Govt, Cairn, Vedanta to meet on Feb 6: Sources

India's oil secretary may meet Cairn Group and Vedanta Resources on Sunday, ministry and company sources said, to try to hammer out royalty payment issues that threaten the multi-billion dollar takeover of Cairn India. 

It could be the last meeting with the parties to the deal before the oil ministry firms up its view -- which will be the clincher for whether the deal goes ahead. 

On Jan. 31, Oil Minister Jaipal Reddy said that Oil Secretary S. Sundareshan would meet all stakeholders for the planned acquisition deal at the end of this week. 

"There will be one more interaction at the end of the first week of February. Situation in its final contours will be known then," Reddy said. 

Cairn Energy agreed in August to sell 40-51 percent inCairn India to Vedanta but the deal has been delayed on rumblings from the government and its partner in the big Rajasthan block, Oil and and Natural Gas Corp. 

State-owned ONGC , which has a 30 percent stake in Cairn-operated Rajasthan fields and pays royalty on the entire output, said it would not block the planned deal but wanted the royalty issue to be resolved at the earliest. 

The oil ministry has been maintaining that it has nothing against the deal but it would strive to protect ONGC's interest. 

ONGC's then chairman R. S. Sharma on Jan 30. said his firm would end up paying a royalty of 140 billion rupees ($3.1 billion) on crude output from Rajasthan fields as per the production plan submitted by the private firm to the government. 

Citing persons with direct knowledge of the matter, the Economic Times of India on Friday reported that Vedanta will terminate the $9.6-billion deal if Cairn India accepts the oil ministry's conditions like changing the royalty obligations in the Rajasthan block. 

ONGC to get 10 per cent RoI on Cairn blocks

In order to boost ONGC’s valuations ahead of followon public offer (FPO) which is scheduled early next year, central government has given in principal ok to the proposal which ensures  Cairn gets minmum 10 per cent return on investment (RoI) in Cairn India’s Rajasthan block.  The government’s in principal approval also paves the way for Cairn-Vedanta deal. 

 The state-run explorer has been losing money from these blocks, as it has to bear the  entire royalty burden, and has been using the deal to negotiate better terms for itself.  The petroleum ministry sources said, the government may transfer a part of its own share of profit from the blocks to help ONGC, but this would require the approval of the finance ministry as it means giving subsidy to the ONGC..

Officials in the finance ministry said, they were looking at ways to help ONGC while petroleum secretary S Sundareshan said his ministry wanted India’s second-largest company by market capitalisation to get a reasonable return.

“This will come as an upside for investors ahead of the FPO as the Rajasthan blocks will generate more revenues in the years to come. A positive return for ONGC would help the Cairn-Vedanta deal as well as ONGC’s concerns would be addressed without making any changes for Cairn India materially,” says Sanjeev Prasad of Kotak Securities .

The ministry is considering ways to give ONGC a return of 10-15 per cent on its investment in the Rajasthan blocks and is consulting ONGC and the Directorate General of Hydrocarbons, the quasi-regulator for the sector, the official said, requesting anonymity. One of those options is to amend the tripartite contract between Cairn India, ONGC and the central government for the Rajasthan blocks. The amendment would allow the Union government to directly compensate ONGC.

By altering a specific contract, as opposed to making a policy change that affects 70-odd royalty deals that are in the same situation as ONGC, the government will not need cabinet clearance, speeding up the deal. The government would like to resolve the royalty issue quickly, as it is looking to sell 5 per cent in ONGC through a public issue by March 2011; if the royalty issue is still pending, it might lower the valuations the government gets.

However, the Cairn-Vedanta deal, pending for about four months, might run into another hurdle. If the delay continues, Vedanta Resources might ask Cairn Energy, Cairn India’s Scottish parent, to lower the deal price, a person involved in the transaction said last Thursday.“The change in crude prices and scrip movements will be variables we will have to keep in mind as the deadline approaches,” he said. The deadline for the deal is April 15, which can be extended by one month.

Cairn cannot sell stake to Vedanta without govt nod

In A significant development, the law ministry has opined that UK’s Cairn Energy cannot sell stake in its Indian unit to Vedanta Resources without government nod for transfer of control in all its properties including the giant Rajasthan oilfields . 

“We had been criticised for being overzealous and so we took the opinion of the law ministry which has unequivocally stated that Cairn Energy must apply and seek government approval in all of its assets in India,” an oil ministry official said here. 

The Edinburgh-based firm, in its August 16 announcement for sale of its 40-51% stake in Cairn Indiato London-listed Vedanta Resources for $8.48 billion, did not say the deal was conditional on government approvals. 

On being shown the relevant provisions of the contracts for exploration it has with the government, Cairn Energy, about a month later, made an application for permission that left out all of its three producing properties including its mainstay 6.5-billion barrels Rajasthan block. 

“The law ministry in an opinion sent late last month has clearly held that the share sale is nothing but transfer of control (in all of the 10 properties of Cairn India) and so government nod is required in all of them,” the official said. 

Previously, the Solicitor General of India, the nation’s second-highest law officer, had held the same view on being asked for advice by Oil and Natural Gas Corporation. 

“Cairn India is primarily an aggregation of interests that it holds directly or indirectly through its subsidiaries in 11 blocks (in India and Sri Lanka). A transfer of controlling stake in Cairn India amounts to a transfer of the respective participating interests, therefore necessitating government approval,” the official said. 

And transfer/sale/assignment of interest to third party will trigger pre-emption rights of state-owned ONGC , which partners Cairn India in most of its properties. 

The official said Cairn was awarded exploration blocks on the basis of the group’s financial strength, technical capabilities and past experience in the area of exploration and production of oil and natural gas worldwide including operatorship experience. 
Vedanta on the other hand would not have won a single block on its own due to lack of experience in oil and gas sphere. But by acquiring Cairn India, it is “circumventing the technical expertise criteria required for bids and assignment (in oil and gas properties),” he said. The new owner of Cairn India will have to meet the technical expertise criteria set for operations of complex oil and gas fields. 

Cairn says the Vedanta deal is only a corporate transaction involving share transfer which does not trigger issues like examination of new owners’ technical capability and ONGC’s pre-emption rights.

ONGC blocks $500 million payments to Cairn

Cairn Energy , struggling to get approval for its $9.6-billion deal to sell its Indian unit to Vedanta Resources , is getting mired in more problems as its day-to-day operations and expansion plans are suffering in the wake of simmering tensions with the oil ministry and state-owned partner Oil and Natural Gas Corp (ONGC). 

ONGC, which is the licensee and a 30% owner in the oil-rich Rajasthan block operated by Cairn, has held back $500 million to Cairn India alleging that the expenditure had been inflated, a director in the company, who did not want to be named because of the sensitivity of the matter, said. 

“Cairn spent money over and above the approved budget. ONGC is a PSU, it is public money. We can’t spend it without approvals,” he said. 

The money was spent by Cairn, the operator, on a particular pipeline as well as capital expenditure and operating costs. ONGC reimburses Cairn its share of the expenditure as it is a partner in the block. The state-owned firm has raised objections on several items in recent months and its share of the expenditure, which it has not paid so far, has accumulated to about $500 million now. 

“Both capital and operating expenditure are inflated under various heads, I don’t remember individual items. We are examining them and legitimate expenditures will be reimbursed,” the official said. 

Cairn India director (corporate affairs & CSR) Manu Kapoor, in an emailed response to ET, did not specifically comment on the payment issue. 

Mr Kapoor said: “We remain committed to maximising the resource and production potential from the Barmer basin working jointly with our joint venture partner ONGC and GoI (government of India). With active support from our joint venture partner ONGC, we have made very significant achievements — going from discovery to first oil in a little over five years, and we are currently producing at 125,000 barrels per day (bpd) with the potential to significantly enhance this production.” The ONGC spokeswoman declined comment. 

A person close to Cairn said the company was facing several hurdles in its operations, as ONGC had even refused to sign the minutes of crucial meetings of the management committee while government authorities had not approved the company’s plans to ramp up production to 150,000 bpd from the current level of 125,000 bpd. 

The company is ready to raise output, which would boost its revenues significantly, he said. An official in the directorate general of hydrocarbon (DGH), the oil ministry’s arm that evaluates such proposals, said Cairn’s application for raising output was being studied. 

“We are examining the matter. No decision can be taken in haste. We have to make sure that extracting additional oil does not damage the reservoir,” the official, who did not want to be identified, said. 

DGH and the oil ministry are represented in the management committee of every oil and gas block. The management committee for the Rajasthan block, which also includes executives from Cairn and ONGC, approves budgets, development plans and other operational matters. 

Another official said DGH was also studying ONGC’s contention that Cairn had inflated expenditure on pipelines transporting oil by road to customers. Officials were also examining alleged violations in exploration expenditure. 

“One of such items was the pipeline. Cairn spent an additional $159 million on laying it to transport crude oil from the Barmer field to the Gujarat coast. The approved cost of the pipeline was $941 million,” a DGH official said requesting anonymity. 

Cairn has so far spent $2.6 billion on the Rajasthan oil field development, company executive director & chief financial officer Indrajit Banerjee had told analysts in a conference call on October 28.

ONGC has no pre-emption rights: Cairn

In a strong rebuttal, Cairn Energy has told Oil and Natural Gas Corp (ONGC) that its decision to sell majority stake in its Indian unit to Vedanta Resources does not trigger the state-owned firm’s pre-emption rights. 

The proposed transaction, valued at $8.48 billion, “is at shareholder level involving the sale of 40-51% shares ofCairn India (and) there will be no change to, or assignment of, the participating interest” in any of the 10 properties held by the company, Cairn Energy wrote on October 29. 

ONGC had, on October 21, written to Cairn Energy saying that the “change of control of Cairn India and acquisition of majority stake therein by Vedanta Resources amounts to an effective assignment/transfer of participating interest” (or sale of stake in the asset like the Rajasthan block). 

ONGC is partner in all the three producing fields held by Cairn India and has interest in most of its seven exploration blocks, awarded under the New Exploration Licensing Policy (NELP). 

While the NELP blocks have explicit provisions for seeking government and partner nod for transfer of control in the company, the contracts for the three producing properties make that necessary only in case Cairn India was to sell its stake in them, individually, to a third party. 

“As previously stated, following review of contractual documentation, we have been advised by external legal advisers and senior counsel in India that the provisions you refer to in both the pre-NELP and NELP joint operating agreements do not apply in respect of a proposed sale of shares in Cairn India,” Cairn Energy said. 

As requested by ONGC, Cairn Energy provided a complete copy of the sale and purchase agreement. ONGC, on October 21, wrote to Cairn Energy, saying it had preemption rights and asked for value of each of the 10 assets held by the British firm’s Indian unit so as to enable it to “decide on the future course of action.” 

“As you will see from the agreement, there is no value assigned to individual (assets): the asset that is subject to the agreement is the shareholding in Cairn India, not the individual licence interests,” Cairn Energy wrote. It said “all of the Indian operating expertise of the Cairn Group resides within Cairn India, and not (in) Cairn Energy. This will remain the case even if Cairn Energy ceases to be the controlling shareholder.” 

“We can also confirm that there are no planned changes in the organisation, standards, policies and systems of the Cairn India Group,” it further said. 

“The transaction will have no effect upon the knowledge and experience of the Cairn India Group as a PSC contractor, or that of Cairn India Group, operating in line with accepted international petroleum industry practice.”