ONGC and Oil India Shares Surge Up to 9% on Reduced Royalty Burden for Oil and Gas Exploration

Government's Royalty Cuts on Crude Oil and Gas Production Boost ONGC and Oil India Shares

The Indian government's decision to rationalize royalty rates and methodologies for crude oil, natural gas, and casing head condensate has sent shares of ONGC and Oil India soaring. On May 12, ONGC's shares climbed 6.6%, while Oil India's shares surged 9% after brokerage CLSA termed the move as a significant positive for the two companies.

In an effort to spur India's domestic oil and natural gas sector, the government has revised the royalty structure for crude oil and gas production. The changes are aimed at increasing domestic production, enhancing energy security, and attracting greater investments to the sector. Last year, the government brought amendments to the Oilfield Regulatory and Development (ORD) Act and PNG rules, which have now been revised to provide a stable and predictable framework for the upstream sector.

According to CLSA, the government has introduced a standard ad-valorem deduction of 20% and applied a royalty rate of 12.5% for onshore blocks and 10% for offshore blocks. The brokerage highlighted that the effective royalty rate on onshore crude production will decline from 16.66% to 10%, while offshore royalty will reduce from 9.09% to 8%. Royalty on natural gas has also been reduced to 8% from the earlier 10%.

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The revised royalty structure provides additional incentives for exploration in difficult terrains. Ultra-deep-water production in fields awarded under the Discovered Small Field Policy and Hydrocarbon Exploration and Licensing Policy (HELP) will attract zero royalty for the first seven years, 5% for the next phase, and 2% thereafter. According to CLSA, the effective royalty burden for ONGC's onshore crude production could decline substantially under the revised framework.

The changes are expected to lower operational costs for companies exploring challenging and high-investment oil and gas fields. The government's move to reduce royalty rates sends a strong policy signal at a time when global crude prices remain elevated, and concerns over the possibility of a windfall tax had weighed on upstream energy stocks.