Economics and funding
Maintaining Corporate Responsibility standards
The sustained low oil price continues to be one of our principal risks. This means that the business remains focused on delivering opportunities to cut costs across operations. However, in pursuing cost reductions in this environment, we do not compromise our commitment to working responsibly.
Investors continue to scrutinise not only our financial position but also our working responsibly practices, and we continue to communicate how we achieve this and how we manage Corporate Responsibility (CR) and the benefits of doing so. Our commitment to working responsibly, and our strong track record in this area, assists in retaining investment and securing opportunities when considering a new venture or licence application.
Evaluating new opportunities
International investment features highly in our activities where we consider operating or where we may be a joint venture partner. To protect our investment, we continue to assess CR risks as part of our evaluation of a new relationship or a new location.
We continue to assess new venture opportunities within the context of our existing financial commitments to our key projects in Senegal and the North Sea and in a low oil price environment, which means restricted funding is an issue for the oil and gas industry as a whole. Some opportunities may be financially attractive, but unacceptable due to associated ethical, safety or environmental concerns.
Evaluation process for new ventures
Before entry into a new venture, we undertake a due diligence process to ensure we have confidence in the integrity and CR track record of the partners involved and understand the CR risks associated with the locations of interest. Through our Corporate Responsibility Management System (CRMS), we rigorously assess new venture opportunities. This consists of a phased process of evaluation using our Cairn Operating Standards to understand all aspects of risk associated with a new venture. From a CR perspective, we consider such risks in relation to the CRMS requirements and CR issues arising from the type of deal (e.g. new country entry, licence application, existing asset acquisition or company deal).
As part of this process we develop Investment Proposals (IPs) that identify and evaluate the risks associated with the investment; these risks include any CR-related concerns. All significant new venture projects require Board approval and are considered by the Board relative to strategy and risk appetite. All IPs submitted to the Board in 2016 included appropriate assessment of CR considerations.
As an operator in Senegal, CR issues are fully integrated into the appraisal and exploration drilling programme, including working and engaging with the relevant regulators and local community stakeholders. We have sought and ensured continuity of permitting and ongoing improvements in understanding the community position, including increased social investment activities. High standards of operation, good governance and transparency help protect our licence to operate (see Society and communities).
In Senegal, we identified and implemented initiatives during the year to reduce our operational cost. These included extensive assessment of rig and other contractors to achieve the most cost-effective solution for further exploration and appraisal of our Senegal blocks in 2017. However, before commercial bids were assessed, CR and technical requirements had to be fulfilled.
In September 2016, we opened a new supply base in Dakar port to meet our operational needs. This supply base, which is developed to a UK regulatory standard, could have been completed at a lesser cost but at the expense of meeting the standards we set ourselves. Previously, our supply base arrangements were focused on a number of storage yards and shared facilities with associated hazardous road, access and handling issues, which contributed to the Lost Time Incident (LTI) we experienced in April (see Major accident prevention and safety). The new base not only reduces safety and environmental risks associated with our previous supply base arrangements, but also improves equipment handling and saves time, a more cost-effective and safer solution (see New supply base at Dakar port).
UK and Norway
In some of our operations, such as in the UK North Sea and Norway, activities are carried out by partner organisations and we participate as a member of a joint venture. We also regularly assess the CR performance of our operating partners through partner operating and technical committees. Cairn’s UK sector non-operated activities include the Catcher and Kraken development projects, which are both due to deliver first oil in 2017. These projects continued to progress in 2016 with ongoing development drilling, and fabrication and refit of the production vessels. Given that Cairn is not the operating party for either project, it is important to monitor and hold our partners accountable for both the delivery and the performance of these developments. We have continued to work very closely with our partners to enhance the performance of the contractors involved in the fabrication and refit of the floating production, storage and offloading (FPSO) installations.
Cairn engaged both of its partners for the Catcher and Kraken developments for this purpose and participated in safety case work, with the Kraken Safety Case being accepted by the UK regulator in October 2016 and the submission of the Catcher Safety Case to the regulator in January 2017.
Our joint venture partners in the North Sea, EnQuest and Premier Oil, were also diligent in delivering cost reductions on our Kraken and Catcher projects by taking advantage of improved contractor market conditions while maintaining a focus on safe delivery and working responsibly. We monitor this through formal joint venture meetings and special working groups, promoting our Business Principles and sharing lessons learned.
Cairn’s UK and Norway region also continued to participate in a wide variety of non-operated assets. In Norway, we continued to fulfil our ‘see to’ responsibilities under the Norwegian regulatory requirements and participated as a non-operating partner in one well in 2016,. We also applied for further licences in the Norwegian and the Barents Sea. In 2016, we were awarded operatorship of one block and non-operated interests in additional blocks in Norway (which has some of the most stringent HSE regulatory requirements).
We also continue to hold exploration interests in a number of other locations. Many are non-operated interests such as Western Sahara where no activities were undertaken in 2016. Planning for works in 2017 has commenced and the same rigour is being applied to manage cost without compromising our CR position.
We are considering potential for further work in the Republic of Ireland, where oil and gas operators are required to meet the high environmental management standards of the Oslo/Paris Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR). In 2016, we retained our OSPAR verification (to OSPAR Recommendation 2003/5); achieving this early protects our investment so we can move forward quickly if needed.
- Strengthen link between Corporate Responsibility Management System (CRMS) and business risk management
- Improve CR risk register
- Annual CRMS audit
- Enhance CR content of Investment Proposals and support new ventures
- Deliver exploration and appraisal success
- Deliver a sustainable business
- Operational and project performance
- Delay in Catcher and Kraken production start-up schedule
- Secure priority new venture opportunities
- Sustained low oil price
- Inability to access internal or external funding
- Fiscal stability and predictability
Create a PDF of this section to take away.