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    India brings a close to Cairn chapter


The country’s long dispute with Cairn Energy is finally drawing to a close, but there is still work to be done to sell the country’s exploration potential.

by: Andrew Kemp

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India brings a close to Cairn chapter

India is on the verge of putting its long-running, high-profile tax dispute with UK developer Cairn Energy in the rear-view mirror, an essential step if the government is to succeed in boosting investor confidence.

New Delhi has been trying for years to woo foreign and private investors into the upstream, launching a series of reforms that date back to 2016. Investors, however, have remained wary of both the country’s reputation for bureaucracy as well as its support for controversial taxation policies.

Despite various upstream reforms, including the introduction of the Hydrocarbon Exploration Licensing Policy (HELP) and the Open Acreage Licensing Policy (OALP), state-run companies continue to dominate new upstream bid rounds and foreign investors are noticeably absent.

The government’s decision in August to dispose of retrospective taxation, which was introduced in 2012, should help on this front. After all, the decision has enabled the government to resolve its seven-year dispute with Cairn in a matter of months.

The settlement and the tax reform should breathe new life into the upstream’s image as an investment destination, though the extent of that boost remains up for debate.


Tax resolution

Cairn said on November 3 that it was preparing to file paperwork for a 79bn rupee ($1.46bn) refund of taxes the government collected in relation to the sale of Cairn India to Vedanta in 2010-2011.

The government froze Cairn’s local assets in 2014 in an effort to enforce the claim, before liquidating the bulk of these assets in mid-2018. Cairn, for its part, launched arbitration proceedings in 2015, with an international tribunal awarding the company $1.7bn in costs and damages in December 2020.

Following the government’s announcement in August that it would abandon retrospective taxation, the two sides have been working toward resolving their dispute amicably.

Cairn said earlier this month that it was working with the Indian government to expedite the refund and that it aimed to pay a special dividend by early 2022. The company followed this announcement with news on November 15 that it intended to commence an initial share repurchase programme of up to £20mn worth of ordinary shares ahead of an anticipated larger buyback programme that will kick off once it had received the tax refund.

Prashant Vasisht, the vice president and co-head of corporate ratings at ICRA, tells NGW that although the resolution would go some way towards improving the country’s investment image, a rise in concerns over environmental, social and governance (ESG) goals could prove a difficult hurdle to overcome.

“The agreement with Cairn and the move to scrap retrospective taxation will improve investor sentiment in general," Vasisht says. "However, large oil and gas companies looking at upstream investments are increasingly keeping in mind their ESG goals and are more likely to invest when the prospectivity is good and/or the projects are close to production.”

The executive added: “Accordingly, investments will not climb substantially unless an asset is also considered to be promising.”


Exploration challenges

While existing and proposed reforms seem likely to bolster confidence in de-risked plays, it remains unclear whether major developers will be willing to commit to higher-risk greenfield plays.

This is a problem for a country with a short list of promising upstream projects in active development. India’s natural gas production has only just begun to find its feet after several years of decline – volumes contracted from 39.75bn m3 in financial year 2012-2013 to 27.78bn m3 in 2020-2021.

While output in September climbed by 26.6% year on year to 2.9bn m3, these gains were primarily driven by just one block – Reliance India Ltd (RIL) and BP’s deepwater KG-DWN-98/3 (KG-D6). The acreage’s production has been ramping up since the partners commissioned the D-34 field in December 2020.

Production from fields operated either by private companies or joint ventures soared 95.9% in the month to 918.2mn m3, according to the Ministry of Petroleum and Natural Gas. State-run Oil and Natural Gas Corp.’s (ONGC) production, on the other hand, slid 2.9% year on year in September to 1.73bn m3.

The state major also has its sights set on the Krishna Godavari (KG) Basin’s deepwater gas resources and is developing KG-DWN-98/2 (KG-D5). ONGC, however, is reportedly years away from beginning commercial production.

ONGC will struggle to pump gas ashore before May 2023, local news agency PTI quoted unnamed government officials as saying on November 14, owing to delayed work package awards. Interface issues between the pipeline, platform and storage and offloading vessel work programmes have also been blamed.

KG-D5 and KG-D6 are India’s biggest upstream developments in years and the country has no other similarly sized prospects in the pipeline. While more money needs to be sunk into greenfield exploration, if ICRA’s analysis is to be believed, then such investments will need to come from ONGC rather than be driven by private or foreign players.

And if this is the case, it may explain why ONGC remains under governmental pressure to offload assets in order to secure new partnerships.


Divestment strategy

The ministry of petroleum and natural gas has asked ONGC to consider selling a 60% stake in the Mumbai High as well as Bassein and Satellite developments offshore the country’s west coast, Reuters quoted an unnamed government source as saying on November 11.

While the ministry’s divestment suggestion is non-binding, according to the newswire’s source, such a move would make sense if the company’s producing fields continue to decline and it struggles with delays at its biggest growth asset – KG-D5.

If it also falls to ONGC to prove up the country’s oil and gas basins, the state major will be forced to streamline its operational and financial resources. In that case, petroleum secretary Tarun Kapoor’s comments to Reuters in October that oil major ExxonMobil was interested in farming into some of the state major’s deepwater assets off the east coast become much more significant.

Managing to close the door on India’s tax dispute with Cairn is an important milestone in the government’s reform agenda. At the same time, though, it highlights the work that still needs to be done to ensure the country’s long-term upstream potential is fully realised.