Cairn's Raj oil fields may return to ONGC if term not extended

The PSC provides for ONGC becoming the owner of all facilities once their cost is recovered from sale of crude oil

Cairn India's prolific Rajasthan oil fields may return to ONGC if the government and the state-owned firm do not extend the term of the block beyond the stipulated period provided in the contract.

The Rajasthan Production Sharing Contract (PSC) provides for ONGC becoming the owner of all facilities once their cost is recovered from sale of crude oil, sources said.

The cost of Mangala, Bhagyam and Aishwariya oil field facilities in the block as well as the heated pipeline that carries the crude from the field to Gujarat refiners will be recovered much before the current term of PSC ends in 2020.

Sources said ONGC as a licensee of the block pays royalty on not just its 30% stake but also on Cairn's 70% interest, which is subsequently cost recovered.

The Rajasthan Block RJ-ON-90/2 was awarded as an exploration acreage on terms different from 28 small and medium-sized fields like Panna/Mukta and Tapti and Ravva awarded alongside during 1991 and 1993.

The Oil Ministry in a draft policy has proposed extension of the PSC for these fields by 10 years or the balance economic life of the field, whichever is earlier. Cairn's Rajasthan block is not included in this policy, they said.

In case of the small and medium sized fields, ONGC is not the licensee and thus upon expiry of the contract period, the fields return to the government which will then auction it, pending which production may have to be shut down and field facilities damaged for no maintenance.

Sources said ONGC, who is a party to the Rajasthan PSC as well as the licensee, will also need to agree to any extension provisions under the PSC.

Some in ONGC argue that it may not be in the interest of the state-owned firm to agree to extension as they would be 100% owner of all facilities as well as the licensee with an obligation to pay royalty on full production.

Cairn, sources said, had originally sought extension of the contract till 2040, the economic life of the field but later sought extension by 10 years till 2030. The Rajasthan PSC provides for a 5-year extension beyond 2020.

Also, the Rajasthan PSC limits the government share to a maximum of 50% of the profits whereas in recent auctions the government share is as high as 80%.

Sources said ONGC after taking over the block can engage global expertise from international companies, including Cairn for operating the fields at terms beneficial to it.

When contacted, a Cairn India spokesperson said, "The PSC for Rajasthan block has a provision for extension beyond 2020 and our request is currently being examined by government."

"The Rajasthan block is a proven and highly prolific oil and gas province, and more recently the gas prospectivity has been established. We believe that there are compelling reasons to not only award a 10-year extension, which the PSC already provides for, but in fact up to field life," he said.