|BIT of a problem on Cairn|
|Tuesday, 26 April 2011 00:00|
When the Group of Ministers (GoM) on Cairn-Vedanta finally meets—the petroleum secretary said, four days ago, that the GoM would meet soon—it would do well to keep in mind the points made by the UK High Commissioner in a letter to Prime Minister Manmohan Singh. While the petroleum ministry has been backing ONGC’s claim that Cairn should pay its share of the royalty on production—right now, though ONGC has a 30% stake in the joint venture, it pays all the royalty—the High Commissioner is making a more important point. “Whilst arguments may be made as to whether or not royalty may be cost recoverable”, the letter says, “under the provisions of the current Production Sharing Contracts, there are provisions in the contract to deal with any dispute over whether it is or it is not”. ONGC may have a point in that it loses money on the deal if it has to pay all the royalty; it may even be right in its interpretation that the Production Sharing Contract (PSC) allows royalty payments to be expensed, but as this newspaper has been arguing, ONGC should have invoked the arbitration clause in the deal by now. More important, instead of trying to arm-twist Cairn to agree to what ONGC wants, the petroleum ministry needs to answer some tough questions on why it did not ensure ONGC’s lackadaisical management filed for arbitration.
Both the government and ONGC should also consider the possibility that, at some point, Cairn may just seek to invoke the Bilateral Investment Treaty (BIT) that India has signed with various countries, including the UK. Under the BIT, no government, in India or in the UK, can seek to unfairly penalise businesses from the other country. In the current case, it won’t be too difficult for Cairn to make the argument. After all, if the Indian PSU chooses not to go for a third-party arbitration on what the PSC allows or doesn’t allow, and instead the government tries to arm-twist Cairn to accept ONGC’s interpretation, this does appear a fit case for the BIT. The issue here is a simple one, and it is not about whether ONGC is right or wrong: the issue is whether the government has the right to withhold permission to allow Cairn to sell its stake in Cairn India to Vedanta on the basis of a dispute on which ONGC refuses to fight in court? So, whenever the GoM does meet—the Cabinet passed on the matter to the GoM almost three weeks ago—it would do well to ask the petroleum ministry for an explanation on this.