Future investments in Cairn JV hinge on royalty recovery or govt compensation

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: May 30 2011, 06:58am hrs
By imposing a rider on the proposed Cairn EnergyVedanta Resources deal that Cairn has to concede to its public sector partner ONGCs demands, the ministerial panel led by finance minister Pranab Mukherjee has saved the government from a major financial burden in the near future.

State-owned ONGC, which now pays the entire 20% royalty on the Cairn-ONGC consortiums Rajasthan crude oil output to the state government, is not in a position to make fresh investments in the highly promising Barmer oilfields operated by Cairn because higher crude production would increase ONGCs royalty outgo disproportionate to its profit share.

ONGC has only 30% participating interest in the Barmer oilfields. At the time of making more capital expenditure, ONGC will need the governments help again for the royalty it is paying to the Rajasthan government on the crude oil produced in the state.

A highly placed ONGC source told FE that there is no difficulty in making future investments in the project if exploration and development cost is shared among the joint venture partners in the ratio of equity. But if royalty is not recovered as a cost, then we will have to see how to go about with respect to future investments. That will include various options including whether the government can reimburse the royalty that we pay, said the official.

Cairn India MD and CEO Rahul Dhir said last Wednesday that the output from the Mangala field in Rajasthan could be raised to 240,000 barrels of oil per day (bopd), from the current 1,25,000 bopd. This enhanced production is subject to further investments. That would necessitate either ONGC being allowed cost recovery of the royalty or the government compensating the state-run firm from the union budget.

But the finance ministry, which is on a fiscal consolidation path, is in no mood to compensate ONGC using tax payers money. Already, high commodity prices are threatening to upset its fiscal deficit target of 4.6% for this financial year.

According to analysts tracking the companies, ONGCs royalty burden would be close to $5 billion over the next two decades.