The government says it will return "rental fees" paid by the Bahamas Petroleum Company (BPC) and suspend the company's bid to pursue oil drilling in The Bahamas.
The statement from the Ministry of the Environment stands in contrast to news on BPC's website announcing its five licenses have been renewed up until April 2015.
"Upon legal advice, this Ministry advised BPC that it is presently unable to accept rental fees for the year April 2012 - 2013 as the government has yet to determine its course of action in connection with license renewal," the government said in a statement.
According to senior officials, the government will return the nearly $300,000 paid by BPC on April 25 2012.
This latest twist in the oil drilling saga comes as the country enters the home stretch of the election.
Prime Minister Hubert Ingraham declared two weeks ago that oil drilling will not occur under his administration, sending the company's share price on the London Stock Exchange into a sharp decline. He later said he would consider drilling based on certain conditions.
The issue once more entered the political arena when Perry Christie, the leader of the opposition, admitted that he had provided legal advice to the oil firm through Davis & Co, a law firm run by PLP deputy leader Philip "Brave" Davis.
Meanwhile, BPC has insisted that it has "significantly exceeded" the commitments and obligations entitling it to a license renewal. This criteria included seismic testing and performing an environment impact assessment.
The company has invested more than $50 million in the project.
Under the renewal terms, BPC committed to drilling an exploratory well in Bahamian waters by this time next year."The current exploration licenses are in their second (of four) renewal period," BPC said in a statement this week. "Under the terms of this renewal, which became effective on April 27, 2012, the company has committed to spud an exploration well by April 26 2013."

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