ONGC agrees to Cairn being given Rajasthan block extension

ONGC agrees to Cairn being given Rajasthan block extension

In a surprise turn of events, state-owned Oil and Natural Gas Corp (ONGC) has without any condition agreed to its partner Cairn India retaining the prolific Rajasthan oil block beyond the contractual deadline of 2020.

The Board of ONGC in its meeting on January 21 recognised that the signed contracts provides for extension of the block licence only on mutually agreeable terms by all parties — the two partners ONGC and Cairn as well as the government.

But unlike 2011 when it had conditional approval for Cairn being acquired by Vedanta Group to resolve the royalty dispute, ONGC has not put any pre-condition this time, sources with direct knowledge of the development said.

The Board merely stated that the licence can be extended on mutually agreeable terms and asked the government to decide on the issue, they said.

After internal approval by ONGC, the matter will now come up for discussion at Management Committee – a panel headed by DGH and comprising the two partners. Once the MC clears the extension proposal, it will go to the government.

Cairn’s contractual term for exploring and producing oil and gas from the Rajasthan Block RJ-ON-90/2 expires in 2020 and the area is to return to the block licensee, ONGC.

The Anil Agarwal-group company, which wants the term of the block extended by a minimum 10 years, had in July 2014 formally written to ONGC on the issue, sources said.

ONGC, which currently holds 30 per cent stake in the block, had previously told the oil ministry that the production sharing contract (PSC) can be extended beyond 2020 if all parties to the contract agree on mutually agreeable terms.

The state-owned firm was to decide on terms on which it can agree on allowing Cairn to continue to operate the fields.

ONGC as a licensee of the block, which produces about 181,000 barrels per day of oil, pays royalty to the government on not just its 30% stake but also on Cairn’s 70% interest.

Though the royalty is later cost recovered (as per the 2011 agreement between Cairn and ONGC), the company faces cash flow issues because of having to pay in advance.

For agreeing to Cairn’s proposal, there was a thinking with ONGC that a condition be put that royalty be shared by the partners in proportion to their shareholding. Also, it must seek a higher stake of 50 per cent.

However, the Board headed by Chairman Dinesh K Sarraf decided not to put any condition.

Interestingly, the company board currently does not have any independent directors after the new government eased out the previous ones.

After ONGC’s nod, a formal resolution will be passed by the block’s operating committee which has the two partners as members. After this, the proposal will go to the block oversight panel called the management committee headed by upstream regulator DGH and then to the government.

The Rajasthan PSC provides for ONGC becoming the owner of all facilities once their cost is recovered from sale of crude oil.

The cost of Mangala, Bhagyam and Aishwariya oil field facilities in the block as well as the heated pipeline that carries the crude from the field to Gujarat refiners will be recovered much before the current term of PSC ends in 2020.

The Rajasthan Block RJ-ON-90/2 was awarded as an exploration acreage on terms different from 28 small and medium-sized fields like Panna/Mukta and Tapti and Ravva awarded alongside during 1991 and 1993.

The Oil Ministry in a draft policy has proposed extension of the PSC for these fields by 10 years or the balance economic life of the field, whichever is earlier. Cairn’s Rajasthan block is not included in this policy.

Sources said the Rajasthan PSC provides for extension of licence for 5 years if there is a producing oil field and by 10 years if there is a gas prospect.

The official said ONGC, who is a party to the Rajasthan PSC as well as the licensee, will also need to agree to any extension provisions under the PSC.

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