The Indian government's recent move to slash onshore crude oil royalty rates is expected to boost India's exploration and production (E&P) sector. According to a latest sector update by JM Financial, state-run giants Oil India Ltd and Oil & Natural Gas Corporation Ltd (ONGC) are among the beneficiaries of this policy pivot. 

The official notification reduces the royalty on onshore crude oil from nominated and pre-NELP blocks to 12.5%, down from the previous 20%. However, rates for offshore blocks and onshore NELP/PSC blocks remain untouched. Additionally, the royalty on APM gas produced above a certain baseline threshold has been trimmed from 10% to 9%.  

Alongside this, the government has revised the “changing the well-head price calculation by allowing an ad valorem 15–20% deduction from sales price (versus fixed deduction of USD 3-6/bbl earlier); and iii) removing inconsistencies across various E&P contracts,” the brokerage said.

Oil India & ONGC

JM Financial highlighted Oil India as the most significant beneficiary. “Our initial assessment suggests this would be the most positive for Oil India given~100% of its output is onshore (hence its cost can reduce by USD 4-5/bbl or boost earnings by 5- 7%,” it said.

ONGC, with roughly 31% of its total production stemming from onshore fields, is expected to see a cost reduction of USD 1-1.5/bbl, pushing earnings up by 2-3%, it noted.

“Followed by Cairn India (Vedanta; ~85% onshore production) and ONGC (~30% of total production from onshore fields)—this can reduce cost by ~USD 1-1.5/bbl or boost earnings by 2- 3%,” the brokerage added.

Target prices

JM Financial has a ‘Buy’ rating on both state-run explorers. The brokerage has set a target price of Rs 585 for Oil India and Rs 340 for ONGC, factoring in a Brent crude price assumption of USD 75/bbl from FY28E onwards.  

“That said, we prefer Oil India as it could be a 15% earnings-compounding story driven by: i) strong 20–25% cumulative output growth over FY27–29E; and ii) expansion of NRL refinery from 3mmtpa to 9mmtpa by end-FY27,” JM Financial said.