The Rajasthan Production Sharing Contract (PSC) provides for ONGC becoming the owner of all facilities once their cost is recovered from sale of crude oil, sources said.
The cost of Mangala, Bhagyam and Aishwariya oil field facilities in the block as well as the heated pipeline that carries the crude from the field to Gujarat refiners will be recovered much before the current term of PSC ends in 2020.
Sources said ONGC as a licensee of the block pays royalty on not just its 30 per cent stake but also on Cairn's 70 per cent interest, which is subsequently cost recovered.
The Rajasthan Block RJ-ON-90/2 was awarded as an exploration acreage on terms different from 28 small and medium-sized fields like Panna/Mukta and Tapti and Ravva awarded alongside during 1991 and 1993.
The Oil Ministry in a draft policy has proposed extension of the PSC for these fields by 10 years or the balance economic life of the field, whichever is earlier. Cairn's Rajasthan block is not included in this policy, they said.
In case of the small and medium sized fields, ONGC is not the licensee and thus upon expiry of the contract period, the fields return to the government which will then auction it, pending which production may have to be shut down and field facilities damaged for no maintenance.
Sources said ONGC, who is a party to the Rajasthan PSC as well as the licensee, will also need to agree to any extension provisions under the PSC.
Some in ONGC argue that it may not be in the interest of the state-owned firm to agree to extension as they would be 100 per cent owner of all facilities as well as the licensee with an obligation to pay royalty on full production.
Cairn, sources said, had originally sought extension of the contract till 2040, the economic life of the field but later sought extension by 10 years till 2030. The Rajasthan PSC provides for a 5-year extension beyond 2020.
Also, the Rajasthan PSC limits the government share to a maximum of 50 per cent of the profits whereas in recent auctions the government share is as high as 80 per cent.
Sources said ONGC after taking over the block can engage global expertise from international companies, including Cairn for operating the fields at terms beneficial to it.
When contacted, a Cairn India spokesperson said, "The PSC for Rajasthan block has a provision for extension beyond 2020 and our request is currently being examined by government."
"The Rajasthan block is a proven and highly prolific oil and gas province, and more recently the gas prospectivity has been established. We believe that there are compelling reasons to not only award a 10-year extension, which the PSC already provides for, but in fact up to field life," he said.
The joint venture of Cairn and Oil and Natural Gas Corp (ONGC), which currently produces around 180,000 barrels per day of oil from Rajasthan, is investing USD 3 billion over next 3 years to sustain this output and increase the same.
The fields production touched 200,000 bopd in March for a brief period, and has subsequently reduced to around 180,000 bopd. The Directorate General of Hydrocarbon (DGH) too has recommended for a 5 year extension as provided in the PSC.
Originally, the Rajasthan block RJ-ON-90/1 was awarded to Royal Dutch Shell in preNew Exploration Licensing Policy (NELP) round in 1992 and a PSC was signed on May 15, 1995. Cairn between 1998 and 2002 bought out Shell in the block.
"We are confident that the government will provide necessary extensions that ensure maximum production for the country, thereby reducing crude oil imports and saving precious foreign exchange," the Cairn spokesperson said.
He said effective exploration and long-term extension of the PSC will naturally result in higher level of reserves and resources, thereby resulting in enhanced production of crude oil and natural gas and securing the growing energy needs of our country.
However, the key remains with ONGC who has to agree to the extension, which may be against their economic interest, as some in the company said.
The savings on imports and the economic benefits to the country will continue from this prolific project no matter who operates or owns the project, they added.
"As we have indicated the PSC for Rajasthan block provides for extension beyond 2020. We are confident that the right step in the interest of all stakeholders will be taken by the government that will allow current scale of efficient operations to continue, resulting in maximum production to the nation and maximum revenues to the government," the spokesperson said.
Stating that the industry was looking forward to time- bound decision making to revive investments in the sector, he said Cairn was "confident that a positive decision will be taken at the earliest that will send an unambiguous message about our collective resolve to urgently attend to India's growing energy demand."