Government to Seek Higher Revenue Share From Cairn India’s Rajasthan Oil Field

Cairn India Ltd. may get government approval for a ten-year extension to operate the Barmer, Rajasthan oil block it operates in partnership with Oil & Natural Gas Corporation Ltd., but the company will have to share more revenue with the government to do so.

A top ranking official in India’s ministry of petroleum and natural gas told BloombergQuint that the government is likely to offer an extension for 10 years to Cairn India as per the new policy for granting extensions to Production Sharing Contracts. The official requested anonymity as the government is yet to inform the Delhi High Court of its decision on allowing such an extension to the Cairn India - ONGC joint venture.

On March 10, 2016, the cabinet approved the policy for granting of extension to the PSCs. The policy says ‘Government share of Profit Petroleum during the extended period of contract shall be 10 percent higher for both small and medium sized fields, than the share as calculated using the normal PSC provisions in any year during the extended period.’

Profit Petroleum is the share of revenue that the government earns from sale of crude oil from oil discoveries in the country. This varies as per the investment made by the operating companies. Linked to an ‘Investment Multiple ratio’, the PSC is such that a higher investment leads to a lower percentage share of revenue for the government.

Oil and Gas Analyst and Deputy Vice President Research at Kotak Securities, Sumit Pokharna, terms this development as the lesser of two evils. Pokharna shared his views with BloombergQuint in a phone interview.

Cairn India’s Rajasthan block comprises Mangala, Bhagyam, Aishwariya, and Raageshwari oil fields. Cairn India has 70 percent participating interest in the block and government owned ONGC has 30 percent. Participating interest refers to the amount of crude each partner is entitled to after deducting the government’s share. The block was awarded to the joint venture under a nomination regime in 1995 for a period of 25 years.

According to the PSC, which laid out the terms for exploration and production, extension has to happen on mutually acceptable terms. In 2013, Cairn India, ONGC and the Ministry of Petroleum initiated negotiations for an extension to the PSC beyond 2020. The ONGC board approved the extension in January 2015. But Cairn India approached the Delhi High Court in December 2015, after a delay in outcome of negotiations with the government.

On July 28, 2016, BloombergQuint reported that ONGC, Cairn’s partner in the Rajasthan block, had informed the Delhi High Court that it has approved an extension to the production sharing contract with Cairn India for the Barmer oil fields in Rajasthan.

ONGC agreed to a 10-year extension of the contract with Cairn India, after the original contract expires in 2020. ONGC had sent the extension approval to the Ministry of Petroleum and Natural Gas, Shashi Prabhu, the counsel for ONGC, told the court then. “The government is now supposed to take the final decision,” Prabhu added. Cairn India had argued in court that it intends to further invest Rs 30,000 crore once clarity on the block extension emerges.

The government’s share of profit petroleum from Cairn India’s fields has halved over in last two financial years. In financial year 2014-15, the government got Rs 4,734.36 crore as profit petroleum, this dropped to Rs 2,363.97 crore in FY16. Commenting on an increase in the government’s revenue if the PSC is extended on new revenue share terms, Pokharna said, “The quantum of hike will depend on multiple factors and it will be unwise to put a number. Since there will be heavy investments, the government share will be falling into a lower matrix of profit petroleum. The fluctuating crude price will also be a factor that makes it difficult to assess the potential gain to the government.”

In July, the Delhi High Court gave the government five weeks to take a final decision on extending the Cairn India-ONGC contract. The High Court will now hear the case on September 9, after the Centre submits its final decision.