The government has restored the effective royalty rate on crude oil produced from onland nomination blocks and areas awarded prior to the New Exploration Licensing Policy (NELP) to 16.67%, according to a gazette notification dated June 4. The royalty for these blocks will now be computed on a cum-royalty basis, reversing a key provision of the May 8 royalty rationalisation exercise that had reduced the rate to 10%. The new rate represents a 13.33% increase from the previous 10% rate, though it remains lower than the 16.67% rate applicable before the May 8 reduction. The reversal is retroactively effective from May 11, 2026, significantly impacting companies with onshore production operations.
The latest royalty reversal has significantly impacted state-run oil explorers, with Oil India shares down 13% in the last five trading days and 14% decline in the past month. According to Nomura, Oil India is expected to be most impacted at 8-9% on profit before tax due to almost all of its production from onshore fields, while ONGC faces a negative 1-1.5% impact. Kotak Securities estimates a higher 5-6% impact on Oil India's EPS and maintains its 'Sell' call on Oil India, cutting the target price to ₹365 from ₹390, implying a 15% downside from the closing price of June 11. However, Kotak also expects this move to fetch between ₹2,300 crore to ₹2,500 crore to the government. The effective royalty rate for crude sales will increase to $13 per barrel in FY27 from $10 per barrel, impacting Oil India's EBITDA by 4-5% and EPS by 5-6%.
Under the May 8 notification, the government had reduced the effective royalty rate on onland crude oil production to 10%, offshore crude oil royalty from 9.09% to 8%, and natural gas royalty from 10% to 8%, while also introducing concessional rates for deepwater and ultra-deepwater production. The royalty rate for onland NELP blocks remains at 16.67% and will continue to be computed on a cum-royalty basis. The government has kept royalty rates on deepwater and ultra-deepwater at attractive levels to promote more investments by private players. Additionally, the benefit of standardized ad valorem deductions of 20% and 15% for nominated and other blocks remains in place, providing some relief to the affected companies. The new category created for Hydrocarbon Exploration and Licensing Policy (HELP) fields, which were bid out and awarded after 2019, remains with fields brought into production within five years enjoying zero royalty for the first seven years and 3.5-4.5% or 1-2% for deepwater and ultra-deepwater fields respectively from the eighth year.
Oil India shares have fallen 13% in the last five trading days and 14% in the past month, reflecting investor concerns over the policy volatility. The stock has declined more than 10% over the previous 12 months but has risen 4% in the last six months. As per Kotak Securities, the effective royalty rate for crude sales will increase to $13 per barrel in FY27 from $10 per barrel, impacting Oil India's EBITDA by 4-5% and EPS by 5-6%. The market reaction reflects investor concerns over the policy volatility, with analysts viewing this as an irritant that may make investors extrapolate more negative government action, though the overall impact on fiscal stability remains manageable. The impact of the rollback on ONGC will be lower as only 30% of its crude production is onshore and it is looking at a higher mix of new well gas (NWG), with the effective royalty on crude oil sales for ONGC increasing from $7.7/bbl to $8.6/bbl, impacting ONGC's standalone EBITDA by 1% and EPS by 1.4%.
