The Centre's decision to cut royalty rates on crude oil and gas aims to boost upstream exploration and attract investment, a CLSA report said. The move is a significant boost for ONGC and Oil India, potentially adding 7-11% to their fair value.
The Centre's decision to cut royalty rates on crude oil and natural gas production is aimed at encouraging upstream exploration and production activity in India and attracting fresh investments into the oil and gas sector, according to a report by global brokerage CLSA.
The report said, "These actions confirm the government's intention to promote policies which boost upstream exploration and production." The report adds that the decision is expected to provide a significant boost to state-run Oil and Natural Gas Corporation (ONGC) and Oil India. "In a surprise move, the government cut the royalty charged on the production of crude oil and gas which could add fair value of 7 per cent-9 per cent for ONGC and 9 per cent-11 per cent for Oil India," CLSA said in its report.
Revised Royalty Structure
The brokerage highlighted that the government has revised the royalty structure for nomination blocks by introducing a standard ad-valorem deduction of 20 per cent and applying a royalty rate of 12.5 per cent for onshore blocks and 10 per cent for offshore blocks.
According to CLSA, the effective royalty rate on onshore crude production will decline from 16.66 per cent to 10 per cent, while offshore royalty will reduce from 9.09 per cent to 8 per cent. Royalty on natural gas has also been reduced to 8 per cent from the earlier 10 per cent.
Incentives for New Exploration Policies
For areas awarded under the Discovered Small Field Policy and Hydrocarbon Exploration and Licensing Policy (HELP), the revised royalty structure provides additional incentives for exploration in difficult terrains. Ultra-deep-water production in such fields will attract zero royalty for the first seven years, 5 per cent for the next phase, and 2 per cent thereafter.
Impact on ONGC and Oil India
According to CLSA, the effective royalty burden for ONGC's onshore crude production could decline substantially under the revised framework.
"For nomination blocks, which form a big chunk of current production for ONGC and Oil India, the existing royalty rate on crude oil from the onshore block is 16.66 per cent after subtracting a flat deduction. These have now been changed by making the deduction to a standard ad-valorem 20 per cent and then applying a rate of 12.5 per cent for onshore blocks and 10 per cent for offshore blocks," the report said.
The brokerage added that the changes effectively imply a reduction of around 6.7 percentage points in royalty for onshore crude production and nearly 1 percentage point for offshore crude.
Positive Policy Signal Quells Windfall Tax Fears
CLSA further said the royalty reduction 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.
"The surprise action to cut upstream tax instead of raising it should put fears of a new windfall tax to rest," the report noted. (ANI)
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