ONGC agrees to Cairn being given Rajasthan block extension

Cairn's contractual term for exploring and producing oil and gas from Rajasthan Block RJ-ON-90/2 expires in 2020

In a surprise turn of events, state-owned Oil and Natural Gas Corporation (ONGC) has agreed to its partner, Cairn India, retaining the prolific Rajasthan oil block beyond the contractual deadline of 2020, without any condition.

In a meeting on January 21, the company board recognised that the signed contracts provided for extension of the block licence only on mutually agreeable terms by all parties — the two partners, ONGC and Cairn, as well as the government.

Unlike 2011, when it had conditional approval for Cairn being acquired by Vedanta Group to resolve the royalty dispute, ONGC had not put any pre-condition this time, sources with direct knowledge of the development said.

The board only said the licence could be extended on mutually agreeable terms and asked the government to decide on the issue.

After internal approval by ONGC, the matter will now come for discussion at the management committee (MC), a panel headed by the director general of hydrocarbons and comprising the two partners. Once the MC clears the extension proposal, it will go to the government.

Cairn’s contractual term for exploring and producing oil and gas from the Rajasthan Block RJ-ON-90/2 expires in 2020 and the area is to return to the block licensee, ONGC.

The Anil Agarwal group company, which wants the term of the block extended by at least 10 years, had in July 2014 formally written to ONGC on the issue, sources said.

ONGC, which currently holds a 30 per cent stake in the block, had previously told the oil ministry that the production-sharing contract (PSC) could be extended beyond 2020, if all parties to the contract agreed on mutually agreeable terms.

The state-owned firm was to decide on terms on which it could agree on allowing Cairn to continue to operate the fields.

ONGC as a licensee of the block, which produces about 181,000 barrels of oil per day, pays royalty to the government on not just its 30 per cent stake but on Cairn’s 70 per cent interest.

Though the royalty is later cost recovered (according to the 2011 agreement between Cairn and ONGC), the company faces cash flow issues because of having to pay in advance. For agreeing to Cairn’s proposal, there was a thinking with ONGC that a condition be put that royalty be shared by the partners in proportion to their shareholding. Also, it must seek a higher stake of 50 per cent.

However, the board, headed by Chairman D K Sarraf, decided not to put any condition.

The company board currently does not have any independent directors after the new government eased out the previous ones.