UK-based Cairn Energy has contested ONGC's claim to cost-recovery of Rs 12,600 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 Rs 18,000 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 April 18 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 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.
In the note, Gammell stated that ONGC was relying on Section 3.1.9 of Appendix-C of the PSC to make its royalty claim, but "this is in conflict with the Article 16.2 of the PSC".
Section 16.4 exempts Cairn from payment of royalty.
The state-owned firm is the licensee of the Rajasthan block and has the right to take 30% interest upon any discovery.
"It is clear that ONGC as the licensee is liable to bear the cost of royalty. Even if ONGC has no participating interest (or stake) in the block, as the licensee it would still be liable to bear the cost. Since ONGC is paying royalty in its capacity as licensee and not as a contractor, this expense is not cost-recoverable under the PSC," he wrote to Mukherjee, Oil Minister Jaipal Reddy and Law Minister Veerappa Moily.
In the letter that went along with the note, Gammell stated that "it is incumbent on us to add that, in our opinion, the terms of the RJ-ON-90/1 (Rajasthan block) PSC are clear that ONGC's liability for royalty as licensee is not cost-recoverable."
Vedanta, a mining company with no oil and gas experience controlled by billionaire Anil Agarwal, agreed in August to buy at least a 40% stake in Cairn India from London-listed Cairn Energy.
A Group of Ministers headed by Mukherjee is slated to meet on May 27 to consider the $9.6-billion deal.
It is not clear if the GoM would take more than one meeting to vet the proposal, after which it has to go back to the Cabinet Committee on Economic Affairs (CCEA) -- the final approval authority in this case.