The issue of royalty being paid by ONGC for the prolific Rajasthan fields hangs as a Damocles' sword over the Cairn-Vedanta deal.
The Petroleum Ministry's stand on the subject will be most crucial, as the parties concerned – Cairn, ONGC and the Government – are expected to meet on Sunday to try and amicably resolve the issue.
The key question is will the Government want to revisit the production sharing contract (PSC) for the Rajasthan field signed between ONGC, Cairn and itself. According to the PSC, the royalty cost has to be ‘borne' by the licensee, in this case ONGC.
Today, ONGC pays 100 per cent royalty, though its share in the field, as the Government nominee, is 30 per cent. Cairn holds the remaining 70 per cent and is the operator.
ONGC on its part holds the view that royalty was cost recoverable, but Cairn was opposed to this view. ONGC wants to recover the statutory levy it pays from Cairn.
Cairn's interpretation of the PSC is that royalty does not qualify to be part of contract costs. This clearly establishes “royalty” is not cost-recoverable, Cairn says.
On the other hand, legal experts point out that any change in the PSC would require the consent of Cairn India Ltd's board. Therefore, if a commitment is sought from Vedanta Resources, the company proposing to buy Cairn Energy Plc's majority stake in Cairn India, then Vedanta cannot give a prior assurance on behalf of Cairn India.
Cairn India's board currently consists of three directors representing Cairn Energy, three operational directors and four independent directors. Both ONGC and Cairn India want timely resolution of the royalty issue. ONGC has already apprised its board of the situation and its stand.
Profit petroleum
Further, if royalty is made cost recoverable then it would adversely affect the economic interests of the Government, as its share of profit petroleum will come down. Profit petroleum is the profit which the Government will make on sale of crude produced from the block after allowing cost recovery to the joint venture partners.
The Rajasthan block has a potential to produce over 30 per cent of domestic crude oil and contribute over $30 billion to the Government by 2020 at current oil prices.
However, if the Sunday parleys do not lead to any agreement, then the only recourse is the dispute resolution mechanism. Analysts say the other option is Cairn calling off the deal.