Oil Ministry wants Vedanta to surrender its rights

In a move that is being seen as fresh arm-twisting, the Oil Ministry wants Vedanta Resources to surrender all its rights in past and future disputes and agree to several other stringent conditions if it wants government nod for acquiring majority stake in Cairn India.

Though the Prime Minister’s Office had earlier this month asked the ministry to decide on giving approvals to the $9.6 billion acquisition on merit, the Oil Ministry has slipped in 11 pre-conditions that are unlikely to be accepted by the London-listed firm.

Sources in know of the development said the ministry has proposed to give “in-principle approval” to the transaction, if Vedanta agrees to withdraw pending lawsuits and accepts ministry’s diktat on future petroleum operations in Cairn’s mainstay Rajasthan block.

The ministry proposal is based on recommendation of the oil regulator Directorate General of Hydrocarbons (DGH), who is supposed to be the custodian of the contracts oil companies sign with the government for oil and gas exploration and production.

The contracts, called Production Sharing Contract (PSC), provide for a dispute resolution mechanism but DGH wants Vedanta to surrender all its rights under the same in order to get approval for acquiring 40 to 51 per cent stake in Cairn.

Sources said the pre-conditions, which have been referred to the Law Ministry to concurrence, states that Vedanta has to “give undertaking that the decision of the government would be final and binding” on all disputes on petroleum operations.

Further, it says the “government decisions/conditions (have to be) unconditionally accepted (by Vedanta) on the issues litigated by Cairn India and their associates”.

The DGH on January 7 advised Oil Ministry to ask Vedanta to accept its decision on disputes unconditionally even though Cairn had won one of the three issues under arbitration.

Sources said the ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from the Rajasthan block in the project cost and its profits calculated thereafter.

As per PSC, a company is permitted to recover all project costs from the sale of oil or gas produced from a field before calculating profits for itself and the government.

State-owned Oil and Natural Gas Corp (ONGC) holds a 30 per cent stake in Rajasthan block RJ-ON-90/1, but pays the royalty on the entire quantum of production, as it is the licensee of the block.

If the royalty paid by ONGC on behalf of Cairn is taken into consideration while calculating the project cost, this would lower the profits of the Scottish energy firm, which does not pay royalty on its 70 per cent share of the projected 12 million tonnes per annum output from the block.

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