Oil and Natural Gas Corporation holds 30 per cent in oilfields where Cairn has proposed $2.4 billion investment in producing oil, and another $980 million for laying a heated pipeline to transport the oil to the Gujarat coast. Its board has, however, not yet cleared its share of $1.01 billion as the investment offers negative returns.
"ONGC's net present value (the value today of anticipated future incomes and expenditures) with revised field investment plan works out to negative $1.435 billion and negative $1.471 billion at a crude price of $60 and 70 per barrel, respectively," a top company 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 even through its share is only 30 per cent. Cairn is exempt from royalty payment and ONGC will have to pay the levy on the private firm's behalf.
"(The) petroleum ministry 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 $60 per barrel," he said.
"Even in case royalty paid by ONGC on behalf of Cairn is reimbursed to it, the breakeven crude price would work out to $71 per barrel," the official 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 $70 a barrel sale price, ONGC's realisation after paying for cess, royalty and profit petroleum would be just $5.78, he said. "The project offers us negative return and over the life of the field we will end up losing Rs 14,000 crore (Rs 140 billion)."
The official said the board of ONGC has held back clearance to the revised development cost of the Rajasthan fields proposed by Cairn but the petroleum ministry was pressuring it to clear it.
A Group of Ministers and a Committee of Secretaries had 11 years ago recommended that ONGC should be reimbursed the royalty it has to bear for the operator but the recommendation is yet to be accepted. "We have told them (the government) that either reimburse us the royalty or free us from the field."
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.
