ONGC may seek control of Cairn's Rajasthan fields

State-run Oil and Natural Gas Corp (ONGC) may seek management control of the giant Rajasthan oilfields in lieu of allowing UK's Cairn Energy to sell majority stake in its Indian arm that now operates the field, to a non-oil firm, Vedanta Resources for $8.48 billion.

Cairn India with 70 per cent interest is the operator of the 6.5 billion barrels Rajasthan block that can produce 240,000 barrels of crude oil per day, equivalent to output from ONGC's prime Mumbai High fields.

ONGC holds 30 per cent interest and pre-emption or right of first refusal (ROFR) in case Cairn was to exit Rajasthan assets.

Industry sources said on Wednesday that though the Production Sharing Contract (PSC) for the Rajasthan block was silent on prior government approval in case of transfer of ownership of a company having stake in the block, ONGC believes its rights flow from joint operating agreement (JOA) for the field that provides for ROFR.

The oil ministry too is keen to protect the interest of ONGC, which currently is a net loser in the Rajasthan block as it has to pay Cairn's share of royalty on crude oil to the government.

Sources said Petroleum Minister Murli Deora and Oil Secretary S Sundareshan told Cairn Energy Plc Chief Executive Bill Gammell, who came to New Delhi on a flying visit on Tuesday, that government approval was central to the Vedanta deal.

They told Gammell that Cairn needs to apply in writing for approval and the government will decide on the case after studying provisions in the PSC and JOA of each of the 10 properties that Cairn India had.

Sources said the ministry was upset that so far only press statements issued by Cairn Energy and Vedanta Resources announcing the deal have been sent to it and no formal approach has been made for seeking clearance.

The ministry insists the deal, wherein Cairn Energy is selling up to 51 per cent out of its 62.37 per cent stake in Cairn India, needs explicit government approval and not just regulatory approvals as mentioned the press releases.

Cairn maintains that the Vedanta deal was a controlling stake transfer and not an asset transfer which would have triggered a government approval but the ministry maintains that since the PSCs for some of the Cairn blocks has provision for prior consent, the whole deal is contingent on government approval, sources said.

While ONGC is not keen on making a counter offer as it sees the Rs 405 per share price being paid by Vedanta as too high, it getting operatorship of the Rajasthan fields together with the government compensating it for the royalty it pays on behalf of Cairn India would make the project viable for it.

Sources said Vedanta's deal was contingent on government approval, as Cairn's three producing oil and gas assets, including the giant Rajasthan fields and seven exploration blocks, either have explicit provisions for seeking prior approval before transfer of interest or gives pre-emption, or the right of first refusal (ROFR), to partners like ONGC.

The stake sale now offers the government an opportunity to settle the issue of the Rs 14,000 crore (Rs 140 billion) loss that ONGC will incur over the life of the Rajasthan oil fields, as it has to pay statutory levies like cess and royalty on behalf of Cairn India.

ONGC has 30 per cent interest in the Rajasthan fields, but has to pay cess and royalty on the entire production, thereby giving negative returns on its investments.

The Production Sharing Contract (PSC) for the Rajasthan field is silent on government approval for transfer of ownership, but the Joint Operating Agreement between Cairn India and ONGC gives the partners ROFR in case of stake sale.

The same is the case with gas discovery block CB-OS-2 and the eastern offshore Ravva oil and gas fields. But its seven exploration blocks, including the KG-DWN-98/2 block with ONGC, have explicit provisions for government approval in case of a change in control.

Cairn India and ONGC are to spend $2.67 billion in capital expenditure in the Rajasthan block and $1.52 billion in operating expenditure, besides $941 million million towards the cost of a pipeline to transport crude oil.

ONGC's Net Present Value (the value today of anticipated future incomes and expenditures) works out to negative $1.435 billion and a negative $1.471 billion at a crude price of $60 and $70 per barrel, respectively, they said.

The negative NPV is a result of ONGC being made liable to pay 20 per cent royalty on the entire crude oil production, while Cairn is exempt from payment of any levy.