cairn india ltdmerged Management discussions

Cairn India operates the Rajasthan Block – a world class asset with significant national importance. The block accounted for ~23% of India’s domestic crude production in FY2015 and over the years its output has considerably reduced India’s crude oil import bill. In FY2015, the Rajasthan block contributed Rs 14,869 crore (~US$ 2.4 billion) to the national and state exchequers.

Cairn India, with its 30% joint venture (JV) partner, Oil and Natural Gas Corporation Limited (ONGC), has invested significantly in these assets. Oil and gas fields, mainly Mangala, Bhagyam and Aishwariya (MBA), constitute Cairn India’s key assets in Rajasthan. The Mangala field, the largest onshore hydrocarbon find in India in the last two decades, was discovered in January 2004. This was followed by discoveries at the Aishwariya and Bhagyam fields. Till date 37 discoveries have been made. The basic facts of the Rajasthan block are highlighted below.

Given the world-class resource base of the block, Cairn India is committed to maximize the potential of the Rajasthan Block through application of cutting-edge technology, superior human capital and excellence in project execution. Along with its Joint Venture partner ONGC, Cairn India has made significant investments in exploration and development of the block leading to landmark discoveries and industry leading production infrastructure.

MANGALA, BHAGYAM AND AISHWARIYA (MBA)

The Mangala, Bhagyam and Aishwariya (MBA) fields with 2.2 bn barrels of discovered hydrocarbons in place remain vital to our growth trajectory.

Both Mangala and Aishwariya fields produced better than expectations this year driven by efficient reservoir management, strong performance of infill wells and production optimization techniques undertaken during the year.

Aishwariya surpassed production mark of 30,000 barrel of oil equivalent per day (boepd) in the third quarter and is now producing at a stable rate.

At Bhagyam, increased water cut has posed some challenges for us but we remain focused on maximizing our recovery through better reservoir management and eventual polymer flood.

In the core MBA reservoirs, focus continues on infrastructure creation and prudent reservoir management in both water flood and EOR implementation. As part of building capabilities to deliver the next phase of growth, four key development projects were completed in the Rajasthan Block during FY2015. These were:

MANGALA POLYMER EOR

First polymer injection at Mangala field was achieved ahead of schedule in October 2014. By end of FY2015, the polymer injection rate was ramped-up to approximately 25,000 barrels of liquid per day (blpd). Two high-performance rigs operating in the field have enabled new injectors to be brought online in support of the injection ramp-up plan. Focus will be to continue to ramp-up injection and scale it up to full field by the end of FY2016

MPT DE-BOTTLENECKING

In the course of FY2015, the de-bottlenecking project relating to Mangala Processing Terminal (MPT) was successfully completed. Liquid handling capacity has now been ramped up to 800,000 barrels of fluid per day (blpd) by leveraging on the existing infrastructure.

The higher capacity will enable increased water injection which is critical to efficient reservoir management.

MANGALA ALKALI SURFACTANT POLYMER (ASP) PILOT

The Mangala ASP pilot was successfully completed in FY2015. The pilot area showed encouraging response to the injected ASP chemicals. For instance, a water-cut decline from 90% to between 20% and 30% was observed within three weeks of the ASP injection. Core samples are being studied to measure levels of oil saturation. The pilot wells produced 10% to 15% incremental oil over polymer flood indicating potential commercial viability. The pilot provided positive data on surface separation post ASP flood - which will be up scaled through modeling to evaluate the potential of a full commercial expansion across MBA.

GRID CONNECTED POWER

Connectivity with the national grid took place during the year. This should significantly enhance the reliability of power supply at the MPT and reduce unit costs.

The delivery on above key projects was a key focus area at MBA in FY2015. With the four projects completed and substantial progress made on others, we are on track to maximize the value creation from the core MBA fields. In addition, significant progress was made in other projects across the block. Some of these are worth mentioning.

At Aishwariya, a revised FDP for an infill-drilling program of 20 wells has been approved by JV. The necessary preparations for this programme are underway.

Also at Bhagyam, the plan for EOR has been optimized to improve the economics and allow Cairn India to undertake polymer flood recovery in the near term.

BARMER HILL AND SATELLITE FIELDS

Here the focus is on monetizing the tight oil reservoirs through efficient reserve development and deployment of fraccing technologies. During FY2015, Cairn India successfully completed the appraisal phase of the Barmer Hill development. A total of eight horizontal and four vertical wells were drilled. At present nine of these wells are online. The remaining three are expected to be so by Q1 FY2016.

In this appraisal phase of the project, initial well productivity rates lie within a range of 800 bopd to 1,000 bopd, which is very encouraging. The wells have been placed under testing to ascertain decline rates. At present the construction costs are between US$ 5 million and US$ 7 million per well. This should decline as the development is scaled up.

The appraisal phase produced key learning around productivity and ‘fraccability’ across various zones of the Barmer Hill reservoir; about horizontal versus vertical well development; and on fluid characterizations. As part of the ramped up field development, the first phase will be focused on Mangala and Aishwariya fields; the second phase on DP and NL fields; and the third phase on V&V fields. Satellite fields will also follow a similar phased development plan.

Several technological feats were achieved during the appraisal phase, which included application of Microseismic hydrofrac monitoring technology, and multistage fraccing of wells that involved pumping three stages in a single day at one of the wells –a first in India by any operator in the conventional Oil and Gas field. Going forward the focus will be on optimizing both capex and opex costs, and maximizing recovery.

In an effort to maximize value from the Rajasthan block, more satellite fields are being brought into production. During FY2015, four satellite fields were brought online taking the total number of such producing fields to six. By using existing infrastructure in the block and exploiting lean, reusable, modular production facilities, we achieved substantial reduction in the development cost per barrel – thus enabling economically sound development of additional fields. Development planning for the Guda and Tukaram fields is currently in advanced stages, with Field Development Plans (FDPs) likely to be submitted in early FY2016.

Tight oil monetization remains a strategic focus area for us. We will continue to invest in Barmer Hill; and are working closely with key global strategic partners to develop commercially feasible solutions and optimize both capex and opex for such reservoirs.

GAS

Gas promises to be a key growth area for Cairn India. The Rajasthan block has significant gas potential and we are working towards creating the appropriate infrastructure for monetizing it. In the years ahead, we expect gas production to be an important part of the Company’s product mix.

Gas development in the Raageshwari Deep Gas (RDG) field in Rajasthan is a priority. During FY2015, average gas production from RDG was 16 mmscfd. This is expected to increase to 25 mmscfd in FY2016. During the year four compressors were installed and commissioned, all on schedule. This has provided us the capacity to ramp-up production from RDG with existing infrastructure, and, hence, secure higher sales from next quarter.

The Management Committee approved the RDG Field Development Plan for 100 mmscfd. Work on execution, planning and contracting is underway. Two key packages for this project will be the EPCs for the pipeline and the gas terminal. An application has been submitted to the Petroleum and Natural Gas Regulatory Board (PNGRB) for authorizing a pipeline under their policy for Tie-in Provisions. The EPC for gas terminal is at the tendering process. We anticipate the Gas project to be completed by end FY2017, subject to regulatory approval.

MANGALA DEVELOPMENT PIPELINE (MDP)

The MDP is designed to evacuate the crude oil and transport Gas from the Rajasthan block. At around 670 km, it is world’s longest continuously heated and insulated pipeline. Beginning at the Mangala Processing Terminal (MPT) and Raageshwari terminal respectively, the 24"crude and 8"gas pipelines pass through eight districts across two states, Rajasthan and Gujarat, go through Viramgam and Salaya and end at Bhogat near Jamnagar on the western coast of India. There are bu_er Crude storage terminals at Radhanpur and Viramgam for sales to Indian Oil Corporation Limited (IOCL); and off-take lines at Salaya for sales to the Reliance and Essar refineries in Jamnagar.

Since its commissioning, the total cumulative crude oil sales of approximately 271 million barrels have been achieved through the pipeline facilities up to March 2015. With the use of drag reducing agents, the proven dispatch capacity of MDP has been enhanced to around 250,000 bbls/day. Given its length, the MDP incorporates a Pipeline Intrusion Detection System to provide surveillance along its entire length using fiber optics. Cairn India’s pipeline operations received the prestigious OISD award for "Best Near-Miss reporting" and accreditation of both OHSAS:18001 and ISO: 14001 systems.

In previous year, Gas sales commenced through the 8" gas line. Notable capacity enhancement initiatives were executed in FY2015. These include the installing of higher capacity Gas compressors at Raageshwari and Viramgam terminals to nearly double gas sales capability; as well as modification of impellers of the mainline booster pumps at Viramgam.

Salaya-Bhogat pipeline and the terminal at Bhogat are ready to receive crude. Once fully commissioned, Cairn India will be able to utilize sea routes for the evacuation of Rajasthan crude oil.

EXPLORATION ACROSS THE BLOCK

As on 31 March 2015, Cairn India has estimated Hydrocarbons Initially-In-Place (HIIP) of 7.4 billion barrels of oil equivalent (boe) – of which gross proved and probable reserves (2P) and resources (2C) constitute 1.4 billion boe. The company has increased its HIIP by approximately 1.4 billion boe driven by the successful exploration efforts over the year.

Since the re-commencement of exploration in the Rajasthan block in March 2013, Cairn India has drilled and tested 1.5 bn boe of hydrocarbons in-place with an additional 0.8 bn boe drilled but yet to be tested. During FY2014 and FY2015 Cairn India discovered 2C resources of 183 mn boe in Rajasthan. An additional 166 mn boe of prospective 2C resource has been drilled and awaits testing.

As on 31 March 2015, the estimated HIIP of Rajasthan Block was 6 billion boe and gross 2P + 2C resources of 1.3 billion boe. The core MBA fields have HIIP of 2.2 billion boe. The company expects to ultimately recover 50% of the resource base through water flooding and Enhanced Oil Recovery (EOR) methods. Other Rajasthan fields have HIIP of 3.8 billion boe, an increase of 1.4 million boe over the previous years thanks to sustained drilling and appraisal efforts over the year.

The exploration and appraisal program for Rajasthan Block continued with a significant shift from exploration to appraisal drilling of prioritized discoveries - In order to accelerate 2C to 2P conversion and advance the booking of reserves. Thus the Company fast-tracked drilling in high volume and high value discoveries, notably in NL, V&V, Kaameshwari and Raageshwari Deep Gas.

In FY2015, Cairn India delivered the largest exploration and appraisal program in the Company’s history - with 12 exploration and 22 appraisal wells drilled during the year. Of the 12 exploration wells, nine showed hydrocarbons.

Since recommencement of exploration in Rajasthan, Cairn India has announced 12 new discoveries. In FY2015, the Company announced six discoveries thus taking the overall discoveries made till date in the block to 37.

Discoveries in FY2015:

The first discovery was SL-1, which flowed oil at an initial rate of 120 bopd from the Dharvi Dungar formation. It marked the 32nd discovery in Rajasthan.

The second discovery was exploration well NL-2, flowing oil at an initial rate of 100-150 bopd. It is anticipated that fractured, horizontal wells within both the Barmer Hill and Dharvi Dungar formations, with artificial lift, will increase well productivity and recovery.

DP-1 was the third discovery - the 34th in Rajasthan – made in the Barmer Hill formation, flowing oil at 120 bopd. This is a significant discovery, given its proximity to the Mangala field; and fast track appraisal is planned to facilitate rapid commercialization.

The fourth discovery in the year was Saraswati SW-1; which is located below the Fatehgarh formation from where the MBA fields produce. The well flowed oil at around 250 bopd.

The fifth discovery in FY2015 was Aishwariya 46. The exploration well flowed oil at 182 bopd from the Dharvi Dungar formation. This well represents the first Dharvi Dungar oil discovery in the northern part of Barmer basin, closer to several other discoveries and key infrastructure.

The sixth discovery, the 37th in Rajasthan, was the Saraswati-4 Basement which encountered a 250 meter gross oil-bearing interval in the Fractured Basement formation, with oil flowing at 160 bopd. It is a play opener in the Barmer basin with potential for substantial resources in the Saraswati structure over 25 sq. km.

The two year 3D seismic acquisition program continued in Rajasthan with a total of 886 square km till the end of the financial year. The emphasis is on improving imaging across the Guda and Guda South areas, and in the vicinity of the Raageshwari Deep Gas field to aid gas development and appraisal activities.

During FY2016, activity will continue to be focused upon appraisal of the Raageshwari Deep Gas field and the key oil discoveries at DP, NL and V&V - with the objective of advancing these discoveries to development. Future programs will focus on identification of additional prospects that will continue replenishing the prospect inventory.

CAPITAL SPENDING

Cairn India’s capital spending on key projects and capability building in Rajasthan has put the Company significantly ahead in terms of discoveries, commercial developments and costs. Cairn India’s gross capital expenditure of Rs 8,256 crore (US$ 1.4 billion) in FY2015 was the highest ever in the history of the company – of which 65% was made in development projects and 35% in exploration activities. Close to 85% of the gross capital expenditure was invested in the Rajasthan block. It has created the necessary base; and thus provided us with the option to be more selective about projects in the current low oil price environment while maintaining positive free cash flows and retaining the ability to pay absolute levels of dividend. In line with our global peers, the Company has revisited the capital allocation plan for FY2016 so as to undertake projects which are economically viable, have low risk and high potential. Cairn India’s capital expenditure for FY2016 has been revised from $1.2 billion to around $500 million, by deferring the rest. Of the revised outlay, around 45% is allocated to core fields; around 40% to growth projects which include Barmer Hill, the satellite fields and Raageshwari Deep Gas development; and remaining 15% to exploration. We retain the flexibility to invest additional amounts as oil prices improve and projects clear return on investment thresholds.

RAJASTHAN SALES

During the year, an average of 174,119 bopd of crude oil from Rajasthan Block, amounting to approximately 64 mmbbls for the year, was sold to public sector and private refiners across India. The average crude price realization for the year was US$ 76.4/ bbl, approximately 20% lower year on year due to a significant drop in crude oil prices globally. Gas sales during the year were approximately 9 mmscfd, resulting in gas sale volumes of 3.3 bcf for FY2015. This is expected to increase further from Q1 FY2016 after the allocation of additional sales gas volume from the Ministry of Petroleum and Natural Gas (MoPNG).

Financial Overview

CONSOLIDATED FINANCIAL REVIEW

Following table list the performance of Cairn as a consolidated entity for the year ended March 31, 2015 compared with the previous year. Further details are given in the balance sheet, statement of profit and loss and the notes accompanying this annual report.

		Amount in Rs crore
Particulars	FY2014-15	FY2013-14
Revenue from operations	14,646	18,762
Other income	1,809	1,502
Total revenue	16,455	20,264
Share of expenses from producing oil and gas blocks including stock adjustments	1,766	1,160
Employee benefit expenses	111	274
Depletion, depreciation and amortization expenses	2,570	2,297
Cess on crude oil	2,799	2,899
Finance costs	20	41
Exploration costs written off	1,098	412
Other expenses	349	331
Total expenses	8,713	7,414
Profit before tax and exceptional items	7,742	12,850
Exceptional Items	2,633	-
Profit before tax	5,109	12,850
Net Current tax expense	93	146
Deferred tax charge/(credit)	1,108	272
Deferred tax (credit) on exceptional items	(572)	-
Tax expense	629	418
Profit for the year	4,480	12,432

INCOME

Revenue from operations for FY2015, post profit sharing with the GoI and the royalty expense in the Rajasthan block, was Rs 14,646 crore down by 22% YoY driven by lower realization of US$ 76.02 bbl against US$ 94.45 bbl and further decrease in working interest volume to 132.7 kboepd (FY2014 137.1 kboepd) and partially offset by rupee depreciation.

Other income excluding gain/loss on exchange fluctuation for the year is up by 68% to Rs 1,285 crore.

Income from US$ investments and loan has increased by Rs 543 crore & INR investments by Rs 185 crore respectively due to booking of gains on Maturity of FMP’s and redemption from Liquid plus fund, which is partially offset by decrease in income from US$ & INR deposit by Rs 157 crore and Rs 50 crore respectively due to redemption of deposits.

Exchange gain (net) for the year is decreased to Rs 524 crore as against Rs 739 crore in previous year mainly on account of rupee depreciation of over 4.5% (FY2014 -10.17%) against the dollar in current year.

EXPENSES

The share of expenses in producing oil and gas blocks including stock adjustments for the year increased to Rs 1,766 crore, an increase of 52% mainly due to increased maintenance and operational activities.

Employee benefit expense includes the stock option charge. Previous year charge was higher, due to impact of the change in the accounting policy retrospectively in the previous year. Accordingly, the stock option charge for FY2015 is lower by 60% .Other than this, employee benefit expense for the year is in line with the previous year.

Depletion, depreciation and amortization expenses increased by 12%, primarily due to change in depreciation method from SLM to UOP on some of the oil and gas assets leading to an additional charge and also due to additional capitalization of Rs 4,812 crore (including Salaya Bhogat pipeline and terminal).

Cess has decreased in line with decrease in production by Rs 100 crore. Total production for the period has decreased by 3%.

Exploration costs written off represent the costs incurred and charged to profit and loss as per the accounting policy of the Company in case of "successful efforts method". The charge has increased to Rs 1,098 crore in FY2015 as compared to Rs 412 crore in FY2014. It is mainly on account of higher spend on seismic study of Rs 552 crore and wells plugged & abandoned in this year in Ravva block, KG-ONN block and Rajasthan.

Exceptional Items

Impact of change in accounting policy of Depreciation on some of the oil and gas assets from Straight Line Method to Unit of Production till 31 March 2014 amounting to Rs 2,127 crore and impairment loss on carrying value of Sri Lanka block amounting to Rs 506 crore has been disclosed as an exceptional items.

TAX EXPENSE

Tax expense increased to Rs 629 crore in FY2015 from Rs 418 crore in FY2014. Effective income tax rate was 12.3 % in FY2015 as compared to 3.3% in FY2014. The effective income tax rate was higher in FY2015 mainly due to higher deferred tax charge on increased exploration and development expenditure in Rajasthan Block which is in tax holiday and due to reversal in site restoration costs. Tax charge for the year includes deferred tax credit on exceptional items.

PROFITABILITY

Profit after tax decreased to Rs 4,480 crore in FY2014-15 compared to Rs 12,432 crore in previous year, down by 64% YoY.

CONSOLIDATED BALANCE SHEET

Following table summarizes position of the Group at the year ended 31 March 2015 and the comparative for the previous year ended 31 March 2014.

		Amount in Rs crore
Particulars	31 March 2015	31 March 2014
Shareholders’ funds	58,870	57,437
Non-current liabilities	2,890	3,849
Current liabilities	5,074	4,406
Total	66,834	65,692
Net fixed assets	29,540	30,773
Long-term loans and advances and other non-current assets	17,891	12,785
Current assets	19,403	22,134
Total	66,834	65,692

CAPITAL STRUCTURE & RESERVES AND SURPLUS

Total shareholder’s fund as at 31 March 2015 aggregated Rs 58,870 crore, of which equity capital is Rs 1,875 crore with 187 crore shares of Rs 10 each.

During the previous year, the Company had approved a proposal for buy back of its equity shares at a price not exceeding Rs 335 per equity share for an aggregate amount not exceeding Rs 5,725 crore. The buyback had commenced on 23 January 2014 and closed on 22 July 2014. During the said period the Company bought back and extinguished 36,703,839 equity shares for a total consideration of Rs 1,226 crore, which accounted for 21.41% of its Maximum buy-back size.

Reserves and surplus aggregated Rs 56,995 crore. Out of total reserves, Rs 19,043 crore (33%) pertains to securities premium account, Rs 229 crore of employee stock options outstanding, Rs 36 crore of capital redemption reserve transferred on buy back of equity shares and balance is general reserve and surplus in the statement of profit and loss. Reserves and surplus during the year increased by Rs 1,465 crore, registering a growth of 2.64%.

NON-CURRENT LIABILITIES

Provision for site restoration decreased to Rs 1,613 crore due to change in estimates of costs as confirmed by an independent third party report.

Deferred tax liability increased to Rs 1,272 crore due to increased capitalisation as a result of higher spent on account of exploration and development.

NET FIXED ASSETS

The net fixed assets as at 31 March 2015 is Rs 29,540 crore as compared to Rs 30,773 crore as at 31 March 2014. The decrease is primarily due to reversal of site restoration cost partially offset by capital expenditure pertaining to exploration and development in all the blocks and increase depreciation charge as a result of change in accounting policy.

LONG-TERM LOANS AND ADVANCES AND OTHER NON-CURRENT ASSETS

As at 31 March 2015, long term loans and advances of the Group aggregated to Rs 16,228 crore. It constitutes majorily of MAT credit entitlement Rs 7,988 crore.

Other non-current asset increased to Rs 1,633 crore primarily due to investment in non-current bank deposits & interest accrued on Fixed Deposit & Loan.

CURRENT ASSETS

Current investment constitutes 79% of total current assets. Current investments decreased by Rs 1,130 crore, a decrease of 7% due to decrease in investment in bonds and mutual fund.

Our Talent

Cairn India’s success is a reflection of the superior quality of human capital and the dedicated approach of its employees. The operational excellence delivered in previous years has been a direct result of the skills and resilient spirit of its employees.

During the year we continued to focus on ensuring flawless business delivery by filling gaps in key leadership positions and by investing in the technical and leadership development of our ‘top talent’. We invested in critical skills aligned to flagship projects such as Enhanced Oil Recovery (EOR) and tight oil extraction at Barmer Hill. On the job training and role-enhancement also received a significant push this year and helped build a culture of continuous learning. We leveraged technology by moving our talent, recruitment and learning processes on to a cloud portal, thus increasing ease of access, usage and reporting.

To build best-in-class projects execution capability, we launched the Professional Career Ladder for the Projects function. Created and executed in-house, the ladder articulates the possible career paths for employees together with the skills and experiences required to progress one’s career.

Cairn India outperformed the industry by keeping overall attrition at significantly lower levels than the industry average of approximately 10%. For senior talent, the attrition was at a healthy 6.5%. It continued its efforts to attract the best talent – not only through social media platforms but also by conducting road-shows in the Houston Oil & Gas market which was attended by professionals from the various E&P organizations.

Being cognizant to changing international market conditions and the continued weakness in oil prices, we re-prioritized some of our initiatives in the latter part of the year to make them relevant in the new scenario. We also re-structured and right-sized the organization to make it future ready basis our business plans for the next 2-3 years.

Going forward we will continue to focus on driving an efficient and lean organization and attract, retain & develop the best talent from the market to deliver our business goals.

Business Risks

RISK: Crude oil and natural gas reserves are estimates and actual recoveries may vary significantly

There are uncertainties inherent in estimating crude oil and natural gas reserves. Reservoir engineering has subjectivity in estimating the underground accumulation of crude oil and natural gas. These cannot be measured in an exact manner. These risks are gradually mitigated through enhanced understanding of the reservoirs, achieved by undertaking additional work. Reserves estimations involve a high degree of judgement and depend upon the quality of available data and the engineering and geological interpretation. Results of drilling, testing, and production may substantially change the reserve estimates for a given reservoir over a period of time. For these reasons, actual results may vary substantially. And it is possible that such variation in results may materially impact Cairn India’s actual production, revenue and expenditures

RISK: Unfavorable changes in Production Sharing Contract (‘PSC’) terms or failure to extend the PSC for the Rajasthan block could have an adverse impact on our financial performance

Our current reserves and production are significantly dependent on the Rajasthan block in India. The current PSC for the block is valid till May, 2020. If the PSC does not get extended, or gets extended on unfavorable terms, this could result in substantial loss of value and have an adverse effect on our results of operations and financial condition

RISK: Regulatory uncertainties may impact the Company’s business

Cairn India’s business has been previously affected by the changing regulatory landscape and it is possible that this might continue in the future. It might be affected by political developments by the central, state, local laws and regulations such as production restrictions, changes in taxes, royalties and other amounts payable to the various governments or their agencies. New political developments, laws and a changing regulatory environment may adversely impact the business. The company has received an order from the Income Tax department for an alleged failure to deduct withholding tax on alleged capital gains arising during the year 2006-07, the details of which are provided in Board’s Report.

RISK: Execution challenges in respect of 3-year Work Programme

To fully capitalize on the potential of the Rajasthan block, Cairn India has planned a substantial program of sustenance and growth projects from FY2015 to FY2017. Some of these projects have long execution timelines, have interdependencies, and are brown-field involving tie-ins with existing facilities. To successfully execute the work programme, the Company will have to rely on multiple equipment and services providers and construction contractors. The Project sites are across a wide geographic area within Rajasthan. Ensuring the delivery of services and equipment as per schedule, of the right quality and cost, managing security of men and materials at remote sites, and ensuring all compliances are met, could pose a potential challenge. Slippages in any of these aspects could have an adverse impact on project execution, and consequently on operational and financial performance.

RISK: International prices for oil & gas are volatile, and have a significant effect on us

The majority of our revenue is derived from sales of crude oil and natural gas in India. The price that we receive for these hydrocarbons is linked to international prices, which have fluctuated due to many macro-economic, geo-political and regional factors. Crude price has declined significantly over last three quarters and the near future outlook continues to be bearish. Substantial or extended declines in international crude oil and gas prices could have an adverse effect on the economics of existing/ proposed projects, capex outlay, results of operations and financial condition.

RISK: Enhanced Oil Recovery (EOR) project may not achieve all its objectives

Following a successful EOR polymer flood pilot at Mangala, a Field Development Plan for full field application of polymer flood in the Mangala field was approved last year. It is currently under implementation. In terms of scale, the project is one of the largest of its kind across the globe. Risks associated with the project include lower than expected recovery, inadequate processing of produced fluids thereby impacting performance of surface facilities, managing the polymer supply chain, and adhering to the overall project schedule. In addition, the use of such a recovery technique may significantly increase operational costs. All these factors could have an adverse impact on Cairn India’s production and profitability.

RISK: Maintaining health and safety related performance of contractors / sub-contractors

Cairn India depends on multiple contractors for the delivery of projects, construction, on-going operations and maintenance activities, drilling programmes, seismic survey programmes, and road transportation of individuals and materials. Inadequate health and safety performance of such contractors is a key risk.

BUSINESS OUTLOOK

In view of the current oil price scenario, Cairn India is taking a proactive approach to capital allocation and shareholder returns. Cairn India’s near term focus lies in optimizing project economics and driving operational efficiencies for core fields. Although there has been a partial deferment of capex, the Company remains agile to make selective investment in growth projects and thus enhance production volumes. Delays in obtaining necessary approvals, inherent uncertainty around global crude oil prices, and rising government profit oil share may further impact the Company’s top-line and profitability. Cairn India remains cautiously optimistic about FY2016.

CAUTIONARY STATEMENT

Statements in this Management Discussion and Analysis describing the Company’s objectives, projections, estimates and expectations may be ‘forward looking statements’ within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Company’s operations include a downtrend in the sector, significant changes in political, regulatory and economic environment in India, exchange rate fluctuations, tax laws, litigation and labour relations.

Internal Controls& their Adequacy

During the year, the Company undertook an exercise to review and re-design the financial processes and entity level controls as part of Sarbanes Oxley Act (2002) requirement with an objective to strengthen internal controls. It also initiated various automation projects including implementation of Governance, Risk & Compliance (GRC) solution of SAP under a phased approach. In the first phase, user access management has been automated to enable workflow driven user creation and role assignment. User access rights with appropriate mitigation measures to ensure adequate control around segregation of duties in financial transactions have been put in place.

BUSINESS RISK MANAGEMENT & ASSURANCE PROCESS

Cairn India’s strategy for risk management is to ensure that the Company and its employees continue to operate a ‘go beyond’ compliance approach. This creates an environment where there is an embedded culture of informed risk acceptance, supported by an effective framework to create and foster growth.

The Board of Directors of Cairn India is responsible for overseeing risk management and for ensuring that robust internal controls are implemented to respond to changes in the business environment. Cairn India has robust risk management framework in place. The Board has approved a Risk Management Policy which is an overarching Statement of Intent and establishes the guiding principles by which key risks are managed across the organization.

In terms of the recently amended Clause 49 of the Listing Agreement of the Securities and Exchange Board of India (SEBI), the existing Risk Management Committee (RMC) has now been re-constituted as a Board Committee, chaired by the CEO. The RMC is responsible for monitoring and reviewing of implementation of various aspects of the Risk Management Policy under the aegis of the Cairn India Board. The RMC’s terms of reference are approved by the Board, as it finally reports to the Board.

The RMC provides quarterly updates to the Board on key risks facing the Company, and proposes mitigating actions, as required. The Director of Risk Assurance is the Secretary to the RMC and Head of the risk management function.

The RMC is assisted by business and function-specific risk management sub-committees, which are responsible for overseeing various activities including proactively identifying any emerging risks that may impact the Company. In addition, the heads of functions make their objective assessment of the internal controls across their respective functions and issue assurance statements. These are then consolidated at the organisation level and signed off by the CEO and presented annually to the Board of Directors.

The risk assurance team reviews the control assertions made by functions, and agrees on action items emanating from control gaps identified along with an action owner and completion timelines. These actions are then periodically reviewed to ensure appropriate closure. Thus, the assurance statements capture the robustness of the internal controls and the action plans that are being taken to further strengthen the controls.

OPERATING POLICIES AND PROCEDURES

In line with the Company’s corporate governance initiatives, new policies were adopted by Cairn India during the year and some existing policies were updated to make these more in line with the business needs. Operating policies are disseminated to appropriate departments and functions to increase awareness and compliance. Cairn India’s operational policies, procedures and activities are subjected to internal audit. Implementation of recommendations arising from the audit reports is regularly monitored by the senior management and the Audit Committee of the Board of Directors.

LEGAL AND COMMERCIAL PROCEDURES

Legal and commercial procedures have been disseminated throughout the Company. A legal compliance management system to track regulatory compliance requirements is used across the organization. It maps the organization hierarchy and structure into the compliance environment and defines workflows for reviews and self-assessment of processes, risks and associated controls. It has been successful in timely identification of areas which require immediate legal attention. The system is periodically reviewed and updated to bring it in line with the changes made in law and applicable compliances.

CODE OF BUSINESS ETHICS

The Company has adopted a "Code of Business Ethics" that develops and formalizes its vision and values, and serves as a guide for the business actions in a global, complex and changing environment. The Code sets forth Cairn India’s commitment to the principles of business ethics and transparency in all areas of activity and establishes a set of principles and guidelines for conduct designed to ensure ethical and responsible behavior. The Code is applicable to the Company and its subsidiaries including its Directors, employees, Officers, service providers & contractors working for and / or on behalf of the company.

During the year under review, the Company has made amendments to its Code of Business Ethics (Code) to bring it in line with the regulatory changes. The Duties of Independent Directors of the Company were incorporated in the Code to make it more robust. The revised Code was approved by the Board. All Directors and employees including senior management have a_rmed compliance with the Code for the year ended 31 March, 2015.

FINANCIAL AND MANAGEMENT REPORTING

The company has circulated financial policies, standards and delegations of authority, covering all activities, across the organization. These are periodically updated and shared through the intranet. Budgets are allocated for all key activities / functions at the beginning of the year and an analysis of the variance between budgets and actuals is carried out on a periodic basis to ensure full understanding of the variance and adopt any requisite course of correction.

AUDIT REVIEW OF OPERATING AND FINANCIAL ACTIVITIES

Cairn India’s processes and financial activities are subjected to independent audits by internal as well as statutory auditors. Implementation of recommendations from various audit reports is regularly monitored by the senior management and the Audit Committee of the Board. The Company has established an IT enabled application for monitoring and escalating agreed corrective actions based on audit findings. This provides regular reminders and escalation notifications to respective stakeholders, thus enhancing the overall effectiveness of compliance. Internal and statutory audit reports and findings, including comments by the management are placed each quarter before the Audit Committee of the Board of Directors.

PERFORMANCE SETTING AND MEASUREMENT

Objectives and key performance indicators (KPIs) have been aligned with Cairn India’s overall vision statement. The KPI elements are owned by the heads of department. These provide clear guidance on key priorities to the business teams and ensure execution of Board approved work programme, budget and business plan. A system is in place to monitor the actual performance against each of these KPIs and report progress to the Executive Committee and the Board of Directors on a regular basis.

BUSINESS CONTINUITY

Emergency response and disaster management plans are in place for all operations. A business continuity plan covering key risks for the corporate office at Gurgaon as well as operating assets of the Company at Rajasthan, Ravva & Cambay has been developed and implemented in line with requirements of ISO 22301:2012. Training as well as testing of the plan for all locations is currently underway and is expected to be completed during first quarter of FY2015.

Cairn India’s strategy for risk management is to ensure that the Company and its employees continue to operate a ‘go beyond’ compliance approach. This creates an environment where there is an embedded culture of informed risk acceptance, supported by an effective framework to create and foster growth.