Seeking an immediate rollback of the Budget proposal to impose an additional cess on crude oil production, Cairn India — the oil and gas company recently acquired by Anil Agarwal’s Vedanta Resources for close to $9 billion — has sounded a note of alarm. The company has informed the government that the hike will cast a shadow on its new $6-billion investment plan to double oil production from the Rajasthan fields to 300,000 barrels of oil per day from 150,000 barrels per day.
India spends over $100 billion per annum to meet its oil demand from imports.
Top government officials told the HT that in a recent communication to petroleum minister Jaipal Reddy, Cairn’s top management has also informed that the new cess of Rs 4,500 per tonne on crude oil production — as opposed to the existing Rs 2,500 per tonne — runs the risk of diverting the investment planned by the company for India to the oil and gas sector of other countries with a favourable investment climate.
In the next few days, Cairn India’s management including promoters Anil and Navin Agarwal are expected to meet top government brass including principal adviser to the PM, Pullock Chatterjee, and Planning Commission deputy chairman Montek Singh Ahluwalia on this issue, government sources said.
Significantly, a March 22 letter written by Cairn India CEO Rahul Dhir to Reddy (in possession of HT) said the proposal to impose this additional cess was a significant contradiction of the company’s “understanding” with the government and “is in direct conflict with the spirit of its agreement.”
“We are deeply disappointed at this proposal coming immediately after GoI approval of the Cairn-Vedanta transaction,” the letter said.
Cairn India had agreed to the government imposed pre-conditions (over payment of royalty and withdrawal of its arbitration cases against the government) to clear the Cairn-Vedanta transaction.
This was done “in good faith and recognising the constructive relationship it had,” even though the conditions resulted in an financial loss of $8 billion to the company, said Dhir.
All this, Dhir said, “was done in the belief that this would establish a solid framework for co-operating with the petroleum ministry and allow full exploitation of the Rajasthan block’s potential to the benefit of all stakeholders”"These combined (the earlier pre-conditions and now the cess hike) are a disincentive to further foreign investment in the exploration and production sector at a time when there is strong pressure to increase domestic production which will help bring down the oil import bill."