ONGC, Oil India and Vedanta shares are in focus after the government announced a reduction in crude oil royalty rates for onshore blocks. This is a critical move that is expected to meaningfully improve the economics of domestic oil production for all three companies.
The government has reduced onshore crude oil royalty rates for nominated blocks and pre-NELP Production Sharing Contracts from 20% to 12.5%. Meanwhile, the royalty rate on New Well Gas has been reduced from 10% to 9%.
What does it mean?
A reduction in royalty rates is quite significant for the upstream oil and gas sector. Royalty payments, after all, are a cost that producers bear before arriving at profit-sharing arrangements with the government.
That means a lower royalty directly improves the realisation of every barrel of crude oil produced. For nominated blocks, which are primarily operated by state-owned ONGC and Oil India, the cut from 20% to 12.5% could go a long way in easing the burden on these companies, which are bearing the brunt of global oil market volatility.
You can think of it like rent. When you farm someone else's land, you pay the landowner a share of your harvest before keeping the rest. Royalty rates work the same way, with oil companies paying the government a fixed share of every barrel they produce before counting their own profits.
ONGC and Oil India are indeed two of India's largest state-run upstream producers and are expected to benefit most from this change. Vedanta's Oil & Gas segment, meanwhile, operates under pre-NELP PSC arrangements and could emerge as a beneficiary as well.
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