With Cairn Energy Plc voluntarily offering to meet government conditions, the Oil Ministry may find it difficult to nix its deal to sell majority stake in Cairn India to Vedanta Resources.
The Oil Ministry has shown signs of discomfort at a non-oil firm taking control of a company whose main property is the Barmer district oilfields in Rajasthan and has been in a huddle for the past two weeks combing through the deal.
"I think the ministry never had a case against Vedanta. Legally speaking, they cannot stop Cairn Energy from selling up to 51 per cent stake in Cairn India to Vedanta," a source in know of the development said.
Cairn India's contract with the government for three oil and gas producing properties including the one in Rajasthan, do not provide for prior government approval in case of a change of control happens at the corporate level.
The only contracts that provide for government permission in case corporate ownership of Cairn India changes are seven exploration blocks the company had won under New Exploration Licensing Policy (NELP).
"Hypothetically speaking, if the oil ministry was to act tough, Vedanta can tell the ministry to keep the exploration blocks and walk away with the Rajasthan oilfield, the Ravva oil and gas field (in eastern offshore) and the Cambay block," he said. "The $9.6 billion that Vedanta is paying is for these three fields and not for the exploration areas."
Also, the Production Sharing Contracts (PSC) that Cairn India has signed with the government for exploration and production of oil and gas, provides for government giving or denying it consent for change of ownership in "reasonable time period" which it is to use to establish credentials of the new party.
"Vedanta is a credible Indian group and world's fifth largest miner. It is willing to undertake all financial obligations for performance of Cairn India's obligations under the PSC. Also it has promised to keep Cairn India an independent entity like it exists now. So where is the case for rejection of the deal," the source said.
Besides, the letter Cairn Energy Plc Chief Executive Bill Gammell wrote to Oil Secretary S Sundareshan last week addresses all concerns the ministry may have.
"Both Cairn Energy and Vedanta Resources are willing to comply with any reasonable conditions of the Government of India/Ministry of Petroleum and Natural Gas as may be necessary in the circumstances to ensure performance by Cairn India of its obligations under the PSCs," Gammell wrote on August 26.
Gammell said Cairn Energy was willing to comply with all contractual obligations in sale to Vedanta which was 10 times bigger than his own firm.
The Oil Ministry had on August 19 written to Cairn Energy stating that certain PSCs have parent company guarantees and some PSCs have explicit provision of prior government consent in case of change of ownership.
Cairn India holds 70 per cent operator interest in the 6.5 billion barrels Rajasthan block where state-owned Oil and Natural Gas Corp (ONGC) has the remaining 30 per cent.
The PSC for the Rajasthan block provides for explicit government approval only in case of a party selling its interest in the block, but does not make the nod mandatory in case of change of ownership at corporate level like in the Cairn-Vedanta deal.
Similar is the case with its other producing properties - the Cambay basin block and Ravva oil and gas fields. But the seven exploration blocks it won in NELP rounds have provision for seeking prior government approval before ownership of a participating company is changed, the source said.
ONGC believes that by virtue of its stake in Rajasthan block, it has the pre-emption or right of first refusal to buy Cairn India in case the company's ownership changed.
But, the Joint Operating Agreement, between Cairn India and ONGC, gives partners pre-emption rights in case of sale of interest by either parties in the block but not in case of corporate ownership change, he added.
Cairn Energy said the proposed sale of majority stake "will not adversely affect the performance or obligations under the various Production Sharing Contracts (signed by Cairn India) nor be contrary to the interests of India."
Besides having a successful experience in executing and operating complex large scale industrial projects, Vedanta has a culture of empowering management as evident in its previous acquisitions, Gammell wrote to Sundareshan.
London-listed Vedanta is buying 40 to 51 per cent in Cairn India from Cairn Energy and up to 20 per cent from open market, in a deal worth $9.6 billion.
Also, Vedanta has promised continuity in operations at Cairn India, which will remain independent, Cairn Energy said.
"We can confirm that there are no planned changes in the Cairn India organisation, standards, policies and systems and that the transaction will have no effect upon Cairn India's knowledge and experience as a contractor, operating to accepted international petroleum industry practice," he wrote.
Cairn India, which has existed as an independently managed entity since 2007, holds 70 per cent in the Rajasthan block that holds 6.5 billion barrels of oil reserves besides two other producing properties and seven exploration areas. For all of these, it has signed PSCs with the government.
"Some of these PSCs have specific provisions requiring the consent of the Government of India in the event of a change of control. Cairn India is committed to complying with all such contractual obligations," Gammell wrote.