Cairn’s Rajasthan oil block licence stuck in cost dispute; hangs by monthly extensions

By: |
September 13, 2020 11:42 AM

ONGC holds 30 per cent interest in the block while Cairn Oil & Gas, a unit of Vedanta Ltd, is the operator with a 70 per cent stake.

The government wants the company to clear the dues before the extension is granted.The government wants the company to clear the dues before the extension is granted. (File Image: Reuters)

Billionaire Anil Agarwal-led Cairn India’s Rajasthan oil block licence extension is stuck in a dispute over cost and the firm is literally surviving on monthly extensions by the government, sources said.

The government had in October 2018 agreed to extend by 10 years the contract for Barmer fields in Rajasthan after the expiry of the initial 25-year contract period on May 14, 2020. This extension was subject to Vedanta Group firm agreeing to raise the share of the government’s profit from oil and gas produced from the block by 10 per cent.

While Cairn protested against the additional payout and took the government to court, the extension was subsequently held up due to the government claiming additional profit petroleum after re-allocating Rs 2,723 crore common cost between different fields in the block and disallowance of Rs 1,508 crore cost on a pipeline, sources privy to the development said.

The government wants the company to clear the dues before the extension is granted, they said adding the company has disputed the demand and issued a notice of arbitration to resolve the differences.

Pending resolution, the government first gave the company a three-month extension of the production sharing contract (PSC) for the Rajasthan block, which houses the prolific Mangla, Bhagyam and Aishwariya oilfields, till August 15, 2020.

It subsequently extended the PSC by 15 days and then by a month till September 30, sources said.

When contacted, a company spokesperson said, “The Rajasthan PSC allows extension on the same terms for a period of 10 years in case of commercial gas production and we are accordingly eligible for the extension.”

The block, it said, produces more than 20 per cent of India’s crude oil production and has the potential to double this over the next 3 years.

“This requires a reduction in fiscal levies and administrative support for timely approvals,” the spokesperson said. “We have referred a few matters to arbitration that we were not able to mutually resolve.”

The company, however, refused to give details.

“We are hopeful to see some positive outcomes, we are committed to produce in this block and contribute significantly towards a self-reliant economy,” the spokesperson added.

Sources said the Directorate General of Hydrocarbons (DGH), the upstream nodal authority of the Oil Ministry, on October 26, 2018, granted its approval for a ten-year extension of the Production Sharing Contract (PSC) for the Rajasthan Block (RJ), with effect from May 15, 2020 subject to payment of additional profit petroleum.

Cairn challenged it before the Delhi High Court and the matter is sub-judice.

The company also had a dispute with its partner state-owned Oil and Natural Gas Corp (ONGC) over investments made in the block, which held up the computation of the government’s share of profit petroleum for fiscal years ending March 31, 2019, and March 31, 2020.

ONGC holds 30 per cent interest in the block while Cairn Oil & Gas, a unit of Vedanta Ltd, is the operator with a 70 per cent stake.

Sources said DGH had way back in May 2018 raised a demand additional share of profit oil for the government after disallowing Rs 1,508 crore out of the cost incurred on laying a heated-pipeline to transport Barmer crude and Rs 2,723 crore in the reallocation of certain common costs.

These costs pertain to only Cairn’s share in the Rajasthan block as ONGC has agreed to pay the government if these costs are disallowed.

In all, Rs 4,828 crore, including interest, is being sought to be disallowed for the 2017-18 fiscal.

The company believes that it has sufficient as well as a reasonable basis for having claimed such costs and for allocating common costs between different fields, sources said adding it believes that the conditions linked to PSC extension are untenable.

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