Oil min wants Vedanta to surrender its rights, disputes

In a move that is being seen as fresh arm-twisting, the Oil Ministry wants Vedanta Resources to surrender all its rights in past and future disputes and agree to several other stringent conditions if it wants government nod for acquiring majority stake in Cairn India.

New Delhi: In a move that is being seen as fresh arm-twisting, the Oil Ministry wants Vedanta Resources to surrender all its rights in past and future disputes and agree to several other stringent conditions if it wants government nod for acquiring majority stake in Cairn India.
Though the Prime Minister's Office had earlier this month asked the ministry to decide on giving approvals to the USD 9.6-billion acquisition on merit, the Oil Ministry has slipped in 11 pre-conditions that are unlikely to be accepted by the London-listed firm.
Sources in know of the development said the ministry has proposed to give "in-principle approval" to the transaction, if Vedanta agrees to withdraw pending lawsuits and accepts ministry's diktat on future petroleum operations in Cairn's mainstay Rajasthan block.
The ministry proposal is based on recommendation of the oil regulator Directorate General of Hydrocarbons (DGH), who is supposed to be the custodian of the contracts oil companies sign with the government for oil and gas exploration and production.
The contracts, called Production Sharing Contract (PSC), provide for a dispute resolution mechanism but DGH wants Vedanta to surrender all its rights under the same in order to get approval for acquiring 40 to 51 per cent stake in Cairn.
Sources said the pre-conditions, which have been referred to the Law Ministry to concurrence, states that Vedanta has to "give undertaking that the decision of the government would be final and binding" on all disputes on petroleum operations.
Further, it says the "government decisions/conditions (have to be) unconditionally accepted (by Vedanta) on the issues litigated by Cairn India and their associates".
The DGH on January 7 advised Oil Ministry to ask Vedanta to accept its decision on disputes unconditionally even though Cairn had won one of the three issues under arbitration.
Sources said the ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from the Rajasthan block in the project cost and its profits calculated thereafter.
As per PSC, a company is permitted to recover all project costs from the sale of oil or gas produced from a field before calculating profits for itself and the government.
State-owned Oil and Natural Gas Corp holds a 30 per cent stake in Rajasthan block RJ-ON-90/1, but pays the royalty on the entire quantum of production, as it is the licencee of the block.
If the royalty paid by ONGC on behalf of Cairn is taken into consideration while calculating the project cost, this would lower the profits of the Scottish energy firm, which does not pay royalty on its 70 per cent share of the projecte 12 million tonnes per annum output from the block.
Sources said the preconditions also include Vedanta guaranteeing that Cairn's technical capability will be undisturbed by the share transfer and the London-listed firm providing a fresh financial and performance guarantee.
The ministry also wants Vedanta to accept the government's decision on future exploration activities and expenditures as "final and binding", as well as unconditionally accept the government's position on issues that have been challenged by Cairn in courts.
Like royalty, Cairn believes the liability to pay cess of Rs 2,500 per tonne on all crude oil produced from the Rajasthan block also rests on ONGC.
This position has been disputed by ONGC and the ministry, which say that cess is to be paid by the project partners in proportion to their shareholding and the matter is under arbitration, sources said.
The ministry said its "in-principle approval shall be further subject to ONGC's decision on the right of first refusal" on the Rajasthan block, as the Solicitor General of India's view was that the transfer triggered ONGC's preemption rights.
According to PSC, the government consent in case of transfer of stake "shall not be unreasonably withheld" provided the buying company has sufficient financial standing and technical competence and is willing to guarantee them; is not incorporated in a country with which India has restricted trade or business; and, is willing to comply with any "reasonable conditions" necessary to ensure the contractual obligations.
Earlier this month, the Prime Minister Office had asked the Oil Ministry to decide whether to give consent to the deal by January-end, at least a month earlier than the deadline the ministry had set for itself.
The PMO had to press for an early decision as the approval accorded to the deal by shareholders of Cairn and Vedanta was valid up to April 15.
After acquiring Cairn Energy's stake, the London-listed firm's Indian unit, Sesa Goa, will make an open offer for an additional 20 per cent stake to minority shareholders of Cairn India.
Sources said going by the February-end deadline, Vedanta would have been unable to close the deal by April 15.
This is because the open offer, which can be made only after government consent to the deal, will have to remain open for subscription for atleast 60 days.
If the government decision on the deal was to come by February-end, the open offer could not have begun before the first week of March and it would have closed in April-end or early May, missing the April 15 deadline, they said.

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