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Rediff News  All News  » Business » Govt prevails, clears Cairn deal with riders

Govt prevails, clears Cairn deal with riders

July 01, 2011 09:18 IST

CairnCairn told to allow cost recovery of royalty and cess, take back arbitration case; Oil and Natural Gas Corporation follow-on public offer gets a boost.

In the first such move in the petroleum sector, the government on Thursday asked Cairn India to accept five conditions before its majority sale to Vedanta Resources can go ahead.

Cairn India will have to allow cost recovery of royalty on Barmer crude from the revenue it earns from the field. It will also have to withdraw the arbitration case against the government.

As cost recovery will reduce the revenue from the field, the two companies this week announced waiver of the non-compete fee that Vedanta had agreed to pay Cairn Energy in August 2010.

This helped Vedanta save $840 million by bringing down the deal size to a little over $6 billion.

Making royalty cost-recoverable and withdrawal of arbitration cases will protect the interests of government-owned ONGC, which is planning to launch a follow-on public offer.

In addition to royalty, the cess of Rs 2,500 per tonne on Barmer output that Cairn India is paying under protest has also been made cost-recoverable.

Allowing the royalty of Rs 18,000 crore (Rs 180 billion) and cess of Rs 13,000 crore or Rs 130 billion (over the life of the field) to be taken as cost will reduce the government's share of profit from the country's biggest on-land oil field.

Announcing the decision taken by the Cabinet Committee on Economic Affairs, Petroleum Minister S Jaipal Reddy told reporters the 'CCEA has endorsed the group of ministers' recommendation and granted conditional approval to the sale of stake in Cairn India to Vedanta Resources'.

He said no further litigation on these issues could be initiated by the company on the above two issues.

Reddy said the issues related to royalty and arbitration were the 'only two bones of contention' but other conditions such as no-objection certificates from Cairn India partners, approvals from regulatory bodies such as the Securities and Exchange Board (Sebi)

and security clearance from the home ministry would have to be met.

Experts say all three players -- Cairn Energy, Vedanta and ONGC -- have gained.

"Cairn Energy has got a multiple return on the investment it made about a decade ago.

Vedanta has become the second mining giant after BHP Billiton to have a presence in oil exploration and it can ride the future potential of Barmer.

"ONGC can smile all the way to the bank as it will help its FPO plans," said Jagannadham Thunuguntla, equity head, SMC Capital.

A statement by Vedanta said, "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. Vedanta continues to work with Cairn Energy towards successful completion of the transaction and a further announcement will be made in due course".

Under the production sharing contract signed by Cairn India and its partner in the Barmer block, ONGC, with the petroleum ministry, ONGC was to pay the full royalty despite owning a mere 30 per cent stake.

The block started commercial production in August 2009.

ONGC would have paid Rs 18,000 crore (Rs 180 billion) as royalty during the life of the field.

In August 2010, the London Stock Exchange-listed Vedanta Resources announced purchase of up to 60 per cent stake in Cairn India.

The deal ran into hurdles when the petroleum ministry insisted on written applications.

The GoM recommended on May 27 that royalty would have to be cost-recoverable,' impacting Cairn India's profitability. Due to this, Cairn Energy, which owns a majority stake in Cairn India, was forced to lower the price at which it would sell its 40 per cent stake to Vedanta by $800 million (Rs 3,800 crore).

The Scottish explorer announced that it would sell the 40 per cent stake to Vedanta at Rs 355 per share instead of the previous agreed price of Rs 405.

Vedanta already has an 18.5 per cent stake in Cairn India.

BS Reporter in New Delhi