Less promising outlook for ONGC royalty payments

Vol 12, PW 25 (21 May 09) People & Policy

During the above (April 30) meeting with oil secretary Pandey, ONGC clearly won ministry support for its unwillingness to pay cess on Rajasthan production.

But can it win similar government backing for its plea to be spared the additional 12.5% royalty that it must pay to the Rajasthan state government As holder of the original Petroleum Exploration Licence, this is an obligation ONGC must bear on any oil and gas production from onshore acreage awarded before the introduction of the NELP regime in 1997. If it was down to the oil ministry, which supports ONGC’s position to be exempted from royalty, there would be no problem.

But a final decision on this rests not with the oil ministry, but the finance ministry – never one to willingly let go of revenue! Before Cairn discovered oil in Rajasthan, production from pre-NELP blocks was insignificant and ONGC could handle it. But when production from Rajasthan reaches a peak of 175,000 b/d in 2011 and ONGC is asked to pay 12.5%, assuming $50/barrel, its daily payment to the state government will be on average $1m, or $365m/annum – no small sum.

Hardly surprising that ONGC stressed this point forcefully in its April 30 meeting with oil secretary Pandey, with a positive outcome. “It was decided,â€‌ says a source present, “that a â€کnote’ will be sent to the finance ministry seeking a definite three-month time frame to reach a decision on ONGC’s demand for royalty reimbursement that it pays on pre-NELP blocks.

â€‌ What happens if the finance ministry again says â€کno’ ONGC, we hear, made it clear that it would be “prudentâ€‌ for the company to “surrender and divestâ€‌ the 30% it holds in the RJ-ON-90/1 development areas and return the PEL to the government. Still, ONGC assured the meeting it would not obstruct first production even though it has not yet approved Cairn’s revised Field Development Plan and would honour all â€کcash calls’.