Cairn, Vedanta to be soon 'informed' of deal approval: Reddy

[LesCrozes]

22 JUL, 2011, 10.19PM IST,PTI
Cairn, Vedanta to be soon 'informed' of deal approval: Reddy

NEW DELHI: More than three weeks after the Cabinet approved UK-based Cairn Energy's proposal to sell its Indian unit to Vedanta Resources , Oil Minister S Jaipal Reddy today said a formal letter communicating the decision will be sent to the companies within "next few days."

The Cabinet Committee on Economic Affairs (CCEA) had on June 30 approved Cairn Energy selling 40 per cent stake in Cairn India to Vedanta with certain riders but the decision has not yet been communicated to Cairn/Vedanta.

"In next few days, decision will be formally communicated to them," Reddy told reporters here.

Law Ministry is vetting the letter communicating the preconditions. "We have been told that the vetting in the law ministry is nearing completion. We should be able to communicate the decision in next few days," he said.

Officials in his ministry said the Law Ministry is likely to send its response by early next week and the same will be communicated to Cairn/Vedanta in the next day.

The CCEA , headed by Prime Minister Manmohan Singh , had on June 30 the Cairn-Vedanta deal subject to the buyer/seller agreeing to cost recovery of royalty in Cairn India's mainstay Rajasthan fields.

Sources said although Cairn India will not have to pay any royalty, and state-owned ONGC will continue to pay royalty on its behalf to the state government, the levy will be added to project cost that is first deducted from oil sale revenues before profits are split between partners and the government.

Cairn also has to agree to ending arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70 per cent share of oil from the Rajasthan fields. Cairn India currently pays Rs 2,626.5 per tonne cess under protest but unlike royalty, treats it as a cost recoverable item.

ONGC pays royalty on its 30 per cent share of oil from Rajasthan fields as well as on operator Cairn India's 70 per cent stake. It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost.

Also, the deal has to be approved by Oil and Natural Gas Corp (ONGC), which has a stake in all three of Cairn India's producing assets and five of its seven exploration assets, waiving its pre-emption rights. And finally, the acquisition will need security clearance.

[mgauthi4]

Tale of two deals in Indian oil & gas sector

Ajay Modi / New Delhi July 23, 2011, 0:18 IST



It took Reliance Industries Ltd only five months to secure an unconditional clearance for its $7.2-billion deal with BP, while the $9.6 billion Cairn-Vedanta deal is still hanging by a thread on a conditional clearance 10 months after the two companies had announced the tie-up.

Part of the reason lies in the nature of the two deals. The biggest difference between the RIL-BP and Cairn-Vedanta deals is that the former is a farm-out agreement and does not involve transfer of control. The Cairn-Vedanta deal, on the other hand, is a transaction between two London-listed companies and the money will not flow into India.

The RIL-BP deal, in contrast, will be the single-largest foreign direct investment (FDI) worth $7.2billion in the petroleum sector. The $12billion FDI announcement made by Korean steel major POSCO in 2005 has failed to take off.

In the Cairn-Vedanta deal, Cairn Energy is transferring control of its Indian unit. The buyout will see the London-listed mining group, led by NRI tycoon Anil Agarwal, take charge of operations without any experience in the oil sector.

In case of the RIL-BP deal, Reliance will remain in charge of operations and retain majority stake. And BP is regarded as the world leader in the oil industry. Another difference is that there is no third company to pre-empt the deal.

By contrast, the Cairn-Vedanta deal saw major opposition from government-owned Oil and Natural Gas Corporation (ONGC) that had a 30 per cent stake in Cairn India’s mainstay Barmer block.

Former director general of hydrocarbons Avinash Chandra said the royalty issue has been the key reason for the delayed approval to the Cairn-Vedanta deal while there was no such complexity in the RIL-BP deal. “Even though ONGC was to pay full royalty, Barmer was a case of supernormal find where the government is well within its right to change the terms and Cairn should appreciate it.”

As an initial response to the deal, ONGC and other companies under the administrative control of petroleum ministry also explored making a counter offer to the one made by Vedanta. It, however, concluded the deal would be too expensive.

According to the production sharing contract signed by Cairn India and its partner ONGC for the Barmer field with the petroleum ministry, ONGC was to pay full royalty on production. The block started commercial production in August 2009 and ONGC started paying full royalty though it had 30 per cent stake in the field and was entitled to 30 per cent share in output.

ONGC was of the view that royalty should be treated as ‘cost-recoverable’ and this was endorsed by the government.

ONGC would have paid a royalty of Rs 18,000 crore for the complete life-cycle of the field. Whether Cairn and Vedanta will accept this condition and whether the deal will reach its conclusion is something that their respective boards will have to decide.

However, the approval given to RIL-BP will certainly brighten up prospects of more foreign investments in the energy space.

[mgauthi4]

Vedanta deal delayed by govt inaction: CairnThursday, July 21, 2011 4:46 PM
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(Source: Mint, New Delhi)By Aveek Datta, Mint, New Delhi
July 21--Indicating its displeasure at the long wait to get government approval for a deal that will see Vedanta Resources Plc become its new owner, Cairn India Ltd has said the inaction has caused the company delays and uncertainties in managing its business.

"It was the best of times; it was the worst of times," Cairn India managing director and chief executive officer Rahul Dhir said in his letter to shareholders in the company's 2010-11 annual report, borrowing the opening phrase of Charles Dickens' novel A Tale of Two Cities.

Dhir said the firm performed "remarkably well" across fronts during the fiscal year but also suffered on account of "an uncertain regulatory environment that delayed many activities and created significant anxieties".

The letter, dated 25 June, elaborates on the anxieties, stating that what should have been a straightforward transaction subject to shareholder approval has been drawn into the ambit of government decision making.

"The hiatus starting from mid-August 2010, when the deal was announced, has caused delays and uncertainties in managing a business that necessarily has to deal with the government and the Rajasthan joint venture partner Oil and Natural Gas Corp. Ltd (ONGC)," Dhir said in the letter.

Analysts say hurdles such as the one before the Cairn-Vedanta deal act as disincentives to international and domestic investors, and hold them from going ahead with plans in India.

"There is a concern among investors that the regulatory environment in the country is slow and unpredictable," said Arvind Mahajan, executive director at audit and consulting firm KPMG. "Hopefully, things will improve in a few months when the situation reaches a crisis point."

On 16 August, Vedanta, controlled by London-based Indian businessman Anil Agarwal, announced a $9.6 billion ('42,720 crore) deal to acquire up to a 60% stake in Cairn India from its promoter Cairn Energy Plc.

Cairn's most productive asset in India is an oilfield in Rajasthan, where it holds a 70% interest, with ONGC holding the rest.

Regulatory hurdles began almost immediately, with ONGC insisting that the royalty to be paid on oil production from Rajasthan be considered recoverable, as a part of the cost of exploration and production from the reserve.

Doing that will increase costs and diminish profits for Cairn India, which also has to pay a percentage of the profit to the government, and will have implications on the valuation being paid by Vedanta for its stake.

ONGC's objection stems from the fact that despite holding a 30% stake in the asset, it bears the royalty burden on the entire production.

Cairn had argued it is not liable to pay any royalty as per the terms of the production sharing contract.
Another hurdle was the payment of cess to the Rajasthan government on oil production in the state that Cairn has challenged but is paying under protest.

The fate of the Cairn-Vedanta deal was subsequently deliberated upon by the petroleum ministry, a group of ministers headed by finance minster Pranab Mukherjee, and eventually the cabinet committee on economic affairs (CCEA).

Interestingly, Cairn India in its annual report said it has no formal intimation from the Indian government or ONGC of any dispute, demand or claims of royalty being part of the contract cost for cost recovery purpose.

"Cairn India has secured legal opinion in its favour and believes that it has a strong case," the company states.

Since the announcement of the deal, Cairn India's stock price on the Bombay Stock Exchange (BSE) has lost 0.35%, while the bourse's benchmark index Sensex has risen 2.51%.

On Wednesday, Cairn India shares dropped 1.08% on the BSE to '317.25, while the Sensex fell 0.81% to 18,502.38 points.

CCEA has given a conditional approval to the deal, with petroleum minister Jaipal Reddy saying on 30 June that the committee had endorsed the group of ministers' view of treating royalty payment as cost recoverable and asking Cairn to withdraw an arbitration case on cess payment.

Cairn and Vedanta, however, have not yet received a formal letter from the government on the new terms.

Vedanta holds a 28.5% stake in Cairn India. In June, the two companies tweaked the structure of the proposed deal by scrapping a proposal to pay an additional '50 per share to promoters as a non-compete fee. As a result, the acquisition price stands lowered by around $800 million, which could at least partially offset any impact of the royalty burden falling on Vedanta after acquiring Cairn India.

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