Govt approves Cairn-Vedanta deal

Also,Cairn India will have to withdraw the arbitration it has initiated disputing its liability to pay Rs 2,500 per ton oil cess on its 70 per cent share in the fields.

Besides,the approval will be subject to ONGC,which has a stake in all the three oil and gas producing properties and five out of seven exploration assets of Cairn India,waiving its pre-emption rights,which Reddy termed as the partner’s no-objection certificate (NOC).

He said the deal would also need the security clearance.

“The CCEA endorsed the recommendation of a Group of Ministers headed by Finance Minister Pranab Mukherjee,which was asked to go into the transaction,” he said.

Asked if the report of the Serious Fraud Investigation Office (SFIO),which had found Vedanta group firm Sesa Goa guilty of misconduct,would in anyway affect the government approval,Reddy said he has communicated the decision taken by the CCEA.

Refusing to say if the SFIO report was discussed,he said “The CCEA records decision not the thoughts.”

Last August,London-listed miner Vedanta proposed buying 51-60 per cent of oil and gas explorer Cairn India for up to USD 9.6 billion in cash,but the deal has been delayed due to a lack of government and regulatory approvals.

Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in Rajasthan oilfields.

ONGC owns a 30 per cent stake in Cairn India’s Rajasthan oil field but pays the entire royalty on production under the government’s previous policy of giving discounts to attract investors.

ONGC had,much before the Cairn-Vedanta deal was announced,cited contractual provisions to demand that the royalty to be recovered as a cost from revenue.

The state-owned firm maintained that as a partner it has preemption or right of first refusal and the deal should not proceed without its concurrence,Reddy said.

Both Cairn and Vedanta disputed royalty being made cost recoverable as it would dent Cairn India profits. They also opposed the need for partner consent for the transaction.

The GoM held that ONGC’s views were correct and recommended to the Cabinet that the deal be approved if Cairn or its successor agreeing to adding royalty to the project cost and recovered from oil sales besides agreeing to pay its share of Rs 2,500 per ton oil cess.

Sensing the mood,Cairn lowered the price it is demanding from Vedanta to make up for reduced profitability on acceptance of the preconditions. It removed a non-compete provision and related non-compete fee of Rs 50 per share.

Vedanta’s total payment at the reduced price of Rs 355 per share for a 40 per cent stake in Cairn India will now be USD 6.02 billion instead of USD 6.84 billion previously.

Reddy said the GoM had on May 27 recommended that approval may be given to the Cairn-Vedanta deal subject to the buyer and seller agreeing to treating royalty as cost recoverable item and withdrawing ongoing arbitration on cess.

“The CCEA endorsed the recommendation of GoM. In other words,the CCEA gave conditional approval to the sale of Cairn to Vedanta,” he said. “We hope it (these conditions) will be acceptable to Cairn/Vedanta.”

A Cairn spokesperson said the company “has not yet received formal confirmation of any decision that has been made by the Government. Cairn and Vedanta continue to work with the Government to secure the necessary consents and approvals.”

Reddy said Cairn/Vedanta had informally informed him about the decision to restructure the deal by lowering the sale price from Rs 405 per share to Rs 355 a share.

“It is now form them to take a view (on the deal) keeping the decision of the Cabinet in view,” he said.

The decision to make royalty cost recoverable would be effective from retrospective effect i.e from the date when Cairn began oil production from Rajasthan in August 2009.

But for the decision,ONGC would have to pay Rs 18,000 crore in royalty on behalf of Cairn India over the life of the Rajasthan field and another Rs 13,000 crore in cess,making the nation’s largest onland oilfield a losing proposition for the state-owend company,Oil Secretary G C Chaturvedi said.

Reddy said Cairn will have to withdraw the arbitration it has initiated disputing its liability to pay cess on its 70 per cent share in Rajasthan fields.

Also,Vednata would have to furnish performance and financial guarnatees and meet other regulatory mandates.

Vedanta in a statement said it “notes the Oil Minister’s statement to the media granting approval to Vedanta’s proposed acquisition of a controlling interest in Cairn India from Cairn Energy plc with certain pre-conditions.”

“Vedanta awaits official intimation of the approval and details of the pre-conditions from the Government of India,in order to consider further course of action,” it said.

On Monday,Cairn and Vedanta agreed to break the deal into two parts – Vedanta will buy a 10 per cent stake in Cairn India on or before July 11 and purchase the remaining 30 per cent after government consent to the deal. The first tranche

purchase will increase Vedanta’s stake in Cairn India to 28.5 per cent and reduce Cairn Energy’s stake to 52.2 per cent.

Vedanta has steadily built a position in Cairn Energy this year by acquiring a 10.4 per cent stake from Malaysia’s Petroliam Nasional Berhad,or Petronas for USD 1.47 billion (Rs 331 a share).

It also bought 8.1 per cent stake through Sesa Goa’s open offer to shareholders,which closed on April 30,for USD 1.2 billion. The open offer was made at Rs 355 per share (original acquisition price of Rs 405 minus Rs 50 per share non-compete fee).

In August last year,Vedanta offered to buy a 51-60 per cent stake in the Indian unit of Cairn Energy,in a deal expected to cost up to USD 9.6 billion. But later the shares on offer was reduced to 40 pe cent.

Cairn India holds stakes in 10 oil and gas blocks in India,including the huge RJ-ON-90/1 oil block at Barmer in Rajasthan. The block’s output of 125,000 barrels a day accounts for about 17 per cent of India’s total crude output.

The Scottish explorer has for the past 10 months denied the need for government approval to what it called a corporate transaction. It also rejected both the requirement of nod and pre-emption of partner ONGC,which holds stake in 8 out of 10 properties of Cairn India,including the Rajasthan block.

Besides agreeing to cost recovery of royalty and paying oil cess,Cairn and its successor will also have to take a no-objection certificate (NOC) from ONGC,which is nothing but the exemption from state-owned firm’s preemption rights.

ONGC owns 30 per cent in the Rajasthan oilfields,but has to pay royalty at the rate of 20 per cent of the crude oil price realised on all of the 240,000 barrels per day of peak output expected from the fields.

At a USD 70 per barrel oil price,it has to pay Rs 12,600 crore in royalties on Cairn India’s behalf over the life of the field,making India’s largest onland fields a losing proposition for it.

ONGC had cited provisions in the contract for Rajasthan oilfields in July last year to demand that royalty like other taxes and levies should first be deducted (recovered) from the sale proceeds of oil before the profits were split between partners and the government.

Cairn as well as Vedanta had opposed ONGC’s demand.

Sources said Cairn has also disputed its liability to pay oil cess at the rate of Rs 2,500 per tonne on its 70 per cent share in the Rajasthan fields,saying ONGC is also liable to pay cess on its behalf,like in the case of royalty.

The government has rejected this position as the contract imposes the royalty liability on ONGC,but is silent on cess,meaning partners have to pay in proportion to their share. Cairn did not agree and has initiated arbitration.

Sources said the GoM recommended that Cairn withdraw the cess arbitration and agree to pay its share of cess as the second pre-condition for approval. Also,the company will have to obtain a no-objection certificate from ONGC for transferring ownership to Vedanta.

For the seven exploration blocks or areas Cairn had won under the New Exploration Licensing Policy (NELP),the GoM held that the PSC provision of seeking partner consent must be met. ONGC is a partner in five of these blocks,they said.

In case of CB-OS/2 and the Ravva oil and gas fields in the Eastern Offshore — the other producing properties of Cairn — the government nod will be subject to Vedanta providing performance and financial guarantees.

Also,Vedanta will need security clearance from the Ministry of Home Affairs,Reddy said.