Give and take,govt to tell Cairn

The petroleum ministry is set to tell Cairn Energy that wants to sell its India business to Vedanta Resources for $9.6 billion that it should go by the well established precedent of give and take on the original contractual terms with the government when oil and gas assets change hands.

The petroleum ministry is set to tell Cairn Energy that wants to sell its India business to Vedanta Resources for $9.6 billion that it should go by the well established precedent of give and take on the original contractual terms with the government when oil and gas assets change hands.

The proposed deal is now deadlocked as the government wants to protect the interests of Cairn’s partner for its Rajasthan oilfields ONGC,which now pays 20% royalty on the entire Rajasthan output despite having only a 30% interest. The government’s suggestion that the royalty be adjusted against revenues from the project as a cost item is not acceptable to Cairn Energy as it would depress the valuation of its Indian arm.

The ministry is expected cite the example of a 2002 deal in which Enron Oil & Gas India sold its assets in Mumbai offshore at a price lower than it originally agreed to British Gas,while the buyer showed more flexibility in accommodating the interests of Enron’s partners ONGC and Reliance Industries.

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Enron,which was operating its Mumbai offshore oil and gas fields Panna,Mukta and Tapti with a 30% holding along with ONGC with 40% and Reliance Industries with 30%,eventually lowered its asking price from $388 million to $350 million. British Gas in turn,conceded on its demand for operatorship of the fields post acquisition and agreed to accept ONGC and Reliance Industries as joint operators. ONGC and RIL insisted on joint operatorship so as to have greater say in the management of the oilfields. The government is of the view that precedents always tend to influence the thinking of negotiating parties.

Cairn and Vedanta announced the deal last August but have not got government clearance so far due to the vexed royalty issue. Cairn is of the view that the government stands to earn about $14 billion over the next 20 years from the Rajasthan oilfields as its share of profit petroleum and could easily compensate ONGC for its $5 billion royalty burden. Cairn Energy chief executive Bill Gammell who met petroleum minister S Jaipal Reddy earlier this week,said he has had constructive dialogue with the government and hopes to conclude the deal before April 15.