New Delhi: State-owned Oil and Natural Gas Corp (ONGC) on Tuesday said it may on September 27 decide on giving its consent to UK's Cairn Energy Plc selling majority stake in Cairn India to London-listed Vedanta Resources.
ONGC, which holds stake in 8 out of the 10 oil and gas properties Cairn India has in the country, holds pre-emption or right of first refusal.
"We have to do valuation of the properties if ONGC should buyout Cairn India or not. A lot of work is being done... we are in the process of doing due diligence. The final call will be taken by the company board which is slated to meet next on September 27," ONGC Chairman and Managing Director AK Hazarika told reporters in New Delhi.
Cairn Energy has agreed to accept all government conditions, including sharing royalty and paying cess on the all important Rajasthan oil block. Since, Cairn India is opposed to the riders; it has demanded that company shareholders should vote on acceptance of them. Cairn Energy with 52.11 per cent stake and Vedanta's 28.5 per cent are all set to overrule Cairn India and accept the conditions.
"They (Cairn Energy) have written to us, saying they are accepting the conditions and results of the shareholder vote will be announced by September 14. Thereafter, they will write to us for no-objection certificate and we will take it to the next board meeting," he said.
Thus far, Cairn Energy had rejected existence of any pre-emption rights of ONGC and its deal to sell 40 per cent stake in Cairn India triggering them. But the government approval to the $9 billion deal made it conditional on Cairn getting a no-objection certificate from ONGC.
"NOC and right of first refusal are the same thing," Hazarika said, adding that the company board will have to decide if acquiring Cairn India at Rs 355 per share -- the price Vedanta is paying Cairn Energy -- was economical to it.
Cairn Energy Managing Director and CFO Jann Brown on August 16 wrote to Hazarika asking ONGC to begin the process of deciding on its consent so that NOC is granted by September 21.
Hazarika said Cairn has to first apply formally requesting waiver of the ROFR, or in other words a consent for its deal with Vedanta. That letter Cairn can write only after it accepts to make royalty payments on Rajasthan block cost recoverable and withdraw arbitration challenging Cairn India's liability to pay cess on its 30 per cent stake in the fields.
Cairn India does not pay any royalty on its 70 per cent interest in the Rajasthan fields. The royalty, as per the contract, is paid by ONGC, which got a 30 per cent stake in the 6.5 billion barrel field for free. However, the royalty like other project cost and taxes is recoverable from revenues earned from sale of oil.
ONGC Director (Finance) DK Sarraf said ONGC had paid about Rs 2,000 crore in royalty on its share and on that of Cairn India up to March 31, 2011.
Once royalty is made cost recoverable, two-third of it will come back to ONGC.
Similarly in first quarter, it paid Rs 780 crore in royalty, two-third of which will come back to the company.
The Cabinet Committee on Economic Affairs (CCEA) on June 27 gave consent to the Cairn-Vedanta deal, but subject to Cairn or its successor agreeing to deducting the royalty paid by ONGC from revenues earned from sale of oil before profits are split between the partners.
This cost recovery of royalty will lower Cairn India's profitability.
Also, the CCEA said Cairn India must pay a Rs 2,500 per tonne cess on its 70 per cent share of oil production. Cairn maintains that cess, like royalty, is a liability of ONGC and had initiated arbitration against the government on being forced to pay cess.
Since the Cairn-Vedanta deal was announced in August last year, Cairn India has been opposed to making royalty payments recoverable from the sale of oil and the company being made liable to pay a Rs 2,500 per tonne cess, as this was not in line with the Production Sharing Contract (PSC).
A change in the contract was neither in the interest of the company, nor its minority shareholders, it has maintained.
Last August, Vedanta proposed buying a 51-60 per cent stake in oil and gas explorer Cairn India for up to $9.6 billion in cash, but the deal has been delayed awaiting government and regulatory approvals.
A Group of Ministers headed by Finance Minister Pranab Mukherjee had recommended to the Cabinet that the deal should be approved if Cairn or its successor agreed to royalty being added to the project cost and recovered from oil sales, as well as agreeing to pay its share of oil cess.
Days before the CCEA accepted the GoM recommendation and gave conditional approval, Cairn Energy lowered the price it was demanding from Vedanta to make up for the reduced profitability due to acceptance of the preconditions.
It removed a non-compete provision and the related non-compete fee of Rs 50 per share.
Vedanta's total payment, at the reduced price of Rs 355 per share for a 40 per cent stake in Cairn India, will now be $6.02 billion, instead of $6.84 billion earlier.
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