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Petroleum ministry sets 11 preconditions for Vedanta-Cairn deal

Petroleum ministry sets 11 preconditions for Vedanta-Cairn deal
PTI
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First Published: Mon, Jan 24 2011. 03 55 PM IST
Updated: Mon, Jan 24 2011. 03 55 PM IST
New Delhi: The petroleum ministry is ready to give “in-principle” approval for Vedanta Resources’ $9.6 billion acquisition of Cairn India, provided the mining firm led by billionaire Anil Agarwal agrees to a set of 11 preconditions.
Earlier this month, the petroleum ministry had sought the law ministry’s opinion on the legality of imposing certain preconditions on the stake sale, including Vedanta agreeing to withdraw pending lawsuits filed by Cairn with respect to payment of oil cess and accepting partner ONGC’s preemption rights.
Sources said the ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from Cairn’s mainstay Rajasthan block in the project cost and its profits calculated thereafter.
As per the production sharing contract (PSC), the operator is permitted to recover all project costs from the sale of oil or gas produced from a field before a mechanism for profit-sharing with the government comes into play.
State-owned Oil and Natural Gas Corp (ONGC) holds a 30% stake in Rajasthan block, but pays the royalty on the entire quantum of production, as it is the licencee of the block.
If the royalty paid by ONGC on behalf of Cairn is taken into consideration while calculating the project cost, this would lower the profits of the Scottish Energy firm, which does not pay royalty on its 70% share of the projected 12 million tonnes per annum output from the block.
Sources said the preconditions also include Vedanta guaranteeing that Cairn’s technical capability will be undisturbed by the share transfer and the London-listed firm providing a fresh financial and performance guarantee.
The ministry also wants Vedanta to accept the government’s decision on future exploration activities and expenditures as “final and binding”, as well as unconditionally accept the government’s position on issues that have been challenged by Cairn in courts.
Cairn believes the liability to pay cess of Rs 2,500 per tonne on all crude oil produced from the Rajasthan block also rests on ONGC.
This position has been disputed by ONGC and the ministry, which say that cess is to be paid by the project partners in proportion to their shareholding and the matter is under arbitration, sources said.
The ministry said its “in-principle approval shall be further subject to ONGC’s decision on the right of first refusal” on the Rajasthan block, as the solicitor general of India’s view was that the transfer triggered ONGC’s preemption rights.
The new petoleum minister, S. Jaipal Reddy, had last week stated he will “not lose time” in deciding on giving consent to Vedanta buying Edinburgh-based Cairn Energy’s majority stake in Cairn India.
The issues relating to Cairn-Vedanta have legal implications. So some of them have been referred to the law ministry for clarification,“ Reddy had stated.
Earlier this month, the Prime Minister’s office (PMO) had asked the petroleum Ministry to decide whether to give consent to the deal by January-end, at least a month earlier than the deadline the ministry had set for itself when Murli Deora was at its helm.
“All fairness will be pressed into seriously (in deciding on the case). We will go by the rule book,” Reddy had said.
The PMO had to press for an early decision as the approval accorded to the deal by shareholders of Cairn and Vedanta was valid up to 15 April.
After acquiring Cairn Energy’s stake, the London-listed firm’s Indian unit, Sesa Goa, will make an open offer for an additional 20% stake to minority shareholders of Cairn India.
Sources said going by the February-end deadline set by petroleum secretary S. Sundareshan for a decision on the acquisition, Vedanta would have been unable to close the deal by 15 April.
This is because the open offer, which can be made only after government consent to the deal, will have to remain open for subscription for at least 60 days.
If the government decision on the deal was to come by February-end (or in March, as was indicated by Deora), the open offer could not have begun before the first week of March and it would have closed in end-April or early May, missing the 15 April deadline, they said.
After the PMO directive, Sundareshan had on 10 January stated that his ministry will decide on giving approval to the deal by January-end or early February.
Cairn made formal applications for transfer of control in all 10 properties it has in India on 23 November.
Sundareshan had subsequently stated that his ministry “will need at two to two-and-half months to decide” on the application and indicated that the government would take a stance on the proposal by February-end.
ONGC, which holds interest in all three producing properties of Cairn and five out of its seven exploration acreages, claims that it has premption, or the right of first refusal, on the deal.
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First Published: Mon, Jan 24 2011. 03 55 PM IST