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Cairn-Vedanta deal heads towards court

Rajeev Jayaswal & Himangshu Watts, ET Bureau Dec 18, 2010, 12.22pm IST

NEW DELHI: The Cairn-Vedanta deal is heading for a stalemate and a possible legal tussle that may derail the $9.6-billion acquisition, unless the government, the British explorer and its partner ONGC formally negotiate contentious issues, officials and executives involved in the matter said. Cairn's India arm holds 70% stake in the Rajasthan block which comprises about 85-90% of the $9.6 billion Cairn-Vedanta deal. Cairn India's partner in the filed, state-run ONGC holds 30% stake in the oil producing asset. State-run ONGC, which owns 30% of Cairn's main oilfield in Rajasthan, has opposed the sale of Cairn's asset to Vedanta and asked for a renegotiation of the agreement which obliges it to pay its partner's share of royalty. ET reported on Friday that ONGC has informed Cairn that it will not make any further contribution to the development of the field unless outstanding issues were resolved.

ONGC OKs Cairn-Vedanta deal

Amitav Ranjan : New Delhi, Wed Sep 28 2011, 02:32 hrs

State-run Oil & Natural Gas Corp (ONGC) today decided to give its consent to Vedanta Resources taking over Cairn India after a valuation by SBI Caps showed that Cairn India's share was best priced at Rs 330 a share Rs 25 short of Vedanta's offer of Rs 355. "We decided not to match Vedanta's offer as the highest share price in the bestcase scenario was estimated by SBI Caps at Rs 330 a share," said an official. "We decided to give the no-objection (certificate) to the Cairn-Vedanta deal provided all partners sign a legal pact to share the royalty and cess payments." The need for a legal document has arisen because Cairn India insisted on ONGC giving a no-objection certificate (NOC) to the Cairn-Vedanta deal before it agreed to share royalty and pay cess on the all-important Rajasthan oilfield. Before it issues the NOC, ONGC wants an assurance from Cairn that it will pay Rs 2,500 per tonne cess on its share of production from RJ-ON-90/1 and also make royalty payments cost-recoverable.
One of the condition is that the arbitration, which is ongoing between Cairn India and the ministry of petroleum in UK (cess arbitration) is to be withdrawn by Cairn India, and Cairn India has to agree to pay the entire cess tax, which annually is around Rs250 crore. Cairn India has been paying the same, but claims that ONGC should bear equal burden. Second condition is to concede to ONGC's stand that the royalty to be paid for the Gujarat project should be equally borne by Cairn India (royalty argument). This may further increase the burden by Rs1,400 crore.

technical issues involving oil and gas fields

Government officials said the director general of hydrocarbons, which advises the oil ministry on technical issues involving oil and gas fields, has expressed concerns about the ability of Vedanta Resources to manage the field, which is already pumping 125,000 barrels and has the potential to pump twice as much. Cairn has argued that it was selling its Indian subsidiary, leaving all the required expertise and talent in the local arm, which can professionally manage the field, officials say. The Rajasthan oil field is India's biggest onshore asset, which is expected to produce oil for at least two decades, making it vital for the country that imports about threequarters of the oil it refines. "The director general of hydrocarbon has advised that we need to be very careful. Internationally there have been cases when after the acquisition, the new owner has not performed very well after the initial phase," said a government official, who did not want to be identified because of the sensitivity of the matter. Sources said the preconditions also include Vedanta guaranteeing that Cairn's technical capability will be undisturbed by the share transfer and the London-listed firm providing a fresh financial and performance guarantee.

Oil Ministry sets 11 preconditions for Vedanta-Cairn deal

Jan 24, 2011

The Oil Ministry is ready to give "in-principle" approval for Vedanta Resources' $9.6 billion acquisition ofCairn India, provided the mining firm led by billionaire Anil Agarwal agrees to a set of 11 preconditions. Earlier this month, the Oil Ministry had sought the Law Ministry's opinion on the legality of imposing certain preconditions on the stake sale, including Vedanta agreeing to withdraw pending lawsuits filed by Cairn with respect to payment of oil cess and accepting partner ONGC's preemption rights. Sources said the ministry also wants Vedanta to agree to consider the royalty paid on crude oil produced from Cairn's mainstay Rajasthan block in the project cost and its profits calculated thereafter. As per the Production Sharing Contract (PSC), the operator is permitted to recover all project costs from the sale of oil or gas produced from a field before a mechanism for profit-sharing with the government comes into play. State-owned Oil and Natural Gas Corp (ONGC) holds a 30 per cent stake in Rajasthan block RJ-ON90/1, but pays the royalty on the entire quantum of production, as it is the licencee of the block. If the royalty paid by ONGC on behalf of Cairn is taken into consideration while calculating the project cost, this would lower the profits of the Scottish Energy firm, which does not pay royalty on its 70 per cent share of the projected 12 million tonnes per annum output from the block.

Like royalty, Cairn believes the liability to pay cess of Rs 2,500 per tonne on all crude oil produced from the Rajasthan block also rests on ONGC. This position has been disputed by ONGC and the ministry, which say that cess is to be paid by the project partners in proportion to their shareholding and the matter is under arbitration, sources said. The ministry said its "in-principle approval shall be further subject to ONGC's decision on the right of first refusal" on the Rajasthan block, as the Solicitor General of India's view was that the transfer triggered ONGC's preemption rights.
It had entered into an agreement with UK-based Vedanta Group on June 16, 2010, to sell 51 to 60 per cent of its shares in Cairn India for a consideration of around $8.5 billion, without offering the shares to its partner ONGC in the joint venture as per the agreement of right of first refusal, the PIL had said.

open offer for an additional 20 per cent stake

The PMO had to press for an early decision as the approval accorded to the deal by shareholders of Cairn and Vedanta was valid up to April 15. After acquiring Cairn Energy's stake, the London-listed firm's Indian unit, Sesa Goa, will make an open offer for an additional 20 per cent stake to minority shareholders of Cairn India. Sources said going by the February-end deadline set by Oil Secretary S Sundareshan for a decision on the acquisition, Vedanta would have been unable to close the deal by April 15. This is because the open offer, which can be made only after government consent to the deal, will have to remain open for subscription for at least 60 days. If the government decision on the deal was to come by February-end (or in March, as was indicated by Deora), the open offer could not have begun before the first week of March and it would have closed in end-April or early May, missing the April 15 deadline, they said. After the PMO directive, Sundareshan had on January 10 stated that his ministry will decide on giving approval to the deal by January-end or early February. ONGC, which holds interest in all three producing properties of Cairn and five out of its seven exploration acreages, claims that it has premption, or the right of first refusal, on the deal.