Oil Ministry blocked Cairn India’s Plans to begin Oil Production from the Bhagyam Oil field

The oil ministry blocked Cairn India’s plans to begin oil production from the Bhagyam oilfield which is the second biggest find in the Rajasthan block. Cairn had planned to put the Bhagyam oilfield into production by October to take total output from the Rajasthan block to 175,000 barrels per day.

At the meeting of the panel that oversees operations of the block on 10 June 2011, the panel had stonewalled 2011-12 production rate, work programme and budget for the Bhagyam field. The ministry wanted Cairn to calculate profit from the Rajasthan block after treating royalty as cost recoverable item.

Cairn believed that royalty, which is paid by state-owned Oil and Natural Gas Corp (ONGC), is a licensee obligation and hence not cost recoverable from revenues.  Cairn’s views were contested by the oil ministry which made cost recovery of royalty as a precondition for allowing Cairn Energy to sell 40% stake in Cairn India to Vedanta Resources.

The ministry insisted that it will not approve further programme on Bhagyam unless Cairn calculates profits to be divided among stakeholders and the government after adding royalty to the cost.