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Cairn India shows signs of accepting riders for Vedanta deal

Cairn India shows signs of accepting riders for Vedanta deal
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First Published: Wed, Jul 20 2011. 03 29 PM IST
Updated: Wed, Jul 20 2011. 03 29 PM IST
New Delhi: In first signs that Cairn India may do a somersault so that its parent Cairn Energy Plc can sell stake to Vedanta Resources, the company has gone silent on the government preconditions that it had so far been bitterly opposing.
Cairn India, whose board had on 10 February passed resolutions opposing change in contract to make the company liable for payment of royalty and cess on oil produced from its showpiece Rajasthan fields, does not mention a word in its annual report on the same being made a precondition by the government for approving Cairn-Vedanta deal.
The company has so far maintained that Oil and Natural Gas Corp (ONGC) which got 30% stake in the prolific Rajasthan oil fields for free, is contractually liable to pay royalty and cess on the entire production.
Besides the board resolution, Cairn India had since its parent Cairn Energy announced sale of 40% interest in the company to Vedanta in August last year, written letters opposing it being asked to pay Rs 2,500 per tonne cess and making royalty cost recoverable.
But now that the Cabinet Committee on Economic Affairs (CCEA) has actually made cost recovery of royalty and payment of cess as preconditions for approval of the $9 billion deal, Cairn India managing director and CEO Rahul Dhir in the annual report for 2010-11 did not mention a word on it.
“What ought to have been a straightforward transaction subject to shareholder approval has now been drawn into the government’s decision-making ambit,” he said, adding Cairn India has not been informed of CCEA decision till now.
Analysts tracking the deal said it was strange for a company, which was ‘out-of-turn’ so vocal, to have suddenly gone silent.
“Acceptance of the preconditions were for the current owner (Cairn Energy) and the new owner (Vedanta) to decide. Yet Cairn India out-of-turn passed board resolution opposing it saying they were not in the interest of the company and its shareholders,” an analyst said.
“If the silence is a sign of its acceptance of the preconditions, Cairn India will have to explain at least to the minority shareholders what changed for it to suddenly accept the riders. Can it compromise on minority shareholder interest to facilitate one shareholder to exit,” another analyst asked.
The CCEA decision imposing preconditions was announced by the oil minister S Jaipal Reddy at a press conference.
Dhir in the annual report said, “the long hiatus starting from mid-August 2010, when the deal was announced, has caused delays and uncertainty in managing a business that necessarily has to deal with the government and the Rajasthan joint venture partner, ONGC.”
Though Dhir did not elaborate on the ”hiatus” in decision making, he may have made an apparent reference to delay in government approval for raising output from Mangala oilfield in the Rajasthan block to 150,000 barrels per day from current 125,000 bpd.
In the section ‘Management Decision & Analysis’, Cairn India said it in 2010-11 fiscal “faced considerable uncertainty arising out of the proposed transaction between Cairn Energy PLC and the Vedanta Resources Plc.”
“Unfortunately, the transaction has been dogged by serious delays, objections by ONGC and major interventions by the ministry of petroleum and natural gas. These have been escalated to the level of the CCEA, which then sought the views of a Group of Ministers (GoM) of the Government of India (GoI),” it said.
Even before Vedanta made its move, ONGC had demanded that royalties it pays on its and Cairn India’s share in the Rajasthan fields be added to costs and recouped through sales, citing provisions in its contract. After the deal was announced, it maintained it had pre-emption rights and that the acquisition could not go ahead without its agreement.
The CCEA last month overruled objections to ONGC’s demand by Cairn/Vedanta and held these will have to be met before the approval is granted.
It on 30 June decided to give approval to the $9-billion deal subject to Cairn/Vedanta allowing royalties from Cairn India’s prize Rajasthan oil fields to be added to project costs and recovered from sales. Also, it has to end arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70% share of oil from the fields.
Third, the deal has to be approved by ONGC, which has a stake in all three of Cairn India’s producing assets and five of its seven exploration assets, waiving its pre-emption rights. And finally, the acquisition needs security clearance.
Accepting the royalty condition alone would mean about $900 million dent in revenues of Cairn India annually.
“At the time of writing this Management Discussion and Analysis, neither Cairn India nor its Board of Directors know what decisions might have been taken by the GoM, which are expected to subsequently flow to the Company as a note from the MoPNG via the CCEA. Whatever the outcome, the fact is that it has created considerable uncertainties,” the report said.
“Since the Company has not yet received a letter from the MoPNG containing the CCEA’s decisions, it is inappropriate to comment on its unsubstantiated contents,” it added.
Cairn said the Rajasthan block has a potential to produce 240,000 bpd of crude, subject to approval of the regulatory authorities and partner, ONGC.
Under Business Risk section, Cairn India said it “is and may become, involved in proceedings in relation to payment of royalty and cess for the production of crude oil from the Mangala field in Rajasthan.”
Cairn India has a participating interest of 70% in the Rajasthan block (RJ-ON-90/1) and is also the operator. ONGC holds the remaining 30% stake.
“Under the Production Sharing Contract executed for this block, in the view of Cairn India, royalty and cess are payable by ONGC as the licencee and these are not part of the contract cost for the purpose of cost recovery,” it said.
ONGC has been paying royalty to the Rajasthan government for the crude production every month. However, ONGC has contended that the royalty payable under this PSC should be considered as a contract cost for cost recovery purposes.
“However, to date, Cairn India has no formal intimation from Government of India or ONGC of any dispute, demand or allegation of royalty being part of contract cost for cost recovery purpose. Cairn India has secured legal opinions in its favour and believes that it has a strong case,” the report said.
Cairn India has initiated arbitration proceedings against the government and ONGC pursuant to a claim notice seeking Cairn India to pay cess on oil produced from the Rajasthan block to the extent of the company’s participating interest in the block.
“In the event that royalty is considered to be part of contract cost for cost recovery or Cairn India is held liable to pay its 70% share of cess, there would be a material adverse effect on its business, financial condition and results of operations,” the annual report added.
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First Published: Wed, Jul 20 2011. 03 29 PM IST