New Delhi (Agency): Oil regulator DGH and Petroleum Ministry have refused to take a stand on ONGC's demand to recover royalty it pays on oil produced from Rajasthan block, an issue that has threatened to derail Vedanta Resources’ USD 9.6 billion acquisition of Cairn India.

Oil and Natural Gas Corp (ONGC) owns 30 per cent in Cairn India's mainstay Rajasthan block but is liable to pay royalty on the entire output from the field. The state-owned firm now wants to recover the statutory levy it pays from sale proceed of Rajasthan crude oil.
    
The Management Committee (MC), which besides Cairn and ONGC comprises of representatives of the ministry and Directorate General of Hydrocarbons (DGH), discussed ONGC's demand at a meeting on January 24, sources in know of development said.

At the MC meeting, the first ever on the issue, D N Narasimha Raju, Joint Secretary (Exploration) – officer incharge of upstream business in the Oil Ministry, and DGH Director General SK Srivastava said nothing on ONGC's demand. Sources said Raju and Srivastava refused to be drawn into the discussion and remained non-committal.

UK's Cairn Energy Plc is selling most of its 62.4 per cent stake in Cairn India to mining group Vedanta. Acceptance of ONGC's demand would lower profitability of Cairn India.

Sources said at the MC meeting Cairn India sited articles of Production Sharing Contract (PSC) for the Rajasthan block to vociferously state that royalty does not qualify to be part of project cost, which can be recovered from sale of oil.

As per PSC, all operating and capital expenditure is allowed to be first recovered from sale of oil or gas and profits for the stakeholders, including the government be calculated thereafter.

Cost recovery of royalty would adversely affect the economic interests of the government, Cairn India stated.

ONGC, sources said, was of the view that royalty was cost recoverable and the Management Committee can pass a resolution to that effect.

Cairn vehemently opposed such a move saying MC was a creation under the PSC to administer function of a block and it cannot take a view inconsistent with the PSC.

Dispute resolution mechanism is clearly set out in PSC, which needs to be taken recourse to rather than passing resolution at MC or referring the issue to the government, it said.

ONGC says the royalty liability makes the Rajasthan project economically unviable for it and wants to recover Rs 14,000 crore payable as royalty for partner Cairn India.

The state-owned firm owns interest in seven out of the 10 properties held by Cairn India and by virtue of which it claims pre-emption or right of first refusal (ROFR). It says Vedanta's acquisition of up to 51 per cent in Cairn India triggers its pre-emption rights.

While Cairn had reluctantly agreed to seek the government's consent for a change in ownership in all 10 properties, it has refused to recognise ONGC's pre-emption rights.

ONGC board had at its meeting on January 29 passed a resolution asking the government not to approve the Cairn-Vedanta deal until the issue of excess royalty it pays on Rajasthan crude oil is sorted out.

It wants the 20 per cent royalty paid to be added to the project cost, which can be recovered from the sale of oil. The move is being opposed by Cairn as it will lower its profits from the field that it says have a potential to produce 240,000 barrels per day.

Mangala field in the Rajasthan block is currently producing 125,000 bpd and there are a dozen more fields in the area.

Vedanta, a mining company controlled by billionaire Anil Agarwal with no oil and gas experience, agreed in August to buy at least 40 per cent and as much as 51 per cent in Cairn India from London-listed Cairn Energy.

The Indian government is reviewing the bid for Cairn India. Vedanta expects to get state approval for the transaction in February. Cairn Energy said it expects to conclude the sale by April 15.

Cairn India acquired a stake in the Rajasthan block RJ-ON-90/1 from Royal Dutch Shell Plc in 2002 and discovered oil in January 2004.

In the case of areas awarded under the New Exploration Licensing Policy (NELP) -- like the gigantic KG-D6 gas fields of Reliance Industries -- royalty can be added to the capital and operating cost of the block, which as per law are deductible from revenues earned on the sale of oil/gas before calculating profits for all stakeholders.

Rajasthan is a pre-NELP block.