Abolish ONGC royalty on pre-NELP blocks

Vol 8, PW 17 (17 Nov 04) Exploration & Production

ONGC is threatening to return ownership of several oil blocks to the government unless it is compensated for past payments of royalty.

Among those affected if ONGC carries out its threat to return the Petroleum Exploration Licence or Mining Lease to the government would be the Cairn Energy-operated CB-OS/2 block in Gujarat and its RJ-ON-90/1 block in Rajasthan as well as Hardy Explorations CY-OS-90/1 block, which contains the PY-3 oil and gasfield. These fields belong to a group of 28 assets in India awarded before the New Exploration Licensing Policy where ONGC or Oil India is licensee, but not operator.

PSCs for these blocks entitle ONGC to 30% of any discovery and the less attractive proposition of paying royalty to the government on any production on behalf of the consortium, something it is doing at PY-3, Lakshmi and Gauri (CB-OS/2) and will soon begin doing at Mangla and NA (RJ-ON-90/1). Unwilling to pay royalty any longer, ONGC is protesting loudly and in September highlighted the Cairn-operated RJ-ON-90/1 to illustrate that it will suffer major financial losses if it pays royalty on future production.

We have done a feasibility study and find that due to the burden on ONGC for statutory levies, the NPV works out to be negative. Scenario NPV at 10% discount factor $18/barrel $20/barrel $22/barrel $28/barrel 0% PI with 100% royalty $-346m $-385m $-462m $-577m 30% PI with 100% royalty and 30% cess $-350m $-349m $-340m $-343mONGC faces a similar problem at block CB-ON/7 in Gujarat where it is licensee but where Hindustan Oil Exploration is operator with 50% and Gujarat Petroleum holds the balance 50%.

ONGC has to decide whether to exercise its right to 30% of imminent production but is hesitating because of government inertia. Since the decision of the government is still pending, it is not possible for ONGC to decide whether to exercise its walk-in rights.

Support for ONGCs position is strong within the oil ministry, which since 1997 has been pressing cabinet to allow reimbursement of royalty and cess from pre-NELP blocks. But cabinet approval is still awaited.

If cabinet refuses, continues ONGC, it would be prudent to surrender such Petroleum Exploration Licences or Mining Leases and appropriate applications for each case will be submitted to the government.