ONGC may invest $1.01 bn in Cairn's Rajasthan oilfields

ONGC today said it may invest $1.01 billion in Cairn India's Rajasthan oilfields even though the project offers negative returns as the public sector firm is liable to pay all the statutory levies.     

Oil and Natural Gas Corporation holds 30 per cent in oilfields where Cairn has proposed $2.4 billion investment in producing oil, and another USD 980 million for laying a heated pipeline to transport the oil to the Gujarat coast.     

Its board has, however, not yet cleared its share of $1.01 billion as the investment offers negative returns.     

"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," a top company 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 even through its share is only 30 per cent. Cairn is exempt from royalty payment and ONGC will have to pay the levy on the private firm's behalf.     

"(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 of 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 USD 60 per barrel," the official said.     

The cess for ONGC's 30 per cent share 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 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," he 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," the official 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 end up losing Rs 14,000 crore."     

The official said the Board of ONGC has held back clearance to the revised development cost of the Rajasthan fields proposed by Cairn but Petroleum Ministry was pressuring it to clear it.     

A Group of Ministers and a Committee of Secretaries had 11 years ago recommended that ONGC should be reimbursed the royalty it has to bear for the operator but the recommendation is yet to be accepted. "We have told them (the Government) that either reimburse us the royalty or free us from the field."     

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.