Cairn's contractual term for exploring and producing oil and gas from the Rajasthan Block RJ-ON-90/2 expires in 2020 and the area is to return to the block licensee, ONGC.
The Anil Agarwal-group company, which wants the term of the block extended by a minimum 10 years, has formally written to ONGC on the issue, sources said.
ONGC, which currently holds 30 per cent stake in the block, has told the Oil Ministry that the Production Sharing Contract (PSC) can be extended beyond 2020 if all parties to the contract agree on mutually agreeable terms.
The state-owned firm will now decide on terms on which it can agree on allowing Cairn to continue to operate the fields.
Once ONGC agrees, a formal resolution will be passed by the block's Operating Committee which has the two partners as members. After this, the proposal will go to the block oversight panel called the Management Committee headed by upstream regulator DGH and then to the government.
Sources said as a licensee, ONGC has concerns on royalty which it would be like to be addressed at the time of extension.
ONGC as a licensee of the block, which produces just over 181,000 barrels per day of oil, pays royalty to the government on not just its 30 per cent stake but also on Cairn's 70 per cent interest. Though the royalty is later cost recovered, the company faces cash flow issues because of the payment.
For agreeing to Cairn's proposal, ONGC may put a condition that royalty be shared by the partners in proportion to their shareholding. Also, it can seek a higher stake of 50 per cent.
The Rajasthan PSC provides for ONGC becoming the owner of all facilities once their cost is recovered from sale of crude oil.
The cost of Mangala, Bhagyam and Aishwariya oil field facilities in the block as well as the heated pipeline that carries the crude from the field to Gujarat refiners will be recovered much before the current term of PSC ends in 2020.
The Rajasthan Block RJ-ON-90/2 was awarded as an exploration acreage on terms different from 28 small and medium-sized fields like Panna/Mukta and Tapti and Ravva awarded alongside during 1991 and 1993.
The Oil Ministry in a draft policy has proposed extension of the PSC for these fields by 10 years or the balance economic life of the field, whichever is earlier. Cairn's Rajasthan block is not included in this policy.
Sources said the Rajasthan PSC provides for extension of license for 5 years if there is a producing oil field and by 10 years if there is a gas prospect.
The official said ONGC, who is a party to the Rajasthan PSC as well as the licensee, will also need to agree to any extension provisions under the PSC.