Vedanta’s Cairn Oil & Gas gets 3-month extension for Rajasthan oil block

By: |
November 7, 2020 1:55 PM

This extension was subject to the 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.

Vedanta Ltd, Cairn, Rajasthan oil block pending settlemnet. Vedanta and Rajasathan government disputeThe license to explore and produce oil by and gas by Cairn from Barmer was due to renewal in May this year. (ONGC Image)

Vedanta Ltd’s oil and gas arm Cairn has got a further three-month extension of license for its prolific Rajasthan oil block pending settlement of a dispute over USD 520 million cost recovery. The license to explore and produce oil and gas from Barmer was due to renewal in May this year, but pending settlement of the dispute the government has given five extensions, the latest till January 31, 2021.

In notes to its second quarter earnings statement, Vedanta said it believes “the company is eligible for automatic extension of production sharing contract (PSC) for Rajasthan (RJ) block on same terms with effect from May 15, 2020.” 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 the 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. The government wants the company to clear the dues before the extension is granted.

“One of the conditions for extension relates to notification of certain audit exceptions raised for FY16-17 as per PSC provisions and provides for payment of amount, if such audit exceptions result into any creation of liability,” it said. Vedanta said it has disputed such demand. “The company has reasonable grounds to defend itself which are supported by independent legal opinions,” it said. “The company has also invoked the PSC process for resolution of disputed extensions and has issued notice for arbitration,” it noted. The arbitration tribunal has been constituted.

“Further, on September 23, 2020, government of India has filed an application for interim relief before Delhi High Court seeking payment of all disputed dues. The bench was not inclined to pass any ex-parte orders and now the matter is scheduled for hearing on November 11, 2020,” it said.

The company said due to extenuating circumstances surrounding COVID-19 and pending signing of the PSC addendum for extension after complying with all stipulated conditions, the government has permitted it to continue petroleum operations in the RJ block with effect from May 15, 2020 until extension is signed or for a period up to January 31, 2021, whichever is earlier. Pending resolution, the government first gave the company a three-month extension of the 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 to September 30 and October 31 through monthly extensions. 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 10-year extension of the PSC for the Rajasthan Block, 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 for 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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