Oil and Natural Gas Corporation appears keen to buy out partner Cairn’s stake in the Rajasthan oil block -- the mainstay property of Cairn. ONGC on October 21 wrote to Cairn Energy, saying it had pre-emption rights and asked for the value of each of the 10 assets held by the British firm’s Indian unit so as to enable it to “decide on the future course of action,” an official said.
Cairn may not have put a separate value to each of the 10 properties and it, like in the past, is likely to dispute ONGC’s claim for pre-emption right on grounds that the deal with Vedanta was more a corporate transaction.
But unless this jurisdiction issue is sorted out, the Oil Ministry is unlikely to begin processing Cairn’s application for government approval to the deal, he said.
For ONGC, which stands to lose USD 2 billion on Cairn India-operated Rajasthan block, going this far in asserting its pre-emption rights and then withdrawing would be difficult. The Rajasthan block at the moment, is a losing proposition for ONGC as it is liable to not only pay statutory levies on its share of 30 per cent interest but also those due on Cairn India. This position will be corrected if ONGC can acquire Cairn India’s 70 per cent holding in the block, the official said.
Vedanta is paying such a high price only on the basis of the exemption it is going to get from paying of 20 per cent royalty and possibly Rs 2,500 per ton oil cess on the Rajasthan block, which is at the heart of its deal with Cairn.
“The fallout of the situation where a foreign seller is allowed to pocket a hefty premium for the burden a public sector company has to bear will be immense,” the official pointed out.
Citing provisions of Production Sharing Contract and Joint Operating Agreements, ONGC in the letter said it had right of first refusal in all the three producing fields held by Cairn India including the 6.5 billion barrels Rajasthan block and Cairn Energy Plc needs its no objection before it can transfer ownership of these to Vedanta.
It asked Cairn Energy for details of “Vedanta Resources’ financial strength, technical capability and past experience in the field of oil and gas” before deciding on its intervention in the deal.
Mining group Vedanta, which has no experience in oil and gas business, is buying Cairn Energy’s 40-51 per cent out of 62.38 per cent stake in Cairn India. The deal, which was announced on August 16, will expire on April 15, 2011 if all necessary regulatory approvals and nods are not obtained.
ONGC asked Cairn Energy to give written notice to ONGC with complete terms of its Vedanta deal for it to “consider the matter of exercising its right to acquire (Cairn India’s) interest (in a block like Rajasthan).”