The Government's revenue share from Cairn India operated Rajasthan oil fields will reduce by Rs 5,032 crore over the project life (2020), if royalty is made cost recoverable.
Cairn Energy's proposal to sell 40 per cent of equity shares in Cairn India to Vedanta Resources was given conditional approval by the Government. One of the conditions is that the royalty paid by ONGC for the Rajasthan fields is cost recoverable. This information was given by the Minister of State in the Petroleum Ministry, Mr R.P.N. Singh, in the Lok Sabha on Thursday.
On present assumptions of production, crude oil prices, and currency exchange rate in net present value terms the Government's share of profit is reduced by Rs 5,032 crore, that of Cairn by Rs 6,272 crore and ONGC by Rs 2,688 crore over the life of the project, the Minister said.
However, ONGC would recover the cost of royalty paid by it to the State Government on behalf of themselves and Cairn amounting to Rs 13,995 crore over the life of the project.
production sharing contract
According to obligations under the production sharing contract, as the licensee of the block, ONGC has to bear 100 per cent royalty.
But according to the accounting procedure prescribed in the production sharing contract, royalty paid is cost recoverable.
According to provisional calculations, the total royalty burden over the project life is Rs 18,000 crore. Commercial production of oil in Rajasthan block started in August 2009 and currently the average output is 1,25,000 barrels a day.
According to information available for 2010-11 Rs 1, 832.95 crore royalty has been paid.
The pre-conditions set by the Government – making royalty cost recoverable and Cairn withdrawing all cess related arbitration cases – had become a contentious issue between the company and the Government.
After getting the formal communication from the Government, the Cairn India board on July 26 decided to seek shareholders' approval on whether the conditions would be acceptable or not.
Though, this is seen as a mere formality as majority shareholders in the company – Cairn Energy (52.2 per cent), Vedanta and its Group company (18.5 per cent) – seem to be in acceptance of the conditions.
The Government wanted the company to implement the decision in a month from July 26.
Cairn Energy Chairman, Sir Bill Gammell, on August 3 wrote to the Petroleum Ministry seeking extension of the timeline to comply with the conditions set by the Government. The results of the postal ballot will be known on September 14.