Saturday, July 2, 2011
CAIRN-VEDANTA DEAL - CCEA APPROVAL = IMPLICATIONS =
CAIRN – VEDANTA DEAL
The Government of India , Cabinet Committee on Economic Affairs (CCEA) has finally cleared the CAIRN-VEDANTA deal, after 10 months of delay – with FIVE main conditions. This was based on the earlier GOM recommendations. The five conditions are :
(i) Cairn India must allow cost recovery of royalty on Barmer crude from the revenue it earns from the field. Royalty must be computed as a Cost –to be shared by the developers.
(ii) CAIRN must withdraw the arbitration case against the government.
(iii) No-objection certificates must be obtained from Cairn India partners,
(iv) Approvals from regulatory bodies such as SEBI are to be obtained and
(v) Security clearance must be obtained from the home ministry
Also, it is to be seen if written approval of ONGC is also to be insisted – for not imposing its pre-emption right.
As per condition,1 - royalty is now to be computed as a cost to be shared by the developers Cairn India and ONGC.
Royalty, as per original Policy, was a levy to be paid by the oil exploration company (Originally ONGC) to the state government where exploration is carried out.
Initially, PSUs like ONGC got many of these blocks for exploration, but their exploration efforts did not yield many finds. Hence, government gave PSUs the option to allow private players to explore these blocks.
According to this - in cases like Barmer, the PSU licensee like ONGC continues to remain as licensee. It can now transfer the exploration costs and risks to a private partner. But, in case of a oil / gas find, the PSU (ONGC) is entitled to a 30% interest.
Rajasthan Barmer was one such block. ONGC’s exploration effort yielded no result from the field. So, ONGC gave it to Shell, which sold it to Cairn, whose efforts to strike oil / gas in the field were eminently successful. After several years of successful operation, CAIRN, for its own reasons, has chosen to sell off most of its stake to Vedanta, which makes Vedanta the majority shareholder in the company. ONGC has not chosen to stake its claim for this majority stake – though it will now retain 30% interest without the exploration risks.
In August 2010, Vedanta Resources announced purchase of up to 60 per cent stake in Cairn India. But, petroleum ministry insisted on its own consent for the deal, which will be considered on written applications from CAIRN.
Subsequently, the GoM recommended on May 27 that royalty would have to be cost-recoverable, for the deal. This reduces Cairn India’s profits.
Due to this, Cairn Energy, which owns a majority stake in Cairn India, was forced to lower the price at which it would sell its 40 per cent stake to Vedanta at Rs 355 per share instead of the earlier agreed price of Rs 405. Vedanta already has an 18.5 per cent stake in Cairn India.
Since, royalty and the cess of Rs 2,500 per tonne are now cost-recoverable, these will be payable after reducing them as costs, from the Incomes. The overall estimated royalty is Rs 18,000 crore and the cess is about Rs 13,000 crore over the life of the field.
Some view that – CAIRN Energy, even after these conditions, gets a decent return on the initial Investments it has made, about a decade ago.
Vedanta Resources finally gets a foothold in the Oil exploration sector in India. The 2 companies have also removed the non-compete clause – enabling both of them to participate in exploration contracts anywhere.
ONGC’s FPO plan (for 5% equity) is now expected to go through smoothly in the market – as and when it is announced.
Now – if CAIRN agrees to all these conditions set by Government, and the required approvals come through, the deal with Vedanta will be through.
It appears that – now, ONGC will pay royalty on its 30% share of oil from Rajasthan fields as well as on operator Cairn India's 70% take. It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost, which is first deducted from revenues earned from sale of oil before profits are split between partners.
It is also understood that lower profits have been calculated now, (compared to earlier calculations) at approved peak output of 175,000 barrels a day and considering a crude oil price of $70 per barrel.
These finer details will however be known when the CCEA decision is received by ONGC and CAIRN and examined by them fully.
Earlier, Vedanta’s open offer for Cairn India received a total of approximately 155 million shares, representing 8.1% of the company’s share capital. Following this, the holding of Sesa Goa (a subsidiary of Vedanta) in Cairn India went up to 18.5% of the total share capital.
SOME CONCERNS :
There are however some concerns voiced by some of the experts.
Under the PSC, Petroleum Ministry says – consent of Govt is a must for transfer of stake from CAIRN to Vedanta. But, whether giving consent empowers changing conditions of PSC is a debatable point. CAIRN initially did not seek consent but later sought consent – which is now cleared with the 5 preconditions as above.
By giving conditional approval to the Cairn-Vedanta deal, the government may have unwittingly set doubts in the minds of reputed exploration firms on the future Production sharing contracts. Will this affect the competition in future exploration efforts?
Also, Will the other PSCs also be reviewed in the same manner?
For India, Oil/Gas and energy self sufficiency is much more important compared to Royalty payments issues of PSUs. Any Government Policy must take care of attracting the best talent – for successful exploration efforts. This must be the main concern.
FUTURE OF CAIRN INDIA :
While complete clarity is yet to come on many issues discussed above and some of the uncertainties arising from Government decision remain to be clarified – the future of CAIRN INDIA as such seems to be quite good. The present rate of progress of the company is reasonably good.
Vedanta (through CAIRN INDIA) can, after the deal is through, go for contracts in other countries, like Sri Lanka.
If the Rajasthan and other fields yield more oil / Gas in future – the profitability of CAIRN to that extent will improve further.
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