ONGC, Oil India and Vedanta Oil & Gas in focus as India cuts crude oil royalty rates

Shares of ONGC, Oil India and Vedanta Oil & Gas came into focus on Tuesday, May 12, after the Indian government announced changes to crude oil royalty rates aimed at boosting domestic exploration and production.

The Ministry of Petroleum and Natural Gas has notified revisions to royalty rates under the Oilfields Regulation and Development Act, 1948. The move is aimed at encouraging domestic exploration and production, especially in challenging areas, while also supporting India’s broader goal of reducing crude oil import dependence.

As part of the revision, the royalty rate on onshore crude oil for nominated blocks and pre-NELP Production Sharing Contracts has been reduced from 20% to 12.5%. These blocks are largely operated by national oil companies such as ONGC and Oil India, making them direct beneficiaries of the lower royalty burden.

The government has also changed the well-head price calculation mechanism. Instead of using actual post-well-head costs, fixed deductions will now be applied. These include a 20% deduction of sale price for the nomination regime and 15% for others, which is expected to further lower the effective royalty burden.

The NWG rate has also been reduced from 10% to 9%, while the overall effective rate for natural gas is expected to come down to around 8% through the new deduction formula.

The changes are also seen as beneficial for companies operating in offshore and difficult fields. Shallow-water offshore royalty rates are often around 10%, while deep-water and ultra-deep-water areas receive significant concessions, including zero royalty for the first seven years in many HELP and DSF blocks, followed by lower rates later.

Among the key beneficiaries, ONGC and Oil India stand out due to their exposure to nominated and pre-NELP onshore blocks. Vedanta Oil & Gas, which has significant onshore operations including Rajasthan assets, is also expected to benefit from the lower fiscal burden.

The market reaction was positive in early trade on May 12. Oil India shares jumped nearly 7%, while ONGC rose over 4% and emerged among the top Nifty gainers at one point. Vedanta also remained in focus after the announcement.

Overall, the reduction in royalty rates is being tracked as a positive development for domestic oil and gas producers, as it lowers the fiscal burden on key exploration and production companies.

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