top of page

Modi Government Rationalises Royalty Rates on Crude Oil and Natural Gas Production to Strengthen India's Upstream Energy Sector

The Union Ministry of Petroleum and Natural Gas has introduced a significant reform in India's hydrocarbon sector by rationalising royalty rates for crude oil, natural gas, and casing head condensate. Notified on May 8, 2026, these changes aim to create a more predictable and investor-friendly fiscal regime, encourage exploration in challenging areas, and support the goal of enhancing domestic energy production.


India lowered upstream royalty burdens for oil and gas producers as the government pushes higher domestic output and reduced import dependence during ongoing West Asia energy volatility. | Financial Express
India lowered upstream royalty burdens for oil and gas producers as the government pushes higher domestic output and reduced import dependence during ongoing West Asia energy volatility. | Financial Express

Revised Royalty Structure

The new framework calculates royalty on the well-head price after allowing a standardised deduction for post-well-head costs. This replaces earlier methods that often resulted in higher effective rates due to variable cost calculations. Under the updated rates, onshore crude oil production now attracts a royalty of 10 percent, down from 16.66 percent. Offshore crude oil royalty has been reduced to 8 percent from 9.09 percent. For natural gas, the rate has been lowered to 8 percent from 10 percent through a new flat deduction formula—20 percent of the sale price for nomination regime blocks and 15 percent for others.


These adjustments apply across various licensing regimes, including nomination blocks, pre-NELP, NELP, and HELP, bringing greater uniformity and removing long-standing inconsistencies.


Special Incentives for Deepwater and Ultra-Deepwater Exploration

A key feature of the reform is the provision of zero royalty for the first seven years of commercial production from deepwater and ultra-deepwater blocks awarded under the Discovered Small Field (DSF) Policy and Hydrocarbon Exploration and Licensing Policy (HELP). This concession covers crude oil, condensate, and natural gas. From the eighth year, royalty will be 5 percent for deepwater areas and 2 percent for ultra-deepwater regions. These measures address the high risks and capital intensity associated with such projects, making them more viable for operators.


Benefits for Industry Players and Market Reaction

The policy is expected to particularly support major producers such as Oil and Natural Gas Corporation (ONGC) and Oil India Limited. Analysts from CLSA have noted that the changes could enhance ONGC’s fair value by 7-9 percent and Oil India’s by 9-11 percent, while also improving net realisations per barrel. Following the announcement, shares of both companies rose significantly on May 12, 2026, reflecting positive market sentiment.


Rating agency ICRA has welcomed the move, stating that it will improve internal rates of return and shorten payback periods for upstream projects, thereby encouraging fresh capital investment.


Strategic Context for Energy Security

India continues to rely on imports for a substantial portion of its energy needs, with around 85 percent of crude oil and nearly 50 percent of natural gas requirements met through overseas supplies. Amid global price volatility and geopolitical developments in West Asia, boosting domestic output remains a priority. The royalty rationalisation forms part of broader efforts to modernise the regulatory framework, following amendments to the Oilfields (Regulation and Development) Act and PNG Rules in 2025.


Union Minister Hardeep Singh Puri described the reform as a major step towards regulatory clarity. He highlighted that the revised schedule eliminates inconsistencies across regimes and establishes a stable, predictable environment aligned with investor expectations.


The MGMM Outlook 

India’s decision to rationalise royalty rates on crude oil and natural gas production marks a timely and strategic intervention aimed at revitalising the upstream energy sector. By reducing royalty burdens, simplifying the pricing framework, and introducing a more uniform system across licensing regimes, the government has sent a strong signal of policy stability and investor confidence. This reform not only improves the commercial viability of existing projects but also strengthens India’s appeal as a destination for long-term energy investment, particularly in a sector that demands significant capital and technological commitment.


The targeted incentives for deepwater and ultra-deepwater exploration further demonstrate a forward-looking approach toward energy security and self-reliance. As India continues to face high import dependency amid global geopolitical uncertainties, encouraging domestic hydrocarbon production has become an economic and strategic necessity. The revised royalty regime is expected to unlock new exploration opportunities, improve returns for major energy producers, and accelerate the country’s broader objective of building a more resilient, competitive, and sustainable energy ecosystem.



Comments

bottom of page