New Delhi: State-run Oil and Natural Gas Corp (ONGC) will invest about $730 million in Cairn India’s main Rajasthan oilfields despite the project offering negative returns.
The board of ONGC has approved its 30% share of the $2.431 billion revised field development cost proposed by Cairn India for the Block RJ-ON-90/1, petroleum minister Murli Deora informed the Rajya Sabha on Monday.
ONGC will invest $729.43 million.
“Under the existing set of fiscal terms and conditions, ONGC has negative net present value for its investment in the revised field development plan,” he said.
The project offers negative returns to ONGC as the firm is liable to pay royalty on the entire crude oil production from the Rajasthan fields despite having just a 30% share.
Deora, however, did not say if the government will reimburse ONGC for the royalty the firm will pay in excess of its share.
ONGC says that its board had approved the revised cost on the assurance that the excess royalty paid will be reimbursed.
Deora said Cairn’s Rajasthan fields would produce 2.6 million tonnes of oil in 2009-10 and 6.8 million tonnes in 2010-11 with a peak output of 8.9 million tonnes the following year.
Cairn had previously pegged the cost of production of the Mangala and adjoining Aishwariya, Saraswati and Raageshwari fields in the Rajasthan block at about $1.5 billion.
Besides, the $2.431 billion cost of developing the Mangala, Aishwariya, Saraswati and Raageshwari (MARS) oilfields, the Cairn-ONGC combine would also invest $471 million in bringing to production the Bhagyam field, the second-largest oilfield in the Rajasthan block.
Mangala is the biggest field in the Rajasthan block.
Additionally, $941 million is being spent on laying a pipeline to transport crude oil from Barmer district in Rajasthan to Gujarat coast.
Deora said the main reasons for rise in the cost in the revised plan for MARS fields is increase in plateau production rate from 96,000 barrels of oil per day to 1,25,000 bpd.
Besides, change in production and processing from individual gathering stations to a central processing hub, updated cost estimates and increase in service tax contributed to increase in the cost, he said.
“ONGC’s Net Present Value (the value today of anticipated future incomes and expenditures) with revised field investment plan works out to negative $1.435 billion and negative $1.471 billion at a crude price of $60 and $70 per barrel, respectively,” ONGC had stated in a representation to the petroleum ministry.
Negative NPV has been a result of ONGC being made liable to pay 20% royalty on the entire crude oil production, while Cairn being exempted from payment of any levy.
Royalty at the time of signing of the production sharing contract for Rajasthan was Rs539.20 per tonne, while it today comes to Rs3,780 per tonne, considering crude price of $60 per barrel.
Besides change in royalty rates, the oil development cess has also been increased to Rs2,500 per tonne from Rs900 per tonne at the time of signing the PSC for the Rajasthan block.