Govt revenue share from Cairn to fall by Rs 5,032 cr

The government today said its share of revenue from Cairn India's Rajasthan oilfields would fall by Rs 5,032 crore if royalty payments are made cost-recoverable as part of Vedanta Resources' plan to acquire the company.

Cairn India at present does not pay any royalty on its 70% interest in its mainstay Rajasthan oilfields. The royalty is paid by state-owned ONGC, which got a 30% stake in the 6.5 billion barrel field for free.

Minister of State for Petroleum and Natural Gas RPN Singh said the government had approved UK's Cairn Energy Plc selling 40% stake in its Indian unit to Vedanta Resources subject to the buyer/seller agreeing to treat royalty paid by ONGC as cost recoverable.

Cairn is allowed to recover all project cost (capital, operating expenditure and taxes) from revenues earned from selling oil before splitting the profits with the government. Making royalty cost recoverable means it will be considered as project cost and subsequent revenues left for splitting between Cairn India, ONGC and the government will be lower.

"As per projections made on the basis of assumptions on production, crude oil price, exchange rate etc, in Net Present Value (NPV) terms, the Government of India's share of profit petroleum is reduced by Rs 5,032 crore, that of Cairn India's by Rs 6,272 crore and ONGC by Rs 2,688 crore over the life of the project ie till 2020," Singh said.

"However, in this situation, ONGC would recover the cost of royalty paid by them to the state government on behalf of themselves and Cairn, amounting to Rs 13,995 crore in NPV terms, over the life of the project," he said in a written reply to a question in Lok Sabha here today.

He said as per the Production Sharing Contract (PSC), ONGC as licensee had the obligation to bear 100% royalty burden. However, as per the Accounting Procedure prescribed in the PSC, royalty paid is cost recoverable by ONGC as contract cost.

"The government granted consent to the proposed Cairn-Vedanta deal by stipulating a condition that the parties shall agree and give an undertaking that the royalty paid by ONGC in the RJ-ON-90/1 [Rajasthan] block is cost recoverable by ONGC as contract costs, as per the provisions of the PSC," he said.

After initially resisting, Cairn Energy has said it will accept the rider set by the government.

Cairn Energy Chairman Bill Gammell, who had till recently maintained that making royalty cost recoverable and asking Cairn India to pay cess on its share in Rajasthan block was against the signed contract and would hurt minority shareholder's interest, on August 3 wrote to Oil Secretary GC Chaturvedi saying all the preconditions set by the government were acceptable to the company and Vedanta.