New Delhi: Rating agency ICRA has welcomed India's decision to rationalise royalty rates on oil and gas production, calling it a positive step for the upstream energy sector that addresses a longstanding demand from the industry. Prashant Vashisht, Senior Vice President and Co-Group Head at ICRA, said the revision could meaningfully improve the financial case for exploration investments in India.
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"These rates would certainly improve the IRRs or the payback periods for the upstream entities," Vashisht said, adding that the cuts could incentivise fresh investment in the sector. He noted that the reform was particularly significant for offshore projects, where capital costs are high and the path to production is long.
Shares of state-run upstream companies reflected the market's enthusiasm, with Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) surging as much as 7 percent following the announcement. CLSA analysts estimated the royalty cut could add fair value of 7-9 percent to ONGC and 9-11 percent to Oil India.
The Ministry of Petroleum and Natural Gas published a gazette notification dated May 8, amending the Schedule to the Oilfields (Regulation and Development) Act, 1948. The notification replaces the existing royalty schedule under Section 6A(4) of the Act with a revised and rationalised rate structure for crude oil, casing head condensate and natural gas across all exploration and production regimes.
Under the revised structure, royalty for crude oil and condensate production from offshore deepwater blocks has been fixed at 5 percent for the first seven years from the start of commercial production and 10 percent from the eighth year onwards. For ultra-deepwater blocks, no royalty will be charged during the first seven years of commercial production, while a 5 percent rate will apply from the eighth year onwards under some categories.
For areas awarded under the Discovered Small Field (DSF) Policy and Hydrocarbon Exploration Licensing Policy (HELP), royalty on onland crude oil production is set at 12.5 percent, while shallow water blocks attract 7.5 percent. Deep water blocks under these policies attract zero royalty for the first seven years, rising to 5 percent from year eight. Ultra-deep water blocks see nil royalty for seven years, rising to just 2 percent thereafter.
A separate concessional rate structure applies for contracts under HELP where commercial production commences within four years for onland and shallow-water blocks, or five years for deepwater and ultra-deepwater blocks. For crude oil, Category-I basin onland blocks attract 11.25 percent, while Category-II and Category-III basins attract 10 percent and 8.75 percent, respectively. For natural gas, onland block rates are 9 percent, 8 percent, and 7 percent for the three categories.
The revised royalty schedule covers multiple categories of exploration and production areas, including nomination-based awards to national oil companies, blocks awarded before the New Exploration Licensing Policy (NELP), and areas awarded under more recent frameworks such as HELP.
The notification also changes the methodology for calculating royalty. The revised approach introduces a flat deduction formula for determining the "well-head price," which forms the basis for royalty calculations. Royalty will now be calculated after allowing fixed deductions towards post-wellhead costs — 20 percent of the sale price for nomination regime blocks and 15 percent for all other regimes. Earlier, royalty calculations were linked to actual post-production expenses, resulting in higher effective royalty payments for producers. The revised schedule also mandates that royalty be computed on a pre-royalty basis under all regimes.
The notification further states that royalty on onshore crude oil production has effectively been reduced to 10 percent, while offshore crude oil royalty has been lowered to 8 percent under the revised calculation mechanism. For natural gas, the effective royalty rate has been reduced to 8 percent.
The gazette also lays out a three-tier classification of India's sedimentary basins to determine which concessional royalty rate applies. Category-I basins — considered the most prolific — include Krishna-Godavari, Mumbai Offshore, Assam Shelf, Rajasthan, Cauvery, Assam-Arakan Fold Belt, and Cambay. Category-II basins include Saurashtra, Kutch, Vindhyan, Mahanadi, and Andaman-Nicobar, among others. Category-III basins, considered frontier or less-explored areas, include Kerala-Konkan, Bengal-Purnea, Ganga-Punjab, and Pranhita-Godavari, with the lowest royalty obligations under the concessional framework.
Petroleum and Natural Gas Minister Hardeep Singh Puri described the reform as a transformational moment for India's energy sector. "In a big boost for the country's Upstream Sector, rationalisation of royalty under the ORD Act marks a new era for our Oil & Gas regimes by eliminating inconsistencies and driving growth in the upstream sector," Puri said on X on May 11.
The minister called the move "a culmination of a decade-long effort to modernise our regulatory landscape by replacing complexity with consistency to fuel India's energy future," and said the revised schedule ensures "a stable, predictable, and investor-aligned framework for India's upstream sector." ANI News
The minister noted that the reform brings uniformity across contractual and policy regimes, helping create certainty among investors and encouraging fresh investments. "The move is aligned with the interest of investors and creates a transparent, fair and competitive regime that aligns with best global practices," Puri said.
The notification follows the 2025 amendments to the ORD Act and Petroleum and Natural Gas Rules.
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ICRA's Vashisht cautioned that the reform's impact on actual output will take time to materialise. He noted that large offshore projects typically require four-to-five years before production begins, making it unrealistic to expect immediate supply gains. He also pointed to regulatory hurdles and project economics as reasons why India has struggled to attract major global oil companies.