It took Reliance Industries Ltd only five months to secure an unconditional clearance for its $7.2-billion deal with BP, while the $9.6 billion Cairn-Vedanta deal is still hanging by a thread on a conditional clearance 10 months after the two companies had announced the tie-up.
Part of the reason lies in the nature of the two deals. The biggest difference between the RIL-BP and Cairn-Vedanta deals is that the former is a farm-out agreement and does not involve transfer of control. The Cairn-Vedanta deal, on the other hand, is a transaction between two London-listed companies and the money will not flow into India.
The RIL-BP deal, in contrast, will be the single-largest foreign direct investment (FDI) worth $7.2billion in the petroleum sector. The $12billion FDI announcement made by Korean steel major POSCO in 2005 has failed to take off.
In the Cairn-Vedanta deal, Cairn Energy is transferring control of its Indian unit. The buyout will see the London-listed mining group, led by NRI tycoon Anil Agarwal, take charge of operations without any experience in the oil sector.
In case of the RIL-BP deal, Reliance will remain in charge of operations and retain majority stake. And BP is regarded as the world leader in the oil industry. Another difference is that there is no third company to pre-empt the deal.
By contrast, the Cairn-Vedanta deal saw major opposition from government-owned Oil and Natural Gas Corporation (ONGC) that had a 30 per cent stake in Cairn India’s mainstay Barmer block.
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Former director general of hydrocarbons Avinash Chandra said the royalty issue has been the key reason for the delayed approval to the Cairn-Vedanta deal while there was no such complexity in the RIL-BP deal. “Even though ONGC was to pay full royalty, Barmer was a case of supernormal find where the government is well within its right to change the terms and Cairn should appreciate it.”
As an initial response to the deal, ONGC and other companies under the administrative control of petroleum ministry also explored making a counter offer to the one made by Vedanta. It, however, concluded the deal would be too expensive.
According to the production sharing contract signed by Cairn India and its partner ONGC for the Barmer field with the petroleum ministry, ONGC was to pay full royalty on production. The block started commercial production in August 2009 and ONGC started paying full royalty though it had 30 per cent stake in the field and was entitled to 30 per cent share in output.
ONGC was of the view that royalty should be treated as ‘cost-recoverable’ and this was endorsed by the government.
ONGC would have paid a royalty of Rs 18,000 crore for the complete life-cycle of the field. Whether Cairn and Vedanta will accept this condition and whether the deal will reach its conclusion is something that their respective boards will have to decide.
However, the approval given to RIL-BP will certainly brighten up prospects of more foreign investments in the energy space.