In a move seen as pressure tactics, UK's Cairn Energy has asked the oil ministry to decide by this weekend on giving a nod to sale of its majority stake in Cairn India to the mining group Vedanta Resources.
Cairn Energy wrote to the ministry within days of it emerging that Petroleum Minister S Jaipal Reddy was referring the $9.6-billion deal to the Cabinet for approval.
"They are accusing us of sitting on the approval for 6 months. But the fact is that Cairn applied for government approval only on November 23, 2010, more than 3 months after the deal was announced," a top oil ministry source said.
"Do you think, the government should have acted on the basis of a press statement they issued and given them the approval?" he asked.
Cairn had at the first instance rejected the need for government's nod. It eventually came around but made a conditional application on November 23 last year.
"We asked them to make an unconditional application for approval but they have rejected our pleas," he said.
Also, it rejected the pre-emption or right of first refusal of partner Oil and Natural Gas Corp (ONGC), which holds stakes in 8 out of the 10 properties held by Cairn India in the country.
While on February 11, Reddy had decided to refer the issue to the Cabinet, Cairn Energy earlier this week wrote to the ministry saying "a decision on the Government of India's approval is critical by February 20 in order for us to be able to complete the transaction by April 15, as approved by Vedanta and Cairn shareholders."
"I cannot comment on the corporate deadlines. The ministry had the competence to decide on the issue but since the issue at hand involved complex dimensions, we decided to seek nod of Cabinet," the source said.
The ministry wants the excess royalty and cess payments made by ONGC in Cairn India's mainstay Rajasthan oilfields be "legitimately addressed" before approving the deal.
ONGC pays royalty at the rate of 20% of oil price realised on not just its 30% share, but also on Cairn India's 70% interest.
"They (Cairn) says ONGC is playing spoilsport but the fact is that ONGC had sought equitable sharing of royalty on July 14, more than a month before the Cairn-Vedanta deal was announced," the source said.
Vedanta is to make an open offer for acquiring 20% stake from minority shareholders of Cairn India after the government approval and complete the process by April 15.
Cairn Energy CEO Bill Gammell met Oil Secretary S Sundareshan yesterday and today he was to meet Law Minister Veerappa Moily, whose ministry is to give inputs on the note oil ministry is moving for Cabinet.
Cairn and Vedanta say the move to recover royalty paid by ONGC from sale of oil would impact their shareholders' interest.
"Will the Rs 21,800-crore in royalty and cess payments that ONGC will make on behalf of Cairn India not impact the interest of minority shareholders of ONGC?" the source asked.
The royalty liability has made the nation's largest onland fields a losing proposition for ONGC. Cairn says ONGC is also contractually bound to pay Rs 2,500 per tonne cess on all of the 12 million tonne of projected crude oil output.
The oil ministry wants the twin liability to be addressed before giving a nod to Vedanta for buying most of the 62.4% stake held by UK's Cairn Energy in Cairn India.
Cairn and Vedanta are opposed to the proposal.
Sources said the oil ministry would tell the Cabinet that ONGC would pay Rs 12,600 crore on behalf of Cairn India as royalty over the 12-year life of the fields. It would have to pay another Rs 9,200 crore as cess, if Cairn has its way.
ONGC's July 2010 suggestion (made more than a month before Cairn-Vedanta deal was announced) of adding royalty to the project cost, so that it can be recovered from the sale of oil produced, would be presented to the Cabinet as one of the 11 pre-conditions that can be imposed for approving the deal.
On the issue of cess, sources said that the ministry may suggest Cairn to withdraw its arbitration and equitably share the burden with its partner ONGC.
At present, Cairn is paying its share of cess under protest, but has included the levy in project cost for recovery before profits for all stakeholders, including the government, is calculated.
According to the ministry, a careful reading of the Rajasthan Production Sharing Contract (PSC) shows that while ONGC would be responsible for paying the statutory duties, these outgoes are to be shared by Cairn India and the state-owned firm through inclusion in the costs.
Cairn is opposed to this as it will lower its profits and valuation. It says only contractor cost (that is capital and operating expenditure) constitute project cost and can be recovered from sale of oil, sources said.
On the other hand, ONGC's royalty liability is a licencee cost, which contractually cannot be made cost-recoverable.
ONGC is the licencee of the Rajasthan block and has got 30% stake in any discovery being made in the area for free. It did not incur any risk capital.
As per the PSC, the profit for Cairn India, ONGC and the government is calculated after deducting capital, operating expenses and royalty from the oil price realised.