ONGC, Oil India royalty reset in 2026: key impact

What changed and why it matters

India’s upstream royalty framework has shifted again weeks after the Ministry of Petroleum and Natural Gas announced a broader rationalisation of royalties on crude oil and natural gas. The latest change is focused on onshore crude oil output from nomination blocks and areas awarded prior to the New Exploration Licensing Policy (NELP). Market participants and brokerages described the move as a reversal of a key provision announced on May 8, when effective royalties were lowered for several categories of fields.

The immediate significance is for state-run producers Oil and Natural Gas Corporation (ONGC) and Oil India, which have meaningful exposure to onshore production. Brokerages said the revised levy can reduce earnings for these companies, while improving receipts for state governments and the Centre. The policy shift also matters for investors because it reintroduces uncertainty around fiscal terms for upstream assets.

The revised onshore crude royalty rate

According to commentary cited in the market, the effective royalty rate on onshore crude production has been revised up to 13.33%, from 10% announced in May. The same commentary noted it remains lower than the earlier effective rate of 16.67% that applied before the May rationalisation.

Separately, a June 4 gazette notification said the government has restored the effective royalty rate on crude oil produced from onland nomination blocks and areas awarded prior to NELP to 16.66%. It also said royalty for these blocks will now be computed on a cum-royalty basis, reversing the May 8 framework that reduced the effective rate on onland crude production from these blocks to 10%.

While reports describe the effective rate differently, they agree on the direction: the May cut on onshore crude for certain legacy blocks has been partly reversed.

Onshore gas royalty cut, even as crude rises

The revision is not uniform across hydrocarbons. The same market commentary said the royalty on onshore gas production has been cut to 7.27%, from 8% announced on May 8, and down from 10% earlier.

This split decision means producers face higher payouts on crude from specific blocks but lower payouts on gas, changing net realisations differently across portfolios. The balance of crude versus gas exposure, and the share of nominated and pre-NELP blocks, becomes central in assessing company-level impact.

Offshore royalty remains unchanged in the latest tweak

Brokerage commentary indicated offshore rates remain unchanged in the latest revision. The gazette update also said the May-announced rates remain unchanged for other categories, and that royalty for all offshore blocks will continue to be calculated on an ex-royalty basis.

This is important because the May 8 rationalisation had reduced the effective offshore crude royalty to 8% from 9.09%, and reduced gas royalty to 8% from 10%, using a flat deduction approach for nomination blocks. The latest change is described as targeted to specific onshore legacy blocks rather than a broad rollback.

Which blocks are affected: nominated and pre-NELP assets

Brokerage notes described the surprise change as applicable only to pre-NELP and nominated blocks. The earlier May framework introduced a standard ad-valorem deduction of 20% for nominated blocks, and the commentary said ad-valorem deductions of around 15% to 20% for nominated blocks still stay.

The gazette update adds an operational detail: the royalty for the affected blocks will be computed on a cum-royalty basis, while onland NELP blocks remain at 10% and continue on an ex-royalty basis.

What brokerages said: CLSA and Kotak on earnings impact

CLSA described the policy shift as an irritant because it signals changing government policy, even if it is positioned as a one-off action to protect state government revenues. CLSA estimated the move could hit EPS by about 2% for ONGC and 9% for Oil India.

Kotak Institutional Equities also called it a surprise move. In commentary referenced in the market, Kotak said the royalty reversal could generate about ₹23-25 billion of additional revenue for the government. Another estimate cited incremental government revenue of around ₹20-25 billion.

Kotak’s assessment of company impact, as cited, was about 1% to 1.5% for ONGC and 5% to 6% for Oil India. Kotak also flagged disappointment over policy flip-flops, while remaining confident that fiscal stability and economic equilibrium could eventually restore the status quo and lead to royalty cuts.

A look back: May 8 royalty rationalisation and May 12 market reaction

On May 8, the government announced revised royalty rates and formulas. Under that regime, the effective royalty on onshore crude for nominated and pre-NELP blocks was reduced to 10% from 16.66%, offshore crude to 8% from 9.09%, and natural gas royalty to 8% from 10%.

After that announcement, ONGC and Oil India shares rose sharply. Reports cited ONGC rising about 6.6% and Oil India climbing about 9% in that session, as CLSA termed the earlier cuts a significant positive and said it eased fears of a fresh windfall tax like 2022.

Kotak’s earlier report on May 14 said the rationalisation could increase standalone earnings, estimating a 5-6% uplift for ONGC and 12-13% for Oil India, driven by lower effective royalty payments and deductions allowed for post well-head costs for gas.

Stock-specific fallout: Oil India falls, Morgan Stanley downgrade

Oil India shares later came under pressure. A market update said the stock fell over 11% to a three-month low of ₹422.55, and it remained the worst performer in the Nifty 200 at the time, down 6.9%.

The same update said Morgan Stanley downgraded Oil India to underweight from overweight and cut its target price by over 28% to ₹404. Morgan Stanley flagged delayed hikes in natural gas prices and weaker refinery margins until downstream companies recover from losses as key negatives. It also pointed to potential diesel discounts as India shifts into a diesel surplus by the second half of 2027, and noted slow growth in domestic production.

Key numbers at a glance

Market impact and why investors are watching policy stability

For ONGC and Oil India, the main near-term market variable is the net impact on realizations after royalties, particularly for assets classified as nominated and pre-NELP. Brokerages highlighted that Oil India could see a higher percentage impact because its production is onshore, while ONGC has a more mixed base.

The second-order impact is sentiment. CLSA explicitly described the revision as an irritant because repeated changes can be extrapolated by investors as a structural headwind, even when framed as a targeted, one-off adjustment to protect state revenues. Kotak’s “flip-flops” comment points in the same direction, focusing attention on the stability of fiscal terms rather than only the absolute rate.

Conclusion

The government’s latest royalty adjustment raises the effective onshore crude levy from the May-cut level, while lowering onshore gas royalty and keeping offshore terms unchanged. Brokerages expect a measurable earnings hit for ONGC and a sharper impact for Oil India, while government receipts could rise by about ₹20-25 billion. Investors will now track how consistently the government applies the revised approach across block categories, and whether further notifications follow the June 4 gazette update.