With the state-owned Oil and Natural Gas Corporation Limited insisting that UK?s Cairn Energy needs the Indian exploration major?s consent for the proposed multibillion majority stake sale in Cairn India to Vedanta Resources, we tackle the various concerned issues in a simple Q&A format.

Cairn says the deal with Vedanta is for the sale of shares and not of assets. So contract is not affected in any way. ONGC says contract is indeed affected because the ownership of assets has changed.

What is the fight about?

ONGC pays royalties on behalf of Cairn India for the Barmer oil field, at the rate of 20%. An internal estimate is that ONGC will end up paying Rs 12,000 crore in royalties by 2020, and that is assuming the global crude price is $60 a barrel. Barmer crude sells at a 10-15% discount to the Brent crude price, which is hovering near $100 a barrel at the moment.

How much money will ONGC make from the deal eventually?

ONGC owns a 30% stake in the Barmer block and has contributed $400 million (another $400 million has been committed but not delivered as yet) towards development of the block, in keeping with its equity share. In 2009-10, ONGC earned Rs 175 crore from the block and paid Rs 143 crore as royalty to the government. In the first half of the current year, it earned Rs 840 crore and paid out a royalty of Rs 560 crore.

Vedanta Resources agreed to buy a 60% stake in Cairn India for $9.4 billion. ONGC gets no share of this but, based on today?s valuations, its share will be valued at $5.39 billion. Cairn has 11 acreages of which three?Ravva, Ravva Satellite and Barmer?are in the production phase. The rest are in an exploration phase. ONGC holds 40% and 50% in the Ravva and Ravva Satellite blocks respectively. The main bone of contention between ONGC and Cairn is the Barmer blocks, where production is quite high and ONGC has to bear royalty on behalf of Cairn.

The Vedanta deal includes all assets of Cairn in India as well as Sri Lanka. Cairn has one exploration block in Sri Lanka.

Why did ONGC agree to such unfair terms?

India?s crude oil production was stagnating in the 1970s, and the government decided to attract private investment. India was not considered to be a great region in terms of hydrocarbon potential, so the government offered that ONGC would pay the royalty as a sweetener to investors. The Barmer block was earlier with ONGC. But it had not made any discovery in the block. Subsequently, the government auctioned the block to Shell India on the condition that ONGC would remain a partner in the block as a licensee. Cairn bought the block from Shell in 1995.

As a public sector company, ONGC had no choice but to agree to the terms decided by the government.

How much does the Barmer block produce?

Cairn started production from the Mangala field of the block in August 29, 2009. This is the largest of 25 discoveries made by Cairn in the Barmer basin in Block RJ-ON-90/1. Currently, it is producing 1,25,000 barrels of crude oil per day, which can go up to 1,50,000 barrels per day from the field. It had produced 16 million barrels as on September 31, 2010. Cairn has also discovered oil in other fields of the block, such as Bhagyam and Aishwarya, which are currently under development. The block is expected to reach a peak production of 1,75,000 barrels per day this year. At its peak production, the Barmer block will contribute about 20% of India?s crude oil output. Meanwhile, Cairn has revised production potential of the block from 4 billion barrels to 6.5 billion barrels.

Has this issue come up before? And what decision was taken?

Yes, ONGC?s board had withheld investment clearance to the Barmer project on the grounds that the company?s additional royalty burden would make the project commercially unviable for ONGC. The board accorded approval only after the government provided an assurance to consider the company?s long-standing request for reimbursement of additional royalty payment. The company also raised this issue in 2009 while presenting its case before the Kirit Parikh-led committee, which was mandated by the government to suggest ways for reducing the petroleum subsidy burden.

The finance ministry had agreed to accommodate ONGC?s request in the last budget. However, it failed to do so. It is unlikely to take a decision in this matter any time soon, given that that it is already bearing one-third of the petroleum subsidy, which is projected to cross Rs 75,000 crore in this fiscal.

ONGC says that it had an understanding with the government that it would be reimbursed for its extra royalty payment for the Barmer block. Recommendations were made by both a Committee of Secretaries and a Group of Ministers in 1997-98. But despite that, the government is yet to take a decision on reimbursement of extra royalty payment to ONGC.

Has Vedanta come up with a solution as well?

While royalty payment for the block goes to the Rajasthan government, the Centre is expected to receive as much as $14 billion in profit petroleum from the Barmer block during 20 years of its production life. Besides, the central government also gets Rs 2,500 crore a tonne in cess on crude production and 33% corporate tax on Cairn?s profits. In comparison, royalty liability for the project over its life cycle is projected at $5 billion. It can easily pay to ONGC out of the proceeds from the Barmer block.

What is the solution to the problem?

Both ONGC and Cairn-Vedanta are correct in their points of view. Ultimately, since the government made the commitment on behalf of ONGC, the government has to make good the losses ONGC suffers.

Does the fight affect India?s image?

Of course it does. Earlier, while the Mukesh-Anil fight was going on, the government took the view that Reliance Industries Limited did not have any rights over the KG Basin oil field and it was only an operator, so the price at which gas would be sold and to whom it would be sold would be decided by the government. This view was upheld by the Supreme Court. Some suggest this has made investors wary and in the last round of NELP, no foreign investors came because of this (the recession in developed countries could also have been a major factor). If the government allows this fight to go on, investors will be upset.

But if the operators have changed, why should ONGC continue to bear the burden?

This is not correct. The operator company is Cairn India, in which Cairn Energy holds a 70% share?this stake is what it is selling to Vedanta. So the operator company has not changed hands. And, therefore, ONGC?s obligations remain unchanged. The government view, and that of ONGC, is that this is not the correct way of looking at things and that the operator has changed hands. In law, however, the operator company has not changed.

Cairn says the deal with Vedanta is for the sale of shares and not of assets. So contract is not affected in any way. But ONGC says contract is affected because the ownership of assets has changed.