The Directorate General of Hydrocarbons (DGH) has asked Cairn India, which holds 70% in the onshore Barmer block, to come up with a tentative exploration programme for 10 years beyond 2020, as a pre-condition for the contract’s extension, sources privy to matter told FE. The DGH, sources added, apprehends the London-headquartered Vedanta Group may dip into Cairn’s cash pile of around R17,000 crore to repay its hefty debt, which could hit capex at the Barmer project. On June 14, the Vedanta Group had proposed that Cairn India be merged with it via a 1:1 share swap in a $2.3-billion deal.
The petroleum ministry and DGH, sources say, would like to ensure that ONGC is not adversely impacted by any decision to reduce the capital expenditure for the Rajasthan onshore block. Cairn’s plea for an extension of the production sharing contract (PSC) by ten years to May 2030, following the expiry of the current PSC on May 14, 2020, is pending before the government. State-run ONGC holds 30% in the block which produces 27% of India’s crude oil output.
“Cairn India has strong cash reserves, which should be used for ramping up output from the (Barmer) block. If the cash flows out of the company, it may impact production and the government has to make sure that doesn’t happen,” a petroleum ministry official told FE. In March this year, the private explorer said the capex for the current year had been pruned to just $500 million from the projected $1.2 billion, following an investment of close to $1.1 billion in FY15. Cairn India ended FY15 with an average crude oil output of 173,649 bopd, down 4% from 180,316 bopd in the previous year.
For the group, the DGH’s stance amounts to a double whammy as it is already troubled with India’s R20,500-crore retrospective tax demand on Cairn India in relation to its 2007 listing in India. In March this year, London-based Vedanta Resources said it would file a notice of claim related to the tax demand before seeking an international arbitration under the Indo-UK bilateral treaty.
For the merger to go through, Cairn India will need approvals from the majority of the minority shareholders of the company as per the new Sebi regulations. Further, Cairn India will also require consent from ONGC and the petroleum ministry.
Vedanta Ltd, which has metals and mining assets under its ambit, had had net debt of Rs77,800 crore, as of March 2015 on its stand-alone balance sheet (including wholly- owned subsidiaries) while cash reserves of Rs 51,700 crore lay with Hindustan Zinc and Cairn India.
“Cairn India’s cash would have been better utilised by pursuing opportunities in the global oil and gas sector in a lower price environment or returning cash to the shareholders through higher dividend payout or buyback,” analysts at Kotak Institutional Equities had observed.
Cairn India submitted its application for contract extension by 10 years on April 5, 2013. A longer PSC tenure, it was argued, would also be in sync with the firm’s plan to augment exploration and raise the output from the block to 3 lakh barrels of oil equivalent per day (boepd) from around 1.75 lakh boepd currently. The DGH, which has been tasked by the petroleum ministry to come up with a revised model for PSC extension, is yet to take a decision.