OREANDA-NEWS. April 5, 2011. The oil ministry has thrown its weight behind ONGC and told the Cabinet that asking Cairn to accept the state firm's views on royalty and withdrawing litigation on cess were "reasonable conditions" for approving the USD 9.6-billion Cairn-Vedanta deal.

In the final note circulated for Wednesday's meeting of the cabinet committee on economic affairs (CCEA), the ministry has said these conditions "should be imposed while granting consent to the proposed transaction."

As an alternative to the "reasonable" conditions, the oil ministry has told the cabinet that it can clear the deal without asking Cairn to accept the oil ministry's conditions but in that case, the government would "pursue all legal recourses" for collecting cess, which Cairn disputes in an arbitration proceeding. Further, the government should take "appropriate decision" to enforce the provision of the production sharing contract which says that royalty is cost-recoverable.

In the initial proposal for the cabinet the oil ministry had simply offered two options but in the final note, after obtaining comments from the ministries of finance, law, corporate affairs and home, as well as the Planning Commission, the petroleum ministry has argued that linking the approval of the deal to disputes over cess and royalty was "reasonable".

In both cases, Cairn would require a no-objection certificate from ONGC. Cairn operates the Rajasthan block and holds a 70% stake while ONGC hold the balance but is contractually obliged to pay the entire royalty. The contract is silent about cess obligations of the partners.

ONGC, being the licensee of the block, pays royalty but says that this cost has to be recovered from the sale of oil from the field before profit is calculated. Cairn disputes this as this would reduce its profit and valuation significantly. Prime Minister-led CCEA is schedule to consider London-listed Cairn Energy Plc's proposal to sell a controlling stake in its Indian arm to Anil Agarwal-promoted Vedanta Resources on Wednesday.

The proposed ownership sale requires the government's nod because it also involves indirect transfer of Indian oil and gas blocks including country's largest onland oil fields in Rajasthan where Cairn and partner ONGC have locked horns over cess and royalty issues.

The deal has been mired in controversy since it was announced last August. Cairn had said it did not need the ministry's nod, arguing that it was only a corporate transaction. The oil ministry objected to this on the basis of advice from the law ministry, which said since direct transfer of assets without government approval was not allowed, indirect transfer would also not be permitted without formal approval of authorities. ONGC's board passed a resolution in January saying that the royalty burden was "cost recoverable".