Not quite the case.
http://oddworldlibrary.net/toe/The_B...of_Fangus_Klot
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Originally, Lorne had set out to create a game with a much more intense and politically shocking atmosphere, even giving it a title of a different ilk to past Oddworld games’, but keeping the setting on Oddworld, albeit a different part of it. However, having given the production team more control over the project, he saw that they shifted the design into something much more realistic and human, and eventually Lorne lost interest, letting the game’s development continue but saying it would not be set on Oddworld at all.
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That’s not to say that the game could never be set on Oddworld if it was picked up again and finished, but vlam’s half right.