Public sector hydrocarbon upstream major ONGC has asked the government to make good on its promise to reimburse Rs 761 crore paid by the company in extra royalty and cess on behalf of other partners in seven pre-Nelp production blocks. ONGC pays royalty and cess on the entire production from these blocks as per the production sharing contracts signed by the government for these blocks. The arrangement was devised by the government to encourage other companies to bid for these blocks.
As oil has started flowing from these blocks, ONGC?s liablity has increased. The company expects the payments will be a big drain on its resources. ONGC registered a net profit of Rs 3,054 crore in the third quarter of the current financial year.
ONGC?s request has been hanging fire for the last ten years, despite a committee of secretaries as well as a ministerial panel set up in 1998 to look into the matter having supported it. The company now expects a sharp rise in its royalty burden as companies like Cairn India ramps up production from its Barmer block in Rajasthan. As per the production sharing agreements for the block, ONGC is required to pay royalty on 100% production from the Barmer fields even though it has just 30% equity in the block. The company is therefore losing money in the block from the very first day. The proposals have again been put before the Kirit Parikh committee that is examining the pricing structure for the sector. The committeee?s report is expected this week.
The company has estimated that its extra royalty liability from the Barmer field in the period running up to 2020 would be as much as Rs 12,000 crore even if international crude oil prices hover at an average of $60 a barrel for the period?a heroic assumption. This will happen because when production goes up, ONGC?s liabilites on royalty will rise correspondingly. The applicable royalty rate for the block is 20%. Cairn is currently producing 20,000 barrels per day of crude oil from the field that is expected to reach 70,000 barrels per day soon. When the block reaches its peak production by 2011, the block will produce 1,75,000 bpd crude oil, which will be 20% of India?s domestic crude production.
Cairn made the discovery in January 2004. The three fields of the block-Mangla, Bhagyam and Aishwariya-have recoverable reserves of 700 million barrels of oil with further 300 million of enhanced oil recovery potential.