No royalty relief likely for Cairn-Vedanta deal

The government will reserve the right to decide on the cost recoverability of royalty from Cairn India's block in Barmer while clearing Cairn Energy's sale of its Indian subsidiary to Vedanta Resources.

Besides, the companies will not be able to formalise the deal till Cairn India's partners in all its Indian blocks, including the government-owned Oil and Natural Gas Corporation (ONGC), give a no-objection certificate (NOC).

As the original licensee, ONGC pays royalty on the entire production from the Barmer block, though it has only 30 per cent interest in it.

In the event of cost recovery of royalty, ONGC's burden will be partially shared by Cairn and the government (as the portion of petroleum after deduction of costs, called profit petroleum, will come down.

The $9.6-billion deal is expected to go for the approval of the Cabinet Committee on Economic Affairs (CCEA) either this week or next.

Taking a tough stand, the Ministry of Petroleum and Natural Gas told the companies that the conditions were being attached as Cairn had dragged the government into litigation.

A senior official said while the government might clear the deal, the issues of cost recoverability of royalty and payment of cess would impact the valuation, especially if ONGC decides to give an NOC only if Cairn agrees to cost recoverability.

"The ONGC board will have a final say on NOC," said the official.

Making the royalty cost recoverable will have to be cleared by the management committee of the block, though Cairn has all along maintained that the production sharing contract should have precedence over the decisions of the committee.

Officials said Cairn executives, in their meetings with ministry officials, said the conditions the government was insisting on would amount to their giving away their fundamental legal right.

Besides, the issue of royalty and cess and approval to the deal were unrelated. To this, the officials said the conditions were proposed due to "the litigious nature of Cairn in dragging the government into arbitration on issues which are not arbitrable, such as cess".

In its note to CCEA, the ministry has given two options. Either the consent be given with an approval for making the royalty cost-recoverable or the government decides on the royalty and establishes its right on cess through the arbitration route.

The royalty and cess conditions would be limited to the Barmer block. These would not apply to the seven blocks given under the new exploration and licensing policy (Nelp) and the two pre-Nelp blocks in Cambay and Ravva.

The approval for these blocks would require NOCs from the partners.