The board of state-owned Oil and Natural Gas Corp (ONGC) today decided not to pull out from its joint venture with Cairn India, and to invest around $350 million more in the the Rajasthan fields operated by Cairn.

Cairn had earlier revised the total cost for developing three oil fields in the Rajasthan block to $3.60 billion, including $940 million for laying a pipeline for pumping out crude oil to Gujarat coast.

In 2005, when the work started Cairn India estimated the development cost of the block, which comprises three main oilfields - Mangala, Bhagyam and Aishwariya fields - at $1.5 billion.

As per the revised cost structure, ONGC's total exposure in the project will rise from $874.2 million to $1.22 billion.

However, the ONGC board found the investment much higher that its earlier estimates and deferred a decision on its last meeting. There were even reports that ONGC may exit the JV unless the government clears it of the royalty burden. (See: Cairn oil to flow this month; ONGC may exit JV).

ONGC's contention was that if it  is to pay royalty on the entire oil produced from the block, then it would not be viable proposition for the public sector giant.

ONGC holds a 30-per cent stake in the fields and, as per the deal, is only entitled to an equivalent share of crude oil recovered from the area, but it has to pay the entire royalty, including that of Cairn, which gets 70 per cent share of the crude produced from the field..

The board at its meeting approved the rise in cost of developing the fields. However, the royalty issue is still not sorted out. According to reports ONGC will continue to pursue with the government the reimbursement of the royalty it will pay on behalf of Cairn.

The decision followed the petroleum ministry pushing ONGC's top management to approve the revised cost despite the project offering negative returns on investment.

The Rajasthan crude is heavy and waxy. Also it cannot produce LPG and has very little kerosene and gasoil output and hence it is expected to trade at a significant discount to other crudes like Brent.

Cairn is almost ready to start producing crude oil from the Rajasthan field. The output may start by this month-end and is slated to reach a peak of 8.75 million tonnes by 2011.