Cairn names arbitrator in oil dev cess case

Cairn India has appointed an international arbitrator in London to resolve the issue of the Rs 342 per barrel oil development cess on its Rajasthan production.

The cess, the subject of a long running dispute between the government and the company, can dent Cairn’s returns from the field at the rate of Rs 240 ($5) per barrel since it has a 70% interest in the field.

The field, currently producing a few thousand barrels of oil per day, is expected to hit peak production of almost 200,000 barrels in two years, increasing the potential cess-related liability to a million dollars per day. It is currently paying 70% of the cess “under protest”.

The move to appoint an arbitrator was hinted at by company officials when the Rajasthan field started production three weeks ago, when they said the contract between the government and the company envisioned such a move to resolve disputes. Cairn did not comment on the matter.

The controversy started due to a lack of correspondence over the contract between the company and the government and the larger policy under which the contract was entered into.

The exploration policy, articulated in the early 1990s and called the pre-NELP bidding policy, stipulated that the contractor does not have to worry about statutory levies if they strike oil. International oil giant Shell had taken a 70% stake in the Rajasthan block in 1995, which was bought over by Britain-based Cairn in 2002-04.

Even though the contract between Shell and the government did not mention anything about the Oil Industry Development Act (OIDA) cess, Cairn has been arguing that the cess is covered under the larger umbrella of regulatory levies that the company is exempted from paying.

It also pointed out that the government representatives in such pre-NELP blocks have been paying the cess from their own pockets.

The ministry of petroleum and natural gas, however, has insisted that the cess was not specifically exempted in the contract — unlike other levies like royalty — and therefore, must be borne by Cairn.