ONGC divided on Cairn counter-bid idea

A $10-billion counterbid for Cairn Energy’s India operations may prove counterproductive and unviable for state-owned Oil and Natural Gas Corporation, despite frenzied speculation and mounting pressure from sections of the petroleum ministry, feel top officials of India’s leading oil exploration and production company.

According to top officials who spoke to Business Standard on condition of anonymity, even ONGC’s apex brass is divided on strategy. “An evaluation is on and there have been talks on the subject. But it’s true that some of the board members and some officials with functional E&P (exploration and production) responsibilities seem keener than others,” said one of the officials. Another added that the Chairman and Managing Director has been more cautious in his views on a counterbid.

ONGC officials say sections in the company feel that instead of a counterbid, it would make a lot more sense to negotiate the cess and royalty issue of the Rajasthan block, flagship asset of Cairn in India. ONGC wants to only pay 30 per cent of the royalty in line with its current economic interest in the block. Currently, under the pre-Nelp production sharing contract, the licensee, that is ONGC, pays the entire cess and royalty for the Barmer crude oil output for the 15-year period.

That translates to an Rs 18,300-crore royalty bill for ONGC in the next 10 years, according to estimates. So, a revision in the royalty payout to just 30 per cent could potentially lead to an Rs 12,800-crore savings for ONGC.

With a change in ownership to Vedanta, ONGC would insist on a revision of the PSC.

Not worth it?
There will have to be a collective decision of the board and ONGC officials say the government will play a vital role in deciding the final strategy. But, that left to itself, it would desist from making a counter-offer. “Matching Vedanta’s offer and improving it would add strain to our balance sheet, as it would mean at least $4 billion of equity component. Raising that kind of resources even for ONGC is a challenge,” said another senior official whom Business Standard had spoken to.

Data from Bloomberg show ONGC had, as on this March, $20.9 billion in total reserves and $4.9 billion in cash. Oil India -– another exploration company believed to be in talks with ONGC to form a consortium for a counterbid -– has only $2.8 billion in its reserves and $1.9 billion in cash.

Analysts and bankers involved in the negotiations say that even though on paper ONGC can stretch its balance sheet, the question, as one involved banker says, is, “Does it really want to, for just for one asset?”

Moreover, some years before, ONGC did an independent valuation of Cairn India and came to a $5-billion figure. So, in just five years, with little material difference on the ground, it would be difficult for ONGC to justify a $10-billion counterbid to its shareholders. The Rajasthan block is still the principal asset of Cairn in India, providing 90 per cent of the total value.

The public and institutions hold close to 26 per cent equity in ONGC,with the government owning the rest.

Historically,the relationship between Cairn and ONGC has also been mixed. ONGC has always countered Cairn’s views on the prospects of a refinery in Rajasthan for its Barmer crude. There have also been differences over reservoir management, taxation and pipeline. There have also been questions asked about the longevity of the reservoir, as Cairn is pumping out 125,000 barrels of oil per day. The difficult nature of the reservoir and the long-term prospects may also lead ONGC to review its stance on the operatorship of the blocks, as it would require very specialised technical expertise.