Cairn, ONGC in talks to share pipeline costs

Cairn India and Oil and Natural Gas Corporation (ONGC) are on their way to resolving differences over the transportation of crude oil from the Rajasthan oil fields.

The two companies are in talks to finalise a deal that could result in the two companies jointly financing a 340 km pipeline from Barmer in Rajasthan to Viramgam in Gujarat at a total cost of $500 million.

According to sources in Cairn India, the company has offered to invest around $340 million in the pipeline, in keeping with the 70:30 stake held by both companies in the oil fields.

In a statement to the stock exchanges though, the company said, "We have yet to reach an agreement on the construction of a pipeline from the Rajasthan fields."

However, ONGC Chairman and Managing Director R S Sharma said, "We have reached an understanding for setting up a pipeline to carry Rajasthan crude to Gujarat."

"Last week, we had a meeting with Cairn Energy and we decided to form two teams to look into this matter," Sharma said.

The Rajasthan crude may be sold to Indian Oil Corporation (IOC) or to private sector refiners, the sources added.

Three IOC refineries, Koyali, Mathura and Panipat are connected to IOC Viramgam tank farm. The idea of building a pipeline to Reliance refinery at Jamnagar or to Essar Vadinar refinery cannot be also ruled out, they said.

"Cairn India is in ongoing discussions with the government of India and third parties regarding the arrangement for the crude from the Rajasthan fields," said Cairn India spokesperson, David Nisbet.

Earlier, the two companies were in dispute over the funding of the pipeline project, with Cairn claiming that the entire cost of the pipeline had to borne by ONGC.

Cairn India had planned to raise $1.4 billion from its public float but could manage only $1.18 billion given the uncertainties over transportation of its crude and concerns over a high valuation.

Sources indicated that the pipeline cost is part of the $1.5 billion investment in field development for Rajasthan that Cairn has planned.

The pipeline cost will be included in the field development plan and the two companies will be allowed to recover the costs apart from the operating cost and capital expenditure.

The pipeline will be constructed in around 12-18 months. Crude oil production from Rajasthan is expected to begin by end 2009.

Sharma did not rule out the option of building a refinery in Rajasthan, saying that the investment would be made only if the state government offers fiscal incentives.