Govt to slap recovery notice on Vedanta’s Cairn

Move comes after Delhi HC held that the firm is liable to pay higher profit share

New Delhi: The Oil Ministry will seeks tens of millions of dollars from Vedanta’s Cairn Oil & Gas after the Delhi High Court held that the firm was liable to pay higher profit share to the government in lieu of its Rajasthan oil and gas block license being extended beyond initial term, a top official said. In the interim, the firm’s Barmer basin block licence, whose initial 25-year term ended on May 15, 2020, has been given an eighth interim extension, the official, who wished not to be identified, said.

“Now that the Delhi High Court has upheld the government policy, we will issue recovery notices seeking higher profit petroleum since May 15, 2020,” he said. “The exact amount is being calculated but it will be in tens of millions of dollars.” When contacted, a company spokesperson said, “We are in the process of reviewing the court’s order, will assess any next course of action” after that.

The Union Cabinet headed by Prime Minister Narendra Modi had in March 2017 approved a policy for extension of production sharing contracts (PSCs) for oil and gas blocks beyond their initial term. This policy provided that the government’s share of profit petroleum (earning from sale of oil and gas after deducting all expenses) would be 10 per cent more during the extended period.

Vedanta’s Cairn sought a 10-year extension of Rajasthan PSC, which the government approved. But the firm challenged in Delhi High Court the condition for additional profit petroleum. A single judge bench of the Delhi High Court in May 2018 upheld the company position that the extension has to be on same terms and conditions as the original licence.

The government challenged the order before a division bench, which on March 26 this year ruled that “there cannot be extension of the Production Sharing Contract unconditionally, on the same terms and conditions which were prevailing 25 years ago i.e. on 15th May, 1995, the effective date.” It set aside the May 2018 single judge order. “In effect what the Delhi High Court has said is that the company has to pay higher profit share after May 15, 2020. So the company is now liable to pay higher profit petroleum for the period they operate the block post May 15, 2020,” the official said.

Vedanta, he said, has the option to not agree to the government condition and relinquish the block. “Even in that case, the company is liable to pay additional profit petroleum for the period they operate the block post May 15, 2020,” he said.

The additional profit petroleum will be in addition to over $520 million that the government has sought from the company in a separate cost recovery dispute in the Rajasthan block – the the mainstay oil and gas block of Vedanta. The government claims additional profit petroleum after re-allocating Rs 2,723 crore common cost between different fields in the block and disallowance of Rs 1,508 crore cost on a pipeline. The company has challenged the demand through an arbitration.

It also had a dispute with its partner state-owned Oil and Natural Gas Corp (ONGC) over investments made in the block, which held up the computation of the government’s share of profit petroleum for fiscal years ending March 31, 2019, and March 31, 2020. ONGC holds 30 per cent interest in the block while Cairn Oil & Gas, a unit of Vedanta Ltd, is the operator with a 70 per cent stake.

Sources said the Directorate General of Hydrocarbons (DGH) had way back in May 2018 raised a demand for additional share of profit oil for the government after disallowing Rs 1,508 crore out of the cost incurred on laying a heated-pipeline to transport Barmer crude and Rs 2,723 crore in the reallocation of certain common costs. These costs pertain to only Cairn’s share in the Rajasthan block as ONGC has agreed to pay the government if these costs are disallowed.

In all, Rs 4,828 crore, including interest, is being sought to be disallowed for the 2017-18 fiscal. The company had previously stated that it believes that it has sufficient as well as a reasonable basis for having claimed such costs and for allocating common costs between different fields.