Plunging into the $9.6 billion deal between its parent firm and mining group Vedanta Resources, Cairn India today said it will not accept any government condition that will negatively impact its value.
While neither UK's Cairn Energy, which is selling most of its 62.4% stake in the Indian arm, nor Vedanta have publicly commented on government attaching any condition for approving the transaction, Cairn India used the announcement of its third quarter earnings to reject any precondition.
"The Cairn India board has stated that any condition tied to the approval of the transaction, which can negatively impact the value of the company, cannot be accepted," the company said in a press statement here.
Previously, Cairn India had gone ahead and written to the Oil Ministry saying partner ONGC was cash surplus from the Rajasthan fields despite its liability to pay royalty in excess of its 30% share in the output.
This was refuted by the state-owned firm which said Cairn India was misleading the oil ministry by deliberately not including capital expenditure incurred on the block while calculating cash flows. After considering capex incurred, ONGC is net negative in cash flow, something that the oil ministry wants to address before approving the Cairn-Vedanta deal.
The oil ministry has put 11 preconditions for approving the deal, most of which are acceptable to Vedanta.
In particular, Cairn/Vedanta are not agreeable to addressing state-owned Oil and Natural Gas Corp's (ONGC) royalty liability on Cairn India's mainstay Rajasthan block.
ONGC had on July 14, more than a month before the Cairn-Vedanta deal was announced, sought royalty it pays for the block to be included in project costs.
Project cost, both capital and operating expenditure, are recovered from sale proceeds of oil before profits for all stakeholders including the government are calculated.
ONGC, which owns 30% stake in Rajasthan block but pays royalty to the state government on the entire output, says it will pay over Rs 14,200 crore on behalf of Cairn India over the life of the field.
Oil Minister S Jaipal Reddy had earlier this week stated that concerns of ONGC must be addressed before the $9.6 billion deal can be approved.
Cairn/Vedanta are opposed to ONGC's demand as it will lower Cairn India's profitability and valuation. Cairn says only contractor cost - capital and operating expenditure - constitute project cost and can be recovered from sale of oil. ONGC's royalty liability, it says, is a licensee cost which contractually cannot be made cost recoverable.
The state-owned firm on the other hand says its demand is in conformity of the Production Sharing Contract (PSC).
Besides, they are also not agreeable to the ministry condition that they will have to abide by its orders in case of past and future cases of operational disputes.
Vedanta, which has no prior experience in oil and gas sector, is agreeable to other conditions like giving financial and performance guarantees and maintaining technical capability of Cairn India.
Cairn India in the statement also stated that the Mangala oilfield, the largest in the Rajasthan block, is ready to produce 25,000 barrels per day more than its current output of 125,000 bpd but has not been able to do so because of lack of government approval for over six months now.
While production from Bhagyam, the second-biggest field in the block, would start in second half of 2011 and reach peak of 40,000 bpd by year end, the plan to commence production from Aishwariya field in the block was awaiting government approval.
