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Cairn-Vedanta deal to get nod next month

Govt is poised to clear the $9.6-billion Cairn-Vedanta deal by the middle of February, ending five months of uncertainty over the controversial deal involving the transfer of India’s biggest onshore oilfield operated by the British explorer.

, ET Bureau|
Jan 13, 2011, 01.29 AM IST
Cairn-Vedanta  deal to get nod next month
NEW DELHI: The government is poised to clear the $9.6-billion Cairn-Vedanta deal by the middle of February, ending five months of uncertainty over the controversial deal involving the transfer of India’s biggest onshore oilfield operated by the British explorer.

The oil ministry has asked Oil and Natural Gas Corporation (ONGC) to stop obstructing the transaction and accept the fact that it is contractually bound to pay its partner’s share of royalty in the venture in which the state explorer was given a 30% equity free of cost. State-run ONGC, hoping to renegotiate the contract, had declared it had pre-emptive rights and the deal could not be completed without its approval.

The oil ministry, which had initially declared it would guard the interests of ONGC and was dragging its feet on the matter, was asked by the prime minister’s office last week to take a quick decision. Vedanta Chairman Anil Agarwal recently met Prime Minister Manmohan Singh and Petroleum Minister Murli Deora.

The government has now rejected ONGC’s request to ease the royalty burden. India had offered royalty exemption to companies as an incentive to lure private capital to oil exploration in the energy-deficient country.

“ONGC has to pay the royalty as per the agreement. Other issues can be resolved through dialogue,” a senior government official with direct knowledge of the matter said, adding a formal approval for the deal was expected by mid-February, the official said requesting anonymity.

After Cairn Energy announced the sale of its controlling stake to London-listed mines and metals firm Vedanta Resources in August, the deal has faced several setbacks, forcing Cairn Chairman Bill Gammell to visit India eight times and prompting Vedanta to seek the PM’s intervention.

Cairn had initially argued that it did not need the oil ministry’s approval for the transfer of the oil-rich Rajasthan block as it was awarded before such a requirement was explicitly stated in India’s production sharing contracts.

Cairn finally accepted this and sought formal approval from the oil ministry for all its blocks. The oil ministry, which initially promised to take a decision by December, said it was delayed because Cairn took time to seek its approval for all the blocks.

ONGC is also demanding operatorship of the Rajasthan block, where its current operator, Cairn India, holds 70%.

The other issue is to ensure that Vedanta’s lack of experience in exploration and production does not affect the country’s oil and gas assets, the official said. The government will ensure that the current management of Cairn India is retained by Vedanta and after the transfer of control, the minority stakeholder—Cairn Energy Plc—continue providing technical expertise.

“Unlike exploration, crude oil production is not very complicated,” the official said. All stakeholders — Cairn, Vedanta, ONGC and the government — can sit together and resolve this issue,” the official added.

The oil ministry also wants Cairn to withdraw an arbitration proceeding challenging its liability to pay cess for oil produced from the Rajasthan block. Cairn is paying “under protest” its share of cess at Rs 2,500 per tonne. But the company had challenged it through an arbitration suit on the ground of a 15-year-old agreement that holds ONGC responsible for paying royalty and other statutory levies. The agreement is, however, silent on ONGC’s cess payment obligation.

An oil ministry official said the government would review ONGC’s royalty obligation separately so that this issue does not impair examination of the deal by the ministry. “We have already said Cairn-Vedanta deal would be judged on merit and a decision would be taken soon ... by January end or by early February,” he said requesting anonymity.

A senior ONGC official said the company had been pursuing the royalty issue even before the Cairn-Vedanta deal was announced. “It is a coincidence the two issues got mixed up. We still insist that we have pre-emption rights, which is not acknowledged by Cairn,” said the official, who did not want to be identified.

The value of total royalty payout is estimated at $2 billion for the life of the field at the approved output. Cairn is currently pumping 125,000 barrels of oil from the Rajasthan field and expected to ramp it up to an approved peak production of 175,000 barrels by next year.

Vedanta Resources, controlled by London-based billionaire Anil Agarwal, had agreed to buy up to 60% of the Indian unit of Scottish firm Cairn Energy for $9.6 billion on August 16.

As per the proposed deal, Vedanta Group will acquire 51-60% of Cairn India for about $8.5-9.6 billion in cash. Post-deal, it is expected that Vedanta Resources will hold 31-40% stake in Cairn India directly and group company Sesa Goa will hold 20%.

Vedanta is acquiring shares from Cairn Energy at a price of `355 per share and will also pay a non-compete fee of `50 per share. Key assets of Cairn India include two producing blocks (Ravva and CB/OS-2) where ONGC has majority participating interest. It also holds seven exploration blocks in India and one exploration block in Sri Lanka.
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