Cairn India Ltd. may get government approval for a ten-yearextension to operate the Barmer, Rajasthan oil block it operates in partnershipwith Oil & Natural Gas Corporation Ltd., but the company will have to share more revenue with the governmentto do so.
A top ranking official in India's ministry of petroleum and naturalgas told BloombergQuint that the government is likely to offer an extension for10 years to Cairn India as per the new policy for granting extensions toProduction Sharing Contracts. The official requested anonymity as thegovernment is yet to inform the Delhi High Court of its decision on allowingsuch an extension to the Cairn India - ONGC joint venture.
On March 10, 2016, the cabinet approved the policy for granting ofextension 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 andmedium sized fields, than the share as calculated using the normal PSCprovisions in any year during the extended period.'
Profit Petroleum is the share of revenue that the government earnsfrom sale of crude oil from oil discoveries in the country. This varies as perthe investment made by the operating companies. Linked to an ‘InvestmentMultiple ratio', the PSC is such that a higher investment leads to a lowerpercentage share of revenue for the government.
Oil and Gas Analyst and Deputy Vice President Research atKotak Securities, Sumit Pokharna, terms this development as the lesser of twoevils. Pokharna shared his views with BloombergQuint in a phone interview.
It is positive that the government will allow an extension to Cairn India-ONGC. Because of this the reserve upgradation will be possible. The earlier view was that the government will not allow an extension. But the 10 percent additional profit petroleum will be negative for the company as they will have to shell out more. And considering crude prices are much lower, it will be a double whammy.Sumit Pokharna, Oil and Gas Analyst & Deputy VP-Research, Kotak Securities
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 entitledto after deducting the government's share. The block was awarded to the jointventure 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 inthe Rajasthan block, had informed the Delhi High Court that it has approved anextension to the production sharing contract with Cairn India for the Barmeroil fields in Rajasthan.
ONGC agreed to a 10-year extension of thecontract 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 nowsupposed to take the final decision,” Prabhu added. Cairn India had argued incourt that it intends to further invest Rs 30,000 crore once clarity on theblock extension emerges.
The government's share of profit petroleum from Cairn India'sfields has halved over in last two financial years. In financial year 2014-15, the government gotRs 4,734.36 crore as profit petroleum, this dropped to Rs 2,363.97 crore inFY16. Commenting on an increase in the government's revenue if the PSC isextended on new revenue share terms, Pokharna said, “The quantum of hikewill depend on multiple factors and it will be unwise to put a number. Sincethere will be heavy investments, the government share will be falling into alower matrix of profit petroleum. The fluctuating crude price will also be afactor that makes it difficult to assess the potential gain to thegovernment.”
In July, the Delhi High Court gave the government five weeksto take a final decision on extending the Cairn India-ONGC contract. The HighCourt will now hear the case on September 9, after the Centre submits its finaldecision.
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