Will back Cairn-Vedanta deal if ONGC concerns addressed: Minister

Our Bureau New Delhi | Updated on February 09, 2011

The Petroleum Minister, Mr S. Jaipal Reddy, has said that the concerns of ONGC have to be addressed before a go-ahead is given to the Cairn-Vedanta stake sale proposal.

Speaking to newspersons after the Chief Executive of Cairn Energy PLc, Sir Bill Gammell, met him here on Tuesday, the Minister said, “I told him (Cairn CEO) that the Government would support the deal in-principle, but some of the concerns of ONGC need to be addressed legitimately and substantially before clearing the deal.”

Cairn Energy is selling a maximum of 51 per cent stake in its Indian arm, Cairn India Ltd, to Vedanta Resources for up to $8.48 billion. ONGC, which is a partner in eight out of the 10 blocks that Cairn owns, wants the issue of royalty payment for Rajasthan oil fields to be resolved before the transaction gets an approval.

According to the production sharing contract (PSC) for the Rajasthan fields, royalty was to be borne by the licensee of the fields, in this case ONGC. Royalty is paid on the entire volumes of crude 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.

ONGC was of the view that royalty was cost recoverable. One of the pre-conditions set by the Government to give its approval to the deal is that royalty paid for the fields should be included in the project cost for purposes of profit calculation. Going by the PSC, Cairn has interpreted that royalty does not qualify to be part of contract costs. This clearly establishes that “royalty” is not cost-recoverable, Cairn says.

In the Rajasthan block, Cairn has invested $600 million of its own risk capital on exploration; and once the oilfields were discovered, ONGC, as the Government nominee, acquired a 30 per cent stake without paying anything. In the first half of 2010-11, ONGC's operating cash flows from the 30 per cent stake were approximately Rs 840 crore and the royalty obligation was approximately Rs 560 crore, according to Cairn's assessment.

Even if ONGC gives up its 30 per cent stake in the Rajasthan project, it will still remain the licensee of the block and be liable to pay 20 per cent royalty on crude.

Another crucial pre-condition set by the Government is that Vedanta Resources will give an undertaking that any future decisions by the Government will be final and binding and cannot be challenged.

The CEO of Cairn Energy, after meeting the Petroleum Minister, said that it was “a positive and constructive meeting”. He was confident that his company will not go back to its shareholders for extending the April 15 deadline for concluding the transaction.

Published on February 08, 2011

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