Cairn India moves Delhi HC on Barmer price, contract

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New Delhi | Updated: December 12, 2015 4:50:12 AM

Shares of Cairn India have lost close to 48% of their value in 2015 so far compared to 9% decline in the benchmark Sensex.

Cairn indiaShares of Cairn India have lost close to 48% of their value in 2015 so far compared to 9% decline in the benchmark Sensex. (Image: Cairn India website)

Vedanta Group company Cairn India on Friday approached the Delhi High Court seeking an extension of its contract for the prolific Barmer oil and gas block in Rajasthan and also a better price for crude oil produced from the block. Senior lawyer CA Sundaram will appear before the court on Monday on behalf of Cairn India.

The move by the Anil Agarwal-controlled firm comes after the government indicated that the company would have to share more revenues with the exchequer of the contract, which is slated to expire in May 2020, is to be extended. The government’s stance could hurt the private explorer, whose revenues are anyway under stress due to the fall in crude oil prices and the decline in production volumes.

Moreover, Cairn India sells crude oil from Rajasthan at a discount to Brent as per a provisional formula put in place by the petroleum ministry in September 2009. This has hurt its revenues as, in the July-September quarter this fiscal, it sold crude oil at a 14.3% discount to Brent. The average Brent price fell 18% in the second quarter against the first quarter to $50.5 a barrel, driving Cairn India’s average oil realisation down by 22% quarter-on-quarter to just $43.70 per barrel. The explorer has already cut its capex by 40% in FY16.

Shares of Cairn India have lost close to 48% of their value in 2015 so far compared to 9% decline in the benchmark Sensex.

“Cairn India has approached the Delhi High Court, seeking early decisions on the extension of its production-sharing contract (PSC) for its Rajasthan block (RJ-ON-90/1) and to seek fair pricing for its crude. Both these matters are presently pending with the government,” said a company spokesperson.

With the Brent crude oil price plummeting to a seven-year low this week and hovering below $40 a barrel, Cairn India’s net realisation in the third quarter could nosedive to $30 a barrel. This is a major challenge when average production was seen reducing to 159,000 barrels per day (bpd) in September against 167,000 bpd in July and 170,000 bpd in August.

Sources in the petroleum ministry told FE that a final decision on extending the contract for Barmer beyond May 2020 by another 10 years or till the economic life of the field would anyway be taken in the next six months. FE had reported on July 13 that the Directorate General of Hydrocarbons (DGH) has asked Cairn India to come up with a tentative exploration programme for 10 years beyond 2020, as a precondition for the contract’s extension.

Cairn India made not just one but several attempts to earn a better price for the waxy crude drilled from Barmer, which is ferried via a heated pipeline, but in vain. First, it proposed to the UPA government’s petroleum ministry M Veerappa Moily to allow it to export the crude oil and earn a better price (Cairn termed it a “swap” mechanism). This was turned down by, citing that the PSC doesn’t offer such a provision. The explorer claims that by way of the swap mechanism, it could earn $4-6 more on every barrel.

Second, Cairn reached out to the petroleum ministry seeking a review of the crude oil pricing formula. This too didn’t see a positive outcome, as the ministry felt it has “no direct role to play” when it came to pricing of crude oil. If Cairn India wants a revision in the pricing formula, it should negotiate with the buyers directly, which is also provided by the PSC, said the ministry. Ironically, Indian Oil Corporation (IOC), which buys about 25% of Barmer crude, is not willing to renegotiate the pricing mechanism, unless directed by government. Private buyers Reliance Industries and Essar Oil follow the PSU’s refiners price.

In September 2009, the government designated PSU refineries IOC, Mangalore Refinery and Petrochemicals and Hindustan Petroleum to purchase the Rajasthan crude at a provisional pricing formula. This waxy, sweet (low-sulphur) crude is not being fully leveraged by domestic refineries that are better suited to process high-sulphur, cheaper crude from various parts of the world. This is why IOC is able to consume only 25% of the total Rajasthan production.

Later, with an increase in production, the government allowed the sale to private refineries – RIL and Essar Oil, who are best suited to process Barmer-type crude oil. Now, the fact is the private refiners are fully leveraging the quality of crude oil and getting benefit of discounted price, while explorer Cairn India is getting a lower price for its crude oil.

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