Cairn India profit to fall by $1.68 bn on govt rider

Cairn India's profit take from its prize Rajasthan oilfields will fall by $1.68 billion in case riders imposed by the government for approving its parent Cairn Energy selling stake to Vedanta Resources are accepted.

The Cabinet had yesterday approved Cairn Energy selling its 40% stake in Cairn India to Vedanta subject to the buyer/seller agreeing to cost recovery of royalty in the Rajasthan fields.

Sources said while Cairn India will not have to pay any royalty and state-owned ONGC will continue to pay royalty on its behalf to the state government but the levy will be added to project costs that is first deducted from oil sale revenues before profits are split between partners and the government.

Acceptance of this condition by Edinburgh-based Cairn Energy or its successor London-listed miner Vedanta will lower Cairn India's profit over the approved life of the life lasting 2020 from $7.43 billion to $5.75 billion.

Sources said the lower profits have been calculated at approved peak output of 175,000 barrels a day and considering a crude oil price of $70 per barrel.

The net present value of Cairn India's lose of profitability is $1.39 billion, a little more than the $800 million concession in the purchase price that Vedanta has already got from Cairn Energy.

Cairn also has to agree to ending arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70% share of oil from the Rajasthan fields. Cairn India currently pays Rs 2,626.5 per tonne cess under protest but unlike royalty, treats it as a cost recoverable item.

The government take from the RJ-ON-90/1 block will come down to $3.6 billion from $5.188 billion as a result of royalty being made cost recoverable, sources said.

Also, the deal has to be approved by state Oil and Natural Gas Corp (ONGC), which has a stake in all three of Cairn India's producing assets and five of its seven exploration assets, waiving its pre-emption rights. And finally, the acquisition will need security clearance.

ONGC pays royalty on its 30% share of oil from Rajasthan fields as well as on operator Cairn India's 70% take. It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost, which is first deducted from revenues earned from sale of oil before profits are split between partners.

Cairn this week cut the price it was demanding from Vedanta and removed a noncompete condition. Vedanta will now pay $6.02 billion for a 40% stake in Cairn India at a reduced price of Rs 355 per share, down from the original $6.84 billion.