Annual cess bill of $158m if Cairn loses the argument

Vol 8, PW 21 (26 Jan 05) People & Policy

Look to the production profile of RJ-ON-90/1to understand why Cairn so fiercely opposes paying production tax (cess) when oil starts flowing.

RJ-ON-90/1 holds an estimated 45m tonnes of recoverable crude. At todays figure of Rs1800 per tonne, the total cess liability would be a staggering Rs81bn ($1.8bn).

As 70% equity holder, Cairns share would be $1.3bn. If Cairn produces oil at 5m t/y over seven or eight years as it has indicated, its liability to Delhi in cess payments on commercial production would be approximately $158m per annum.

But production from the block is still two years away and many are asking why Cairn is raising this issue now. Cairn argues it had to disclose this in line with London Stock Exchange guidelines but some in the Indian oil ministry suspect Cairn is trying to embarrass it during the NELP-V roadshows that are underway.

They are trying to squeeze out an exemption (from cess) while the roadshows are on, reveals a source. We cant think of any other reason.

Cairn has agreed to help the Indian government by highlighting its exploration and production success in India to attract more overseas companies to bid for blocks under NELP-V. Some in the ministry believe Cairns only motive is to have the tax amount frozen at Rs900 per tonne, the prevailing figure when the Rajasthan PSC was signed.

They could invoke the fiscal stability clause in the PSC for this, adds a source. But the law ministry and the finance ministry will decide on that.

Cairn hasnt yet submitted any formal proposal to the ministry on this issue. Cairn has told the London Stock Exchange that cess could be capped at Rs900 per tonne, he adds.

But we havent got any request from them yet. Cairns position is contradictory, believes one official.

On one hand they say they shouldnt pay. On the other they say cess should be frozen at Rs900 per tonne.

LNG Summit