End in sight for Cairn India deal

26 July 2011 Last updated at 21:30 GMT By Douglas Fraser BBC Scotland Business and Economy Editor The Indian government's condition would reduce profits from Cairn India An end is in sight in the long-running dispute over a major oil deal in which Cairn Energy has faced delay by the Indian government.

The Edinburgh-based oil explorer is taking the issue to shareholders of its Indian offshoot.

Cairn is expected to accept a sharp cut in the value of its oil fields in Rajasthan.

The company has been trying to sell a controlling stake in Cairn India for almost a year.

But the sale to metals company Vedanta has been stalled by the Indian government.

Last month, cabinet ministers in Delhi decided to change the terms under which Cairn Energy was encouraged to explore for oil in the Rajasthani desert.

Having found oil, that change is calculated by Cairn to reduce its value by ?176m ($289m)

Cairn India, the spin-off company which is now 52% owned by Cairn Energy in Scotland, has warned the Indian government that a lack of co-operation in developing the vast Mangala field in Rajasthan is harming the national interest, by forcing higher energy imports.

The Oil and Natural Gas Corporation (ONGC), majority owned by the Indian government, has been pushing to reduce its liability to pay all the royalties on oil production, as previously agreed.

The Indian government has ruled those royalties should now be deducted before calculating Cairn India's profits.

While the dispute has continued, the flow from Mangala has been limited to 125,000 barrels per day, when it could be increased to 240,000 barrels.

Cairn India is now to ballot shareholders.

And as Cairn Energy and Vedanta together control 80% of the company, approval of the changed terms is expected.

Rahul Dhir, chief executive of Cairn India, said: "The Rajasthan fields have significant growth potential and an increase in production from this world class asset will enhance the energy security of our nation.

"The optimal development of this resource will only be possible with the active support of our joint venture partner, ONGC and the Government of India".

The quarterly update on Cairn India reflects the Mangala oil field coming on stream, with revenue since the quarter to June 2010 up by 342% to ?506m ($830m), with profit after tax up 869% to ?384 ($610m).

Cairn India is also increasing its drilling activity in Sri Lankan waters.

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Cost blow to Cairn India deal

30 June 2011 Last updated at 18:53 GMT By Douglas Fraser BBC Scotland Business and Economy Editor The Indian government's condition would reduce profits from Cairn India The Indian government has put an expensive condition on its approval for Cairn Energy to sell its stake in the country's biggest oil field.

Edinburgh-based Cairn Energy last summer agreed to transfer a controlling stake in Cairn India and its Rajasthani oil assets to the London-listed metals company Vedanta.

But the deal to sell 40% of the spin-out company Cairn India, which is now valued at around ?3.4bn ($5.46bn), was delayed by the Indian government. It owns most of ONGC, which has a 30% stake in Cairn India.

The impasse, in which government departments have taken conflicting positions, had been watched closely by foreign investors, as a signal of whether India is a predictable and safe business environment for them.

Indian oil minister Jaipal Reddy has announced that ministers approved the deal, but with a condition that is likely to reduce substantially the value of Cairn Energy's stake.

ONGC agreed in 1995, before oil was struck and when it was wholly owned by the Indian government, to pay the government all production royalties if oil was found.

But the Mangala oil field is so big that the state-controlled company, now with a stake held by private shareholders, wants to force its partner to take on some of the royalty cost.

Reduced profits

The Indian government wants to make the cost of those royalties recoverable - meaning profit can only be taken by shareholders such as Cairn Energy or Vedanta once the royalty payments have been accounted for.

That sharply reduces the profits that can be expected.

Cairn reacted cautiously to the news from New Delhi, saying it has yet to see details of the government's ruling, and that it continues to work towards conclusion of the deal.

It has repeatedly said that the "sanctity of contract" is a principle the Indian government should want to protect.

That carries an implicit warning that breaking the terms of the royalty agreement will have a bad impact on India's international reputation, at a time when foreign investment in India has already fallen sharply.

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Cairn Energy sells Indian stake

27 June 2011 Last updated at 20:36 GMT By Douglas Fraser BBC Scotland Business and Economy Editor A deal has been stalled while it awaits Indian government approval Cairn Energy has sold a stake in its Indian operation while it continues the long wait for approval from the Delhi government for a much bigger sale.

The Edinburgh-based oil explorer secured a net ?854m ($1.365bn) for the 10% stake in Cairn India.

It was purchased by Vedanta, the London-listed metals company run by Indian tycoon Anish Agarwal.

Last August, Cairn Energy agreed to sell Vedanta a controlling stake in Cairn India.

It had previously floated the company on the Mumbai stock exchange.

That would release cash for investment in its Greenland drilling operation and for a pay-out to Cairn shareholders.

But that deal has been stalled while it awaits Indian government approval.

Reputation threat

There is disagreement between ministers on how to handle a claim by ONGC, the majority state-owned Oil and Natural Gas Corporation, that it should be relieved of a contractual obligation to pay all the royalties on production from Cairn India's massive Mangala oil field in Rajasthan.

That deal was struck before any oil was found, when Indian authorities were keen to make it attractive for foreign companies to drill for oil.

The threat to break a commercial contract is seen in India as a threat to the country's reputation as being attractive to international business.

UK Prime Minister David Cameron has intervened on behalf of Cairn Energy, highlighting the potential damage to India when it has already seen a rapid decline in foreign investment.

The sale of 10% of Cairn India does not need the same government approval as the controlling stake.

Lower share valuation

The price agreed between Cairn Energy and Vedanta is 9% lower than that agreed last year for its much bigger sale, in exchange for removal of a clause that would have banned Cairn from competing with Vedanta.

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Vedanta believes this initial 10% purchase is a further demonstration of its commitment to India”

End Quote Anil Agarwal Vedanta executive chairman The net proceeds post-tax are expected to be 5.3% lower than previously planned.

If the sale of a further 30% stake in Cairn India goes ahead, the same lower share valuation will hold.

Following the sale of the 10% stake, which is due to complete by 11 July, Vedanta will hold 28% of Cairn India, while Cairn Energy will have 52%.

The intention is to move to 58% Vedanta ownership, while Cairn Energy reduces to 22%.

Sir Bill Gammell, chief executive of Cairn Energy, said: "Cairn is pleased to have secured this adjustment to the agreement with Vedanta.

"Cairn continues to believe the necessary approvals to complete the Vedanta transaction will be received and is working with the government of India in a positive and constructive manner."

Anil Agarwal, executive chairman of Vedanta, added: "Vedanta believes this initial 10% purchase is a further demonstration of its commitment to India.

"We look forward to the successful completion of the proposed transaction".

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