New Delhi: Amidst a scramble to meet deadlines, the government on Tuesday said legitimate concerns of state-owned Oil and Natural Gas Corp (ONGC) will need to be addressed before it can approve Vedanta Resources’ $9.6 billion acquisition of Cairn India.
With time running out, Bill Gammell, the chief executive officer of Cairn Energy, which is selling up to a 51% stake in its Indian unit to Vedanta, met oil minister S. Jaipal Reddy to press for an early decision.
“I told him (Gammell) that the government would support the deal in-principle, but some of the concerns of ONGC need to be addressed before clearing the deal,” Reddy told reporters here. “He (Gammell) seemed satisfied.”
ONGC, by virtue of its stake in 8 out of the 10 oil and gas properties held by Cairn India, claims that it has preemption rights over the deal. It wants the issue of excess royalty it has to pay on Cairn India’s mainstay Rajasthan block to be addressed before giving its no-objection.
“We cannot be opposed to (Cairn Energy) selling (its) shares (in Cairn India)... ONGC is not prepared to buy (Cairn Energy stake) at the price (Vedanta is paying),” Reddy said. “Given these conditions, we need to see that concerns of ONGC are substantially and legitimately addressed.”
The deal, involving Vedanta acquiring a 40 to 51% stake from UK’s Cairn Energy Plc and thereafter making an open offer to buy an additional 20% from minority shareholders of Cairn India, is to be completed by 15 April.
To meet the deadline, government approval for the deal needs to come within this month so that Vedanta can meet the 55-60 days’ timeframe mandated by market regulator Sebi for completion of the open offer.
Gammell described the talks with Reddy as “positive and constructive”, but said Cairn will not go to its shareholders for extending the 15 April deadline to close the Vedanta deal.
“We would not go back to our shareholders,” he said.
The Rajasthan block, which gives Cairn India 90% of its valuation, 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%.
The oil ministry has made resolution of the royalty issue one of the 11 preconditions for giving its nod. Cairn/Vedanta are opposed to ONGC’s demand for recovering the royalty before profits from the sale of Rajasthan oil are split, as it will lower Cairn India’s profitability and valuation.
“We are determined that concerns of ONGC are legitimately addressed,” Reddy said.
Asked about the February deadline that Cairn/Vedanta are looking at for getting government approval, he said: “We respect time pressure, but our concerns have to be addressed.”
Cairn India does not pay any royalty on the crude oil and gas produced from the Rajasthan block and has even contested the payment of a Rs2,500 per tonne cess on its 70% share.
Oil secretary S. Sundareshan had on Sunday met Gammell, Cairn India CEO Rahul Dhir and Vedanta officials M. S. Mehta (Group CEO) and Tarun Jain (CFO) to hammer out differences on the preconditions, but there was no meeting ground.
Reddy said the official will hold more discussions shortly on the issue.
Sundareshan has already cancelled his 9-11 February trip to Calgary (Canada) for promoting oil blocks offered for bidding in the IXth round of NELP in order to meet the chief executive of Vedanta Resources and Cairn Energy again.
Joint secretary (Exploration) D. N. Narasimha Raju, who was to accompany Sundareshan for the roadshow in Calgary and then proceed to Houston for another promotional show, will also stay back to discuss the finer points of the deal.
Market regulator Sebi has not permitted Vedanta to make the open offer to Cairn India shareholders in the absence of government approval for its deal with Cairn Energy.
Besides royalty, Cairn/Vedanta are also not agreeable to the ministry’s demand that they will abide by its orders with regard to past and future operational disputes.
Vedanta, which has no prior experience in oil and gas sector, was agreeable to other conditions like giving financial and performance guarantees and maintaining technical capability of Cairn India.
ONGC says it would be paying Rs14,000 crore royalty on behalf of Cairn India over the life of Rajasthan fields and wants to recover it from the sale of oil.
Acceptance of the demand would impact Cairn India’s valuation as its future profits will go down and the company saying its minority shareholder interest will be compromised.
While Cairn had reluctantly agreed to the need for government approval on the deal, it has so far not accepted ONGC’s preemption or the right of first refusal (ROFR), as has been held by Solicitor General of India (SGI).
ONGC, which was kept out of yesterday’s meeting, says Vedanta’s acquisition of an up to 51% stake in Cairn India triggers its preemption rights.
Its board had, at its meeting on 29 January, passed a resolution asking the government not to approve the Cairn-Vedanta deal until the issue of excess royalty it pays on Rajasthan crude oil, is sorted out.
Rajasthan block currently produces 1,25,000 barrels of oil per day and has potential to produce up to 240,000 bpd.
Cairn India acquired a stake in Rajasthan block RJ-ON-90/1 from Royal Dutch Shell Plc in 2002 and discovered oil in January, 2004.
In case of areas awarded under the New Exploration Licensing Policy (NELP) -- like the gigantic KG-D6 gas fields of Reliance Industries -- royalty can be added to the capital and operating cost of the block, which as per law are deductible from revenues earned on the sale of oil or gas before calculating profits for all stakeholders.
The Rajasthan block is a pre-NELP acreage.