ONGC board today decided against exercising the company's pre-emption rights if the royalty it pays on crude oil produced from Cairn's mainstay Rajasthan oilfields are added to the project cost, sources in know of the development said.
ONGC pays 20 per cent royalty on the entire crude oil produced from Cairn's Barmer oilfields in Rajasthan even though the state-run firm's share in production is just 30 per cent. Cairn holds 70 per cent interest in the Rajasthan block but does not pay any royalty.
Sources said ONGC claims pre-emption or the right of first refusal by virtue of its stake in seven out of the 10 properties Cairn has in India. It says since ownership of Cairn India will change when London-listed Vedanta acquires up to 60 per cent interest, its pre-emption rights are triggered.
The Oil Ministry, which had been asked to decide on giving approval to Vedanta buying most of Edinburgh-based Cairn Energy Plc's stake in its Indian unit by month-end, had asked ONGC to give its response on the transaction.
The response of ONGC is being submitted to the oil ministry, which will incorporate it in a letter it will write to Cairn/Vedanta giving "in-principal" approval. The letter will list out a set of 11 pre-conditions that Cairn/Vedanta will have to meet for securing the government nod, they said.
Sources said ONGC wants the royalty it pays on the entire 12 million of expected crude output from Cairn's Barmer oil fields to be added to the project cost and profits for stakeholders be calculated thereafter.
As per the Production Sharing Contract (PSC), the operator gets to first recover all project costs from the sale of oil or gas produced from a field before profits for itself and the government are calculated.
Statutory levies like royalty paid by ONGC are not a part of the project cost in the PSC for the Rajasthan block and Cairn is opposed to their inclusion, as it will not only lower its own profit, but also the profit that the government earns, they said.
The pre-conditions being set for Cairn/Vedanta include they withdrawing pending lawsuits and accepting ministry's diktat on future petroleum operations in Rajasthan block.
The ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from the Rajasthan block in the project cost and its profits calculated thereafter.
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. Vedanta would not have factored in reduced profits because of the inclusion of royalty in the project cost and may be forced to call off the deal if ONGC takes the matter to arbitration.
Sources said the royalty liability on ONGC, wherein it has to pay 20 per cent of the price realised on the entire output of crude oil from fields like Rajasthan, even though its share of production is only 30 per cent, is a historic legacy and the government had at several times considered reimbursing the part which the PSU pays on behalf of foreign operators like Cairn.
The government had in the 1990s put the liability of statutory levies on national oil companies to attract global players to the then-nascent oil and gas sector in India.
The royalty liability had made projects like Rajasthan economically unviable for ONGC. Royalty could be reimbursed from the government's profit share from the Rajasthan field, the oil ministry had opined earlier.
According to the Production Sharing Contracts and the Government of India policy for pre-New Exploration Licensing Policy (NELP) blocks in the 1990s, 100 per cent of statutory levies (including royalty) were to be borne by the NOCs in order to provide a competitive fiscal and contractual regime.
During this period, the relationship between the government and NOCs was seen in a different perspective, because the NOCs were 100 per cent owned by the government. As such, the NOCs' rights and obligations for the pre-NELP blocks were to be borne by the government.
To attract investment in exploration and production in India during the pre-NELP regime, the government consciously placed the responsibility of royalty entirely on the licensee. In return, NOCs could take 30 per cent interest upon a discovery in these blocks without incurring any risk capital or past cost.
In the Rajasthan block, Cairn invested USD 600 million of its own risk capital on exploration and once the oilfields were discovered, ONGC, as the government nominee, acquired a 30 per cent stake in these fields without paying anything.
In 1997, it was agreed by a Group of Ministers (subsequently discussed by Committee of Secretaries in February, 1998, and reviewed various in recent years) that NOCs could be reimbursed for actual liabilities out of profit petroleum accruing to the government, sources said.