The Oil Ministry is ready to give "in-principle" approval for Vedanta Resources' $9.6 billion acquisition of Cairn India, provided the mining firm led by billionaire Anil Agarwal agrees to a set of 11 preconditions.
Earlier this month, the Oil Ministry had sought the Law Ministry's opinion on the legality of imposing certain preconditions on the stake sale, including Vedanta agreeing to withdraw pending lawsuits filed by Cairn with respect to payment of oil cess and accepting partner ONGC's preemption rights.
Sources said the ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from Cairn's mainstay Rajasthan block in the project cost and its profits calculated thereafter.
As per the Production Sharing Contract (PSC), the operator is permitted to recover all project costs from the sale of oil or gas produced from a field before a mechanism for profit-sharing with the government comes into play.
State-owned Oil and Natural Gas Corp (ONGC) holds a 30 per cent stake in Rajasthan block RJ-ON-90/1, but pays the royalty on the entire quantum of production, as it is the licencee of the block.
If the royalty paid by ONGC on behalf of Cairn is taken into consideration while calculating the project cost, this would lower the profits of the Scottish Energy firm, which does not pay royalty on its 70 per cent share of the projected 12 million tonnes per annum output from the block.
Sources said the preconditions also include Vedanta guaranteeing that Cairn's technical capability will be undisturbed by the share transfer and the London-listed firm providing a fresh financial and performance guarantee.
The ministry also wants Vedanta to accept the government's decision on future exploration activities and expenditures as "final and binding", as well as unconditionally accept the government's position on issues that have been challenged by Cairn in courts.
Like royalty, Cairn believes the liability to pay cess of Rs 2,500 per tonne on all crude oil produced from the Rajasthan block also rests on ONGC.
This position has been disputed by ONGC and the ministry, which say that cess is to be paid by the project partners in proportion to their shareholding and the matter is under arbitration, sources said.
The ministry said its "in-principle approval shall be further subject to ONGC's decision on the right of first refusal" on the Rajasthan block, as the Solicitor General of India's view was that the transfer triggered ONGC's preemption rights.
The new Oil Minister, S Jaipal Reddy, had last week stated he will "not lose time" in deciding on giving consent to Vedanta buying Edinburgh-based Cairn Energy's majority stake in Cairn India.
