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ONGC may invite Cairn, Vedanta to sign pact
October, 04th 2011

State-owned Oil & Natural Gas Corp (ONGC) may this week invite Cairn India and Vedanta Resources for signing of an agreement on sharing of statutory levies on the all important Rajasthan oilfields.

The Board of ONGC had on September 27 agreed to waive its pre-emption rights and give consent to London-based miner Vedanta buying majority stake in Cairn India.
But the state-owned oil explorer had added a caveat that the no-objection certificate or NOC will be issued only after Cairn and Vedanta sign a legal document agreeing to share royalty and pay cess on oil produced from Rajasthan fields.

"ONGC may in next couple of days send a draft agreement to Cairn India and upon their agreeing to the language and content, the pact will be signed within this week," a source in knowledge of the development said.

Upon signing of the agreement, ONGC will give NOC to the deal but the transaction will conclude only after Home Ministry gives security clearance to Vedanta buying majority stake in Cairn India.

The need for a legal document had arisen because Cairn India insisted on ONGC giving no-objection before agreeing to conditions on royalty and cess that the government had set for approving the $9 billion transaction.

The source says Cairn doubts if partner ONGC would give consent if it agrees to the conditions. Similarly, ONGC thinks Cairn may backtrack on royalty and cess payments if it gives consent first.

Cairn India's 97% owners, including parent Cairn Energy of the UK, and new management Vedanta had accepted the riders set by the government.

ONGC, for whom the Rajasthan project had been a losing proposition because it paid royalty not just on its 30% share but also on Cairn India's 70% interest, has demanded an equitable sharing before the deal was cleared.

The government accepted ONGC contention and conditioned its approval to the deal on Cairn making royalty payments cost recoverable and agreeing to pay cess on its 70% share.

Cairn India does not pay royalty on its 70% stake in the Rajasthan fields. Royalty, as per the contract, is paid by ONGC, which got a 30% stake in the field for free.

Even before the Cairn-Vedanta deal was announced in August last year, ONGC had demanded that like all other taxes, royalty be made cost recoverable by adding it to the project costs. All project cost are first deducted from revenue earned from oil sales before profits are split between partners.

Cairn had opposed this as it would lower its profits. It also believed cess, likely royalty, was also an ONGC liability even though the contract for Rajasthan fields is silent on any such sharing.

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