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Edited Transcript of CNE.L earnings conference call or presentation 10-Sep-19 8:00am GMT

Half Year 2019 Cairn Energy PLC Earnings Call

Edinburgh Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Cairn Energy PLC earnings conference call or presentation Tuesday, September 10, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Hathon

Cairn Energy PLC - Director of Exploration

* James Donald Smith

Cairn Energy PLC - CFO & Executive Director

* Paul Joseph Mayland

Cairn Energy PLC - COO

* Simon John Thomson

Cairn Energy PLC - CEO & Executive Director

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Conference Call Participants

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* Al Stanton

RBC Capital Markets, LLC, Research Division - Analyst

* David Matthew Round

BMO Capital Markets Equity Research - Oil and Gas Research Analyst

* James Carmichael

Macquarie Research - Senior Analyst

* James Thompson

JP Morgan Chase & Co, Research Division - Analyst

* James William Hosie

Barclays Bank PLC, Research Division - Research Analyst

* Matthew Cooper

Peel Hunt LLP, Research Division - Analyst

* Michael J Alsford

Citigroup Inc, Research Division - Director

* Thomas Henry Martin

Numis Securities Limited, Research Division - Analyst

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Presentation

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [1]

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Okay. Morning, everybody, and welcome to Cairn's results presentation. I'm Simon Thomson, Chief Executive. With me are James Smith, CFO; Paul Mayland, COO; and Eric Hathon, Exploration Director.

So as in usual way, we've got a presentation to run through with you this morning, and we'd be happy to take questions at the end. It is being webcast as usual, so there will be microphones available. If you have a question please state your name before asking it. I think everybody's been in this room before, but in the event of a fire alarm, you can see the exit sign there and the muster point is outside in the square.

Okay. Turning to the first slide. We believe that Cairn today can create, add and realize value for shareholders on a sustainable basis through a combination of these 3 things: the full-cycle E&P business that we have built, our focus -- continued focus on capital discipline and active portfolio management and the offering of multiple catalysts for shareholder value.

And looking at each of those in turn. The full-cycle business has the financial flexibility to deliver all of our strategic objectives. So we have significant headroom available through a combination of cash and a largely undrawn RBL facility. As you know, we have strong cash flow through improved production. You've seen improvements at Kraken and also continued excellent performance at Catcher. We've got reduced production costs, and we have an accretive hedging program.

In terms of the next point, capital discipline and active portfolio management. You've seen the Nova farm-down, the Chimera farm-down and also the asset swap with ENI in Mexico, and all of those, I think, evidence our strong desire to realize and redeploy value within the portfolio. And it's something we will keep on doing.

And in terms of the last point there, in the multiple catalysts for shareholder value, that's through the remainder of this year into 2020 and beyond. So as we said in the statement today, SNE FID will be later this year, and we're about to enter a very exciting period of exploration activity. So we'll shortly spud the 150-million barrel Chimera well, which I mentioned earlier in terms of something that we recently farmed-down a little bit of. That's a Cairn-operated well, and it should spud towards the end of this month. Soon after that, we will commence a 4-well program for 2019 in Mexico, targeting over 0.5 billion barrels. And there will be further wells in Mexico already planned for 2020. So very active exploration program.

And in addition, in terms of catalysts, we obviously await the decision, the outcome from the panel in terms of the Indian arbitration. There's no update there other than to say we remain just as confident in terms of the merits of our case.

Okay. Before I hand over to James, a few words on core values. I guess we've probably been presenting here at Lincoln's Inn Fields for over 15 years. It's something that I can remember. And each time when you come in, you see posters and video like today, and they're always focused around our core values, the 3 Rs: give and earn respect, build relationships and behave responsibly towards the environment. And on that latter point, we obviously recognize the requirement for energy transition, and we also recognize the important role that companies like Cairn will play in terms of continued energy security. We all need to do that in a way that is safe, that is transparent, that is compliant and that is efficient. But it is something that we continue to need to do.

And so I'm just looking at -- a little bit more detail on that. We obviously don't operate our production today in terms of Kraken and Catcher and also Nova when it comes on. But all of those fall under the EU Emissions Trading Scheme, which reduces emissions year-on-year. And it's worth noting that membership of that scheme will result in a 43% overall reduction in emissions by 2030 over 2005 numbers. So significant reductions. We're aligned with the task force on climate change of financial disclosures (sic) [Task Force on Climate-related Financial Disclosures] and indeed are working closely with BRINDEX in relation to a coordinated response on that. We're committed to the UN Global Compact, EITI and also the performance standards of the IFC.

But I think the important thing to emphasize is that that's not something new. It's something that we've always done. So when the Board and when we look at making decisions, we always come back to the core values, all of those core values, in terms of anything that we try and do to create further shareholder value.

And on that value point, I'll hand over to James.

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [2]

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Thank you, Simon, and good morning, everyone. So what I'd like to do over the next few slides is, firstly, to look at our performance during the first half; secondly, have a review about what that means for our guidance for the full year; and thirdly, to set out the strong position that puts us in to take the business forward and to deliver key value catalysts.

So let's start with operating performance during the first half of the year. Net production, as you will see, is strong relative to guidance, averaging 23,700 barrels a day. That's up 15% on the previous 6 months and 65% on the same period last year. Our average crude realized price was $68 a barrel, and that resulted in first half sales revenue of $257 million. It's worth noticing that Brent prices averaged $66 in the first half, so that's obviously a very strong story in terms of crude marketing for both Kraken and Catcher.

Average production cost was actually just a little below $17 a barrel. That's significantly below our original guidance of $20 a barrel for the year. And that, together with the realizations, has resulted in a strong operating cash flow result of $200 million for the first half. And from that, we report an operating profit for the period of $60 million, reflecting the successful delivery of our balanced portfolio model.

So if we look now at how that's influenced our guidance for the full year. Production has continued to remain strong through Q3, and as consequence, today, we're upgrading our full year production to -- guidance to 21,000 to 23,000 barrels of oil a day. And we're reducing our expected production cost guidance from $20 down to $18 a barrel.

In terms of hedging, as you can see, we've hedged about 40% of our expected second half production this year with a floor price of $67 a barrel. And so far, we've hedged about 6,000 barrels a day of next year's production with a floor price of just over $62 a barrel Brent.

I'll move on now to reconciliation of cash flows during the first half. And as you've seen from today's financial statements, drawn debt reduced from $85 million to $60 million during the first half, and therefore, our net debt position reduced effectively to 0 as of the 30th of June. The large blue bar on the left there shows cash inflows received during the period, operating cash inflows from Catcher and Kraken of $177 million. And there was a working capital increase during the period of just over $20 million. So that reconciles to the reported $200 million operating cash flow from hydrocarbons produced in the first half.

The first 3 orange bars there show cash CapEx outflow during the period by category totaling $135 million, or that's $121 million net of the Norwegian tax effect, which is effectively the drawing on the exploration financing facility of $13 million, which you can see at the top of the chart. So as you can see, within that, exploration CapEx net of tax in the first half was about $56 million, and around $7 million net related to the 3 Norwegian well drilling program, which is now completed. So overall, full year CapEx guidance remains in line with previous guidance in the beginning of the year, and I'll come on to that in the next slide.

And then just to finish off here to the period close. Other cash outflows related to new ventures, admin, financing, other costs and the repayment of debt of $25 million, which took us to the mid-year cash position of $58 million.

So as I said, and as you can see, the updated CapEx estimates for the full year remain in line with our previous guidance, and in fact, come in slightly lower despite including a broader exploration program. So starting at the top here. Capital activity on Catcher and Kraken is relatively limited this year at $25 million, and the bulk of that relates to completion of the DC4 drilling on Kraken earlier in the year, now completed.

On the development assets, as we've previously noted, we sold half of our interest in Nova to Oranje-Nassau Dyas with an effective sale date of the 1 January this year 2019. So that resulted in a proportionate reduction for the full year CapEx forecast down to $35 million.

Then on SNE, obviously project definition and engineering work continues prior to FID expected later this half. We submitted an updated development plan for the government on completion of FEED a couple of months ago, and significant progress has been made with contract awards, which Paul will come on to talk about. And so our full year costs in relation to this activity for 2019 are forecast at $70 million.

On the exploration side, the capital program for the year remains in line with guidance, the key activity in the second half being the Chimera well in the U.K. and what is now a 4-well program in Mexico following our license swaps with ENI into Block 10. So that's effectively an expanded drilling program, whilst expected capital costs have remained the same.

And then finally, we also have early-stage work -- or earlier-stage work in [data] acquisition in preparation for potential future wells in Nicaragua, Côte d'Ivoire and Suriname. So total capital program for the year, $295 million, against previous guidance of $300 million.

So before I hand over to Paul, just to reiterate some of those main points. Production levels and cash flow realizations for the North Sea were strong during the first half, and we expect them to continue as such at similar levels for the balance of the year. With outperformance and the prevailing oil prices, we'd expect to end the year again with minimal leverage, putting us in a strong position to continue to deliver our active capital program.

Obviously, the key focus for the second half year -- the second half of this year will be on Senegal. Significant progress has been made on project definition, and we're now working with the joint venture, with the government and with the lending group we've appointed to finalize financing and take FID later this half.

We're always considering active portfolio management in order to allow us to optimize our capital allocation decisions. On the exploration side, we farmed-down our paying interest in the upcoming Chimera well to very low levels whilst maintaining a material equity position in the well. We swapped licenses in Mexico in order to gain exposure to additional attractive drilling opportunities. And then on the development side, selling down half of our interest in Nova into an attractive asset market has materially enhanced our liquidity position for reinvestment elsewhere in the portfolio. And in that same vein, we'll continue to assess our equity positions across the portfolio as we make investment decisions in the future.

So overall, the balance sheet and the asset base is strong, and that allows us to deliver a series of material value catalysts as we move forward. And we'll continue to actively manage both of those in order to allocate capital to the highest potential return and to maintain a balanced asset portfolio.

And on that, I'll hand over to Paul.

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Paul Joseph Mayland, Cairn Energy PLC - COO [3]

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Thanks, James. Good morning, everyone. I am to talk through the U.K. production results in more detail, and I'll update you on progress on our developments in Norway, but particularly SNE and Senegal.

I'll start with some additional details on our U.K. production where we're pleased to upgrade our full year 2019 guidance from 19,000 to 22,000 barrels of oil per day, as outlined in March, to a revised position of 21,000 to 23,000 barrels of oil per day. This incorporates a recent planned shutdown in August on Catcher for gas treatment upgrades. And this revised production guidance has been driven by 3 factors: Firstly, the Catcher FPSO has performed fantastically well in its second full year of operation, with production efficiency in excess of a designed basis of 95%. Secondly, in May 2019, the Catcher joint venture was able to agree with a Catcher FPSO provider on a commercial basis that allows a framework for sustained production above the nameplate FPSO capacity. And therefore, we can consistently produce at the levels that we've seen recently of 66,000 barrels of oil. And finally, we've seen a step change in production efficiency on the Kraken FPSO such that it's been much improved in 2019 versus 2018. And in the latter part of the first half, with both process trains on-stream, production efficiency on that asset exceeded 80%.

So we now move on and discuss the individual progress and plans for both fields. So Catcher averaged oil production of approximately 13,300 barrels of oil per day net to Cairn in the first half. The Catcher area production data continues to demonstrate good pressure support provided by aquifer and injector wells and generally excellent continuity. In addition, the field GOR is relatively stable, and water cut remains at low levels, below 10%. And therefore, we anticipate a small reserves increase at year-end 2019, assuming the water cut development follows a forecast trend.

Additionally, the joint venture has supported the Laverda and Catcher North satellite field developments, and 4 more approval from the Oil & Gas Authority was granted last week. The reserves associated with these discoveries will also be booked at year-end.

A key element associated with these developments was reaching an equity equalization agreement within the joint venture in July with Cairn as a key catalyst farming down from 36% in Laverda to 20%. These 2 satellites will come onstream in the first half of 2021 and will preceded by a single infill well on Varadero in the second half of 2020. A strong appetite remains in the European market for this medium-grade, sweet Catcher crude.

So next, Kraken, which averaged approximately 9,600 barrels of oil per day net in the first half. 3 drill center 4 new wells were hooked up and commissioned in March 2019, adding 2 new producers and 1 new injector to the overall well stock. Subsequent well testing in May confirmed the gross well production capacity in excess of 47,000 barrels of oil per day. Reservoir field performance indicates that the field water cut has stabilized and is averaging around 60%. And well potential was improved due to the better voidage replacement in the central and southern areas of the field and the stabilized water cut.

Further investment is also planned on Kraken in 2020 with a drilling of a single producer and injector from the drill center 2 template to an accumulation west of Kraken called Woodside. The reserves associated with this area will be booked at year-end, and these wells are expected to come online in the second half of 2020. The inventory management of critical spares by the operator has helped to contribute to the improved uptime, along with more rapid response to trips by the FPSO contractor. As I've already stated, we look to see further improvement in the FPSO performance in the coming period.

The Kraken crude pricing has continued to strengthen, both in light of the current heavy oil market dynamics and a good understanding of the crude's characteristic by a global set of buyers.

So we will now move on to our SNE project in Senegal. And as a reminder, we are progressing towards final investment decision of Phase I, which involves development of 230 million barrels from a combination of lower S500 and upper S400 reservoirs. This is likely to be followed by further stages of both gas and oil development by extending the subsea infrastructure, installing gas export facilities and drilling further oil, gas and water injection subsea wells beyond the initial 23 wells envisaged for Phase I.

2019 has indeed been a busy year for the project. A high-resolution 3D seismic survey commenced in July to enhance definition across the field, particularly the S400 sands and potentially may become a baseline survey for a future 4D survey. The updated exploitation plan, including the findings of FEED, has been submitted to the government and is being reviewed. We anticipate costs will continue to reduce for the current scope, and at the point of FID, to be below $3 billion. And as a reminder, the Environmental and Social Impact Assessment associated with the project has already been approved by the government.

Excellent progress has been made on the drilling side too. Earlier in the year, we awarded the drilling rig contracts to Diamond Offshore for the provision of 2 deepwater drillships: the Ocean BlackRhino, currently operating for Hess in the U.S. Gulf of Mexico; and the Ocean BlackHawk, currently operating for Anadarko in the same area. These modern units are 5 years old, have a very strong operational track record and have a unique feature, whereby the BOP manufacturer operates and maintains the pressure control equipment on a leased basis. And these contracts are well spaced and will commence in early 2020 and 2022, respectively. The drilling and completion services contracts have also been awarded and split between drilling, formation evaluation and sand-phase completion to Halliburton and upper completions to Baker Hughes.

Both front-end engineering and design studies have progressed well with the full support of the joint venture. The subsea FEED was awarded to SIA in late 2018, and this work is now essentially complete. With riser pipeline and subsea production systems' technical deliverables in the process of being closed out, and manufacturing slots allocated to protect delivery of long-lead items to support the start of drilling operations. All flow assurance studies associated with the subsea production system are now complete.

The FPSO FEED was awarded to MODEC in early 2019, and this scope has progressed well. The tanker for conversion has been identified. It's a sister vessel to recent MODEC conversions, which inspected last year. And as a double-hold VLCC, it meets our basis of design for storage requirements. A VLCC also has a much larger surface footprint for future facilities expansion. Request for quotations or call for bids have been issued to all the main process and utility packages, along with the shipyard conversion work and subsequent integration and commissioning of this 100,000 barrel oil a day capacity FPSO. And as you can see, the project has progressed well with all of the key components now essentially in place, sitting with Tier 1 contractors familiar with executing projects of this nature in West Africa.

Let's now move on to Nova in Norway. And you'll be familiar with many of the details on this slide, so I don't intend to go through them all. Although we've reduced our stake, we continue to actively monitor progress and remain fully engaged on the project. This summer saw the preparation for modifications on the Gjøa host platform and a very successful subsea pipeline -- sorry, subsea campaign. Two subsea templates were installed before laying 65 kilometers of pipeline and 20 kilometers of control umbilicals. Next year, we'll see the dedicated Nova module installed and the start of development drilling using the West Mira rig for the drilling and completion of 6 planned development wells.

And on this positive note and with a backdrop of improved production guidance from our U.K. assets and very strong strides towards FID being made in Senegal regarding our SNE oil and gas project, I will hand over to Eric.

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Eric Hathon, Cairn Energy PLC - Director of Exploration [4]

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Thank you, Paul. Good morning, everyone. The watchwords for our exploration program are active and dynamic, as I'll explain. But our core values have not changed. We pursue and execute quality material opportunities while maintaining exposure to potential game-changing prospects in order to add significant value for shareholders. There are multiple catalysts coming up in our drilling program in countries with good fiscal terms, a variety of play types and in multiple basins. We accelerated our exploration program in a strong way in 2018 on the heels of our very successful appraisal program in Senegal. And we will continue right through 2020 and beyond, with the goal of demonstrating the NAV growth we have committed to.

We have a robust drilling schedule both this year and next. We're in the midst of what is now an 8-well drilling campaign in 3 countries, and 5 of those wells are operated by Cairn. We built an attractive portfolio in Latin America, with Mexico the focus of drilling now. We're progressing opportunities in West Africa with newly acquired seismic data and have expanded into the Eastern Mediterranean with an operated entry in offshore Israel. In Europe, we completed 3 exploration wells in Norway without incident, and we are preparing to spud the Chimera well in the U.K. As I said, active and dynamic.

Now we've completed our drilling program in Norway for this year and unfortunately did not find hydrocarbons. Now all 3 wells were targeting very material volumes, but they were higher-risk prospects focused on either unproven plays or trying to push proven plays into new unproven areas. And given the attractive fiscal regime for exploration in Norway, it is the ideal place to take additional risk while trying to expand the proven play portfolio. So while an unsuccessful campaign in terms of hydrocarbons, there were no health, environment or safety issues, and our first 2 operated wells in Norway were completed ahead of time and under budget.

Now let's move to the U.K. The Chimera well is planned to spud this month, and this prospect has material impact potential. Now as I've talked about before, it is a new play in a proven reservoir interval. It's targeting stratigraphically trapped Heimdal sands, which really are only invisible on modern 3D seismic, which took special processing and attribute analysis. Now this prospect certainly has risk. It is a stratigraphically trapped prospect. But first Suncor, and now, DNO have chosen to farm in, which adds confidence to our thesis. And we should know the results in a month or so give or take. And in the last U.K. lease sale, we picked up the adjoining acreage, which you can see here, so that in the event of success, we have follow-on exploration potential, which, as I've said many times, is one of our consistent themes, the ability to move on with success.

Now let's focus and switch to Latin America, where we continue to build a mature and exciting program. Now as you've already heard, we've increased our position in Mexico and are on the verge of starting our drilling campaign. In Nicaragua, we have worked with our partner, Equinor, to mature multiple interesting prospect and leads on newly acquired seismic, with the possibility of a well as early as 2020. Offshore Suriname, we have acquired over 4,500 line kilometers of 2D seismic on our offshore block, and we're working up opportunities there.

But now let's talk about Mexico. Mexico is clearly a country which has multiple exploration catalysts for us. As you all have heard, we are now in 4 blocks with our entry in ENI's operated Block 10, giving us 4 wells between now and the end of the year. Now Block 10 has clear synergies for both Cairn and ENI. Some prospects that you'll see straddle the block boundaries, and this enhances a hub-and-spoke concept of pulling multiple fields together as we have numerous targets to chase. And we're particularly happy to enhance our relationship with ENI, which, as you know, is the first IOC to bring on production in the basin.

Overall, we're targeting over 700 million barrels of gross unrisked resource across our 6 commitment wells in these 3 blocks. Now the schematic you can see at the bottom of the slide gives you a view of the variety of play types and the different aged sands which we're targeting, and the line is anchored here on the east by the world-class Zama discovery. In addition, the Murphy-operated Cholula oil discovery sits due north of our block up here. So we're definitely in a good address to find hydrocarbon.

Now let's turn to the prospects. In Block 9, which you see on the left here, the Alom well is expected to spud by the end of the month using the Maersk Developer. Alom is targeting multiple stacked sands with potential direct hydrocarbon indicators. Now these sands are slightly younger than the well-known Zama discovery to the east. Now the Bitol well, shown on the right, will directly follow Alom and is targeting multiple intervals from that proven Upper Miocene zone that Zama found all the way down to largely untested Lower Miocene and Oligocene sections. So in essence, we're drilling a frontier well but in a proven oily basin.

Now let's take a look at our nonoperated prospects. ENI plan to spud the Ehecatl well in Block 7 in November, following the Saasken test in Block 10. Ehecatl is a very robust structure, being a 3-way trapped against salt. It is targeting also Lower Miocene sands, which again, have been rarely penetrated in the basin. So success here will open up a whole new play. Now in Block 10, as you see on the right, the Saasken prospect should also spud this month. It has moderate volumes but robust hydrocarbon indicators on seismic in the Upper Miocene. And this represents a quality tieback candidate to any potential hub in either Block 9 or Block 10. So across our acreage position in Mexico, we have the potential for multiple combinations of hub-and-spoke developments, which adds flexibility and enhances our chances of commercial success.

Now while our focus has been on the active drilling campaign, and remember, we'll likely have 3 wells drilling at the same time between now and the end of the year, we do continually and aggressively evaluate other leasehold. We remain very active in Africa. Our analysis offshore Mauritania on new 3D seismic is ongoing. In Senegal, as Paul said, we're in the midst of requiring a high-resolution 3D [multi] seismic survey, which will not only be instrumental in the development campaign but will also be used to mature other potential exploration targets. And in Côte d'Ivoire, the operator, Tullow, plans to begin 2D seismic acquisition over our 7 onshore blocks in the coming months. And recent fieldwork there has demonstrated the presence of active oil seeps on our block.

And in our latest addition to the portfolio as I've said, we entered the Eastern Med being successful in the second Israel offshore bid round, which closed in August. We're operator of 8 licenses, which cover over 2,700 square kilometers. We're chasing both Tamar-like sandstone plays and Zora-like carbonate plays. And our initial commitment of seismic reprocessing here is modest. And this represents a good example of that long-range thinking, where we have things that may mature into future drilling targets some time out.

So in conclusion, I want to leave you with this. We have multiple, near-term exploration catalysts in our drilling portfolio, while we continue to mature other opportunities across a variety of plays and prospective basins in countries with attractive fiscal terms. We have a strong multiyear opportunity set in front of us, and we're continually screening for additional potential game-changers. We are as capable as any operator of drilling wells safely, effectively and in a way which protects the environment. We certainly have exciting times ahead for exploration at Cairn.

And with that, I'll return it to Simon.

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [5]

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Thanks, Eric. So as you can see, we are, as Eric has just outlined, well positioned as a company to deliver a catalyst-rich portfolio across a full-cycle business. That's through the remainder of this year into 2020 and beyond. And as Eric has outlined, we're building further option value in terms of further exploration activity out into the long-term.

And I think the other point to reiterate is that that is all underpinned by our full-cycle business, underpinned by balance sheet strength and by financial flexibility and underpinned by continued focus on capital discipline and on active portfolio management, of which you've seen evidence over the last few months, on which you will see further evidence in coming months and years.

We believe that we do offer shareholders multiple catalysts for value creation in the near and medium and longer term, and we look forward to reporting further news flow to you through the remainder of this year.

So with that, I'd like to hand over to any questions.

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Questions and Answers

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Matthew Cooper, Peel Hunt LLP, Research Division - Analyst [1]

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Matt Cooper, Peel Hunt. Two questions. So first one on the updated SNE development plan. Just wondered if you could give a bit more detail on that. Is there are any CapEx implications or production profile implications? And then the second question, of the 4 wells you're drilling in Mexico this year, do any of those have flat spots or amplitude conformance to structure?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [2]

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So Paul, do you want to deal with the first one, then Eric?

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Paul Joseph Mayland, Cairn Energy PLC - COO [3]

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Yes. Sure. The SNE exploitation plan update is fairly simple, to be honest. There have been a few refinements, but I would say nothing material. And it's really just to incorporate the findings of FEED, which is a request from the government in terms of some of the design basis, some of the layouts and some of the additional details that came out of those front-end engineering design studies, including the layouts of products and so forth. But there's no sort of material changes to the reserves, the production forecast, and at this stage, the cost, which are still being refined on 1 or 2 elements, particularly the drilling and the owners' costs.

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [4]

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Eric?

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Eric Hathon, Cairn Energy PLC - Director of Exploration [5]

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Yes. And in Mexico, we do see indications of both flat events, which could indicate few fluid contacts as well as indications of conformance to structure, the latter which is more difficult given the potential steep dips in places and the salt, which sometimes will make imaging more difficult. But yes, we have indications of both, and drilling will demonstrate whether they truly are direct hydrocarbon indicators.

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David Matthew Round, BMO Capital Markets Equity Research - Oil and Gas Research Analyst [6]

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It's David Round from BMO. Two quick ones on SNE -- or one quick one, actually, to start with. Obviously, we've heard a bit from your partners around the time frame around FID in the second half of this year. So really just interested in any comments around your confidence of still hitting that target.

The second one, I think, Simon, you might have mentioned an attractive asset market and applying that to SNE. Obviously, you've talked in the past about a potential farm-down there. I suppose I'm just wondering, we've got all the inputs. We know what the project is potentially worth. Is that the type of project you are looking for full value given the -- what sounds like an attractive backdrop? Or how much would you be willing to leave on the table to entice a buyer? Because obviously, that has advantages for your balance sheet, et cetera.

And sorry, just thinking about -- if you were to leave something on the table, would that be likely to be oil price or resource upside?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [7]

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Yes. Well, dealing with the second part of your question first. I mean I think every negotiation is different. Obviously, another thing that we do, we're looking to try and extract full value from many discussion. I suppose when you think about timing, Nova is an example of something where we're taking money off the table ahead of first production. Looking back through time, India is an example of where we waited until first production to take value off the table. So I think -- and each one of those discussions has a number of different aspects in terms of, as you say, what's the underlying price assumptions, what's the timing to market, are they fully valued, et cetera, how much other interest is there and so on and so forth.

I mean what I would say in relation to Senegal specifically is that we continue to have incoming interest, but our line remains the same. We will look at or around FID if there is an appropriate transaction that we may take some value off the table but we don't have to. And that remains the position on it.

In relation to timing and 2019 FID, I mean we remain in close discussion with all of the JV, speaking with Woodside last week, have regular meetings with government and so on. I mean there is an alignment -- no matter what you might hear about other things, there is an alignment to move this project forward to FID. That's what everybody wants. And specifically, that is what the government wants and what they are targeting. So we're all working very hard towards that, yes. So that remains the case, FID in 2019.

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Michael J Alsford, Citigroup Inc, Research Division - Director [8]

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It's Mike Alsford from Citi. So a couple of questions. Just on SNE as we're talking about SNE. Could you maybe just speak more specifically on the financing, where we are and what needs to be done? Clearly, there's a number of parties with different requirements from a funding perspective. So could you maybe talk a bit holistically about the project from a financing perspective?

And then just on the sort of U.K. North Sea area and Norway. I was wondering if you could provide us with an overview of your assessment of how the strategy has gone since you entered the basin in 2012 with Agora. And what's worked? What hasn't worked? And should we see any changes to that U.K. Norway strategy going forward?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [9]

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Yes. I'll let James answer on SNE financing, I mean on the strategy and the general entry into the U.K. and Norway. Yes, I mean not everything is going to work. And as you pointed out, we've had a number of wells that haven't been successful. As Eric has been highlighting, what we tend to do is try and move towards more materiality in terms of prospects, in terms of newer types of plays or extending those plays. And that's higher risk. So we obviously have had success in terms of -- Nova's an example of that, and what you can realize in terms of value.

In terms of future strategy, I think we'll continue to do what we have been doing, which is constantly honing our efforts around those areas that we see as attractive, technically, first of all, most importantly, and where we think we can build a large position around success. I mean sometimes, it takes time necessarily, I mean don't forget, Rajasthan was the 16th well before we found Mangala. So I think everything -- it'd be nice if you had success all of the time, but I think strategically, you've got to take a longer-term view in terms of the -- of any particular basin that you're exploring. And furthermore, I mean obviously, there's a cost advantage in Norway, but that is not the driving factor. The driving factor is we're looking for things that we think have sufficient materiality.

Eric, I don't know if there's anything else you want to comment on in there?

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Eric Hathon, Cairn Energy PLC - Director of Exploration [10]

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No. I think that's exactly right. It's a long-term view. It's a balanced program. And we do tend to target things that when they come in, will make a material difference for shareholders.

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [11]

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Yes. On SNE financing, the -- I mean we've appointed a group of commercial banks in the various key roles to move forward with the senior debt financing and in terms of discussions on -- or agreements around terms with them, and also with the government to the extent that those interlink. That's well progressed and well defined now. So we've been working towards being ready to press go on the -- effectively, on the credit prices for that senior debt.

In terms of project definition, obviously all key contracts have been awarded now. So from a cost point of view, that's well defined. As Paul has mentioned, there's probably a couple of areas where there's one more turn with the intention of hopefully moving those cost estimates down. But they're in a good place already, and the resource base is obviously well defined. So yes, we're close to being able to push the button on that.

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Michael J Alsford, Citigroup Inc, Research Division - Director [12]

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And just to confirm, on the financing, is it -- do you need to see the end of the arbitration process before the banks will lend?

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [13]

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Well, look, we are -- if you're talking about the FAR Woodside arbitration, we're obviously not a party to that, so I -- you wouldn't expect us to be able to comment on what the potential outcomes or the timing of that is. What we do know is that everybody in the joint venture and particularly the government is aligned on seeing this project funded in FID in the time frame that we've talked about.

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Al Stanton, RBC Capital Markets, LLC, Research Division - Analyst [14]

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It's Al Stanton from RBC. I've got 3 questions, but they're all very different, so can I do them individually? Chimera, is there a heavy oil play?

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Eric Hathon, Cairn Energy PLC - Director of Exploration [15]

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No.

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Al Stanton, RBC Capital Markets, LLC, Research Division - Analyst [16]

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No. Okay. On the financing, SNE, are you assuming you have to pay for the government's stake?

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [17]

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No.

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Al Stanton, RBC Capital Markets, LLC, Research Division - Analyst [18]

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It's -- all right. No. You're not assuming that you're paying for the stake?

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [19]

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No. The PSC is very clear that the Petrosen is fully carried through the exploration and appraisal phase and post-FID, post exploitation license towards a production license award that they pay their share of development costs. They have the option to increase their share from 10% up to 18%, and that is very much the basis on which we've been working with the government. And Petrosen has been making its preparations, yes.

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Al Stanton, RBC Capital Markets, LLC, Research Division - Analyst [20]

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All right. And then you all sound very happy with what you've got. So I'm wondering why you bid for Edison.

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [21]

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Well, we wouldn't comment on any particular rumors on what we did or didn't look at. I think the point that I would make is that, yes, we are happy with what we've got. But we continue, like everybody, to look and say, is there something else that's accretive that we could bring into the portfolio to make sense to us, both from the point of view of obviously the financials attached to that particular transaction, but also does it fit with our strategy moving forward? So we continue to look at things, but it's only on the basis that we would only bring it in if we believe it's accretive.

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James Carmichael, Macquarie Research - Senior Analyst [22]

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James Carmichael from Macquarie. Just a quick one on Kraken. It sounds like everything's sort of going well there. Two train operations. The efficiency is back up, and water cut is in line. So I'm just wondering what do you need to see there before you get confidence to write those reserves back up or at least narrow the gap between yourselves and the operator?

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Paul Joseph Mayland, Cairn Energy PLC - COO [23]

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Well, yes, so I guess the first thing to say is we fully respect all the views in the Kraken family. And I think across it, we're all striving to improve production potential and maximize economic recovery from the field. And the second thing I think we should recognize, and I think I said this in March, is reserves are estimated. They're never determined. So we carry a range of estimates, P90, P50, P10. And of course, we chose and we believed it was prudent at that time and remains prudent to reduce our P50 estimate, which we did back in March. We would just like to see sort of longer production data in terms of the water cut trend and overall performance in the field before we make any revisions actually, which we would do as a matter of normal course of business on a 6 monthly basis.

But there's further potential in Kraken. And I guess touching a little bit on Michael's question about the North Sea, we had 3 assets when we acquired those 2 companies. We chose to sell one of them, which was a small stake in Mariner. And if you step back and look at Catcher and Kraken performance overall, we are pretty happy with it. And there's still growth potential on both fields. So we're seeing investments next year on Catcher that we touched on in terms of the satellites. There's a plethora of infill opportunities in Catcher, and there's significant potential in the west side of Kraken, which we are going to obviously test for the first 2 wells next year. So overall, we're relatively happy with both fields.

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [24]

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Thomas from Numis. Firstly, on SNE, the rig contract has been signed, and just to be clear, are the costs associated with that now set in stone? And I think you said before that 60% or thereabouts of the development costs are rigs -- or excuse me, are wells. So does that mean that you've locked in getting on the 2/3 of the development cost?

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Paul Joseph Mayland, Cairn Energy PLC - COO [25]

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Yes. Partially, I guess, is the answer to that. So that's the variable element of the cost. But obviously, the other element is the durations. So we're still looking at the optimized schedule in terms of the batch approach which we successfully did, for example, on Kraken. Can we phase the wells? And also looking at the durations in terms of sand phase completions and upper completions. So an element of it is indeed fixed, as you said, but there's another element, which we're still trying to optimize further.

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [26]

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Okay. So the sort of time on the rig (sic) [well] is priced, but -- because then you said it was a rig -- I'm sorry, a well-based contract. But it's not a fixed price per well then that you've agreed.

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Paul Joseph Mayland, Cairn Energy PLC - COO [27]

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No, it's a normal day rate-based contract. But the commitment we'll make under that contract will be well-based rather than duration-based.

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [28]

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On the SNE FPSO footprint point that you made for future expansions, does that imply that you will have the ship coming to shore in future phases to put this in?

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Paul Joseph Mayland, Cairn Energy PLC - COO [29]

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Could you repeat the question?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [30]

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(inaudible)

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [31]

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Because you spoke about having a big footprint there to put it on...

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Paul Joseph Mayland, Cairn Energy PLC - COO [32]

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No. It's basically -- it's just the additional modules that would be added. I mean it's predominantly around the consideration of gas export, so we'll have -- we've got a basis of design of 130 million standard cubic feet a day of gas. So that's more than what we need in terms of gas lift and fuel on the FPSO. So there's a future phase of potentially gas export, which would follow, first, oil by several years. We would need to consider export risers and obviously pipeline, et cetera, to shore. So there's flexibility to do that, and there's flexibility if necessary to expand the FPSO.

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [33]

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Okay. So you could be loading modules onto the FPSO offshore for future expansions?

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Paul Joseph Mayland, Cairn Energy PLC - COO [34]

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Correct, yes.

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [35]

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Okay. So the other ones were just Catcher reserves. I can't remember now. Did you originally book a higher reserves amount versus Premier? I remember back in the Nautical days, they had a different view.

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Paul Joseph Mayland, Cairn Energy PLC - COO [36]

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No. We were very -- from what I recall, we're very close to the operator's position when we booked our reserves share.

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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [37]

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Okay. And sorry, I'm almost there. Just on the bigger picture on exploration spend and strategy. I mean you touched on it a bit before. But on the one hand, you've got SNE, which it looks to me like you're well funded for a good period of time on your current interest. But obviously, if you're spending $170 million a year on exploration for multiple years, that becomes quite a large amount of money. Looking at the drilling program, should we be thinking that the exploration budget for next year is, give or take, similar to this year's budget?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [38]

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Yes. I mean I think year-on-year -- I mean sometimes, it will be higher. Sometimes, it will be lower. But the guidance remains around about $150 million is what we would like to allocate towards exploration. I mean coming back to your point on SNE exploration, other calls on capital, we're always looking at that balance. We're always looking at the weighting and the balance between development activity and exploration. But at the end of the day, we have viewed ourselves an exploration-led company. We believe it's very important, core to the strategy to continue to provide exploration catalysts, and that's what we'll want to do. So we'll look at that in terms of our thinking around the balance of expenditure in the portfolio without being specific about what we might sell or when.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [39]

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It's James Thompson from JPMorgan. A couple of questions from me. Just in terms of Senegal, the SNE seismic program, what are you hoping to learn from the more detailed view of the S400 sands?

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Paul Joseph Mayland, Cairn Energy PLC - COO [40]

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Yes. I mean so basically it's primarily looking to add -- to trying to improve the overall imaging and connectivity within the S400 reservoirs. And potentially, it may well help in terms of well placement and orientation.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [41]

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And then just in terms of Catcher and the Laverda farm-down, what were the terms?

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [42]

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In terms of the...

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [43]

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From 36% to 20%.

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [44]

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All right, yes.

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Paul Joseph Mayland, Cairn Energy PLC - COO [45]

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Well, we're not going to obviously disclose them. But obviously, the key driver there was to ensure that we have the common equity across the joint venture within the Catcher area. So if you recall, MOL didn't participate in that exploration well. So we basically brought them into that discovery. And ourselves predominantly went from 36% to 20% and Premier who held 54%, went down to obviously their 50% operated stake. And from our perspective, it was a very smart move because it brings complete alignment associated with production allocation and also metering, et cetera, on the FPSO. So we were all aligned to make sure that that happened.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [46]

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And just finally on India, I mean obviously, when you've spoken to the arbitration panel before, they told you to sort of not bug them too often. Have you sort of -- have you bugged them recently? And have they given you any indications at all about how they're getting on and when you might hear?

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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [47]

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The -- I don't know we've bugged them, but we're in regular contact with them. I mean they're still -- I mean effectively, they're now in the mode of drafting the award. So a correspondence interaction is relatively limited, but it's still frequent. So we're in regular contact with them. And what we know is that they will give us a reasonable but relatively short period of notice when they're ready to issue the award.

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James William Hosie, Barclays Bank PLC, Research Division - Research Analyst [48]

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It's James Hosie from Barclays. Another question on SNE. You're very clear that you can get FID by the end of this year, but have you prepared for the worst and talked to the government about an extension to the PSC just in case?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [49]

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Well, that would be the job of the operator. But the answer is no. We are moving forward on the basis of FID this year.

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James William Hosie, Barclays Bank PLC, Research Division - Research Analyst [50]

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So the operator had any -- or between the JV partners discussed plans for extension?

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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [51]

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No. There's no plan for it because the plan is to get FID this year. Any other questions? No? Well, listen, thanks for coming, and we look forward to coming back to you with news flow. Thank you.