OREANDA-NEWS. February 08, 2011. Seeking to puncture ONGC's claims of negative returns from Rajasthan block, Cairn India said accepting the state-owned company's demand for recovering royalty would result in government losing USD 2 billion in revenues.

Oil and Natural Gas Corporation (ONGC) has 30 per cent stake in India's mainstay Rajasthan block but has to pay a royalty on the entire crude oil produced from the prolific field. The state-owned firm says paying royalty on Cairn India's 70 per cent share of production has made the Rajasthan block a losing proposition for the company.

Cairn India in a letter to Oil Secretary Sundareshan said ONGC's cash flows from operations (EBIDTA) from the Rajasthan field was USD 48.6 million in April-September period of this fiscal.

The cash flows were positive contrary to claims of negative returns made by ONGC, Cairn India's CEO Rahul Dhir wrote to Oil Secretary today." ONGC bears the royalty obligation as a licensee but they also accrue positive cash flows from their 30 per cent participating interest in the Rajasthan block," he said.

"If both revenue from their share of participating interest and the outflow on account of royalty are together taken into account, the net impact on ONGC is not significant as is being perceived," he added.

ONGC has been demanding that the issue of royalty it pays on behalf of Cairn India should be addressed before Vedanta Resources is allowed to takeover Cairn India in a deal valued at USD 9.6 billion.

The state-owned firm says it would be paying Rs 14,000 crore royalty on behalf of Cairn India over the life of Rajasthan fields and wants to recover it from the sale of oil.

Acceptance of the demand would impact Cairn India's valuation as its future profits will go down. "It is also important to note that very significant value accrues to the Government of India from the Rajasthan operations.

"The total revenue from the Rajasthan operations till the life of the fields that is in 2020, on the basis of the approved peak output of 175,000 barrels per day is estimated to be over USD 14.6 billion," Dhir said.

"Clearly, ONGC's plans to recover the royalty from the profit petroleum will have a material impact on the Government of India's revenue share - we estimate this could reduce the Government of India's profit petroleum by over USD 2 billion.

On the other hand, if we are able to implement our plans to produce more oil from the block, the value to the Government will increase very significantly," he added.