OREANDA-NEWS. May 31, 2011. State-run ONGC is readying for a legal battle over royalty payments for India's biggest oilfield in Rajasthan irrespective of the outcome of Vedanta Resources' USD 9.6 billion bid to buy Cairn India that operates the field, government officials said.

The dispute has dogged the deal for 10 months as a change in royalty payments system will change valuations and even threatens to derail the transaction which is expected to be approved by the government with the condition that Cairn accepts ONGC's view on the dispute.

ONGC has a 30% stake in the Rajasthan block but is contractually bound to pay Cairn's share of royalty. The state-run firm says that the contract also allows ONGC to get this payment reimbursed from the total revenue of the field before profit is calculated. Cairn strongly opposes this.

Senior oil ministry officials and top ONGC executives have said the royalty obligation of state-run energy firm is cost recoverable irrespective of materialization of the deal and they would take legal recourse if Cairn disputes it. Even Cairn chief executive Bill Gammell had written to the government on April 18 (copy of the letter with ET) that the deal would "inevitably cause the proposed transaction to fail" if the government insisted on conditional approval.

ONGC has paid Rs 1,289 crore royalty for crude oil produced from the Rajasthan field in 2010-11 and asked the operator Cairn India to make it cost recoverable. Declining to comment, whether Cairn has accepted ONGC's demand to treat the levy as cost recoverable, company director-finance DK Saraf said; "We have made our position clear (to them)." The government also wants Cairn to withdraw arbitration challenging cess payment.

This is not acceptable to Cairn as it would mean surrendering company's right to seek legal remedies. The government wants Cairn to withdraw the arbitration as a pre-condition for approving the deal. Cairn is already engaged in a legal battle with the government and ONGC over its cess liability which has a financial implication of about USD 2.9 billion. Government and ONGC officials say that they can't support a private deal against the interest of a state-run firm.