Cairn-Vedanta deal riders upset global investors

By giving conditional approval to the Cairn-Vedanta deal, the government might have been able to work things in favour of state-run Oil and Natural Gas Corporation (ONGC), but has left international players in the country upset.

International operators, whom Business Standard spoke to, said the move sends out wrong signals to investors. “This is a very short-sighted decision. The government cannot arm-twist international players. Production sharing contracts are above any government. How can the government not honour it?,” asked a senior official from an international exploration and production company.

The government after 11 months, on Thursday, gave a conditional approval to Scottish explorer Cairn Energy Plc’s plan to sell controlling stake in its Indian arm Cairn India to London-listed Vedanta Resources. ONGC was to pay Rs 18,000 crore in royalty on behalf of Cairn India over the life of the Rajasthan field and another Rs 13,000 crore in cess. After the conditional approval, this will be shared by Cairn India or its successor.

Also, Cairn India will have to withdraw the arbitration it has initiated disputing its liability to pay Rs 2,500 per tonne oil cess on its 70 per cent share in the fields.

“This means the government is trying to re-write the contract. So, if you can change the production sharing contract, you can change anything. Investors don't like changes in contracts. How can you make investors believe it is safe to invest in India?,” said a chief financial officer of an international exploration and production company.

"It was unfortunate that an issue as fundamental in a PSC as royalty payments had to be sorted out so late in the day and become a stumbling block in what should have been a simple commercial transaction. Hopefully, the government will now take a close look at all other PSCs to sort out discrepancies and anomalies. State-owned companies such as ONGC deserve a level playing field. Above all, the government needs to have clear rules and regulations and apply them uniformly and transparently if it hopes to encourage future investment in the country's upstream sector," said Vandana Hari, Asia Editorial Director, Platts.

Morgan Stanley in its report stated that while “Cairn Energy and Vedanta control 80 per cent of voting rights, we believe the board of directors and minority shareholders may not accept these conditions”.

In its recent earning releases, the company has explicitly communicated its board would not accept any pre-conditions that would affect the value of the business negatively.

“This is frustrating. On the one hand, the government has the comptroller and auditor general (CAG) looking into technical cases of exploration of which it does not have any expertise. On the other, it comes up with solutions like this to clear a deal that it stalled for 11 months. How do you explain this?” the CFO asked.

In its draft report, the CAG, last month had questioned the reasonableness of costs incurred by Reliance Industries (RIL) in respect of various high-value procurement activities during 2006-07 and 2007-08. It blamed the petroleum ministry and its technical arm, Directorate General of Hydrocarbons, for allowing RIL, the operator of D6 block, to enter successive phases of exploration without the stipulated relinquishment of the area. Later on, the operator was allowed to declare the entire contract area as discovery area and relinquishment was avoided.

The CAG pulled up the ministry for granting 1,708 sq km additional area beyond the contract area in respect of the Rajasthan block operated by Cairn India. It has also pointed out to the non-compliance of PSC with regard to the appraisal programme and field development plans.

On Panna-Mukta-Tapti fields operated jointly by RIL, British Gas and ONGC, the CAG said the operators have not completed key work commitments, while the cost recovery limit has been exceeded. It had also noticed several instances of excess expenditure and deficiencies in procurement in the PMT fields.