Cairn India's profit take from its prize Rajasthan oilfields will fall by $1.68 billion in case riders imposed by the government for approving its parent Cairn Energy selling stake to Vedanta Resources are accepted.
The Cabinet on Thursday approved Cairn Energy selling its 40 per cent stake in Cairn India to Vedanta subject to the buyer/seller agreeing to cost recovery of royalty in the Rajasthan fields.
Sources said while Cairn India will not have to pay any royalty and state-owned ONGC will continue to pay royalty on its behalf to the state government but the levy will be added to project costs that is first deducted from oil sale revenues before profits are split between partners and the government.
Acceptance of this condition by Edinburgh-based Cairn Energy or its successor London-listed miner Vedanta will lower Cairn India's profit over the approved life of the life lasting 2020 from $7.43 billion to $5.75 billion.
Sources said the lower profits have been calculated at approved peak output of 175,000 barrels a day and considering a crude oil price of $70 per barrel.
The net present value of Cairn India's lose of profitability is $1.39 billion, a little more than the $800 million concession in the purchase price that Vedanta has already got from Cairn Energy.
Cairn also has to agree to ending arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70 per cent share of oil from the Rajasthan fields.
Cairn India currently pays Rs 2,626.5 per tonne cess under protest but unlike royalty, treats it as a cost recoverable item.
The government take from the RJ-ON-90/1 block will come down to $3.6 billion from $5.188 billion as a result of royalty being made cost recoverable, sources said.
Also, the deal has to be approved by state Oil and Natural Gas Corporation, which has a stake in all three of Cairn India's producing assets and five of its seven exploration assets, waiving its pre-emption rights.
And finally, the acquisition will need security clearance.
ONGC pays royalty on its 30 per cent share of oil from Rajasthan fields as well as on operator Cairn India's 70 per cent take.
It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost, which is first deducted from revenues earned from sale of oil before profits are split between partners.
Cairn this week cut the price it was demanding from Vedanta and removed a noncompete condition.
Vedanta will now pay $6.02 billion for a 40 per cent stake in Cairn India at a reduced price of Rs 355 per share, down from the original $6.84 billion.
For ONGC, cost recovery of the royalty would mean that it will get $721.37 million over the life of the field as against a negative cash flow of $3.18 billion when the royalty was not cost recoverable, sources said.
Last August, London-listed, India-focused miner Vedanta proposed to buy 51 to 60 per cent of oil and gas explorer Cairn India for up to $9.6 billion in cash, but the deal has been delayed due to a lack of government and regulatory approvals.
Even before Vedanta made its move, ONGC had demanded that royalties be added to costs and recouped through sales, citing provisions in its contract.
After the deal was announced, it maintained it had pre-emption rights and that the acquisition could not go ahead without its agreement.
The Cabinet Committee on Economic Affairs on Thursday overruled objections to ONGC's demand by Cairn/Vedanta and held these will have to be met before the approval is granted.
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.
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 $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 $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).
Cairn India holds stakes in 10 oil and gas blocks in India, including the huge RJ-ON-90/1 oil block at Barmer in western Rajasthan state.
The block's output of 125,000 barrels a day accounts for about 17 per cent of India's total crude production.
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 crown-jewel Rajasthan block.