Rajasthan News

Government rejects Cairn appeal to renew Rajasthan block

by RajasthanDirect
Oct 23, 2015

The government has rejected the Cairn India's plea to renew the contract for the prolific Rajasthan block with the existing terms and conditions and has asked for the investment plan for the renewal period to assess the extent to which the state's share of profit can be raised. Cairn India, controlled by billionaire Anil Agarwal, is seeking to extend the contract to operate the oil and gas block in Barmer, Rajasthan, by 10 years after the 20-year agreement runs out in 2020.

Cairn owns 70% in the joint venture that manages the Barmer block, responsible for nearly one-fourth of India's local oil production, with state-run Oil and Natural gas Corp (ONGC) owning the balance

The company has been lobbying the government for about two years for an early extension, arguing a clarity on this would make it easier for them to plan future investments. It has also argued against any suggestion of alteration to the terms of the contract.

“Legally, we can change the terms of the contract if we choose to extend it. We will take a call on the new terms of the contract only after the company shows us their investment plan and output projection for the block,” said a senior gover..

Now it is upon Cairn India BSE 3.47 % to quickly prepare the investment plan, which will become the basis for negotiations with the government and lead to faster renewal. The investment plan will also show the projected profit for the period of extension, helping the government assess the extent to which it can demand to raise its share in the profit petroleum from the field, the official said.

Profit petroleum, or the revenue remaining after the operator has recovered its cost, is shared between the operator and the government based on a so-called investment multiple, calculated using annual income and investment made by the contractor. The government also earns income through royalty and cess imposed on the output from a hydrocarbon block.

Whether the government should demand a higher share in profit petroleum at the time of renewal is widely debated with equally strong arguments on both sides.

One argument is that with much of the risk already discounted and major investments made in the first contract period, the profitability is likely to be higher in the extended period and therefore, the contractor must offer a higher share in profit to the exchequer.

On the other hand, the operators want to further compensate themselves for the initial risk they took and also argue that the cost would rise during extension as the quality of find deteriorates after having been exploited for 20 years

The terms and conditions for renewal of a contract have to be mutually agreed between the government and the operator. ONG CBSE 2.25 % has told the government that it would abide by the latter’s decision on this. The Directorate General of Hydrocarbons, the technical arm of the oil ministry, is negotiating with Cairn on the terms of the renewal.

Source from : indiatimes

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