The Union Petroleum and Natural Gas Ministry has given up its ‘tough stand' on payment of royalty and cess paid by Oil and Natural Gas Corporation (ONGC), paving way for smooth clearance for the Cairn-Vedanta deal and sending positive signal to foreign investors.

The Ministry as well as Cairn Energy and Vedanta Resources were engaged in a battle of wits in the last few months, which had put a question mark over the deal. However, in the latest draft Cabinet note circulated for approval of various ministries, the Petroleum Ministry has watered down the preconditions it had set for Vedanta to buy a 51 per cent stake from Cairn Energy of U.K.

Petroleum Ministry sources said the Ministry had virtually withdrawn all the preconditions, including the one that Rs.21,802 crore in royalty and cess paid by ONGC on behalf of Cairn India on production from the Rajasthan oilfields should be equitably shared. “The Petroleum Ministry will continue to legally pursue equitable sharing of royalty and cess, but will not make it a precondition for approval of the deal,'' the note states.

The Ministry has withdrawn its precondition asking Cairn India to give up its legal rights on future disputes over its mainstay Rajasthan oilfield and abide by the government and the diktat of the Directorate General of Hydrocarbons. “As an alternative to the precondition of royalty and cess, the Ministry has suggested that the government shall pursue all legal recourse for establishing its rights under the production sharing contract (PSC) in the case of cess. On royalty, it shall take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable,'' the note states.

ONGC owns 30 per cent stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields. Over the life of the field, the royalty burden works out to Rs.18,000 crore, of which ONGC has to bear the Cairn's share of about Rs.12,600 crore. Cairn India had disputed any liability to pay Rs.2,500 a tonne cess on its 70 per cent share of production from the Rajasthan blocks, which totals up to Rs.9,202 crore. ONGC wants royalty and cess to be cost-recoverable like capital and operating expenses. Under the PSC, capital and operating expenses are first deducted from the sale of oil and the profits, shared between the stakeholders including the government, thereafter.

Cairn and Vedanta are opposed to the move as it would lower Cairn India's profitability. Though Cairn Energy and Vedanta have a timeline of April 15 to close the transaction, the deal would go through even if the Cabinet is to give its nod by the month-end.

Once the government's nod is obtained, the two firms can approach their shareholders seeking extension of the April 15 deadline, saying the conclusion now remains a mere formality.

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