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Cairn opposes ONGC plea for recovering royalty on Raj block

Cairn opposes ONGC plea for recovering royalty on Raj block
PTI
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First Published: Tue, Feb 08 2011. 07 59 PM IST
Updated: Tue, Feb 08 2011. 07 59 PM IST
New Delhi: Cairn India has opposed ONGC’s plea for recovering royalty that the state-run firm pays on its mainstay Rajasthan block
saying such a move will result in government losing $ 2 billion in revenues.
The Rajasthan block is a losing proposition for ONGC, as it has to pay 20% royalty to the state government on the entire output from the field, even though its share of production is only 30%.
Cairn India CEO Rahul Dhir on Monday wrote to petroleum secretary S Sundareshan saying the government will get about $14.6 billion as its share of revenue over the 20 year life of the 6.5 billion barrel Rajasthan block.
If ONGC is allowed to recover the royalty it pays on behalf of Cairn India from sale proceeds of Rajasthan oil, the government share from the block would come down by about $2 billion, Dhir wrote.
ONGC officials, however, say the government revenues would be lower by over $3 billion if the Rs 14,250 crore royalty it pays on behalf of Cairn India is reimbursed from the government’s profit share.
At present, capital and operating expenditure is allowed to be deducted from sale proceeds of oil and gas and profit share of all stakeholders including government calculated thereafter.
But if royalty, which is paid at the rate of 20% of oil price, is added to the cost, the profits left to be divided between the stakeholders will be less. Cairn India will earn less in this scenario.
Dhir in the letter said ONGC’s cash flows from operations (EBIDTA) from the Rajasthan field was $48.6 million in April-September period of this fiscal.
“ONGC bears the royalty obligation as a licensee but they also accrue positive cash flows from their 30% participating interest in the Rajasthan block,” he wrote.
“If both revenue from their share of participating interest and the outflow on account of royalty are together taken into account, the net impact on ONGC is not significant as is being perceived,” he added.
An ONGC official said higher the output from Rajasthan block, bigger will be its liability on royalty.
“The total revenue from the Rajasthan operations till the life of the fields i e in 2020, on the basis of the approved peak output of 175,000 barrels per day is estimated to be over $14.6 billion,” Dhir wrote.
“Clearly, ONGC’s plans to recover the royalty from the profit petroleum will have a material impact on the Government of India’s revenue share - we estimate this could reduce the Government of India’s profit petroleum by over $2 billion,” he added.
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First Published: Tue, Feb 08 2011. 07 59 PM IST