ONGC approves revised plan to invest in Cairn's Raj fields

The Board of Oil and Natural Gas Corp (ONGC) today approved the revised cost estimates for developing the nation's most prolific on-land oilfield in Rajasthan and agreed to invest around $350 million more in the fields operated by Cairn India.

The approval ends the uncertainty surrounding the development and the fields will now be put to production any time now.

ONGC, which holds 30 per cent interest in the fields, had previously withheld approval to Cairn's revised field development plan as the state-run firm's liability to pay royalty on the entire crude oil production, although it was only a 30 per cent shareholder, had turned the project economically unviable for it.

The board at its meeting approved the rise in cost of developing Mangala field in the Rajasthan block to $2.396 billion from $1.241 billion. Besides, the cost of smaller adjoining fields would also rise from $261 million to $275 million, a top company official said. ONGC will bear 30 per cent of this cost.

The official, however, said that ONGC will continue to pursue with the government the reimbursement of the royalty it will pay on behalf of Cairn.

There will be no change in the development cost of Bhagyam field, the second largest oilfield in the Rajasthan block, at $471 million. Also the cost of pipeline transporting the crude from Barmer district in Rajasthan to Gujarat cost would remain unchanged at $941 million.

ONGC's total exposure in the project will rise from $874.2 million to $1.22 billion, he said.

The decision followed Petroleum Ministry pushing ONGC top management to approve the revised cost despite the project offering negative returns on investment.

ONGC had previously approved its 30 per cent share of investment at the original capital expenditure of $1.5 billion and operating expenditure of $1.43 billion for Mangala and adjoining smaller fields.

But Cairn revised the capital cost to $2.67 billion and operating expenditure to $1.52 billion. The Bhagyam field cost would be $471 million and $941 million being the cost of a pipeline to transport crude oil.

"ONGC's Net Present Value (the value today of anticipated future incomes and expenditures) with revised field investment plan works out to negative $1.435 billion and negative $1.471 billion at a crude price of $60 and 70 per barrel, respectively," the official said.

Negative NPV has been a result of ONGC being made liable to pay 20 per cent royalty on the entire crude oil production while Cairn being exempt from payment of any levy. 

"(The) Petroleum Ministry today says that we signed the contract for the Rajasthan block fully knowing about the royalty liability. But the royalty at the time of signing of the production sharing contract was Rs 539.20 per tonne while it today comes to Rs 3,780 per tonne, considering a crude price of $ 60 per barrel," he said.

Besides change in royalty rates, the oil development cess has also been increased to Rs 2,500 per tonne from Rs 900 per tonne at the time of signing the PSC for the Rajasthan block.

"Keeping in view ONGC's liability of payment of royalty on 100 per cent production against its participating interest of 30 per cent in RJ-ON-90/1 block, ONGC's liability towards royalty works out to $36 per barrel at crude price of $60 per barrel," the official said.

The cess works out to $ 7.14 per barrel. "Further, we have to share profit petroleum (which is broadly revenue minus operating and capital expense and cess, royalty is not deductible) with the Government in a prescribed ratio.

"Assuming the current cost and production estimates and a crude oil price of $60 per barrel, ONGC would need to pay $10.34 per barrel to the Government as its share of profit petroleum," he said.

ONGC would be left with $6.5 per barrel after payment of royalty, cess and profit petroleum to the Government. On the other hand, operator Cairn would be left with $42.5 per barrel since it does not have to pay royalty. "The balance of $6.5 per barrel is grossly insufficient for meeting the obligation of sales tax/VAT, opex and capex," the official said, adding ONGC wants the government to refund the royalty it has to pay on behalf of Cairn.

"Even in case royalty paid by ONGC on behalf of Cairn is reimbursed to it, the breakeven crude price would work out to $71 per barrel," he said.

The Rajasthan crude is heavy and waxy. Also it cannot produce LPG and has very little kerosene and gasoil output and hence it is expected to trade at a significant discount to other crudes like Brent.

At $70 a barrel sale price, ONGC's realisation after paying for cess, royalty and profit petroleum would be just $5.78, he said. "The project offers us negative return and over the life of the field we will lose Rs 14,000 crore."

"We have told them (the Government) that either reimburse us the royalty or free us from the field," he said. Cairn is almost ready to start producing crude oil from the Rajasthan field. The output may start by this month-end and is slated to reach a peak of 8.75 million tonnes by 2011.