In fresh confrontation, the Oil Ministry has blocked Cairn India's plans to begin crude oil production from the Bhagyam oilfield, the second biggest find in the prolific Rajasthan block.
Cairn had plans to put the Bhagyam oilfield into production by October to take total output from the Rajasthan block to 175,000 barrels per day.
Sources privy to the development said the ministry, however, at the June 10 meeting of the panel that oversees operations of the block, stonewalled FY12 production rate, work programme and budget for the Bhagyam field.
The ministry wants Cairn to calculate profit from the Rajasthan block after treating royalty as cost recoverable item. Cairn believed that royalty, which is paid by state-owned Oil and Natural Gas Corporation (ONGC), is a licensee obligation and hence not cost recoverable from revenues.
This view has been contested by the ministry, which has made cost recovery of royalty as a precondition for allowing UK's Cairn Energy to sell 40% stake in Cairn India to London-listed mining group Vedanta Resources, they said.
The Cabinet Committee on Economic Affairs (CCEA) had last month agreed to making this a precondition for approving the $9-billion deal and so, the ministry now insists that it will not approve further programme on Bhagyam unless Cairn calculates profits to be divided among stakeholders and the government after adding royalty to the cost.
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All project cost are first deducted from revenues earned from oil sales and then profits split between partners Cairn India, ONGC and the government. Cairn holds 70% interest in the fields, while ONGC has the remaining 30%.
Cairn on June 21 wrote to the Oil Ministry saying the issue of profits entitlement "should not be linked to production from Bhagyam field and Bhagyam production should be allowed to commence from October 2011, as per schedule".
"It will be appreciated that increasing crude production at this juncture is in the best interest of all stakeholders and the nation when crude has to be imported at exorbitantly high prices," it wrote.
Currently, Mangala, the biggest of the 18 oil discoveries in the Thar desert block, is producing 125,000 bpd but has potential to do "much more".
Bhagyam is targeted to produce a peak output of 40,000 bpd by the year-end.
Cairn said it had executed Bhagyam field development in line with approved development plan. "So far the contractor has committed more than $250 million towards the development cost against approved Field Development Plan estimate of $470 million."
Cairn said Bhagyam field can commence production from October, 2011 and total production in 2011-12 from the field is estimated to be about 6.7 million barrels.
"However, Ministry of Petroleum and Natural Gas representative present at the Management Committee meeting [on June 10] directed that the Bhagyam program quantity of 6.7 million barrels and the associated production budget of $15.5 million should be removed from the Work Programme and Budget till the issue relating to the Entitlement Interest [profit of stakeholders] is resolved," it said.
CCEA had last week decided to give approval to the $9-billion deal subject to Cairn/Vedanta allowing royalties from Cairn India's prize Rajasthan oilfields to be added to project costs and recovered from sales.
Also, it has to end arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70% share of oil from the fields.
ONGC pays royalty on its 30% share of oil from Rajasthan fields as well as on operator Cairn India's 70% take.
It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost, which is first deducted from revenues earned from sale of oil before profits are split between partners.