The Indian government has implemented a significant policy shift, reducing the royalty rates on onshore crude oil production. This move is poised to provide a substantial earnings boost for state-run exploration and production (E&P) companies, most notably Oil India Ltd (OIL) and Oil & Natural Gas Corporation Ltd (ONGC).
Key Royalty Rate Adjustments
According to a recent sector update by JM Financial, the official notification outlines several key changes:
- Royalty on onshore crude oil from nominated and pre-NELP blocks has been slashed from 20% to 12.5%.
- Offshore blocks and onshore NELP/PSC blocks remain unaffected by these specific royalty reductions.
- Additionally, the royalty on APM gas produced above a certain baseline threshold has been trimmed from 10% to 9%.
The government has also revised the well-head price calculation, now allowing an ad valorem deduction of 15-20% from the sales price, a change from the previous fixed deduction of USD 3-6 per barrel. Furthermore, inconsistencies across various E&P contracts are being addressed.
Impact on Major Players
JM Financial identifies Oil India as the primary beneficiary of these policy adjustments. Given that nearly 100% of OIL's output is onshore, the brokerage projects a cost reduction of USD 4-5 per barrel, which could translate to a 5-7% boost in its earnings.
ONGC, with approximately 31% of its total production originating from onshore fields, is also set to benefit. Analysts expect a cost reduction of USD 1-1.5 per barrel for ONGC, potentially increasing its earnings by 2-3%.
Analyst Outlook and Target Prices
JM Financial maintains a 'Buy' rating for both state-run explorers, factoring in a Brent crude price assumption of USD 75 per barrel from fiscal year 2028 onwards. The brokerage has set a target price of Rs 585 for Oil India and Rs 340 for ONGC.
The firm expresses a preference for Oil India, forecasting it to be a 15% earnings-compounding story. This outlook is driven by strong projected cumulative output growth of 20-25% over FY27-29E, alongside the expansion of OIL's NRL refinery from 3 million metric tonnes per annum (mmtpa) to 9 mmtpa by the end of FY27.
This policy pivot is a strategic move to invigorate India's exploration and production sector, providing tangible financial relief and growth opportunities for key domestic players.
Disclaimer: This article provides market news for informational purposes only and should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.