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Rajeev Jayaswal & Himangshu Watts, ET Bureau Dec 18, 2010, 12.22pm IST
NEW DELHI: The Cairn-Vedanta deal is heading for a stalemate and a possible legal tussle that may derail the $9.6-billion acquisition, unless the government, the British explorer and its partner ONGC formally negotiate contentious issues, officials and executives involved in the matter said. Cairn's India arm holds 70% stake in the Rajasthan block which comprises about 85-90% of the $9.6 billion Cairn-Vedanta deal. Cairn India's partner in the filed, state-run ONGC holds 30% stake in the oil producing asset. State-run ONGC, which owns 30% of Cairn's main oilfield in Rajasthan, has opposed the sale of Cairn's asset to Vedanta and asked for a renegotiation of the agreement which obliges it to pay its partner's share of royalty. ET reported on Friday that ONGC has informed Cairn that it will not make any further contribution to the development of the field unless outstanding issues were resolved.
State-run Oil & Natural Gas Corp (ONGC) today decided to give its consent to Vedanta Resources taking over Cairn India after a valuation by SBI Caps showed that Cairn India's share was best priced at Rs 330 a share Rs 25 short of Vedanta's offer of Rs 355. "We decided not to match Vedanta's offer as the highest share price in the bestcase scenario was estimated by SBI Caps at Rs 330 a share," said an official. "We decided to give the no-objection (certificate) to the Cairn-Vedanta deal provided all partners sign a legal pact to share the royalty and cess payments." The need for a legal document has arisen because Cairn India insisted on ONGC giving a no-objection certificate (NOC) to the Cairn-Vedanta deal before it agreed to share royalty and pay cess on the all-important Rajasthan oilfield. Before it issues the NOC, ONGC wants an assurance from Cairn that it will pay Rs 2,500 per tonne cess on its share of production from RJ-ON-90/1 and also make royalty payments cost-recoverable. http://www.indianexpress.com/news/ongc-oks-cairnvedantadeal/852919/#sthash.NaFpARIH.dpuf
One of the condition is that the arbitration, which is ongoing between Cairn India and the ministry of petroleum in UK (cess arbitration) is to be withdrawn by Cairn India, and Cairn India has to agree to pay the entire cess tax, which annually is around Rs250 crore. Cairn India has been paying the same, but claims that ONGC should bear equal burden. Second condition is to concede to ONGC's stand that the royalty to be paid for the Gujarat project should be equally borne by Cairn India (royalty argument). This may further increase the burden by Rs1,400 crore.
http://articles.economictimes.indiatimes.com/2010-1218/news/27619130_1_cairn-vedanta-deal-royalty-issue-rajasthan-oil-field
The Oil Ministry is ready to give "in-principle" approval for Vedanta Resources' $9.6 billion acquisition ofCairn India, provided the mining firm led by billionaire Anil Agarwal agrees to a set of 11 preconditions. Earlier this month, the Oil Ministry had sought the Law Ministry's opinion on the legality of imposing certain preconditions on the stake sale, including Vedanta agreeing to withdraw pending lawsuits filed by Cairn with respect to payment of oil cess and accepting partner ONGC's preemption rights. Sources said the ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from Cairn's mainstay Rajasthan block in the project cost and its profits calculated thereafter. As per the Production Sharing Contract (PSC), the operator is permitted to recover all project costs from the sale of oil or gas produced from a field before a mechanism for profit-sharing with the government comes into play. State-owned Oil and Natural Gas Corp (ONGC) holds a 30 per cent stake in Rajasthan block RJ-ON90/1, but pays the royalty on the entire quantum of production, as it is the licencee of the block. If the royalty paid by ONGC on behalf of Cairn is taken into consideration while calculating the project cost, this would lower the profits of the Scottish Energy firm, which does not pay royalty on its 70 per cent share of the projected 12 million tonnes per annum output from the block.
Like royalty, Cairn believes the liability to pay cess of Rs 2,500 per tonne on all crude oil produced from the Rajasthan block also rests on ONGC. This position has been disputed by ONGC and the ministry, which say that cess is to be paid by the project partners in proportion to their shareholding and the matter is under arbitration, sources said. The ministry said its "in-principle approval shall be further subject to ONGC's decision on the right of first refusal" on the Rajasthan block, as the Solicitor General of India's view was that the transfer triggered ONGC's preemption rights.
It had entered into an agreement with UK-based Vedanta Group on June 16, 2010, to sell 51 to 60 per cent of its shares in Cairn India for a consideration of around $8.5 billion, without offering the shares to its partner ONGC in the joint venture as per the agreement of right of first refusal, the PIL had said.