Govt to pay heavy penalty for delays in Cairn oil offtake

The government may be forced to pay heavy penalties as it falters on the deadline to create offtake arrangements for crude oil that Cairn India will start pumping from its Rajasthan fields from 2009.

Officials said the petroleum ministry has put on backburner the planned 580-km pipeline from Barmer district in Rajasthan to Viramgam in Gujarat to take the 7.5 million tonnes of crude to multiple refineries and instead reopened the issue of constructing a refinery in the state.

The refinery will take a minimum of 48 months to come up from the date of all approvals and in absence of a buyer of crude oil that starts coming out in first half of 2009, the government will have to pay heavy penalties to Cairn India, they said.

For the 580-km pipeline to come by 2009, all necessary approvals, including right of use, should have come by April.

The officials said the $3-billion refinery cannot be built solely on Rajasthan crude as it is medium heavy oil and the refinery will need to import a light crude to get the optimum mix. Imports need a pipeline from Gujarat.

The refinery size being talked about now is pegged to have at least 10 million tonne capacity, with half of the crude requirement coming from Cairn's Rajasthan field.

A pipeline will necessarily be needed for transporting the balance 2.5 million tonnes to other refineries as also for sending out the oil during the period for building of the refinery.

Cairn, they said, had asked the ministry's permission for inclusion of the pipeline in field development plan, the cost of which is recoverable through sale of oil, and pending such approval sought grant of right of use (ROU).

The ministry has approved neither. The officials said the ministry has asked Directorate General of Hydrocarbons (DGH) to see if recovery from the fields can be increased to feed the proposed refinery.

Accordingly, a decision on Cairn's proposal to evacuate crude oil from Rajasthan fields by laying a pipeline and selling it to multiple refineries has been deferred till submission of the report by the DGH.

Cairn has informed DGH that it can prolong the peak production of 1,50,000 barrels per day (7.5 million tonnes) from 8-10 years through use of enhanced oil recovery techniques.

The company, they said, is also willing to commit the minimum quantity of 5 million tonnes to the proposed refinery that is to be build by Oil and Natural Gas Corp and its subsidiary Mangalore Refinery and Petrochemicals (MRPL).