State-owned Oil and Natural Gas Corp (ONGC) has asked the government not to approve London-listed Vedanta Resources’ $9.6 billion acquisition of Cairn India until the issue of excess royalty it pays on Rajasthan crude oil is sorted out.

ONGC holds a 30 per cent stake in Cairn India’s mainstay Rajasthan oilfields, but is liable to pay royalty on all the crude oil produced from the fields, making the nation’s largest on land field a losing proposition for the PSU.

Its board yesterday recommended to the government that the royalty it pays not only its share, but also on the 70 per cent share of Cairn India, should be deducted from the price realised on the sale of crude oil from Mangala and other oilfields in the Rajasthan block, sources in-the-know of the development said.

The ONGC board’s resolution will be added to the preconditions that the Oil Ministry has imposed for approving the Cairn-Vedanta deal.

Sources said the preconditions, including resolution of ONGC’s royalty liability, have been vetted by the law ministry and the same are being sent to the Prime Minister’s Office.

ONGC’s board yesterday noted that the Solicitor General of India has opined that the state-run firm’s preemption rights will be triggered upon UK’s Cairn Energy selling up to 51 per cent of its stake in Cairn India to Vedanta.

The stake sale will lead to a change in ownership in the 10 properties held by Cairn, the nation’s second highest law officer opined. ONGC is a partner in seven of these blocks, including all three producing properties of Cairn.

While Cairn had reluctantly agreed to seek the government’s consent for a change in ownership in all 10 properties, it has refused to recognise ONGC’s pre-emption rights, a fact that the board noted. In contrast, the ONGC board felt that in line with the SGI opinion, Cairn needs its prior approval for the stake sale, they said.

Sources said the ONGC board noted that the Rs 405 a share price Vedanta is paying was about 40 per cent more than its own internal valuation of Cairn India and so it would not like to match the offer or make a counterbid.

The Oil Ministry and its regulatory arm, the DGH, are also in favour of adding the royalty paid by ONGC to the Rajasthan project cost.

In the case of fields awarded under the New Exploration Licensing Policy (NELP) - like the gigantic KG-D6 gas fields of Reliance Industries - royalty can be added to the capital and operating cost of the block, which as per law are deductible from revenues earned on the sale of oil and gas before calculating profits for all stakeholders.

The Production Sharing Contract (PSC) for the Rajasthan block is silent on the treatment of royalty and Cairn is opposed to its addition to the project cost as it would lower its profits.

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