Oil sector regulator rejects Cairn India's proposal for 10-year extension of contract

Cairn India's long-term investment prospects in Rajastan's Barmer block has dimmed with the Directorate General of Hydrocarbons (DGH) rejecting its proposal for a 10-year extension of the production sharing contract up to 2030.

Cairn's exploration contract for the Barmer oil block expires on 14 May 2020 and it now seems the company will have to content with a 5-year extension that would give the company exploration rights up to 2025.

This, however, is too short a period for investments to give enough returns and the Anil Agarwal-promoted company, which had lined up investments for the next few years, is rethinking its investment plans now.

The current PSC for the Rajasthan block is valid till 14 May 2020. The Barmer block, according to Cairn India, has potential for commercial production till 2040 and, with plans to invest over $3 billion over the next three years, the shorter extension will make the investment superfluous.

For this, an extension in the production-sharing contract (PSC) is crucial.

Cairn India had, in April last year, written to the petroleum ministry seeking an extension of the PSC till 2030. The petroleum ministry is reported to have rejected an additional 10-year term on recommendations of DGH.

DGH argues that a 10-year extension can only be granted to gas fields and oil fields are not generally granted extension of PSC beyond five years.

Besides the Barmer field operated by Cairn, around 12 more PSCs are expiring between 2019 and 2025. These include the Panna Mukta Tapti fields held by ONGC, Reliance Industries and BG. So, any decision to extend the PSC beyond the stipulated period would be a policy decision by the government.

Meanwhile, production from the Barmer oil fields is expected to increase from around 200,000 barrels of oil equivalent at present to 300,000 barrels by 2016, according to Cairn India and its partner ONGC Ltd.

Cairn, however, claims that the oil block also has the potential to yield up to 15 million standard cubic metres a day (mscmd) of gas, which is higher than Reliance Industries' current production from its KG-D6 block.

At present, the Vedanta group company holds a 70 per cent stake in the Rajasthan block, while ONGC owns the remaining 30 per cent.