Cairn India is open to buying the 30 per cent stake that government-owned Oil and Natural Gas Corporation owns in its oil block in Rajasthan. Cairn India is the operator of the block, with 70 per cent ownership currently.
ONGC had earlier asked the government for permission to relinquish its stake in the Rajasthan block saying the royalty burden and the development cost it would have to bear would make its investment in the project unviable.
Selling the stake would not, however, address the key problem that ONGC faces, which is the burden of royalty payment it has to bear as the nominated licensee to the block. This is because ONGC gained the stake under a provision that is distinct from a licensee obligation. The government nominated the state-owned exploration company as the licensee for the block in 1995.
"If ONGC is keen to sell the stake, Cairn India can consider buying it. However, ONGC, as a licensee, would still have to bear the royalty obligation," said sources close to the company. Cairn officials, however, denied any such move.
The Rajasthan block comprises three main onshore oilfields--Mangala, Bhagyam and Aishwariya.
According to licence conditions for the Rajasthan block, ONGC has the right to take 30 per cent in any discovery free of cost but the state-run firm has to pay not only its share of royalty but also the 70 per cent share of the operator.
Royalty of 20 per cent has to be paid to the Rajasthan government on the price crude may fetch. At $40 a barrel, the royalty for six million tonnes a year of average output works out to $352 million (Rs 1,760 crore).
ONGC is also required to bear 30 per cent of the $ 2.4 billion cost of developing the fields.
"At this point it is a very sensitive issue. However, there is no communication gap between Cairn and ONGC and we are discussing this issue," said a senior ONGC official.
ONGC had earlier told Business Standard that it has been asking for reimbursement of the royalty it pays and unless the issue is sorted, it would be difficult for its board to approve further investments in the field. The company had asked the finance ministry to examine the issue.
Since ONGC and Oil India were the only exploration companies operating during the nineties, the government, in order to attract foreign investment, had promised to take care of statutory levies on oil and gas production when it awarded blocks like RJ-ON-90/1 in Rajasthan more than a decade ago.
The central government is entitled to royalty on offshore fields; for onshore fields the royalty is payable to the state governments concerned. The royalty rate for each field is decided on a case-by-case basis based on various parameters.
