Cairn initiates arbitration against $520 mn govt demand over discrepancies

A source said based on the PSC, the seat of arbitration is likely to be London, while both the parties can have the option of deciding the seat later

Cairn Oil & Gas, a vertical of Anil Agarwal-controlled Vedanta Limited, has initiated arbitration against the government after it served a demand notice of $520 million on the company for alleged discrepancies in cost recovery in Rajasthan fields.

The Directorate General of Hydrocarbons (DGH) had sought the amount in additional profit petroleum after an audit found discrepancies in the way capital expenses made on setting up the infrastructure to produce oil were booked. “Following the government’s demand, the company has initiated arbitration against the move,” said a senior government official.

Cairn refused to comment on the issue. The arbitration notice was initiated on May 14, a day before the expiry of the production sharing contract (PSC).

With the arbitration initiated, sources indicated there was a lack of clarity on the extension of the PSC for 10 more years, as it was granted based on certain conditions, one of which was a solution to the demand notice.

Based on the PSC, a source said the seat of arbitration was likely to be London. Both parties always have the option of deciding on the seat later.

“The demand notice was imposed by the government almost two years ago. Now, the company has initiated arbitration as it is unable to solve the issue mutually,” said a source privy to the development.

There will be a three-member arbitration panel — one each from the government and the company, in addition to a neutral member. Another source added that the company was likely to take The Hague as the seat of arbitration. In the Rajasthan block, Cairn holds a 70 per cent stake, while the rest is under state-run Oil and Natural Gas Corporation (ONGC). Based on existing rules, Cairn will have to pay at least 30 per cent.

The crux of the issue lies in the company trying to shore up efficiency of the oilfield. The three fields -- Mangala, Bhagyam, and Aishwariya — were considered separate development areas with different field development plans as part of the PSC. However, to maintain operational efficiency, Cairn merged the operations by bringing oil from the other two fields to Mangala for processing.

“The idea was to have operational efficiency by having a common processing unit and pipeline infrastructure. Instead of independently creating three different facilities, Cairn turned Mangala into a hub,” said a source. He added that in the audit, the government pointed out that its cost recovery got sluggish when a lower margin field was added to a higher margin one, triggering losses. Despite having a representative on the management committee, the government waited several years to come out with this claim. This time delay could have been avoided, said an industry expert.

A solution to this dispute was one of the conditions for the extension of the PSC.

In addition, the extension notice also wanted a solution to a dispute over the payment of royalty from the block. Cairn had stopped paying its share of royalty on oil produced from its Rajasthan block to ONGC. Around $400 million of royalty is pending since July 2017.