Cairn Energy may give up non-compete fee on Vedanta deal

With cost recoverability of royalty on Barmer crude oil set to become a reality for Cairn India, its Edinburg-based parent Cairn Energy Plc might give up the non-compete fee on the multibillion-dollar deal with Vedanta Resources.

This would mean instead of getting Rs 405 a share for selling a 40 per cent stake in Cairn India, Cairn Energy would get Rs 355 per share from the Anil Agarwal-controlled Vedanta Resources.

A senior executive in one of the companies said Cairn India and Cairn Energy management were likely to hold discussions on the impact of royalty payments over the next few days. Though Cairn Energy would lose out 7-8 per cent in valuations, minority shareholders who were offered Rs 355 in the open offer would also be hit due to cost recoverability of royalty. A calculation by state-run Oil and Natural Gas Corporation (ONGC), Cairn India’s 30 per cent partner in the Barmer field, had estimated an outgo of more than $908 million over the life of the field at a crude rate of around $75 a barrel.

Vedanta has already acquired a 18.5 per cent stake in Cairn India through Sesa Goa. It acquired eight per cent at a price of Rs 355 a share in an open offer and the other 10.5 per cent from Petronas at Rs 331. Cairn Energy currently holds around 62 per cent in its Indian arm, while financial institutions hold around 19 per cent, and the remaining about one per cent being held by others.

The Cairn India management is awaiting a decision from the Cabinet Committee on Economic Affairs (CCEA) which is expected to seal the fate for the deal next week.

Once CCEA gives its stamp on the decision of a group of ministers (GoM) allowing ONGC to recover royalty payment on Barmer crude as costs, Cairn India would have two options — either to seek a redressal legally or accept the condition. The executive, however, said Cairn Energy and Vedanta Resources might not want to take the legal recourse.

In a statement issued after a meeting of the GoM last week, Cairn had said the company had not received any formal communication from the government. When contacted, a Cairn India spokesperson did not comment, while the Cairn Energy spokesperson in London was unavailable.

On Friday, the GoM, headed by Finance Minister Pranab Mukherjee, decided to recommend cost recoverability of royalty and cess on crude oil being produced from Cairn India’s Mangala field in Rajasthan. Though ONGC holds 30 per cent in the field, it is required to pay 100 per cent royalty on production since it is the licensee of the block. Cairn India, however, pays cess on the crude “in protest” even as it is pursuing an arbitration suit in London on this issue against the Indian government.