The Oil Ministry has approached the Cabinet to give companies, including Cairn India and Reliance Industries, greater flexibility to continue exploring for oil and gas even after the expiry of deadlines.
The government had allowed companies in February last year to launch probe missions to find more oil and gas within already-producing areas.
The approval was subject to severe conditions such as ensuring the government's share of profit from existing fields was not affected due to the additional investments needed to find and produce more oil or gas.
This, as well as other stipulations such as capping the cost of developing a discovery, were opposed by the industry, which said they were restrictive and discouraged contractors from making further investments.
The ministry earlier this month moved a draft note for the consideration of the Cabinet Committee on Economic Affairs to relax some of these conditions, sources privy to the development said.
The clause allowing companies to explore further only after demonstrating that the government's cumulative share of profit petroleum from existing discoveries would not be adversely impacted has been diluted.
This clause is proposed to be changed to require companies to prove commercial and techno-economical viability of new discoveries as a result of such exploration on a stand-alone basis, they said.
Under production sharing contracts signed before and after the advent of the New Exploration Licensing Policy in 1997, companies are allowed to recover costs incurred on finding oil and gas from sales before sharing profit with the government.
However, the recovery of expenses is not allowed in an area where the initial exploration phase of up to seven years has been completed and discoveries have either been put on production or are being developed.
The February 2013 policy for continuation of exploration activities in mining lease areas was aimed at facilitating that.
After the February policy, RIL and its partner BP of UK made the MJ-1 discovery about two kilometres below the currently producing Dhirubhai-1 and 3 gas fields.
The discovery is estimated to hold 0.5 to 3 trillion cubic feet of gas reserves.
Cairn has claimed that extension of exploration in the Barmer field would result in the addition of 125,000 barrels of oil a day to the current output of 175,000 barrels a day.
Sources said the ministry feels increased exploration is the only answer to cut the ever-growing dependence on imports to meet the nation's oil needs. India relies on overseas purchases to meet about 80 per cent of its oil requirements.
The cap on development and production costs has been retained in the proposal to the CCEA as the ministry wants new discoveries to be viable on a stand-alone basis.
The provision allowing recovery of costs of new exploration activities only after proving commercial and techno-economic viability at the time of presenting investment plans (field development plan) has also been retained.
This, they said, has been done to preserve the thrust of the policy that only commercially successful hydrocarbon discoveries are cost recoverable.
The ministry has proposed to allow costs incurred in the past on activities that were in accordance with provisions of the PSC to be recovered from sales.