ONGC not to rival Vedantas $9.6-bn bid for Cairn India

Written by Press Trust of India | New Delhi | Updated: Jan 31 2011, 04:00am hrs
State-owned Oil and Natural Gas Corp (ONGC) on Saturday decided not to make a rival bid to Vedanta Resources $9.6 billion acquisition of Cairn India provided its concerns on royalty payout on Rajasthan oil are addressed.

ONGC board on Saturday decided against exercising the company's pre-emption rights if the royalty it pays on crude oil produced from Cairn's mainstay Rajasthan oilfields are added to the project cost, sources in know of the development said.

ONGC pays 20% royalty on the entire crude oil produced from Cairn's Barmer oilfields in Rajasthan even though the state-run firm's share in production is just 30%. Cairn holds 70% interest in the Rajasthan block but does not pay any royalty.

Sources said ONGC claims pre-emption or the right of first refusal by virtue of its stake in seven out of the 10 properties Cairn has in India. It says since ownership of Cairn India will change when London-listed Vedanta acquires up to 60% interest, its pre-emption rights are triggered.

The oil ministry, which had been asked to decide on giving approval to Vedanta buying most of Edinburgh-based Cairn Energy Plc's stake in its Indian unit by month-end, had asked ONGC to give its response on the transaction.

The response of ONGC is being submitted to the oil ministry, which will incorporate it in a letter it will write to Cairn/Vedanta giving in-principal approval. The letter will list out a set of 11 pre-conditions that Cairn/Vedanta will have to meet for securing the government nod, they said.

Sources said ONGC wants the royalty it pays on the entire 12 million of expected crude output from Cairn's Barmer oil fields to be added to the project cost and profits for stakeholders be calculated thereafter.

As per the Production Sharing Contract (PSC), the operator gets to first recover all project costs from the sale of oil or gas produced from a field before profits for itself and the government are calculated. Statutory levies like royalty paid by ONGC are not a part of the project cost in the PSC for the Rajasthan block and Cairn is opposed to their inclusion, as it will not only lower its own profit, but also the profit that the government earns, they said.