ONGC wants royalty shared by all stakeholders of Rajasthan oil fields

ONGC, being seen as the bad boy in the Cairn-Vedanta deal, has said it was never opposed to bearing the royalty burden for the Rajasthan oil fields.

But at the same time, it wants to bring down its own burden by making royalty ‘cost-recoverable' according to the contract signed for the field.

In other words, it wants royalty paid for the fields to be included in the project cost when calculating profit-petroleum. Thus, the royalty burden would be shared by all stakeholders.

A senior official close to the developments told Business Line , “ONGC wants that while calculating profit-petroleum, royalty should be factored in, and then only profit-petroleum should be distributed among the stakeholders — the Government and the contractors (Cairn and ONGC), according to the production sharing contract.”

“Making royalty cost-recoverable will bring down the burden in the ultimate analysis,” the official said.

According to the production-sharing contract for the Rajasthan fields, royalty was to be borne by the licensee of the fields, in this case – ONGC. The applicable royalty rate for the block is 16.67 per cent on the net price of crude oil.

Royalty is paid on the entire volume of crude oil produced from the block. ONGC pays 100 per cent royalty, though its share in the field is 30 per cent. Cairn holds the remaining 70 per cent, and is the operator.

For this fiscal till December 2010, ONGC has paid a royalty of close to Rs 820 crore, and through the life of the field the royalty burden for ONGC is expected to be more than Rs 15,000 crore.

As the production from the Rajasthan block would ramp up, ONGC's royalty burden would also increase sharply. The Rajasthan field is the most prominent asset of Cairn, which currently produces up to 1,25,000 barrels of oil a day.

ONGC believes that according to the contract, royalty was cost-recoverable. However, Cairn has been holding a diverse opinion.

Apart from royalty being made cost-recoverable, ONGC has also informed the Government that its valuation of Cairn India Ltd does not make it an attractive investment. This is with regard to the pre-emptive right which the company says it has if any stake sale takes place.

Also, the company has stressed that the operator of the field should have knowledge of exploration and production.

When Cairn Energy was offered Rajasthan block it was keeping in mind its knowledge oil and gas exploration, the official said.

Vedanta Resources proposes to acquire a maximum of 51 per cent stake from Cairn Energy in its Indian arm, Cairn India, for up to $8.48 billion.

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