Cairn's Rajasthan plans hit by govt delay

Cairn India's much touted Rajasthan oil finds face risk of production delays as the government has further put-off a decision on its proposal to claim cost recovery for a $700-million pipeline needed to evacuate crude oil.

The petroleum ministry, about an year after mooting the idea of Cairn and ONGC combine laying a 585-km pipeline from Barmer in Rajasthan to Salaya on the Gujarat coast and claiming cost recovery by including it in field development cost, has now referred the proposal to the law ministry.

Cairn-ONGC had originally targeted crude oil production from Rajasthan fields from first quarter of 2009, but this may be delayed as the combine is unwilling to proceed on the pipeline unless the government allows them to recover cost of the pipeline from crude oil sale, industry sources said.

The pipeline, which was necessitated after Mangalore Refinery - the official offtake of Rajasthan crude - said it could take only 1.2 million tonne out of the 7.5 million tonne output from the field, will take minimum 18 months to complete. The rest of the crude is to be sold to other refiners including private sector Reliance and Essar Oil.

The sources said the pipeline proposal came from Petroleum Secretary M S Srinivasan at a meeting called to discuss crude evacuation on December 24, 2006. It was later endorsed during a meeting of heads of Cairn, ONGC, oil regulator DGH and Srinivasan on January 25, 2007.

However, it took seven months for the ministry to allow Cairn-ONGC to go ahead with acquisition of right of user (RoU) for laying the pipeline, but the cost recovery proposal was kept pending with petroleum minister Murli Deora. The minister referred the issue to Law Ministry on December 5, after more than three months.

Sources said unrelated queries about payment of cess (tax on oil production) by Cairn, which has long argued that ONGC should pay because it is the block's 'licensee', have also been raised.

Cess, according to the ministry, must be paid by the contractor, in this case Cairn and ONGC, in proportion to their interest in the field. Cairn India holds 70% and is an operator, while ONGC holds 30%.

Some say the ministry might be using the pipeline cost recovery debate to get Cairn to acknowledge its liability to pay cess.

The production sharing contract (PSC) for Rajasthan block RJ-ON-90/1, which was originally awarded to Royal Dutch/Shell, has no mention of who pays cess. For blocks awarded during the time Shell got this block, cess had clearly stated to be a liability of ONGC as it did not have to bear the risk of exploration and got 30% stake upon a discovery.

After Cairn bought out Shell in the block and made oil discoveries, ONGC exercised its right and took 30 per cent in RJ-ON-90/1, the sources said.

The government today charges cess at the rate of Rs 2,500 per tonne, while in 1995 when Shell signed the PSC for RJ-ON-90/1, it was charged at Rs 900 per tonne.