OilMin to refer Cairn-Vedanta deal to Cabinet: Reddy

With the standoff continuing, the oil ministry decided to present the case to the CCEA for necessary directions, sourcessaid.

ONGC, by virtue of its stake in eight out of the 10 oiland gas properties held by Cairn India, claims that it haspreemption rights over the deal. It had asked Cairn to providedetails of the deal, including asset-wise valuation, so as todecide on exercising its pre-emption rights.

Cairn, which had agreed reluctantly to the requirement ofgovernment nod for conclusion of the transaction, has rejectedthe state-owned firm''s pre-emption or right of first refusal.

Sources said the oil ministry would tell the Cabinet thatONGC would pay Rs 12,600 crore on behalf of Cairn India asroyalty over the 12-year life of the fields. It would have topay another Rs 9,200 crore as cess, if Cairn has its way.

ONGC''s July 2010 suggestion (made more than a monthbefore Cairn-Vedanta deal was announced) of adding royalty tothe project cost so that it can be recovered from the sale ofoil produced would be presented to the Cabinet as one of the11 pre-condition that can be imposed for approving the deal.

Sources said that on cess it may suggest that Cairnwithdraw its arbitration and equitably it partner ONGC. Cairnis pays its share of cess under protest but has included thelevy in project cost for recovery before profits for allstakeholders, including government, is calculated.

According to the ministry, a careful reading of theRajasthan Production Sharing Contract (PSC) shows that whileONGC would be responsible for paying the statutory duties,these outgoes are to be shared by Cairn India and thestate-owned firm through inclusion in the costs.

Cairn is opposed to this as it will lower its profits andvaluation. It says only contractor cost (that is capital andoperating expenditure) constitute project cost and can berecovered from sale of oil, sources said.

On the other hand, ONGC''s royalty liability is a licenseecost which contractually cannot be made cost recoverable.

ONGC is the licensee of the Rajasthan block and had got30 per cent stake upon a discovery being made in the area forfree. It did not incur any risk capital.

As per the PSC, the profit for Cairn India, ONGC and thegovernment is calculated after deducting capital and operatingexpenses and royalty from the oil price realised.

The proposal to the CCEA may state that though the costrecovery of royalty would have an impact on the profitpetroleum share of the government and Cairn Energy, ONGC''sentitlement "cannot be overlooked" as it was based on the PSC.