The oil ministry may refer mining group Vedanta Resources' buyout of Cairn India to the Cabinet, as a standoff over Cairn's main oilfields in Rajasthan has stalled approval to the $9.6 billion deal.
Oil and Natural Gas Corp not just pays royalty on its 30% share of oil from the Rajasthan block, but also on partner Cairn India's 70% share, making the nation's largest onland fields a losing proposition for it.
Cairn says ONGC is also contractually bound to pay Rs 2,500 per tonne cess on all of the 12 million tonnes of projected crude oil output from the fields in the 3,111 sq km block.
Sources in the know of the development said the oil ministry wanted the twin liability of Rs 21,800 crore on ONGC to be addressed before giving nod to Vedanta buying most of 62.4% stake held by the UK's Cairn Energy in Cairn India.
However, Cairn and Vedanta have vehemently opposed its proposal to make partners share the levies equitably.
Sources said that at the meeting called by Oil Secretary S Sundareshan last Sunday, Cairn Energy Chief Executive Bill Gammell had even given a veiled threat of calling off the deal if the ministry made this a precondition for approval.
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While Gammell is believed to have followed up February 6 deliberations with a meeting with top officials in the Prime Minister's Office, Cairn India board on Thursday also opposed any move that will impact its valuation.
With the stand-off continuing, the oil ministry has decided to present the case to the Cabinet Committee on Economic Affairs for necessary directions, sources said.
ONGC, by virtue of its stake in 8 out of the 10 oil and gas properties held by Cairn India, claims that it has preemption rights over the deal. It has asked Cairn to provide details of the deal, including asset-wise valuation, so as to decide on exercising its pre-emption rights.
Cairn, which had reluctantly agreed to the requirement of government's nod for conclusion of the transaction, has rejected the state-owned firm's pre-emption or right of first refusal.
Sources said the oil ministry would tell the cabinet that ONGC would pay Rs 12,600 crore on behalf of Cairn India as royalty over the 12-year life of the fields. It would have to pay another Rs 9,200 crore as cess, if Cairn has its way.
ONGC's July 2010 suggestion (made more than a month before Cairn-Vedanta deal was announced) of adding royalty to the project cost, so that it can be recovered from the sale of oil produced, would be presented to the Cabinet as one of the 11 pre-condition that can be imposed for approving the deal.
Sources said on cess, it may suggest that Cairn withdraw its arbitration and equitably it partner ONGC. Cairn pays its share of cess under protest but has included the levy in project cost for recovery before profits for all stakeholders including government is calculated.
According to the ministry, a careful reading of the Rajasthan Production Sharing Contract (PSC) shows that while the ONGC would be responsible for paying the statutory duties, these outgoes are to be shared by Cairn India and the state-owned firm through inclusion in the costs.
Cairn is opposed to this, as it will lower its profits and valuation. It says only contractor cost (that is capital and operating expenditure) constitute project cost and can be recovered from sale of oil, sources said.
On the other hand, ONGC's royalty liability is a licensee cost, which contractually cannot be made cost recoverable.
ONGC is the licensee of the Rajasthan block and has got 30% stake upon a discovery being made in the area for free. It did not incur any risk capital.
As per the PSC, the profit for Cairn India, ONGC and the government is calculated after deducting capital and operating expenses and royalty from the oil price realised.
Sources said Cairn feels that ONGC was in the Rajasthan block as government nominee and the onus of getting its consent for the deal.
The proposal to the CCEA may state that though the cost recovery of royalty would have an impact on the profit petroleum share of the government and Cairn Energy, ONGC's entitlement "cannot be overlooked" as it was based on the PSC.
Government will be absolved of its commitment to reimburse the statutory levies ONGC pays on behalf of partners in case they are made cost recoverable.
Sources said at the February 6 meeting Cairn and Vedanta besides refusing to agree to share royalty or cess cost, also rejected the precondition of furnishing an undertaking to accept government decision on issues under litigation or on spending being carried out by Cairn outside the work program.
Both firms also refused to withdraw the arbitration cases saying that "these matters cannot be negotiated at a time when the sale transaction is taking place". They declined to provide transaction details of their share sale to ONGC saying that "it would affect the minority shareholders' interest".
They had also refused to seek government consent "unconditionally" for the share sale, an issue - which the ministry says - could affect the government's position vis-a-vis operators in other PSCs.
Cairn had on November 23, more than three months after the deal with Vedanta was announced, made a conditional application for government nod.
Vedanta, which has no prior experience in oil and gas sector, is agreeable to other conditions like giving financial and performance guarantees and maintaining technical capability of Cairn India.