NEW DELHI: The increase in cess by Rs 2,000 a tonne on domestically produced crude oil could make Vedanta Group’s $9-billion investment uneconomical.
Cairn India, in which Vedanta has recently acquired majority stake, termed the move as ‘unfair and discriminatory’.
Seeking a rollback, Cairn India has approached the Prime Minister’s Office. The company said the Rajasthan block is the only production sharing contract (PSC) that is materially affected by this increase.
In the 2012-13 Budget, the Government increased the cess to Rs 4,500 a tonne. Cairn said that instead of imposing financial levies, the Government should be pushing for higher domestic production and earn revenues from there.
Sources told Business Line that the cess impact of $2.5 billion on Cairn is in addition to the $8-billion hit due to the conditions the Government set for the approval of Vedanta deal (royalty made cost recoverable and cess arbitration dropped).
This has resulted in erosion of $1 billion in market cap for Cairn India on the day the increase was announced. “Overall, this made Vedanta’s investment uneconomical,” sources said.
Though the Petroleum Ministry agrees that the higher cess would affect Cairn, the private sector player will have to fight its own battle as the Ministry is taking up only the case of public sector exploration companies — ONGC and Oil India.
Sources close to the developments said this increase was contrary to conditions that were accepted on the Vedanta deal. Cairn India had agreed to accept payment of cess (and royalty) as part of the Vedanta transaction in ‘good faith’.
The company has been maintaining that the Rajasthan PSC is silent on the payment of cess and does not specify any rate. In fact, Cairn had taken up the issue for arbitration, but committed to drop it as part of the conditions laid down by the Government for approving the Cairn Energy-Vedanta Resources deal.
NELP (New Exploration Licensing Policy) PSCs are exempt from the cess. For most other blocks offered before the licensing rounds producing crude oil, such as Ravva and Panna-Mukta-Tapti joint venture fields, the cess is fixed at Rs 900 a tonne.
“As such, there is no impact on any other private sector company,” sources added.
Besides, the nomination blocks — awarded to PSUs ONGC and OIL — are somewhat different as they were not bid out on a competitive basis and have no obligation to share profits with Government.