ONGC not to bid for Cairn India

Wants royalty paid on oil from Rajasthan oilfields added to project cost.

State-owned Oil and Natural Gas Corporation (ONGC) on Saturday decided not to make a rival bid to Vedanta Resources’ $9.6-billion offer for Cairn India, provided its concerns regarding the royalty payout on Rajasthan oil were addressed. The ONGC board decided against exercising the company’s pre-emption rights if the royalty it paid on crude oil produced from Cairn’s mainstay Rajasthan oilfields was added to the project cost, sources in the know of the development said.

ONGC pays 20 per cent royalty on the entire crude oil produced from Cairn’s Barmer oilfields in Rajasthan even though the state-run firm’s share in production is just 30 per cent. Cairn holds 70 per cent interest in the Rajasthan block but does not pay any royalty.

Sources said ONGC claimed pre-emption or the right of first refusal by virtue of its stake in seven out of the 10 properties Cairn has in India. It says since the ownership of Cairn India will change when the London-listed Vedanta acquires up to 60 per cent interest, its pre-emption rights are triggered.

The oil ministry, which was asked to decide about giving approval to Vedanta for buying most of the Edinburgh-based Cairn Energy’s stake in its Indian unit by the month-end, had asked ONGC to give its response on the transaction.

The response of ONGC would be submitted to the oil ministry, which would incorporate it in a letter to Cairn/Vedanta, giving “in-principal” approval. The letter would list out a set of 11 pre-conditions that Cairn/Vedanta would have to meet for securing the government nod, sources said.

Sources said ONGC wanted the royalty it paid on the entire 12 million of the expected crude output from Cairn’s Barmer oil fields to be added to the project cost and profits for stakeholders be calculated thereafter.

According to the production sharing contract (PSC), the operator gets to first recover all project costs from the sale of the oil or gas produced from a field before profits for itself and the government are calculated.

Statutory levies like the royalty paid by ONGC were not a part of the project cost in the PSC for the Rajasthan block and Cairn was opposed to their inclusion, as it would not only lower its own profit, but also that of the government, sources said.

The pre-conditions being set for Cairn/Vedanta include withdrawing pending lawsuits and accepting the ministry’s diktat on future petroleum operations in Rajasthan block. The ministry also wants Vedanta to consider the royalty paid on the oil produced from the Rajasthan block in the project cost and its profits calculated thereafter.

The preconditions also include Vedanta guaranteeing that Cairn’s technical capability will be undisturbed by the share transfer and the London-listed firm providing a fresh financial and performance guarantee.