DGH to renegotiate fiscal terms of Cairn's Rajasthan block

Cairn's contract for exploring oil from block expires in 2020; company wants licence extended by 10 years saying block has potential to produce natural gas

The Oil Ministry has asked sectoral regulator DGH to renegotiate fiscal terms of Cairn India's Rajasthan oil block before its licence can be extended beyond the contractual period.

"We have asked DGH to renegotiate terms with both the contractors, Cairn and Oil and Natural Gas Corp (ONGC)," a senior government official said.

Cairn's contractual term for exploring and producing oil from the Rajasthan Block RJ-ON-90/2 expires in 2020 and the company has made a formal application for extending the licence by another 10 years saying that the block also has significant potential to produce natural gas.

As per the Production Sharing Contract (PSC), the licence can be extended by 5 years if it is oil bearing, and by 10 years if it has natural gas potential.

ONGC, which is the licensee of the block, has agreed to 10 year extension but asked the ministry to decide if fiscal terms need to be renegotiated.

The official said the ministry put the Directorate General of Hydrocarbons on the job after the Law Ministry opined that fiscal terms can be renegotiated while granting extension beyond contractual period.

The government can look at raising its share of oil from the fields from a current cap of up to 50 per cent as well as allowing state-owned ONGC to raise its stake.

Asked for an opinion on the issue by the Oil Ministry, the Law Ministry stated that the extension of contract can be done only on "mutually agreed terms and conditions" by all parties to the contract ie government, ONGC and Cairn.

He said the ministry has stated that the PSC for the Rajasthan block clearly states that extension can be granted on "mutually agreed" terms and conditions.

The phrase mutual agreement clearly indicates a new agreement implying thereby that the parties to the agreement are at liberty to renegotiate the terms and conditions of the contract including fiscal terms and conditions, it has opined.

Accordingly, the administrative ministry can renegotiate the terms and conditions in the best interest of the Union of India before granting extension and there appears to be no legal objection in this regard, it added.

On the term of extension, it left it to the oil ministry to decide based on ground facts.

ONGC holds 30 per cent interest in the Rajasthan block. Contractually the Rajasthan block is to return to ts licensee, ONGC after its term expires in 2020.

Cairn India is the operator of the block with 70 per cent interest.