Shares of Oil and Natural Gas Corporation Limited (ONGC) rallied 6% on Tuesday following the central government's announcement of rationalisation of royalty rates on crude oil and natural gas production. According to reports from The Economic Times, ONGC shares surged as much as 6% to the day's high of ₹298 on the BSE after Hong Kong-based brokerage CLSA termed the government's latest move to cut upstream royalty rates a "big positive" for the state-run explorer and the broader upstream oil and gas sector. The rally was further boosted by the government's decision to reduce offshore crude royalty from 9.09% to 8% and natural gas royalty from 10% to 8% under the revised regime, following the introduction of a new flat deduction formula. The revised rates were notified by the Ministry of Petroleum and Natural Gas on May 8.
Global brokerage CLSA has maintained a 'High Conviction Outperform' rating on ONGC with a target price of ₹405, representing an upside of 44.4% from current levels. According to CLSA's analysis reported by The Economic Times, the royalty cuts could increase ONGC's fair value by 7-9% and Oil India's by 9-11%. The brokerage noted that the changes imply a blended royalty reduction of around 3 percentage points for ONGC's crude production, given that nearly one-third of its output comes from onshore fields. At crude prices of $80-100 per barrel, CLSA estimates this could raise ONGC's net crude realisation by $2.4-3 per barrel. Including lower gas royalties and GST-related savings, the changes could add around ₹2.5-3 to ONGC's earnings per share, with the brokerage seeing a fair value increase of ₹20-24 per share.
The government has approved the rationalisation of royalty for India's upstream sector, as announced by Union Minister of Petroleum and Natural Gas Hardeep Singh Puri. According to reports from The Economic Times, this decision would benefit oil & gas regimes by eliminating inconsistencies and driving growth in the upstream sector. The government has rationalised royalty rates and methodologies for Crude Oil, Natural Gas, and Casing Head Condensate, following the historic 2025 amendments to the ORD Act & PNG Rules. The new royalty structure aims to incentivize exploration and domestic hydrocarbon production, with HELP blocks offered after 2019 getting even lower royalty rates to attract fresh investments. The landmark decision aims to bring regulatory clarity and modernize the sector by replacing complexity with consistency, expected to fuel India's energy future and reduce import dependence.
According to CLSA's analysis reported by The Economic Times, Oil India shares also gained 7.5% to trade at a day's high of ₹491, reflecting the broader positive sentiment across upstream producers. For Oil India, where all production is onshore, CLSA estimates a sharper reduction in royalty rates, translating into an increase in net realisation of $5.3-6.7 per barrel at crude prices of $80-100. The brokerage said this could add ₹5.2-6.4 to Oil India's EPS, implying a fair value boost of ₹42-51 per share. CLSA highlighted that the royalty cut suggests the government is focused on encouraging upstream exploration and production rather than increasing taxes on producers, particularly significant given the current rising crude oil prices and elevated fiscal pressures.
As reported by The Economic Times, CLSA emphasized the broader policy signal from the government, especially when crude oil prices are rising, and fiscal pressures remain elevated. The brokerage noted that concerns around higher upstream taxation had weighed heavily on ONGC and Oil India, making them among the weakest-performing global upstream energy stocks. CLSA reiterated its 'High Conviction Outperform' rating on ONGC, saying the stock is effectively pricing in Brent crude at just $65 per barrel, compared with Oil India at $80 per barrel. The brokerage sees a potential upside of 43% for ONGC, along with a dividend yield of 7% at $80/barrel oil prices, reflecting the positive impact of the government's strategic decision to support domestic energy production.
