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Govt to ask Essar oil to pay more cess

The petroleum ministry may ask Essar Oil to pay more cess and royalty for allowing it to produce oil and gas from Ratna & R-series, fearing a revenue loss of about $1 billion.

, ET Bureau|
Feb 04, 2009, 09.06 PM IST
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NEW DELHI: The petroleum ministry may ask Essar Oil to pay more cess and royalty for allowing it to produce oil and gas from Ratna & R-series, fearing a revenue loss of about $1 billion. It is considering to negotiate new rates of statutory levies in line with the current crude oil price with Essar-led consortium. The Cabinet had awarded the contract of the discovered fields to the consortium in 1996 but a production sharing contract (PSC) could not be signed due to various reasons including changes in rates of royalty and cess.

"The old rates of cess (Rs 528/metric tonne) and royalty (Rs 900/MT) were applicable when crude oil price was around $16 a barrel in 1995. Since then crude oil prices jumped manifold. It peaked at about $147 a barrel in July 2008 and currently hovering around $40 a barrel. Average crude oil price for Indian basket in this fiscal is over $91 a barrel. A negotiation (of rates) is a must as the loss of about $1 billion public money is involved," an official in the government, who wished not to be identified, said. The current rate of cess is Rs 2500/MT and royalty is about six time higher than the old rate.

An oil ministry official confirmed the move. "Negotiation of rates (royalty and cess) is one of the options being explored to resolve the Ratna & R-series issue. Various government arms, including finance ministry, have pointed out that revenue loss must be minimised before signing the PSC," he said requesting anonymity.

Interestingly, on March 20, 2008 at a meeting of the negotiating team of secretaries (NTS), representatives of the law ministry and the finance ministry had said the contract had been concluded and no negotiation could be possible as it would amount to not honouring a concluded contract. "The NTS had recommended old rates of cess and royalty with old cost recovery limit (CRL) bid by the contractors without any provision for upward revision on account of higher prices," an official close to the development said, citing decision of the meeting.

Based on NTS' recommendations, on June 26, 2008 the oil ministry had moved a note in the Cabinet Committee on Economic Affairs (CCEA) seeking its approval for signing of the PSC with the consortium with old rates of cess and royalty. The note was returned to the oil ministry citing drafting errors, the official said on condition of anonymity. The Essar-led consortium had bagged the contract to develop and produce oil and gas from Ratna & R-series discovered fields through a global bid, invited in 1993. CCEA approved the award of the contract in February 1996 and a letter in this regard was issued to the consortium in March 1996.

It is estimated that the field has 12.33 million metric tonne (without Basal classic structure 11.97 MMT) of oil and 1285 million standard cubic meter of gas over the project's lifetime (22 years). The consortium won the bid by offering minimum development cost (or CRL) of $298.17 million excluding signature and production bonus. Essar Oil has a 50% stake in the field while other members -- UK-based Premier Oil Pacific Ltd and state-owned Oil & Natural Gas Corp (ONGC) hold 10% and 40% interests respectively.
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