The government may give Cairn Energy one of the surrendered oilfields such as Ratna R-Series in lieu of the $1.4 billion it has pay to the British firm, helping prevent the seizure of foreign assets in the case of default as well as get an experienced operator in the struggling E&P sector, sources said.

Cairn Energy gave India its biggest onland oil discovery but exited the country after it was slapped with a Rs 10,247-crore tax demand using a legislation that gave the government the powers to tax companies retrospectively. The firm has now won an international arbitration against the tax demand and the government has been ordered to return the value of shares of Cairn it had sold, dividends it had seized and tax refund it had withheld to recover the tax demand.

For a government struggling to find revenue to boost a Covid-19 battered economy, options of appeal against the arbitration award are limited and it may not have the financial bandwidth for such a payout, two sources with knowledge of the development said.

“One option is to give Cairn one or more of the oil and gasfields that the government now owns after they are surrendered by operators for various reasons,” one of them said.

“The government could give the Ratna and R-Series oil and gas fields in the Arabian Sea that were taken away from the Essar Oil-Premier Oil consortium in 2016 because of a change in contractual terms.”

The Barmer oilfield in Rajasthan, which was originally discovered by Cairn Energy, could be another option. Vedanta Ltd, which now operates the field after it bought out Cairn’s Indian subsidiary a decade back, has so far not agreed to the government’s conditions to get an extension of the contract beyond its original end date of May 2020.

Under Vedanta, which continues to operate the field on monthly extensions till its legal challenge to the government conditions is settled, the Rajasthan oilfields have seen a steady decline in output.

“It’s a win-win — the government settles it liability without paying a single penny or upsetting investor sentiments by not honouring the arbitration award through endless legal challenges and at the same time get back an established exploration and production (E&P) firm back,” another source said.

No major oil and gas discovery has been made in the past seven years since the retrospective tax demand was raised.

If the government chooses not to honour the arbitration award, it risks the prospect of its assets in foreign countries being seized just like US oil firm ConocoPhillips did with Venezuela to recoup multi-billion dollar of compensation awarded in arbitration.

Earlier this month, Cairn Energy’s chief executive officer Simon Thomson wrote to the Indian government that the arbitration ruling is final and binding, and failure to comply would breach the international rules.