- Before Understanding the Royalty Cut, Let’s Understand Onshore and Offshore Oil Fields
- Who Actually Owns These Oil Fields?
- What Is Royalty in Oil & Gas?
- What Exactly Did the Government Change?
- Why Did the Government Reduce Royalty?
- Why ONGC and Oil India Benefited the Most
- Why This Reform Matters Beyond Just Stock Prices
- Final Thoughts
ONGC and Oil India stocks rallied sharply after the Indian government reduced royalty rates on oil and gas production. At first glance, it looked like just another policy announcement for the energy sector. But this move is much bigger than a simple duty cut.
To understand why the market reacted so strongly, we first need to understand how India’s oil industry actually works.
What are onshore and offshore oil fields? Who owns these oil reserves? Why do companies pay royalty to the government? And why would the government reduce it now?
The answers to these questions explain not just the stock rally, but also India’s larger push toward energy security and lower dependence on imported crude oil.
Before Understanding the Royalty Cut, Let’s Understand Onshore and Offshore Oil Fields
Oil is not extracted from one uniform type of location. Some oil reserves are located beneath land, while others are buried deep under the ocean floor. This difference matters because the cost, difficulty and risk of extraction vary significantly.
What are Onshore Oil Fields?
Onshore oil fields are reserves located beneath land.
In India, major onshore oil-producing regions include Assam, Rajasthan and Gujarat. Companies drill these reserves using land-based rigs. Since the operations happen on land, transportation, maintenance and infrastructure are relatively easier to manage.
As a result, onshore drilling is generally cheaper, faster and less technically complex than offshore operations. Think of it like digging deep underground on land using heavy industrial machinery.
Because production costs are comparatively lower, governments usually charge higher royalty rates on onshore production.
What are Offshore Oil Fields?
Offshore oil fields are reserves located beneath the sea floor.
India’s major offshore fields include Mumbai High and the Krishna-Godavari (KG) Basin. Extracting oil offshore is far more complex because companies need offshore platforms, floating drilling rigs, subsea pipelines and marine logistics systems to operate in the middle of the ocean.
Unlike onshore drilling, offshore operations must deal with harsh weather, ocean pressure, corrosion and deep-sea engineering challenges. These projects are extremely expensive and technically demanding.
A useful way to think about it is this: onshore drilling is like digging underground on land, while offshore drilling is like trying to drill beneath the ocean while standing on a floating industrial structure.
That complexity is why offshore royalty rates are generally lower across the world.
Deepwater and Ultra-Deepwater Fields Are Even More Complex
Even within offshore drilling, there are multiple categories:
- Shallow-water
- Deepwater
- Ultra-deepwater
As drilling moves deeper into the ocean, costs rise sharply, technology becomes more advanced and operational risk increases significantly.
Deepwater projects can take years before becoming commercially viable, and some wells cost hundreds of millions of dollars to develop.
That is why governments globally offer lower royalty rates and incentives for deepwater exploration. Without incentives, many projects may simply become economically unattractive.
Who Actually Owns These Oil Fields?
One common misconception is that companies like ONGC or Oil India own the oil reserves they extract. They don’t.
In India, natural resources such as oil and gas belong to the Government of India. Oil companies only receive:
- Exploration rights
- Production licenses
- Mining leases
This means companies get permission to extract and sell oil, but the resource itself belongs to the nation. And this is where royalty comes in.
What Is Royalty in Oil & Gas?
Royalty is essentially a payment companies make to the government for extracting natural resources. You can think of it as a resource usage fee.
For example, if a company extracts crude oil worth ₹100:
- Under the earlier onshore structure, ₹17 went to the government as royalty.
- Under the new structure, only ₹10 will go to the government.
The remaining amount stays with the producer.
Governments charge royalty because natural resources belong to the country, and extraction depletes national reserves. Royalty ensures the state receives compensation for allowing companies to commercially exploit these resources.
It is also important to understand that royalty is different from corporate tax, windfall tax or profit-sharing arrangements because it is directly linked to production.
This is important because any reduction in royalty immediately improves the profitability of oil producers.
What Exactly Did the Government Change?
The government reduced royalty rates across multiple categories of oil production. Here’s the revised structure:
| Field Category | Old Statutory Rate | New Statutory Rate | Effective Rate |
| Onshore crude oil | 20% | 12.5% | 10% (Was ~16.66%) |
| Offshore (Shallow) | ~11% | 10% | 8% (Was ~9.09%) |
| Deepwater | 10% | 5% | 5% |
| Ultra-deepwater | 5% | 2% | 2% |
The effective royalty is lower because the government does not charge royalty on the full sale price. For example, if oil is sold for ₹100, the government first allows a 20% deduction for post-production costs. So royalty is calculated only on ₹80.
That means a 12.5% royalty rate becomes an actual cash outflow of ₹10, or 10% of the sale value. This calculation varies across categories.
Why Did the Government Reduce Royalty?
This is where the bigger strategic picture emerges.
India imports nearly 85% of its crude oil requirement. That makes the country highly dependent on global oil markets.
When global crude prices rise, India faces pressure through higher import bills, rupee weakness, inflation and larger trade deficits. Increasing domestic production helps reduce some of this dependence.
But there is a challenge.
Many domestic oil fields, especially offshore and deepwater projects, are expensive to develop. Companies often hesitate to invest aggressively because exploration is risky, capital requirements are huge, project timelines are long and returns may not always justify the investment.
By reducing royalty, the government is effectively improving project economics.
Lower royalty means companies retain a larger share of revenue, which improves profitability, strengthens cash flow and increases the incentive to explore and produce more domestically. This becomes especially important for offshore and deepwater projects where costs are already extremely high.
In simple terms, the government is trying to make domestic oil production more attractive.
Why ONGC and Oil India Benefited the Most
ONGC
ONGC is India’s largest oil and gas producer with exposure across:
- Onshore fields
- Offshore assets
- Deepwater exploration
Because of its massive production scale, even a small reduction in royalty creates a meaningful impact on margins, EBITDA, cash flow and overall profitability.
ONGC also has major offshore assets like Mumbai High, so the offshore royalty cuts matter as well.
Oil India
Oil India is more heavily focused on onshore production, particularly in Assam and the Northeast.
Since the biggest royalty reduction happened in onshore fields, the company stands to benefit significantly. For companies like Oil India, royalty is a major production-linked expense, so lower royalty directly improves earnings potential.
Why This Reform Matters Beyond Just Stock Prices
This policy move is not just about helping oil companies.It reflects a broader energy strategy. India wants to:
- Increase domestic oil production
- Reduce import dependence
- Improve energy security
- Encourage investment in difficult exploration projects
The country may continue to rely heavily on imports for years, but even modest improvements in domestic production can strengthen India’s strategic position.
Lower royalty is essentially the government telling producers: produce more, explore more and invest more within India.
That is why the market treated this as a structural reform rather than a temporary relief measure.
Final Thoughts
The rally in ONGC and Oil India was not just about lower royalty rates. It was a reflection of improving economics for India’s upstream oil sector and a larger push toward energy security.
Understanding the difference between onshore and offshore drilling, how royalty works, and why governments charge it makes this policy move far more meaningful than a simple “duty reduction” headline.
At its core, the reform is about one thing: making domestic oil production more attractive in a country that still depends heavily on imported crude oil.