ONGC has a 30% ‘interest’ in Cairn India’s three Rajasthan blocks. This only means that ONGC will fund 30% of the capital required. In return, it will be receiving 30% of the revenues. In addition, it will also pay the royalty to the Rajasthan government. All this, if and only if there is a discovery, which in effect means that it carries no exploration risk and conveniently transferred it to its partner. Barmer was one such block which is owned by Cairn Energy.
History
ONGC, the licensee, had the block since 1956 when all national hydrocarbon assets were nominated to government agencies and corporations. After little or no investment, ONGC gave it to Shell in 1995, which sold it to Cairn. In 2004, Cairn hit jackpot and discovered India’s largest on-land oil find in the last 20 years at Barmer.
ONGC got its share of 30% in these blocks, whose implied value was estimated at close to $2 billion in 2004, without paying or investing a single penny. ONGC spent nothing on exploration, which cost Cairn $600 million, but got a 30% interest, in return for agreeing to invest 30% of the cost of developing the field and all of the royalty.
Current numbers hurting ONGC
We assume the global crude prices to be $70. The cost of production including opex, taxes and the capex comes out to be around $18 a barrel. Cairn walks away with a cool $42 per barrel. For ONGC, the royalty payment, which comes to around $40 per barrel are negating all the revenue from the black gold and it is left with only $2 per barrel.
The PLC then approached both Cairn, expressing its desire to give up the interest and the Petroleum Ministry, regarding the nominal ROI that it is receiving from the block.
GOI smiles on ONGC
GOI has agreed to ONGC’s plea and is set to grant permission to pay only a third of its royalty payments to the Rajasthan government. The Centre will compensate the Rajasthan government for the remaining amount though the modalities of the compensation have not yet been finalised.
As they say, it is good to have a Godfather.
About ONGC
ONGC Videsh Limited (OVL) was rechristened on 15th June 1989 from the earstwhile Hydrocarbons India Private Limited, which was incorporated on 5th March, 1965. Over a period of time, OVL has grown to become the second-largest E&P company in India both in terms of oil production and oil and gas reserve holdings.
What is NELP?
The Ministry of Petroleum and Natural Gas introduced the New Exploration License Policy (NELP) in 2000 to govern the growing domestic oil production and exploration activities. This policy permits foreign companies to hold 100% equity in oil and natural gal projects.
Cairn Energy
Cairn Energy is one of Europe's largest independent oil and gas exploration and production companies. The business is divided into two key units: one focused on developing the Rajasthan resource base in India; the other on exploring frontier basins in Greenland.
Cairn India was listed on 9 January 2007 on the Bombay and National Stock Exchanges. The Initial Public Offering (IPO) of Cairn India was the largest IPO to date in the Indian primary equity markets and Cairn India currently has a market capitalisation in excess of USD 13 billion, ranking as the fourth largest oil and gas company in India.
The IPO attracted a number of high quality investors (including PETRONAS, which currently holds 14.95%) thereby signifying investor confidence in the Indian equity story, the regulatory environment and the capital markets.
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