More oil from Mangala to up ONGC's royalty burden

An increased production from Cairn India’s Mangala oilfield in Barmer means increasing royalty burden payment for Oil and Natural Gas Corporation (ONGC). It’s no wonder the two companies differ on the capital expenditure being incurred on developing and operating the Barmer block.

Still, the government-owned company’s representative on the management committee approved the $120-million (Rs 531-crore) expenditure on the field on Tuesday, according to an executive close to the development. “Differences with regard to earlier expenses amounting to $50 million (over Rs 221 crore) during the exploration phase continue,” the executive told Business Standard.

ONGC, with a 30 per cent stake, is the licensee of the Barmer block. But it has an obligation to pay 100 per cent royalty on crude oil production. Cairn India, the block operator with 70 per cent stake, pays no royalty. Each oil block has a management committee comprising representatives from the government and partners for approving costs associated with exploration, development and production phases.

When the ONGC board approved an investment of $1 billion (Rs 4,425 crore) in the pipeline, it was on the understanding that the royalty issue will be resolved, according to a senior ONGC executive. The executive added an increase in production from Barmer increases ONGC’s loss from the field since royalty payment increases.

Though ONGC has an assurance from the government that the royalty payment on Barmer crude will be reimbursed, a decision is yet to be taken. ONGC Chairman R S Sharma said last month the company had paid Rs 446 crore as royalty for Rajasthan crude in the first six months of the current year.

“ONGC has been a good partner for us. We understand their position on royalty and that is an issue being examined by the government. Once that is resolved, the commercial issue with ONGC will be solved,”Cairn India ED and CEO Winston Frederick Bott told Business Standard earlier in an interview.

In case of a further increase in production, the royalty burden on ONGC is set to rise. Cairn hopes to augment output to 175,000 barrels by 2012 and further to 240,000 barrels, though the second stage of ramp-up is not approved. Currently, the issue of increase in production is being examined by ONGC’s Institute of Reservoir Studies.

“We are producing 125,000 barrels now and will be producing 150,000 barrels per day (bpd) from Mangala and, when Bhagyam and Aishwarya (fields)come, production will be 175,000 bpd,” said Bott.