ONGC to invest $1 billion in Cairn's Rajasthan oilfields

Move is expected to enhance supply

Oil and Natural Gas Corporation holds 30 per cent in oilfields where Cairn has proposed $2.4 billion investment in producing oil, and another $980 million for laying a heated pipeline to transport the oil to the Gujarat coast.
Its board has, however, not yet cleared its share of $1.01 billion as the investment offers negative returns. “ONGC’s Net Present Value with revised field investment plan works out to negative $1.435 billion and negative $1.471 billion at a crude price of $60 and 70 per barrel, respectively,” a top company official said.
Negative NPV has been a result of ONGC being made liable to pay 20 per cent royalty on the entire crude oil production even through its share is only 30 per cent. Cairn is exempt from royalty payment and ONGC will have to pay the levy on the private firm’s behalf.

Royalty liability

“The Petroleum Ministry on Thursday says that we signed the contract for the Rajasthan block fully knowing about the royalty liability. But the royalty at the time of signing of the production sharing contract was Rs 539.20 per tonne while it today comes to Rs 3,780 per tonne, considering a crude price of $60 per barrel,” he said.
Besides change in royalty rates, the oil development cess has also been increased to Rs 2,500 per tonne from Rs 900 per tonne at the time of signing of PSC for the Rajasthan block.
“Keeping in view ONGC’s liability of payment of royalty on 100 per cent production against its participating interest of 30 per cent in RJ-ON-90/1 block, ONGC’s liability towards royalty works out to $36 per barrel at crude price of $60 per barrel,” the official said.
The cess for ONGC’s 30 per cent share works out to $7.14 per barrel. “Further, we have to share profit petroleum with the Government in a prescribed ratio. Assuming the current cost and production estimates and a crude oil price of $60 per barrel, ONGC would need to pay $10.34 per barrel to the Government as its share of profit petroleum,” he said.
ONGC would be left with $6.5 per barrel after payment of royalty, cess and profit petroleum to Government.
“The balance of $6.5 per barrel is grossly insufficient for meeting the obligation of sales tax/VAT, opex and capex,” he said, adding ONGC wants the government to refund the royalty it has to pay on behalf of Cairn.