The government is unlikely to clear London-listed Vedanta Resources' acquisition of majority stake in Cairn India in a hurry, as it sees an opportunity in the deal to settle state-owned ONGC's negative returns from the latter's Rajasthan oil fields.
Edinburgh-based Cairn Energy is selling the majority of its 62.37 per cent stake in subsidiary Cairn India to Vedanta. But the deal is contingent upon government approval.
"Oil and Natural Gas Corp (ONGC) has invested $1.3 billion in Rajasthan fields (which are Cairn India's biggest assets) and ideally, it is ONGC who should takeover Cairn Energy's interest," a senior government official said.
In fact, in 2005, Cairn Energy had offered its interest in the Rajasthan and other fields to ONGC for close to $5 billion, but when the PSU did not agree with the valuation, it floated a India unit and listed the firm on the stock exchanges in 2006.
"It is a matter of concern that a non-energy firm is to take over operatorship of these complex fields. World-over, governments insist on prior experience before companies are allowed even to explore. And here is a firm which has never even seen an oilfield," the official said.
Vedanta's deal will be contingent on government approval, as Cairn's three producing oil and gas assets, including the giant Rajasthan fields and seven exploration blocks, either have explicit provisions for seeking prior approval before transfer of interest or gives pre-emption, or the right of first refusal (ROFR), to partners like ONGC.
The official said the stake sale now offers the government an opportunity to settle the issue of the Rs 14,000 crore loss that ONGC will incur over the life of the Rajasthan oil fields, as it has to pay statutory levies like cess and royalty on behalf of Cairn India.
ONGC has 30 per cent interest in the Rajasthan fields, but has to pay cess and royalty on the entire production, thereby giving negative returns on its investments.
"We are not in a hurry to do anything just yet. We need to make sure that our PSU's interest is protected," he said.
The Production Sharing Contract (PSC) for the Rajasthan field is silent on government approval for transfer of ownership, but the Joint Operating Agreement between Cairn India and ONGC gives the partners ROFR in case of stake sale.
The same is the case with gas discovery block CB-OS-2 and the eastern offshore Ravva oil and gas fields. But its seven exploration blocks, including the KG-DWN-98/2 block with ONGC, have explicit provisions for government approval in case of a change in control.
"We will need to study PSC provisions carefully before we do anything," the official said.
Cairn India and ONGC are to spend $2.67 billion in capital expenditure in the Rajasthan block and $1.52 billion in operating expenditure, besides $941 million million towards the cost of a pipeline to transport crude oil.
ONGC's Net Present Value (the value today of anticipated future incomes and expenditures) works out to negative $1.435 billion and a negative $1.471 billion at a crude price of $60 and 70 per barrel, respectively, he said.
The negative NPV is a result of ONGC being made liable to pay 20 per cent royalty on the entire crude oil production, while Cairn is exempt from payment of any levy.
"Some say that ONGC signed the contract for the Rajasthan block fully knowing about the royalty liability. But the royalty at the time of signing of the production sharing contract was Rs 539.20 per tonne, while it today comes to Rs 3,780 per tonne, considering a crude price of $60 per barrel," the official said.
Besides the change in royalty rates, the oil development cess has also been increased to Rs 2,500 per tonne from Rs 900 per tonne at the time of signing the PSC for the Rajasthan block.
"Keeping in view ONGC's liability of payment of royalty on 100 per cent production against its participating interest of 30 per cent in RJ-ON-90/1 block, ONGC's liability towards royalty works out to $36 per barrel at crude price of $60 per barrel," he said.
The cess for ONGC's 30 per cent share works out to $7.14 per barrel.
"Further, ONGC has to share profit petroleum (which is broadly revenue minus operating and capital expense and cess, royalty is not deductible) with the government in a prescribed ratio.
"Assuming the current cost and production estimates and a crude oil price of $60 per barrel, ONGC would need to pay $10.34 per barrel to the government as its share of profit petroleum," he said.
ONGC would be left with $6.5 per barrel after payment of royalty, cess and profit petroleum to the government. On the other hand, operator Cairn would be left with $42.5 per barrel, since it does not have to pay royalty.
"The balance of $6.5 per barrel is insufficient for meeting the obligation of sales tax/VAT, opex and capex," the official said, adding that ONGC wants the government to refund the royalty it has to pay on behalf of Cairn.
"Even in case royalty paid by ONGC on behalf of Cairn is reimbursed to it, the break-even crude price would work out to $71 per barrel," he said.
At a $70 a barrel sale price, ONGC's realisation after paying cess, royalty and profit petroleum would be just $5.78. The project offers negative returns and over the life of the field, the PSU will lose Rs 14,000 crore.