Cairn India's Rajasthan oil output schedule may be hit

Cairn India's Rajasthan oil production schedules are likely to be hampered due to key decisions hanging fire.

Caught in the crossfire between the Government and Cairn Energy plc, the issues involve who will buy the crude oil in FY 2011-12, and which will be the delivery point for private refiners.

With the Petroleum Ministry, ONGC and Cairn Energy yet to resolve the issues that would lead to smooth transfer of Cairn Energy's majority stake in Cairn India to Vedanta Resources, the Indian arm of the company is facing hiccups in getting approvals for its daily operations. Cairn India has communicated its concerns to the Petroleum Ministry.

The Rajasthan field (RJ-ON-90/1) is the most prominent asset of Cairn, which produces up to 125,000 barrels of oil a day. Cairn is the operator of the block and owns 70 per cent stake, with ONGC holding the remaining 30 per cent.

A senior official associated with the developments said, “There are several outstanding matters that may sound routine in nature but are critical for the operations and functioning under the production sharing contracts. Delays in getting timely approvals on such matters have an adverse effect on the schedules.”

For instance, Rajasthan crude oil is being sold as approved by the Government to private refiners — Reliance Industries Ltd and Essar Oil — for a year. The issue of delivery points for sales to private refiners remains unresolved, causing non-payment of cash calls by ONGC for the spur crude oil pipelines and facilities set up to deliver the crude to these refiners. “Non-payment of cash calls by ONGC for spur lines and facilities amount to approximately $130 million,” the official told Business Line .

The Rajasthan crude oil is being supplied to the refiners through a pipeline network built by Cairn India. To reach the designated refineries spur lines have also been laid.

Another important decision which is pending is nomination of buyers for the Rajasthan crude. “Nominations for the fiscal 2011-12 have not been made yet. The current nominees (MRPL and Indian Oil) are for fiscal 2010-11. To ensure there is no disruption on the crude oil production nominations need to be done in time,” the official said.

Last nomination

The last nomination was for 2.4 million tonne of crude — IOC (1.5 mt), MRPL (0.4 mt), and HPCL (0.5 mt). However, HPCL did not buy the crude oil. In case of shortfalls in offtake by the Government nominees and planned shutdowns by the refineries, Cairn India is also pursuing with the Directorate-General of Foreign Trade for permission to sell to the SEZ refinery. At present, RIL's second refinery in Jamnagar is in SEZ.

Ministry's stand

The Petroleum Ministry has been maintaining that “in-principle” it has nothing against the Cairn-Vedanta deal, but would protect the interests of ONGC. It wants certain issues to be resolved before it takes a final call on the deal.

The issues include lawsuits filed by Cairn with respect to payment of oil cess, accepting ONGC's pre-emptive rights, and the royalty paid on crude oil produced from the Rajasthan block.

Meanwhile, Vedanta officials have also met the Petroleum Ministry officials and have tried to convince them about the company's commitments in the field of oil and gas.

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