Deal or no deal in the desert
Cairn Energy may look like a wee Edinburgh company that got lucky with an oil gusher in the Indian desert.
It's since gained some notoriety from green groups for prospecting off the virgin coast of Greenland.
But the significance of its current predicament goes far beyond its Lothian Road headquarters or the oil sector. It has become a litmus test of the future of the globalised economy and of Asia's elephantine growth.
The regulatory obstacle on which it's become stuck in Delhi challenges whether foreign investors can have confidence in India, and it's being closely watched in the oil sector and far beyond.
Cairn's concern, now being signalled to others to put pressure on the Indian government, is this: if national interest can be used to renege on legal contracts, then why would anyone else risk billions of risk capital in the country?
Lucky with the black stuff
The start to the story has become corporate folklore. Cairn bought up the rights to drill in the Rajasthan desert, cheaply, where others had failed. On its last throw of the prospecting dice, Bill Gammell, chief executive, rugby internationalist and schoolboy chum of fellow oilman George W Bush, rolled a double six.
The Mangala field is now pumping 125,000 barrels a day, with the potential to go at least to 150,000 barrels. Thursday's figures from Cairn India, of which it owns two-thirds, came with a warning that momentum is being lost because of a lack of regulatory approval for expansion of production. That's a symptom of the wider malaise.
Cairn sees its expertise as being in exploration rather than production. So last August, it struck a deal to sell about half of Cairn India to Vedanta, the London-listed, Indian-based metals company. The proceeds, more than £6bn, can go partly to shareholders and partly to help fund its hugely expensive Greenland adventure.
But there's a catch. In India, there's often a regulatory catch. In this case, it involved ONGC, three-quarters owned by the Indian government, with a further tranche expected to go private in months.
In the 1990s, when it was wholly owned by the Indian government and when ministers in Delhi were eager to attract international oil exploration, Cairn moved in on the basis that, if it took the financial risk and got lucky with the black stuff, ONGC would pay all of the royalties from any oil find due to the Indian government.
ONGC got a 30% stake in the Rajasthan field, without having to put in any risk capital. That was all Cairn's - more than half a billion dollars of it.
It seems the catch in the Vedanta deal is that ONGC is telling the energy minister that it wants to get out of that royalty agreement - a contract that looks like costing it about £2bn in payments over the lifetime of the Rajasthani fields.
It wants Vedanta to take on some of those royalty payments - preferrably 70%. And if Vedanta has to fork out that that much in rupees, the value of its acquisition from Cairn would be considerably less and would require renewed shareholder approval.
With Vedanta having already clashed with the Indian government over environmental concerns around its metals business, the problem with the Cairn deal was clear by last October, and the Scottish company's hopes of completing the sale by the end of 2010 were dashed.
Humungous investment potential
Sir Bill Gammell has shareholder authority and Vedanta's agreement to complete the transaction by 15 April. By that time, at least 20 days, and arguably more than double that length of regulatory processing, will have to be completed.
So a decision is required imminently if the deal is not to fall. That's why Cairn's chief executive has this week met the Indian energy minister, S Jaipal Reddy, eager afterwards to stress how "positive and constructive" the talks were. The minister let it be known that ONGC would require its concerns to be legitimately addressed.
The meeting was probably also quite tough, because the message to India is a blunt one: refuse Cairn on this one, let ONGC break a legal contract on the royalties payment, and wave goodbye to the confidence of those wielding the humungous potential for foreign direct investment (FDI) into India.
It's clear from Friday morning's Indian business press that both Cairn and ONGC are now playing hardball in public. One publication carries ONGC's version of Cairn's apparent lack of co-operation: another a reminder to the Indian government that it is also in Alberta, looking for bidders to take on other exploration blocks, and those in the frame will want to know what's happening with the Cairn deal before they commit.
From Delhi, the Scottish company may look like the former colonial masters intending to walk away with vast profits from the country's natural resources. That tends not to go down well.
Refined energy security
But prospective FDI investors from anywhere need to know they can take risks on India, then exit that or any other country, selling on stakes when they've extracted value and want to move elsewhere.
That's a hurtful process - as Scotland found when much of its own FDI boom in electronics pulled out, seeking improved shareholder value where wages were lower.
It's a lot less painful where Cairn has created a legacy that keeps flowing through the desert for refining, providing energy security where it had little.
India may be an emerging giant with much more clout in the newly globalising world economy, but it's being reminded that the rule of law and the reliability of legal contracts is essential if inward investment is to be attracted in the first place.