The revised cost was approved on the guarantee that the surplus royalty paid will be repaid to ONGC.

“Under the existing set of fiscal terms and conditions, ONGC has negative net present value for its investment in the revised field development plan,” Deora said.

The project offers negative revenues to ONGC as it is liable to pay royalty on the entire crude oil output from the Rajasthan fields in spite of having just a 30% share.

Deora said oil production from Cairn India’s Rajasthan fields is expected at 2.6 million tonnes in 2009-10 and 6.8 million tonnes in 2010-11 with a highest production of 8.9 million tonnes the next year.

Earlier, Cairn India had raised the cost of production of the Mangala and adjoining Aishwariya, Saraswati and Raageshwari fields in the Rajasthan block at around $1.5 billion.

Cairn India-ONGC will jointly spend $471 million in placing the Bhagyam field into production. Furthermore, an investment of $941 million will be done on laying a pipeline to ship oil from Barmer district in Rajasthan to Gujarat coast.

Deora cited the main reasons for increase in the cost in the revised plan for MARS fields as boost in plateau production rate from 96,000 barrels of oil per day (bpd) to 1,25,000 bpd. He also cited change in production and processing from individual gathering stations to a central processing center, updated cost estimates and increase in service tax contributed to increase in the cost as the reasons.

“ONGC’s Net Present Value (the value today of anticipated future incomes and expenditures) with revised field investment plan works out to negative $1.435 billion and negative $1.471 billion at a crude price of $60 and $70 per barrel, respectively,” ONGC had stated in a representation to the petroleum ministry.

ONGC was liable to pay 20% royalty on the entire crude oil output due to the negative net present value, while Cairn India being exempted from payment of any levy.

At the time of signing of the production sharing contract (PSC) for Rajasthan, royalty was INR539.20 per tone, while at present it is INR3,780 per tone, considering crude price of $60 per barrel.

The oil development cess has also been raised to INR2,500 per tone from INR900 per tone at the time of signing the PSC for the Rajasthan block.