ONGC likely to file papers for FPO after Cairn verdict

New Delhi: State-owned Oil and Natural Gas Corp (ONGC) is likely to file papers for a Rs 11,500 crore share sale after the government gives its verdict on its dispute with Cairn India.

ONGC is in dispute with Cairn India over royalty payments on the later’s showpiece Rajasthan oilfields and the government is expected to give its verdict when Cabinet decides on UK’s Cairn Energy selling stake in its Indian unit to London-listed mining group Vedanta Resources.

Informed sources said ONGC has to mention about its dispute with Cairn in the red herring prospectus (RHP) it will file for sale of 5 per cent, or 427.77 million shares, through a follow-on public offer. It will add the government stand along with the dispute in the RHP, likely to be field next month.

The Cabinet Committee on Economic Affairs (CCEA) may decide on the USD 9.4 billion Cairn-Vedanta deal next week and state that it backs ONGC’s claim of royalty paid on crude oil from Rajasthan oilfields being cost recovered.

ONGC owns 30 per cent interest in the Rajasthan oilfields, but has to pay royalty at the rate of 20 per cent of the crude oil price realised on all of the 240,000 barrels per day of peak output expected from the fields.

It had cited provisions in the Production Sharing Contract (PSC) in July last year, more than a month before the Cairn-Vedanta deal was announced, to demand that royalty like other taxes and levies should be deducted (recovered) from the sale proceeds of oil before the profits were split between partners and the government.

Cairn as well as Vedanta have opposed ONGC’s demand.

Sources said a Group of Ministers headed by Finance Minister Pranab Mukherjee has backed ONGC’s claims and has suggested to the CCEA that approval to the deal be given only if Cairn or its successor agrees to cost recovery of royalty.

ONGC is likely to file RHP after the June 30 meeting of the CCEA which is expected to consider the Cairn-Vedanta deal.

At a USD 70 per barrel oil price, ONGC will pay Rs 12,600 crore in royalties on Cairn India’s 70 per cent share in the oilfield, making India’s largest onland fields a losing proposition for it.

Sources said Cairn has also disputed its liability to pay oil cess at the rate of Rs 2,500 per tonne on its 70 per cent share in the Rajasthan fields, saying ONGC is also liable to pay cess on its behalf, like in the case of royalty.

The government has rejected this position as the PSC imposes the royalty liability on ONGC, but is silent on cess, meaning partners have to pay in proportion to their share.

Cairn has disputed this and initiated arbitration.

The GoM has recommended that Cairn withdraw the cess arbitration and agree to pay its share of cess as the second pre-condition for Cabinet approval.