Cairn India investors in a fix over royalty sharing

Now, it is the turn of investors of Cairn India, ONGC and Vedanta Resources to wait with bated breath. The final decision in the long-running Cairn Energy-Vedanta Resources stake sale deal is expected to be taken shortly by the Cabinet Committee on Economic Affairs.

Sources told Business Line that Cairn India board which met on May 25 was unanimous that the company will not share the royalty burden of the Rajasthan oilfields. However, the Group of Ministers (GoM) that went into the Cairn -Vedanta deal wants the two companies to bear the royalty burden, if the deal is to be cleared.

Such a condition could well sound the death knell for the deal in its present form given both Cairn and Vedanta's oft-repeated opposition to royalty-sharing, which they say will erode the former's profits and valuation sharply. Thus, industry watchers say, if Cairn agrees to shoulder the royalty, then the Vedanta offer may also need to be re-valued.

ONGC, as the licensee of the Rajasthan block, bears the entire royalty burden. According to provisional calculations, the total royalty burden over the project life (the current PSC is valid till 2020) is Rs 18,000 crore. Of this, ONGC has to bear Cairn's share of approximately Rs 12,600 core.

If the royalty is made cost recoverable then ONGC's net cash flow and its net present value (NPV) in the project become positive. However, projections indicate that, over the life of the project, this would mean a reduction in the Government's share of profit petroleum (in NPV terms) by Rs 5,032 crore, while that of Cairn and ONGC would reduce by Rs 6,272 crore, and Rs 2,688 crore respectively. Nevertheless, ONGC would still benefit since it would recover royalty paid to the State on behalf of Cairn as well as itself amounting to Rs 13,995 crore in NPV terms, over the project life.

On the other hand, such an eventuality will likely see the Cairn India stock taking a knock on the bourses. Whichever way the dice turns, given the stakes involved, the dispute may be headed for litigation.

Also, Cairn India has been paying cess under protest, at the rate of Rs 2,650 a tonne of crude oil.

Cess has to be borne by the producer, which in this case is Cairn India. However, according to Cairn's interpretation, the Rajasthan PSC is ambiguous about who will be paying it.

At a crude oil price of $70 a barrel, the company was projected to pay Rs 9,202 crore towards its share of cess and Rs 3,944 crore towards ONGC's share.