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Friday, 08 April 2011 00:00
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Even those sympathetic to ONGC in the Cairn-Vedanta deal are hard put to justify the PSU oil major’s refusal to protect its interests. Going by the calculations made by ONGC, it will have to shell out around R15,000 crore (on a net present value basis) or thereabouts as Cairn’s share of royalties over the life of the Barmer field, and this may even be larger than the profits it hopes to make from the field. So why did ONGC sign the contract? One explanation is that the contract was signed when ONGC was not even a company, when it was called the Oil and Natural Gas Commission, under the direct control of the petroleum ministry—the deal was signed, this argument goes, as part of the government’s plan to bring in foreign investment in the oil sector. In which case, why didn’t ONGC the company’s management insist the government make good its losses or help it get out of the contract all these years?


In recent months, ONGC has started saying its interpretation of the production sharing contract (PSC) between it and Cairn is that the royalty payments have to be treated as an expense—ONGC will still make a loss on the royalties, but this will be a lot less than what it does right now. But if this is indeed the case, why hasn’t ONGC gone in for arbitration? ONGC’s partner Cairn believes the entire cess payments to the central government (royalties are paid to the state government) are to be paid by ONGC under the PSC, but it has gone in for arbitration on the matter. ONGC may or may not have got unofficial directions asking it not to go ahead with arbitration, but its officials have a fiduciary responsibility towards their shareholders, and that requires it go in for arbitration.

Instead of asking ONGC to go in for arbitration, the petroleum ministry has so far been content with trying to arm-twist Cairn into agreeing to ONGC’s terms, that royalty payments will be expensed and that it will withdraw its arbitration claim. Cairn will not agree since this will destroy a very large part of the value it is getting from Vedanta on the deal. But this doesn’t give the petroleum ministry the right to arm-twist Cairn. If anything, it has to pull up ONGC’s management for not protecting the company’s interests. ONGC has got some time, with the case going to a Group of Ministers—a few weeks or a few months? If it doesn’t make the most of the opportunity, it has no one to blame but itself.


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