Cairn, ONGC and Tata Petro spar over cess, royalty

ONGC has been bearing the cess and royalty since inception of production of the block and has declined to bear it further

State-run Oil and Natural Gas Corporation (ONGC) and its partners, Cairn India and Tata Petrodyne are at loggerheads over the payment of cess and royalty at its CB-OS/2 block in the Gulf of Cambay, off western coast of Gujarat. The block includes the Lakshmi and Gauri fields.

The consortium is led by Cairn Energy, having participating interest of 40%. ONGC, the licensee, has 50% participating interest and Tata Petrodyne Limited 10% in the block.

Sources said ONGC, which has been bearing the burden of cess and royalty on the block since inception of production from the block, has declined to bear it further saying investments from the joint venture may turn negative if the state-run firm is to bear cess and royalty further. Officials part of the joint venture did not wish to get quoted but said the operating committee, after unanimously approving the investment programme recommended the same for managing committee approval, "which was the stage when ONGC did not approve the programme saying that the increased rates of cess/royalty made the programme techno-economically unviable."

A senior official from ONGC said the terms and conditions of the project have to be discussed and reviewed by partners. "Each project has to be discussed and technical process followed which will be done in this case as well," the ONGC official added.

The joint venture partners said the difference of opinion over payment of cess and royalty means further investments in the field could suffer. Proposed development drilling plan as budgeted is $77.50 million for four well drilling and facility upgradation.

Officials said that ONGC chose not to exercise article 16.7 of the production sharing contract, which specifically states that in the case of any change in any Indian law dealing with income tax, export-import tax, excise, custom duty, or any other levies, duties or taxes imposed on petroleum or dependent on the value of petroleum results in a material change to the expected economic benefits accruing to any of the parties after the effective date of the contract, the parties shall consult promptly in good faith to make necessary revisions and adjustments to the contract in order to maintain such economic benefits to each of the parties.

"It is evident that this fiscal stability clause was present only to strengthen the rights of each party which ONGC chose not to exercise to the detriment of the contractor parties," an official said.

In an emailed response, on of the joint venture partners said, "The private JV partners in the block are keen to take it forward in the spirit of the PSC as the proposed project will generate an additional combined revenue of over $250 million dollars and the primary beneficiary will be the Government and its nominee ONGC. This is significant at a time when India's fuel imports -oil and gas - is mounting every passing day. This plan reinforces the private JV partners commitment in this the matured block to arrest its natural decline and extend the life of the field."

The actual difficulty is clear unwillingness to respect the sanctity of contracts by the government combined with the diffidence of ONGC and the operator(Cairn India) so as not to ruffle feathers, said a senior executive from one of the companies.

Production from the block began in 1997 and it is expected that the profile continues through to 2023. So far the consortium partners have spent around Rs 600 crore on the field.