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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
More than eight months ago, India's oil and gas sector saw the signing of its biggest acquisition deal.
That was when on August 16, 2010, Anil Agarwal-controlled Vedanta Resources entered into an arrangement with the Edinburgh-based Cairn Energy to acquire a controlling stake in Cairn India, the latter's Indian company that along with ONGC operates the country's biggest onland oilfield in Barmer district of Rajasthan.
Several rounds of meetings between representatives of Vedanta Resources and the officials of the Union petroleum and natural gas ministry have taken place since then, but the $9.6 billion deal is nowhere near receiving the government's final nod of approval.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
Next Monday, a group of ministers, formed after a Cabinet meeting early this month refused to clear the deal, is likely to review the government's options on the matter.
There are no guesses on how many times the group of ministers, headed by finance minister Pranab Mukherjee, will meet before any clarity on the Vedanta-Cairn deal emerges.
What may have already complicated the issues before the ministerial group are two recent developments.
Days before the Cabinet refused to clear the deal, the stock market regulator, the Securities and Exchange Board of India, gave the green signal to the Indian arm of Vedanta Resources to go ahead with the open offer to acquire the controlling stake in Cairn India.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
A few days later, Malaysian oil major, Petronas, which had a minority 14.94 per cent stake in Cairn India, exited the company by selling its stake to the Vedanta group.
Indeed, there is nothing much that the group of ministers will need to debate simply because everything conceivable so far has been debated among various government departments.
Still, to quote petroleum minister Jaipal Reddy there are differences in the "nuance".
These nuances are not known officially but a senior government official, who is involved in attracting foreign investment in the oil and gas sector, says: "What was a simple question of interpretation of the production sharing contract has become a political issue.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
Not surprisingly, bidding for the ninth round of the New Exploration and Licensing Policy, which closed on March 29, evoked as lukewarm a response from investors as the previous one.
This was despite the fact that two major deals have aroused international interest in India's oil and gas sector in the last few months - the Vedanta-Cairn deal and the BP pact with Reliance Industries Ltd to buy 30 per cent stake in its 23 blocks for $7.2 billion with an investment commitment of about $13 billion.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
If one reason for Nelp becoming unattractive was the risky nature of exploration, with companies preferring to buy into producing properties, the other reason was the recent flip-flop in government's policies.
Oil experts draw attention to two instances - when the government took away the tax holiday benefit from production of natural gas and then the Vedanta-Cairn deal where the government has been dragging its feet.
"Wherever there is a find, the government seems to be saying we will change the policy," said the official.
Nor has the issue of royalty, the biggest hurdle in the Vedanta-Cairn deal, been resolved.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
Though ONGC is a 30 per cent partner in the Barmer block, it is required to pay the entire royalty on its production.
It is estimated that ONGC would have to bear a burden of Rs. 14,000 crore (Rs. 140 billion) on account of royalty payment over the life of the field.
ONGC is keen that it gets compensated either by the government or by the new owners of Cairn India after the deal.
According to the senior official, India's production-sharing contracts are well-defined and take care of all the disputes.
Even R S Sharma, former chairman and managing director of ONGC, is of the view that cess and royalty should not come in the way of clearance, though he admits that Cairn is also to be blamed for the episode.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
"In the normal course, the deal should have been cleared subject to these issues getting resolved in due course of time as per contractual provisions.
But it is a fact that Cairn Energy kept the contentious issues under wraps and a resolution of those issues is important," Sharma said. Ian Blakeley, Vice-President, Asia, DI International, an energy consultancy, too sees royalty and cess issues to be the primary reason behind the delay in the Vedanta-Cairn deal.
He said that though deals of this nature were sorted out much faster, the delay was due to the financial interests of the national oil company.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
Sharma said that the pitch in the Vedanta-Cairn deal got spoiled because Cairn Energy did not take the government and the partners into confidence before announcing the deal and "they also publically declared they do need approval from them".
Sharma, who has been ONGC's director (finance) as well, nevertheless admits that midway policy changes do not augur well for future investment.
"The changes in the taxation regime for exploration and production sector sent out wrong signals to the international community.
"For instance, the definition of mineral oil was changed for the levy of income tax. Further, service tax has been imposed on exploration activities whereas it (service tax) is usually levied on revenue-generating activities."
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
Though oil deals are difficult to clinch globally since natural resources are national assets, many in the oil industry are critical of the government approach.
"This dilly-dallying on the government's part is very frustrating. Does this mean that if I invest in a company, I do not have an easy exit option?
"The government cannot make policies to attract investment and technology into India and then change the same policies," said the India head of an international company, which operates in partnership with Reliance Industries Ltd.
While in other countries such deals take only three to four months, there seems to be no deadline for clearing the Vedanta-Cairn deal.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
"In India, the way government deals with such matters is distasteful," he added.
Consultants who facilitate international mergers and acquisitions in the energy space are not as pessimistic.
For them, if on the one hand it is the Vedanta-Cairn deal, on the other it is RIL and British Petroleum deal too.
"It's only a matter of time that the Cairn deal will materialise.
Also, the Big Oil knows the details of the Vedanta-Cairn deal. While they are closely watching these developments, they also know that a deal has also taken place between RIL and BP which has been smooth so far," said the oil and gas head of an international transaction advisory company.
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Will the $9.6 bn Vedanta-Cairn deal ever get approved?
It is a widely held view that the more protracted the Vedanta-Cairn deal becomes, it will send out a wrong signal to global investors.
"Whether this affects India as an exploration and production destination for international oil and gas companies, however, is open to question.
"It is not a journey for the faint-hearted - companies require patience and persistence," said the advisory company head.
That may well be the message for Anil Agarwal, at least for now.
