ONGC seeks resolution of royalty before Cairn deal

ONGC is ready to let the $ 9.3-bn Cairn-Vedanta deal go through, provided the royalty that ONGC pays on the Rajasthan oil fields is considered as part of the cost of production of the project. ONGC chairman R.S. Sharma said according to the contract, ONGC has the right of first refusal and the sale cannot go through without ONGC's consent.

He said however, ONGC was not going to bid for the oil field as the valuation at $ 9.3 bn was not considered commercially viable.

"We did not give a counter offer because the valuation does not suit us. We will not get swayed by sentiments. We will go purely on commercial merit," he added.

Contrary to what Cairn has been claiming, according to the production sharing contract (PSC) the entire royalty of the Rajasthan field which ONGC has been paying can be considered as cost of production of the crude oil. The profit has to be calculated after this royalty cost has been accounted for.

ONGC will be presenting its view to the new petroleum minister Jaipal Reddy on Monday.

Sharma said ONGC was ready to hold bilateral talks with Cairn across the table to settle the issue. However, under no circumstances would ONGC give up its interests, which are protected by contractual obligations.

ONGC owns a 30 per cent stake in the Rajasthan oil field, while Cairn India owns the rest 70 per cent. ONGC has been bearing the royalty cost of the entire field while Cairn has not been paying anything as royalty for the crude produced from the Rajasthan oil field.
The royalty works out to a hefty 20 per cent of the value of the crude oil that is produced.

The royalty for the current financial year works out to Rs 1,000 to Rs 1,200 crore. The Rajasthan oilfield is the biggest asset of Cairn and is expected to produce 12 million tonnes of crude oil a year.

Sharma also stated that Cairn Energy had been blowing up the issue in the media, which was not appropriate given the sensitivities of the deal. This has hurt investor sentiment at a time when India is in need of foreign direct investment (FDI). ONGC does not want investor sentiment to be adversely affected as it is not in the country's interest, Sharma said.

Courtesy: Mail Today