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Disputes worth $800 million obstructing renewal of Vedanta's Barmer block contract

The government had agreed in October last year to extend Vedanta’s production sharing contract by ten years subject to certain conditions, including resolution of these disputes. In the absence of a resolution, the government has held back renewal of the contract but provided a three-month extension to avoid disruption of production from the Barmer field, the country’s largest on-land oil production site

, ET Bureau|
Last Updated: May 30, 2020, 11.30 AM IST
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NEW DELHI: Lingering disputes worth $800 million are holding back renewal of Vedanta’s contract to operate the prolific Barmer oil block whose original 25-year term expired on May 14.

The government had agreed in October last year to extend Vedanta’s production sharing contract by ten years subject to certain conditions, including resolution of these disputes. In the absence of a resolution, the government has held back renewal of the contract but provided a three-month extension to avoid disruption of production from the Barmer field, the country’s largest on-land oil production site, said people aware of the matter.

ET’s queries emailed to the petroleum and natural gas ministry as well as Vedanta remained unanswered till press time on Friday.

One dispute relates to the government’s demand for $520 million in additional profit petroleum from Vedanta following an audit a few years ago that flagged discrepancy in the way the company had claimed cost recovery for certain infrastructure in the Barmer block. Vedanta has disputed the government claim and invoked arbitration to settle this.

The second dispute relates to the cost of a pipeline Vedanta laid to evacuate crude oil from the production site. The government doesn’t want the operator to recover this cost of about $280 million, leading to a dispute. Higher cost recovery from a field’s revenue reduces profit that is shared between the contractor and the government.

Amid this tug of war with the government, Vedanta announced on May 18 that its chief executive for the oil and gas business, Ajay Dixit, will leave the company at the end of May.

Vedanta is also engaged in another dispute with its joint venture partner in the Barmer block, ONGC, and an arbitration proceeding recently began in London to resolve this. This relates to non-payment of its share of royalty by Vedanta, which has now accumulated to a little more than $200 million, according to people aware of the matter.

Vedanta and ONGC, which have 70% and 30% participating interest respectively in the Barmer block, have an agreement between them to pay a royalty on production in proportion to their stakes. Vedanta has refused the pay royalty for about two and a half years. Its argument is that ONGC had refused to honour some cash calls worth $200 million for investment in Barmer project and so that was being set off against the royalty dues, according to the people. ONGC’s argument is that such investments were unilaterally made by the operator without the consent of the partner.
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