State-run Oil and Natural Gas Corp has sought a legal opinion on whether it will be liable to shoulder the entire royalty burden on crude output from the Rajasthan oilfields even after Vedanta Resources buys Cairn Energy’s stake.
The prolific Rajasthan oilfield is economically unviable for ONGC, as it not only has to pay royalty on its 30 per cent share, but also on Cairn India’s 70 per cent stake.
ONGC has sought the Solicitor General of India’s (SGI) opinion if this dispensation will legally continue when Cairn is exiting the project after making a huge profit, sources close to the development said.
In the 1990s, the government had exempted companies investing in the then nascent oil and gas exploration business from payment of statutory levies like royalty and oil development cess. This liability was put on the licensee of the field, a state-owned firm. ONGC is the licensee for the Rajasthan block.
Sources said ONGC, in its query to the SGI, wanted to know the legal position in the event that a company is entering a discovered and producing field and no exploration risk is involved, which was the premise on which the incentive was given in the 1990s. The exemption from statutory levies was to make up for the risk that a company was taking by investing in a nation that is not known to be rich in hydrocarbons.
However, Vedanta, which is buying UK-based Cairn Energy’s majority stake in Cairn India for up to USD 8.48 billion, is not taking any such risk, they said. ONGC wants Vedanta to pay royalty and cess on the 70 per cent crude oil from the Rajasthan block that will accrue to it.
Cairn India operates the Mangala field, the largest of the 25 oil and gas discoveries in the Rajasthan block. The block currently produces 125,000 barrels per day and at peak output of 240,000 bpd, it will account for one-fifth of the nation’s domestic oil production.
ONGC has a 30 per cent interest in the Rajasthan block, which is central to Vedanta’s deal to buy a Cairn India stake. Cairn India holds the remaining 70 per cent participating interest in the Rajasthan block.
A royalty of 20 per cent has to be paid to the government on the price that Rajasthan crude is sold at. At an oil price of USD 40 a barrel, the royalty in case of an average output of 6 million tonnes a year works out to USD 352 million (Rs 1,760 crore).
ONGC has to bear 30 per cent of the USD 2.4 billion cost for developing the fields, as well as pay more than three times its share of USD 105 million royalty.
Cairn wants ONGC to also pay its share of the Rs 2,500 per tonne cess levied on crude oil, which would amount to a burden of Rs 1,500 crore for ONGC annually.
Sources said ONGC sought the opinion of the second highest law officer of the country after Cairn Energy stated that the UK firm’s sale of a majority stake in Cairn India to Vedanta Resources would not trigger the preemption rights of the state-owned firm.
The state-owned firm believes that it has preemption or the right of first refusal on all the three producing oil and gas fields operated by Cairn India and Edinburgh-based Cairn Energy needs its consent for the sale of a stake to Vedanta.
ONGC has a 30 per cent interest in the giant Rajasthan oil block, 40 per cent in the Ravva oil and gas fields off the Andhra coast and 50 per cent in the Gauri and Lakshmi gas fields in the Cambay Basin, off the west coast. It also has a stake in some of the seven exploration acreages held by Cairn India.
Cairn Energy has stated that it is selling up to 51 per cent out of its 62.38 per cent holding in Cairn India to London-listed Vedanta at the corporate level and the deal does not trigger the preemption rights of ONGC, as the transaction is at shareholder level and is not the sale of interest in a particular oilfield.
ONGC is not in agreement with the position taken by Cairn Energy and has so sought opinion of SGI, sources said.
The UK firm earlier this month applied to the government for a formal nod in respect of only the seven exploration blocks Cairn India had won in the New Exploration Licensing Policy (NELP) rounds. It stated that only the NELP blocks had provisions necessitating government approval in case of the transfer of ownership. As such, pre-NELP block RJ-ON-90/1 in Rajasthan, the Ravva oil and gas fields and the CB/OS-2 gas fields in the Cambay Basin, off the Gujarat coast, “do not require prior consent” of the government.
“We are not buying the Cairn Energy argument. We believe it needs prior approval in all the 10 (properties),” an Oil Ministry official said, adding that future action will depend on what the SGI has to say.
The SGI has been submitted the provisions of the Production Sharing Contract (PSCs) for the exploration blocks and the Joint Operating Agreement (JOA) in respect of the production acreages.
Cairn Energy had initially sought government concurrence for the entire deal, but the Oil Ministry insisted that it apply separately for approval in respect of each of the 10 properties held by Cairn India. Subsequently, the company applied for separate approvals as per the provisions of the PSC for each of the 10 properties.
