Government seeks $520 million from Cairn Oil & Gas; co slaps arbitration notice

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Updated: May 28, 2020 3:27 PM

The audit alleged discrepancies in the way capital expenses made on setting up the infrastructure to produce oil were booked.

Cairn Oil & Gas, Anil Agarwal, Ministry of Petroleum and Natural Gas, ONGC,  VedantaCairn is the operator of Rajasthan block with 70 per cent interest while the balance is held by state-owned Oil and Natural Gas Corp (ONGC).

The government has slapped a USD 520 million (around Rs 3,941 crore) demand notice on billionaire Anil Agarwal’s oil and gas unit Cairn after an audit found alleged discrepancies in cost recovery in the Rajasthan oil and gas fields operated by the company, sources said adding the firm has disputed the demand and initiated arbitration proceedings.

The Directorate General of Hydrocarbons (DGH), the upstream technical arm of the Ministry of Petroleum and Natural Gas, sought USD 520 million in additional profit petroleum for the government after an audit of capital and operating expenses incurred on the Mangala and other oilfields in the Rajasthan block RJ-ON-90/1, sources with direct knowledge of the development said.

The audit alleged discrepancies in the way capital expenses made on setting up the infrastructure to produce oil were booked. The law provides for operators recovering all the capital and operating cost from revenues earned from the sale of oil and gas before sharing a fixed percentage of profit with the government. Booking a higher expenditure curtails government’s profit share.

Cairn Oil and Gas, a vertical of Agarwal-controlled Vedanta Ltd, earlier this month sent an arbitration notice, disputing the demand, they said. A company spokesperson declined to comment.

Cairn is the operator of Rajasthan block with 70 per cent interest while the balance is held by state-owned Oil and Natural Gas Corp (ONGC).

ONGC is not a part of the arbitration but will have to abide by whatever award of the dispute resolution proceeding comes out, sources said adding the company will have to pay 30 per cent of the USD 520 million demand in case the arbitration panel upholds the DGH demand.

The arbitration notice sent by Cairn triggered disputed resolution proceedings under the Production Sharing Contract (PSC). A three-member arbitration panel, comprising a nominee each of Cairn and the government and a neutral judge, will be set up to adjudicate on the dispute.

Cairn and ONGC are already in a dispute over payment of royalty from the block. Cairn had stopped paying for its share of royalty on oil produced from its Rajasthan block following differences with partner ONGC on cost recovery.
As much as USD 400 million of royalty dues since July 2017 have not been paid to ONGC, sources said.

ONGC is the licensee of the Barmer block in Rajasthan, home to India’s biggest onland oil discovery to date, and is responsible for payment of royalty at the rate of 20 per cent of the oil price on the entire output from the field irrespective of its stake.

However in 2011, when ONGC gave its nod to Cairn being taken over by Vedanta, it was agreed that the two partners would pay for royalty in proportion to their share — so Cairn was to pay for royalty on its 70 per cent share of oil and ONGC on 30 per cent.

This was to be done by way of reimbursement — ONGC would initially pay royalty on 100 per cent of the oil produced and Cairn would reimburse it for 70 per cent soon after.

Sources said this reimbursement stopped in July 2017 with only sporadic payments coming in for some months.
That dispute has also been referred to an arbitration panel.

The Rajasthan block was in the early 1990s awarded to Royal Dutch Shell. Shell held 100 per cent interest in the block and ONGC, as per the contract, was made the licensee and given rights to back-in or take 30 per cent stake in any oil or gas discovery made in the future.

The idea was that the exploration risk is taken by the private firm. The state-owned company was not supposed to pay for the exploration risk. Shell did not find any hydrocarbon in the block and sold it to British explorer Cairn Energy plc a few years later. Cairn discovered the biggest onland oil field in the block, which was put to production more than a decade ago.

In 2011, Vedanta bought out Cairn’s India operations, including the Rajasthan block. The permission of ONGC, being the licensee of the block, was prerequisite for such transfer and the state-owned firm gave its nod subject to Cairn paying for a royalty on its share of oil.

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