The government can look at raising its share of oil from the fields from a current cap of up to 50 per cent as well as allowing state-owned ONGC, which is the licensee of the block, to raise its stake, sources privy to the development said.

Cairn's contractual term for exploring and producing oil from the Rajasthan Block RJ-ON-90/2 expires in 2020 and the company has made a formal application for extending the license by another 10 years saying the block also has significant potential to produce natural gas.

Asked for an opinion on the issue by the Oil Ministry, the Law Ministry stated that the extension of contract can be done only on "mutually agreed terms and conditions" by all parties to the contract ie government, ONGC and Cairn, they said.

The Law Ministry said the Production Sharing Contract (PSC) for the Rajasthan block clearly states that extension can be granted on "mutually agreed" terms and conditions.
The phrase mutual agreement clearly indicates a new agreement implying thereby that the parties to the agreement are at liberty to renegotiate the terms and conditions of the contract including fiscal terms and conditions, it opined.

 Accordingly, the administrative ministry can renegotiate the terms and conditions in the best interest of the Union of India before granting extension and there appears to be no
legal objection in this regard, it added.

On the term of extension, it left it to the oil ministry to decide based on ground facts. According to the PSC, the contract can be extended by five years in case of an oil field and by 10 years if it is producing gas.  Sources said the Law Ministry has forwarded the file on the issue with its observations to the Solicitor General for his opinion.

ONGC, which holds 30 per cent interest in the Rajasthan block, may insist on raising its stake to 50 per cent as a condition for agreeing to allow the Anil Agarwal-group firm to operate the block after expiry of contractual period. Contractually, the Rajasthan block is to return its licensee, ONGC after its term expires in 2020. Also, ONGC as a licensee of the block, where crude oil production touched 200,000 barrels per day in March, pays royalty to the government on not just its 30 percent 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. It may seek to address the royalty payment issue as well at the time of granting extension, sources added.

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