Vedanta Group company, Cairn India on Friday said that it has approached the Delhi High Court with regards to extension of its contract for the prolific Barmer oil and gas block in Rajasthan and also seeking a better price for crude oil produced from the block.
“Cairn India has approached the Delhi High Court, seeking early decisions on the extension of its production sharing contract (PSC) for its Rajasthan block (RJ-ON-90/1) and to seek fair pricing for its crude. Both these matters are presently pending with the government,” said the company spokesperson.
Senior lawyer C A Sundaram will appear before the High Court on Monday on behalf of Cairn India.
The move is seen as a desperate move by the London-based Anil Agarwal promoted firm after government indicated that it would have to share more revenues with exchequer for the contract for its to be extended. This would hurt the private explorer, whose revenues are under stress for falling in crude oil price as well as production of crude oil from the country’s largest onshore block that contributes 25% to domestic output.
The extant production sharing contract (PSC) would expire on May 14, 2020. Moreover, Cairn India sells crude oil from Rajasthan at a discount to Brent according to a provisional formula put in place by petroleum ministry in September 2009. This has hurt Cairn India revenues as, during July-September quarter of current fiscal, it sold crude oil at 14.3% to Brent. The average Brent prices fell 18% in second quarter of FY16 against first quarter of FY16 to $50.5/ barrel driving Cairn India’s average oil realisation down by 22% q-o-q to $43.7/barrel.
With the Brent crude oil price plummet to nearly seven-year low this week and hovering around $40/barrel, Cairn India’s net realisation in the third quarter could nose dive to about $30/barrel. This is a major challenge when average production was rather seen reducing to 159,000 barrels per day (bpd) in September against 167,000 bpd in July and 170,000 bpd in August.
Sources in the petroleum ministry told FE that the final outcome of extending the contract for Barmer beyond May 2020 by another 10 years or till the economic life of the field would anyway be taken in next six months. FE had reported on July 13 that the Directorate General of Hydrocarbons (DGH) has asked Cairn India to come up with a tentative exploration programme for 10 years beyond 2020, as a pre-condition for the contract’s extension.
Cairn India made not just one but several attempts to earn a better price for the waxy crude drilled from Barmer, which is ferried via a heated pipeline. But all in vain. First, it proposed to UPA’s petroleum ministry M Veerappa Moily to allow it to export the crude oil and earn a better price (Cairn termed it ‘swap’ mechanism). This was turned down by the NDA government citing that production sharing contract (PSC) doesn’t offer such provisions. The explorer claims that by way of swap meachanism, it could earn $4-6 more on every barrel.
Second, Cairn reached out to the petroleum ministry seeking a review of the crude oil pricing formula. This too didn’t see a positive outcome, as the ministry felt it has ‘no direct role to play’ when it comes to pricing of crude oil. If Cairn India wants a revision in the pricing formula, it should negotiate with the buyers directly, which is also provided by the PSC, said the ministry. Ironically, IOC which buys about 25% of Barmer crude, is not willing to negotiate the pricing mechanism, unless directed by government. Private buyers RIL and Essar Oil follow PSU’s refiners price.
In September 2009, government designated PSU refineries IOC, MRPL and HPCL to purchase the Rajasthan crude at a provisional pricing formula. This waxy, sweet (low sulphur crude) is not being fully leveraged by domestic refineries which are better suited to process high sulphur, cheaper crude from various parts of the world. This is why IOC is able to consume only 25% of the total Rajasthan production.
Later, with increase in production, government allowed sale to private refineries – RIL and Essar Oil, who are best suited to process Barmer-type crude oil. Now, the fact is the private refiners are fully leveraging the quality of crude oil and getting benefit of discounted price, while explorers Cairn India is getting a lower price for its crude oil.