Refuting the claims made by Cairn India, state-run Oil and Natural Gas Corp (ONGC) has said the government will save $2 billion if royalty paid on the prolific Rajasthan oilfields is allowed to be cost-recovered.

ONGC owns a 30 per cent stake in the Barmer oilfields and pays royalty to the state government not just on its share, but also on the balance 70 per cent owned by Cairn India.

Over the life of the field, ONGC estimates it will pay over Rs 14,200 crore ($3.15 billion) in royalty on behalf of Cairn India, which the government — in numerous commitments since 1997 — has promised to reimburse the state-run oil exploration firm for in full, sources said.

ONGC has alternatively suggested that the royalty can be added to the project cost and recovered from the sale of up to 2,40,000 barrels per day of oil projected to be produced from the Rajasthan oilfields.

Sources said the company, in workings submitted to the Oil Ministry this week, stated that the government’s profit share will be lower by $1.1 billion in such a scenario, much less than the $3.15 billion it would otherwise have to reimburse to ONGC.

While the workings have been calculated considering the oil price of $70 a barrel, the profit for Cairn India, ONGC and the government is calculated after debiting capital and operating expenses and royalty from the oil price realised.

Sources said Cairn India CEO Mr Rahul Dhir had on February 7 written to the Oil Secretary Mr S Sundareshan saying the government’s profit share of $14.6 billion at the present approved peak output of 1,75,000 barrels per day would be reduced by over $2 billion if ONGC’s proposal is accepted.

The UK-based company estimates that ONGC’s cashflow at an $80 per barrel oil price will be $5.834 billion. ONGC’s royalty payout would be $5.282 billion and it would have paid another $878 million as its share of capital expenditure. Thus, its total deficit would be just $564 million.

Cairn says the government will have to reimburse only $564 million to ONGC if the PSU is reimbursed for the excess royalty burden, while if royalty is added to project cost, the government’s profit share will come down by $2 billion.

Sources said ONGC has countered these assumptions, stating that Cairn has not accounted for the cost of money and the operating expenditure involved before calculating the net cashflow.

Also, ONGC is a commercial organisation which functions for earning profits. In Cairn’s assumption, ONGC is shown as a no-profit-no-loss company. These also do not account for the time and effort put by ONGC into the Rajasthan joint venture.

ONGC says it is only asking for its contractual right under the Production Sharing Contract (PSC) and it was none of Cairn’s business to discuss how much of its royalty liability should be reimbursed by the government.

Related Topics
comment COMMENT NOW