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Riled ONGC wants Cairn-Vedanta deal tweaked

ONGC and the oil ministry have argued that the deal cannot be consummated without government approval-a point that Cairn grudgingly accepted last month.

, ET Bureau|
Dec 17, 2010, 04.26 AM IST
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NEW DELHI: ONGC has stepped up its confrontation with Cairn, saying it will not contribute a penny to future development in the Rajasthan oilfield unless the British explorer renegotiates the contract which puts the entire royalty burden on the state-run firm although it only holds a 30% interest.

ONGC’s stance could further delay the government’s decision on the $9.6-billion Cairn-Vedanta deal and change its valuation if Cairn is forced to alter the royalty agreement, which ONGC officials say bleeds the state-run company’s balance sheet, while Cairn Energy has made handsome profits from the sale of its Indian assets to London-listed metals and minerals group Vedanta Resources.

ONGC and the oil ministry have argued that the deal cannot be consummated without government approval—a point that Cairn grudgingly accepted last month.

Since the deal was announced in August, Cairn CEO Bill Gammell has visited New Delhi eight times, most recently on Thursday, when he met government officials including Petroleum Secretary S Sundareshan.

A top executive at ONGC confirmed that his company had written to Cairn, saying it would not invest in the field unless ‘outstanding issues’ are resolved. “The royalty arrangement is unfair. One partner is making huge profit at the expense of the other partner,” he said.

“We will examine it absolutely on merit by end-February,” the petroleum secretary told reporters after his meeting with Gammell. He said the government would take a decision on the deal in February-March.

He said the government could examine the merits of the deal only after Cairn formally sought the government’s approval for all 10 blocks held by Cairn India on November 26.

“Even though they have finally applied, it was with some reservations — we will examine it on merit,” he said.
ONGC, which is planning a follow-on public offer of about Rs 11,000 crore in 2011, wants to bring Cairn to the negotiating table, officials with direct knowledge of the matter said, requesting anonymity.

“We offer no comments on this,” Cairn India director (corporate affairs) Manu Kapoor said while ONGC did not respond to emailed queries.

The state-run firm’s royalty burden over the life of the field is estimated to be over $2 billion while its partner pays no royalty.

This is because when the government was wooing private capital it tried to lure companies with attractive terms, including a promise that the private investor would not pay any royalty. The entire burden would fall on the government-nominated partner, who would hold 30% in the project and pay all the royalty if there was a commercial discovery. ONGC has also requested the government to reimburse the royalty it pays on behalf of Cairn for the Rajasthan field that pumps 125,000 barrels per day, and has the potential to double the output.

Answering a media question on royalty after the company’s board meeting on Thursday, ONGC chairman & managing director RS Sharma said: “We are continuously in dialogue (with the finance ministry)”. At the heart of the dispute are Cairn’s assets in Rajasthan, which include the country’s biggest privately run oilfield. Other two assets are Ravva and CB/OS-2. All the three blocks were awarded to Cairn before the New Exploration Licensing Policy (Nelp).

Ravva and CB/OS-2 on the west coast are oil and gas producing fields. The three comprise over 95% of Cairn India’s valuation as other seven fields, awarded under Nelp auction rounds, are still in the exploration stage.

Cairn’s India arm holds 70% stake in the Rajasthan block, which comprises 85-90% of the $9.6-billion Cairn-Vedanta deal. Cairn India’s partner ONGC holds 30% in the oil-producing asset. 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 Plc for $9.6 billion on August 16. As per the proposed deal, Vedanta Group will acquire 51-60% of Cairn India for $8.5-9.6 billion in cash. Post deal, it is expected that Vedanta Resources will hold 31-40% stake in Cairn India directly while group company Sesa Goa will hold 20%. Vedanta is acquiring shares from Cairn Energy at Rs 355 per share and will also pay a non-compete fee of Rs 50 per share.
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