ONGC's claim that it will incur an actual loss of Rs 14,250 crore ($3.16 billion) on the Barmer oil block in Rajasthan has been contested by its partner Cairn India, which says the state-owned oil firm will only lose about $564 million.
ONGC owns a 30% stake in the Rajasthan block, but pays royalty to the state government on the entire output.
It says the 6.5 billion barrels block in Barmer district is a losing proposition for it on account of the Rs 14,250 crore royalty it will pay on behalf of Cairn India over the life of the field.
However, cash flow charts prepared by Cairn India show that ONGC's revenue from the Rajasthan block at an approved peak output of 175,000 barrel per day and an oil price of $80 a barrel will be $5.8 billion over the field's lifecycle, up to 2019-20.
During this period, ONGC will pay $5.28 billion in royalty to the state government, leaving a cash surplus of $314 million. But after considering the $878 million that ONGC will pay as its share of the field development cost, the state-owned firm will have a cumulative deficit of $564 million in 2019-20.
Sources said ONGC's actual loss from the field can be made up by the government from its share of the $14.6 billion profit from the Rajasthan field.
ONGC wants resolution of its royalty liability before the government clears Cairn India's takeover by London-listed mining group Vedanta Resources, sources said.
The state-owned firm has suggested that royalty may be added to the project cost and recovered from the sale of the up to 240,000 barrels per day of oil projected to be produced from the Rajasthan oilfields.
Cairn is opposed to ONGC's demand as it will lower its profitability and valuation. It says only contractor costs -- capital and operating expenditure -- constitute the project cost and can be recovered from the sale of oil, sources said.
On the other hand, ONGC's royalty liability is a licensee cost, which cannot be cost recoverable, claims Cairn. ONGC is the licencee of the Rajasthan block and had got a 30% stake upon a discovery being made in the area for free. It did not incur a single penny of risk capital.
As per the Production Sharing Contract (PSC) for the Rajasthan block, the profit for Cairn India, ONGC and the government is calculated after deducting capital and operating expenses and royalty from the oil price realised.
If royalty is made cost-recoverable, the government's share of profit will decline by $2.2 billion to $12.4 billion, while ONGC will rake in $1.5 billion.
Sources said ONGC was in the Rajasthan block as government nominee and the onus of getting its consent for Vedanta Resources to buy most of UK's Cairn Energy Plc's 62.4% stake lies with the oil ministry.
