Deal to get expensive by 7-8 per cent for Anil Agarwal-promoted Vedanta.
With a group of ministers (GoM) deciding to make royalty on Barmer crude cost recoverable, as a condition for approval to multibillion Cairn-Vedanta deal, Cairn India would have to take a hit of over $908 million. Analysts said this would make the deal more expensive by 7-8 per cent for Anil Agarwal-promoted Vedanta Group.
A top government official said: “The GoM has decided to recommend that both royalty and cess should be cost recoverable. Accordingly, ONGC will have to pay 30 per cent royalty and cess in tune with its 30 per cent participating interest. The rest will have to be borne by Cairn India.” Allowing royalty and cess to be taken as cost would also reduce the government share in profit from the biggest onland crude oil producing field.
| THE FINEPRINT |
| * Cairn India holds 70% participating interest in Mangala field in Rajasthan |
| * ONGC holds the remaining 30% |
| * Royalty on onland production is paid to the govt at 20% of well head value |
| * Block licensee ONGC has to pay royalty on the entire volumes of crude produced from the block |
| * Cost recoverability of royalty allows ONGC to deduct the payment as cost, leaving a lower profit for sharing among Cairn India, ONGC, and the government |
| * Once royalty is recovered, 100% payment by ONGC or sharing of it between the two partners does not impact the companies |
According to ONGC calculations, based on $75 a barrel crude oil price, the government profit would be reduced by about $623 million. “If ONGC is allowed to recover the payment as cost, a benefit of about $1.53 billion would pass on to ONGC over the life of the field,” said a person privy to the calculations. He said the figure would rise further since the price of crude has risen to around $100 a barrel.
Analysts said the government decision would help ONGC ahead of a July follow-on public issue. “It will be a major relief for ONGC that has recently been hit by rising fuel subsidy burden,” said Jagannadham Thunuguntla, Equity Head, SMC Capital.
Though the production sharing contract (PSC) has been interpreted to facilitate cost recovery, a senior executive privy to negotiations surrounding the deal said ONGC would have to continue paying 100 per cent royalty since Cairn India cannot be asked to pay royalty under PSC.
Cairn India is already paying cess at a rate of Rs 2,626 on every tonne “in protest”, though it has challenged this in an ongoing arbitration case. Cost recoverability of cess would reduce the burden on Cairn.
Vedanta on August 16 last year had announced buying Cairn Energy’s stake in Cairn India at Rs 405 a share. “Vedanta offer assumed that 100 per cent royalty will be paid by ONGC on Barmer production. Now, the purchase has become expensive considering that Vedanta will have to bear 70 per cent of the royalty. The acquirer will have to take a call,” said S P Tulsian, investment advisor.
Sesa Goa, a subsidiary of London-based Vedanta Resources, in April acquired 8.1 per cent through an open offer priced at Rs 355 a share and another 10.4 per cent from Petronas at Rs 331 a share. Thunuguntla said Vedanta would not exit the deal since it had already acquired 18.5 per cent stake in the company. “While this (royalty condition) makes the deal expensive by 7-8 per cent for Vedanta, I do not think the company will shy away from the deal. Cairn India presents a rare opportunity for Vedanta to diversify into the oil exploration business,” he said.
In a letter to the ministry of petroleum and natural gas, Vedanta Resource Chief Executive M S Mehta had said in January that the government conditions would have “material adverse impact on Cairn India's value and thus negatively impact the interests of all shareholders”.
