ONGC feels unfairly burdened by Cairns deal
26 May 2009
The state-run Oil and Natural Gas Corporation has said it will lose about Rs14,000 crore ($2.96 billion) on Cairn India Ltd's Rajasthan project over the oilfield's life of 18 to 20 years if it is forced to continue in the project, as it will have to pay for all of the government levies.
The government has appointed ONGC as the licencee for Cairn's RJ-ON-09/1 block, making it liable to pay royalty to the state government and cess to the Centre on entire oil and gas production irrespective of whether it holds any stake in the field or not. As a consolation, the state-run firm was given a choice of taking 30 per cent stake once oil or gas was found.
ONGC took 30 per cent in Mangala, Bhagyam and Aishwariya fields in the block but it now wants to exit, as the obligation to pay all the levies had made the project economically unviable, according to reports.
An official said that if crude oil was sold at the current market price of $60 a barrel price, ONGC will have to pay $7.44 in cess (at the rate of Rs2,500 per tonne), $36 in royalty (for its and Cairn's share) and $10.34 per barrel in profit petroleum, leaving $6.22. Out of this, ONGC will have to pay for operating and capital expenditure and sales tax on its 30 per cent share.
The official said exiting the Rajasthan block would not end its woes as it would not be absolved from its obligation to pay government levies on the crude oil produced. "We want the government to compensate us for the levies we will pay on behalf of Cairn," he said.
The government, in order to attract foreign investment, had promised to take care of statutory levies on oil and gas production when it awarded blocks like RJ-ON-90/1 in Rajasthan more than a decade ago. ONGC was appointed licensee for the block, which was awarded to Royal Dutch Shell, which subsequently sold it to Cairn.
Cairn India, a unit of the UK-listed Cairn Energy Plc, operates the Rajasthan fields with a 70-per cent stake. It is almost ready to start producing crude oil from the fields. The output may start by this month-end and is slated to reach a peak of 8.75 million tonnes by 2011.
ONGC has asked the government to compensate it for royalty payments on the 70 per cent of the crude that belongs to Cairn, according to the reports. Meanwhile its The board has held back clearance to the revised development cost of the Rajasthan fields proposed by Cairn.