Vedanta in a great rush to get Cairn deal through!

No one should be surprised why Vedanta Resources Plc is in a tearing hurry to take over Cairn India despite the issue being stuck in the Prime Minister's Office? The answer is simple: the LSE-listed firm of Anil Agarwal is eyeing mind-boggling profits by clocking an estimated revenue of $650 billion on an investment of mere $9.6 billion, where as the government should have the right of first option of purchase.
The oil discovered so far in the Barmer and Jalore districts, including Mangala region, is estimated to be over one billion barrels and further significant discoveries are expected to cross over 6.5 billion barrels in the entire state of Rajasthan. The value of the oil is over $650 billion given the average price of $100 per barrel that the company expects to make in a period of 30 years of the lease agreement.
A Bangalore-based lawyer Arun Agarwal has lodged a complaint with Prime Minister Manmohan Singh and other ministers besides the CBI and the CVC alleging large-scale bungling in the whole deal.
On Tuesday, Vedanta bought 10 percent of Cairn India from Malaysian company Petronas which made a cool profit of $1.16 billion in four years. Vedanta paid a total of $2.1 billion for 14.94 percent of Cairn India.
“This clearly shows the profits Vedanta will make after it gets full control of the oil fields,” says Agarwal.
The direct cost of producing a barrel of oil, according to the website of Cairn India, is $5 and after meeting the financial charges etc it is $10 dollars per barrel. Cairn India owns 70 per cent of the oil producing fields while the state-owned ONGC owns 30 per cent. Cairn does not pay any royalty to ONGC.
There are pending disputes relating to payment of royalty and cess presently paid by ONGC and neither paid nor recovered as cost from Cairn. The excess liability (to be paid by Cairn) of ONGC on royalty alone is about Rs 12,000 crore. The deal also becomes cheaper to the extent that ONGC has to pay excess royalty.
“It therefore does not stand to reason as to why the oil reserves should be allowed by the government to be transferred for around seven billion dollars to Vedanta when it has the right of first option of purchase,” says Agarwal.
The matter of royalty is now with the CCEA headed by Prime Minister Manmohan Singh. Law Minister M Veerappa Moily and the Solicitor General of India say that the royalty ONGC pays on entire output from Cairn India's oifields is cost recoverable.
“Somehow the original deal got structured in a manner by which the entire liability of royalty and cess devolved on ONGC and not on Cairn. The matter needs to be investigated and responsibility fixed,” the lawyer said in the complaint to the PM.
The oil ministry in the Cabinet note has admitted that Cairn could later play difficult. The Cabinet note says that Cairn has alleged that the non-inclusion of cess in the production sharing contract was “either a mutual or a unilateral mistake by the Government by playing fraud by diverting (original operator) Shell's attention away from cess during the contract negotiations.”
Vedanta is buying 51 per cent of shares of Cairn India at a price of around Rs 400 per share which amounts to approximately Rs 43,600 crore or $9.6 billion. Hence, by investing $9.6 billion, Vedanta is looking at profits of $600 billion, if $50 billion are subtracted as operational costs and other expenditures, according to the complainant, who terms the deal as "national loot".
“Under the circumstances, it is the collective responsibility of all the Ministers… including the CVC and the CBI that there is complete pre deal signing transparency so that allegations of crony capitalism/ bribery,/sell out / economic blunder are not leveled later on after the government approves the deal,” the complainant alleges.