Shares of state-owned energy giants Oil & Natural Gas Corpn Ltd (ONGC) and Oil India Ltd soared by 7-9% in early trading following a significant government decision to reduce royalty rates on crude oil and gas production. This unexpected move has been widely interpreted by analysts as a positive catalyst, removing the specter of increased upstream taxation that had previously weighed heavily on these stocks.
Foreign brokerage CLSA highlighted the immediate impact, estimating that the royalty cut should add 7-9% to the fair value of ONGC and 9-11% for Oil India. The brokerage further reiterated its "High Conviction Outperform" (HC O-PF) rating for ONGC, projecting a substantial 44% upside potential, along with a 7% yield, assuming Brent crude prices at $80 per barrel.
Government's Policy Shift Boosts Investor Confidence
The government's decision to cut upstream taxes, rather than impose new levies, signals a clear intent to foster growth in India's exploration and production (E&P) sector. This action directly addresses investor fears of a repeat of the 2022-like windfall tax, which had contributed to ONGC and Oil India being among the worst-performing global upstream stocks. CLSA emphasized that the timing of this move, amidst rising crude oil prices, underscores the government's commitment to its promises under the new hydrocarbon laws passed last year.
Details of the Royalty Rate Adjustments
CLSA detailed the specific changes to royalty rates. For nomination blocks, which account for a substantial portion of ONGC and Oil India's current production:
- Onshore crude oil royalty rates have effectively been reduced from 16.66% to 10%.
- Offshore crude oil royalty rates have decreased from 9.09% to 8%.
- Natural gas royalty rates will now decline to 8% from the previous 10%.
These adjustments involve changing the deduction mechanism from a flat rate to a standard ad-valorem 20%, followed by applying new rates of 12.5% for onshore and 10% for offshore blocks. Furthermore, an 18% GST reduction on royalty payments is expected to amplify these savings.
Broader Impact on India's Upstream Sector
Beyond ONGC and Oil India, the government's policy also includes a 15% flat deduction for all blocks other than nomination blocks. This will lead to reduced royalties for other major players, such as Vedanta's Rajasthan field, where rates will drop from 16.67% to 10.6%. The policy also extends to blocks offered after 2019 under the new Hydrocarbon Exploration Licensing Policy (HELP), with even further reductions aimed at attracting fresh investment into the upstream oil and gas sector across India.
CLSA noted that ONGC is currently pricing in Brent crude at just $65 per barrel, while Oil India is at $80 per barrel, reinforcing the significant upside potential seen for ONGC given the revised tax structure and current market dynamics.