Capricorn Energy PLC (CNE) Earnings Call Transcript & Summary

Good day, and welcome to the Cairn Energy results for the year ended December 31, 2020 conference call. At this time, I would like to turn the conference over to Simon Thomson, CEO. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Cairn's results presentation. I'm Simon Thomson, Chief Executive; and with me are James Smith, CFO; Paul Mayland, COO; and Eric Hathon, Exploration Director. As in usual way, we have a presentation to run through with you this morning, and we'd be very happy to take questions at the end. Before heading into the presentation itself, a few words of overview. The last 12 months have, of course, been incredibly challenging for everybody. Throughout this period, our focus has been on the safety of our people and the people we work with, like everyone. We're relieved to now be seeing light at the end of the tunnel. At the same time, I'm happy to say that this has also been a very busy and productive period for the company. Cairn has a proven track record of continuous evolvement and renewal in the drive for sustainability and value growth. We've been clear in our ambition to grow and diversify the company's production base ideally in a region where we see potential to access additional assets and opportunities. The transactions that we are announcing today mark a pivotal step in the achievement of that ambition, doubling our current production and more than tripling reserves within a portfolio that provides both long-term sustainability and considerable upside potential. Okay. Moving to the next slide and turning to the transactions themselves. A brief overview and rationale for each. The first is the proposed acquisition of the Shell Western Desert Assets in Egypt, alongside our JV partners, Cheiron. This significant portfolio brings high-quality onshore assets with material development and exploration growth potential. It secures long-term low-cost gas-weighted production with a clear path to near-term upside, represents an investment in a region where there is stable and competitive fiscal regime, considerable and growing market demand, cross-border energy trading and an active M&A market. And we believe that our partnership with Cheiron, who already operate around 40,000 barrels equivalent in Egypt, results in a joint venture with deep local experience and knowledge and competitive strengths across the full breadth of the E&P value chain. The second transaction is the agreement to divest of our entire interest in the Kraken and Catcher fields. With each asset entering natural decline this year, we believe that this is the right point to monetize and redeploy, ensuring that we retain the balance sheet flexibility to access further growth opportunities. Both fields have been great assets for Cairn, and I would like to take this opportunity to thank the teams at EnQuest and Premier for their hard work and cooperation throughout the period of our ownership. Turning to the next slide. The transactions represent the culmination of a year of active portfolio management, with sales in Norway, Senegal and the North Sea preceding the acquisition onshore Egypt. In essence, we've taken risk development and declining existing offshore oil production and replaced it with sustainable gas-weighted onshore production with significant growth potential. We've also retained the financial flexibility to access additional opportunities and are actively engaged in this respect. And as you know, all of this was achieved against a backdrop of continued fiscal discipline, allowing a further cash return of $250 million to be made to shareholders at the start of this year. A significant milestone was reached in late December 2020 with the unanimous definitive Indian arbitration award in favor of Cairn of $1.2 billion plus interest and costs. We recently met with the Government of India to seek their adherence to the award and resolution of this long-standing issue. Now whilst that engagement continues, absent resolution, we are now deploying robust recovery options to seek to safeguard shareholders' rights to the value of the award, and James will provide more detail in this respect. But it's worth restating that all of our activities and related financial planning are exclusive of India and, therefore, the value remains upside to the current business case. Against the backdrop of portfolio management and capital discipline and notwithstanding the logistical challenges raised by the pandemic, I'm pleased to say that we continued to see safe and effective operations across the business. We proactively managed exploration capital commitments without jeopardizing growth opportunities. And as Eric will outline, we're now well positioned to move forward across multiple jurisdictions including wells this year with ENI in Mexico and Shell in the U.K. and we remain committed to executing our strategy responsibly and in line with the UN Sustainable Development Goals. Along with our fellow BRINDEX members, we are committed to assisting the U.K. government in reaching its net-zero 2050 target. We recognize climate change as a principal risk to the business. And as previously detailed, we aim to reduce emissions in our operations wherever possible. We are also participating in early-stage carbon capture and storage evaluations to ensure that we are in a position to participate in the event of the technical and economic case can be proven. So in summary, we believe we are well placed for further value growth from a renewed and expanded platform of exciting assets with the financial flexibility to make further portfolio additions, all against the backdrop of continued capital discipline and retained balance sheet strength. James?

Thank you, Simon, and good morning, everyone. So in the next few slides, I'll briefly take you through the 2020 financial performance and the outlook for this year. I'll talk in a bit more detail about the Indian Arbitration Award and then I'll come on to the 2 transactions that we announced this morning before handing over to Paul to talk in more detail about the Shell Egypt Assets. So production last year, as we've already announced, was 21,000 barrels of oil a day, with an average realized oil price of $42.56 a barrel, plus hedging gains of $7.27, that led to revenues of $324 million. With net production cost of $19 a barrel of oil equivalent, that resulted in operating cash inflows from production of $239 million. Looking forward to this year, net production from the Catcher and Kraken assets is expected to be in the range of 16,000 to 19,000 barrels of oil a day, with production costs targeted $23 a barrel. We currently have hedging in place for around about 3,000 barrels of oil a day, but obviously, we'll be reviewing that now in the context of the planned Egypt acquisition. CapEx for 2021, excluding Egypt and Catcher and Kraken, it's principally focused on planned drilling activity in Mexico and the U.K., which Eric will talk about and totals $90 million. Looking at the reconciliation of cash flows from last year. The opening cash position was $154 million. As I mentioned, cash inflows from Catcher and Kraken, $239 million. And then the asset sale proceeds from last year, Norway, $105 million; and from the Senegal sale, $552 million. Total cash CapEx last year relating to the divested assets was $248 million. And on the continuing portfolio, cash CapEx was $151 million. That was $28 million on Catcher and Kraken and $123 million on exploration appraisal activity which is effectively paused after Q1 last year and, therefore, reflects the Mexico program, which we completed in the early part of the year. So after admin and other costs, that took us to $570 million of cash on the balance sheet at the year-end, of which we distributed $250 million as a special dividend in January of this year. Moving on now to India. As you already know, on the 22nd of December, the arbitration panel, which are seated in the Hague under the registry of the Permanent Court of Arbitration issued its long-awaited ruling on this issue. That ruling is binding on the parties under the terms of the U.K.-India Bilateral Investment Treaty. And the award itself is an extensively reasoned 580-page ruling, which determined on several key matters. Firstly, the panel ruled that it had jurisdiction on this matter under the terms of the treaty and under Dutch and international law. Having established jurisdiction, it ruled that the retrospective tax in India breached the fair and equitable treatment standards in the treaty, and that the means of enforcing that retrospective tax on Cairn were discriminatory and unfair. As a result of that finding, it ordered for compensation equating to the value of the asset seized being $1.2 billion, plus interest at 2.75% over LIBOR backdated to 2014 at the time of the asset seizures. That interest now totaling nearly $500 million, plus costs of just over $20 million, putting the total value of the award today at just over $1.7 billion. In terms of ensuring that we access the value of the award, there are really 3 parallel tracks that we're pursuing in tandem: First of all, the first is obviously, engagement directly with India. As Simon mentioned, we've been in Delhi in recent weeks, and we've had constructive discussions directly with the Government of India, supported by other discussions from third-party stakeholders on our behalf. But clearly, India has not yet complied with the terms of the award. So in parallel, we've been preparing for enforcement. The treaty is subject to the 1958 Convention -- New York Convention on enforcement of arbitration rulings and India is a signatory to that convention. That means that it can be enforced in over 160 jurisdictions around the world, and we've already registered the award in multiple of those jurisdictions and begun the process of identifying assets against which action could be taken, should that be required. Thirdly, clearly, this is an asset which has value in the eyes of third parties, either to participate directly in our claim or as lenders secured against the proceeds. And naturally, this is an avenue we're exploring as a potential way to accelerate access to the recovery of the award, again, should that be necessary. So just to take stock on how all this positions us against the strategic priorities for capital allocation and managing the business that we set out last year. Obviously, we've been very active in managing the portfolio over the last year or so. We sold our development-based assets in Norway and Senegal, avoiding $1.7 billion of CapEx. And positioning ourselves to redeploy capital into expanding and producing the asset -- sorry, expanding the producing asset base. And today's announcement of the planned Egypt acquisition delivers on exactly that objective. We also announced today the proposed sale of our U.K. producing assets as they enter into decline phase, again, positioning us to redeploy capital to sustain the operating cash flow base and to reinvest for longer-term growth. Exploration remains core, but always focused on value delivery. Egypt will offer extensive near field potential as well as newer exploration concessions, and we've also retained a number of high potential assets elsewhere around the globe, which Eric will talk about. But importantly, where there is flexibility in the capital program. And we've delivered all of this in a way that doesn't put strain on the balance sheet and by which we retain the flexibility to continue to invest and expand the portfolio at what is an opportune point in the cycle. Following completion of the proposed U.K. and Egypt transactions, we expect to remain comfortable in a net cash position and, therefore, have significant capacity to further build the asset base. And finally, as well as building value in the portfolio, we remain focused on returning cash to shareholders. We see this as a key differentiator of the Cairn equity story over the last 15 years. We continued it in January of this year, and we aim to position ourselves to do more in the future. So I'll turn now to the 2 transactions we announced this morning. We've entered into an agreement to sell our U.K. producing asset interest to Waldorf Production for base consideration of $460 million plus contingent consideration structures would have the potential to be very material. We'll be retaining our U.K. exploration interest as well as some of the tax losses in the U.K. The details of the transaction are set out in our announcement this morning, but the key points are, as I said, $460 million of base consideration effective 1st of January 2020 and, therefore, obviously, subject to customary working capital and interim period adjustments. To give you an idea of that, the interim period adjustment to the end of December 2020 was about $144 million of that headline price. Additional consideration will be payable to Cairn based on the percentage of revenues from the field when Brent averages above $52 during the next 5 years. So we share both -- in the benefit of both oil price and production performance upside. To illustrate that, at $65 Brent over the period, that would pay out an additional $125 million of consideration based on our production projections. But importantly, that contingent consideration is uncapped. So the amount could be more than that if production outperformed or if the oil price was higher. As we said, whilst both fields have significant production life remaining, they are expected to begin to fall into decline this year. So it's a natural time for us to consider monetizing them to redeploy into growth assets particularly given the opportunity set that we're seeing in the market at the moment. Turning now to Egypt. I'll start with an overview of the transaction terms and structure. So this is a joint acquisition with Cheiron Energy, a highly experienced operator of similar production assets onshore Egypt. The net Cairn base consideration payable is $323 million, and there's additional consideration payable when Brent averages over $55 over the next 4 years, up to a cap of $100 million net to Cairn and further consideration of up to $40 million linked to commercial discoveries from exploration. We intend to fund the acquisition from a joint reserve-based lending facility, senior debt facility with Cheiron and a joint junior debt facility as well as obviously existing cash resources on our balance sheet. Looking on the right-hand side of this slide of the ownership structure, the producing assets are operated by Bapetco, which is a joint venture between the consortium and EGPC state oil company, that's the standard operating model in Egypt, and Bapetco is one of the most substantial and long-established joint operating companies in the country. Of the consortium, Cheiron is a designated contractor party for the production and development leases, and Cairn will operate the 3 newer exploration concessions acquired by Shell in recent years. This slide sets out the investment potential and scope for growth that we see in the portfolio. There is significantly more detail on the production and cost expectations to be provided in the mineral expert report that will be included in the shareholder circular that will be published in the coming weeks, but we wanted to set out the key high level picture today. As you would have seen, the acquisition will add net working interest reserves of 113 million barrels to Cairn, but also around 50 million barrels of oil equivalent of resources -- 2C resources, and gross unrisked exploration potential of over 800 million barrels predominantly in Cairn-operated acreage. So it's a resource base that can support both near-term growth and long-term sustainability of production. We'll be aiming to significantly ramp up the level of drilling activity following completion of the acquisition, and we think we can take production from around about 35,000 barrels of oil equivalent per day net working interest to Cairn for this year, up to 50,000 barrels of oil equivalent per day or more over the next couple of years. And that would be effectively returning production levels to that, which has been seen in a significant period before the last couple of years when drilling activity is diminished on the licenses. As you can see from this chart, we also hope to be able to materially reduce OpEx over the same period through operating efficiencies and contractor overhead reductions. And that, of course, will further enhance cash flows from the assets. And on that note, I'll hand over to Paul to talk more about the asset base.

Thank you, James, and good morning, everyone. I'd like to provide you with some further details on the quality of the assets that we are jointly acquiring with Cheiron from Shell in Egypt. The combination of these assets has already produced almost 1 billion barrels of oil equivalent, has gross 2P remaining reserves of over 300 million barrels of oil equivalent as of the effective date of the transaction and includes the largest gas field in the Western Desert. There are 4 main concessions as part of this package, which includes the Obaiyed and Badr El Din or BED fields where Shell hold a fuel contractor working interest; and NEAG and AESW, with our additional joint venture partners in the IOC share. A joint Cairn and Cheiron team, including myself, visited all the key sites in the fourth quarter of last year, and these are assets that have continued to operate safely and efficiently through this global pandemic. On the right-hand side, the pie charts illustrate the 2P working interest reserves and 2C contingent resources net to Cairn as of the 31st of December 2020, i.e., adjusted to last year's production. As normal, these have been independently estimated by a third-party and that will be contained in our circular to shareholders. Obaiyed and BED contribute more significantly to the overall reserves and production. At anticipated 2021 production rates, the reserve life index is approximately 8.5 years, which extends to around 12 years, including the contingent resources. And this compares with 5 years for our current North Sea assets calculated on our mid-case production guidance for Kraken and Catcher for 2021. As James has mentioned, the assets are managed through a joint operating company, Badr Petroleum company or shortened to Bapetco, which is a 50-50 joint venture between EGPC, the national oil company of Egypt and Shell. And of course, the Shell interest will be replaced and transferred to Cheiron and Cairn on completion. Cairn -- Cheiron will be deemed the operator within the contractor parties, but Cairn will have rights to certain operational positions. This JOC actually operates all of the concessions, including those with other IOC joint venture partners, which are shown on this slide. We believe that we are well placed to bring together and leverage the skill sets of the 2 companies, including Cheiron's existing Western Desert production experience and our prior legacy development experience from onshore desert in Rajasthan, India. Current OpEx is around $6 a barrel, and we would anticipate reducing that with time. Again, this compares with our North Sea OpEx, which has now risen to above $20 a barrel as production starts to decline. The shale working interest production is shown on the next chart. And during 2020, averaged 83,000 barrels of oil equivalent per day. This has exhibited a relatively low decline of around 10% due to our curtailed capital program in 2020, limiting the number of new wells, in particular, that were drilled. And naturally, that was a consequence of the significant fall in oil price during the year, particularly during the second quarter and highlights the capital flexibility within this established onshore asset base. And the percentage displayed on the chart for each year refers to the split by hydrocarbon type, with approximately 2/3 gas and the remaining 1/3, a combination of oil, condensate and natural gas liquids. As James has mentioned, going forward, in the right investment climate, we will work with the joint ventures with the aim to grow production back to the historical working interest level of approximately 100,000 barrels of oil equivalent or 50,000 net to Cairn. And the overall entitlement interest, production and reserves as calculated under the PSCs are typically around 40% to 45% of working interest. There are 2 main processing facilities as part of this package, which have recently undergone life extension work, and there are ongoing process enhancements in relation to produced water handling and gas treatment. The majority of Shell's entitlement oil and condensate is currently exported, while the gas is sold domestically to EGPC via the Western Desert gas complex. The acquisition includes ownership in the main transportation infrastructure to deliver hydrocarbons to the point of sale, including third parties, via the Obaiyed facilities. Oil from BED and Obaiyed facilities is delivered to the Hamra oil receiving terminal on the Mediterranean Coast. And this Western Desert grade has historically sold at prices close to Brent. And the Western Desert is, of course, a well-established oil field sector with a competitive playing field for service companies. This allows rigs and services to be contracted and executing new activities on a fast cycle time. We will aim to work together with Cheiron, who already operate in this area to deliver synergies and to reduce costs while maintaining safety and efficiency. And I'll finish on the forward plan. Following completion, we aim to maintain the excellent HSSE performance that has been delivered historically in partnership with EGPC. We will look to maintain and leverage the infrastructure to aid development and production of further resources. And beyond 2021, we will look to direct new capital to the best infill, satellite and process enhancement projects to arrest declines and grow the production base. Concurrently, we will baseline, verify and develop a greenhouse gas emissions reduction plan to build on the good work already done by the current operator. This initial focus is likely to be electrification to reduce diesel consumption and to reduce routine flaring, consistent with Cairn's commitment to the World Bank's global gas flaring reduction initiative. And we will also examine further initiatives tied to the host government's nationally determined contributions to the Paris Agreement. But it would be wrong just to focus on the short term. These assets have the potential to produce out beyond this decade and can both survive in a low price environment and thrive in a higher price environment. So finally, we will finish and establish a presence in country, look to work with our new joint venture partners and prepare for the operated exploration activities. And at this point, I'll hand over to Eric to tell you more.

Thank you, Paul. Good morning, everyone. Turning to Slide 20. Exploration at Cairn is entering an exciting new phase. Our entry into the Western Desert provides us with numerous targets across multiple basins from near-field exploration to deeper wildcats, all in a province with a historical discovery rate above 50%. Importantly, as James said, Cairn will operate exploration in 3 large concessions with lots of potential. I'll give you more on that shortly. Now as Simon told you, in the U.K., we're beginning our drilling campaign with Shell; and in Mexico, we're following up on our success at the Saasken discovery with more exploration drilling. We continue to mature the other targets in our portfolio in Suriname, Côte d'Ivoire in Israel. And we remain on the hunt for select opportunities, which fit our advantaged barrels criteria, high-value and/or low-cost resource, optimize development time, sufficient scale and good fiscal terms. Now if we turn to Slide 21, I'll focus first on Egypt. The Shell acquisition presents a host of opportunities for exploration in a proven super basin, which frankly just keeps on giving. As you see on the slide, there are myriad leads and prospects identified by Shell with material potential. We're working this inventory in detail now. And given the maturity of the infrastructure in the Western Desert, even modest discoveries have a high chance of being commercialized. Now if we turn to Slide 22, you can see that the Western Desert provides a host of often stacked targets, from Paleozoic Sands, over 250 million years old, right through to [ using ] carbonates less than 50 million years old, and the entire prospective section can be up to 5 kilometers thick. Now while much of the success has been focused in the tertiary and cretaceous age sections, recent activity is opening up deeper plays in the jurassic and even the Paleozoic. And there are even unconventional style opportunities operators are starting to investigate. And of course, our partner, Cheiron, brings a deep knowledge to the basin. Now on Slide 23, I'm particularly pleased with the acreage Cairn will be operating. We are 50-50 partners with Cheiron in the West El Fayum, Southeast Horus and South Abu Sennan concessions, which together cover almost 9,000 square kilometers. These were awarded to Shell in 2020 and are still in their first exploration phases. There is significant activity ahead, including 2 new 3D seismic acquisitions and 9 commitment wells in the first phase. We have had a team working these concessions for some time now and are a good place to start the exploration campaign, aided by our partner who is also active in the immediate area. There is significant growth potential here. Of course, there are more frontier exploration blocks and they have seen activity in the past. So it will take new ideas, better seismic and a broad vision of what's possible to maximize the value. Now if we turn to Slide 24. Yes, we talked about our new acquisition, but we still remain focused on the rest of our program. In the U.K., we will be spudding our first well in the jurassic fulmar sand play with our partner, Shell, in just a few months. And we'll be targeting over 30 million barrels gross within 15 kilometers of the Shell-operated Nelson platform. With success, this could be on production in 3 years as a subsea tieback. Follow-on next year will come from the Cairn-operated Diadem well also just south of Nelson. Again, a relatively quick subsea tieback with success. And as you can see, with encouragement, we have other similar prospects to target in our acreage. Now turning to Mexico, where we resume our exploration campaign in Block 10 with ENI with the Sayulita-1 exploration well targeting amplitudes, analogous to our Saasken discovery, which completed just over a year ago, and we may also appraise Saasken later in the year. And there are multiple such amplitude-supported targets throughout Blocks 9 and 10, as you can see, and these can form a hub concept for development here. Now turning on Slide 26, to Suriname. Success continues to march east towards our block, following on 4 discoveries in a row in Block 58. Petronas and Exxon announced a discovery in December on their Block 52, just to the west of our block as the map shows. Now we've identified numerous targets at multiple levels, including several of a similar style to the discoveries we are -- and we are planning a 3D acquisition program in the future. So in summary, we are accelerating our exploration program after a sensible pause in 2020. We have new operated acreage to mature in our exciting Western Desert acquisition. We have exploration drilling in the U.K. and Mexico. And we continue to mature the rest of our portfolio to drill decisions in the near future with very modest capital expenditure. We have a lot to do in exploration. Now back to you, Simon.

Thank you, Eric. So in conclusion, we've taken a pivotal step in our strategic ambition to grow and diversify Cairn's production base to provide a sustainable platform for differentiated growth over the next decade and beyond as we seek to responsibly produce hydrocarbons in support of the UN Sustainable Development Goals. Our retained balance sheet strength and financial flexibility affords us the ability to consider additional opportunities, and we continue to provide exposure to significant exploration upside from an actively managed portfolio. Ongoing capital discipline shows that investment opportunities are continually ranked against the potential for further returns. And as I previously stated, the portfolio is managed and financed ex the value of Indian arbitration, where notwithstanding ongoing dialogue with the Government of India, we are actively deploying robust recovery options to safeguard shareholders' rights to the value of the award. We look forward to updating you on progress in the coming months. Thank you. I'll now hand back to the operator for questions.

[Operator Instructions] And we'll now take our first question. It comes from Nathan Piper of Investec.

Thanks for the call and the backdrop on the deals. I wonder if I could ask why you're swapping high-margin oil exposure for low-margin gas-weighted production. And why don't you keep them both? I mean, I recognize it's a short cycle, and I see the opportunity there to start reinvesting that at Shell stopped. Will this become clearer with future deals you've got planned? And are you effectively trying to build the company so that you can pay a regular dividend? And just one last one. This is also a suggestion that there's a lack of attractive deals in the U.K. North Sea, it seems a bit of a surprise for these tax losses. And also, given you got exploration coming up potentially more tax losses and utilizing them to the existing production. I guess can you pull the deal together because there's nothing wrong with having oil in the North Sea and gas that we did?

No, no, there isn't. You're right. But it's not about swapping so much, Nathan, is about renewing and regenerating. As we said, these assets are at the point of entering natural decline. So for us -- and I think we've been very open about this. We've been, as we said, looking to grow and to diversify the production base, and we want to do that from a platform that's sustainable and has upside growth potential. So from our perspective, it's perfectly natural to dispose of assets at what we believe is the right point in the cycle. And to reinvest in a region where we see considerable growth potential. You're right that we -- this is a pivotal step, as I said, but it's not the only step. And we believe that there's more that we can do in terms of adding to the portfolio, and you'll have to leave that with us to come back to you. But in the meantime, this in itself is a material transaction. And actually, with the fiscal terms in Egypt and the -- it's gas-weighted, but there's also liquids production. I'd say these are pretty attractive from a fiscal perspective as well. I'll maybe let James answer on the tax losses point?

Yes. And just to sort of reiterate your point on the first question by Simon there, the U.K. sale was not -- was not undertaken in order to enable us to redeploy that capital into Egypt, as you saw, based on our year-end cash position post dividend, we were well placed to fund the Egypt acquisition anyway. The U.K. transaction was, in our minds, the right portfolio move and the right economic decision based on the deal terms in its own right. And obviously, as you alluded to, it positions us to do more in terms of building the portfolio if we see attractive opportunities to do that. On the specific point about tax losses in the U.K., lots of asset buyers in the U.K. have plenty of their own tax losses. In fact, most do. And so just in structuring terms and in terms of the commercial reality of it, if they're not a value to the purchase, then we may as well retain them. Clearly, they will have some value in the event of exploration success in the U.K. They have some theoretical value if we were to look at further deals in the U.K., we certainly don't rule that out. And so it made sense for us to retain part of those losses. Part of them will transfer to the purchaser.

Okay. One just quick follow-up, please. You're obviously shifting a different type of political risk in U.K. North Sea, overseas Egypt. I wonder if you could give a bit more color on the payment histories and within these assets. I mean, I know Egypt is beginning to catch up on quite significant arrears it had in the past with certain players. So maybe a bit of color there. And I guess I was alluding to whether you're planning to set the company up to pay a regular dividend as in the specials that you've done over the years?

Well, let me deal with the dividend point, first of all, and then, James can deal with payments. I mean, obviously, we, as you know, Nathan, are very focused on returns -- providing returns to shareholders, and that's always a balance against disciplined reinvestment of capital in the business. Today, we're not at a scale where a regular dividend is appropriate, looking at the kind of reinvestment cycle we've got. Obviously, we have India ahead of us in terms of further potential for returns. And obviously, if we get to a scale that we believe gives us the flexibility to contemplate a more regular form of dividend then that's something we'll look at. And I hope that our track record speaks for itself in terms of the focus on routes to returns to shareholders. James?

Yes. And on the payments point for hydrocarbon sales to the state in Egypt, I mean, obviously, that has been a key focus for international investors in Egypt for some time. I mean, I would -- to your question, Nathan, I would say, it was very much more than beginning to catch up on that situation in Egypt. I mean there has been a very significant improvement in restructuring in recent years to normalize that, and we see a massively improved position on that front. During the course of looking at this transaction, we saw the receivables position grow a little bit, as you might have expected, following the shock of Q2 of last year. But then equally, we saw it improve significantly on these assets through the latter part of last year. So it's being actively managed, and I would say that the track record is pretty strong. And clearly, we'll be coming in with a story of reinvigorating investment in these assets, which we expect to be welcomed by the government.

We will now take our next question. It comes from James Thompson of JPMorgan.

And congratulations on the deal. First question, really, or first couple of questions is on Egypt. I mean, obviously, it's going to take a few months now to get all the approvals in place and actually get on to the licenses. When I look at your production profiles going out through to -- over the next 3 or 4 years, you obviously got a very significant ramp-up in 2022. I just wondered how achievable that is given you may not be operating the licenses until the back end of 2021. First question. And then in terms of the kind of gas oil mix, I mean, it looks like on the reserve split that -- the Obaiyed license is the one which is probably most, I suppose, go getable from a production growth standpoint. Does that mean this is going to become a more gas weighted portfolio over the next couple of years? So the first 2 questions.

Yes. Thanks, James. I mean, I guess the beauty of these assets is, it's in a very well-established areas. So -- and it's got quite a long sort of budget cycle process, which is quite helpful in terms of setting out your sort of overall capital program, but you can obviously adjust it fairly quickly, and that can be in the case of 2020. They obviously laid down quite a few rigs and services and reduced the activity. And the contrary to that is obviously in the right investment environment, you can ramp it back up. So I think we're relatively comfortable that providing we see completion in a reasonable time period, then we can start to obviously shape the activity levels in 2022. And we've already identified what I would describe as a sort of quick wins. In terms of the gas oil mix, both in terms of the last question, and this one is clearly in a higher oil price environment, you would probably target more of those opportunities. And likewise, obviously, in a lower oil price environment, you may target more of the gas opportunity. So I think it offers that flexibility as well in terms of where you direct your capital, in terms of thinking about the returns.

Okay. And in terms of the capital program, maybe you've got a rough estimate of what the CapEx is going to be to get the assets back to 50,000 barrels equivalent a day?

Yes. I mean I think we -- I mean I think last year, we saw a capital program that was under $100 million gross. I think you're probably looking at sort of growing that potentially up to $80 million to $100 million net to Cairn, to double that for the consortium.

And that's what you see, James -- James, that's what you see on Slide 12 of the presentation this morning. The high-level numbers around that. You'll see, as I mentioned, in a lot more detail in the circular when we publish that to shareholders. But I think the key point here is that, that significant delivery of growth, potentially 40% to 50% of production growth. We anticipate will be self-funded so can be funded out of operating cash flow within Egypt over the next couple of years. And then clearly, when we get there, that puts us in a much stronger free cash flow position.

Okay. And James, while you're there, just in terms of the India consideration, you're now talking about $1.7 billion, $500 million of interest that is higher than when you last talked about the total consideration from Egypt -- sorry, from India, I should say. So just what's driving that change? And then in terms of the processes you laid out, I mean, clearly, you're not going to be drawn on particular time phrase, anything on that, perhaps. But just in terms of the enforcement measures that you are pursuing or at least laying the groundwork for -- at what point you start becoming more active in those processes?

So on the interest amount, I don't think we've previously quantified it, but the -- it's -- well, I said 2.75%, annually, it's actually 1.375% calculated -- over LIBOR, calculated semiannually. And as I said, backdated to 2014. So that's obviously quite over 7 years. That is the quantum. And it continues to grow. So in terms of timing, as you'd expect, we're not going to be drawn on giving specific guidance. I think all we can say is that we have been taking all the necessary proprietary steps to make sure that we're ready based on the enforcement front and that we've progressed discussions around monetizing and risk-sharing for this in the event that we don't reach a timely accommodation with India directly.

Our next question comes from Rachel Fletcher of Morgan Stanley.

I want to ask a little bit about your net-zero target. I'm not sure if this is something you've kind of officially talked about before. I just wanted to know, is this scope 1 and 2 or because now you have a more gas-focused portfolio. And you also mentioned CCUS, does this also include Scope 3? And then in terms of bringing down your emissions, what are the steps do you plan on taking to do this?

Yes. Rachel, thanks for that question. So yes, we are, at this stage, primarily focused on Scope 1 and Scope 2, recognizing we're only in the upstream part of the business. In terms of net-zero, I mean, I guess we've made a commitment for some time aligned with our fellow BRINDEX members about supporting, in particular, the U.K. Government's aspiration to reach net-zero by 2040. One of the reasons for being in the NECCUS consortium is working not just with other E&P players, but also industrial players to really understand the scope of that challenge and where CCUS may play a role, particularly in the U.K. and whether we can contribute in some way towards that. In terms of the general emissions reduction, I mean, I guess the #1 step is obviously, is energy efficiency. So looking for ways particularly in our operations operated or nonoperated through all of the phases: exploration, appraisal and production, as to how we can use energy better. And then where we have emissions. So for example, in the case of the portfolio that we'll hopefully be acquiring in Egypt where we can actually make a difference there and reduce them. So you've seen that we stated that we do need to do our own sort of baseline survey verification plan and identification of targets where we believe we can potentially reduce things and improve the overall emissions from those fields that have obviously been producing for several decades.

Our next question comes from James Hosie of Barclays.

A couple of questions for me. And first, on the Egyptian assets. Can you outline just what determines the gas prices you receive there? Is it specs or is it a benchmark? And then secondly, if you could just provide detailed carbon footprint of these assets, for example, sort of scope onto emissions per BOE and how that compares to the U.K. portfolio you're divesting?

Yes. James, you'll see, again, more detail on the gas pricing. But I mean, I think for the purposes of your modeling, you can think of it as basically fixed $2.60 or at least average across the portfolio. There is -- at the extreme ends, there is some Brent linkage, but thinking about it as basically fixed gas prices is probably the simplest way.

Yes. On the emissions is, obviously, we've got to recognize that, well, not just for these assets, but assets and generally, there'll obviously be a function of the maturity or how new they are. So assets that have been built and constructed in the last few years are obviously going to be probably more energy-efficient and, therefore, lower emissions than assets that were potentially built 1 or 2 decades ago. That, in no way, excuses us from not looking for significant improvements. So the actual emissions from the Egypt assets are about 1.2 million to 1.4 million tonnes per year, which equates to about average for Africa on the IOGP benchmarking of an intensity of about 30 kilograms per CO2 -- 30 kilograms CO2 per barrel of oil equivalent, which is obviously higher than our North Sea assets. But obviously, the main reason there is Kraken and Catcher are assets that were constructed in the last 5 years.

Okay. May just add just 1 more on the North Sea asset sale. Why did you not consider proposing a further special dividend [indiscernible] given that you've already mentioned that you do have the resources for the Egypt deal without selling [indiscernible].

Yes. We -- of course, we continue to look at everything we're doing against -- set against the prospect of further returns to shareholders. And obviously, as you know, very recently, we made a considerable return but we do see the opportunity to add to the portfolio. As we said over recent months, we think now is a good time to be adding with some of the disposal programs that are in place. So as I said, this is a pivotal step, but it's not the only step that we are contemplating. So we think there's more that we can do.

Our next question comes from Chris Wheaton of Stifel.

A few questions from me, if I may. Could you just go back to the CapEx slide or for Egypt, I think it's slide 12? Just to understand there, is that kind of 100 -- $90 million to $100 million of CapEx net to Cairn? There's kind of steady state number that you would expect to hold production at around 50,000 a day net to you?

Well, I think -- okay, sorry, we're waiting for your list. That is the -- that is, I would say this -- in the early years, there's certainly some catch-up of -- against a couple of years of at least of significantly diminished activity from the current owner. So there is a certain amount of catch up to accelerate production, which has declined over the last couple of years, as I said, from a net basis of $35 million to $50 million for us. So I would say the steady state CapEx is lower than that. But as I said, you'll see in, I hope, a short number of weeks, full life of field production and cost projections by license in our mineral expert report, at least for the drilling opportunities that have been identified already.

Okay. My next question is going to be about how much you're going to have to spend on both converting the 2C into 2P, but also going up to the exploration because ramping up production of 55,000 a day, really starts to come into your reserve-to-production ratio. And that suggests to me that you're going to have to spend, maybe running on an exploration trend mill quite significantly. And I'm trying to work out what the steady state free cash flow leads for this business. And coming out on your 2024 numbers, about $100 million a year, but that's going to be less than that if you have to spend money on the 2C and the exploration in order to give you that runway or that longevity on the assets? So could you help me understand does the $100 million number seem right? And if not, then how much of the additional CapEx is going to have to be spent on exploration on top of what you've identified in Slide 12? Looks to be just operational CapEx rather than exploration as well.

Yes. So Chris, just thinking about it. So in the near-term, anyway, there's a -- this is a portfolio pretty rich in opportunities in and around the fields, which has obviously been classified, as you've seen in the circular, both in terms of reserves and contingent resources. And obviously, we will move to invest and convert the reserves into production predominantly, maybe not exclusively, predominantly in the first couple of years. There are some discoveries that are -- have also been made with several wells already drilled. Some of those are producing, but the area isn't fully developed. And then we'll probably look at those in the sort of -- you could see in the sort of 2024, 2025 category. So I think that's where we'll be directing the capital probably in the next period of time. And then in addition, Eric can just touch on -- there's obviously these 3 new exploration blocks, which we're quite excited about, which have got commitment wells associated with them.

Yes. So those 3 blocks, certainly, but then also the blocks to the north, which we only briefly touched on North Um Baraka and North Matruh where there are a couple of wells to be drilled this year for exploration. But one of the attractions here is, the wells, these are $2 million to $5 million wells, depending on the depth and the complexity to drill, which is quite a bit different from even in shallow offshore. So you get a lot of bang for your buck for exploration. And then again, with the amount of infrastructure, as I said, it's -- you can bring even modest discoveries online commercially, which is what drives up the success rate. So you're right, there will be significant activity. But if I have to have exploration activity, this is the place to have it.

Okay. One last question is following up on some of the earlier questions on the ESG. What do you see is the carbon litigation strategy for these assets, given that you've got a disparate well stock. We have a geographically widely-disbursed well stock. But I presume a lot of which is running off natural gas at the moment. And I'm guessing would be expensive to electrify. I'm just interested in your thoughts about that on that sort of 5 to 10-year basis?

Yes, Chris, actually, it's a little bit different from that, but you're on the right theme. So there's basically about 100 diesel generators across the Bapetco facilities. And obviously, the focus of them in the near-term will be conversion to gas. So I think that will make a difference. The second step, which we'll need to look at in terms of the overall process as I mentioned, is a reduction of continuous routine flaring, which contributes about 14% to 15% of the overall emissions. So we'll be looking at that. And so I guess, longer term, there are some studies that the current operator is done that we need to look into further, which is really to do with use of CO2, either sequestration or potentially miscible flooding in some of the oil fields. But I'd say that's a longer cycle project.

Our next question comes from Mark Wilson of Jefferies.

I might touch firstly regarding the Egypt Asset trends visualize the activity that's required there in physical terms. Just how many rigs were running across those licenses in the years 2007 (sic) [ 2017 ] to 2018 versus now? And so what -- how many rigs you would look to get back to in order to increase the production? You say you've got 3 workovers at the moment. So just how many drilling rigs in the past versus what we'd expect to get back to, please?

Yes. Mark, the specifics of every year might be beyond my memory. But certainly, I can give you a flavor of what has operated in the past. So they've probably been at a peak in the past of around 7 rigs operating. And they've probably been at a low, particularly last year of around sort of 2. I would imagine the sort of program that we're outlining is probably somewhere in between that range, so probably more around about the 4 mark, and we could envisage potentially drilling 40 to 50 wells per year rather than sort of 20, which occurred last year. But a lot of that is also down to working out a sort of optimal contracting and execution strategy over a number of years. So it may not be necessarily as picky. As you know, up and down, we'd rather have it obviously stable and driving continuous improvement. So that's sort of what we'll be looking at, Mark.

Got it. Okay. All right. Thanks, for that Paul. You may have to change your logo on your operations slide, I think. That's it. And then the second question is for James, just some details on the U.K. disposal. James, you mentioned $144 million working capital adjustment. So we either had that, of that pro forma year-end of $320 million or of the headline figure, the 1st of January. Is that correct? And then the second part of that, I suppose, just to clear up, are there any preemption requirements for partners on either deal, actually in Egypt or in the U.K.? And are you completely exiting any decommissioning requirements across both Kraken and Catcher?

So yes, Mark, that's the right way to think about the interim period adjustment. So effectively, the effective date of the deal was 1st of January, 2020. In practice, we will retain the cash flows, therefore, they're recognized on our balance sheet at the year-end, and they will be deducted from the purchase price. So either of the rates you described comes out with the same pro forma answer, I guess, for Cairn. The -- I'm sorry, the second part of your question?

Just if there's any preemptions on [indiscernible]

No -- so there's not preemption. And it is a clean exit, yes. So we have no residual exposure to liabilities relating to the assets. The only residual exposure we have is on the upside, obviously, relating to oil price and production, as I mentioned.

Yes, Mark, just yet, Mark -- so Mark, just to clarify, there are obviously preemption rights in Egypt. But you're correct, as James alluded, there's no preemption in the North Sea.

Okay. Good. And then, just -- the contingent upside on the U.K. assets. You seem quite material, actually, you mentioned that over $100 million of revenue is just on oil prices, I think.

Yes, that's right. So basically, it is -- I mean, the details are in the -- it's quite an extensive announcement this morning on the U.K. transaction because it will be a Class 1 transaction. And therefore, subject to a shareholder vote. So there's a lot of detail on the transaction terms in that announcement, and you'll see midway through that -- the exact mechanism for the earn-out. But basically, over the next 5 years, including this year, it's a percentage of revenues that are generated by the oil price being over $52 uncapped. And so what I mentioned was our estimate of in Brent being at $65 over that period with the production profiles we expect from those assets, generating a further $125 million of consideration.

[Operator Instructions] And now we'll take out next question. It comes from Werner Riding of Peel Hunt.

Just a quick one on the U.K. So just wondering if JAWS and Diadem don't work, would that trigger your complete exit from the U.K. oil industry in effect?

Well, no, I mean, we -- I wouldn't rule out an area that has such good fiscal terms, strong hydrocarbon delivery and a long history. I mean, we look at each thing as it comes. And if good opportunities pop up in the North Sea, we'll pursue them. But for right now, we'll just remain focused on the program we have as well as some of our other licenses, particularly in the East Orkney Basin where we're also maturing.

This concludes our question-and-answer session. I would now like to hand the call back to Simon Thompson for any additional or closing remarks.

Okay. So thank you, everybody, for listening in. Appreciate the questions. Obviously, if you've got any follow-ups, please do let us know. And in the meantime, we look forward to reporting to you on further progress. Thanks very much for your time.