Cairn-ONGC face-off on royalty issue; meet inconclusive

Cairn-ONGC face-off on royalty issue; meet inconclusive

New Delhi: Oil regulator DGH and Petroleum Ministry have refused to take a stand on ONGC’s demand to recover royalty it pays on oil produced from Rajasthan block, an issue that has threatened to derail Vedanta Resources’s $9.6 billion acquisition of Cairn India.

Oil and Natural Gas Corp (ONGC) owns 30% in Cairn India’s mainstay Rajasthan block but is liable to pay royalty on the entire output from the field. The state-owned firm now wants to recover the statutory levy it pays from sale proceed of Rajasthan crude oil.

The Management Committee (MC), which besides Cairn and ONGC comprises of representatives of the ministry and Directorate General of Hydrocarbons (DGH), discussed ONGC’s demand at a meeting on 24 January, sources in know of development said.

At the MC meeting, the first ever on the issue, D N Narasimha Raju, Joint Secretary (Exploration) - officer incharge of upstream business in the Oil Ministry, and DGH director general SK Srivastava said nothing on ONGC’s demand.

Sources said Raju and Srivastava refused to be drawn into the discussion and remained non-committal.

UK’s Cairn Energy Plc is selling most of its 62.4% stake in Cairn India to mining group Vedanta. Acceptance of ONGC’s demand would lower profitability of Cairn India.

Sources said at the MC meeting Cairn India sited articles of Production Sharing Contract (PSC) for the Rajasthan block to vociferously state that royalty does not qualify to be part of project cost, which can be recovered from sale of oil.

As per PSC, all operating and capital expenditure is allowed to be first recovered from sale of oil or gas and profits for the stakeholders, including the government be calculated thereafter.

Cost recovery of royalty would adversely affect the economic interests of the government, Cairn India stated.

ONGC, sources said, was of the view that royalty was cost recoverable and the Management Committee can pass a resolution to that effect.

Cairn vehemently opposed such a move saying MC was a creation under the PSC to administer function of a block and it cannot take a view inconsistent with the PSC.

Dispute resolution mechanism is clearly set out in PSC, which needs to be taken recourse to rather than passing resolution at MC or referring the issue to the government, it said.

Sources said Cairn requested oil ministry and DGH to formally state their views on the issue but Raju and Srivastava declined to comment.

Cairn felt the royalty issue was not a matter for MC to decide as it cannot take a contrary view to matters clearly provided for in the PSC.