Cairn Stops Paying Royalty On Rajasthan Oil After Differences With ONGC
Pedestrians walk past the Oil and Natural Gas Corp. (ONGC) office at the Bandra Kurla Complex in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Cairn Stops Paying Royalty On Rajasthan Oil After Differences With ONGC


Cairn Oil & Gas, a vertical of mining billionaire Anil Agarwal-owned Vedanta Ltd., has stopped paying its share of royalty on oil produced from its Rajasthan block following differences with partner Oil & Natural Gas Corporation Ltd. on cost recovery.

As much as $400 million of royalty dues since July 2017 haven’t been paid to state-run ONGC, people in the know said. ONGC is the licensee of the Barmer block in Rajasthan, home to India’s biggest on-land oil discovery to date, and is responsible for payment of royalty at the rate of 20 percent of the oil price on the entire output from the field irrespective of its stake.

However in 2011, when ONGC gave its nod to Cairn India Ltd. being taken over by Vedanta, it was agreed that the two partners would pay for royalty in proportion to their share—so Cairn was to pay for royalty on its 70 percent share of oil and ONGC on 30 percent. This was to be done by way of reimbursement—ONGC would initially pay royalty on 100 percent of the oil produced and Cairn would reimburse it for 70 percent soon after.

Sources said this reimbursement stopped in July 2017 with only sporadic payments coming in some months. Reached for comments through a detailed questionnaire, a Cairn spokesperson said, “The suggestion that Cairn has outstanding dues towards the joint venture partner is incorrect”, without elaborating. ONGC officials said there were disputes between the partners and problems in receiving royalty reimbursements from Cairn.

The people cited earlier said the royalty reimbursement stopped followed dispute over recovery of exploration cost. The government had a few years ago allowed exploration for oil and gas within an area that already has an oil or gas discovery and has been earmarked as production area.

The exploration cost so incurred was allowed to be deducted as expense from revenue earned from sale of oil. Profit earned after allowing for such exploration and development expense was to be shared with the partners and the government. However, ONGC disputed some of the exploration expense incurred by Cairn and did not agree to them being cost recovered. Cairn initiated an arbitration against ONGC to resolve the issue, they said.

The company spokesperson, without directly saying an arbitration has been initiated, said: “An operation of this scale and complexity, as a matter of course has varied perspectives among different stakeholders. The Production Sharing Contract provides several mechanisms to resolve such routine issues, which are regularly pursued by the parties involved to make sure we all keep moving forward in the interest of the nation.”
BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.