Cairn India has demanded a change in the pricing formula for crude oil from its prolific Rajasthan block saying the current pricing mechanism does not capture the full value of oil.
Rajasthan crude oil, mostly used by private refiners like Reliance Industries and Essar Oil, is currently sold at a discount to prevailing price of benchmark Brent crude oil. Government's share of taxes and royalty is linked to the price of crude oil.
Sources said the company last month wrote to the Oil Ministry saying the price currently being realised was around 8-10 per cent lower than the benchmark Dated Brent price.
This current sub-optimal realisation in pricing of Barmer crude is impacting the value for all stakeholders, it said. That is resulting in potential yearly revenue loss for the government due to lower realisation.
There is an immediate need to review the pricing formula, it wrote.
Stating that the unique nature of the Barmer crude makes it difficult to optimise it in Indian refineries, Cairn wrote that in September 2009 Government had designated PSU refineries to purchase the Rajasthan crude, a sweet low sulphur crude, at a provisional pricing formula till it is examined and approved by the government.
The discount was provided as an initial incentive. But the same formula has continued since then.
Sources said Rajasthan crude oil is being priced using the indigenous crude oil pricing formula linked to Bonney light of west African origin and quality adjustment based.
The current price formula doesn't capture the value provided by high quality secondary conversion unit feed, Cairn said.
The government had in September 2009 designated refineries of Indian Oil Corporation (IOC) Mangalore Refinery and Petrochemicals Limited, and Hindustan Petroleum Corporation to purchase the Rajasthan crude at the agreed pricing formula.
Since these refineries were not lifting the allocated quantity of crude oil, the government allowed sale of the remaining quantity to domestic private refineries.
To date over 250 million barrels of oil equivalent has already been sold for the past five years.
Today, the government nominee Indian Oil is able to off take only 25 per cent of the total Rajasthan production, remaining being sold to Reliance and Essar, sources said.
Sources said that since for every dollar realised 75 cents go to the government - every dollar discounted leads to significant loss to the exchequer.
By revisiting the pricing formula government can significantly get an upside and it will also give Cairn and its partner ONGC an opportunity to get better realisation at a time when crude prices are significantly low, they said.
