Cairn's Rajasthan oil block licence stuck in cost dispute; hangs by monthly extensions

Sep 14,2020

Billionaire Anil Agarwal-led Cairn India's Rajasthan oil block licence extension is stuck in a cost conflict and the company basically manages to survive on government-led monthly extensions, sources said. In October 2018, the Government agreed to extend the contract for Barmer fields in Rajasthan by 10 years after the expiry of the early contract period of 25 years on May 14, 2020. This extension was subject to Vedanta Group firm agreeing to increase by 10 per cent the share of government benefit from the block's oil and gas produced.

While Cairn protested against the additional payout and took the government to court, the extension was subsequently deferred due to the government alleging additional petroleum benefits after re-allocating Rs 2,723 crore common costs between various fields in the block and disallowing Rs 1,508 crore costs on a pipeline, private sources said.

Until the extension is approved, the government requires the company to clear the debts, they said adding the company disputed the demand and issued an arbitration notice to settle the discrepancies.

Pending resolution, the government first granted the company a three-month extension of the Rajasthan block production sharing contract (PSC), which houses the prolific oilfields of Mangla, Bhagyam and Aishwariya, till 15 August 2020.

It subsequently extended the PSC by 15 days and then by a month till September 30, sources said.

When contacted, a company spokesman said, "The Rajasthan PSC requires an extension on the same terms for a 10-year span for commercial gas development, and we are eligible for extension accordingly."

The block, it said, produces over 20 per cent of India's crude oil production and has the capacity to double that over the next three years.

"It requires a reduction in fiscal levies and administrative support for timely approvals. We have submitted a few problems to arbitration that we were unable to settle jointly. We are hopeful to see any good results, we are committed to delivering in this block, and we make a significant contribution to a self-reliant economy," the spokesman said.

Sources suggested that on 26 October 2018, the Directorate-General of Hydrocarbons (DGH), the Oil Ministry's upstream nodal body, issued its approval for a ten-year extension of the Rajasthan Block (RJ) Production Sharing Contract (PSC), with effect from 15 May 2020, subject to payment of additional petroleum profits.

Cairn challenged it before the Delhi High Court and the matter is sub-judice. The company also had a dispute with its partner state-owned Oil and Natural Gas Corp (ONGC) over investments made in the block, which held up the computation of the government's share of profit petroleum for fiscal years ending March 31, 2019, and March 31, 2020.

Oil and Natural Gas Corporation holds 30 per cent interest in the block while Cairn Oil & Gas, a unit of Vedanta Ltd, is the operator with a 70 per cent stake.

Sources said DGH had way back in May 2018 raised a demand additional share of profit oil for the government after disallowing Rs 1,508 crore out of the cost incurred on laying a heated-pipeline to transport Barmer crude and Rs 2,723 crore in the reallocation of certain common costs.

These costs pertain to only Cairn's share in the Rajasthan block as ONGC has agreed to pay the government if these costs are disallowed.

In all, Rs 4,828 crore, including interest, is being sought to be disallowed for 2017-18 fiscal.

The company believes that it has sufficient as well as a reasonable basis for having claimed such costs and for allocating common costs between different fields, sources said adding it believes that the conditions linked to PSC extension are untenable.

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