A ministerial panel on Friday agreed to government granting approval to UK's Cairn Energy selling majority stake in its Indian unit to Vedanta Resources apparently without any pre-condition.
Cairn-Vedanta deal referred to CCEA, decision in two weeks
The recommendation of the Group of Ministers headed by Finance Minister Pranab Mukherjee will go to the Cabinet Committee on Economic Affairs (CCEA) in two weeks time, Oil Minister S Jaipal Reddy told reporters after the 75-minute long meeting.
Initial indications available suggest the GoM may have ignored the tougher option of asking Cairn or its successor to consent to paying cess on the all important Rajasthan block as well as agreeing to cost-recovery of Rs 18,000 crore in royalty that ONGC pays in the fields, as a pre-condition for the nod.
"It (GoM) has looked at various aspects of the (USD 9.6 billion) deal. It has taken a view on the matter. This view will be presented to the CCEA. GoM is not going to meet again," Reddy said.
Refusing to divulge what the GoM recommendation will be, the minister however stated that his ministry's previous stand of supporting ONGC's demand for royalty being made cost recoverable from revenues of Rajasthan block "may not be GoM's recommendation".
Oil Ministry had till January supported the view that consent to Cairn-Vedanta deal should be pre-conditioned to agreement on demand made by ONGC in July 2010, a month before the USD 9.6 billion deal was announced. However, after Reddy took over in late January, the ministry diluted the stand and suggested an alternative that consent may be given without any condition and the government "shall take appropriate decision to enforce cost recovery of royalty".
The GoM appears to have gone with the second option, which was strongly supported by finance ministry. In both the cases, Cairn will have to seek consent of state-owned Oil and Natural Gas Corp's (ONGC), which holds stake in 8 out of the 10 properties held by Cairn India in the country.
Also, Vedanta will need a security clearance from the Ministry of Home Affairs. Cairn has refused to accept the requirement of partner consent even though five oil blocks it won under New Exploration Licensing Policy (NELP) explicitly provides for obtaining no objection from partners in case of change of ownership.
It holds 70% interest in the Rajasthan block but does not pay any royalty. It is opposed to cost recovery of the Rs 18,000 crore royalty payments that ONGC has to make on its 30% and Cairn's share of production.
The CCEA had on April 6 constituted a GoM to look into the issue of conditional or unconditional consent to the Cairn-Vedanta deal. Today was the first meeting of the GoM which also comprised of Law Minister M Veerapa Moily, Telecom Minister Kapil Sibal, Commerce Minister Anand Sharma and Planning Commission Deputy Chairman Montek Singh Ahluwalia. Sharma did not attend the meeting.
"We have taken up the matter in right earnest. We have taken a view at our level. The decision has to be taken by CCEA," Reddy said. Solicitor General Gopal Subramaniam had in March opined that the government should not give unconditional nod to the deal but in April 6 slightly diluted it but reaffirmed the cost recoverability of royalty.
He however refrained from saying if this along with Cairn being made to pay cess should be made a pre-condition for approval. ONGC owns a 30% stake in Cairn India's mainstay Rajasthan block, but is liable to pay 20% of crude oil price as royalty on the entire output from the field. This
liability has made the project economically unviable for ONGC.
liability has made the project economically unviable for ONGC.
Cairn is also contesting its liability to pay a Rs 2,500 per tonne cess on its 70% share. But unlike royalty, it is treating cess as a cost-recoverable item. All cost-recoverable items like capital and operating expenditure are first deducted from revenues earned from the sale of oil before profits are shared between stakeholders, including the government.
Cairn Energy, which wants to sell at least a 40% stake in its Indian unit to Vedanta, and the London-listed mining group are opposed to making royalty cost-recoverable as it will lower the profitability of Cairn India