Cairn told to allow cost recovery of royalty and cess, take back arbitration case; ONGC FPO gets a boost.
In the first such move in the petroleum sector, the government today asked Cairn India to accept five conditions before its majority sale to Vedanta Resources can go ahead.
Cairn India will have to allow cost recovery of royalty on Barmer crude from the revenue it earns from the field. It will also have to withdraw the arbitration case against the government.
As cost recovery will reduce the revenue from the field, the two companies this week announced waiver of the non-compete fee that Vedanta had agreed to pay Cairn Energy in August 2010. This helped Vedanta save $840 million by bringing down the deal size to a little over $6 billion.
| DEAL FINE PRINT | ||
| CAIRN ENERGY to sell 40% stake for Rs 355 a share. (10% by July 11, rest on acceptance of government conditions) | ||
| VEDANTA’S SESA GOA bought 8% for Rs 355 a share in an open offer that ended on April 30 | ||
| PETRONAS sold its 10.5% stake for Rs 331 a share to Sesa Goa on April 19 | ||
| SHAREHOLDING PATTERN (in %) | ||
| Current | After deal | |
| Cairn Energy Plc | 61.70 | 21.70 |
| Vedanta Resources through Sesa Goa | 18.50 | 58.50 |
| FIIs | 11.68 | 11.68 |
| DIIs | 7.20 | 7.20 |
| Others | 0.92 | 0.92 |
Making royalty cost-recoverable and withdrawal of arbitration cases will protect the interests of government-owned ONGC, which is planning to launch a follow-on public offer (FPO). In addition to royalty, the cess of Rs 2,500 per tonne on Barmer output that Cairn India is paying under protest has also been made cost-recoverable. Allowing the royalty of Rs 18,000 crore and cess of Rs 13,000 crore (over the life of the field) to be taken as cost will reduce the government’s share of profit from the country’s biggest on-land oil field.
Announcing the decision taken by the Cabinet Committee on Economic Affairs (CCEA), Petroleum Minister S Jaipal Reddy told reporters the “CCEA has endorsed the GoM’s (group of ministers’) recommendation and granted conditional approval to the sale of stake in Cairn India to Vedanta Resources”. He said no further litigation on these issues could be initiated by the company on the above two issues.
Reddy said the issues related to royalty and arbitration were the “only two bones of contention” but other conditions such as no-objection certificates from Cairn India partners, approvals from regulatory bodies such as the Securities and Exchange Board (Sebi) and security clearance from the home ministry would have to be met.
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Experts say all three players — Cairn Energy, Vedanta and ONGC — have gained. “Cairn Energy has got a multiple return on the investment it made about a decade ago. Vedanta has become the second mining giant after BHP Billiton to have a presence in oil exploration and it can ride the future potential of Barmer. ONGC can smile all the way to the bank as it will help its FPO plans,” said Jagannadham Thunuguntla, equity head, SMC Capital.
A statement by Vedanta said, “Vedanta awaits official intimation of the approval and details of the pre-conditions from the government of India in order to consider further course of action. Vedanta continues to work with Cairn Energy towards successful completion of the transaction and a further announcement will be made in due course”.
Under the production sharing contract signed by Cairn India and its partner in the Barmer block, ONGC, with the petroleum ministry, ONGC was to pay the full royalty despite owning a mere 30 per cent stake. The block started commercial production in August 2009. ONGC would have paid Rs 18,000 crore as royalty during the life of the field.
| CAIRN DEAL TIMELINE |
| AUG 16, 2010: Cairn Energy announces plan to buy up to 60 per cent in Cairn India for $9.6 billion, informs Ministry of Petroleum and Natural Gas |
| AUG 17: Vedanta says open offer for Cairn India to begin on October 11 |
| AUG 19: Petroleum ministry asks Cairn Energy to seek consent |
| SEPT 9: Cairn seeks consent only for Nelp blocks |
| NOV 4: Petroleum ministry tells Cairn India consent is required even under pre-Nelp production sharing contracts (PSCs), including three producing properties in Barmer, Cambay and Ravva. |
| NOV 23: Cairn seeks fresh approval for all PSCs |
| JAN 19, 2011: Jaipal Reddy replaces Murli Deora as petroleum minister |
| FEB 15: Reddy says Cabinet to decide on the deal |
| APRIL 6: Vedanta’s Sesa Goa gets Sebi approval for open offer from April 11 |
| APRIL 6: Cabinet Committee on Economic Affairs refers deal to GoM |
| APRIL 19: Vedanta acquires 10.4 per cent in Cairn India from Malaysia’s Petronas |
| JUNE 27: Cairn-Vedanta announce deal restructuring, Cairn cuts stake sale price to Rs 355/share |
| JUNE 30: CCEA gives conditional clearance based on GoM’s recommendations |
In August 2010, the London Stock Exchange-listed Vedanta Resources announced purchase of up to 60 per cent stake in Cairn India.
The deal ran into hurdles when the petroleum ministry insisted on written applications.
The GoM recommended on May 27 that royalty would have to be cost-recoverable,’ impacting Cairn India’s profitability. Due to this, Cairn Energy, which owns a majority stake in Cairn India, was forced to lower the price at which it would sell its 40 per cent stake to Vedanta by $800 million (Rs 3,800 crore). The Scottish explorer announced that it would sell the 40 per cent stake to Vedanta at Rs 355 per share instead of the previous agreed price of Rs 405. Vedanta already has an 18.5 per cent stake in Cairn India.