New Delhi: In a disquieting development, state-run Oil and Natural Gas Corp (ONGC) may have overstated natural gas reserves in its much-talked about KG basin Block KG-DWN-98/2 that sits next to Reliance Industries' prolific KG-D6 fields.

Cairn India, which had made four discoveries in the KG-DWN-98/2 before selling 90 per cent out of its 100 per cent stake in the block to ONGC in 2005, has written to the oil regulator DGH saying the state-owned firm grossly overstated reserves in block, sources privy to the development said.

Cairn, which still holds 10 per cent in the block, said finds are small and are not be viable at current gas price.

ONGC in a statement said its estimates are at "conceptual" stage and "would be subject to wide variations." It has sought DGH and oil ministry permission to drill more wells on the block to get to better picture of reserves.

Cairn in the letter to DGH said "the work undertaken by Schlumberger Data and Consulting Services in 2007 (at ONGC's behest) is flawed and they substantially over-estimated the resources in the block."

Sources said Schlumberger is not a recognised reserve auditor and only DeGolyer and MacNaughton (D&M) and Gaffney, Cline and Associates (GCA) are known to do that job.

ONGC estimates USD 7.7 billion would be needed to bring to production 101 billion cubic meters (3.57 trillion cubic feet) of hydrocarbons in place in northern area of the block.

In the neighbouring KG-D6 block, Reliance is investing USD 8.8 billion on 11 Tcf of gas reserves in two discoveries and an envisaged peak output of 80 mmscmd.

Cairn said "the hither-to discovered oil and gas resources in the block are only marginal to non-commercial, because of their small size and the potential high development costs due to water depth versus the prevailing gas prices."

The warning by Cairn, which is credited with finding oil in an area in Rajasthan where global giant Royal Dutch/Shell said none existed, is significant in view of the fall in gas output from Reliance's neighbouring KG-D6 block.

Reliance had in 2007 estimated that the Dhirubhai-1 and 3 fields in the KG-D6 block would hit 69 mmscmd of output, but production has fallen to 40 mmscmd due to what the Mukesh Ambani-led firm says are reservoir complexities.

Cairn wants "a correct reserve estimation of the block through an independent agency."

ONGC in the statement said a conceptual development plan has been submitted as part of proposal for 'Declaration of Commerciality' (commercial viability) of finds in the northern area of the block.

"The proposal is under consideration with DGH," it said. "ONGC has been requesting DGH and Oil Ministry for permission to drill additional exploratory/appraisal wells for firming up a field development plan with least uncertainty."

"In the proposal submitted to DGH, initial-in place is indicated at 101 billion cubic meters which translates to 3.57 Tcf," ONGC said.

Stating that it had on various occasions pointed out the the flaws, Cairn wrote to DGH, saying "It is imperative that a new study is undertaken by a third party of repute which enjoys the confidence of both ONGC and Cairn, such as DeGolyer & MacNaughton, in order to establish a correct assessment of the resources, based on which the stakeholders would be able to take appropriate decisions."

Cairn said ONGC had submitted a proposal to declare some of the discoveries in the block as commercial, a step towards developing the finds, without keeping it informed.