ROYAL Dutch Shell, the energy giant, has linked up with India's biggest oil and gas company, fuelling speculation the firms could bid for Edinburgh's Cairn Energy.

As Shell tries to put the legacy of a scandal concerning the over-statement of reserves behind it, the company has signed a wide-ranging deal to co-operate with state-owned Oil & Natural Gas Company to help meet its voracious appetite for hydrocarbons.

This could see the firms jointly exploring for, and developing reserves of, oil and gas and developing downstream assets such as refineries in India.

Shell might take stakes in ONGC's exploration acreage and finds in India, where the majors are starting to jockey for position following a series of notable finds by Cairn in Rajasthan state.

Including the giant Mangala discovery, these contain more than one billion barrels of oil, and were made on territory in which Shell sold a 50per cent stake to Cairn for a mere dollars7m (GBP4m).

ONGC, which has co-operated with Cairn on exploration and production projects across India for several years, has a 30per cent stake in the licences concerned.

In return, ONGC will have the opportunity to acquire interests in Shell's assets in territories such as the North Sea.

The Indian government wants ONGC to boost production as fast as possible to help meet the burgeoning demands of the country's fastgrowing economy, Subir Raha, chairman, told The Herald recently that ONGC was keen to buy North Sea assets after bidding aggressively but unsuccessfully to take control of the giant Buzzard discovery last year.

Analysts said news that ONGC and Shell had signed a memorandum of understanding formalising a relationship between them stoked speculation that they might try to acquire Cairn, under chief executive Sir Bill Gammell, either jointly or individually.

Aspects of the deal might cause concern at Cairn, which, during long years in which there was limited outside interest in India became used to being the first port of call for ONGC when the company wanted a western partner.

In addition to allowing Shell to farm-in to Cairn projects, the memorandum raises the possibility of Shell and ONGC bidding for and exploring acreage on which the Edinburgh firm might previously have expected first refusal.

Among a range of possible areas of co-operation downstream, it states that the firms will evaluate opportunities to build refineries.

ONGC is keen to build one in Rajasthan to help boost the returns it makes from the oil output from Cairn-controlled fields when they come onstream.

That could result in delays in laying the pipelines that will be needed to take Cairn's output to market.

However, asked whether Cairn was concerned to hear of the deal yesterday, a spokesman said it had been well known that western majors had been having discussions with Indian firms.

"It's good news for India that the majors are recognising the potential that India has, both as an investment and as a hydrocarbon-rich destination, " he said.

"We have got a very good relationship with ONGC and we work across the country in all our operations with ONGC."

Pressed to comment on the possibility of a bid for Cairn he said: "We get on with our business, that's all that we do."