Unwilling to take a decision on the $9.6-billion Cairn-Vedanta deal, the petroleum ministry will place the matter before the Cabinet committee on economic affairs in two to three weeks. Though the ostensible reason for CCEA approval is the royalty burden on government-owned Oil & Natural Gas Corporation, it effectively means a corporate deal in the oil sector is being decided upon by the Cabinet.
ONGC being the original licensee of the Barmer block pays royalty on the entire 150,000-tonne crude production, although its share in the find is only 30 per cent. If the CCEA rejects an earlier proposal that the government reimburses ONGC this royalty payment and asks Cairn India to share the burden, it would alter the latter’s valuation and its stake sale to Vedanta might have to be reworked.
“By agreeing to pay royalty or give up its right to contest the cess claim would lower the value of the assets held by Cairn India and have negative implications for minority shareholders,” the Royal Bank of Scotland said in a recent report.
Though Reddy said the government would expedite a decision on the deal, the ministry faces the tricky issue of giving a green signal without first settling ONGC’s royalty payment issue. The petroleum ministry had in August 2004 moved a Cabinet note to reimburse ONGC and Oil India of statutory levies for blocks awarded to private companies prior to the New Exploration & Licensing Policy (NELP) in 1991.
The government had signed 28 production-sharing contracts prior to NELP, under which all statutory levies were to be borne by the national oil companies as licensees, except under contracts where a cess is to be borne by the contractor.
In order to ensure that investment for state-owned oil companies in these blocks remain viable, the petroleum ministry had more than a decade ago mooted a proposal 7that they be reimbursed the statutory levy from the government’s share in profit petroleum or the oil pool account. Since the oil pool account no longer exists, the only way out is to either reimburse them from profit petroleum or make it part of cost petroleum.
More From This Section
While ONGC has asked the ministry to allow making royalty payment part of the cost petroleum, such a move will reduce the profit of operator Cairn India.
“Though the government’s share in profit petroleum will also come down, it will anyway lose that amount, since it will be paid by ONGC to the Rajasthan government in the event of a reimbursement of royalty,” said a senior ONGC executive.
The minister’s statement comes a few days after a meeting with senior Cairn executives, where CEO Bill Gammell had sought government approval by February 20. While announcing the sale of 40 per cent stake in Cairn India to the Anil Aggarwal-controlled Vedanta, the two companies had said the deal would be closed by April 15.