India's government has asked energy giant Reliance Industries to pay a $1.25 billion penalty for a fall in gas production from its main oilfields, a company executive said.

The government and investors have been concerned for months over Reliance's declining gas output from its main D6 fields in the Krishna-Godavari basin off the coast of eastern India.

The oil ministry's notice to Reliance says it "failed to fulfil its obligations... and wilfully caused breaches, which led to immense loss and prejudice to the government and people of India," Indian media reported on Friday.

The reports said Reliance would not be permitted to recover the cost of its investments - $457 million in 2010-11 and $778m in 2011-12 - from the sale of gas.

Under India's exploration policy, the government allows firms to first recover their exploration and production costs from oil and gas revenues, and later share profits with the government.