In what could be a major relief to Vedanta Group firm Cairn India, the ministry of petroleum and natural gas is set to extend the production-sharing contract (PSC) for the country’s largest onshore block at Barmer in Rajasthan by 10 years. This means that the PSC will expire only in May 2030, as against May 2020 as currently scheduled, allowing the firm to tap the resources fully.
A longer PSC tenure will also be in sync with the firm’s plan to augment exploration and raise the output from the block, already India’s largest onshore crude-producing one, to 3 lakh barrels of oil equivalent per day (boepd) from around 2 lakh boepd currently.
Cairn India contributed a gross amount of R24,299 crore ($4 billion) to the exchequer in FY14.
Currently, Cairn shares more than 70% of the revenue generated from crude oil sales with the exchequer.
Cairn had sought the contract extension to petroleum ministry on April 5, 2013, but the ministry seemed inclined to extend the tenure by five years only.
However, the government is set to renegotiate the fiscal terms after the law ministry opined that terms could be redrawn. Now, the Centre would look for a bigger pie of revenues from the Barmer block (RJ-ON-90/1), which contributed 25% of India’s crude oil production in FY14.
“The latest field development plan shows substantial volumes of gas up to 3 trillion cubic feet, which could be commercially drilled. So the Barmer block could be considered as a gas field and hence qualifies for 10 years’ extension,” a senior government official told FE, requesting anonymity.
Cairn India faced a major setback after the previous director general of hydrocarbons Rajiv Narayan Choubey had turned down its request for a 10-year extension of the PSC for the Barmer block. The upstream regulator said that Barmer is primarily oil-producing and hence the contract can be extended only for five years. If it had been a gas field, the PSC could have been extended by another 10 years.
On January 21, the board of PSU explorer and Cairn’s joint venture partner for the Barmer block, ONGC, approved the extension of the PSC without any preconditions. Cairn India is the operator with 70% participating interest. ONGC has the remaining 30% participating interest.
“ONGC said that it would abide by financial terms decided by the government while extended the PSC,” the official added. Now, the petroleum ministry is awaiting a proposal from the DGH on the revised terms before it decide on the issues. Currently, profit petroleum (or the government’s share of revenue) is linked to the investment multiple in the project.
Cairn India and ONGC have put forward a $700-million plan to develop gas reserves at the Raageshwari fields in the block. The gas output from Raageshwari fields is pegged to go up to 2.80 million metric standard cubic metres per day (mmscmd) by 2017 from nearly 0.25 mmscmd now.
At present, five oil fields — Mangala, Bhagyam, Aishwariya, Raageshwari and Saraswati — produce about 180,000 barrels of oil per day. Also in March 2013, Cairn India commenced commercial sale of gas.
The private explorer reported an operational expenditure of $3.90 per barrel in FY14 in the Barmer asset. It believes that the entire oil cannot be taken out before 2030. Cairn has projected Barmer production to grow at 7-10% (CAGR) for the three years starting FY16.
The Rajasthan block marked its peak production of 200,000 boepd in March 2014. So far the block has produced over 250 million barrels of oil equivalent since start of production in 2009. The company received environmental clearance to augment production from the block to 300,000 boepd.
Analysts expect Cairn India’s earnings to be subdued since production is flat or decline marginally, while the government’s profit share keeps going up. Cairn India reported an Ebitda of Rs 13,900 crore on revenues of Rs 18,800 crore in FY14. It reported a net profit of Rs 12,400 in FY14, roughly 3% higher than Rs 12,100 crore in FY13.