Exit won't spare ONGC of levy on Rajasthan crude

Oil and Natural Gas Corporation (ONGC) wants to quit from Cairn India's prolific Rajasthan oil fields but the exit will not absolve it from its obligation to pay government levies on the crude oil produced.      

The government, in order to attract foreign investment, had promised to take care of statutory levies on oil and gas production when it awarded blocks like RJ-ON-90/1 in Rajasthan more than a decade ago.      

ONGC was appointed licensee for RJ-ON-09/1, which was awarded to Royal Dutch Shell, which subsequently sold it to Cairn, and was made liable to pay royalty on behalf of the operator. Additionally, the state-run firm was given a choice of taking a 30 per cent stake once oil or gas was found.      

"Even if ONGC (is) to relinquish its 30 per cent stake, it will not be absolved of its liability to pay 20 per cent royalty on all crude oil produced from the Rajasthan block," a Petroleum Ministry official said.      

If ONGC is relieved of its licence obligation, the onus of paying royalty will fall on the central government, which can make the payment from its share of oil and gas from the block called profit petroleum.      

ONGC would like to "relinquish" its 30 per cent interest in the block unless the Government reimburses it for the royalty it has to pay on behalf of Cairn. At $40 a barrel, the royalty for 6 million tonnes a year of average output came to $352 million (Rs 1,760 crore).

ONGC has to bear 30 per cent of the $2.4 billion cost of developing the fields and pay more than three times its share of $105 million royalty. Also Cairn wants ONGC to pay even its share of Rs 2,500 per tonne cess levied on crude oil (Rs 1,500 crore annually).      

"The project with these levies does not make economic sense to us," an ONGC official said, adding the company had written to the Petroleum Ministry to relinquish its stake.      

ONGC, he said, wanted Cairn to reimburse all the investment it has put in with a reasonable rate of return.      

If the company relinquishes its share, the 30 per cent holding will first be offered to Cairn and if it declines offered to outside parties, the ministry official said.      

The Board of ONGC has held back clearance to the revised development cost of the Rajasthan fields proposed by Cairn.      

"Our Board wants more information from Cairn on doubling of the development cost to $2.4 billion," an ONGC official said, adding that this cost excluded the $900 million for laying a pipeline from Barmer district in Rajasthan to the Gujarat coast.      

A Group of Ministers and a Committee of Secretaries had 11 years ago recommended that ONGC should be reimbursed the royalty it has to bear for the operator but the recommendation is yet to be accepted.      

"We have told them (the Government) that either reimburse us the royalty or free us from the field," he said.

On cess, ONGC feels both partners have to bear it in proportion to their shareholding. Its stand has been backed by the Law Ministry as well as by the Petroleum Ministry but Cairn insists that it is not liable to pay any of these statutory levies.      

"If ONGC is to bear the cess, we will have to pay an additional Rs 1,500 crore per annum," the official said.      

Cairn is almost ready to start producing crude oil from the Rajasthan field. The output may start by this month end and is slated to reach a peak of 8.75 million tonnes by 2011.