Preliminary 2013 Cairn Energy PLC Earnings Conference Call
Mar 18, 2014 AM EDT
CNE.L - Cairn Energy PLC
Preliminary 2013 Cairn Energy PLC Earnings Conference Call
Mar 18, 2014 / 09:00AM GMT
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Corporate Participants
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* Simon Thomson
Cairn Energy PLC - Chief Executive
* Jann Brown
Cairn Energy PLC - Finance Director
* Mike Watts
Cairn Energy PLC - Deputy CEO
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Conference Call Participants
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* Nathan Piper
RBC - Analyst
* Mark Wilson
Jefferies - Analyst
* Dan Ekstein
UBS - Analyst
* David Mirzai
Societe Generale - Analyst
* Brendan Warn
Bank of Montreal - Analyst
* Jamie Maddock
Morgan Stanley - Analyst
* Tom Robinson
Deutsche Bank - Analyst
* Rafal Gutaj
BofA Merrill Lynch - Analyst
* Thomas Martin
Canaccord - Analyst
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Presentation
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Simon Thomson, Cairn Energy PLC - Chief Executive [1]
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Morning, everybody. Morning. Welcome to Cairn's preliminary results presentation. I'm Simon Thomson, Chief Executive. With me are Jann Brown, Finance Director, and Dr. Mike Watts, Deputy CEO. And we also have a number of members of the senior management team in the audience for questions later on.
As in the usual way, we're going to run through a presentation updating you on the Group's activities, and we'd be happy to take questions at the end. But before we launch into the presentation, I wanted to say a few words on Cairn India and the tax situation.
Jann will give some more details shortly, but the important point to emphasize is that there is currently an investigation being carried out under the auspices of recently introduced retrospective legislation. There is therefore no claim, no number, nor basis of any number that can be discussed.
Now, we've already stated that we believe that we've applied with all applicable legislation and that we are prepared to strongly defend our position. We're in discussion with our advisors; we're in discussion with the authorities. There are multiple lines of activity ongoing and, believe me, we're leaving no stone unturned to seek to resolve this issue.
But there is uncertainty on timing, and whilst that uncertainty on timing continues, there is the restriction on our being able to realize value from our shareholding in Cairn India.
What does that practically mean? Well, what it means is that we can and we will deliver our 2014 exploration program with multiple rigs. We can and we are delivering our development programs. So, as you know, Kraken has already been sanctioned and we expect the sanction request for Catcher to come shortly.
However, when we look to the future, there may be impacts upon the business and upon our equity, our paying interest shares in our various projects. But the important thing is that over the last couple of years -- and I'll get to the slide -- we have created, we have delivered a balanced business, combining exploration on the one hand, frontier and mature basin, and also our development assets on the other.
So we have a business model that has flexibility inbuilt and we have the ability, therefore, to deal with this current constraint and still deliver our strategic objectives.
We will and we are delivering this multi-well frontier program. We're looking forward to talking to you about the wells we have drilled and about the wells we're going to drill for the remainder of the year. As I said, we've advanced our two main projects, Kraken and Catcher, and they're on track. And we remain focused, remain focused on creating value; remain focused on capital discipline and also on capital allocation.
And on those two important points, I'll hand over to Jann to continue with the presentation. Jann.
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Jann Brown, Cairn Energy PLC - Finance Director [2]
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Thank you, Simon, and good morning, everyone.
The first slide in the finance section, there's no surprises, on the Indian tax situation. And as Simon's already outlined, there is no new news this morning and everything that needs to be said has already been put out in our previous two announcements. So I'll just pick up on two or three points -- there's a lot of bullets on this slide -- two or three points.
The first one, to repeat what Simon said, we have been fully compliant with the tax legislation that was in force at the time in each year. Once Cairn India was floated and we started the process of selling down, moving from the 100% position we had in 2006 down to the 10% position we had at the back end of last year, at each stage we've been again compliant with the tax legislation in India. And we've paid hundreds of millions of dollars of capital gains tax as we've sold to, for example, Petronas and Vedanta.
The second point, just to repeat and emphasize what Simon was saying about protecting our interests, we will do whatever is necessary, albeit within legal bounds, to protect our interests.
And the final point, and really the key one for the finance section, is that that uncertainty over the timing of being able to access that value that's been locked up for now, we've responded very quickly to that to make sure that it's built into all our forward planning and our cash flow forecasting.
So, looking at what that means for the financial strategy, we have been consistent about saying that the cash proceeds from realizing the value of the Cairn India shares were not required until well into 2015. We had net cash at December 31 of $1.25b, and that means that all our 2014 commitments are fully covered, including the current drilling campaign.
Looking forward beyond 2014, our future capital requirements and the allocation of that capital will be determined by three things. First of all, as we progress through Catcher sanction and what that means in terms of the cost base; secondly, the availability of debt funding, and we'll come on to talk about that a bit more on the next couple of slides; and of course the results of the current exploration drilling campaign.
It's with some regret that we announced this morning that we're suspending the share buyback program. We put that in place last October as a response to selling Mariner and avoiding about $300m worth of CapEx. We have spent just short of a third of that and bought in about 4% of the capital, and the share buyback is suspended as a prudent move at this stage until we get more clarity on being able to access the value of that Cairn India shareholding.
So, looking at some of the projects and programs in more detail, first of all the two development projects, Kraken and Catcher, and a reminder that these two projects, once they come on stream, provide the cash platform to fund future exploration activities.
Kraken was sanctioned after the interim results last year, and that means that we booked 2P reserves of 30m barrels in the yearend accounts. We talked at the interims about the heavy oil field allowances, GBP400m; that's a sterling figure because it's a UK tax allowance. And that tax allowance is triggered when the relevant fields come into production and is then available to use across our North Sea production base.
We're carried, of course, on this and at the current reserves level we expect approximately $200m of the carry from Enquest to be available to us, and our share of the CapEx to the end of 2017 is about $0.5b. The operator estimate of first oil dates are 2016 or 2017. So that's Kraken.
Turning to Catcher, the draft field development plan has now been submitted to DECC, with gross 2C resources of approximately 96m barrels with upside potential. Again, there's tax allowances, the small field allowances here at GBP135m. And our share of CapEx again to the end of 2017 is $580m. Operator first oil estimate 2017.
As you would expect, we've been talking to a number of banks for quite some time. They're fully up to speed with Kraken, they're very quickly getting up to speed with Catcher, and we would expect to have debt facilities finalized well before the interims.
So now the E&A program, which Mike will talk in a lot more detail about. We're fully funded to deliver that. The 2014 program, at a cost of about $430m, includes seven wells, $70m of mature basin exploration, two wells, and the balance on frontier basin. And the total CapEx for the year including developments, $530m.
So, in summary, we've moved quickly to review opportunities within the current portfolio, to high-grade them and to optimize the E&A program beyond 2014.
We're guided by the three core principles that Simon talked about, first and foremost creating value through exploration within a balanced portfolio, and then the twin issues of capital discipline married to optimization of our capital allocation to individual wells and projects. And Mike will now talk a bit more about them.
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Mike Watts, Cairn Energy PLC - Deputy CEO [3]
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Thank you, Jann, and good morning, everyone.
Just to first say, irrespective of the Indian situation, the Cairn strategy remains intact. We're about organic growth, and organic growth in this business is about finding oil and gas through the drill bit. And it's through finding hidden value you can create value and ultimately realize value.
We're looking at frontier basins or overlooked plays in more established areas where you have a niche or knowledge advantage. A good example in our case is off the coast -- continental coast of Norway.
You always want to explore and you always want to do transactions on the best commercial terms, and that's paramount in everything we do. We always ally the technical risk assessment with the commercial risk assessment.
Simon's mentioned we have flexibility; we've always had flexibility. And the thing you can do in this business, you can cut your cloth to fit your requirement, the capital allocation; you can change your equity levels; you can change your discretionary expend. And I think we've built a business which is robust even in the present circumstance of having assets frozen.
Just to remind you of the exploration focus, it's based on geological -- background geological thinking. No need to repeat it, but the break-up of the last super-continent produced incipient rifting, restricted marine basins which generate -- give you the conditions for source rock generation and expulsion.
We're looking at the passive margins along the North Atlantic, from Greenland, North West Africa, the coast of Ireland, also the more mature parts of the North Sea. As I mentioned, we have particular knowledge edge on some play types on the North Sea, Norway and the UK. And we've got small positions in the Mediterranean, off the coast of Spain, and we've got applications in various places in Spain, including offshore Catalonia.
The important thing you'll see later is all this exploration is balanced by the development and future cash-generating portfolio which we've put in place.
Now, if we look at the prospect and lead inventory, just to point out the whole objective is to move this way, towards the top right-hand corner, both in terms of risk and volume size. And last year I envisaged all the stars lining up and having a fantastic program, starting with wells around the Catcher area and including a large prospect in Greenland called Pitu.
However, we've not been able to persuade the joint venture in the Catcher area to get after those exploration wells at this stage. They will come. The potential remains in the ground. And there's been a deferral of the Pitu well in Greenland.
But you can see from this the materiality of the program that we've already spoken about. The Spanish Point well, the Aragon well in the North Sea, the two wells in Senegal, and the largest prospect we'll be drilling is at the end of the year, the fourth quarter, with Kosmos in Cap Boujdour in Morocco.
So that's the spread of the program, and we're always looking to upgrade and evolve that prospect lead inventory and then look at the cream, the top 10% or so, for the drilling program.
If we look at our program, the operating rig, the Cajun Express, we are just wrapping up the Cap Juby Maritime well in Morocco. We're aiming for first week in April to commence operations in Senegal. We have two wells in Senegal. And then the intention last year was to winterize the rig and take it up to Greenland. That's not going to happen, but we are looking at various options. That's within our own portfolio, it's follow-up potential, but also with third parties, what we do with that slot at the end of Senegal.
If we look at the Blackford Dolphin rig, that's in Ireland at the moment, getting a refit in Belfast. It comes off, it drills a well. MPX is the operator of the Aragon well in the North Sea. We have an option to take over the operatorship in this area later on. And then we go to Ireland and drill the Spanish Point well.
A couple of wells in the North Sea that may change as the year goes on. There's all sorts of wheeling and dealing that's done in that North Sea portfolio. And then the largest prospect is the Morocco, the Cap Boujdour prospect operated by Kosmos.
If we look first of all at Morocco, the well that we drilled at the end of last year, the Foum Draa well, did not encounter reservoir. This is the play that we were going for. It's the large deltaic system on the shelf, sediments rolling down the slope and being trapped on systems on the slope.
There was no reservoir. We can be left with the conclusion that the reservoir continued down the slope and ponded on the sea floor, the basin floor. That's something we're looking at. But it's possible in these predominantly aggradational deltaic systems that a lot of the clastics remained on the shelf edge itself. So we've got further work to do there to evaluate the potential.
The Juby Maritime block; we've got a 3D survey we shot a year or so ago. I'm very hopeful that there we will be able to find carbonates with primary porosity, and primary porosity in carbonates is the Holy Grail that we're trying to find.
If we look at the well that we've just drilled, it was designed to go to the Middle Jurassic. We drilled through the Upper Jurassic and encountered 110 meters of oil column in what is probably going to be tight -- we haven't completed all the core evaluation, but tight reservoir with oil in microfractures.
And then we drilled on a kilometer to the main objective. Drilling on, we encountered a huge secondary porosity, cavernous porosity in places, which gave quite demanding, challenging operational conditions, total losses in the mud system, for example. We drilled on to the main objective at the Middle Jurassic. We encountered traces of oil, light oil, again in microfractures.
So, if we stand back and look at this Cap Juby field, we now have to re-look at the Upper Jurassic. It's quite clear in the valuation we have a large structure, a large closure; we have large areas where the reservoir has castified its vagular huge secondary porosity potential. The mapped oil column is about 170 meters, 110 in the well but 170 meters across the structure, which is very nice to play for.
Our current estimates are somewhere between 150m to 200m barrels in place at the Upper Jurassic, which may lead to 30 to 50 resource potential. What we will be looking at is coming back at some point in the future with a lower cost rig and maybe looking at things, deviated wells or horizontal wells, to see what flow rates and what recoveries you may get from this field. The good news is that in 100 meters of water depth, on these commercial terms, even 20 meters of resource would be commercial.
The Cap Boujdour well is in what they call the southern provinces of Morocco, and that is 1b barrel prospect. We have 20%. The interesting thing there, and you can see from the map, it's a huge area, 30,000 square kilometers of acreage. If there were to be success with that well, there's tremendous running room for follow-up potential.
The rig, as I said, will be going shortly to Senegal. We've got at least two wells to drill in Senegal. We're looking at fan systems at the bottom of the Mesozoic shelf edge, and we're looking at dual objective prospects on the Mesozoic shelf itself.
So there's two stacked prospects and an exciting program you can see. You saw from the P&L inventory, you can see from these numbers, they're much larger than the numbers and the potential we were going for in Morocco.
The Blackford Dolphin rig, roughly July 1 is when we are aiming to be on location. This is a drill -- re-drill of the discovery that was made by Phillips in the early 1980s. It's quite clear that Phillips located the well not deliberately but through a fault plane. That only became clear subsequently with 3D data and analysis. We think this is a gas, high cal gas, with condensate and a lot of potential to feed into the Irish gas market.
If this well is a success, we are not planning to test this year. The assumption would be in the subsequent year, next year, ideally we would come in and drill an appraisal well on a separate fault block and do a test program.
If we look at the North Sea, UK North Sea, Norwegian Continental Shelf, Jann's gone through the development projects. We've also been busy in what I would call normal business portfolio management, a bit of rationalization.
The selling of Mariner, as Jann's already mentioned, gave a huge capital saving. We had a very small percentage interest and no influence, really, in that group. If we're not the operator, we always seek to have like-minded partners and equity at levels we can influence. That wasn't the case with Mariner.
We've relinquished some non-core exploration, tidying up the portfolio. But we've also been building a little portfolio particularly around the Skarfjell discovery which we made the year before last.
If you look at the illustrative production profile, at the base there, roughly, we've always spoken about we're trying to get to a 25,000 barrel a day sort of company and sustain that. And it's the cash generation from that sort of production at these sorts of oil prices that will be the engine for the exploration of the future.
Looking at the Skarfjell area, and if I can just point out, if you look at the postage stamp map at the bottom, that shows you the exploration portfolio that we had, or the equity interests just a year ago, and you can see the map today. We've greatly been extending quietly with transactions our position around Skarfjell.
Why? Well, you've got the second-largest field in the North Sea area, Troll, just to the south. To the north of it, the team that we acquired in Agora, formerly the Revus team, were responsible for many of the existing discoveries. They're in the zone, they have their eye in, and they came up with the Skarfjell discovery.
It's quite clear there's still outstanding prospectivity in that area, and the question is what is the hub for a hub and satellite development. And we believe, now that the appraisal of Skarfjell is more or less complete, that you have a project which is the hub, and now it's a question of finding additional prospects and fields that come in and tie in. So, for example, the Grosbeak, which was a stranded asset before, can be unlocked, the value can be unlocked and brought in through any Skarfjell system.
Again in Norway, having people on the ground, having an office in Stavanger, it gives you a knowledge edge position and we were successful with our applications in one of the last rounds.
So I think it's -- as it ever was with Cairn, we're focusing on organic growth. Thank you. Simon.
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Simon Thomson, Cairn Energy PLC - Chief Executive [4]
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Thanks, Mike. So, in conclusion, we're absolutely focused on resolving the tax issue in India. There is timing uncertainty. There is not a lot that we can say publicly, because there's a lot of commercially sensitive discussions that are ongoing. But we will update you as and when we can on developments in the situation.
In the meantime, notwithstanding the capital constraint that that imposes, we can and will deliver our exploration drilling program. And Mike's talked about not only the frontier basins, but also the exciting prospects that we have in the North Sea.
We're progressing our core development projects, which will provide cash flow going forward. And we're looking at cash flow in 2017 of roughly $500m to Cairn.
The continued strategy of our balanced portfolio and the optimizing and capital allocation are what it's all about. That is a portfolio that we have created over the last two years. It's a portfolio that we designed to be flexible, and it's a portfolio that is therefore delivering flexibility at the current time and can therefore deliver continued success, notwithstanding the current capital constraint.
And with that, we'd be happy to take questions. Thanks. Nathan.
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Questions and Answers
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Nathan Piper, RBC - Analyst [1]
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Morning, Simon. Nathan Piper from RBC. I just wanted to understand, you say you've got lots of flexibility but aren't you stuck? After the 2014 program which you've already committed to, is it fair to assume that with an ongoing unresolved tax situation in India you won't be drilling any exploration wells in 2014 -- 2015/2016 until you get some production from, say, Kraken and Catcher?
And is there maybe a wee bit of a Freudian slip on page 19, where you've got a lower working interest in Catcher than I think you actually have? And are you going to start selling some of your portfolio or changing your portfolio quite dramatically to refinance the business?
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Simon Thomson, Cairn Energy PLC - Chief Executive [2]
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I think the answer is no. We will not be in a position where we're not delivering exploration wells, whether it's 2015 or 2016. The design of the Company, as Mike said, we're exploration-led; we're looking to realize value from organic growth. So we'll always put ourselves in a position where we can deliver that exploration program.
Now, with the capital constraint, with $1b locked up in Cairn India, then we need to, as we say, cut our cloth to fit. So it may well be that you're delivering a program which isn't weighted towards high CapEx frontier deepwater operated exploration. It doesn't mean we can't participate in those wells, but it may not be in the same equity level going forward.
By the same token, we have quite a large presence now in Norway, where obviously there's a tax efficiency in terms of delivering exploration wells, and we've got a number of other North Sea assets and, as Mike says, a number of things, interesting things, in the Mediterranean which are lower cost.
Again, I come back to the design of the portfolio, we may reduce equities. We may, for example, as we've done with Mariner, sell some things, trade -- that's one of the reasons why we're in the North Sea; it is an active portfolio that can organically shrink and grow as we go on. But I think the whole design is yes, we will continue to deliver those wells. And I don't know about the Catcher mistake, but that was a mistake.
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Unidentified Company Representative [3]
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You're right. It should be 30%, page 19. Sorry.
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Nathan Piper, RBC - Analyst [4]
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Analysts are known for being rather pedantic. So to follow that one --
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Simon Thomson, Cairn Energy PLC - Chief Executive [5]
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Good spot.
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Nathan Piper, RBC - Analyst [6]
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To follow that one, but isn't your portfolio a bit skewed? So you've got producing assets and, as you say, you've got a great high-risk exploration portfolio which you perhaps can change the working interests of, but isn't there a lack of materiality in the middle? So although you have got a North Sea portfolio, aside from Kraken and Catcher, it lacks materiality and will you change that? There's lots of options in front of you, but is an option trying to get involved in a province where you can get a cash return on your investment more quickly than your currently offshore -- your offshore portfolio?
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Simon Thomson, Cairn Energy PLC - Chief Executive [7]
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I would say I'd take issue with the it's not material; I think it is. The Aragon well coming up is a 100m barrel prospect. You've seen the numbers on Skarfjell, for example. I think, sure, it's difficult to find that kind of size of resource base in the North Sea, but that's one of the reasons why we made a lot of effort to get and keep that Revus team because, as Mike said, they're very focused on particular areas and particular play types.
So I think we can, whether it's with a, for example, reduced equity position in the frontier basins, whether it's through North Sea wells, further Norwegian wells or Mediterranean wells, we can deliver materiality. And that materiality will be appropriate to the size of vehicle that we are.
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Nathan Piper, RBC - Analyst [8]
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One last one from me. With the Cajun Express rig, or looking at your 2014 CapEx number, is there any risk to the upside, i.e., if you drill more wells like Mike suggested, or are you committed to a rig contract which you must honor? Or what's the implications of the rig contract with Cajun Express, or is this how you want to flex your CapEx spend?
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Simon Thomson, Cairn Energy PLC - Chief Executive [9]
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Sure, yes. No, we're committed to that rig contract. We committed to that over a year ago and, as we' said, we will deliver on that rig contract. There's some leeway at the end of the second Senegalese well, and we're looking at a number of different options from the point of view of utilization of that rig, whether that's on our own acreage or elsewhere.
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Nathan Piper, RBC - Analyst [10]
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Thank you.
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Mark Wilson, Jefferies - Analyst [11]
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Mark Wilson, Jefferies. Can I ask, Jann, just to clarify a point you made before about finalizing debt facilities, you said before interim results or well before?
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Jann Brown, Cairn Energy PLC - Finance Director [12]
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Well before, yes.
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Mark Wilson, Jefferies - Analyst [13]
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So are you looking for both Kraken and Catcher?
And can I also ask how those discussions have changed since the freezing of the Indian share assets? And can that debt -- those discussions continue with that situation in parallel?
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Jann Brown, Cairn Energy PLC - Finance Director [14]
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Okay. So the plan always was to put Kraken and Catcher together into one facility. That just seems to make sense to us. It's diversifying the risk with the banks and that's the approach we've taken since we acquired them. I seem to have been saying for the past six sessions, we're going to introduce debt at the appropriate time and the appropriate time is definitely now.
Have the discussions changed? No, they haven't. The banks will always look for an appropriate level of equity, to make sure that you can cover not just the non-debt covered portion of completing the development projects but also your other activities. So, as long as we're comfortable that we've got that, it doesn't matter what the split of that is.
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Dan Ekstein, UBS - Analyst [15]
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Thank you. It's Dan Ekstein from UBS. It seems your partner's enthusiasm for drilling in Greenland has waned. Has yours?
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Simon Thomson, Cairn Energy PLC - Chief Executive [16]
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No. I think we still see, and I'm sure Mike can talk about how attractive we find the Pitu prospect, but the -- no, it hasn't waned. But I think we are in a good position, in that we don't have a commitment sitting out there. We do have the opportunity.
And it's true; our partners in a number of areas are focusing on their existing discoveries. But I would also say that there are a number of other parties in the region who are looking at the acreage, whether it's the surrounding acreage or elsewhere in Greenland, and working out plans for the future.
So I think we're actually in a good position, where we're not pushing to drill a well this year, for example, and we have flexibility to include it in our program in the future. And it's another example of an area where, when we talk about cutting our cloth to fit, it may not be appropriate -- depending on how long the situation lasts in India, may not be appropriate to be drilling that well at the current equity level. We'll see.
But Mike, do you want to talk about the prospect?
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Mike Watts, Cairn Energy PLC - Deputy CEO [17]
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Well, there's no -- I don't think there's any change from Statoil's technical view. They're on the adjacent block with Shell as a partner and they're privy to more information. And you know that collaboration with industry players is important. I think it's just timing. So, pretty cool.
But Simon's right. We've got a high equity, which gives flexibility. Mauritania, we've not mentioned Mauritania. We've got 35% in Mauritania. Maybe our plan would have been to increase. Now we can, in this new circumstance, look to perhaps reduce our -- I don't think there's anything unusual. We've had a discontinuity. We've had $1b frozen. We've got to run the business and I think we're capable of doing that.
And that's the exciting thing. We've built a flexibility into the Company. It's normal to transact, do deals. But you need ships, you need assets and you need a portfolio to be able to do these sorts of things. And that's what the last two years has been about, creating a rounded portfolio.
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Dan Ekstein, UBS - Analyst [18]
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Thanks. And then perhaps a couple for Jann. Could you tell me what the book value of the assets that were transferred to Cairn India was in 2006?
And then, we've had data points from the operators on Kraken and Catcher over the past couple of months. How's the cost profile evolved? Has that been in line with how you would have expected it when you did those acquisitions?
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Jann Brown, Cairn Energy PLC - Finance Director [19]
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So, the value of the asset base that was transferred to Cairn India, there are a number of different reference points. Maybe the one that you take is, well, what happened when you actually floated it in 2007, and that was around about $6b. But there are a number of different reference points before then.
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Dan Ekstein, UBS - Analyst [20]
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$6b wouldn't be the book value.
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Jann Brown, Cairn Energy PLC - Finance Director [21]
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Sorry?
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Dan Ekstein, UBS - Analyst [22]
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$6b wouldn't be the book value, though.
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Jann Brown, Cairn Energy PLC - Finance Director [23]
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The book value?
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Dan Ekstein, UBS - Analyst [24]
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Yes.
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Jann Brown, Cairn Energy PLC - Finance Director [25]
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No, it wouldn't be the book value.
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Dan Ekstein, UBS - Analyst [26]
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My question was on the book value of the assets you transferred.
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Jann Brown, Cairn Energy PLC - Finance Director [27]
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Right. The book value, well, again there were a number of steps, so it would depend on which one you looked at. And this is quite a complicated set of steps that you're looking at to consolidate. Our Indian business was held through a variety of Dutch, Australian, UK subsidiaries. We'd acquired them at different stages. Some of them were acquired before I even joined in 1998. And it was about consolidating all of that and putting it together into one sub-group, which would then be transferred to Cairn India and sold on.
So, it's not an easy -- you had to have an Indian corporation to list, which was why the reorganization. So it's not a question I can give a simple answer to.
So, the second one, about the cost base on Catcher and Kraken, Kraken's been pretty consistent. There's been no real uptick in that cost base. Catcher, there has been an increase in cost. Previously we were probably about neck and neck, what Kraken and Catcher were going to cost. Catcher has come up a bit, and that's part of the reason for the write-down, the impairment in the accounts today.
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Dan Ekstein, UBS - Analyst [28]
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Thank you.
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David Mirzai, Societe Generale - Analyst [29]
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Hi. David Mirzai with Soc Gen. One for you first, Jann. Just in relation to me trying to get an idea of where the Indians may be trying to find fault in what Cairn did with the Cairn India proceeds, you paid out -- you bought back, I think it was somewhere in the region of $1.6b to pay out to shareholders in 2007. Was any of that cash taxed in any way? Did it fall under any capital gains tax rules in India?
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Jann Brown, Cairn Energy PLC - Finance Director [30]
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It fell under capital gains tax rules in the UK, because it was the sale by an Indian company of -- sorry, it was a sale by a UK company to an Indian company of a sub-group with all the different jurisdictions I talked about. So the UK was the primary taxing authority because it was a UK seller, and it qualified for substantial shareholdings exemption in the UK. At that stage, there was absolutely no suggestion that the Indians had any taxing rights over a sub-group which included no Indian company.
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David Mirzai, Societe Generale - Analyst [31]
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And just a second question for you, Simon. I've always thought of Cairn as a fairly honest company. Your development of the Cairn India asset, I'm going to develop it and produce it this way; you achieved that. I'm going to return cash to shareholders; you've done that both through the special dividend and the buyback. I'm going to drill these wells; you haven't gone off, you've gone ahead and drilled them.
And you talk about, given the $1b you now have tied up in Cairn India, taking that into account in your future thinking, and I was just wondering, given a change in the industry environment and the way that other people look at deepwater offshore wells, through a matter of costs, through a matter of development, I appreciate your tax terms are quite good in Morocco but costs are getting higher. A lot of people are pulling back from expensive exploration wells. How has that affected your thinking, going into 2015? I appreciate you're committed for 2014 but --
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Simon Thomson, Cairn Energy PLC - Chief Executive [32]
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Yes, very good question. I think whether or not you had this capital constraint that's happened in Cairn India, the strategy would be consistent. We'd be looking to realize value from success and follow onto those things that we have the ability to follow on with. Mike talked about Juby, and there needs to be further work done there, but that could be a development, for example, that we could participate in in the future.
But you look at something like Senegal, which we're about to drill, I agree with you from the point of view of the cost bases. But nevertheless, if there's something that's sufficiently interesting, the likes of Conoco have farmed into it and we have strong partners. And I think you just need to look at the fact in Morocco there's, I think, 10 wells coming over the next 12 months, so there is still a lot of appetite for that region. And I think that does give us some flexibility when we look at our future interest levels.
Mike, I don't know if you want to comment on that.
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Mike Watts, Cairn Energy PLC - Deputy CEO [33]
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Well, just to add, the Cap Juby thing is in 100 meters of water depth, so it doesn't fit into that deepwater high cost which -- for this Upper Jurassic, which we always knew about and that's why Nautical went in there in the first place. What we were trying to do was add significant volumes and a much deeper objective.
But Senegal, we're at 40%. We have an agreement, like we have with Statoil in Greenland. We have an agreement with Conoco. If we make discoveries, Conoco take over the development. 40% with a major operator. You've got trading chips that you can do things with. That's flexibility. If we have a discovery, they come in. We could come down to 30%, 25%, 20%, realize money.
So it's difficult for you to -- it's not a static picture, an oil company. It's a living, breathing thing and you're trying to move. It's like the little example of the Norwegian situation. In a year we've moved it. Without rocking anybody, without shouting it from the rooftops, we've now got a little core area right across a number of assets around Skarfjell.
So you work your asset base, but if you start with a high equity you've got more flexibility. But where I totally agree with you, going forward, a shift of emphasis, let's say that rather than a complete change towards maybe even onshore again or shallow water is a natural thing to be doing for a smaller company. No surprise.
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Brendan Warn, Bank of Montreal - Analyst [34]
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Thank you. Sorry. Brendan Warn from Bank of Montreal. Just in terms of that comment of cutting the cloth and flexibility, how flexible is 2014 in terms of drilling in Senegal, if you see a situation where you need to preserve cash?
And just in terms -- to Mike, in terms of the Middle Jurassic, do we forget about that now in terms of your comments, or what's the other -- any other opportunities within your acreage?
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Simon Thomson, Cairn Energy PLC - Chief Executive [35]
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I'll now let Mike deal with that question. On the Senegal, we've designed it and we're -- to deliver that well and that's what we're going to do. So I think we've got commitment to rig. We've got partners. We've got commitments to governments and we want to drill these two wells. We do. We are excited by them. We see a lot of upside. And, as Mike's just mentioned, in the event of success, they are trading chips for us.
Mike, do you want to talk about --?
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Mike Watts, Cairn Energy PLC - Deputy CEO [36]
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Well, I think, like I tried to say, the issues with carbonates are varied because they're complex reservoirs, primary porosity, secondary porosity. What we didn't encounter in the Middle Jurassic was any significant primary porosity. Between the two reservoirs, literally, it was cavernous. We had, if you like, Wookey Hole down there. So if you have Wookey Hole filled with oil, that's the best you can get.
Now, I think for the Middle Jurassic, the shift of emphasis, and I'm prejudging months of work, the technical team will move up the block. We shot a 3D last year and you can already see on that 3D the seismic facies is indicative of a better primary facies of the carbonates, i.e., you may get grainstones rather than [wetstones] or whatever. So you may have an exploration target away from Cap Juby which goes through Middle Jurassic, and you may get primary porosity. And if you get secondary porosity as well, you're quids in.
So I think the shift, in my mind, is up to the Upper Jurassic. This well was not designed. We have two sets of casing; we couldn't test through there. We now have a good feeling over this large structure of the seismic facies, where it's calcified, where it's vagular, where it's tight and fractured. So you can come up with this 150, 200 in-place volume, but you need to come in with a lower-cost rig. You need to just drill for that horizon. You need to get flow rate.
So it splits into a Cap Juby Upper Jurassic. And further up in Juby Maritime, I think there's still exploration potential for the Middle Jurassic, going for primary porosity, based on the seismic facies.
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Jamie Maddock, Morgan Stanley - Analyst [37]
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Good morning. It's Jamie from Morgan Stanley. Sorry about that. Page 8, sorry, the -- with regard to Kraken CapEx, is the $500m to first oil, is that including a carry?
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Jann Brown, Cairn Energy PLC - Finance Director [38]
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That's not to first oil. That's to the (multiple speakers).
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Jamie Maddock, Morgan Stanley - Analyst [39]
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Sorry, to end 2017.
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Jann Brown, Cairn Energy PLC - Finance Director [40]
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To the end of 2017, which is our proxy for free cash flow. And that's after the carry.
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Jamie Maddock, Morgan Stanley - Analyst [41]
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After carry. Okay. And then the second one, what type of debt can you get in the current market when you have no cash flow?
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Jann Brown, Cairn Energy PLC - Finance Director [42]
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You can get project finance for the specific developments, either an RBL or a term loan. So you don't need production for that.
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Jamie Maddock, Morgan Stanley - Analyst [43]
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So all interest repayments are just rolled up and bundled into a term loan?
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Jann Brown, Cairn Energy PLC - Finance Director [44]
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Into what's coming out of the actual asset, which is why you need a really strong technical bank who understands what the reservoir's actually going to do. Luckily, there are a number of them.
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Jamie Maddock, Morgan Stanley - Analyst [45]
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Are there any examples that you would highlight in the market at the moment, either in Europe or globally, of that sort of lending facility?
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Jann Brown, Cairn Energy PLC - Finance Director [46]
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Gosh, I hadn't thought of that. No, but I'll come back to you on that.
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Jamie Maddock, Morgan Stanley - Analyst [47]
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Thanks.
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Tom Robinson, Deutsche Bank - Analyst [48]
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Thank you. It's Tom Robinson from Deutsche Bank. Just on Cairn India, please, I appreciate that you can't disclose a great deal of information in this -- probably in this forum, but if you could talk a little bit more about the process. What level of communication do you have with the Indian tax authorities and what is your ability to influence the outcome of the investigation?
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Simon Thomson, Cairn Energy PLC - Chief Executive [49]
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Well, I think we are very limited in what we say, and I'd never say that we have an ability to influence. Put it that way. But I think what we can do and what we have done are extensive interactions, not just with the tax authorities but with a number of different parties. Again, I don't want to talk in too much detail about it, whether that's in India, though, or the UK. And position ourselves as well as we can from the point of view of presenting our case and presenting why we don't think that this is applicable to us.
Jann, I don't -- the trouble is there's very little that we can add.
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Mike Watts, Cairn Energy PLC - Deputy CEO [50]
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Well, I would say that nobody's got the time or inclination to look at this now. There's an election going on in the biggest democracy in the world. And until June, that's what everybody's focused on in India. So that's reality.
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Tom Robinson, Deutsche Bank - Analyst [51]
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Maybe just a follow-on, then. Is there a hard date that you're willing to share with us where you will present your case?
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Simon Thomson, Cairn Energy PLC - Chief Executive [52]
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No. No, there isn't, because I think, as Jann said, basically there's been a request for information. There are some timescales attached to that in relation to the provision of information, but there is then no particular timescale in relation to what happens next, or rather an open timescale. So I think it would be misleading of us, potentially, to give you an on this firm date this might happen or on this firm date this might happen.
I think -- I appreciate that that's a very unsatisfactory answer, but as I said at the beginning, believe me, there is no stone unturned in relation to our approach. And we're looking to resolve this as soon as we possibly can. And we're hopeful for early resolution, but we can't give certainty of that. I'm sorry.
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Tom Robinson, Deutsche Bank - Analyst [53]
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Thank you.
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Unidentified Audience Member [54]
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Hi. I just had -- first question, looking back at the acquisitions you've done, I suppose around the UK North Sea in the last few years, just wondering if you can give a bit of a post mortem of those acquisitions, because we've seen today some significant impairments. If you look back over 2012/2013, you've had eight dry holes in the area. Just wondering, if you look back to the time of the acquisition, how you've seen those proceed versus your expectations.
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Simon Thomson, Cairn Energy PLC - Chief Executive [55]
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Yes. They've gone up in value. The trouble is that you write down but you don't write up in accounting rules. So we're very pleased. We remain very pleased with these acquisitions. They're the right ones for us. It's the right asset base. It's a mix of assets. It's a great team, great group of people. And we believe we've made a lot of progress.
Jann, I don't know if you want to comment particularly on the values or anything else.
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Jann Brown, Cairn Energy PLC - Finance Director [56]
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Well, Simon's right. What you do is when you acquire companies, you look at the whole suite of assets you bought and you have to ascribe parts of the consideration to each of them. Over time, the ones that go up from your initial estimate, there's no adjustment to the accounting. But the ones that come down, like Catcher has on the cost that we talked about earlier and aligning our resource base in line with the operator scale development plan, although we still think there's more to chase there, the ones that come down you have to write down.
So, as Simon said, overall, we're pleased that we're ahead of the game, but that doesn't necessarily translate into accounting.
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Unidentified Audience Member [57]
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Okay. And I had a second question, more focused on the Senegal exploration. Going back over the last few years, it seems like the success up and down the West African Transform Margin's been somewhat mixed. Where you have had discoveries, a lot of them have been non-commercial due to the depth of burial, the reservoir quality being maybe good but not excellent given the -- so the economics don't work, given the cost to drill these wells at the moment.
I was just wondering, when you look at the Senegal acreage, what gives you confidence that you're going to have that excellent reservoir quality that's going to give you 10m barrel recoveries per well that you need to justify commercial development at the moment?
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Mike Watts, Cairn Energy PLC - Deputy CEO [58]
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Well, it's a question for us, a question for Conoco as well. There's no data off Senegal. These are the first deepwater wells. But if you start looking at what Statoil have done off Newfoundland last year, largest discovery they've had outside of Norway deepwater, there's indications on this play that there's huge potential. But this is exploration. You can have a view and you can hypothesize, but you need to go out and perform on the pitch and score. And that's what we need to do. We need to go and drill a well.
So we can position it. You can't remove the risk. But we look at these prospects having multiple stack plays. We've simplified it, if you like, to just a couple, but there's multiple stack plays. Yes, reservoir risk is a risk, and that's what you factor in.
I think the encouraging thing from an exploration point of view is you need to be knowing that you've been generating oil in the first place, and I think that part of the puzzle we're comfortable with. But it's always been reservoir. The interesting thing is we've got some structural, we've got pinch-outs, you've got everything you need, but you have to drill a well. And you can hypothesize all you like, but you have to drill.
And we're in the business of drilling. Like I say, Conoco farmed into the block. They wanted more equity. They're at 35%, we're at 40%. We've got a transaction they can get more in the success case. They can take over the operatorship. I don't think we've done anything wrong.
We've drilled one well in Morocco that didn't come in, and like I say, we need to evaluate. You've got massive, thick sands, clastics on the shelf in the Tan Tan delta. Did they stay there or did they roll down the coast? They didn't stay on the slope. They may have pondered against salt domes further down. That's a very deepwater play. Chevron are playing it just in the adjacent block to us.
It's normal business that you have to go and gather data and reinvent and come up with new theories. The idea that you can just have an exploration program and guarantee success is not reality. You need to be in a mature province and then you just don't get the rewards.
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Unidentified Audience Member [59]
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And just my final question, just on Greenland, I heard from Statoil that they were looking at pulling out or pulled out of their licenses. So you're saying that they're still in the license for the time being?
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Simon Thomson, Cairn Energy PLC - Chief Executive [60]
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Well, the question I think was Daniel's over here. Technically, I think they have not changed their view. Technically, this is -- the Pitu prospect is a great prospect.
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Mike Watts, Cairn Energy PLC - Deputy CEO [61]
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And correct, they're selling the license. What other issues, and Simon's alluded to them, are that -- Statoil clearly have had a lot of success, a lot of development projects, a lot of exploration success. They're having to rank projects now in a way that they perhaps never did in the -- they used to do everything, develop everything. And therefore they've had a massive discovery off the coast of Newfoundland, for example. So there may be other factors which are not close to us.
But the question was do we still believe in that prospect. Yes, we do. Giving ourselves more time is of benefit in this particular case because, as Simon says, 56%, 57%, or whatever we have, we've got flexibility to maybe do another transaction there.
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Unidentified Audience Member [62]
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Okay. Thanks.
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Simon Thomson, Cairn Energy PLC - Chief Executive [63]
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Behind you. Sorry.
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Rafal Gutaj, BofA Merrill Lynch - Analyst [64]
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Rafal Gutaj from Bank of America Merrill Lynch. So just two quick ones. On Catcher, what has changed in your internal modelling assumptions, aside from costs, that led you to take the $250m write-down there?
And then also, just coming back to Cairn India, I'm sorry to dwell on this, but is there any precedent we can look to on whether interest would be charged on any potential capital gains liability, because I guess Indian tax rates, going back to 2006, that could be very material?
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Simon Thomson, Cairn Energy PLC - Chief Executive [65]
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I'll let Jann answer both.
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Jann Brown, Cairn Energy PLC - Finance Director [66]
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Okay. So second one first. There are no precedents. This is new legislation of 2012. There's absolutely no sensible precedent about anything, including interest. So I can't point you to anything on that.
And the first one was on Catcher. We've talked about costs and the other side is we've brought our resource estimates in line with those used in the draft field development plan that's gone into DECC. That doesn't mean to say that we don't think there's more to play for, but that's what we've done.
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Simon Thomson, Cairn Energy PLC - Chief Executive [67]
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Yes. I think that's the point. We still have higher -- internally have higher numbers that I've alluded to. There's prospects around Catcher. We're not the operator and we would have done this slightly differently before having a feel -- there's more things to drill before you decide. We are where we are. We've gone, as Jann says, with the FTP and the operator.
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Rafal Gutaj, BofA Merrill Lynch - Analyst [68]
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Yes. Thanks.
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Thomas Martin, Canaccord - Analyst [69]
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Thomas Martin at Canaccord. First one was just on the Catcher. Can you tell us what oil price you're using in that impairment test?
And second one was related to Indian tax. You highlight that you've had a request for information in January 2014, and there's some reporting overnight that may or may not be correct that seems to suggest that there hasn't been much or any dialogue yet. Can you just tell us if you have responded to that request for information? Is the dialogue ongoing or are we still at step one?
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Jann Brown, Cairn Energy PLC - Finance Director [70]
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So, answer to the first question is 90m -- $90 is the oil price we use for our internal accounting assumptions.
And the answer to the second question is there is interaction between our advisors and the tax department, but it's mainly at this stage discussing giving us more time, given that the request goes back to files that are pretty old, to give us more time to dig out the information that they've asked to see.
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Thomas Martin, Canaccord - Analyst [71]
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Thanks.
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Simon Thomson, Cairn Energy PLC - Chief Executive [72]
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Okay. I'm conscious of time. Any more questions? No? In that case, thank you very much indeed for joining us. Thank you.
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