The new policy, which provides exemption from cess and a seven-year tax holiday for new ventures, was announced by the finance minister in his budget speech last year.

The union cabinet has to clear the ordinance in order to amend the provisions of the Oilfields (Regulation and Development) Act, 1948. The ordinance was on the cabinet meeting's agenda on Thursday night, but could not come up for discussion.

Amendments to the Act were introduced in the Lok Sabha in the form of a bill on July 21, but the parliament did not find time to deliberate on it. The ordinance is a must to implement the long-pending policy. The existing Act allows only one royalty rate for any kind of mineral oil.

The liberalised policy was first scheduled to go on stream in March last year. The policy package was hanging fire till the revenue department and the petroleum ministry could agree on all the proposals.

All glitches holding up the exploration policy have since been ironed out and the petroleum ministry has set itself a deadline for issuing notices inviting offers for the first oil blocks this month. The only hitch was the Oilfields Act, which did not allow the multiply royalty rates proposed in the new exploration and licensing policy.

Petroleum minister VK Ramamurthy's attempt to cross the hurdle by introducing an amendment bill in the Lok Sabha proved futile. The amendment merely introduces an enabling provision, to allow the government alter rates whenever necessary, thus scrapping the three-year freeze on oil-royalty revision.

The new policy promises exploration companies 12.5 per cent royalty for onland areas, 10 per cent for offshore blocks and 5 per cent royalty for deep water and frontier areas. The Oilfields Act, however, sets a 20 per cent ceiling on royalty rates, which are only subject to revision every three years.

The centre also considers it necessary to "vary the royalty rate on crude oil at intervals shorter than three years" in light of the phased dismantling of the administered price mechanism. The price of crude oil, which was earlier fixed according to a "cost-plus formula," is now linked partially to the f.o.b. (freight on board) price of imported crude.

The price of locally-produced crude has, consequently, begun to vary from month to month. Government think-tanks feel that the centre should have the flexibility to alter royalty rates, depending on the prevailing crude oil price.

The second modification of the Act will enable the centre notify different royalty rates for different kinds of oil blocks, which also is not permissible in the Oilfields Act in its present form. The slim bill introduced in the last session, contained a provision for reducing or exempting royalty for deep-water and frontier areas "to encourage exploration."

The bill said "to begin with, royalty will be charged at half the prevailing rate for offshore areas and beyond 400 metres bathymetry for the first seven years after the commencement of commercial production." The centre notifies the royalty rates, but state governments have always been consulted before fixing the rates, as a matter of convention.

Since the coming parliament session will probably be in November, the ordinance is necessary now, if notices inviting offers for new exploration blocks are to be issued this month.