ONGC approves revised plan to invest in Cairn's Raj fields

New Delhi, June 6 (PTI) India's Board of Oil and Natural
Gas Copr (ONGC) Saturday approved the revised cost estimates
for developing the nation's most prolific on-land oilfield in
Rajasthan and agreed to invest around USD 350 million more in
the fields operated by Cairn India.

The approval ends the uncertainty surrounding the
development and the fields will now be put to production any
time now.

ONGC, which holds 30 per cent interest in the fields,
had previously withheld approval to Cairn's revised field
development plan as the state-run firm's liability to pay
royalty on the entire crude oil production, although it was
only a 30 per cent shareholder, had turned the project
economically unviable for it.

The board at its meeting approved the rise in cost of
developing Mangala field in the northern state Rajasthan block
to USD 2.396 billion from USD 1.241 billion. Besides, the cost
of smaller adjoining fields would also rise from USD 261
million to USD 275 million, a top company official said. ONGC
will bear 30 per cent of this cost.

The official, however, said that ONGC will continue to
pursue with the government the reimbursement of the royalty it
will pay on behalf of Cairn.

There will be no change in the development cost of
Bhagyam field, the second largest oilfield in the Rajasthan
block, at USD 471 million. Also the cost of pipeline
transporting the crude from Barmer district in Rajasthan to
Gujarat cost would remain unchanged at USD 941 million.

ONGC's total exposure in the project will rise from USD
874.2 million to USD 1.22 billion, he said.

The decision followed Petroleum Ministry pushing ONGC top
management to approve the revised cost despite the project
offering negative returns on investment.

ONGC had previously approved its 30 per cent share of
investment at the original capital expenditure of USD 1.5
billion and operating expenditure of USD 1.43 billion for
Mangala and adjoining smaller fields.

But Cairn revised the capital cost to USD 2.67 billion
and operating expenditure to USD 1.52 billion. The Bhagyam
field cost would be USD 471 million USD 941 million being the
cost of a pipeline to transport crude oil.

"ONGC's Net Present Value (the value today of anticipated
future incomes and expenditures) with revised field investment
plan works out to negative USD 1.435 billion and negative USD
1.471 billion at a crude price of USD 60 and 70 per barrel,
respectively," the official said.

Negative NPV has been a result of ONGC being made liable
to pay 20 per cent royalty on the entire crude oil production
while Cairn being exempt from payment of any levy.

"(The) Petroleum Ministry today says that we signed the
contract for the Rajasthan block fully knowing about the
royalty liability. But the royalty at the time of signing of
the production sharing contract was Rs 539.20 per tonne while
it today comes to Rs 3,780 per tonne, considering a crude
price of USD 60 per barrel," he said.

Besides change in royalty rates, the oil development cess
has also been increased to Rs 2,500 per tonne from Rs 900 per
tonne at the time of signing the PSC for the Rajasthan block.

"Keeping in view ONGC's liability of payment of royalty
on 100 per cent production against its participating interest
of 30 per cent in RJ-ON-90/1 block, ONGC's liability towards
royalty works out to USD 36 per barrel at crude price of USD
60 per barrel," the official said.

The cess works out to USD 7.14 per barrel. "Further, we
have to share profit petroleum (which is broadly revenue minus
operating and capital expense and cess, royalty is not
deductible) with the Government in a prescribed ratio.

"Assuming the current cost and production estimates and a
crude oil price of USD 60 per barrel, ONGC would need to pay
USD 10.34 per barrel to the Government as its share of profit
petroleum," he said.

ONGC would be left with USD 6.5 per barrel after payment
of royalty, cess and profit petroleum to the Government. On
the other hand, operator Cairn would be left with USD 42.5 per
barrel since it does not have to pay royalty.

"The balance of USD 6.5 per barrel is grossly
insufficient for meeting the obligation of sales tax/VAT, opex
and capex," the official said, adding ONGC wants the
government to refund the royalty it has to pay on behalf of
Cairn.

"Even in case royalty paid by ONGC on behalf of Cairn is
reimbursed to it, the breakeven crude price would work out to
USD 71 per barrel," he said.

The Rajasthan crude is heavy and waxy. Also it cannot
produce LPG and has very little kerosene and gasoil output and
hence it is expected to trade at a significant discount to
other crudes like Brent.

At USD 70 a barrel sale price, ONGC's realisation after
paying for cess, royalty and profit petroleum would be just
USD 5.78, he said. "The project offers us negative return and
over the life of the field we will lose Rs 14,000 crore."

"We have told them (the Government) that either reimburse
us the royalty or free us from the field," he said.
Cairn is almost ready to start producing crude oil from the
Rajasthan field. The output may start by this month-end and is
slated to reach a peak of 8.75 million tonnes by 2011. PTI ANZ
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