Royalty dispute jeopardises Cairn-Vedanta deal
17 Feb 2011
The fate of the $9.6-billion deal between UK's Cairn Energy Plc and NRI businessman Anil Aggarwal's Vedanta Resources continues to remain uncertain, with both the Indian government and the British energy major appearing to have hardened their positions.
Cairn has urged the Indian petroleum ministry to take a decision on the deal (which involves the sale of its stake in Cairn India, a joint venture with Oil and Natural Gas Corporation) by 20 February to enable it to complete the transaction by April. ''A decision on the Government of India's approval is critical by February 20 in order for us to be able to complete the transaction by 15 April as approved by Vedanta and Cairn shareholders,'' the company wrote to the ministry.
But S Jaipal Reddy, the petroleum minister, says he will refer the matter to the cabinet's committee on economic matters next month, especially as it involves a dispute between ONGC and Cairn over royalty payment. Reddy wants other ministries, including finance, law and corporate affairs, to give their opinion on the matter, before taking a decision.
Last year, Cairn announced the deal with Vedanta and had even suggested it did not need the Indian government's approval for the sale of its interests in the joint venture with ONGC. But in November, it made a conditional application to the government, seeking the sale of its stake in the venture to Vedanta Resources.
Cairn also rejected the pre-emption (right of first refusal) of ONGC in the deal. The state-owned energy major has a stake in eight of the 10 acreages held by Cairn in India.
But a major dispute surfaced recently over the payment of royalty by ONGC; though the company has a 30-per cent stake in the Barmer oilfields – which accounts for 90 per cent of Cairn India's valuations – it pays 100 per cent royalty on the production.
ONGC has already paid Rs.812 crore as royalty in the first nine months of the current fiscal – at the rate of 20 per cent of the oil price realised – and expects total royalty payment of $2 billion over the life-cycle of the field. The public sector energy major wants to recover Cairn's share of royalty, but the latter refuses to give in.
The dispute over the equitable sharing of royalty payments is now threatening to jeopardise the multi-billion-dollar deal. ''ONGC's claim that royalty should be a recoverable item is being supported by us,'' says Reddy.
