A panel of ministers has recommended stringent conditions for approving London-listed mining group Vedanta Resources Plc's $9.4 billion takeover of Cairn India.
A six-member Group of Minister headed by Finance Minister Pranab Mukherjee yesterday recommended to the Cabinet Committee on Economic Affairs (CCEA) that approval to Edinburgh-based Cairn Energy Plc selling majority stake in its Indian unit be granted subject to five conditions, sources privy to deliberations at the 75-minute meeting said.
Sources said the GoM wants Cairn or its successor to agree to royalties paid by state-owned Oil and Natural Gas Corp (ONGC) on its most important Rajasthan oilfields, being cost recoverable from oil sales.
ONGC owns 30% interest in the Rajasthan oilfields but has to pay royalty at the rate of 20% of crude oil price realised on all of the 2,40,000 barrels per day of peak output expected from the fields.
At USD 70 per barrel oil price, it has to pay Rs 12,600 crore in royalties on Cairn India's behalf over the life of the field, making the India's largest onland fields a losing proposition for it.
ONGC had cited provisions in the Production Sharing Contract (PSC) of the Rajasthan oilfields in July last year, which was more than a month before the Cairn-Vedanta deal was announced, to demand that royalty like other taxes and levies be first deducted (recovered) from sale proceeds of oil before profits are split between partners and the government.
Cairn as well as Vedanta have rejected ONGC demand.
Sources said Cairn has also disputed it liability to pay oil cess at the rate of Rs 2,500 per tonne on its 70% share in the Rajasthan fields saying ONGC is also responsible to pay cess on its behalf like in the case of royalty.
The government has rejected this position as the PSC imposes royalty liability on ONGC but is silent on cess, meaning partners have to pay in proportion to their share. Cairn has initiated arbitration against government on this issue.
Sources said the GoM recommended that Cairn withdraw the cess arbitration and agree to pay its share of cess as the second pre-conditions for approval. Also, the company will have to obtain a no-objection certificate from ONGC for transferring ownership to Vedanta.
For the seven exploration blocks or areas Cairn had won under New Exploration Licensing Policy (NELP), the GoM held that the PSC provision of seeking partner consent must be met. ONGC is a partner in five of these blocks, they said.
In case of CB-OS/2 and Ravva oil and gas fields in the eastern offshore -- the other producing properties of Cairn-- the GoM suggested government nod should be subject to Vedanta providing performance and financial guarantees.