Oil and gas assets

Expenditure incurred on the acquisition of a licence interest
is initially capitalised on a licence-by-licence basis. Costs are held,
undepleted, within exploratory & development wells in progress until the
exploration phase relating to the licence area is complete or commercial oil and
gas reserves have been discovered.

Exploration expenditure incurred in the process of
determining exploration targets which cannot be directly related to individual
exploration wells is expensed in the period in which it is incurred.

Exploration/appraisal drilling costs are initially
capitalised within exploratory & development wells in progress on a well basis
until the success or otherwise of the well has been established. The success or
failure of each exploration/appraisal effort is judged on a well-by-well basis.
Drilling costs are written off on completion of a well, unless the results
indicate that oil and gas reserves exist and there is a reasonable prospect that
these reserves are commercial.

Where results of exploration drilling indicate the presence
of oil and gas reserves which are ultimately not considered commercially viable,
all related costs are written off to the Profit and Loss Account. Following
appraisal of successful exploration wells, when a well is ready for commencement
of commercial production, the related exploratory and development wells in
progress are transferred into a single-field cost centre within producing
properties, after testing for impairment.

Where costs are incurred after technical feasibility and
commercial viability of producing oil and gas is demonstrated and it has been
determined that the wells are ready for commencement of commercial production,
they are capitalised within producing properties for each cost centre.
Subsequent expenditure is capitalised when it enhances the economic benefits of
the producing properties or replaces part of the existing producing properties.
Any costs remaining associated with such part replaced are expensed in the
financial statements.

Net proceeds from any disposal of an exploration asset within
exploratory and development wells in progress are initially credited against the
previously capitalised costs and any surplus proceeds are credited to the Profit
and Loss Account. Net proceeds from any disposal of producing properties are
credited against the previously capitalised cost and any gain or loss on
disposal of producing properties is recognised in the Profit and Loss Account,
to the extent that the net proceeds exceed or are less than the appropriate
portion of the net capitalised costs of the asset.

The expenditure on producing properties is depleted within
each cost centre. Depletion is charged on a unit-of-production basis, based on
proved reserves for acquisition costs and proved and developed reserves for
other costs.

At the end of the producing life of a field, costs are
incurred in removing and restoring the site of production facilities. Cairn
India Group recognises the full cost of site restoration as an asset and
liability when the obligation to rectify environmental damage arises. The site
restoration asset is included within producing properties of the related asset.
The amortisation of the asset, calculated on a unit-of-production basis on
proved and developed reserves, is included in the ‘depletion and site
restoration costs’ in the Profit and Loss Account.

Revenue represents the Cairn India Group’s share of oil, gas
and condensate production, recognised on a direct-entitlement basis and tariff
income received for third-party use of operating facilities and pipelines in
accordance with agreements.