Oil and Natural Gas Corporation (ONGC) share price surged 6.5% on Tuesday, 12 May, after the government reduced royalty rates on crude oil and natural gas production across multiple field categories, including deepwater and ultra-deepwater blocks, to boost domestic exploration.
The updated framework is anticipated to advantage state-owned companies ONGC and Oil India, as the royalty on onshore crude oil production has been reduced from 16.66% to 10%.
Royalty on offshore crude production has been cut to 8% from 9.09%, while the rate on natural gas has been lowered to 8% from 10%, following the introduction of a new flat deduction formula.
Royalty represents the payment made by oil and gas firms such as ONGC and Oil India Ltd to the government for extracting crude oil and natural gas from the nation’s reserves. This fee is typically calculated as a percentage of the market value of the extracted oil or gas. The term “royalty rate” refers to this percentage set by the government.
Increased royalty rates raise upstream companies’ expenses, while reduced rates enhance profitability and may stimulate further exploration and production, particularly in costly deepwater and ultra-deepwater ventures.
According to a CNBC-TV18 report, brokerage firm CLSA has reiterated its ‘High Conviction Outperform’ rating on Oil and Natural Gas Corporation (ONGC) with a target price of ₹405, noting that the government’s recent move to cut royalty rates came as a positive surprise.
As per the news report, CLSA estimates that the decision could increase ONGC’s fair value by 7%–9%, while Oil India Limited could see an upside of 9%–11%. The brokerage highlighted that the move helps ease concerns around potential upstream taxation risks, including the reintroduction of a windfall tax similar to 2022.
Such concerns had previously weighed on ONGC and Oil India, making them among the weaker-performing upstream energy stocks globally. CLSA further noted that at Brent crude prices of $80 per barrel, ONGC could deliver a total return of over 50%, as the stock currently factors in a lower crude price assumption of around $65 per barrel, CNBC-TV18 reported.
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