"There are no talks with Gazprom on this issue," ONGC Chairman R.S. Sharma told Reuters.
The unsourced report in Britain's Observer newspaper said that Gazprom had confirmed it was in talks to buy the 20 percent stake from ONGC, although a Gazprom source who requested anonymity told Reuters he believed the report to be incorrect.
Gazprom, the world's largest gas company, has been seeking a foothold on the energy-rich island off Russia's Pacific coast via a swap deal with Royal Dutch Shell, which has 55 percent of the neighbouring Sakhalin-2 project.
However, talks on the swap have stalled since Shell unveiled a doubling of its project's budget from $10 billion to $20 billion last year.
As well as angering Gazprom, the move has prompted Russia's Natural Resources Ministry to open an environmental investigation into Sakhalin-2, culminating in its decision to withdraw a key ecological permit last week.
The ministry has also brought pressure on Exxon's venture, which it says plans a similar budget overrun from $12.8 billion to $17 billion.
The ministry says it will not tolerate budget increases because they contravene the terms of the production sharing agreements (PSAs) which govern the two projects.
TOUGH LINE
Under the PSAs, the oil firms can recoup project costs before sharing any profits with the Kremlin, so bigger budgets mean less money later for the Russian state.
The tough line on the two projects has drawn expressions of concern from British, Dutch, European Union, Japanese and U.S. politicians, as well as the companies themselves.
Besides Exxon's 30 percent holding and ONGC's 20 percent, the shareholders in Sakhalin-1 also include a Japanese consortium with a 30 percent stake and Russian state oil firm Rosneft, which holds 20 percent.
Rosneft has interests in most projects on Sakhalin Island and a history of rivalry with Gazprom, even though both are controlled by the Kremlin.
Sakhalin-1 has already begun producing oil and Exxon says it plans to load its first export cargo by the end of September.
It is due to pump 250,000 barrels per day (bpd) of crude by the end of this year, making it one of this year's five-biggest oil projects worldwide and a welcome source of gasoline- and distillate-rich crude for Asian importers.
Gazprom, which wants to boost the oil side of its business, has monopoly power over all gas projects in Russia except for the PSAs. It is not yet involved in any projects on Sakhalin, meaning it is absent from one of Russia's main energy hubs.
A Gazprom spokesman declined to comment on Sunday.
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