After being forced to withdraw its arbitration case against the government over cess, Cairn India has received another jolt in the form of an increase in the cess rate. It places the company, which got government approval for a takeover by Vedanta Resources after more than a year’s wait, unfavourably among a host of other private companies for whom the cess amount has been capped at Rs 900 a tonne.
The Budget burdened oil and gas producing companies with an 80 per cent increase in cess to Rs 4,500 a tonne from Rs 2,500. Effecting the hike, finance minister Pranab Mukherjee had said the rate was last revised in 2006-07 and the increase was undertaken as an indexation measure. Companies that operate in an almost similar pre-New Exploration and Licensing Policy (NELP) dispensation and enjoy the cap advantage include Reliance Industries Ltd, BG India and Videocon. Besides Cairn, government-owned ONGC and Oil India Ltd have to bear the hike in cess expected to bring Rs 6,000 crore in revenue to the government next year.
Cairn India CEO and MD Rahul Dhir wrote a letter to petroleum minister Jaipal Reddy this week, seeking support in making a case for a rollback to the finance ministry. “This increase has come as a complete surprise to Cairn India and has had an immediate and significant impact on our value, wiping almost $1 billion from our market cap on Friday, March 16. Indeed, the total impact on Cairn India is $2.5 billion assuming the proposed rate of Rs 4,500 per metric tonne,” Dhir said in his letter.
Cairn India was contesting its obligation to pay royalty and cess under the Rajasthan production sharing contract (PSC). However, to clear the stake sale in Cairn India to Vedanta, the government made Cairn India accept royalty and withdraw the cess arbitration, ignoring the company’s right to raise disputes under the PSC.
“In good faith and recognising the constructive relationship, Cairn India accepted these conditions and assumed a significant financial impact on its value (approximately $8 billion loss to revenue) in the belief that this would establish a solid framework for co-operating with the petroleum ministry,” Dhir said.
Coincidentally, the group of ministers on the Cairn-Vedanta deal that ironed out issues related to royalty and cess was headed by Mukherjee.
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Calling the increase ‘unfair and discriminatory’, Dhir said Cairn India was the only private producer of crude oil in the country impacted by the rate variation. The PSC on the Barmer block in Rajasthan (RJ-ON-90/1) is silent on the payment of cess and no rate is specified. For most other pre-NELP contracts like Ravva, the cess rate has been fixed at Rs 900 a tonne; all NELP blocks are exempt.
A senior government official said a fiscally constrained government might not role back the increase since it was hankering for "even Rs 10-12 crore" revenue from any sources. "Besides, the increase in cess was a better and more transparent system than having a windfall gains tax," he added.
Former ONGC chairman R S Sharma defended the hike, saying crude oil prices had risen dramatically since the cess was last revised. "Cairn India can invoke the fiscal stability clause to address this increase if it thinks it is adversely impacted. However, the case is weak since crude oil prices have seen a considerable increase since the last cess rate was decided,” said Sharma, now chairman of the Ficci Hydrocarbon Committee. He said for other blocks, like Ravva where Cairn India has a stake, Rs 900 a tonne levy had been fixed in the production sharing contract itself but that was not the case with Cairn's Barmer field.