|Cairn nod can give govt $15 bn more|
|Tuesday, 10 April 2012 01:57|
While CAG says approval is beyond Cairn’s production contract, it says government can negotiate
After the Union Budget wiped out $1 billion from Cairn India’s market cap by raising the cess on oil production from R2,500 per tonne to R4,500, the government continues to sit on the company’s applications for both increasing production from its existing MBA (Mangala, Bhagyam and Aishwarya) fields in Rajasthan as well as to carry on more exploration in its Rajasthan block. If the applications are cleared, apart from the gains Cairn and its partner ONGC will make, the government stands to gain R6.8 crore a day (of this, R2.1 crore is for the Rajasthan government) and the country can save R12.5 crore of forex every day in the immediate future; potential gains for the government on the exploration side could be as high as $30 billion (of this, $8 billion for Rajasthan) over 20 years, or around $15 billion on a net present value basis (assuming a 10% discount rate, see graphic).
Cairn officials met petroleum ministry officials last week to once again reiterate the need for early permissions to raise production at Mangala from 125,000 barrels per day (bpd) now to 150,000 bpd. When the proposal to raise Mangala production was first made, the Directorate General of Hydrocarbons (DGH) wanted further tests done to ensure higher production did not compromise the reservoir. When this was done, the DGH wanted some more tests done and for ONGC to certify this as well (ONGC owns 30% of the field, but the operator is Cairn). Now that this has also been done, the DGH has been asked to grant permission.
Since Cairn can raise production the day permission is granted, this means substantial forex savings as well. At $100 a barrel, 25,000 barrels translates to R12.5 crore of potential daily forex savings or R4,500 crore a year. Since the Rajasthan government gets a royalty of 15% and a VAT of 2%, that’s R2.1 crore per day that it could get once the DGH gives its permission, or R775 crore a year. In the case of the central government, it gets 30% of Cairn’s profits (at the current investment multiple) as well as the cess, the daily gains adding up to R4.7 crore a day, or R1,724 crore a year.
The much larger opportunity relates to the permission for Cairn to do further exploration in the area it already has in Rajasthan, even though the exploration phase of its production sharing contract (PSC) is over.
While Cairn and its legal team believe the PSC and the Oil Fields (Regulation & Development) Act, 1948 allow it to continue to explore for more oil, the DGH view is that since the PSC is not clear on this, a final decision will have to be taken by the petroleum ministry – the CAG is also of the view that continuous exploration is beyond the purview of the PSC (http://goo.gl/yeiER). Cairn wrote its first letter to the DGH on being allowed continuous exploration in June 2005. Under the PSC, of the 25 years, seven years is given for exploration and the rest for production. Cairn has been arguing that in keeping with international practice, it should be allowed to continuously explore in the area it has with it, even after the production phase has begun.
Both Cairn and ONGC are confident that if they are allowed to explore for more oil, they can raise production by another 65,000 barrels per day (from the likely 235,000 bpd in another couple of years, this will take Cairn’s output to 300,000 bpd). Cairn-ONGC’s proposal envisages spending $1 billion on exploration and, if this yields the desired results, another $5 billion on developing the oil fields. While Cairn-ONGC will put up the $1 billion for now, this will be deducted from their revenues before paying the government its share of profits.
So, in the worst-case scenario, the government stands to lose $500 million in profits (its share in profits is 50% at the highest investment-multiple). Assuming Cairn-ONGC find the oil they think is there, the additional revenues at $100 a barrel would be $47 billion over 20 years. At 17%, that means the Rajasthan government gets an additional $8 billion; the Government of India’s share will be up to 50% of profits (since the investment multiple will now be at the highest level) – add this and the cess and corporate tax, and this works out to around $19 billion extra over 20 years. Given a discount rate of 10%, this means $4 billion for Rajasthan and $9.5 billion for the Government of India in NPV terms. Whether the government agrees to the increased exploration, however, remains to be seen – as the CAG report on Cairn puts it, “approval by the GoI of such extensions should be on clear financial quid pro quo – beyond the existing PSC provisions – for the benefit of GoI or its parties.”