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Mar 8 Fév 2011 22:27
India risks backlash in $9bn Cairn crisis
Published: February 8 2011 19:11 | Last updated: February 8 2011 19:11
Ask an Indian politician how India can compete with China and he will point to two principal mechanisms: democracy, which provides a powerful tool for resolving political conflicts, and the independent legal system, which underpins contracts and deters arbitrary government.
Few would question India’s commitment to democracy, rough edged and messy as it is. But a clumsy intervention by the oil ministry in a $9.6bn energy deal is raising awkward questions about whether the same remains true of the rule of law.
Like many energy deals, this one has a colourful background, starting 15 years ago with the acquisition of a ragbag of minor South Asian oil interests by Edinburgh-based Cairn Energy, then a small independent explorer.
Cairn was lucky. It hit the jackpot in the desert sands of Rajasthan, north-west India, with a discovery that holds at least 1bn barrels of recoverable oil. That is a big find anywhere; for energy-poor India it is huge, potentially accounting for 20 per cent of crude production at the approved extraction rate of 175,000 barrels a day.
London-listed Cairn is now one of the UK’s 100 biggest companies, largely on the back of its controlling interest in Cairn India, the Mumbai-listed vehicle for its south Asian assets, which owns 70 per cent of the Rajasthan field.
Last year, Sir Bill Gammell, Cairn’s chairman, got even luckier. Over tea at his Scottish home, Sir Bill received an unexpected offer for Cairn India from Anil Agarwal, the Indian-born founder of Vedanta, a London-listed conglomerate with largely South Asian mining interests.
The offer – at what Sir Bill calls “an attractive price” – was too good to miss, especially in the light of Cairn’s plans to develop big new fields in Greenland. Six months later, though, the deal is on the verge of collapse in the face of demands from the oil ministry for a revision of the operating rules for the Rajasthan field.
The ministry’s shopping list is long, but the main issue is a change in the way royalties are paid by Cairn India and Oil and Natural Gas Corporation, a state-owned utility that owns the remaining 30 per cent of the Rajasthan assets.
ONGC, backed by oil minister Jaipal Reddy, wants to scrap a pre-1999 deal under which Cairn pays no royalties on production – an incentive offered by the government to encourage foreign oil explorers to bring their expertise to India. It is not clear why the proposed change of ownership should trigger the move, but splitting royalties in proportion to ownership would cost Cairn India about $3bn, according to ONGC.
The official explanation for the oil ministry’s intervention is that the Rajasthan field is a national strategic asset. But this is a red herring. Cairn India will continue to be listed in Mumbai if the deal goes through, with ultimate control passing from one London-listed company (run by a Scotsman) to another (run by an Indian).
A much more likely motive is that ONGC, which is planning an initial public offering, saw an opportunity to make financial demands that the companies would be unable to refuse. Mr Agarwal is said to lack friends in the government, which may also have been lobbied by rival energy companies keen to stymie the sale.
Whatever the reason for the ministry’s intervention, it looks short-sighted at a time when India’s need for foreign capital is higher than ever, not least to fund a $1,000bn infrastructure programme requiring multiple investments in public/private projects that will be viable only with regulatory certainty.
Foreign direct investment is already sluggish, especially by comparison with China. And India’s reputation is reeling from the disclosure of massive corruption in the telecoms ministry. A lawsuit that seeks to tax Vodafone, the UK telecoms group, for offshore transactions has not helped, although that issue may yet be resolved by the courts.
The outcome of the Cairn India imbroglio remains unclear. If Vedanta walks away there will be serious consequences for the companies involved: Cairn will have to refinance its Greenland projects and Vedanta will have to find other ways to expand; Cairn India will need fresh investment to pay for a planned increase in Rajasthan production to 210,000 barrels a day.
But it is India, already suffering from rising perceptions of political risk, that faces the biggest potential damage if foreign investors raise the bar for investments in new projects.
Indian prime minister Manmohan Singh clearly understands the danger. On Tuesday he ordered a legal review after the oil ministry’s failure to act on his earlier instructions to resolve the issue by the end of January. Sadly, officials at the ministry appear blind to the broader significance of their actions. India may yet face a big bill for their intransigence.
