Oil and Natural Gas Corp (ONGC) has sought a legal opinion on whether it would be liable to shoulder the entire royalty burden on crude output from the Rajasthan oilfields even after Vedanta Resources buys Cairn Energy’s stake.
The prolific Rajasthan oilfield is economically unviable for ONGC, as it not only has to pay royalty on its 30 per cent share, but also on Cairn India’s 70 per cent stake.
ONGC has sought the Solicitor General of India’s opinion if this dispensation would legally continue when Cairn was exiting the project after making a huge profit, sources in the know of the development said.
In the 1990s, the government had exempted companies investing in the then nascent oil and gas exploration business from payment of statutory levies like royalty and oil development cess. This liability was put on the licensee of the field, a state-owned company. ONGC is the licensee for the Rajasthan block.
Sources said ONGC, in its query to the SGI, wanted to know the legal position in the event that a company was entering a discovered and producing field and no exploration risk was involved, which was the premise on which the incentive was given in the 1990s.
The exemption from statutory levies was to make up for the risk that a company was taking by investing in a nation that was not known to be rich in hydrocarbons.
However, Vedanta, which is buying UK-based Cairn Energy’s majority stake in Cairn India for up to $8.48 billion, was not taking any such risk, they said.
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ONGC wants Vedanta to pay royalty and cess on the 70 per cent crude oil from the Rajasthan block that will accrue to it.
Cairn India operates the Mangala field, the largest of the 25 oil and gas discoveries in the Rajasthan block. The block currently produces 125,000 barrels per day and, at peak output of 240,000 bpd, it will account for one-fifth of the nation’s domestic oil production.
ONGC has a 30 per cent interest in the Rajasthan block, which is central to Vedanta’s deal to buy a Cairn India stake. Cairn India holds the remaining 70 per cent participating interest in the Rajasthan block. A royalty of 20 per cent has to be paid to the government on the price that Rajasthan crude is sold at. At an oil price of USD 40 a barrel, the royalty in case of an average output of 6 million tonnes a year works out to USD 352 million (Rs 1,760 crore). ONGC has to bear 30 per cent of the USD 2.4 billion cost for developing the fields, as well as pay more than three times its share of USD 105 million royalty. Cairn wants ONGC to also pay its share of the Rs 2,500 per tonne cess levied on crude oil, which would amount to a burden of Rs 1,500 crore for ONGC annually.