Principal risks and uncertainties

Risk: Approach in 2016
Sustained low oil price

The continuing low oil price is both a risk and opportunity for the Group. The low oil price is driving down industry costs introducing the potential for cost efficiencies in the Group’s exploration, appraisal and development projects. The lower oil price environment, however, has reduced the amount of debt available under the Group’s Reserve Based Lending (RBL) facility and may impact on the availability of other sources of funding for the Group. Declining oil prices may also impact the ability of our JV partners to fund work programme expenditures.

Kraken and catcher development activities and production start-up not executed on schedule and budget

The Kraken and Catcher development projects remain on track to deliver free cash flow from 2017. Development projects of this nature, however, can be susceptible to delays and budget increases for a variety of reasons and this may lead to increased costs and delays in future cash flow. To mitigate these risks, the Group works closely with its JV partners to support and/or influence key decisions.

Restriction on ability to sell cairn india limited shareholding

The Indian Income Tax Department is seeking to apply tax to a 2006 internal group reorganisation prior to the IPO of the Group’s Indian business at that time. Cairn strongly contests their tax claim and is challenging it under domestic Indian and international law. However, in the meantime, Cairn is restricted from monetising its remaining assets in India which are material to the Group. If that restriction continues or if the tax claim is enforced against those Indian assets, that value may be further impaired.

Lack of exploration or appraisal success

Exploration and appraisal success is fundamental to the strategy of creating value through discovery and development of hydrocarbon resources. In 2015, the Group commenced its appraisal programme offshore Senegal with successful testing of SNE-2, building on the success of the 2014 discoveries. A lack of exploration and appraisal success, specifically in Senegal, may lead to limited or no value creation and a loss of investor confidence in the Group’s business model.

For more detail please refer to the 'How we manage risk' section of the 2015 Annual Report.