The Union Cabinet’s decision to refer Vedanta’s proposed buyout of Cairn India to a group of ministers (GoM) after months of inter-ministerial consultation is yet another example of the government’s indecisiveness. The contentious issues of royalty and cess referred to the GoM headed by Finance Minister Pranab Mukherjee are not new. They have been in existence ever since Cairn India began pumping crude oil from its Barmer block in August 2009, and even when Cairn Energy informed the petroleum ministry about the deal (August 16, 2010). It took the petroleum ministry a month to write to Cairn that a formal consent was required for clearance. And when Cairn applied, the ministry responded nearly two months later saying that an application for pre-New Exploration Licensing Policy (Nelp) contracts would also be required. The Barmer field, in which Cairn India found India’s largest crude oil reserves after Oil and Natural Gas Corporation’s (ONGC’s) discovery of Bombay High in 1972, was awarded to Cairn before the government introduced the auction of oil blocks in 1999 under Nelp. Surely, there were differences in the way the ministry and Vedanta/Cairn perceived the deal.
While Cairn saw this deal merely as a commercial transaction involving change of ownership, the ministry viewed it as one involving a productive oil asset, whose ownership rested with the central government — as established by the Supreme Court in the Reliance Industries-Reliance Natural Resources Ltd case. The ministry also unearthed the issue of royalty payment for the Barmer block. Meanwhile, both the petroleum ministry and ONGC sought legal opinion on the impact of the deal from the Solicitor General, the highest legal advisor to the government. After this, both ONGC and its administrative ministry opined that the royalty on Barmer was cost-recoverable according to the provisions of the production sharing contract. If that was the case, why did ONGC have to pay royalty on Barmer for the last 19 months? Before the deal, ONGC maintained that the government had assured that it would reimburse the royalty paid by the firm. According to the government-determined licence conditions for the block, ONGC has the right to an output of 30 per cent in any discovery but the state-run firm has to pay not only its share of royalty but also the 70 per cent share of the operator. ONGC, however, woke up to the fact that it could end up paying Rs 14,000 crore as royalty after the deal. It then quoted the production sharing contract to insist that royalty was cost-recoverable. ONGC’s view was fully endorsed by the petroleum ministry.
Former petroleum minister Murli Deora constantly assured that the government would “soon take a call” on the deal. And his successor, S Jaipal Reddy, started off with similar assurances and foot-dragging. In February, however, Mr Reddy preferred to leave it to the Cabinet to take a call on the issue after presenting two options. It is not clear in what way the government’s stand will impact the fortunes of Vedanta and Cairn. However, it is amply clear that the approach towards this deal has done its damage to the ninth round of the petroleum ministry’s flagship Nelp. There was nothing global about the bids in spite of the high crude oil price and the several foreign road shows organised by the ministry. Only eight foreign companies participated in the round compared to seven in the previous round. It isn’t clear whether ministers are making a policy or acting as minders of vested interests. So, new investors would rather wait and watch than step in where angels fear to tread!
