ONGC in variance with government on royalty from Cairn field

Oil and Natural Gas Corp (ONGC) wants the 20 per cent royalty it pays on the entire 125,000 barrels per day crude output from Cairn's Barmer oilfields to be added to the project cost and profits for all stakeholders -- including the government -- calculated thereafter, sources privy to the development said.

As per the Production Sharing Contract (PSC), the operator gets to first recover all project costs from the sale of oil or gas produced from a field before profits for itself and the government are calculated.

Statutory levies like royalty paid by ONGC are not a part of the project cost in the PSC for the Rajasthan block and Cairn is opposed to their inclusion, as it will not only lower its own profit, but also the profit petroleum that the government earns, they said.

The Law Ministry and upstream regulator DGH have held that royalty cannot be recovered from the cost of the project and their position is documented in the Cabinet note the oil ministry moved in August, 2004, seeking reimbursement of royalty paid by ONGC.

ONGC, too, did not raise the issue in the past and only raked it up at the time the Cairn-Vedanta deal was announced.

"The Directorate General of Hydrocarbons (DGH) has mentioned that statutory levies paid by the licensee (ONGC in case of Rajasthan oilfields) are not cost-recoverable. Legal opinion from Ministry of Law was also taken and cost recovery out of project revenue has not been supported," the ministry's Cabinet note seeking reimbursement of royalty stated.

If royalty could have been recovered from the cost of the oilfield, the oil ministry would never have pushed for its reimbursement by the government, they said.

Sources said ONGC, which owns 30 per cent participating interest in the Rajasthan fields, had initially hardened its position by refusing to entertain cash calls made by Cairn toward the cost of operating the fields in the Thar desert, but later backed off after government read out the riot act for its actions in variance with the PSC.

Vedanta would not have factored in reduced profits because of the inclusion of royalty in the project cost and may be forced to call off the deal if ONGC takes the matter to arbitration.

Sources said the royalty liability on ONGC, wherein it has to pay 20 per cent of the price realised on the entire output of crude oil from fields like Rajasthan, even though its share of production is only 30 per cent, is a historic legacy and the government had at several times considered reimbursing the part which the PSU pays on behalf of foreign operators like Cairn.

The government had in the 1990s put the liability of statutory levies on national oil companies to attract global players to the then-nascent oil and gas sector in India.
The opinion of the Law Ministry, annexed to the 2004 Cabinet note, stated, "Ministry of Petroleum and Natural Gas (MoPNG) has been consistently of the view that royalty and cess cannot be adjusted against cost from the produced petroleum as per the Production Sharing Contract (PSC)."

"Though arguments can be built up in favour of ONGC on the basis of equity, but on the face of past practice adopted by the MoPNG, including other parties, such arguments cannot set at naught the contemporary interpretation made," it said.

The then-Oil Secretary M S Srinivasan had on April 27, 2006, written to the Finance Ministry stating that in the 28 PSCs signed in the 1990s, "All statutory levies (including royalty and oil cess) on the entire production of oil and gas, including the private parties' share, were to be borne by the National Oil Companies (NOCs), namely ONGC and Oil India Ltd, who remained sole licensees under these contracts."

But the royalty liability had made projects like Rajasthan economically unviable for ONGC and should be reimbursed, Srinivasan wrote. Royalty could be reimbursed from the government's profit share from the Rajasthan field, the oil ministry had opined.

"... Any delays in implementation of past PSCs due to non-cooperation by NOCs with the private companies (which happen to be operators) would send wrong signals about the sanctity of these PSCs entered under the old policy," he had added.

According to the Production Sharing Contracts and the Government of India policy for pre-New Exploration Licensing Policy (NELP) blocks in the 1990s, 100 per cent of statutory levies (including royalty) were to be borne by the NOCs in order to provide a competitive fiscal and contractual regime.

During this period, the relationship between the government and NOCs was seen in a different perspective, because the NOCs were 100 per cent owned by the government. As such, the NOCs' rights and obligations for the pre-NELP blocks were to be borne by the government.

To attract investment in exploration and production in India during the pre-NELP regime, the government consciously placed the responsibility of royalty entirely on the licensee. In return, NOCs could take 30 per cent interest upon a discovery in these blocks without incurring any risk capital or past cost.

In the Rajasthan block, Cairn invested USD 600 million of its own risk capital on exploration and once the oilfields were discovered, ONGC, as the government nominee, acquired a 30 per cent stake in these fields without paying anything.

In 1997, it was agreed by a Group of Ministers (subsequently discussed by Committee of Secretaries in February, 1998, and reviewed various in recent years) that NOCs could be reimbursed for actual liabilities out of profit petroleum accruing to the government, sources said.