ONGC may do own valuation of Cairn India's hydrocarbon assets

ONGC may do its own valuation of Cairn India Ltd's hydrocarbon assets in India on receiving a formal request from Cairn Energy for no- objection certificates.

Using pre-emptive rights

Industry sources said ONGC would then take a decision on whether it wants to exercise its pre-emptive rights as a joint venture partner. Cairn Energy has written to ONGC about its intent of seeking NOCs by September 21 for a smooth transfer of the Edinburgh-based firm's stake in Cairn India to Vedanta Resources.

Sources said, “A decision on whether ONGC would like to use its pre-emptive rights or not will be taken by the company's board. Such decision cannot be taken at the executive level.”

Besides, any deliberation on the issue will happen only after September 14, once Cairn India's shareholders give their mandate on whether they accept Government's conditions – royalty cost recoverable and withdrawal of arbitration cases by Cairn India, sources added.

Royalty issue

Making royalty paid for the premium Rajasthan oil fields cost recoverable would also mean Cairn India's current valuation will go down, observers say.

Last August, Cairn Energy and Vedanta announced a deal, according to which, Cairn Energy would sell a maximum 51 per cent stake in Cairn India to Vedanta for up to $8.48 billion. However, a recent re-adjustment in the sale and purchase agreement between the two firms is estimated to result in the deal size being brought down by $628 million.

This, according to industry observers, was made to factor in the aspect of making royalty cost recoverable. On account of shouldering heavy royalty burden for the Rajasthan fields, ONGC has been restraining itself from using the first right of refusal.

If royalties paid by ONGC are made ‘cost recoverable', the Government's revenue share from the fields will reduce by Rs 5,032 crore over the Rajasthan project life (2020).

On present assumptions of production, crude oil prices, and currency exchange rate in net present value terms, the Government's share of profit is reduced by Rs 5,032 crore, that of Cairn by Rs 6,272 crore and ONGC by Rs 2,688 crore over the life of the project.

However, ONGC would recover the cost of royalty paid by it to the State Government on behalf of themselves and Cairn amounting to Rs 13,995 crore over the life of the project.

Under the production sharing contract (PSC), as the licensee of the Rajasthan block, ONGC has to bear 100 per cent royalty. But according to the accounting procedure prescribed in the PSC, royalty is cost recoverable.

Provisional calculations show the total royalty burden over the project life is Rs 18,000 crore. Commercial production of oil in Rajasthan block started in August 2009 and currently the average output is 1,25,000 barrels a day.

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