Vedanta deal: who foots the royalty tab?
With the entire global investors community watching, the fate of the $9.6-billion (Rs 43,500-crore) Cairn-Vedanta transaction that is currently hanging in balance over the royalty sharing on the oil produced from the Rajasthan fields will now be decided at the highest level in the government.india Updated: Feb 15, 2011 21:53 IST
With the entire global investors community watching, the fate of the $9.6-billion (Rs 43,500-crore) Cairn-Vedanta transaction that is currently hanging in balance over the royalty sharing on the oil produced from the Rajasthan fields will now be decided at the highest level in the government.
The Prime Minister chaired Cabinet Committee on Economic Affairs (CCEA) will take a final call on the issues coming in the way of this transaction under which the London-listed Vedanta Resources is trying to secure key oil fields by getting control of Cairn India. However, the deal is locked in a wider wrangle with state-controlled ONGC over royalty payments on the crude oil produced.
Sources close to the three parties in the deal — Vedanta, Cairn Plc and Cairn India — said the deal could also see top-level diplomatic intervention from the office of the British Prime Minister David Cameron seeking help from his counterpart Manmohan Singh to break the impasse over this deal.
The intervention from British authorities could come over pending regulatory approvals required from the petroleum ministry and the market watchdog Securities and Exchange Board of India (SEBI) to clear what would be the biggest merger and acquisition deal in India’s oil and gas sector.
Despite repeated attempts, the British High Commission spokesperson did not respond to queries sent by HT over this possible diplomatic intervention.
Sources said this intervention is being seen as a last-ditch attempt to resolve a six-month long standoff between Cairn Energy and ONGC.
The Scottish energy major Cairn had in August 2010 agreed to sell a majority of its 60% shareholding in Cairn India to Vedanta. State-owned ONGC, which owns 30% in Cairn India’s Rajasthan fields, currently pays royalty on the entire oil output from the Rajasthan oil field.
While ONGC is demanding equitable royalty sharing between all partners in proportion to their shareholding, all three private sector companies have turned this down, saying this is not part of the original contract with the government.
The government has limited options. One, maintain status quo by asking ONGC to continue bearing the royalty, in which case the deal sails through.
While doing so and in order to guard ONGC’s interest, the government could ask the finance ministry to reimburse the entire royalty amount being paid by ONGC.
In fact, the petroleum ministry had in August 2004 moved a Cabinet note for reimbursement of statutory levies to ONGC and Oil India for blocks that were awarded to private companies prior to the New Exploration and Licensing Policy (Nelp) in 1991.
Two, to agree to ONGC’s suggestion over making royalty cost-recoverable which means that the royalty amount that ONGC has to pay over the life of the oil field will be added to the project cost and the same can be recovered from the sale of oil produced.
As this would impact Cairn India’s profits, the latter is opposed to any such proposal and has already expressed its resentment. In which case, the deal is as good as dead.