Oil and Natural Gas Corporation on Wednesday said it has bought out Scottish explorer Cairn Energy Plc's stake in two oil and gas blocks on the east and west coast for US $135 million.

"ONGC has signed a heads of agreement with Cairn for farm-in in certain assets of Cairn, the participation of Cairn in two exploration blocks of ONGC, and the formation of a strategic alliance for future opportunities," a company statement said.

The Indian exploration giant will buy Cairn's 90 per cent interest in Bay of Bengal exploration block KG-DWN-98/1, which its next to Reliance Industries' gigantic gas field in the Krishna-Godavari Basin.

Cairn will retain operatorship of Block KG-DWN-98/2 until the closing date, following which ONGC will assume operatorship under the terms of transfer of operatorship agreements to be agreed between Cairn and ONGC.

ONGC will also buy Cairn's 15 per cent exploration interest in Block CB/OS-2 in Gujarat offshore and a 10 per cent interest in the Lakshmi and Gauri gas fields, with an effective economic date of January 1 2003.

In return, Cairn will pick ONGC's 30 per cent interest in Block GV-ONN-97/1 onshore Northern India and CB-ONN-2001/1 onshore Gujarat Western India, with an effective economic date of September 30 2003.

"ONGC will pay to Cairn a cash consideration of US $135 million for the farm-out interests," the statement said.

The cash consideration will be adjusted to reflect net working capital movements between the respective effective economic dates and the closing date.

Cairn will pay to ONGC a cash consideration equivalent to economic monetary value of the blocks as assessed by ONGC at the time of bidding for its farm-in participative interest in two ONGC blocks (to be evaluated by Cairn).

Cairn Energy CEO Bill Gammell said, "The farm-out of discovered and producing interests is consistent with our strategy of both creating and realising value from exploration success. The transaction also significantly augments our onshore acreage position in India."

ONGC Chairman and Managing Director Subir Raha said, "These transactions will synergise the competencies of ONGC and Cairn and enhance our cost-efficiencies."

Cairn holds 100 per cent stake in KG-DWN-98/2 block where 1.4 trillion cubic feet of gas reserves have been discovered and the British firm was facing cash crunch to develop it.

In Block CB/OS-2, Cairn holds 75 per cent stake and is operator for the joint venture, which also includes Tata Petrodyne Limited (15 per cent) and ONGC (10 per cent).

ONGC has a right to increase its stake by 30 per cent in the event of a commercial discovery on the block and has exercised this right in respect of the Lakshmi and Gauri

Development Areas.

The current equity interests for these development areas are therefore Cairn 50 per cent, ONGC 40 per cent and Tata 10 per cent.

The Lakshmi gas field commenced production in November 2002 and average sales from the field during the first half of 2003 were 106 million standard cubic feet of gas per day.

Development of the neighbouring satellite Gauri gas field is currently underway with production expected to commence in the first half of 2004.