ONGC and Oil India shares climbed 6.6% and 9%, respectively, on May 12 after brokerage CLSA termed the government's royalty cuts on crude oil and gas production as a significant positive for the two companies.

In an attempt to spur India’s domestic oil and natural gas sector amid the global crude oil crisis, the Indian government has rationalised royalty rates and methodologies for crude oil, natural gas, and casing head condensate. With strong policy support, the government is aiming to spur exploration, increase domestic production and enhance energy security.

Last year, the government brought amendments to ORD (Oilfield Regulatory and Development) Act and PNG rules. The revised schedule under Sec 6A of the ORD act removes long-standing inconsistencies across regimes.

This offers a stable, predictable and investor-aligned framework for India’s upstream sector.

The proposed changes are likely to lower operational costs for companies exploring challenging and high-investment oil and gas fields, as India looks to attract greater investments to increase domestic energy output and cut reliance on imports.

"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%-9% for ONGC and 9%-11% for Oil India," CLSA said in its report.

The brokerage highlighted that the government has revised the royalty structure for nomination blocks by introducing a standard ad-valorem deduction of 20% and applying a royalty rate of 12.5% for onshore blocks and 10% for offshore blocks.

According to CLSA, the effective royalty rate on onshore crude production will decline from 16.66% to 10%, while offshore royalty will reduce from 9.09% to 8%. Royalty on natural gas has also been reduced to 8% from the earlier 10%.

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% for the next phase, and 2% thereafter.

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?ter subtracting a flat deduction. These have now been changed by making the deduction to a standard ad-valorem 20% and then applying a rate of 12.5% for onshore blocks and 10% 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.

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.