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Moily endorses SGI’s view on royalty
Published on 4 Apr. 2011 10:32 PM IST
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New Delhi, Apr 3 :In a possible deal breaker, Law Ministry wants the government to approve Vedanta Resources’
USD 9.6 billion acquisition of Cairn India only if the London-listed mining group agrees to equitably share royalty on oil produced from Rajasthan oilfields.
Law Minister M Veerappa Moily has endorsed the opinion of the Solicitor General of India, the nation’s second highest law officer, that royalty state-owned ONGC pays on entire output from Cairn India’s mainstay Rajasthan oifields is cost recoverable, officials privy to the development said.
Oil and Natural Gas Corp (ONGC) had in July 2010, more than a month before Edinburgh-based Cairn Energy announced sale of majority stake in its Indian unit to Vedanta, demanded that Rs 18,000 crore in royalty it will pay over the life of Rajasthan oilfields should be cost recovered from revenues.
Cairn India holds 70 per cent stake in Rajasthan oil fields but does not pay any royalty. It made a conditional application in the Vedanta deal rejecting all rights of partner ONGC, which owns 30 per cent in Rajasthan block.
It remains to be seen if the Cabinet Committee on Economic Affairs headed by Prime Minister Manmohan Singh will on April 6 reject the legal opinion and approve the USD 9.6 billion deal without any pre-condition, officials said.
Oil Ministry’s Cabinet note lists royalty being made cost-recoverable as a pre-condition for approval as an option.
Alternatively, it has suggested that the government gives its consent to the deal without any pre-condition and “appropriate decision” will be taken to enforce ONGC’s right. SGI has however opposed the second option saying “the second option which has been suggested in the Cabinet note i.e. pursuing rights under the PSC (production sharing contract) to recover the rightful dues of ONGC, would involve an undesirable amount of time and resources to be spent and would be contrary to public interest.”
Officials said the oil ministry in the Cabinet note has admitted that Cairn could later play hooky as it was doing in the arbitration case on payment of cess on Rajasthan oil.
Cairn says it is not liable to pay Rs 2,500 per tonne cess on its 70 per cent share of production from the Rajasthan blocks and the same has to be paid by ONGC.
The Cabinet note says that Cairn has alleged that the non-inclusion of cess in the PSC was “either a mutual or a unilateral mistake by the government by playing fraud by diverting (original operator) Shell’s attention away from cess during the contract negotiations.”
“Vedanta Resources may also take a similar position at a later point of time to its advantage on the issue of cost recovery of royalty. Therefore, a suitable safeguard may be put in place as the ministry feels that the cess is payable by the contractor and royalty is cost recoverable under the PSC,” it says.
“If the competent authority does accord its consent to the transfer of participating interest from Cairn to Vedanta, the same should be granted subject to the stipulation/condition regarding the recoverability of the cost of the royalty,” SGI said in his opinion.
SGI’s opinion was taken on insistence of Finance Ministry which wanted to know the legality of ONGC’s demand.
The Oil Ministry Cabinet note on the issue lists two alternatives. In the first, five preconditions, including royalty being made cost-recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC’s no-objection and Vedanta providing performance and financial guarantees have been listed.
The alternative to the precondition of royalty and cess suggests that the government shall pursue all legal recourses for establishing its rights under the Production Sharing Contract (PSC) in the case of cess. On royalty, it should take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable. In both the options, ONGC’s consent or no-objection is a pre-requisite.
ONGC owns 30 per cent stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields. Over the life of the field, the royalty burden works out to be Rs 18,000 crore, of which ONGC also has to bear Cairn’s share of about Rs 12,600 crore.
Cairn has also disputed any liability to pay Rs 2,500 per tonne cess on its 70 per cent share of production from the Rajasthan blocks, which totals Rs 9,202 crore for ONGC over the life of the field.
Sources said ONGC wants royalty and cess to be cost- recoverable, like capital and operating expenses. Under the PSC, capital and operating expenses are first deducted from the sale of oil and the profits shared between the stakeholders, including the government, thereafter. Cairn and Vedanta are opposed to the move as it would lower Cairn India’s profitability.
More than three months after announcing the sale of its up to 51 per cent stake in the Indian unit to Vedanta, Cairn Energy Plc on November 23 last year had made a conditional application to seek the government’s nod but refused to accept partner ONGC’s rights. ONGC holds stakes in eight out of Cairn India’s 10 assets, including the mainstay Rajasthan oilfields.
Cairn Energy and Vedanta have set a deadline of April 15 to close the transaction. After the clearance by the government, the two firms can approach their shareholders seeking an extension of the April 15 deadline, saying the conclusion now remains a mere formality.

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