Also on the panel is telecom minister Kapil Sibal but Deora, who as the then oil minister had done the spade work on the Cairn-Vedanta deal and whose current ministry looks after mergers and acquisitions, is not on the panel. The GoM is likely to meet soon, they said adding Sibal may have been included as the deal involved complex legal issues.

Sources said Deora was in favour of addressing concerns of state-owned Oil and Natural Gas Corp, which owns stake in 8 out of 10 assets of Cairn India, before approving the deal. After his exit from the ministry in January this year, Reddy diluted his stand. But the Cabinet Committee on Economic Affairs on April 6 had to refer the deal to the GoM following differences in the cabinet panel.

The Cabinet panel was divided on whether London-listed mining group with no experience in oil should be given unconditional approval for buying a company that owns the nation’s largest onland oil fields or given clearance after attaching reasonable conditions. Sources said law ministry has strongly backed protection of partner ONGC’s rights in the deal.

Solicitor General of India had opined that Vedanta must agree to equitably share Rs 18,000 crore royalty ONGC pays in excess of its share from Cairn India’s mainstay Rajasthan oilfields, before the government nod.
Agencies

Despite the higher expenditure, Reliance’s gas output from D-6 has fallen to about 55 million cubic metres a day, well below the target of 80 million cubic metres, a performance which the national auditor may criticise, said a senior government official, who did not want to be identified.

Analysts say concerns over gas output from the field has been a drag on Reliance’s shares, which have fallen from a 52-week peak of 1,187 in November to 919 on Monday. Goldman Sachs said in a recent report that there was “uncertainty” about ramping up output, while JP Morgan said after the company’s quarterly earnings that “ RIL management gave no guidance on the timelines for the ramp-up in the D-6 field.”

The official said the chief auditor’s finding is likely to include an extensive account of lapses by the oil ministry, which abandoned its own procedures, and Reliance, which the CAG feels did not comply with some provisions of the production sharing contract (PSC). Under the PSC, the company that is awarded the field recovers the cost of developing the field from sale of gas and balance output, called profit petroleum. This is shared between the government and the company.

The report would be sent to the oil ministry before it is placed in Parliament, he said. Reliance did not respond to a detailed questionnaire sent by ET. Murli Deora , who was petroleum minister when higher costs were approved, did not respond to calls by ET. The CAG report is not final and can undergo changes after being reviewed by the oil ministry. But if the report sticks to the conclusion described to ET it could lead to a furore in Parliament.
Economic Times

The oil ministry has asked Oil and Natural Gas Corporation (ONGC) to stop obstructing the transaction and accept the fact that it is contractually bound to pay its partner’s share of royalty in the venture in which the state explorer was given a 30% equity free of cost. State-run ONGC, hoping to renegotiate the contract, had declared it had pre-emptive rights and the deal could not be completed without its approval.

The oil ministry, which had initially declared it would guard the interests of ONGC and was dragging its feet on the matter, was asked by the prime minister’s office last week to take a quick decision. Vedanta Chairman Anil Agarwal recently met Prime Minister Manmohan Singh and Petroleum Minister Murli Deora.

The government has now rejected ONGC’s request to ease the royalty burden. India had offered royalty exemption to companies as an incentive to lure private capital to oil exploration in the energy-deficient country.

“ONGC has to pay the royalty as per the agreement. Other issues can be resolved through dialogue,” a senior government official with direct knowledge of the matter said, adding a formal approval for the deal was expected by mid-February, the official said requesting anonymity.

After Cairn Energy announced the sale of its controlling stake to London-listed mines and metals firm Vedanta Resources in August, the deal has faced several setbacks, forcing Cairn Chairman Bill Gammell to visit India eight times and prompting Vedanta to seek the PM’s intervention.

Cairn had initially argued that it did not need the oil ministry’s approval for the transfer of the oil-rich Rajasthan block as it was awarded before such a requirement was explicitly stated in India’s production sharing contracts.

Cairn finally accepted this and sought formal approval from the oil ministry for all its blocks. The oil ministry, which initially promised to take a decision by December, said it was delayed because Cairn took time to seek its approval for all the blocks.

ONGC is also demanding operatorship of the Rajasthan block, where its current operator, Cairn India, holds 70%.

The other issue is to ensure that Vedanta’s lack of experience in exploration and production does not affect the country’s oil and gas assets, the official said. The government will ensure that the current management of Cairn India is retained by Vedanta and after the transfer of control, the minority stakeholder—Cairn Energy Plc—continue providing technical expertise.

“Unlike exploration, crude oil production is not very complicated,” the official said. All stakeholders — Cairn, Vedanta, ONGC and the government — can sit together and resolve this issue,” the official added.

The oil ministry also wants Cairn to withdraw an arbitration proceeding challenging its liability to pay cess for oil produced from the Rajasthan block. Cairn is paying “under protest” its share of cess at Rs 2,500 per tonne. But the company had challenged it through an arbitration suit on the ground of a 15-year-old agreement that holds ONGC responsible for paying royalty and other statutory levies. The agreement is, however, silent on ONGC’s cess payment obligation.

An oil ministry official said the government would review ONGC’s royalty obligation separately so that this issue does not impair examination of the deal by the ministry. “We have already said Cairn-Vedanta deal would be judged on merit and a decision would be taken soon … by January end or by early February,” he said requesting anonymity.

A senior ONGC official said the company had been pursuing the royalty issue even before the Cairn-Vedanta deal was announced. “It is a coincidence the two issues got mixed up. We still insist that we have pre-emption rights, which is not acknowledged by Cairn,” said the official, who did not want to be identified.

A senior PMO official, who did not want to be identified said, that the directive was sent to the petroleum ministry  on January 5th after UK-based Vedanta group’s chairman Anil Agarwal wrote to the prime minister seeking support for “expeditious completion” on the transaction arguing that his company had sought all necessary approvals and had promised to invest more in the business.

“We have also met the petroleum minister and affirmed our commitment to grow Cairn India by investing profit of Cairn

India back into the business which will increase the oil production and India’s energy security,” Agarwal wrote to the PM last week. “We seek your support for expeditious completion of this transaction after obtaining necessary approvals from the government of India,” he wrote.

In a communication to petroleum secretary S Sundareshan, Vini Mahajan, joint secretary to the PM has stated that the “prime minister has desired that the matter may be decided on merits at the earliest and certainly within January 2011.”

Sundareshan and petroleum minister Murli Deora were not reachable over the weekend. They did not responded to text messages.

A Vedanta official confirmed that the letter had been sent early this month. He declined to be named because of the sensitivity of the matter.

In August last year Vedanta Resources entered into an agreement with London-listed Cairn Energy to acquire a controlling stake in Cairn India for close to $9.6 billion. The deal, which on the face of it seems like a simple business transaction, has not been able to go through because of the oil ministry’s insistence that it has the final say on the matter. The oil ministry’s interpretation was initially contested by Cairn, but the company later gave in and sought approval.

Cairn chief executive Bill Gammell has visited India eight times in the quest for government approvals, but has failed so far. Now, Agarwal, a key player in the metals and minerals sector in the country, has decided to step in an effort to convince the government of the merits of the transaction.

The PMO’s intervention comes after the oil ministry indicated it was in no hurry to approve the deal. The ministry has extended the deadline for approving the deal on several occasions. It had first said it would decide on the matter by the end of December. Later it said that it would not consider the deal unless Cairn formally sought its approval to transfer all its oil and gas fields including the key oil-producing fields, for which Cairn had argued that it did not need approval.

Cairn had initially sought approval only for fields awarded under the New Licensing and Exploration Policy or NELP, claiming that those fields award prior to NELP did not need the government’s nod. There have been nine rounds of NELP, under which companies bid for the right to explore for oil and gas in areas designated by the government, since 1999.

After Cairn sought approval for all blocks, the ministry indicated that a decision would be taken in February. But last month Deora said his ministry would take a call on the transaction by the end of the financial year or March 31, potentially delaying the approval by another month. Deora had said the deal was complicated but did not specify the complexities.

Some officials had argued that Vedanta’s entry had implications for national security but home ministry officials disagreed saying Vedanta has considerable presence in India already after having acquired a number of businesses such as Hindustan Zinc, Sesa Goa and Bharat Aluminium.

State-run ONGC has also contended that its approval is needed for the deal. The company is Cairn’s partner in the Rajasthan field, with an equity stake of 30 per cent, but is contractually bound to pay its partner’s share of royalty. The company wants to change this as its royalty obligation makes it a loss-making venture for the state firm.

Economic Times

SV Narasimhan, head of finance IOC said his firm’s daily revenue loss on the sale of diesel, kerosene and cooking gas was Rs 150 crore. Revenue loss is the gap between fixed retail prices and what state-run oil retailers pay when they buy petrol and diesel from refineries.

The head of state-run explorer ONGC said his firms December quarter profitability may be hit. The ruling Congress party has dithered over raising retail prices of diesel and cooking gas, primarily because of high food inflation that has angered most of its core voters as it prepares for elections in three key states this year.

“Higher crude oil prices are disadvantageous for us. Crude oil prices above US $70 per barrel reduce our retention price,” ONGC chairman R S Sharma said.

Benchmark US crude oil futures have been above US $90 a barrel for most of the past three weeks, returning to levels last seen at the end of 2008. IOC, HPCL and BPCL can set petrol prices but prices of diesel and cooking fuels are fixed by the government, in an attempt to check inflation and cushion the poor.

Upstream firms ONGC, OIL and GAIL sell crude oil and products at cheaper rates to retailers to partly compensate them for losses on fuel sales.  Food inflation accelerated for the fifth straight week to the highest in more than a year reinforcing fears it has spilt over to broader prices.

Raising diesel prices could give the opposition another weapon to attack Prime Minister Manmohan Singh’s coalition government, which has been weakened by corruption scandals that stalled parliament’s December session and put reform proposals in Asia’s third-largest economy on hold.

Indian oil firms last month raised petrol prices by Rs 5.6 per cent, but petroleum minister Murli Deora on Wednesday hinted that the government would not raise diesel prices for now.  Diesel accounts for one-third of fuel use and is crucial for transportation and the agriculture sector. On the sale of a litre of diesel IOC’s revenue loss was about Rs 6.21 a litre.
Agencies

RBI had last month said that oil payments to Iran can no longer be settled using a longstanding clearing house system run by the central banks of nine nations — including India and Iran — dubbed the Asian Clearing Union (ACU).

For January, we have an interim arrangement for paying Iran through a German bank. But for a permanent solution, we will need to look at currencies other than dollar and euro, a senior government official said.
At a meeting of central banks of India and Iran in Mumbai last week, the Persian Gulf nation agreed to accepting rupee payments but RBI so far has not agreed to it, he said.

The trade between India and Iran is heavily loaded in favour of Iran. As against exporting US $12 billion worth of oil, Iran imports $1 billion worth of products from India.

“But if they are ready to receive payment in a State Bank of India account in Mumbai, it shouldn’t matter to us what they did with that money. If they used the money to import more, that will be good for the country. And if they used it to invest in India, that will create more jobs,” he said.

“Strangely, this proposition is not acceptable to RBI which had scrapped the well running ACU payment mechanism without consulting the oil companies or putting an alternate mechanism in place,” the official said.

Payment in Chinese currency is also being considered.   Petroleum  minister Murli Deora today said a solution to the payment row would be found soon.

When OMCs increased petrol prices by Rs 2.95 per litre around mid-December, they lost Rs 1.25 per litre. This difference has now widened to Rs 2. An increase of at least Rs 1 per litre is likely if the crude price does not drop from December’s second fortnight average of $90.84 per barrel, said an executive.

While the government-controlled companies are booking revenue loss on sale of diesel, with the government refusing to bite the bullet, private sector retailer Essar Oil has increased diesel prices. The company earlier charged a premium of Rs 1-4 per litre over the public sector companies. It has now increased the premium by Rs 2-5 a litre.

The Indian basket of crude oil had averaged $87.83 per barrel in the first fortnight of December, after which companies decided to go for a jump of Rs 2.95-2.96 per litre in petrol. Crude oil averaged 3.42 per cent higher in the second fortnight of December. The basket had averaged $89.78 per barrel in December, up 6.55 per cent from the November average of $84.26. The current financial year average price is $79.35 per barrel, up 13.74 per cent from the financial year 2009-10 average of $69.76.

The petrol price was decontrolled from June 26 and any under-recovery incurred on the product will not be compensated by the government. In spite of the deregulation, the OMCs did not pass on the required increase of Rs 4.17 when they raised petrol prices by Rs 2.95.

The price of diesel, kerosene and LPG, that together account for over 60 per cent of petroleum products’ consumption, has not been increased since June 25. Currently, OMCs — Indian Oil, Bharat Petroleum and Hindustan Petroleum — have incurred under-recovery (revenue loss) of Rs 7 per litre on diesel, Rs 19.60 per litre on kerosene and Rs 366 per cylinder on domestic LPG.

Petroleum Minister Murli Deora today said his ministry was not in favour of raising diesel and domestic LPG prices as a response to the spurt in global crude oil prices since the move will add to an already high inflation rate. “We are trying not to increase prices,” he told reporters here.

Based on the increased crude oil price, the OMCs are expected to incur a revenue loss of Rs 73,000 crore in the current financial year on sale of diesel, domestic LPG and kerosene.

Business Standard

Empowered group of ministers (EGoM) chaired by finance minister Pranab Mukherjee  was scheduled to meet last week to discuss a possible increase in diesel and cooking gas prices. Oil marketing companies (OMCs) have been given freedom to set petrol prices but prices of diesel and cooking fuels continue to be fixed by the central government.  OMCs last month raised petrol prices by 5.6 per cent, but increasing diesel prices could have a broader inflationary impact as farmers and manufacturers pass their higher costs along to consumers. “We are trying to see there is no further price increase,” Deora told reporters.

“If (global) oil prices go up then something has to be done. But we are doing our best to see that essential commodity prices don’t increase.”
Global crude prices have rallied, and oil steadied to US $89.18 a barrel on Wednesday, after reaching a 27-month high of $92.58 on Monday.

Prime Minister Manmohan Singh’s coalition government, already weakened by orruption scandals, must seek to balance the benefits of more market-related pricing with the immediate impact on inflation, already spurred by rising food prices. Diesel accounts for one-third of fuel use and is crucial for transportation and the agriculture sector.

Tackling the structure of fuel subsidies would help stock investors value proposed share sales for state-run energy firms Indian Oil Corp and Oil and Natural Gas Corp. The political tussle over diesel pricing comes as India and Iran try to end a row over payments for Iranian oil supplies.

Iran has offered a stop-gap plan for supplies for January, but a lasting solution to the row over how to pay for future supplies may take weeks.

Deora said he expected a solution soon. India’s central bank said last week payments to Iran could no longer be done through a longstanding clearinghouse system run by central banks, prompting fears India’s US $12 billion annual oil imports from Iran could be threatened.

He said that an impression seems to have been generated that since the EGoM (ministerial panel with powers of the full cabinet for a specific issue) had been postponed, the under-recoveries (of oil marketing firms) would be left unattended.
He added that this was totally incorrect. 

A ministerial panel meeting to review diesel and cooking gas pricing scheduled for yesterday was put off. The meeting was to be led by finance minister Pranab Mukherjee.

According to Sundareshan, the government would not ask oil producers ONGC or Oil India Ltd to share more than one third of the total losses run up by the oil marketing firms. Analysts say the statement would help remove any concerns over ONGC’s valuation during its follow-on public offer in March.

“I am told that the ministry of finance has released an additional Rs 3,000 crore in subsidies to oil marketing companies,” oil secretary S Sundareshan said.

Oil minister Murli Deora recently met finance minister Pranab Mukherjee seeking a hike in cash compensation for state-run oil companies, which lost over Rs 31,000 crore on selling fuel below cost in the first half of this fiscal.

With the additional dole out, Indian Oil Corp (IOC), Bharat Petroleum and Hindustan Petroleum will get a total of Rs 13,000 crore in cash to make up part of their revenue loss, he said.

The oil ministry had been asking the finance ministry to make up for 50 per cent of the revenue loss as the retailers cannot absorb more than Rs 6,000-7,000 crore loss in the entire financial year.

The three firms lost Rs 31,367 crore in revenues during the April-September period on selling diesel, domestic LPG and kerosene below cost.

This includes Rs 2,227 crore they lost on selling petrol below cost till 25 June when its pricing was freed from the government control.

Of this revenue loss, upstream oil firms Oil and Natural Gas Corp (ONGC), Gail India and Oil India will make up for Rs 10,456 crore and about Rs 10,000 crore had previously been committed by the government by way of cash compensation.

About Rs 8,000 crore of unmet revenue loss will be dealt with together with the under recoveries the oil companies will incur in the second quarter of the current fiscal, Sundareshan said.

“This is not final settlement,” he said, adding the final compensation to the fuel retailers will be decided at the end of the fiscal.

S Sundareshan said that the government is targeting sale of 10 per cent of its holding in IOC through a follow-on public offer in January 2011 and 5 per cent in ONGC in March.

The additional dole out “is a very, very good message for the disinvestment of IOC and ONGC,” he said.