Cairn contests ONGC’s royalty recovery claim

Cairn contests ONGC’s royalty recovery claim

New DelhiL UK-based Cairn Energy has contested ONGC’s claim to cost-recovery of Rs12,600 crore in royalty payable on Cairn India’s share of oil production from the Rajasthan field, but the solicitor general of India has supported the state-run company’s claim.

Oil and Natural Gas Corp (ONGC) owns a 30% stake in Cairn India’s mainstay Rajasthan block, but is liable to pay royalty on the entire output from the field.

It wants the Rs18,000 crore royalty payable on its and Cairn India’s behalf to be added to the project cost and recovered from the sale of oil.

Cairn Energy CEO Bill Gammell on 18 April sent a note to members of a ministerial panel that is to vet his firm’s sale of a stake in Cairn India to Vedanta Resources, saying “royalty is the obligation of ONGC as the licensee (of the Rajasthan block) and hence is not cost recoverable."

He quoted Article 16.4 of the production sharing contract (PSC) for the Rajasthan fields to say “Cairn shall not be liable to the government or a state government for payment of royalty... the cost of which shall be borne by the licensee (ONGC)."

But the SGI, whose opinion was sought by finance minister and group of ministers head Pranab Mukherjee, stated that Section 3.1 of Appendix C of the PSC provides for all costs incurred by the contractor in the form of duties, levies, fee, charges and any other assessments levied by the central or state government, are cost-recoverable.

“The term ‘contractor’ has been defined in Clause 1.19(b) of the PSC as the company (here Cairn India) and the nominee (i.e. ONGC), collectively. It is not disputed that ONGC, being the licensee/nominee, is a constituent of the contractor and therefore included within the meaning of term ‘contractor’," it said.