Cairn India, the operator of the Barmer oil field, is caught in a Catch-22 situation when it comes to pricing the crude from the country’s biggest onshore field. While domestic crude oil is largely sold at import-parity prices, a 2009 government directive binds Cairn to sell Barmer crude at formulaic (5-15%) discounts to the Brent benchmark. As the company has lately petitioned the petroleum ministry against this oddity, the latter had no definite answer to give and asked it to negotiate the matter with its buyers which include state-run Indian Oil (IOC). And till the six-year-old directive was withdrawn, IOC won’t forgo the discount, nor would the other buyers Reliance Industries and Essar.
According to sources, the petroleum ministry has said the production-sharing contract between the Barmer operators (Cairn and state-run ONGC) provides for arm’s length pricing and any pricing decision has to be taken between the buyer and seller. The operators are currently selling Barmer crude (180,000 barrels per day) at discount of $3-6 a barrel, given that Brent crude is hovering around $66 per barrel.
A senior ministry official told FE: “Under the PSC, the ministry oversees whether the explorers are compliant with the norms. The crude price, however, is negotiated between the buyer and the government can’t interfere in that process.” IOC, which is sure to respond to a government directive changing the current system, buys about 25% of the Barmer output.
Cairn’s average crude price realisation from Barmer for FY15 was $76.40 a barrel, after offering a 10.6% discount to Dated Brent. The overall operating expense in the field last year was at $5.80 per barrel of oil equivalent, one of the lowest in the world. Cairn India’s profit after tax in FY15 dropped by 64% to Rs 4,480 crore against Rs 12,432 crore in the previous year.
In 2009, when Cairn India commenced production from the Barmer block, the petroleum ministry had instructed all nominee refineries (IOC, Hindustan Petroleum and Mangalore Refinery and Petrochemicals) to consider the pricing formula agreed with the contractor as provisional till it is reviewed. Later, with the increase in production, the government allowed sale to private refineries RIL and Essar Oil.
According to new formula for domestic crude pricing recommended by the Petroleum Planning and Analysis Cell, the price would be linked to regional crude grades (Duri and Daqing). This could potentially allow domestic oil producers to improve their margins. However, it seems that even if the new formula is implemented, Barmer crude would continue to be governed by the 2009 directive.
According to industry watchers, not selling crude from Barmer at market prices could have implications for the government exchequer. Every dollar that is discounted on this crude results in a loss of about 70-80 cents to the exchequer, given the current rates of taxes and levies. Of course, IOC’s under-recoveries could go up a bit if it start getting Barmer crude without a discount.
Over 249 million barrels of oil equivalent has already been sold by Cairn during the past five years at a discounted prices. About a quarter of domestic crude comes from Barmer.
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