Cairn stepped in when Shell left the exploration work at Rajasthan’s Barmer, one of the most backward districts of the country, in 2002. State-owned ONGC continued to be a partner in the block and decided to carry on the work along with Cairn, in what is still known in government books as RJ-ON-90/1 block.
On August 24, 2009, Cairn pumped out waxy crude oil, adding about 20 per cent to India’s production. Just about a year later, on August 15, 2010, when billionaire Anil Agarwal, who journeyed from Patna to London via Mumbai to become a metal tycoon, decided to buy a majority stake in Cairn India, analysts questioned his wisdom.
Many, including public sector refining companies, continued to doubt whether the wax in Cairn’s crude that necessitated an insulated pipeline, was worth the $9.6-billion deal. ONGC, too, thought the deal was not worth it. Even petroleum minister Jaipal Reddy dropped a hint, saying: “ONGC conveyed to us that they were not interested (in pre-empting the Vedanta buy by making a counter offer).”
The waxy crude produced from the Mangala field in Barmer became a bone of contention as ONGC paid the 100 per cent royalty on it. This made investment by the government-owned company in the field unviable at a certain value of crude oil. While the Cairn India management had disputed the ONGC claim on the viability of investment, when the tug of war was going after the deal was announced, a senior ONGC board member had told Business Standard: “Mr Cairn had obviously never informed Mr Vedanta about the royalty claims and the royalty recoverability provision.” Though ONGC in no way could have verified these allegations since the deal came as a surprise to it and the government, it maintained publicly a tough stand on the issue of royalty sharing. “Do not clear the deal till you get the royalty burden off our shoulder”, was ONGC’s message to the petroleum ministry.
Since it was a corporate deal, and not a purchase of interest in the production sharing contract (unlike in RIL-BP case), Cairn India applied for government clearance in the case of the Barmer field only after it was forced to do so by the government on November 23, 2010. Since then, the government had been bargaining hard with Cairn and Vedanta. Both petroleum minister and secretary changed in the interim, leading to speculation that the deal was behind the change of guard at the ministry.
The fact that a government company was the loser since it paid 100 per cent royalty under the contract and the government being under the public scanner for corruption did not make matters easy for the deal. Meanwhile, Vedanta not only purchased 18.5 per cent equity in Cairn India through Sesa Goa, without any approval from the government, but also renegotiated the deal with Cairn Energy and got a benefit of $840 million through the waiver of non-compete fee. “The transacting parties have been pragmatic by deciding to waive the non-compete fee. If they were rigid with the issue, they would have been drawn into a long-term litigation,” said Gokul Chaudhri, partner, BMR Advisors.
As was evident from Reddy’s briefing after a late meeting of the Cabinet Committee on Economic Affairs, the deal is still not done. Besides cost recoverability that will make the government lose some revenue in profit share, it wants Cairn India to withdraw its arbitration case against it on cess payment. This amounts to taking away Cairn’s right to seek redressal under the production sharing contract (PSC), which the government, ONGC and Shell India signed originally, but to which Cairn India is now a party.
“The mechanism under PSC allows the parties to seek arbitration. Logically, the matter should have been settled through that means. The government has been tough with the transacting parties (Cairn and Vedanta),” said Chaudhri.
Playing a role of arbitrator itself, the government resolved the issue in favour of ONGC. “It undermines the judicial process we have in this country,” said Chaudhri. It means if the Cairn India board, forced by its current and future promoter, accepts these conditions to the disadvantage of minority shareholders, its rights are clipped under PSC.
