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Petromin may ask Essar to pay more cess, royalty on Ratna oil

The petroleum ministry is likely to ask Essar Oil to pay more cess and royalty on its oil and gas production from Ratna & R-series blocks in line with the revised rates.

, ET Bureau|
Feb 10, 2009, 12.07 AM IST
NEW DELHI: The petroleum ministry is likely to ask Essar Oil to pay more cess and royalty on its oil and gas production from Ratna & R-series blocks in line with the revised rates. The government may stand to lose almost $1 billion as revenues if Essar paid as per the old rates.

The ministry is considering negotiating new rates of statutory levies in line with the current crude price with the Essar-led consortium. The Cabinet had awarded the contract of the discovered fields to the consortium in 1996, but a production-sharing contract (PSC) for the block was not signed.

���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 prices have jumped manifold. They peaked at $147 a barrel in July 2008 and are currently hovering around $40 a barrel.

The average crude oil price for the Indian basket in this fiscal is over $91 a barrel. A negotiation (of rates) is a must, as the loss of around $1 billion public money is involved,��� a government official, who declined to be named, said. The current rate of cess is Rs 2,500/mt and royalty is about six times higher than the old rate.

An official in the petroleum ministry 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 the finance ministry, have pointed out that revenue loss must be minimised before signing the PSC,��� he said, requesting anonymity. A spokesperson for Essar Oil declined to comment on the issue in response to an email sent to the company.

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 was 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 the decision of the meeting.

Based on NTS��� recommendations, on June 26, 2008, the petroleum 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 the old rates of cess and royalty. The note was returned to the petroleum 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. The 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 1,285 million standard cubic meter of gas over the project���s lifetime (22 years). The consortium won the bid by offering a 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 and state-owned Oil & Natural Gas (ONGC) ��� hold 10% and 40%, respectively.
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