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ONGC to lose Rs14,000 cr in Cairn’s Rajasthan block

ONGC to lose Rs14,000 cr in Cairn’s Rajasthan block
PTI
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First Published: Mon, May 25 2009. 02 37 PM IST
Updated: Mon, May 25 2009. 02 37 PM IST
New Delhi: State-run Oil and Natural Gas Corporation on Monday said it will lose about Rs14,000 crore if it is forced to continue in Cairn India’s prolific Rajasthan oilfields as it will have to pay for all of the government levies.
The government has appointed ONGC as the licencee for Cairn’s RJ-ON-09/1 block, making it liable to pay royalty to the state government and cess to the Centre on entire oil and gas production irrespective of whether it holds any stake in the field or not. As a consolation, the state-run firm was given a choice of taking 30% stake once oil or gas was found.
ONGC took 30% in Mangala, Bhagyam and Aishwariya fields in the block but it now wants to exit as the obligation to pay all the levies had made the project economically unviable, a top company official said.
“If crude oil is sold at $60 a barrel price, ONGC will have to pay $7.44 in cess (at the rate of Rs2,500 per tonne), $36 in royalty (for its and Cairn’s share) and $10.34 per barrel in profit petroleum, leaving $6.22. Out of this, ONGC will have to pay for operating and capital expenditure and sales tax on its 30% share,” he said.
At $70 a barrel sale price, the realisation after paying for cess, royalty and profit petroleum was just $5.78, he said. “The project offers us negative return and over the life of the field we will end up losing Rs14,000 crore.”
The official said exiting the Rajasthan block would not end its woes as it would not be absolved from its obligation to pay government levies on the crude oil produced.
“We want the government to compensate us for the levies we will pay on behalf of Cairn,” he said.
The government, in order to attract foreign investment, had promised to take care of statutory levies on oil and gas production when it awarded blocks like RJ-ON-90/1 in Rajasthan more than a decade ago.
ONGC was appointed licensee for RJ-ON-09/1, which was awarded to Royal Dutch Shell, which subsequently sold it to Cairn, and was made liable to pay royalty and cess on behalf of the operator. Additionally, the state-run firm was given a choice of taking a 30% stake upon a discovery.
“Even if ONGC (is) to relinquish its 30% stake, it will not be absolved of its liability to pay 20% royalty on all crude oil produced from the Rajasthan block,” a petroleum ministry official said.
If ONGC is relieved of its licence obligation, the onus of paying royalty will fall on the central government, which can make the payment from its share of oil and gas from the block called profit petroleum.
Besides the levies, ONGC has to bear 30% of the $2.4 billion cost of developing the fields.
ONGC, the official said, wanted Cairn to reimburse all the investment it has put in with a reasonable rate of return.
If the company relinquishes its share, the 30% holding would first be offered to Cairn and if it declines offered to outside parties, the ministry official said.
The Board of ONGC has held back clearance to the revised development cost of the Rajasthan fields proposed by Cairn.
A Group of Ministers and a Committee of Secretaries had 11 years ago recommended that ONGC should be reimbursed the royalty it has to bear for the operator but the recommendation is yet to be accepted. “We have told them (the government) that either reimburse us the royalty or free us from the field.”
On cess, ONGC feels both partners have to bear it in proportion to their shareholding. Its stand has been backed by the law ministry as well as the petroleum ministry but Cairn insists that it is not liable to pay any of these statutory levies.
“If ONGC is to bear the cess, we will have to pay an additional Rs1,500 crore per annum,” the official said.
Cairn is almost ready to start producing crude oil from the Rajasthan field. The output may start by this month-end and is slated to reach a peak of 8.75 million tonnes by 2011.
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First Published: Mon, May 25 2009. 02 37 PM IST
More Topics: ONGC | Cairn India | Rajasthan | Sales tax | Royalty |