Cairn challenges ONGC to go for arbitration

Vol 14, PW 16 (10 Feb 11) People & Policy

Bill Gammell rightly had a smile on his face when in Delhi this week for talks on his blocked deal to sell a majority stake in Cairn India to Vedanta.

Behind the scenes, Gammell and everyone else at Cairn are quietly confident they have an open and shut case in their row with ONGC over its royalty obligations on Mangala crude – the main obstacle to completion of the $9.6bn deal with Vedanta. Cairn’s position was forcefully put on January 24 during a Management Committee meeting of the RJ-ON-90/1 block in Rajasthan, which includes Mangala.

During heated arguments, Cairn challenged ONGC to activate the ‘dispute resolution mechanism’ in the PSC if unhappy about its contractual obligation to pay all royalty on Mangala crude, despite holding only 30% equity in Mangala and other producing Rajasthan fields. In short, go for arbitration.

Cairn’s challenge was provoked by ONGC’s suggestion that its royalty obligation should be ‘cost-recoverable’ from Mangala production, currently at around 125,000 b/d. Quoting the PSC, Cairn objected, saying royalty is not cost recoverable and must be paid by the licensee, in this case ONGC.

“Royalty does not qualify to be part of the contract costs,” said Cairn, in minutes of the meeting seen by this report. “Cost recovery of royalty would also adversely affect the government’s economic interests.

” Could the government intervene, asked ONGC, to help resolve the problem No, said Cairn. The government’s job is to give its opinion, “but not to resolve the issue, for which there is a dispute resolution mechanism under the PSC.

” Helpless, ONGC looked to the oil ministry representative at the meeting. Why, asked this official, couldn’t the MC meeting decide whether royalty is eligible for cost-recovery “On matters clearly provided for in the PSC,” responded Cairn, “the MC can’t take a contrary view.

” Under the PSC, ONGC must pay royalty equivalent to 20% of the crude well-head price.

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