
At 31 December 2020, following a reduction in the Group's long-term oil price assumption, impairment tests were conducted on the Group’s UK
producing assets at the balance sheet date. No impairment was identified. Sensitivity analysis on the Group’s impairment tests can be found in
note 2.7.
During 2019, production performance on Kraken improved significantly and in addition the Operator conducted more regular well testing to improve
reservoir monitoring. Consequently Cairn revised production profile estimates upward reflecting this improvement while also incorporating new
volumes associated with the Worcester satellite field, subsequently developed in 2020. The changes to the production profile resulting from
improved performance is an indicator that prior year impairment charges may no longer exist or may have decreased. The resultant impairment test
indicated that a full reversal of prior year impairment charges should be recorded. The reversal was capped to US$147.3m, being the brought forward
impairment adjusted for the depletion that would have been charged had no impairment been recorded.
Proposed Sale of Catcher and Kraken Producing Assets
On 8 March 2021, Cairn entered into a sales agreement to dispose of its entire interests in the Catcher and Kraken producing assets (note 9.3). As the
sales process was not sufficiently advanced at the year end, the assets have not been reclassified as Assets Held-for-Sale at the balance sheet date.
2.4 Provisions – Decommissioning
At 1 January 2019
Foreign exchange
Unwinding of discount (note 4.5)
Provided in the year
Released on disposal (note 6.4)
Transferred to liabilities held-for-sale (note 6.3)
At 31 December 2019
Foreign exchange
Unwinding of discount (note 4.5)
Provided in the year
At 31 December 2020
Exploration well
abandonment
US$m
Development/
Producing
assets
US$m
Total
US$m
119.1
5.8
2.6
18.2
(1.8)
(2.7)
141.2
5.0
2.9
4.1
117.8
5.7
2.6
18.2
(1.8)
(2.7)
139.8
4.9
2.9
3.4
151.0
153.2
1.3
0.1
–
–
–
–
1.4
0.1
–
0.7
2.2
Decommissioning provisions at 31 December 2020 represent the present value of decommissioning costs related to the Kraken and Catcher
development/producing assets and exploration well abandonment provisions in the UK. Amounts provided during the year of US$3.4m reflect
additional decommissioning costs for the wells drilled in the year. During 2019, a provision of US$4.5m was introduced for development activities
undertaken on Nova, which were released through disposal and the balance transferred to liabilities held-for-sale. Further provisions during 2019
relate to revised decommissioning estimates for Kraken.
Provisions are based on operator cost estimates, subject to internal Cairn review and amendment where considered necessary, and are calculated
using assumptions based on existing technology and the current economic environment, with a discount rate of 0.0% and 0.7% per annum for
Catcher and Kraken respectively (2019: 2.0%). The rates are based on the UK risk-free rate to the maturity of the respective decommissioning liability.
The reasonableness of these assumptions is reviewed at each reporting date.
The decommissioning provisions represent management’s best estimate of the obligation arising based on work undertaken at the balance
sheet date. Actual decommissioning costs will depend upon the prevailing market conditions for the work required at the relevant time. The
decommissioning of the Group’s development/producing assets is forecast to occur between 2026 and 2036.
148
Cairn Energy PLC Annual Report and Accounts 2020
Section 2 – Oil and Gas Assets and Operations continued
2.5 Capital Commitments
Oil and gas expenditure:
Intangible exploration/appraisal assets
Property, plant & equipment – development/producing assets
Contracted for
1
2
3 Financial Statements
4
At
31 December
2020
US$m
At
31 December
2019
US$m
46.2
7.9
54.1
96.7
460.0
556.7
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$25.9m (2019: US$40.4m) for operations in the UK and US$13.1m
(2019: US$37.9m) commitments in LATAM, predominantly Mexico.
The capital commitments for property, plant & equipment – development/producing assets at 31 December 2019 related principally to Senegal.
As at 31 December 2020, Cairn had the following commitments relating to short-term leases. These amounts are also included in the total of capital
commitments shown above.
Lease commitments at 31 December 2020
Lease commitments at 31 December 2019
2.6 Intangible Assets – Goodwill
Cost
At 1 January 2019
Foreign exchange
Transferred to assets held-for-sale
At 31 December 2019 and 31 December 2020
Impairment
At 1 January 2019
Foreign exchange
Transferred to assets held-for-sale
Impairment charge
At 31 December 2019 and 31 December 2020
Net book value
At 31 December 2018
At 31 December 2019
At 31 December 2020
Exploration/
Appraisal
assets
US$m
Development/
Producing
assets
US$m
6.0
9.5
–
10.6
UK &
Norway
US$m
384.6
(1.4)
(82.1)
301.1
258.8
(0.6)
(36.1)
79.0
301.1
Total
US$m
6.0
20.1
Total
US$m
384.6
(1.4)
(82.1)
301.1
258.8
(0.6)
(36.1)
79.0
301.1
125.8
125.8
–
–
–
–
Goodwill was tested for impairment at 31 December 2019 and an impairment charge of US$79.0m was recorded against continuing operations.
Goodwill, net of impairment, allocated to Capricorn Norge AS was transferred to assets held-for-sale and tested for impairment as part of the
disposal group. with a subsequent impairment charged and recorded in discontinued operations as detailed in note 6.3.
Cairn Energy PLC Annual Report and Accounts 2020
149
Section 2 – Oil and Gas Assets and Operations continued
2.7 Impairment Testing Sensitivity Analysis
UK Producing Assets
At 31 December 2020, impairment tests were conducted on the Group’s UK producing asset cash generating units. No impairment was recorded.
Cairn has run sensitivities on its long-term oil price assumption of US$55/bbl, using alternate long-term price assumptions of US$50/bbl and
long-term prices based on the IEA's World Economic Outlook 2020 Sustainable Development Scenario ('WEO-2020'). These are considered to be
reasonably possible long-term changes for the purposes of sensitivity analysis. The impact on the carrying value of development/producing assets
is shown below.
Reduction in long-term oil price assumption to:
Reduction in carrying value of development/producing assets
WEO-2020
US$m
US$50/bbl
US$m
60.5
72.0
The oil price at the end of the Group's short-term, forward-curve based assumption period was US$48/bbl and the impact of using this price
as a long-term assumption does not materially differ from the US$50/bbl sensitivity shown above.
The Group’s proved and probable and contingent reserve estimates are based on P50 probabilities. P10 and P90 estimates are also produced
but would not provide a reasonable estimate to be used in calculating the fair value of the Group’s assets.
The valuations of Catcher and Kraken used in the year end impairment test have not been updated to reflect the combined value of the assets
in the sales agreement entered with Waldorf Production Limited (note 9.3). However, the sales value agreed would not indicate any impairment
of the producing assets.
150
Cairn Energy PLC Annual Report and Accounts 2020
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities
1
2
3 Financial Statements
4
This section includes detail on the Group's loan facilities, lease liabilities and hedging positions
at the year-end. The Group's financial risk management objectives and policies are also contained
in this section.
Significant Accounting Judgements and Key Estimates and Assumptions in This Section:
Arbitration Award Settlement Due from Government of India
No asset has been recognised in respect to the Award due to Cairn following the Tribunal's ruling on the Indian Tax arbitration, See note 1.4 for full
details.
3.1 Cash and Cash Equivalents
Cash at bank
Money market funds
At
31 December
2020
US$m
At
31 December
2019
US$m
4.3
565.3
569.6
7.0
139.5
146.5
Closing cash balances held by Capricorn Norge AS at 31 December 2019 of US$7.2m (note 6.3) were included in closing cash and cash equivalents
disclosed in the 2019 cash flow statement of US$153.7m.
Cash and cash equivalents earn interest at floating rates. Short-term investments are made for varying periods, which can be as short as instant
access but generally not more than three months, depending on the cash requirements of the Group.
At 31 December 2019 and 2020 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$200.0m depending on the ratings of the counterparty. No investments are placed with any counterparty with a five-year credit
default swap exceeding 250 bps. Investments in money market liquidity funds are only made with AAA rated liquidity funds and the maximum
holding in any single fund is 20% of total investments.
Cairn Energy PLC Annual Report and Accounts 2020
151
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.2 Loans and Borrowings
Reconciliation of opening and closing liabilities to cash flow movements:
Opening liabilities
Loan advances disclosed in the Cash Flow Statement:
RBL advances in the year
Senegal Bridge Facility advances in the year
EFF advances in the year
Loan repayments disclosed in the Cash Flow Statement:
RBL repayments in the year
Senegal Bridge Facility repayments in the year
EFF repayments in the year
Other movements in Cash Flow Statement:
Debt arrangement fees
Non-cash movements:
Foreign exchange
Amortisation of debt arrangement fees
Transfer of unamortised arrangement fees from prepayments
Transfer of unamortised arrangement fees to prepayments
Transferred to liabilities held-for-sale (note 6.3)
Closing liabilities
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
–
100.0
39.6
-
139.6
(100.0)
(39.6)
–
(139.6)
(5.3)
–
6.3
(8.5)
7.5
–
–
101.7
20.0
–
27.4
47.4
(105.0)
–
(29.0)
(134.0)
–
(1.6)
1.9
-
8.5
(23.9)
–
RBL
The Group’s RBL facility was undrawn at 31 December 2020 and 31 December 2019.
Interest on debt drawn 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. Any debt drawn 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.
Total commitments under the facility are US$575.0m. An accordion feature permits additional future commitments of up to US$425.0m. The maximum
available drawdown at 31 December 2020 was US$107.0m available to several Group companies. 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. Details of guarantees
granted under this facility can be found in note 7.3.
Senegal Bridge Facility
Cairn signed a Bridge loan facility with a syndicate of international banks, effective 25 September 2020. The purpose of the facility was to fund
Senegal-related development and general and administrative expenses from 1 September 2020 until completion of the sale of Senegal assets
to Woodside.
Total commitments under the facility were US$250.0m and interest on debt drawn was charged at the appropriate LIBOR for the interest period
drawn plus an applicable margin.
The facility was drawn from September to December 2020, then repaid in full and cancelled on 23 December 2020, after proceeds were received
from the sale of the Senegal assets.
EFF
The Group’s Norwegian Exploration Finance Facility was included in the disposal of Capricorn Norge AS in February 2020 and no longer forms
part of the Group’s borrowing facilities. No advances were drawn under this facility in the current year prior to disposal.
152
Cairn Energy PLC Annual Report and Accounts 2020
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
1
2
3 Financial Statements
4
3.3 Lease Liabilities
Accounting Policy
Lease liabilities are measured and recorded on commencement of the asset being brought into 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 lease liabilities
Leases commenced/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:
Foreign exchange
Reimbursements due transferred from other receivables
Lease interest charges (note 4.5)
Transferred to liabilities held-for-sale (note 6.3)
Closing liabilities
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
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
282.9
322.9
–
0.4
(82.5)
23.0
(59.5)
4.0
0.3
(1.0)
13.3
–
(85.1)
25.6
(59.5)
7.0
0.4
(3.0)
15.3
(0.6)
240.0
282.9
40.9
2.3
43.2
193.1
3.7
196.8
240.0
41.0
2.1
43.1
234.0
5.8
239.8
282.9
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. Amortisation 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. The maturity analysis for lease liabilities is disclosed in note 3.8. The
carrying value of right-of-use development/producing assets at 31 December 2020 is US$189.1m (2019: US$238.1m) (note 2.3) and the carrying value
of right-of-use assets included in other property, plant & equipment is US$5.2m (2019: US$7.0m).
Cairn Energy PLC Annual Report and Accounts 2020
153
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.4 Trade and Other Receivables
Accounting Policy
Trade receivables represent amounts due from the sale of oil and gas from the Group’s UK producing assets and royalty payments
receivable from producing fields in Mongolia. Other receivables primarily represent recharges to joint operations. Joint operation receivables
relate to Cairn’s interest in its oil and gas joint arrangements, including Cairn’s participating interest share of the receivables of the joint
arrangements themselves.
Trade receivables, other receivables and joint operation receivables, which are financial assets, are measured initially at fair value and
subsequently recorded at amortised cost.
A loss allowance is recognised, where material, for expected credit losses on all financial assets held at the balance sheet date. Expected
credit losses are the difference between the contractual cash flows due to Cairn, and the discounted actual cash flows that are expected
to be received. Where there has been no significant increase in credit risk since initial recognition, the loss allowance is equal to 12-month
expected credit losses. Where the increase in credit risk is considered significant, lifetime credit losses are provided. For trade receivables
a lifetime credit loss is recognised on initial recognition where material.
Prepayments, which are not financial assets, are measured at historic cost.
Trade receivables
Other receivables
Accrued income – underlift (note 2.1)
Prepayments
Joint operation receivables
At
31 December
2020
US$m
At
31 December
2019
US$m
16.4
15.3
–
11.1
31.8
74.6
22.3
9.0
15.1
14.0
50.8
111.2
Trade receivables are measured at amortised cost. Revenue is recognised at the point in time where title passes to the customer and payment
becomes unconditional.
Reconciliation of opening and closing receivables to operating cash flow movements:
Opening trade and other receivables
Closing trade and other receivables
Decrease/(Increase) in trade and other receivables
Foreign exchange
Increase in joint operation receivables relating to investing activities
(Decrease)/Increase in prepayments and other receivables relating to other non-operating activities
Joint operation receivables derecognised on disposal of Senegal assets
Other receivables transferred to assets held-for-sale (note 6.3)
Increase in other receivables classified as assets held-for-sale
Trade and other receivables movement
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
111.2
(74.6)
36.6
(2.2)
9.2
(2.2)
(24.1)
–
(0.7)
16.6
91.2
(111.2)
(20.0)
1.3
17.7
10.5
–
(7.3)
–
2.2
The movements in joint operation receivables relating to investing activities relate to the Group’s share of the receivables of joint operations in respect
of exploration, appraisal and development activities. Cash flow movements during 2019 include amounts for Norwegian operations. Movements
relating to production activities are included in amounts through operating cash flows.
Other non-operating cash flow movements for 2019 primarily relate to the reclassification of prepaid facility fees.
154
Cairn Energy PLC Annual Report and Accounts 2020
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
1
2
3 Financial Statements
4
3.5 Derivative Financial Instruments
Current assets
Financial assets – hedge options maturing within one year
Current liabilities
Financial liabilities – hedge options maturing within one year
At
31 December
2020
US$m
At
31 December
2019
US$m
0.2
(3.2)
(3.0)
4.1
(1.6)
2.5
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 2020.
At 31 December 2020 the Group had hedged ~1.0m barrels of 2021 forecast Kraken and Catcher oil production, using three-way collar and swap
structures. ~0.5m barrels of production have been hedged through three-way collars, with a weighted average ceiling, floor and sub-floor prices
of US$55.00/bbl, US$48.27/bbl and US$35.00/bbl respectively (all prices quoted relate to dated Brent). ~0.5m barrels of production have been
hedged through swap options with a weighted average strike price of US$45.20/bbl. At 31 December 2020, no production forecast beyond
31 December 2021 had been hedged.
The three-way 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$50.49/bbl (2019: US$66.00/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$3.8m being offset by fair
value gains on options that matured in the year of US$56.0m. The gain on matured options has been recycled to the Income Statement. In 2019 fair
value losses of US$40.6m were offset by fair value gains of US$10.9m on options that matured in the year. The gain on matured options was recycled
to the Income Statement.
Hedge options outstanding at the year end
Volume of oil production hedged
Weighted average sub-floor price of options
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 (loss)/profit for the year
Financial assets
Financial liabilities
Accruals and other payables – accrued option costs
Fair value gain/(loss) on hedge options recorded in Other Comprehensive Income
Hedging gain recycled to Income Statement
Hedging gain recorded in Income Statement within revenue (note 2.1)
At
31 December
2020
1.0mmbbls
US$35.00
US$48.27
US$55.00
US$45.20
At
31 December
2019
2.8mmbbls
-
US$62.09
US$74.89
US$61.85
January 2021
– December
2021
January 2020
– December
2020
2020
US$m
0.2
(3.2)
(0.5)
52.2
(56.0)
56.0
2019
US$m
4.1
(1.6)
(2.1)
(29.7)
(10.9)
10.9
Sensitivity Analysis
Sensitivity analysis has been performed on equity movements that would arise from changes in the year end oil price forward curve and the resulting
impact on the fair value of open hedge options at the year end. The sensitivity analysis considers only the impact on line items directly relating to
hedge accounting (being financial assets and liabilities and fair value gains through Other Comprehensive Income) and not the impact of the change
of other balance sheet items where valuation is based on the year end oil price, such as inventory.
Increase/(decrease) in equity
Change in year end oil price forward curve
Decrease of 10%
Decrease of 20%
Increase of 10%
Increase of 20%
At
31 December
2020
US$m
At
31 December
2019
US$m
8.8
4.2
(4.3)
(9.2)
12.4
26.6
(12.6)
(25.5)
Cairn Energy PLC Annual Report and Accounts 2020
155
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.6 Trade and Other Payables
Accounting Policy
Trade and other payables are non-interest bearing and are measured at fair value initially then amortised cost subsequently.
Joint operation payables are payables that relate to Cairn’s interest in its oil and gas joint arrangements, including Cairn’s participating interest
share of the trade and other payables of the joint arrangements themselves. Where Cairn is operator of the joint operation, joint operation
payables also include amounts that Cairn will settle to third parties on behalf of joint operation partners. The amount to be recovered from
partners for their share of such liabilities are included within joint operation receivables.
Trade payables
Other taxation and social security
Accruals and other payables
Joint operation payables
At
31 December
2020
US$m
At
31 December
2019
US$m
10.6
1.6
42.3
37.1
91.6
0.9
0.9
25.4
107.4
134.6
Accruals and other payables include US$11.3m payable to the previous marketing agent for the sale of Kraken crude and US$6.0m of costs relating
to the disposal of Senegal assets.
Joint operation payables include US$9.6m (2019: US$71.4m), US$5.1m (2019: US$5.5m) and US$22.4m (2019: US$30.5m) relating to exploration/
appraisal assets, development/producing assets and production costs respectively.
The decrease in joint operation payables for exploration/appraisal assets at the balance sheet date compared to the prior year was due to payables
of US$49.2m at 31 December 2019 relating to the Mexico drilling campaign.
Reconciliation of opening and closing payables to operating cash flow movements:
Opening trade and other payables
Closing trade and other payables
(Decrease)/Increase in trade and other payables
Foreign exchange
(Increase)/Decrease in trade payables relating to investing activities
Decrease/(Increase) in joint operation payables relating to investing activities
Decrease in accruals and other payables relating to other non-operating activities
Joint operation payables derecognised on disposal of Senegal assets
Trade and other payables transferred to liabilities held-for-sale (note 6.3)
Decrease in other payables classified as liabilities held-for-sale
Trade and other payables movement recorded in operating cash flows
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
(134.6)
91.6
(43.0)
(0.6)
(2.2)
44.3
2.1
11.4
–
(0.4)
11.6
(103.1)
134.6
31.5
(1.1)
1.1
(40.4)
3.4
–
10.4
–
4.9
Movements above for investing activities relate to exploration, appraisal and development activities through the Group’s joint operations. Movements
relating to production activities are included in amounts through operating cash flows.
The movement in trade and other payables recorded in the Cash Flow Statement through operating cash flows primarily arises on production
activities in the UK North Sea.
156
Cairn Energy PLC Annual Report and Accounts 2020
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
1
2
3 Financial Statements
4
3.7 Deferred Revenue
Accounting Policy
Deferred revenue, arising from a streaming agreement, is treated as cash received in advance of future oil sales. Revenue is recorded at the
fair value of the consideration received and is amortised to the Income Statement on a unit-of-production basis, based on expected future
volumes to which the stream provider is entitled.
FlowStream deferred revenue
At 1 January
Released during the year (note 2.1)
At 31 December
Amounts expected to be released within one year
Amounts expected to be released after one year
2020
US$m
35.6
(13.9)
21.7
4.8
16.9
21.7
2019
US$m
52.8
(17.2)
35.6
16.9
18.7
35.6
Deferred revenue relates to the stream agreement with FlowStream entered into in 2017. A step-down in the percentage of Kraken crude sales
attributable to FlowStream, triggered during 2020, has reduced the amounts that fall payable within 12 months from the balance sheet date.
3.8 Financial Instruments
Set out below is the comparison by category of carrying amounts and fair values of all the Group’s financial instruments that are carried in the
Financial Statements.
Financial Assets
Carrying amount and fair value
Financial assets at amortised cost
Cash and cash equivalents
Trade receivables
Other receivables
Accrued underlift
Joint operation receivables
Financial assets at fair value through profit or loss
Listed equity shares
Derivative financial instruments
Financial assets – hedge options
At
31 December
2020
US$m
At
31 December
2019
US$m
569.6
16.4
15.3
–
31.8
5.2
0.2
638.5
146.5
22.3
9.0
15.1
50.8
5.1
4.1
252.9
Due to the short-term nature of financial assets held at amortised cost, their carrying amount is considered to be the same as their fair value.
There are no material impairments of financial assets held on the Balance Sheet at either 31 December 2020 or 2019.
All the Group’s financial assets are expected to mature within one year.
Cairn Energy PLC Annual Report and Accounts 2020
157
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
3.8 Financial Instruments continued
Financial Liabilities
Carrying amount and fair value
Financial liabilities at amortised cost
Trade payables
Accruals and other payables
Joint operation payables
Lease liabilities
Derivative financial instruments
Financial liabilities – hedge options
At
31 December
2020
US$m
At
31 December
2019
US$m
10.6
42.3
37.1
240.0
3.2
333.2
0.9
25.4
107.4
282.9
1.6
418.2
The fair value of financial assets and liabilities, other than the listed equity shares and hedge options, has been calculated by discounting the
expected future cash flows at prevailing interest rates.
Maturity analysis of financial liabilities
The expected financial maturity of the Group’s financial liabilities at 31 December 2020 is as follows:
Financial liabilities at amortised cost
Trade payables
Accruals and other payables
Joint operation payables
Lease liabilities
Financial liabilities – hedge options
< 1 year
US$m
1-2 years
US$m
2-5 years
US$m
>5 years
US$m
10.6
42.3
37.1
43.2
3.2
136.4
–
–
–
44.8
–
44.8
–
–
–
89.5
–
89.5
–
–
–
62.5
–
62.5
The expected financial maturity of the Group’s financial liabilities at 31 December 2019 was as follows:
Financial liabilities at amortised cost
Trade payables
Accruals and other payables
Joint operation payables
Lease liabilities
Financial liabilities – hedge options
< 1 year
US$m
1-2 years
US$m
2-5 years
US$m
>5 years
US$m
0.9
25.4
107.4
43.1
1.6
178.4
–
–
–
43.1
–
43.1
–
–
–
123.0
–
123.0
–
–
–
73.7
–
73.7
158
Cairn Energy PLC Annual Report and Accounts 2020
Section 3 – Working Capital, Financial Instruments and Long-Term Liabilities continued
1
2
3 Financial Statements
4
3.8 Financial Instruments continued
Fair Value
The Group holds hedge options which are held at fair value determined by models which have observable inputs.
Cairn holds listed equity shares, being the residual shareholding in Vedanta Limited as a financial asset at fair value through profit or loss. The Group
determines and discloses the fair value by reference to the quoted (unadjusted) prices in active markets for those shares at the measurement date.
Assets measured at fair value – Level 1
Financial assets at fair value through profit or loss
Listed equity shares
Assets measured at fair value – Level 2
Derivative financial instruments
Financial assets – hedge options
Liabilities measured at fair value – Level 2
Derivative financial instruments
Financial liabilities – hedge options
At
31 December
2020
US$m
At
31 December
2019
US$m
5.2
0.2
(3.2)
2.2
5.1
4.1
(1.6)
7.6
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 2020 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 2020
159
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.
The operations of the Group have been impacted by COVID-19 and increased oil price volatility throughout 2020. The Group has deferred capital
expenditure to preserve liquidity during this period of uncertainty. The Group runs various sensitivities on its liquidity position throughout the year.
This includes scenarios forecasting a prolonged economic downturn as a result of COVID-19 and further volatility in oil prices. Further details are
noted in the Viability Statement provided on page 43.
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 and other 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 2020 the Group had investments with
thirteen counterparties (2019: nine) 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 2020 and at 31 December 2019 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 exchange rate, 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$
At 31 December 2020
At 31 December 2019
Effect on profit
before tax
US$m
Effect on
equity
US$m
Effect on profit
before tax
US$m
(24.4)
24.4
(18.6)
18.6
(31.6)
31.6
Effect on
equity
US$m
(16.3)
16.3
160
Cairn Energy PLC Annual Report and Accounts 2020
Section 4 – Income Statement Analysis
1
2
3 Financial Statements
4
This section contains further Income Statement analysis, including segmental analysis, details of
employee benefits payable in the year and finance costs.
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. During the current
period, Cairn has presented segmental disclosures exclusive of the results of the discontinued operations, being the sale of Capricorn Norge AS
and the disposal of the Group's operations in Senegal, and comparative information has been restated accordingly to exclude these results from
the segment formerly called UK & Norway, now presented as the UK segment.
Effective 1 January 2021, Cairn restructured its operations and reporting segments following the disposal of the Group's operations in Senegal.
Revised segments now consist of a UK development and producing asset segment, containing the Kraken and Catcher producing assets, an Eastern
Assets segment for exploration activities in Mauritania, Côte d’Ivoire and Israel, and a Western Assets segment for exploration activities in the UK,
Mexico and Suriname. These changes did not impact the presentation of management information to the Board during 2020, therefore segmental
disclosures do not reflect these changes
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.
In 2020, Cairn had five reportable operating segments: Senegal (until disposal), UK, Norway (until disposal), LATAM (Latin America) and East
Atlantic. The Senegal operating segment was focused on the development of the Sangomar discovery prior to the disposal of the Group’s assets
in the country (note 6.1). The UK segment includes exploration activity in the North Sea and the Kraken and Catcher producing assets. The LATAM
segment includes costs of the Mexican exploration drilling programme and exploration activity in Suriname, while the East Atlantic includes costs
associated with interests in Côte d’Ivoire, Mauritania and Israel.
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; and other property, plant & equipment and intangible assets.
Geographical information: non-current assets
Senegal
UK
Mexico
Suriname
LATAM
Côte d’Ivoire
Mauritania
Israel
East Atlantic
Other UK
At
31 December
2020
US$m
At
31 December
2019
US$m
–
521.9
857.8
1,047.7
57.1
13.5
70.6
12.2
21.0
1.7
34.9
10.1
49.0
9.2
58.2
15.2
9.8
0.3
25.3
11.7
Total non-current assets
973.4
1,664.8
Cairn Energy PLC Annual Report and Accounts 2020
161
Section 4 – Income Statement Analysis continued
4.1 Segmental Analysis continued
The segment results for the year ended 31 December 2020 are as follows:
Revenue
Cost of sales
Depletion and amortisation charges
Gross profit
Pre-award costs
Unsuccessful exploration costs
Other operating income
Depreciation – purchased assets
Amortisation – right-of-use assets
Amortisation of other intangible assets
Other administrative expenses
Operating profit/(loss)
Gain on fair value of financial assets
Interest income
Finance costs
Profit/(Loss) before taxation from continuing
operations
Tax charge
Senegal
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Profit/(Loss) for the year from continuing
operations
Loss from discontinued operations
–
(237.3)
(Loss)/Profit attributable to equity holders of the
UK
US$m
394.3
(115.5)
(215.7)
63.1
(1.0)
(20.6)
–
–
–
–
(0.1)
41.4
–
–
(23.6)
17.8
–
17.8
–
Norway
US$m
LATAM
US$m
East
Atlantic
US$m
Other Cairn
Energy
Group
US$m
Group
adjustment
for
segments
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(39.0)
–
–
–
–
(2.7)
(46.6)
–
–
(0.2)
(0.3)
(0.2)
–
–
–
–
(1.6)
(11.6)
–
–
–
–
–
0.4
–
–
0.4
(6.8)
–
1.4
(0.1)
(1.9)
(4.6)
(33.7)
(50.0)
(13.2)
(45.3)
–
–
0.2
(49.8)
(0.1)
(49.9)
–
–
–
–
0.1
0.8
(27.8)
(13.2)
–
(72.2)
–
(13.2)
–
(72.2)
–
Total
US$m
394.7
(115.5)
(215.7)
63.5
(12.1)
(78.8)
1.4
(0.1)
(2.1)
(4.9)
(34.0)
(67.1)
0.1
0.8
(51.2)
(117.4)
(0.1)
(117.5)
(276.3)
(393.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Parent
(237.3)
17.8
(39.0)
(49.9)
(13.2)
(72.2)
Balances as at 31 December 2020:
Capital expenditure
Total assets
Total liabilities
Non-current assets
225.8
0.6
–
–
47.9
917.1
464.7
857.8
5.5
–
–
–
59.5
97.1
6.3
70.6
21.2
39.1
3.2
34.9
4.9
581.4
35.5
10.1
(5.5)
359.3
–
–
–
1,635.3
509.7
973.4
All revenue in the UK segment is attributable to the sale of oil and gas produced in the UK. 31.3% of the Group’s sales of oil and gas are to a single
customer that marketed the crude on Cairn’s behalf and delivered it to the ultimate buyers, prior to a change in the marketing of crude during the
second half of 2020.
All transactions between the segments are carried out on an arm’s length basis.
162
Cairn Energy PLC Annual Report and Accounts 2020
1
2
3 Financial Statements
4
Section 4 – Income Statement Analysis continued
4.1 Segmental Analysis continued
The segment results for the year ended 31 December 2019 were as follows:
Senegal
US$m
UK
(restated)
US$m
Norway
(restated)
US$m
LATAM
US$m
East
Atlantic
US$m
Other Cairn
Energy
Group
US$m
Group
adjustment
for
segments
(restated)
US$m
Revenue
Cost of sales
Depletion and amortisation charges
Gross profit
Pre-award costs
Unsuccessful exploration costs
Depreciation – purchased assets
Amortisation – right-of-use assets
Amortisation of other intangible assets
Other administrative expenses
Reversal of impairment of property, plant &
equipment – development/producing assets
Impairment of goodwill
Operating profit/(loss)
Loss on fair value of financial assets
Interest income
Finance costs
Profit/(Loss) before taxation from continuing
operations
Tax charge
Profit/(Loss) for the year from continuing operations
Loss from discontinued operations
Profit/(Loss) attributable to equity holders
of the Parent
Balances as at 31 December 2019:
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
532.3
(73.1)
(217.2)
242.0
(0.8)
(5.9)
–
–
–
(0.6)
147.3
(79.0)
303.0
–
0.4
(14.0)
289.4
–
289.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(25.6)
–
–
–
–
(5.0)
(84.7)
(0.2)
(0.1)
–
(0.1)
–
–
–
–
–
–
(2.3)
(16.4)
–
–
–
–
–
–
1.1
–
–
1.1
(9.1)
–
(0.2)
(1.8)
(2.4)
(26.9)
–
–
(90.1)
(18.7)
(39.3)
–
–
(0.4)
(90.5)
(0.3)
(90.8)
–
–
–
–
(1.8)
2.6
(22.2)
(18.7)
(60.7)
–
–
(18.7)
(60.7)
–
–
289.4
(25.6)
(90.8)
(18.7)
(60.7)
Total
US$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)
154.9
(1.8)
3.0
(36.6)
119.5
(0.3)
119.2
(25.6)
93.6
313.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Capital expenditure
58.9
34.0
89.1
109.9
Total assets
Total liabilities
Non-current assets
522.1
1,248.2
143.5
9.9
504.3
521.9
1,047.7
37.6
–
91.1
51.2
58.2
19.5
30.7
6.5
25.3
1.6
174.3
(120.9)
2,089.0
144.9
(120.9)
633.5
11.7
–
1,664.8
All revenue in the UK segment was attributable to the sale of oil and gas produced in the UK. 38.0% 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
Other
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
1.0
4.3
6.8
12.1
0.8
7.3
9.1
17.2
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 2020
163
Section 4 – Income Statement Analysis continued
4.3 Administrative Expenses
Administrative expenses – recurring departmental expenses and corporate projects
Administrative expenses – Indian tax arbitration costs
4.4 Employee Benefits: Staff Costs, Share-Based Payments and Directors’ Emoluments
a) Staff Costs
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
35.3
5.8
41.1
29.3
3.0
32.3
Wages and salaries
Social security costs
Redundancy costs
Other pension costs
Share-based payments
Year ended 31 December 2020
Year ended 31 December 2019
Continuing
operations
US$m
Discontinued
operations
US$m
28.5
7.4
0.9
2.1
9.1
48.0
1.8
(1.0)
0.2
0.1
–
1.1
Continuing
operations
(restated)
US$m
Discontinued
operations
(restated)
US$m
26.7
4.7
–
2.3
9.4
43.1
9.4
1.5
–
0.7
2.5
14.1
Total
US$m
30.3
6.4
1.1
2.2
9.1
49.1
Total
US$m
36.1
6.2
–
3.0
11.9
57.2
Staff costs are shown gross before amounts recharged to joint operations and include staff employed in Norway and Senegal in discontinued operations.
The share-based payments charge represents amounts in respect of equity-settled options.
Staff costs shown for 2019 have been restated above to include Senegal in discontinued operations, previously having been included in continuing
operations, see note 1.3. The impact of the restatement is a total increase in staff costs relating to discontinued operations of US$1.0m, of which wages
and salaries and share-based payments amounted to US$0.8m and US$0.2m respectively. There was an equivalent decrease in continuing operations.
The monthly average number of full-time equivalent employees, including Executive Directors and individuals employed by the Group working
on joint operations, and restated to show Senegal in discontinued operations was:
Number of employees
Monthly
average
2020
Monthly
average
2019
(restated)
164
7
171
7
2
9
180
154
5
159
41
3
44
203
Continuing operations:
UK
Mexico
Discontinued operations:
Norway
Senegal
164
Cairn Energy PLC Annual Report and Accounts 2020
Section 4 – Income Statement Analysis continued
4.4 Employee Benefits: Staff Costs, Share-Based Payments and Directors’ Emoluments continued
b) Share-Based Payments
Income Statement charge
Included within gross staff costs (continuing operations):
SIP
LTIP
Employee Share Scheme
1
2
3 Financial Statements
4
Year ended
31 December
2020
US$m
Year ended
31 December
2019
(restated)
US$m
0.7
7.1
1.3
9.1
0.6
7.5
1.3
9.4
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 and 2019 comparatives have been restated
as set out in note 4.4a.
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 2020
Year ended 31 December 2019
WAFV
£
1.03
1.25
0.67
0.78
WAGP/
WAEP
£
1.03
1.25
1.32
1.32
Number
of shares
550,756
342,032
8,327,281
1,173,776
10,393,845
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
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
2020
2019
Number
of shares
26,186,465
8,327,281
(1,154,333)
(7,541,443)
25,817,970
WAGP
£
1.94
1.32
1.82
2.03
1.72
Number
of shares
27,336,846
9,662,172
(1,834,262)
(8,978,291)
26,186,465
WAGP
£
2.03
1.68
1.89
1.94
1.94
The weighted average remaining contractual life of outstanding awards under the LTIP at 31 December 2020 was 1.2 years (2019: 1.3 years).
Included in the above are 1,386,998 of exercisable LTIP awards (2019: 2,541,331). No exercise price is payable in respect of LTIP awards.
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
2020
2019
Number
of shares
WAGP/WAEP
£
Number
of shares
WAGP/WAEP
£
10,129,768
2,066,564
(929,045)
(662,192)
10,605,095
1.93
1.23
1.94
1.81
1.80
9,595,198
2,185,468
(300,284)
(1,350,614)
10,129,768
1.99
1.68
1.96
1.94
1.93
The weighted average remaining contractual life of outstanding awards under all other schemes at 31 December 2020 was 6.8 years (2019: 7.0 years).
Included in the above are 1,401,152 of exercisable ESAS (2019: 1,144,858) and exercisable share options of 2,844,905 (2019: 3,073,608). No exercise
price is payable in respect of ESAS; the share options had a range of exercise prices from £1.54 to £1.87.
Cairn Energy PLC Annual Report and Accounts 2020
165
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 and the ESAS share awards were calculated using a Monte Carlo model. Awards in prior
years were valued similarly.
Vesting % is by reference to the market performance of the Company's TSR compared with a group of peer companies. 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 105.
For the ESAS, 100% vesting occurs if the Company's TSR is in excess of the median of the comparator group, otherwise the ESAS will lapse in full.
Cairn Energy PLC share awards normally have a ten year life from the date of grant. Awards 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
£1.39 (2019: £1.76).
The main inputs to the models include the number of options, share price, leaver rate, trigger points, discount rate and volatility of share prices
of the Company and the comparator group.
– 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 2020: 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 the Company
and of a peer group of similar companies selected from the FTSE, as disclosed in the Directors’ Remuneration Report on page 108, over a three-
year period to the date of award.
– No expected dividends were factored into the model as the Company customarily operates a share consolidation scheme which leaves the
number of share awards unchanged before and after any dividend.
The following assumptions and inputs apply:
Scheme name
SIP
LTIP
Employee Share Scheme
Volatility
Risk-free rate
per annum
0%
0%
34% – 44%
0.25% – 1.41%
34% – 44% 0.17% – 1.20%
Lapse due to
withdrawals
per annum
0%
0%
5%
Employee exercise trigger point assumptions
For 2020 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 Executive 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 121. Directors’ remuneration, their pension entitlements and any share awards vested during the year are
provided in aggregate in note 8.8.
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
Termination benefits
Post-employment benefits
Share-based payments
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
6.4
0.2
0.3
2.9
9.8
6.7
–
0.4
3.2
10.3
In addition, employer’s national insurance contributions for key management personnel in respect of short-term employee benefits were US$0.9m
(2019: US$0.9m).
Share-based payments shown above represent the cost to the Group of key management personnel’s participation in the Company’s share
schemes, measured under IFRS 2.
During 2020, 613,791 shares awarded to key management personnel vested under the LTIP (2019: none).
166
Cairn Energy PLC Annual Report and Accounts 2020
Section 4 – Income Statement Analysis continued
4.5 Finance Costs
Loan interest and facility fee amortisation
Other finance charges
Unwinding of discount – provisions
Lease interest (note 3.3)
Exchange loss
1
2
3 Financial Statements
4
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
6.4
2.2
2.9
13.3
26.4
51.2
10.3
3.7
2.6
15.3
4.7
36.6
Loan interest and facility fee amortisation includes US$1.0m (2019: US$1.6m) of facility fees relating to the RBL facilities, which are amortised over the
expected useful life of the facility.
4.6 Earnings per Ordinary Share
Basic and diluted earnings per share are calculated using the following measures of (loss)/profit:
(Loss)/Profit and diluted (loss)/profit after taxation from continuing operations
(Loss)/Profit and diluted (loss)/profit attributable to equity holders of the Parent
The following reflects the share data used in the basic and diluted earnings per share computations:
Weighted average number of shares
Less weighted average shares held by ESOP and SIP Trusts
Basic weighted average number of shares
Potential dilutive effect of shares issuable under employee share plans:
LTIP awards
Approved and unapproved plans
Employee share awards
Diluted weighted average number of shares
Potentially issuable shares not included above:
LTIP awards
Approved and unapproved plans
Employee share awards
Number of potentially issuable shares
1 2020 potentially issuable shares were all anti-dilutive due to the loss for the year
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
(117.5)
(393.8)
119.2
93.6
Number
of shares
2020
‘000
589,782
(7,041)
582,741
Number
of shares
2019
‘000
589,751
(7,731)
582,020
–
–
–
4,057
43
1,886
582,741
588,006
25,818
2,845
4,620
33,2831
20,877
2,734
1,679
25,290
The weighted average number of shares used in the calculations of earnings per share above has been adjusted to reflect the consolidation of shares
which took place in January 2021. Further details of the consolidation are provided in note 9.1.
Cairn Energy PLC Annual Report and Accounts 2020
167
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 deferred tax liabilities
and unrecognised deferred tax assets existing at the year end.
Significant Accounting Judgements in This Section:
Deferred Taxation – Potential Deferred Tax Assets on UK Tax Losses
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 2019 and 2020, Cairn concluded that no deferred tax asset should be recognised. Impairment tests performed on UK producing
assets at both balance sheet dates determined that assets were held at or close to their recoverable 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.
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. 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. If it is
not considered probable that the income tax filing position will be accepted by the tax authority, the uncertainty is reflected within the carrying
amount of the applicable tax asset or liability by using either the most likely amount or an expected value of the tax treatment, depending on
which method is considered to better predict the resolution of the uncertainty, based on the underlying facts and circumstances.
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.
168
Cairn Energy PLC Annual Report and Accounts 2020
Section 5 – Taxation continued
1
2
3 Financial Statements
4
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 2019 or 2020 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 no cash payments of
corporation tax made in the year (2019: payments of US$0.5m in Mexico).
Cairn undertakes tax planning that supports the business and reflects commercial and economic activity. The Group’s policy is to not enter into
any artificial tax avoidance schemes but to build and maintain strong collaborative working relationships with all relevant tax authorities based on
transparency and integrity. The Group aims for certainty in relation to the tax treatment of all items; however, it is acknowledged that this will not
always be possible, for example where transactions are complex or there is a lack of maturity in the tax regime in the relevant jurisdiction in which the
Group is operating. In such circumstances Cairn will seek external advice where appropriate and ensure that the approach adopted in any relevant
tax return includes full disclosure of the position taken.
5.2 Tax Charge on (Loss)/Profit for the Year
Analysis of Tax Charge on (Loss)/Profit for the Year
Current tax charge:
Overseas corporation taxes
Total tax charge on (loss)/profit from continuing operations
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
0.1
0.1
0.3
0.3
Factors Affecting Tax Charge for the Year
A reconciliation of the income tax charge applicable to the (loss)/profit before income tax to the UK statutory rate of income tax is as follows:
(Loss)/Profit before tax from continuing operations
(Loss)/Profit before tax multiplied by the UK statutory rate of corporation tax of 19% (2019: 19%)
Effect of:
Special tax rates and reliefs applying to oil and gas activities
Impact on deferred tax of adjustments in respect of prior years
Temporary differences not recognised
Permanent items non-deductible
Exchange differences
Other
Total tax charge on (loss)/profit from continuing operations
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
(117.4)
(22.3)
(16.9)
(2.0)
37.3
7.9
(3.9)
–
0.1
119.5
22.7
64.4
(3.3)
(100.2)
16.6
–
0.1
0.3
The reconciliation shown above has been based on the average UK statutory rate of corporation tax for 2020 of 19% (2019: 19%).
The UK main rate of corporation tax is currently 19% (2019: 19%). In the Spring Budget 2020, the UK Government announced that from 1 April 2020 the
corporation tax rate would remain at 19% (rather than reducing to 17%, as previously enacted). This new law was substantively enacted on 17 March 2020.
Deferred taxes at the balance sheet date have been measured using these enacted tax rates and reflected in these financial statements.
The applicable UK statutory tax rate applying to North Sea oil and gas activities is 40% (2019: 40%).
The effect of special tax rates and reliefs applying to oil and gas activities of US$(16.9)m (2019: US$64.4m) comprises US$(8.5)m (2019: US$68.2m)
in respect of differences between the average UK statutory rate and the special rates applying to oil and gas activities in the UK and US$(8.4)m
(2019: US$(3.8)m) in respect of the UK ring fence expenditure supplement (“RFES”) claimed in the year.
Cairn Energy PLC Annual Report and Accounts 2020
169
Section 5 – Taxation continued
5.2 Tax Charge on (Loss)/Profit for the Year continued
Factors Affecting Tax Charge for the Year continued
The effect of temporary differences not recognised of US$37.3m (2019: US$(100.2)m) includes:
– a US$17.1m (2019: US$(125.9)m) movement in the year predominantly in respect of the unrecognised deferred tax asset on UK decommissioning
liabilities;
– US$2.1m (2019: US$8.9m) unsuccessful exploration costs on which future tax relief is available but the expenditure has been expensed through
the Income Statement;
– US$5.5m (2019:US$nil) in respect of UK temporary differences on which a deferred tax asset was recognised;
– US$nil (2019: US$6.7m) in respect of the carry forward of UK tax losses on which no deferred tax asset was recognised; and
– US$12.6m (2019: US$10.1m) on overseas tax losses and other temporary differences arising in the period on which no deferred tax was
recognised.
5.3 Deferred Tax Assets and Liabilities
Reconciliation of Movement in Deferred Tax Assets/(Liabilities):
Deferred tax assets
At 1 January 2019
Deferred tax (charge)/credit through the Income Statement
At 31 December 2019
Deferred tax credit/(charge) through the Income Statement
At 31 December 2020
Deferred tax liabilities
At 1 January 2019
Foreign exchange
Deferred tax credit/(charge) from discontinued operations
At 31 December 2019 and 2020
Temporary
difference in
respect of
non-current
assets
US$m
(243.1)
(60.5)
(303.6)
53.3
(250.3)
(89.8)
5.7
84.1
–
Other
temporary
differences
US$m
Total
US$m
–
71.6
71.6
(12.8)
58.8
1.4
(0.1)
(1.3)
–
–
–
–
–
–
(66.5)
4.2
62.3
–
Losses
US$m
243.1
(11.1)
232.0
(40.5)
191.5
21.9
(1.4)
(20.5)
–
170
Cairn Energy PLC Annual Report and Accounts 2020
Section 5 – Taxation continued
1
2
3 Financial Statements
4
5.3 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 (2019: 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.
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$486.3m RFCT losses which can be offset against RFCT
of 30% on future ring fence trading profits and US$409.8m SCT losses which can be offset against SCT of 10% on future ring fence trading profits.
In 2019 the Group had US$601.0m of RFCT and US$516.7m 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$579.2m and US$2.3m 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$148.7m (2019: US$105.2m) relating to
decommissioning liabilities as it is not considered probable that these amounts will be utilised in future periods.
The deferred tax liability recognised on UK ring fence asset temporary differences in respect of non-current assets of US$245.7m (2019: US$303.6m)
includes temporary differences in respect of investment allowances (previously field allowances) of US$(21.7)m (2019: US$20.2m) on the Laverda and
Kraken developments which will reduce future ring fence profits subject to SCT.
Unrecognised Deferred Tax Assets
No deferred tax asset has been recognised on the following as it is not considered probable that it will be utilised in future periods:
UK fixed asset temporary differences
UK other ring fence temporary differences
UK non-ring fence trading losses
UK non-ring fence pre-trade losses
UK excess management expenses
UK non-trade deficits
UK temporary differences on share-based payments
Mexico tax losses and temporary differences
Brazil tax losses
Nicaragua fixed asset temporary differences
Senegal fixed asset temporary differences
At
31 December
2020
US$m
At
31 December
2019
US$m
24.3
148.7
3.7
–
331.7
79.6
38.5
127.0
0.6
–
–
408.4
105.2
3.7
3.0
329.2
61.6
11.8
55.6
0.3
30.4
5.9
Cairn Energy PLC Annual Report and Accounts 2020
171
Section 6 – Discontinued Operations
6.1 Loss from Discontinued Operations
Sale of Capricorn Norge AS ('Norway')
Cairn’s sale of Capricorn Norge AS to Sval Energi AS completed on 28 February 2020. Norwegian assets and liabilities were classified as held-for-
sale at 31 December 2019.
The financial performance of the Norwegian subsidiary was presented as discontinued operations in the Financial Statements for the year ended
31 December 2019.
Sale of Working Interests in Senegal
Cairn disposed of its entire 40% working interest in its Senegal exploration and development assets in December 2020.
The financial performance of the discontinued operations is expanded in the tables below.
Norway1
US$m
Senegal2
US$m
Year ended
31 December
2020
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.5)
–
(0.3)
–
–
(1.8)
–
(0.3)
(2.1)
2.4
0.2
–
0.5
(237.3)
(276.8)
–
–
Norway
US$m
–
(4.0)
(38.7)
(1.5)
0.7
(65.7)
(109.2)
0.4
(6.8)
(115.6)
27.7
26.9
35.4
(25.6)
–
–
(237.3)
(276.3)
(25.6)
Gross Profit
Pre-award costs
Unsuccessful exploration costs
Administrative expenses
Gain on disposal of property, plant & equipment –
development assets (note 6.4)
Impairment of disposal group
Operating loss
Finance income
Finance costs
Loss before tax from discontinued operations
Taxation
Current tax credit
Deferred tax credit
Deferred tax credit on disposal of development
assets (note 6.4)
Profit/(loss) from discontinued operations prior
to disposal
Loss on disposal of discontinued operations
before tax
Tax charge on disposal of discontinued
operations
Loss from discontinued operations
1 Period ended 28 February 2020
2 Period ended 22 December 2020
–
(1.5)
–
(0.3)
–
–
(1.8)
–
(0.3)
(2.1)
2.4
0.2
–
0.5
(39.5)
–
(39.0)
The loss on disposal of Senegal oil and gas assets is calculated as follows:
Gross cash proceeds
Costs of disposal
Net proceeds
Derecognition of assets and liabilities:
Intangible exploration/appraisal assets
Property, plant and equipment – development/producing assets
Joint operation receivables
Joint operation payables
Loss on disposal of Senegal oil and gas assets
Year ended
31 December
2019
US$m
Senegal
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4.0)
(38.7)
(1.5)
0.7
(65.7)
(109.2)
0.4
(6.8)
(115.6)
27.7
26.9
35.4
(25.6)
–
–
(25.6)
US$m
524.8
(7.7)
517.1
(145.7)
(602.0)
(24.1)
17.4
(237.3)
Deferred consideration of up to US$100.0m is receivable dependent upon the first oil date and the oil price at that time. In accordance with IFRS15, no
amount is recognised at the balance sheet date as there is no reasonable certainty that it would not reverse in future periods. At 31 December 2020,
the risk-weighted fair value of the deferred consideration was US$27.2m.
The costs of disposal of US$7.7m include amounts accrued at the balance sheet date of US$6.0m.
172
Cairn Energy PLC Annual Report and Accounts 2020
Section 6 – Discontinued Operations continued
6.1 Loss from Discontinued Operations continued
The loss on disposal of Capricorn Norge AS is calculated as follows:
Gross cash proceeds
Costs of disposal
Net proceeds
Disposal of cash and cash equivalents
Disposal of assets and liabilities held-for-sale:
Intangible exploration/appraisal assets
Property, plant and equipment – development/producing assets
Other property, plant & equipment and intangible assets
Trade and other receivables
Income tax asset
Loans and borrowings
Lease liability
Trade and other payables
Provisions – decommissioning
Translation loss recycled from Other Comprehensive Income
Loss on disposal of Capricorn Norge AS
1
2
3 Financial Statements
4
US$m
105.2
(0.5)
104.7
(2.2)
(24.3)
(74.3)
(1.4)
(7.6)
(28.1)
22.9
0.5
12.4
2.5
(97.4)
(44.6)
(39.5)
On completion of the sale, the merger reserve of US$255.9m relating to the acquisition of Capricorn Norge AS was transferred to retained earnings.
6.2 Cash Flow Information for Discontinued Operations
Norway1
US$m
Senegal2
US$m
Net cash flows from/(used in) operating activities
Net cash flows (used in)/from investing activities
Net cash flows used in financing activities
Net (decrease)/increase in cash and cash
equivalents
1.5
(6.4)
(0.4)
(5.3)
1 Period ended 28 February 2020
2 Period ended 22 December 2020
3 2019 comparatives have been restated to include Senegal cash flows (note 1.3)
Year ended
31 December
2020
US$m
1.3
278.1
(5.8)
(0.2)
284.5
(5.4)
278.9
273.6
Senegal
(restated)3
US$m
–
(48.2)
(21.4)
(69.6)
Year ended
31 December
2019
(restated)3
US$m
(3.6)
(29.0)
(25.7)
(58.3)
Norway
US$m
(3.6)
19.2
(4.3)
11.3
In 2020 US$2.2m cash and cash equivalents was disposed of on the sale of Capricorn Norge AS. There was no cash and cash equivalents disposed
of on the sale of Senegal assets.
During 2019, a cash tax refund of US$30.9m was received on prior year qualifying expenditure on exploration activities, new venture costs and
administrative expenses. US$2.3m 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$28.6m included as a refund in investing activities where it relates to costs initially capitalised within
intangible exploration/appraisal assets.
Cairn Energy PLC Annual Report and Accounts 2020
173
Section 6 – Discontinued Operations continued
6.3 Assets and Liabilities Held-For-Sale
At 31 December 2020 there were no assets or liabilities held-for-sale. At 31 December 2019 the assets and liabilities of Capricorn Norge AS were
reclassified as held-for-sale, forming a single disposal group.
Assets Held-For-Sale:
Goodwill
Intangible exploration/appraisal assets
Property, plant & equipment – development assets
Other property, plant & equipment and intangible assets
Cash and cash equivalents
Trade and other receivables
Income tax asset
At 31 December 2019
Liabilities Held-For-Sale:
Loans and borrowings
Lease liability
Trade and other payables
Provisions – decommissioning
At 31 December 2019
Transferred to
held-for-sale
US$m
Impairment of
disposal group
US$m
At
31 December
2019
US$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
As the net assets of the subsidiary were realised through sale rather than recovered through use, and the gain was not 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 at that time, an impairment was recorded. In accordance with applicable IFRS, this impairment was 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 was
US$37.7m. The cumulative foreign exchange loss at the date of completion of the sale in 2020 of US$44.6m was recycled to the Income Statement.
6.4 Gain on Disposal of Property, Plant & Equipment – Development Assets
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$36.1m, calculated as follows:
Proceeds on disposal
Costs of disposal
Net proceeds
Development assets – disposals
Working capital balances at date of completion
Decommissioning provision released
Gain on disposal of property, plant & equipment – development assets
Tax credit on disposal
Post-tax gain on disposal
US$m
80.2
(3.1)
77.1
(82.1)
3.9
1.8
0.7
35.4
36.1
174
Cairn Energy PLC Annual Report and Accounts 2020
Section 7 – Capital Structure and Other Disclosures
1
2
3 Financial Statements
4
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 2019
Issued and allotted for employee share options
At 31 December 2019
Issued and allotted for employee share options
At 31 December 2020
Share Premium
At 1 January
Arising on shares issued for employee share options
At 31 December
Number
231/169p
ordinary
‘000
589,502
51
589,553
165
589,718
2020
US$m
489.8
0.3
490.1
231/169p
ordinary
US$m
12.6
–
12.6
–
12.6
2019
US$m
489.7
0.1
489.8
The Company does not have a limited amount of authorised share capital.
Subsequent to the year end, Cairn undertook a share consolidation where the existing ordinary shares of 231/169 pence each were replaced
with ordinary shares of 21/13 pence each. See note 9.1.
a) Shares held by ESOP Trust
The cost of shares held by the ESOP Trust at 31 December 2020 was US$4.4m (2019 US$7.4m). The number of shares held by the Trust at
31 December 2020 was 2,788,271 (2019 4,293,341) and the market value of these shares was £5.8m/US$8.0m (2019: £8.8m/US$11.7m). During 2020,
the Group purchased 1,028,000 shares at a cost of US$1.0m. During 2019 no shares were purchased for or allotted to the ESOP Trust. During 2020,
1,708,070 (2019: 1,950,797) shares vested and 825,000 (2019: 500,000) 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 2020 was US$9.0m (2019: US$8.4m). The number of shares held by the Trust at
31 December 2020 was 3,177,717 (2019: 2,562,975) and the market value of these shares was £6.7m/US$9.1m (2019: £5.3m/US$7.0m).
c) Foreign currency translation
Unrealised foreign exchange gains and losses arising on consolidation of non-US$ 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. The foreign currency translation reserve includes US$52.8m which is expected to be recycled to the Income Statement in 2021
on the completion of liquidation of various subsidiaries.
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 the
subsidiary 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$0.7m of capital reserves relates directly to Cairn Energy PLC, the Company.
e) Hedge reserve
The hedge reserve at 31 December 2020 of US$(3.4)m (2019: US$0.4m) is a consequence of the Group’s commodity price hedging (note 3.5). The
hedge reserve is used to recognise the effective portion of gains or losses on the derivatives that are designated for, and qualify as, cash flow hedges.
Cairn Energy PLC Annual Report and Accounts 2020
175
Section 7 – Capital Structure and Other Disclosures continued
7.2 Capital Management
The objective of the Group’s capital management structure is to ensure that there remains sufficient liquidity within the Group to carry out committed
work programme requirements. The Group monitors the long-term cash flow requirements of the business in order to assess the requirement for
changes to the capital structure to meet that objective and to maintain flexibility. The Group is subject to quarterly forecast liquidity tests as part of the
RBL facility. The Group has complied with the capital requirements of this test at all times during the year.
Cairn manages the capital structure and makes adjustments to it in light of changes to economic conditions. To maintain or adjust the capital structure,
Cairn may buy back shares, make a special dividend payment to shareholders, return capital, issue new shares for cash, repay debt, put in place
new debt facilities or undertake other such restructuring activities as appropriate. No significant changes were made in the objectives, policies or
processes during the year ended 31 December 2020.
Capital and net debt, including lease liabilities, was as follows:
Lease liabilities
Less cash and cash equivalents
Net (funds)/debt
Equity
Capital and net (funds)/debt
Gearing ratio
At
31 December
2020
US$m
At
31 December
2019
US$m
240.0
(569.6)
(329.6)
1,125.6
796.0
–
282.9
(146.5)
136.4
1,455.5
1,591.9
9%
As detailed in note 9.1 Cairn returned cash of approximately US$250m to shareholders in January 2021. This dividend was paid out of retained earnings
at 31 December 2020 but was not recognised as a liability at the year end.
2019 balances in the table above relate only to continuing operations.
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 2020:
– Various guarantees under the RBL facility for the Group’s operational commitments for the current year of US$45.1m (2019: US$52.3m);
– Parent Company Guarantees for the Group’s obligations under joint operating agreements and other contracts.
176
Cairn Energy PLC Annual Report and Accounts 2020
Section 7 – Capital Structure and Other Disclosures continued
1
2
3 Financial Statements
4
7.4 Auditors’ Remuneration
Fees payable to the Group’s external auditors (including associate firms) for:
Audit fees:
Auditing of the Financial Statements of the Group and the Company
Auditing of the Financial Statements of subsidiaries
Non-audit fees:
Audit-related assurance services
Other assurance services relating to corporate finance transactions
Non-audit services not included above
Total fees
Year ended
31 December
2020
US$’000
Year ended
31 December
2019
US$’000
396
479
875
267
424
6
697
1,572
335
488
823
397
–
6
403
1,226
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 90).
The split of audit fees to non-audit fees payable to the auditors is as follows:
2020 Fees to the Auditors
2019 Fees to the Auditors
Non-audit fee:
US$697,000
Audit fee:
US$875,000
Non-audit fee:
US$403,000
Audit fee:
US$823,000
Cairn Energy PLC Annual Report and Accounts 2020
177
Company Balance Sheet
As at 31 December 2020
Non-current assets
Investments in subsidiaries
Long-term intercompany receivables
Current assets
Cash and cash equivalents
Other receivables
Derivative financial instruments
Total assets
Current liabilities
Lease liability
Derivative financial instruments
Trade and other payables
Non-current liabilities
Lease liability
Total liabilities
Net assets
Equity
Called-up share capital
Share premium
Shares held by ESOP/SIP Trusts
Capital reserves
Merger reserve
Retained earnings:
At 1 January
Loss for the year
Other movements in retained earnings
Total equity
Note
8.2
8.3
8.4
8.4
8.5
7.1
7.1
7.1a,b
7.1d
7.1d
2020
US$m
1,146.4
3.0
1,149.4
251.9
2.3
3.4
257.6
2019
US$m
1,994.6
4.6
1,999.2
2.2
5.7
4.1
12.0
1,407.0
2,011.2
1.7
3.4
10.7
15.8
3.0
3.0
18.8
1,388.2
12.6
490.1
(13.4)
0.7
-
1,167.6
(531.0)
261.6
898.2
1,388.2
1.5
4.1
90.2
95.8
4.6
4.6
100.4
1,910.8
12.6
489.8
(15.8)
0.7
255.9
1,708.0
(548.5)
8.1
1,167.6
1,910.8
The Financial Statements on pages 178 to 188 were approved by the Board of Directors on 8 March 2021 and signed on its behalf by:
James Smith
Chief Financial Officer
Simon Thomson
Chief Executive
178
Cairn Energy PLC Annual Report and Accounts 2020
Company Statement of Cash Flows
For the year ended 31 December 2020
Cash flows from operating activities:
Loss before taxation
Share-based payments charge
Impairment of investment in subsidiary
Waiver of intercompany loan
Finance income
Finance costs
Other receivables movement
Trade and other payables movement
Net cash used in operating activities
Cash flows from investing activities:
Dividend received
Group funding
Interest received and other finance income
Net cash flows from investing activities
Cash flows from financing activities:
Facility fees, other interest and charges
Cost of shares purchased
Proceeds from exercise of share options
Lease payments
Net cash flows used in financing activities
Net increase/(decrease) in cash and cash equivalents
Opening cash and cash equivalents at beginning of year
Closing cash and cash equivalents
1
2
3 Financial Statements
4
Note
2020
US$m
2019
US$m
(531.0)
(548.5)
1.6
855.7
138.7
(486.6)
12.8
4.9
(7.4)
(11.3)
183.3
82.1
2.0
267.4
(4.3)
(1.0)
0.3
(1.4)
(6.4)
249.7
2.2
251.9
4.3
534.8
–
(4.5)
3.9
4.6
1.1
(4.3)
–
–
4.6
4.6
(3.1)
–
0.1
(1.4)
(4.4)
(4.1)
6.3
2.2
7.1a
Cairn Energy PLC Annual Report and Accounts 2020
179
Company Statement of Changes in Equity
For the year ended 31 December 2020
At 1 January 2019
Loss for the year
Total comprehensive expense
Share-based payments
Exercise of employee share options
Cost of shares vesting
At 31 December 2019
Loss for the year
Total comprehensive expense
Merger reserve transferred to retained earnings (note 7.1d)
Share-based payments
Exercise of employee share options
Cost of shares purchased
Cost of shares vesting
Equity share
capital and
share
premium
US$m
Shares held
by ESOP/SIP
Trusts
US$m
Merger
and capital
reserves
US$m
502.3
(19.6)
256.6
–
–
–
0.1
–
–
–
–
–
3.8
–
–
–
–
–
Retained
earnings
US$m
1,708.0
(548.5)
(548.5)
11.9
–
(3.8)
Total
equity
US$m
2,447.3
(548.5)
(548.5)
11.9
0.1
–
502.4
(15.8)
256.6
1,167.6
1,910.8
–
–
–
–
0.3
–
–
–
–
–
–
–
(1.0)
3.4
–
–
(255.9)
–
–
–
–
0.7
(531.0)
(531.0)
255.9
9.1
–
–
(3.4)
898.2
(531.0)
(531.0)
–
9.1
0.3
(1.0)
–
1,388.2
At 31 December 2020
502.7
(13.4)
180
Cairn Energy PLC Annual Report and Accounts 2020
Section 8 – Notes to the Company Financial Statements
1
2
3 Financial Statements
4
This section contains the notes to the Company Financial Statements.
The issued capital and reserves of the Company are largely consistent with the Cairn Energy PLC
Group Financial Statements, as per note 7.1
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 assets, 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 is calculated using the same
assumptions as noted in section 2.
8.1 Basis of Preparation
The Financial Statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union.
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.
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$55/bbl unescalated (2019: long-term oil price of US$65/bbl escalated at 2.0%), escalation for costs of 0.5% (2019: 2.0%) and a discount
rate of 10% (2019: 10%). Full details on the assumptions used for valuing oil and gas assets can be found in section 2.
Cairn Energy PLC Annual Report and Accounts 2020
181
Section 8 – Notes to the Company Financial Statements continued
8.2 Investments in Subsidiaries continued
Cost
At 1 January 2019
Additions
At 31 December 2019
Additions
At 31 December 2020
Impairment
At 1 January 2019
Impairment charge
At 31 December 2019
Impairment charge
At 31 December 2020
Net book value
At 31 December 2018
At 31 December 2019
At 31 December 2020
Subsidiary
undertakings
US$m
3,685.9
7.6
3,693.5
Total
US$m
3,685.9
7.6
3,693.5
7.5
7.5
3,701.0
3,701.0
1,164.1
534.8
1,698.9
855.7
2,554.6
2,521.8
1,994.6
1,146.4
1,164.1
534.8
1,698.9
855.7
2,554.6
2,521.8
1,994.6
1,146.4
Additions during the year of US$7.5m (2019: US$7.6m) 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$855.7m was made to the Income Statement in 2020 (2019: US$534.8m). The fall in the value of the
investments in the Capricorn Oil Group principally reflects a reduction due to distributions by the subsidiary and a reduction in the valuation of the
Group's producing assets.
The recoverable value of the assets of Capricorn Oil Limited used in the impairment test is based on the market value of tangible assets held by its
subsidiaries, cash and cash equivalents held and an assumption that the recoverable value of exploration assets is broadly aligned to the carrying
value. Removing the value attributed to future exploration success would increase the impairment recognised by US$112.2m.
182
Cairn Energy PLC Annual Report and Accounts 2020
Section 8 – Notes to the Company Financial Statements continued
1
2
3 Financial Statements
4
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
Business
Agora Oil and Gas (UK) Limited
Alba Resources Limited2
Capricorn Americas Limited
Capricorn Americas Mexico S. de
R.L. de C.V.
Capricorn Brasil Petróleo e Gás Ltda Exploration
Exploration
Exploration
Holding company
Exploration
Country of
incorporation
Country of
operation
Scotland
Scotland
Scotland
Mexico
UK
UK
Scotland
Mexico
Brazil
Brazil
Registered office address
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
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 Egypt (Holding) Limited
Exploration
Holding
Scotland
England
Côte d’Ivoire 50 Lothian Road, Edinburgh, EH3 9BY
UK
Capricorn Egypt Limited
Exploration
England
UK
Holding company
Exploration
Scotland
Mexico
Scotland
Mexico
Exploration
Exploration
Scotland
Scotland
Scotland
Morocco
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
50 Lothian Road, Edinburgh, EH3 9BY
Av. Paseo de la Reforma 295, Cuauhtémoc, CP 06500,
CDMX, México
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
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
Limited2
Capricorn Ireland Limited
Capricorn Malta Limited2
Capricorn Mauritania Limited
Capricorn Nicaragua BV
Exploration
Exploration
Exploration
Exploration
Capricorn Offshore Exploration
Limited
Capricorn Oil and Gas Tunisia GmbH2 Non-trading
Capricorn Petroleum Limited
Capricorn Resources Management
Limited
Capricorn Senegal Limited
Capricorn Spain Limited
Capricorn Suriname BV
Exploration
Exploration
Exploration
Holding company
Royalty interest
Nautical Holdings Limited
Holding company
Non-trading
Holding company
Scotland
Scotland
Non-trading 50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
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
Israel
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
Scotland
The
Netherlands
Scotland
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
Senegal
Spain
Suriname
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
50 Lothian Road, Edinburgh, EH3 9BY
Scotland
Scotland
The
Netherlands
England
UK
Nautical Petroleum AG2
Nautical Petroleum Limited
UAH Limited
Production
Exploration and
production
Holding company
Switzerland UK
UK
England
England
UK
1 Exempt from audit under Section 480 of the Companies Act
2 Company is in the process of liquidation
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
Baarerstrasse 8, 6300 Zug, Switzerland
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
Wellington House 4th Floor, 125 The Strand, London,
WC2R 0AP
Cairn Energy PLC Annual Report and Accounts 2020
183
Section 8 – Notes to the Company Financial Statements continued
8.3 Cash and Cash Equivalents
Cash at bank
Money market funds
8.4 Derivative Financial Instruments
Current assets
Financial assets – hedge options maturing within one year
Current liabilities
Financial liabilities – hedge options maturing within one year
At
31 December
2020
US$m
At
31 December
2019
US$m
1.9
250.0
251.9
2.2
-
2.2
At
31 December
2020
US$m
At
31 December
2019
US$m
3.4
(3.4)
–
4.1
(4.1)
–
Mark-to-market gains and losses on commodity derivatives are recorded as financial assets and liabilities. Cairn Energy PLC enters into option
contracts with third parties and back-to-back contracts with a subsidiary on the same date, with the same terms. Therefore there are equal financial
assets and liabilities. Details of Group hedging can be found in note 3.5.
8.5 Trade and Other Payables
Trade and other payables
Amounts payable to subsidiary undertakings
Accruals
At
31 December
2020
US$m
At
31 December
2019
US$m
0.5
8.1
2.1
10.7
0.4
86.9
2.9
90.2
8.6 Financial Instruments
Set out below is the comparison by category of carrying amounts and fair values of all the Company’s financial instruments that are carried in the
Financial Statements. The fair value of financial assets and liabilities, other than those relating to hedge options, has been calculated by discounting
the expected future cash flows at prevailing interest rates. Hedge options are valued using models with observable inputs.
Financial assets
Carrying amount and fair value
Financial assets at amortised cost
Cash and cash equivalents
Other receivables – amounts receivable from subsidiary undertakings
Other receivables – other
Long-term intercompany receivables
Derivative financial instruments
Financial assets – hedge options
At
31 December
2020
US$m
At
31 December
2019
US$m
251.9
–
2.3
3.0
3.4
260.6
2.2
1.8
3.9
4.6
4.1
16.6
For all financial assets held at amortised cost, their carrying amount is considered to be the same as their fair value.
184
Cairn Energy PLC Annual Report and Accounts 2020
1
2
3 Financial Statements
4
Section 8 – Notes to the Company Financial Statements continued
8.6 Financial Instruments continued
Maturity analysis of financial assets
The expected financial maturity of the Company’s financial assets at 31 December 2020 is as follows:
Financial assets at amortised cost
Cash and cash equivalents
Other receivables – other
Long-term intercompany receivables
Financial assets – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
251.9
2.3
–
3.4
257.6
–
–
3.0
–
3.0
–
–
–
–
–
–
–
–
–
–
The expected financial maturity of the Company’s financial assets at 31 December 2019 was as follows:
Financial assets at amortised cost
Cash and cash equivalents
Other receivables – amounts receivable from subsidiary undertakings
Other receivables – other
Long-term intercompany receivables
Financial assets – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
2.2
1.8
3.9
–
4.1
12.0
–
–
–
1.6
–
1.6
–
–
–
3.0
–
3.0
–
–
–
–
–
–
Financial liabilities
Carrying amount and fair value
Financial liabilities at amortised cost
Trade and other payables
Amounts payable to subsidiary undertakings
Accruals
Lease liability
Derivative financial instruments
Financial liabilities – hedge options
At
31 December
2020
US$m
At
31 December
2019
US$m
0.5
8.1
2.1
4.7
3.4
18.8
0.4
86.9
2.9
6.1
4.1
100.4
Maturity analysis of financial liabilities
The expected financial maturity of the Company’s financial liabilities at 31 December 2020 is as follows:
Financial liabilities at amortised cost
Trade and other payables
Amounts payable to subsidiary undertakings
Accruals
Lease liability
Derivative financial instruments
Financial liabilities – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
0.5
8.1
2.1
1.7
3.4
15.8
–
–
–
3.0
–
3.0
–
–
–
–
–
–
–
–
–
–
–
–
Cairn Energy PLC Annual Report and Accounts 2020
185
Section 8 – Notes to the Company Financial Statements continued
8.6 Financial Instruments continued
The expected financial maturity of the Company’s financial liabilities at 31 December 2019 was as follows:
Financial liabilities at amortised cost
Trade and other payables
Amounts payable to subsidiary undertakings
Accruals
Lease liability
Derivative financial instruments
Financial liabilities – hedge options
< 1 year
US$m
1–2 years
US$m
2–5 years
US$m
>5 years
US$m
0.4
86.9
2.9
1.5
4.1
95.8
–
–
–
1.6
–
1.6
–
–
–
3.0
–
3.0
–
–
–
–
–
–
Financial Risk Management: Risk and Objectives
The Company’s financial risk management policies and objectives are consistent with those of the Group detailed in note 3.9.
The Company is not exposed to material foreign currency exchange rate risk.
8.7 Capital Management
Capital and net debt were made up as follows:
Continuing operations
Amounts payable to subsidiary undertakings
Lease liability
Less cash and cash equivalents
Net (funds)/debt
Equity
Capital and net (funds)/debt
Gearing ratio
At
31 December
2020
US$m
At
31 December
2019
US$m
8.1
4.7
(251.9)
(239.1)
1,388.2
1,149.1
–
86.9
6.1
(2.2)
90.8
1,910.8
2,001.6
5%
186
Cairn Energy PLC Annual Report and Accounts 2020
Section 8 – Notes to the Company Financial Statements continued
1
2
3 Financial Statements
4
8.8 Related Party Transactions
The Company’s subsidiaries are listed in note 8.2. The following table provides the Company’s balances which are outstanding with subsidiary
undertakings at the balance sheet date:
Amounts payable to subsidiary undertakings
Amounts receivable from subsidiary undertakings
The amounts outstanding are unsecured, repayable on demand and will be settled in cash.
The following table provides the Company’s transactions with subsidiary undertakings recorded in the loss for the year:
Amounts invoiced to subsidiaries
Amounts invoiced by subsidiaries
At
31 December
2020
US$m
At
31 December
2019
US$m
(8.1)
–
(8.1)
(86.9)
1.8
(85.1)
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
13.7
56.8
10.4
10.6
Directors’ Remuneration
The remuneration of the Directors of the Company is set out below. Further information about individual Directors’ remuneration is provided in the
audited section of the Directors’ Remuneration Report on pages 94 to 121.
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
Emoluments
Share-based payments
3.4
0.4
3.8
3.3
–
3.3
Pension contributions of US$0.2m (2019: US$0.2m) were made on behalf of Directors in 2020.
290,683 LTIP share awards to Directors vested during 2020 (2019: none). Share-based payments disclosed above represent the market value at the
vesting date of these awards in that year.
Other Transactions
During the year the Company did not make any purchases in the ordinary course of business from an entity under common control (2019: US$nil).
In December 2020 the Company received a dividend from its subsidiary, Capricorn Oil Limited, of US$484.6m, of which US$183.3m was settled
in cash and US$301.3m by offset against previous borrowings.
The Company waived a loan of US$138.7m due from Capricorn Senegal (Holding) Limited in December 2020.
Cairn Energy PLC Annual Report and Accounts 2020
187
Section 9 – Events After the Balance Sheet Date
9.1 Return of Cash to Shareholders
On 8 January 2021 Cairn received shareholder approval for the return of cash to shareholders of 32 pence per eligible ordinary share totalling £188m.
US$250m of the proceeds from the sale of Senegal assets were converted to £ and the return was paid to shareholders on 25 January 2021. In
conjunction with the cash return, shareholders also approved an 11 for 13 share consolidation to seek to maintain share price comparability. The share
consolidation completed on 11 January where the existing ordinary shares of 589,816,826 ordinary shares of 231/169 pence each were replaced with
499,075,775 ordinary shares of 21/13 pence each.
The weighted average number of shares used in both basic and diluted earnings per share calculations, disclosed on the Income Statement and in
note 4.6, was retrospectively adjusted for the current and prior year. The extent of the adjustment has been limited to the change in the number of
ordinary shares outstanding without a corresponding change in the resources of the business.
9.2 Proposed Acquisition of Exploration, Development and Production Interests in the Western Desert, the Arab Republic of Egypt
On 8 March 2021, Cairn, together with Cheiron Energy (its consortium partner) entered into a sales and purchase agreement for the proposed acquisition
of a portfolio of upstream oil and gas exploration, development and production interests from Shell in the Western Desert, onshore The Arab Republic
of Egypt for a purchase price of approximately US$323m net to Cairn, with additional contingent consideration of up to US$140m net to Cairn if certain
requirements are met.
Cairn will acquire 50% of the portfolio of interests being sold by Shell, comprising of 13 concessions (including 5 exploration concessions), with
21 development leases. The producing fields are split over four distinct areas, each with different characteristics and geographies: the Obaiyed Area;
Badr El Din ("BED"); North East Abu Gharadig ("NEAG"); and Alam El Shawish West ("AESW").
Bapetco, a joint venture company currently owned 50:50 by the Sellers and the Egyptian General Petroleum Corporation ("EGPC"), is the operator
of all of the producing concessions within the portfolio. Upon completion of the transaction, the interests to be acquired by Cairn will be as follows:
Area
Concession &
Exploration Blocks
Obaiyed Area Obaiyed
North Matruh
North Um Baraka
Badr El Din
(BED)
Sitra
BED
BED 2 & 17
BED 3
North Alam El Shawish ("NAES")
Cairn working
interest in
Concession
Partners in
Concession
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
Operating
Company
Obaiyed Petroleum Company
Obaiyed Petroleum Company
North Um Baraka Petroleum
Company
Sitra Petroleum Company
Bapetco
Bapetco
Bapetco
NAES Petroleum Company
NEAG
NEAG Tiba and NEAG
Extension
26% Cheiron (26%);
Tiba Petroleum Company
Apache Egypt (48%)
AESW
AESW
20% Cheiron (20%); North Petroleum
AESW Petroleum Company
International Company SA (35%);
Neptune (25%)
Abu Sennan1
South Abu Sennan
Horus1
South East Horus
El Fayum1
West El Fayum
50% Cheiron (50%)
50% Cheiron (50%)
50% Cheiron (50%)
-
-
-
1
It is intended that Cairn shall be appointed operator of the three newly awarded exploration concessions
Cairn working
interest in Operating
Company
25%
25%
25%
25%
25%
25%
25%
25%
13%
10%
-
-
-
The transaction is conditional, inter alia, on the approval of the Minister of Petroleum and Mineral Resources in The Arab Republic of Egypt. In addition,
there are pre-emption rights outstanding for EGPC in relation to all Concessions and for Concession Contractors in relation to NEAG and AESW. If any of
these pre-emption rights is exercised, the Consortium will not acquire the relevant Concessions as part of the Transaction. The proposed acquisition
is a Class 1 transaction and subject to shareholder approval.
Cairn, together with Cheiron Energy, plans to finance the acquisition with a new joint acquisition reserve-based lending facility of up to US$350m
(US$175m net to Cairn), joint junior debt facility of US$100m (US$50m net to Cairn) and existing cash on balance sheet.
9.3 Sale of Cairn’s Interests in the Catcher and Kraken Producing Assets
On 8 March 2021, Cairn entered into an agreement that will result in the sale of its interests in the UK Catcher and Kraken producing assets to Waldorf
Production Limited for a cash consideration of US$460m plus additional contingent consideration dependent principally on oil prices from 2021 to
the end of 2025. The consideration is subject to adjustments for working capital and other customary interim period adjustments from the economic
effective date of 1 January 2020. As at 31 December 2020, the interim period and working capital adjustments were approximately US$144m. On
completion of the deal, derecognition of deferred tax assets, currently offsetting deferred tax liabilities, is expected to result in a loss after tax, which
at the year-end was forecast to be approximately US$140m.
The transaction is conditional upon, inter alia, the release of guarantees by the Group in favour of the OGA and FPSO contractors and OGA
confirmation that its power to revoke licences will not be exercised on the change of control of the interests. The disposal is a Class 1 transaction
and subject to shareholder approval.
188
Cairn Energy PLC Annual Report and Accounts 2020
Licence List
as at 31 December 2020
Country
Asset name
Côte d'Ivoire
CI-301
Côte d'Ivoire
CI-302
Côte d'Ivoire
CI-520
Licence
CI-301
CI-302
CI-520
Israel
Block 39
Licence No. 39
Israel
Block 40
Licence No. 40
Israel
Block 45
Licence No. 45
Israel
Block 46
Licence No. 46
Israel
Block 47
Licence No. 47
Israel
Block 48
Licence No. 48
Israel
Block 52
Licence No. 52
Israel
Block 53
Licence No. 53
Mexico
Block 7
Mexico
Block 9
Mexico
Block 15
CNH-R02-L01-A7.
CS-2017
CNH-R02-L01-A9.
CS-2017
CNH-R03-L01-G-
TMV-01-2018
Suriname
Block 61
BLOCK 61
Block(s)
CI-301
CI-302
CI-520
39
40
45
46
47
48
52
53
7
9
15
61
1
2
3
4 Additional information
Operator
Cairn Côte d’Ivoire Limited
Cairn Côte d’Ivoire Limited
Tullow Côte d'Ivoire Onshore Limited (60%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
Capricorn Offshore Exploration Limited
(33.34%)
ENI (45%)
Capricorn Energy Mexico
Capricorn Energy Mexico
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
Cairn
Energy
interest (%)
90
90
30
33.34
33.34
33.34
33.34
33.34
33.34
33.34
33.34
30
65
50
100
29.5
20
25
20
45
50
50
100
20
20
100
50
20
Kraken
Catcher
Agar-Plantain
Laverda
Chimera
Woodstock
Jaws
Manhattan
Bonneville
Laverda Template
Mane
East Orkney Basin
P1077
P1430
P1763
P2070
P2312
P2379
P2380
P2381
P2453
P2454
P2466
P2468
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
9/2b
28/9a
9/9d, 9/14a
28/4a
3/16a, 3/17a
22/11b, 22/12b, 22/16b, 22/17c
Nautical Petroleum
22/12d
22/13c, 22/18d
28/9c
28/9d
Shell U.K. Limited (50%)
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
Cougar Rapide
P2550
28/9f
Premier Oil UK Ltd
Note
Post 2020 year end, Cairn no longer holds interests in UK licences P1763 and P2312.
Cairn Energy PLC Annual Report and Accounts 2020
189
189
Group Reserves and Resources
As at 31 December 2020
Group Proven Plus Probable Oil and Gas Reserves 2P
31 December 2019
Disposals
Technical revisions
Commodity price revisions
Production
31 December 2020
All current 2P Reserves are located within the Kraken and Greater Catcher areas in the UK North Sea
Sensitivity Analysis with Different Hydrocarbon and Carbon Emission Prices
Total Group 2P Reserves
WEO-2020 Stated Policies scenario
WEO-2020 Sustainable Development scenario
Group Contingent Oil and Gas Resources 2C (Development Pending)
31 December 2019
Improved recovery
Disposals
31 December 2020
EI
WI
Entitlement Interest
Working Interest
WI
mmboe
149.7
(106.5)
1.5
(4.0)
(7.8)
32.9
WI
mmboe
38.4
28.5
EI
mmboe
142.2
(99.0)
1.5
(4.0)
(7.8)
32.9
EI
mmboe
38.4
28.5
WI
mmboe
109.4
1.2
(109.4)
1.2
190190
Cairn Energy PLC Annual Report and Accounts 2020
Glossary
The following are the main terms and abbreviations used in this report:
1
2
3
4 Additional information
Denotes best estimate scenario of contingent resources
two dimensional
three dimensional
Proved plus probable reserves, denotes best estimate scenario
Cairn core values: Respect, Relationships and Responsibility
anti bribery and corruption
authority for expenditure
annual general meeting
as low as reasonably practicable
African Partner Pool
Audit Quality Inspection
Biodiversity Action Plan
barrel
barrels
billion
barrels of oil equivalent
barrels of oil equivalent per day
barrels of oil per day
Britain's exit from the European Union
the Association of British Independent Oil Exploration Companies
British Standard Time
carbon capture, utilisation and storage
Carbon Disclosure Project
Chief Executive Officer
Crisis and Emergency Response Team
Chief Financial Officer
Crisis Incident Management
Corporate Major Accident Prevention Policy
National Hydrocarbons Commission
carbon dioxide
carbon dioxide equivalent
Chief Operating Officer
Cairn Operating Standards
2019 novel coronavirus disease
corporate responsibility
Corporate Responsibility Management System
corporate social responsibility
Direct Air Capture
exploration and appraisal
Extractive Industries Transparency Initiative
Europe, Middle East and Africa
Environmental, Social and Governance
Environmental and Social Impact Assessment
Emissions Trading Scheme
employee share option plan
Emissions Trading Scheme
European Union
Employee Voice Forum
Executive Committee
Ernst & Young LLP
2C
2D
3D
2P
3Rs
ABC
AFE
AGM
ALARP
APP
AQI
BAP
bbl
bbls
bn
boe
boepd
bopd
Brexit
BRINDEX
BST
CCUS
CDP
CEO
CERT
CFO
CIM
CMAPP
CNH
CO2
CO2e
COO
COS
COVID-19
CR
CRMS
CSR
DAC
E&A
EITI
EMEA
ESG
ESIA
ETS
ESOP
ETS
EU
EVF
ExecCo
EY
FlowStream FlowStream Thruer Ltd
FPSO
FRC
G&G
GDPR
GHG
GJ
GoI
GRI
H1/2
HR
HSE
HSSE
floating production storage and offloading
Financial Reporting Council
geological and geophysical
General Data Protection Regulation
greenhouse gas
gigajoule
Government of India
Global Reporting Initiative
first/second half (of a year)
human resources
health, safety and environment
health, safety, security and environment
IAS
IASB
ICSA
IEA
IFC
IFRS
IIA
INPG
IOGP
IP
IPIECA
International Accounting Standards
International Accounting Standards Board
The Chartered Governance Institute
International Energy Agency
International Finance Corporation
International Financial Reporting Standards
Invest in Africa (not-for-profit organisation)
National Institute for Oil and Gas (Senegal)
International Association of Oil and Gas Producers
investment proposal
International Petroleum Industry Environmental
Conservation Association
joint venture
key performance indicator
Latin America
London Interbank Offered Rate
Liquefied Natural Gas
lost time injury frequency
lost time injuries
Long Term Incentive Plan
million
million barrels of oil
million barrels of oil equivalent
Modern Slavery Act
Management Team
Institute for Natural Resources and Engineering Studies
JV
KPI
LATAM
LIBOR
LNG
LTIF
LTI
LTIP
m
mmbbls
mmboe
MSA
MT
NATIN
NECCUS North East Carbon Capture, Utilisation and Storage
NGO
NPV
OPEC
OSPAR
non-governmental organisation
Net Present Value
Organization of the Petroleum Exporting Countries
Oslo/Paris convention (for the Protection of the Marine
Environment of the North-East Atlantic)
person discharging managerial responsibility
Production Sharing Contract
PricewaterhouseCoopers LLP
reserves based lending
Ring Fence Corporation Tax
Risk Management Committee
return to office
Sustainability Accounting Standards Board
Industrial Safety, Operational Safety and Environmental
Protection Administration System
Supplementary Charge Tax
The United Nations Sustainable Development Goals
social impact assessment
Senior Independent Director
share incentive plan
Senior Leadership Team
small and medium-sized enterprises
SNE development, Senegal
sediment trapping units
terms and conditions
Task Force on Climate-related Financial Disclosures
total recordable injury rate
total shareholder return
United Kingdom
United Kingdom Continental Shelf
United Nations
United Nations Global Compact
United States dollar
working interest
SCT
SDGs
SIA
SID
SIP
SLT
SMEs
SNE
STUs
Ts and Cs
TCFD
TRIR
TSR
UK
UKCS
UN
UNGC
US$
WI
Woodside Woodside Energy Ltd.
YTD
PDMR
PSC
PwC
RBL
RFCT
RMC
RTO
SASB
SASISOPA
year to date
Cairn Energy PLC Annual Report and Accounts 2020
191
191
Appendix: GHG Emissions Calculation
We calculate our GHG emissions in
accordance with the GHG Protocol Corporate
Accounting and Reporting Standard. We
use the published 100-year Global Warming
Potentials (GWPs) for CO2 CH4 and N2O from
the Intergovernmental Panel on Climate
Change (IPCC) – with the Fourth Assessment
Report (AR4) values applied when using
Defra 2020 emission factors (they are already
integrated), and the Fifth Assessment Report
(AR5) values applied when using other
emission factors.
1. Our Scope 1 (direct) GHG emissions arise
from fuel combustion (primarily during
offshore rig, marine vessel and aircraft
operations), flaring during well testing
and incineration of waste (a very small
amount). For calculating these emissions,
we use emission factors from the API
Compendium 2009 (fuel combustion),
EEMS 2008 (flaring) and the GHG Protocol
2017 (waste incineration).
2. We report Scope 2 (purchased electricity)
GHG emissions in line with GHG
Protocol Scope 2 Guidance, i.e. in two
ways: according to a location-based
method and a market-based method.
(Transmission and distribution losses
are excluded.) For the location-based
method, we use emission factors from
the IEA (International Energy Agency)
(updated to IEA 2020 in 2020). These are
grid average emission factors for each
country. For district heating and cooling,
we use location-based emission factors
from Defra (updated to Defra 2020 in
2020). For the market-based method,
we use emission factors, where available,
in the following order of preference:
• Supplier-specific emission factors –
obtained from Cairn’s offices’ electricity
suppliers;
• Residual mix emission factors –
obtained from the Association of
Issuing Bodies (AIB) document
‘European Residual Mixes 2017’; and
• Location-based emission factors.
These are the same IEA and Defra
emission factors that we use for
calculating location-based emissions.
We have provided location-based Scope
2 figures in this report. Our market-based
Scope 2 figures, and further details about
our GHG emissions data and calculations,
are available in our Data Appendix and on
our website.
3. We report Scope 3 GHG emissions from
two sources:
• business travel (business travel well-
to-tank emissions are excluded); and
• electricity transmission and distribution
losses.
For calculating Scope 3 (business
travel) GHG emissions, we use the
Defra methodology, including its
recommendation to include an uplift for
the influence of radiative forcing in air
travel emissions. We updated to Defra
2020 emission factors in 2020 (see www.
ukconversionfactorscarbonsmart.co.uk/).
For calculating Scope 3 (electricity
transmission and distribution losses)
GHG emissions, we use Defra 2020
emission factors.
4. ITPEnergised has provided Cairn Energy
PLC with independent limited assurance
engagement of our Scope 1, 2, 3 and
normalised 2020 GHG data and has
concluded that the data is reliable, accurate
and has been reported and prepared in
accordance with Cairn’s methodology.
A full assurance statement detailing the
verification steps undertaken as well as
its limitations is available on our website.
SECR Data Table
SECR
Scope 1 GHG emissions tCO2e
Scope 2 emissions tCO2e (location-based)
Total gross Scope 1 & Scope 2 emissions
GHG intensity ratio: tCO2e (gross Scope 1 + 2) /1000 hours worked
Energy consumption used to calculate above emissions: kWh
UK
0.00
135.87
135.87
0.44
2020
Cairn total
24,439.70
175.12
24,614.82
35.48
592,273.00 98,360,873.00
192192
Cairn Energy PLC Annual Report and Accounts 2020
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
Company Information
Financial Advisers
Rothschild & Co
New Court
St Swithin’s Lane
London
EC4N 8AL
Secretary
Anne McSherry
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
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 2020
193
193
4 Additional information123 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
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
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www.cairnenergy.com/ar2020