Logjam ends, production to start this month
The board of Oil and Natural Gas Corporation (ONGC) today approved the revised investment plan submitted by Cairn India for its Rajashtan oilfields which are owned 30 per cent by the public sector unit. This has ended the uncertainty over ONGC’s participation in the venture, which is one of the largest onshore crude oil wells discovered in the country in recent years.
Cairn had revised the total cost for developing the three oil fields (Mangala, Bhagyam and Aishwariya) in Rajasthan to $3.60-3.80 billion (Rs 16,902-17,840 crore), including $940 million (Rs 4,413 crore) for a pipeline to evacuate the crude oil to coastal Gujarat, from $2.93 billion (Rs 13,756 crore) earlier. Cairn is the operator in the three oilfields with a 70 per cent stake, while the rest is owned by ONGC as a licensee. Consequently, Cairn will have to fund 70 per cent of this investment and ONGC, 30 per cent.
ONGC had earlier withheld approval to Cairn’s revised field development plan as the liability to pay royalty on the entire crude oil production, although it is only a 30 per cent shareholder, rests with it, which has turned the project economically unviable for it. In spite of today’s approval, said an ONGC official, the company will continue to pursue with the central government the reimbursement of the royalty it will pay on behalf of Cairn.
“ONGC’s liability to pay royalty to Rajasthan on 100 per cent production works out to $36 per barrel at a price of $60 per barrel,” the official said. In addition, it will have to pay a crude oil cess of $7.14 per barrel to the Centre. “Further, we have to share profits (revenue minus operating, capital expense and the cess) with the government in a prescribed ratio. Assuming 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 added.
After the royalty, cess and profit petroleum, ONGC will be left with just $6.5 per barrel, according to the company’s calculations. On the other hand, Cairn will pay just the cess and profit petroleum and therefore will be left with $42.5 per barrel.
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“The balance of $6.5 per barrel is grossly insufficient for meeting the obligation of sales tax/VAT, operating and capital expenses,” the official said and added that ONGC wants the government to refund the royalty it has to pay on behalf of Cairn. The development plan was revised owing to the steep increase in construction, drilling and manpower costs. Moreover, the initial plan was based on a daily peak output of 125,000 barrels, which now stands at 175,000 barrels.
The Rajasthan block is ready for production and output is expected to begin this month. Cairn’s initial Mangala crude output is seen around 30,000 barrels a day, which will be ramped up to 80,000 barrels by the year-end. Production from the block would plateau at 175,000 barrels a day, or 8.75 million tonnes per year, in 2011.