Cairn changed stand on royalty: ONGC

Oil and Natural Gas Corporation (ONGC) has said that Cairn never disputed cost recovery of royalty on crude oil production from the Barmer field before August 16, 2010, when Vedanta Resources announced buying of a majority stake in Cairn India.

A senior ONGC executive told Business Standard that his company was willing to pay 100 per cent royalty on the Barmer production but wanted it to be adjusted as cost under the production sharing contract (PSC). He claimed that Cairn India changed its position after its parent, London Stock Exchange-listed Cairn Energy, decided to sell stake in the Indian company to Anil Agarwal-controlled Vedanta in a $9.6 billion deal.

“It may be possible that while the deal was being negotiated with Vedanta, Cairn did not take into account the royalty issue,” he said on condition of anonymity. The executive pointed out to a letter written by ONGC to Cairn on July 14, 2010, asking it to include royalty payment in cost calculations.

Cairn India, on July 28, replied by asking ONGC to send in the details for royalty payment during 2009-10 along with an approval from the Directorate General of Hydrocarbons (DGH) to enable calculation of entitlement interest. Subsequently, on September 13, Cairn said the “PSC stipulates it (royalty) as cost of licensee and as such the operator is of the opinion that the same cannot be considered for cost recovery”.

Cairn also wanted the views of the management committee to be taken on the issue. The committee consists of representatives of the government, DGH, ONGC and Cairn. While informing the ministry of petroleum and natural gas about the royalty issue, ONGC has interpreted the July 28 letter to say that Cairn had agreed to the royalty being cost recoverable.

A Cairn executive disputed the claim stating that the fact it wanted the matter to be resolved by DGH was a proof that it did not agree to royalty being cost recoverable.

Being the original licensee, ONGC pays 16.67 per cent on the net price of crude oil for the entire production from the Mangala field in Barmer though it has a 30 per cent interest in the block. For this financial year till December 2010, ONGC has paid a royalty around Rs 820 crore in royalty and through the life of the field, it is expected to be more than Rs 12,000 crore.

In the event of government allowing cost recovery of royalty, ONGC’s royalty burden will be partially shared by Cairn and the government since the portion of petroleum after deduction of costs (profit petroleum) will come down. “We are seeking reimbursement of the royalty burden on us. Though the government share in profit petroleum will also come down, it in any case will be losing that amount since it will be paid by ONGC to the Rajasthan government in the event of a reimbursement of royalty,” said a senior ONGC executive.

Cairn India in a letter to the government has said that treating royalty as expenditure would reduce profits, including a $2-billion reduction in the government's share of the earnings. The government appears to be supporting ONGC with petroleum minister S Jaipal Reddy recently stating that his ministry supports ONGC, stand on cost recovery and has referred the matter to the Cabinet Committee on Economic Affairs.