The Centre's move to lower royalty rates on oil and gas produced in the country is a sharp contrast to its decision to impose a windfall tax during the earlier bout of oil price surge in 2022, when the Russia-Ukraine war began. The West Asia war is causing sharp volatility in oil prices, besides exposing supply-chain vulnerabilities, and seems to have prompted the government to provide greater incentives to encourage domestic production.
The share prices of state-owned producers Oil India Ltd (OIL) and Oil & Natural Gas Corp. Ltd (ONGC) have jumped 14% and 7.5%, respectively, over the last three days after the news.
The royalty rate on onshore fields is down to 12.5% from 20%, while it remains steady at 10% for offshore fields. The move should spur greater investments in onshore fields, which are faster and cheaper to develop. Yet, the effective rate would drop for offshore fields as well, as the method of deducting expenses before royalty calculation has changed. Exploration and production (E&P) companies can now claim a deduction of 15-20% of realization, or up to $16 per barrel, assuming an oil price of $80 per barrel, against $3-6 per barrel earlier.
Earnings estimates
Existing producers should benefit. Thus, earnings estimates have been raised. ICICI Securities has revised its FY27-28 earnings per share estimates upwards by 16% and 7% for Oil India, and 12% and 10% for ONGC. Oil India benefits more, as it produces all its oil from onshore fields, whereas ONGC's fields are primarily offshore. Earnings could be even higher if oil prices stay stronger for longer.
“Our assumptions of $85 per barrel realizations for FY27 and $80 per barrel for FY28 are conservative and may see upside risk if the current tightness in the oil markets continues for the next 3-4 months,” said ICICI Securities. Cairn Oil & Gas, a part of Vedanta, is currently undergoing a demerger and should also benefit.
Higher oil prices improve realizations of producers. Oil India’s crude oil realization in the March quarter (Q4FY26) grew sharply to $77.9 per barrel, from $62.8 per barrel in Q3FY26. Thus, Ebitda grew nearly 40% sequentially to ₹1,820 crore. ONGC is set to declare its Q4 results on 26 May.
Oil India and ONGC’s shares have gained 22-26% so far in 2026 in the backdrop of firm oil prices. Easing of geopolitical tensions, or any government decision to share the subsidy burden with oil marketing companies, would be a dampener for the stocks.