ONGC, Oil India jump as royalty cut adds 7-11% value

What changed and why it matters

ONGC and Oil India shares rose sharply after the Centre reduced royalty rates on crude oil and natural gas production. Brokerage CLSA called the move a significant positive for both companies, estimating the policy change could lift ONGC’s fair value by 7-9% and Oil India’s by 9-11%. The government said the rationalisation is aimed at encouraging exploration and production activity, supporting domestic output and energy security. The decision also mattered for market sentiment because it arrived amid higher crude prices, when investors had been wary of additional levies on upstream producers. CLSA said the royalty cut eases fears of a fresh windfall tax similar to the one imposed in 2022. The revised framework also attempts to remove inconsistencies across regimes and improve predictability for investors.

How the market reacted on May 12

The announcement translated into an immediate rerating for upstream stocks in trade on May 12. ONGC rose about 6.6% and Oil India climbed about 9% during the session. ONGC touched an intraday high near Rs 299.90, while Oil India hit a high around Rs 498.75 on BSE in one of the updates cited. In another data point, Oil India gained 7.5% to trade at a day’s high of Rs 491. The stocks were also described as top gainers in the Nifty 200 and Nifty 500 indices that day. The move reflected expectations of a direct earnings uplift from lower royalties, alongside a lower perceived risk of near-term policy tightening for the upstream sector.

The new royalty framework for nomination blocks

A key element was the revision for nomination blocks, which form a substantial share of production for ONGC and Oil India. CLSA highlighted the introduction of a standard ad-valorem deduction of 20% and the application of royalty rates of 12.5% for onshore blocks and 10% for offshore blocks. Under this mechanism, the effective royalty rate on onshore crude production falls to 10% from 16.66%. Offshore crude royalty is reduced to 8% from 9.09%. Royalty on natural gas also declines to 8% from 10% earlier, linked to the flat deduction approach. CLSA added that the changes effectively imply a reduction of around 6.7 percentage points in royalty for onshore crude and nearly 1 percentage point for offshore crude.

What CLSA expects for ONGC’s economics

CLSA said the revised structure implies 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 $10-100 per barrel, the brokerage estimates this could raise ONGC’s net crude realisation by $1.4-3 per barrel. Including lower gas royalties and GST-related savings, CLSA estimates the change could add around Rs 2.5-Rs 3 to ONGC’s earnings per share (EPS). Applying an 8x price-to-earnings multiple, CLSA sees a fair value increase of Rs 20-24 per share, equivalent to 7-9% of the current market price. The brokerage also said that at $10 per barrel, ONGC’s stock is pricing in around $15 a barrel Brent, and it sees an over-50% total return at $10 per barrel.

What CLSA expects for Oil India’s economics

For Oil India, CLSA expects a sharper benefit because its production is onshore. At crude prices of $10-100, the brokerage estimates higher net realisation of $1.3-6.7 per barrel. The royalty changes could add Rs 5.2-Rs 6.4 to Oil India’s EPS, implying a fair value boost of Rs 42-Rs 51 per share, as per CLSA’s calculations. The stock’s sharp intraday gains on May 12 were consistent with this higher sensitivity to onshore royalty rates. Investors also reacted to the broader signal that the government is reducing the upstream tax burden rather than raising it at a time of elevated crude.

Wider reforms: DSF, HELP and ultra-deep-water incentives

Beyond nomination blocks, the revised royalty structure includes additional incentives for fields awarded under the Discovered Small Field (DSF) Policy and the Hydrocarbon Exploration and Licensing Policy (HELP). For ultra-deep-water production in such fields, the royalty is set at zero for the first seven years, then 5% for the next phase, and 2% thereafter. The government also announced a flat deduction of 15% for all blocks other than nomination blocks. CLSA noted this would drive down royalties for Vedanta’s Rajasthan field from 16.67% to 10.6%. The changes were positioned as part of a broader attempt to attract fresh investment into upstream exploration and production.

Why windfall-tax fears mattered for valuations

CLSA linked the policy surprise to investor concerns that higher crude prices could trigger a windfall tax, similar to 2022. Those fears, it said, had weighed on upstream valuations and made ONGC and Oil India among the worst-performing global exploration and production stocks in relative terms. In that context, a cut in the upstream take was interpreted as a supportive signal for the sector. Union petroleum and natural gas minister Hardeep Singh Puri described the revision as a “big boost” and said the updated schedule removes long-standing inconsistencies across regimes to ensure a stable, predictable framework.

Brokerage stance and target price reference

CLSA reiterated a ‘High Conviction Outperform’ rating and cited a target price of Rs 405, implying an upside of 44.4% in the report excerpts provided. It also referred to “43 per cent upside plus” and a “7 per cent yield” at $10 per barrel oil for ONGC. These estimates were presented alongside the fair-value uplift from the royalty change, suggesting the brokerage views the policy shift as additive to its existing investment case.

Key facts at a glance

Timeline of the policy and market response

Conclusion

The royalty rationalisation lowered the government take on crude oil and natural gas production, with the largest impact on onshore output and nomination blocks. CLSA’s estimates point to a measurable uplift in realisations and EPS for both ONGC and Oil India, alongside a 7-11% fair-value boost. The policy also carries a signalling effect, reducing near-term investor anxiety over another windfall-style levy during a period of elevated crude prices. Separately, the DSF and HELP incentives, including zero royalty for ultra-deep-water output for seven years, add to the investment narrative around exploration. The next market focus will be on how the revised rates flow through quarterly earnings and on any further government steps aimed at boosting domestic upstream activity.