ONGC set to get 10% return on Cairn fields

Govt To Ensure Minimum RoI To Boost Valuation Before FPO

THE government has agreed in principle to ensure a minimum 10% return on investment (RoI) to ONGC in Cairn India's Rajasthan blocks, boosting the firm's valuation ahead of its follow-on public offering and removing a big obstacle for the $9.6-billion Cairn-Vedanta deal, petroleum ministry sources said.
    The state-run explorer has been losing money from these blocks, as it has to bear the entire royalty burden, and has been using the deal to negotiate better terms for itself. Oil ministry sources said the government may transfer a part of its own share of profit from the blocks to help ONGC, but this would require the approval of the finance ministry because it would be a direct subsidy from the government.
    Officials in the finance ministry said they were looking at ways to help ONGC while petroleum secretary S Sundareshan said his ministry wanted India's second-largest company by market capitalisation to get a reasonable return.
    "This will come as an upside for investors ahead of the FPO as the Rajasthan blocks will generate more revenues in the years to come. A positive return for ONGC would help the Cairn-Vedanta deal as well as ONGC's concerns would be addressed without making any changes for Cairn India materially," says Sanjeev Prasad of Kotak Securities.
    The ministry is considering ways to give ONGC a return of 10-15% on its investment in the Rajasthan blocks and is consulting ONGC and the Directorate General of Hydrocarbons, the quasi-regulator for the sector, the official said, requesting anonymity. One of those options is to amend the tripartite contract between Cairn India, ONGC and the central government for the Rajasthan blocks. The amendment would allow the Union government to directly compensate ONGC.
    By altering a specific contract, as opposed to making a policy change that affects 70-odd royalty deals that are in the same situation as ONGC, the government will not need cabinet clearance, speeding up the deal. The government would like to resolve the royalty issue quickly, as it is looking to sell 5% in ONGC through a public issue by March 2011; if the royalty issue is still pending, it might lower the valuations the government gets. However, the Cairn-Vedanta deal, pending for about four months, might run into another hurdle. If the delay continues, Vedanta Resources might ask Cairn Energy, Cairn India's Scottish parent, to lower the deal price, a person involved in the transaction said last Thursday.
    "The change in crude prices and scrip movements will be variables we will have to keep in mind as the deadline approaches," he said. The deadline for the deal is April 15, which can be extended by one month