Its returns under threat, ONGC has told the government to either reimburse the levies it pays on oil and gas production, as promised, or allow it to “surrender and divest its interest” in all the 15 pre-NELP (new exploration licensing policy) blocks.
In letters to the ministries of finance and petroleum, ONGC said that absence of a proper mechanism to reimburse statutory taxes (royalty, cess and profit petroleum) — paid by it on the production of oil and gas from such blocks — is turning the company’s investments in these blocks “uneconomical”.
As per the contractual provisions, private companies have been exempted from paying royalty and cess, with the burden falling on ONGC and OIL — on 100 per cent production (including the share of private companies).
This was done to incentivise private investment and with an understanding that these levies will be later reimbursed to ONGC and OIL. The total royalty and cess paid so far by ONGC in four blocks under production stands at Rs 694 crore.
“Since ONGC is paying royalty and cess on 100 per cent production against its share of a maximum of 40 per cent, these blocks are ab-initio economically unviable,” the letters state.
For instance, with production from Cairn Energy’s block (where ONGC has a 30 per cent stake) in Rajasthan expected to begin shortly, ONGC will end up paying Rs 14,103 crore over the life cycle of this field.
“It is expected that at the estimated crude price of $60 a barrel, only $6.5 per barrel would be left with ONGC after payment of royalty, cess and profit petroleum to the government,” the letter stated. “On the other hand, Cairn would be left with $42.50 a barrel, since it does not have to pay royalty.” The balance $10.50 a barrel will go to the government.
“We will always honour our obligations under the contract,” a Cairn spokesperson said. “If, however, there are any disputes we would discuss them with the government and other stakeholders and seek to secure an amicable resolution.”
In case the government does not agree to reimburse the levies, ONGC would be “commercially prudent for it to surrender and divest its interest from all pre-NELP blocks including the licences in these blocks.”