More delay in Rajasthan cost recovery for Cairn

Vol 11, PW 15 (29 Nov 07) People & Policy

Confusion surrounds the oil ministry’s delay in allowing Cairn India to include its proposed Rajasthan crude oil pipeline in the Mangala Field Development Plan and claim cost recovery â€کupfront’.

In September the oil ministry approved the Right of User (RoU) application submitted by Cairn and ONGC to lay a pipeline from Barmer in Rajasthan to Salaya on the Gujarat coast to evacuate crude from its Rajasthan fields. But strangely, the ministry refused to approve the application to include the pipeline cost in the FDP and claim cost recovery right away.

Oil minister Murli Deora, it seems, is still sitting on the file. Deora, we hear, has raised queries about payment of cess (tax on oil production) by Cairn, which has long argued that ONGC should pay because it is the block’s â€کlicensee.

’ Cess, according to the ministry, must be paid by the contractor, in this case Cairn and ONGC, in proportion to their interest in the field. Cairn India holds 70% and is operator; ONGC holds 30%.

Is the oil ministry using the pipeline cost recovery debate to get Cairn to acknowledge its liability to pay cess Quite possibly, says an industry source. He adds that the ministry feels RoU permission should not be construed as a decision on cost recovery and that the ministry also wants Cairn to confirm that it is ready to pay cess.

But Cairn is believed to have written to the ministry, arguing that payment of cess, cost recovery and the RoU are three separate issues and should not be linked. “Cairn is not accepting its liability to pay cess,â€‌ he adds.

“So Deora wants to know the other options for the government.â€‌ Cairn supporters argue RoU permission does not oblige the company to accept cess liability.

Whatever the outcome, the ministry is preparing a letter for Cairn but first needs to decide if other departments should be consulted. Unlike other PSCs, Cairn’s PSC for Rajasthan block RJ-ON-90/1, inherited from Shell, is unclear on who should pay cess.

As such, the ministry has fallen back on provisions in the Oil Industry (Development) Act, 1974, where payment of cess is put at the door of the â€کcontractor’.

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