ONGC Seeks to Recover Royalty Paid on Behalf of Partner Cairn

Oil & Natural Gas Corp., India’s biggest explorer, says it should be allowed to recover 140 billion rupees ($3 billion) payable as royalty for partner Cairn India Ltd., which Vedanta Resources Plc seeks to buy.

“The royalty issue is hurting investors’ sentiments,” ONGC Chairman R.S. Sharma told reporters in New Delhi today. “I would like to see it be resolved very quickly. We think the royalty we pay is cost recoverable.”

State-run ONGC wants to increase returns on its investments in India’s largest onshore oil block in Rajasthan state, operated by Cairn India, after Vedanta proposed to buy a majority stake in the unit of U.K.-based Cairn Energy Plc for as much as $9.6 billion. ONGC owns 30 percent in the block and is liable to pay royalty on the entire output from the field, an incentive offered by India to attract overseas explorers before the government started auctioning fields in 1999.

ONGC wants the royalty paid to be added to the project cost, which can be recovered from the sale of oil, said Sharma, who is retiring tomorrow. Cairn Energy and Vedanta need ONGC’s approval for the transaction, Sharma said.

“According to us, Cairn Energy needs our permission for the transaction,” Sharma said. “ONGC is not against this transaction. We will protect our contractual rights.”

The board of ONGC met in New Delhi yesterday and decided not to make a counter offer for Cairn India because the valuation was high, Sharma said.

Vedanta, a mining company controlled by billionaire Anil Agarwal with no oil and gas experience, agreed in August to buy at least 40 percent and as much as 51 percent in Cairn India from London-listed Cairn Energy.

The Indian government is reviewing the bid for Cairn India. Vedanta expects to get state approval for the transaction in February. Cairn Energy said it expects to conclude the sale by April 15.

Cairn India acquired a stake in a block called RJ-ON-90/1 in Rajasthan state from Royal Dutch Shell Plc in 2002 and discovered oil in January 2004.