Noida, May 12 (APAC Media): Shares of state-run Oil and Natural Gas Corporation (ONGC) surged up to 6% on Tuesday after the government announced a sharp reduction in royalty rates on crude oil production, a move that brokerages said could significantly improve upstream profitability.
The stock surged 6.55% to Rs 298.85 on the BSE, while it advanced 6.42% to ₹298.35 on the NSE, extending gains as investors responded positively to the policy change that reduces the cost burden on domestic oil producers.
The broader market sentiment remained mixed, but ONGC stood out as one of the top gainers in the energy space.
According to market participants, the rally was driven by the government’s decision to reduce royalty rates across various categories of crude oil and natural gas production, covering both onshore and offshore fields.
The revised structure is expected to ease the financial burden on exploration and production companies, particularly state-owned firms such as Oil and Natural Gas Corporation and Oil India Limited, thereby improving operational margins and cash flows.
“For nomination blocks, which contribute a significant share of current production for Oil and Natural Gas Corporation and Oil India, the prevailing royalty rate on onshore crude oil is 16.66 per cent after accounting for a flat deduction. Under the revised framework, this structure has been modified by replacing the earlier deduction with a uniform ad-valorem adjustment of 20 per cent, followed by the application of revised rates of 12.5 per cent for onshore fields and 10 per cent for offshore fields,” the report said.
Hong Kong-based broking CLSA termed the development a “big positive” for upstream oil producers. It noted that the effective royalty rate on onshore crude production will fall significantly under the revised structure, a change expected to strengthen margins and improve cash flows for companies with substantial exposure to nomination blocks.
Analysts at CLSA estimated that the policy change could result in a meaningful earnings uplift for Oil and Natural Gas Corporation, with the potential to support valuation multiples in the near term.
The report stated, “These actions confirm the government’s intention to promote policies which boost upstream exploration and production.”
The government’s move forms part of a wider strategy to promote domestic exploration and production, curb import dependence, and strengthen energy security. Through the rationalisation of royalty rates, policymakers aim to enhance the attractiveness of investment in India’s upstream oil sector amid ongoing volatility in global crude prices.
“In a surprise move, the central government cut the royalty charged on crude oil and gas production, which could add a fair value of 7–9% for Oil and Natural Gas Corporation and 9–11% for Oil India,” CLSA said in its report.
The development also strengthened sentiment across the broader oil exploration sector, with investors expecting improved profitability and better earnings visibility for state-run energy producers.
Disclaimer: Views expressed are those of experts and do not reflect APAC Media. This is for informational purposes only, not financial advice. We are not responsible for investment decisions. Please consult a qualified financial advisor before investing.
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