New Delhi (Agencies): The Oil Ministry may refer mining group Vedanta Resources' buyout of Cairn India to the Cabinet, as a disagreement over Cairn's main oilfields in Rajasthan has stalled sanction to the $9.6 billion contract.


Oil and Natural Gas Corporation not just pays royalty on its 30 per cent share of oil from the Rajasthan block, but also on partner Cairn India's 70 per cent share, making the nation's largest onland fields a losing proposition for it.

ONGC is also contractually bound to pay Rs 2,500 per tonne cess on all of the 12 million tonnes of projected crude oil output from the fields in the 3,111 sq km block, said Cairn.

Cairn and Vedanta have strongly opposed its plan to make partners share the levies equitably.

With the stand-off continuing, the Oil Ministry has planned to present the case to the Cabinet Committee on Economic Affairs for important directions, sources said.

ONGC, by virtue of its stake in eight out of the 10 oil and gas properties held by Cairn India, said that it has preemption rights over the contract. It has asked Cairn to give details of the deal, including asset-wise assessment, so as to decide on exercising its pre-emption rights.

Cairn has rejected the state-owned firm's pre-emption or right of first refusal.

According to the Ministry, a careful reading of the Rajasthan Production Sharing Contract shows that while the ONGC would be accountable for paying the statutory duties, these outgoes are to be shared by Cairn India and the state-owned firm through inclusion in the costs.

Cairn is opposed to this, as it will hit its profits and valuation. It says only contractor cost form project cost and can be recovered from sale of oil, sources said.

On the other hand, ONGC's royalty liability is a licensee rate, which contractually cannot be made cost recoverable.

ONGC is the licensee of the Rajasthan block and has got 30 per cent stake upon a discovery being made in the area for free. It did not gain any risk capital.

As per the PSC, the profit for Cairn India, ONGC and the government is calculated after deducting capital and operating expenses and royalty from the oil price realised.

The proposal to the CCEA may state that though the cost recovery of royalty would have an impact on the profit petroleum share of the government and Cairn Energy, ONGC's entitlement "cannot be overlooked" as it was based on the PSC.

Government will be absolved of its commitment to reimburse the statutory levies ONGC pays on behalf of partners in case they are made cost recoverable.

Sources said at the February 6 meeting Cairn and Vedanta besides refusing to agree to share royalty or cess cost, also rejected the precondition of furnishing an undertaking to accept government decision on issues under litigation or on spending being carried out by Cairn outside the work program.

Both firms also refused to withdraw the arbitration cases saying that "these matters cannot be negotiated at a time when the sale transaction is taking place". They declined to provide transaction details of their share sale to ONGC saying that "it would affect the minority shareholders' interest".

They had also refused to seek government consent "unconditionally" for the share sale, an issue - which the ministry says - could affect the government's position vis-à-vis operators in other PSCs.

Cairn had on November 23, more than three months after the deal with Vedanta was announced, made a conditional application for government nod.

Vedanta, which has no prior experience in oil and gas sector, is agreeable to other conditions like giving financial and performance guarantees and maintaining technical capability of Cairn India.