India Reduces Oil & Gas Royalty Rates, Boosting ONGC and Oil India Profits

Overview

This report analyzes the Indian government's May 11, 2026 notification on reduced upstream oil and gas royalty rates. Nomura views this as a measure to attract investment for boosting domestic production and reducing import dependence. The report details financial impacts for state-owned producers ONGC and Oil India, maintaining Neutral ratings.

Core views

Key policy changes: The government reduced oil royalty rates for nomination fields from 20% (effective 16.67%) to 12.5% (effective 11.1%). Additionally, the wellhead price calculation now incorporates a 20% ad valorem deduction instead of fixed per-ton deductions, further reducing royalty payments. For gas, while nominal rates remain unchanged, the new 20% deduction applies where none existed previously. Financial impact: Based on FY24/25 data, Nomura estimates ONGC's PBT will improve by ~9%, while Oil India's PBT may rise 14%-18%. Savings could be higher in FY26 if average selling prices increase. Reduced royalty amounts will also lower GST payments (18% of royalties). Valuation & ratings: Despite policy benefits, Nomura maintains Neutral ratings. ONGC's SOTP valuation uses 6.5x FY28E P/E for standalone E&P and 20% discount to market price for listed investments (target INR 260). Oil India's SOTP similarly values domestic operations at 6.5x FY28E P/E plus investments in IOCL/NRL (target INR 470).

Analysis framework

Nomura first dissected policy details across different field types (nomination, HELP contracts). Financial modeling quantified PBT impacts from rate reductions and ad valorem deductions. SOTP valuation reaffirmed company values, though current prices already reflect some positives, warranting Neutral ratings.

Methodology notes

• Valuation MethodologySOTP Valuation

  Sum of the Parts Valuation

  Valuing different business segments/investments separately then aggregating. The report applied distinct multiples/discounts to E&P operations and investment holdings for more accurate valuation.

• Industry Analysis Framework

  Royalty & Ad Valorem Deduction Analysis

  Examining how government fee policies directly affect upstream cost structures and net profits. The report demonstrated dual benefits from rate cuts and deduction base changes.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ONGC (ONGC IN)

  Beneficiary; royalty cuts reduce production costs and boost PBT

  Strengths

  Largest domestic producer benefiting from rate cuts and deductions

  Risks

  Lower-than-expected production/realized prices, higher costs, windfall tax reintroduction

• Oil India (OINL IN)

  Beneficiary; royalty cuts reduce production costs and boost PBT

  Strengths

  Higher estimated PBT improvement vs ONGC (14-18% vs 9%)

  Risks

  Lower-than-expected production, higher operating costs

Key data

• Oil Royalty Rate (Nomination Fields)Reduced from 20% to 12.5%Effective rate drops from 16.67% to 11.1%
• Ad Valorem Deduction Rate20%Applies to oil/gas wellhead prices; previously fixed amount for oil, none for gas
• ONGC PBT Increase Estimate~9%Based on FY24/25 data
• Oil India PBT Increase Estimate14%-18%Based on FY24/25 data
• ONGC Target PriceINR 260Unchanged
• Oil India Target PriceINR 470Unchanged

Impact & implications

The report concludes that lower rates directly improve ONGC/Oil India's profitability, with greater absolute savings at higher oil/gas prices. This supports domestic production economics but maintains Neutral ratings as benefits may be partially priced in, urging investors to monitor production execution and cost trends.

Risks

• Lower-than-expected oil/gas production
• Lower realized oil/gas prices
• Higher operating costs and DD&A
• Reintroduction of windfall taxes or SAED

What to watch

• FY26 actual wellhead prices and ASPs
• Domestic production growth
• Potential further tax policy adjustments