Refuting the claims made by Cairn India, state-run Oil and Natural Gas Corp (ONGC) has said the government will save $2 billion if royalty paid on the prolific Rajasthan oilfields is allowed to be cost-recovered.
ONGC owns a 30% stake in the Barmer oilfields and pays royalty to the state government not just on its share, but also on the balance 70% owned by Cairn India.
Over the life of the field, ONGC estimates it will pay over Rs 14,200 crore ($3.15 billion) in royalty on behalf of Cairn India, which the government -- in numerous commitments since 1997 -- has promised to reimburse the state-run oil exploration firm for in full, sources said.
ONGC has alternatively suggested that the royalty can be added to the project cost and recovered from the sale of up to 240,000 barrels per day of oil projected to be produced from the Rajasthan oilfields.
Sources said the company, in workings submitted to the Oil Ministry this week, stated that the government's profit share will be lower by $1.1 billion in such a scenario, much less than the $3.15 billion it would otherwise have to reimburse to ONGC.
While the workings have been calculated considering the oil price of $70 per barrel, the profit for Cairn India, ONGC and the government is calculated after debiting capital and operating expenses and royalty from the oil price realised.
Sources said Cairn India CEO Rahul Dhir had on February 7 written to the Oil Secretary S Sundareshan saying the government's profit share of $14.6 billion at the present approved peak output of 175,000 barrels per day would be reduced by over $2 billion if ONGC's proposal is accepted.
The UK-based company estimates that ONGC's cashflow at an $80 per barrel oil price will be $5.834 billion. ONGC's royalty payout would be $5.282 billion and it would have paid another $878 million as its share of capital expenditure. Thus, its total deficit would be just $564 million.
Cairn says the government will have to reimburse only $564 million to ONGC if the PSU is reimbursed for the excess royalty burden, while if royalty is added to project cost, the government's profit share will come down by $2 billion.
Sources said ONGC has countered these assumptions, stating that Cairn has not accounted for the cost of money and the operating expenditure involved before calculating the net cashflow.
Also, ONGC is a commercial organisation which functions for earning profits. In Cairn's assumption, ONGC is shown as a no-profit-no-loss company. These also do not account for the time and effort put by ONGC into the Rajasthan joint venture.
ONGC says it is only asking for its contractual right under the Production Sharing Contract (PSC) and it was none of Cairn's business to discuss how much of its royalty liability should be reimbursed by the government.
Cairn India, which London-listed mining group Vedanta Resources is seeking to buy, says royalty is a licencee cost and only contractor costs are allowed to be recovered from the project costs.
Vedanta, a mining company controlled by billionaire Anil Agarwal, with no oil and gas experience, agreed in August to buy at least a 40% stake and as much as 51% in Cairn India from London-listed Cairn Energy.
The government is reviewing its bid. Vedanta expects to get state approval for the transaction in February. Cairn Energy said it expects to conclude the sale by April 15.
Oil Minister S Jaipal Reddy had earlier this week stated that the concerns of ONGC will need to be addressed before it can approve Vedanta Resources' USD 9.6 billion acquisition of Cairn India.
ONGC, by virtue of its stake in eight out of the 10 oil and gas properties held by Cairn India, claims that it has preemption rights over the deal. It wants the issue of excess royalty it has to pay on Cairn India's mainstay Rajasthan block to be addressed before giving a green signal to the deal.
The Rajasthan block, which gives Cairn India 90 per cent of its valuation, is a losing proposition for ONGC.
The Oil Ministry has made resolution of the royalty issue one of the 11 preconditions for giving its nod. Cairn/Vedanta are opposed to ONGC's demand for recovering the royalty before profits from the sale of Rajasthan oil are split, as it will lower Cairn India's profitability and valuation.
Cairn India acquired a stake in Rajasthan block RJ-ON-90/1 from Royal Dutch Shell in 2002 and discovered oil in January, 2004.
In case of areas awarded under the New Exploration Licencing Policy (NELP) -- like the gigantic KG-D6 gas fields of Reliance Industries -- royalty can be added to the capital and operating cost of the block, which as per law are deductible from revenues earned on the sale of oil or gas before calculating profits for all stakeholders.
The Rajasthan block is a pre-NELP acreage.
