Cess-burdened ONGC delays Lakshmi drilling

Vol 20, PW 6 (01 Dec 16) People & Policy

Contrary to what we thought earlier, Cairn India is not to blame for delayed development drilling at the Lakshmi field that sits inside Cambay basin block CB-OS/2.

Sources close to Cairn tell us the real culprit is ONGC and its age-old complaint about shouldering the full cess and royalty liability at pre-NELP blocks like this. Cairn accepted bids in February 2016 from Greatship India, Aban Offshore and Shelf Drilling to drill three firm and one optional well but can't award contracts because ONGC refuses to clear the $70m investment.

For close to a year ONGC has been petitioning the oil ministry to reduce its share of cess and royalty payments in proportion to its 50% stake in the field. "Right now ONGC is paying the full 20% cess on production," says a source.

"But with oil trading at nearly $45/barrel any new investment is a bad proposition for ONGC." Some expect the ministry to take a decision within the next month so drilling can begin in 2017 if not this year. But don't hold your breath: any ministry decision will impact all ONGC's pre-NELP joint ventures.

One source argues certain PSC articles give ONGC an option for "economic equilibrium" or cess-sharing. In August oil minister Dharmendra Pradhan also asked the finance ministry to cut cess from 20% to 10-12% ad-valorem.