Royalty rate cut to boost ONGC, Oil India earnings: Kotak report

The Centre's decision to rationalise upstream royalty rates for crude oil and natural gas is expected to increase the standalone earnings of state-run oil producers ONGC by 5-6% and Oil India by 12-13%, a Kotak Equities report has estimated.

The Centre's decision to rationalise upstream royalty rates could increase standalone earnings of state-run oil producers ONGC and Oil India, according to a report by Kotak Institutional Equities. The government had earlier announced a rationalisation of royalty rates for crude oil, natural gas and casing head condensate under the amended Oilfields (Regulation and Development) Act and Petroleum & Natural Gas (PNG) Rules, with Petroleum Minister Hardeep Singh Puri saying the move marks a "new era" for India's oil and gas regime by creating a "stable, predictable, and investor-aligned framework."

Impact on Earnings

Upstream royalty refers to the fee or share paid by oil and gas companies to the government for extracting crude oil and natural gas from fields. It is usually calculated as a percentage of the value of oil or gas produced. According to the Kotak report, "We estimate a ~5-6% standalone earnings uplift for ONGC and ~12-13% for OIL."

Reforms to Simplify Royalty Structure

The report said the reforms aim to simplify the royalty structure and remove older inconsistencies across exploration regimes. "The government has taken multiple steps to enhance the attractiveness of the upstream sector. Amendments to the ORD Act, 1948, and revisions to the Petroleum & Natural Gas (PNG) Rules are focused on ensuring fiscal stability," the report said.

Changes for Crude Oil

Kotak said one of the key changes is the reduction in crude royalty for nominated and pre-NELP blocks to 12.5 per cent from an earlier effective rate of around 16.67 per cent. The report added that the government has also standardised deductions allowed for post-well-head costs, which are expenses incurred after oil or gas is extracted from the well and prepared for sale. "For crude oil well-head cost deduction from the sale price was rationalized to 20% for nominated blocks and 15% for other blocks," it said.

New Benefits for Natural Gas

Kotak further noted that natural gas fields will now also receive similar deductions, which were not available earlier. "Importantly, natural gas will also get a 15-20% well cost deduction for other/nominated blocks (earlier NIL). This will effectively reduce royalty rates on gas to 8% on nominated fields and 8.5% on other fields (earlier 10%)," the report said.

The report further noted that royalty rates have also been aligned across Discovered Small Fields (DSF) and Hydrocarbon Exploration Licensing Policy (HELP) regimes to simplify the framework further.

Effective Royalty Reduction for ONGC and OIL

According to Kotak, the changes could reduce effective royalty payments on crude oil production by around 2.5 per cent for ONGC and nearly 5.8 per cent for Oil India. "As on-land blocks account for ~30%, the effective royalty decline on oil production will be ~2.5% for ONGC. With its entire oil production on land, the benefit will be higher at ~5.8% for Oil India," the report said. For natural gas, the report estimated royalty rates could decline by around 1.8-2 per cent because post-well-head costs are now allowed as deductions. (ANI)

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