British High Commissioner to India Richard Stagg has written to the Prime Minister`s Office (PMO) on March 31, saying that an approval subject to state-owned ONGC being allowed to recover Rs 14,000 crore royalty -- payable on behalf of Cairn India -- will render the transaction unviable, sources privy to the development said.
Oil and Natural Gas Corp (ONGC) has 30 per cent stake in Cairn India`s mainstay Rajasthan oilfields, but it is liable to pay royalty on Cairn`s 70 per cent share as well.
Royalty at the rate of 20 per cent of the crude price is payable to the state government and ONGC, a month before the Cairn-Vedanta deal was announced in August 2010, had cited provisions of field contract to demand its cost recovery.
The Oil Ministry is backing the ONGC demand that royalty payment be added to the project cost, which can be recovered from the sale of oil before profits are split between the partners and the government.
However, such a move is being opposed by Cairn Energy and Vedanta as it will lower Cairn India`s profitability.
"...a decision to approve the transaction on the basis of such a pre-condition would fundamentally change the commercial basis upon which the transaction had been agreed as well as unfairly impact minority shareholders in Cairn India," Stagg wrote.
"It would therefore render the proposed transaction unviable," he added
Stagg mentioned that since CCEA was meeting on that day (March 31), he "thought it would be useful" for him to bring to PMO`s attention the issue of pre-condition.
However, the sources said CCEA did not meet that day and Stagg`s letter may have been triggered by media reports of a Cabinet meeting on that day.
The CCEA met on April 6 and referred the issue of attaching pre-conditions to a Group of Ministers (GoM), headed by Finance Minister Pranab Mukherjee. After the GoM decision, the issue will be sent to the cabinet.
"Whilst arguments may be made as to whether or not royalty may be cost recoverable under the provisions of the current Production Sharing Contracts, there are provisions in the contract to deal with any dispute over whether it is or it is not," Stagg wrote.
An e-mail sent to the British High Commission here seeking comments remained unanswered.
Vedanta, a mining company controlled by billionaire Anil Agarwal, with no experience of oil and gas business, agreed in August to buy at least 40 per cent and as much as 51 per cent in Cairn India from the London-listed Cairn Energy.