Government Reduces Oil Gas Royalty

General Studies Paper II: Government Policies & Interventions

Why in News?

Recently, the Indian government reduced royalty rates on crude oil and natural gas production to boost domestic exploration and strengthen India’s long-term energy security amid rising import dependence.

Government’s New Oil and Gas Royalty Reform

Reform: The Union Government revised royalty rates for crude oil, natural gas and casing head condensate under the Oilfields (Regulation and Development) Act, 1948.
- The reform follows the 2025 amendments to petroleum sector regulations aimed at simplifying the upstream fiscal regime.
- The revised royalty structure was officially notified by the Ministry of Petroleum and Natural Gas (MoPNG) on 8 May 2026.
- The notification applies to multiple categories of producing fields across India’s upstream hydrocarbon sector.
Reduction: The government reduced the effective royalty on onshore crude oil production from around 16.66% to nearly 10% under the revised formula.
- Royalty on offshore crude production was revised downward from approximately 9.09% to 8%. Separate royalty slabs were maintained for shallow-water, deepwater and ultra-deepwater production areas.
- The royalty rate on natural gas production was reduced from 10% to 8%. The government also introduced a revised methodology for calculating the well-head gas price through a flat deduction mechanism.
Methodology: The reform removed several legacy differences between nomination blocks, pre-NELP blocks, NELP blocks and HELP regimes by introducing a more uniform royalty framework.
Coverage: The changes apply to fields operated by National Oil Companies, private contractors, joint ventures, NELP blocks and HELP acreage, creating a broader unified royalty architecture.
Special Provision: For blocks awarded under HELP and the Discovered Small Field Policy, ultra-deepwater production will attract zero royalty for the first seven years, followed by phased royalty obligations later.
- The revised framework introduced a standard 20% ad-valorem deduction while calculating royalty liabilities in several nomination and legacy blocks.
- The royalty rationalisation is part of a wider petroleum-sector reform process initiated after amendments to the ORD Act and PNG Rules in 2025, focused on reducing procedural complexity.

What are Royalty Rates?

Royalty rates are mandatory payments made by companies to the government for extracting natural resources such as crude oil, natural gas, coal and minerals from licensed areas.
- In the petroleum sector, royalty is generally charged as a percentage of the well-head value or production value of oil and gas.
In India, royalty on petroleum resources is governed under the Oilfields (Regulation and Development) Act, 1948.
- Section 6A of the Act empowers the Central Government to notify royalty rates for crude oil and natural gas production.
Royalty is calculated either as a fixed percentage of sale price or on the well-head price of hydrocarbons.
- For example, if crude oil worth ₹100 crore is produced and royalty is fixed at 10%, the producer must pay ₹10 crore as royalty to the government.
Royalty rates differ according to the location of fields, type of hydrocarbon, and exploration policy regime.
- India maintains separate structures for onshore fields, offshore fields, deepwater blocks and ultra-deepwater areas.
Royalty collected from onshore production is generally transferred to concerned State Governments, while royalty from certain offshore areas accrues to the Central Government.
The royalty framework ensures that governments receive compensation for allowing private or public firms to exploit national natural resources.
- It forms a major part of the fiscal regime alongside cess, profit petroleum, taxes and licensing fees in the hydrocarbon sector.

Significance of This Reform

Domestic Energy Production: The royalty reduction is significant because India imports nearly 85% of its crude oil and around 50% of natural gas requirements.
- By lowering royalty burdens, the government aims to make domestic hydrocarbon production financially more viable and reduce dependence on costly imports.
Global Energy Uncertainty: The royalty rationalisation gains importance amid rising geopolitical tensions and volatile global crude prices.
- India’s high import exposure through the Strait of Hormuz makes domestic production expansion strategically critical for long-term energy stability and foreign exchange management.
Upstream Exploration Activities: The reform directly supports upstream exploration and production (E&P) activities, especially in technically difficult regions such as deepwater and ultra-deepwater basins.
- The new framework provides zero royalty for the first seven years in several deepwater projects under HELP and DSF policies.
Improved Investment Climate: The decision sends a strong policy signal to both domestic and foreign investors that India is moving toward a stable and investor-friendly fiscal regime.
- The simplified royalty methodology reduces uncertainty in long-term project planning and financing.
Public Sector Oil Producers: The reform is highly significant for companies such as Oil and Natural Gas Corporation and Oil India Limited, whose nomination blocks form a large share of India’s domestic output.
- CLSA estimated potential fair-value gains of 7–11% for these firms after the royalty revision.
Frontier Basin Development: The revised royalty structure introduces concessional rates for Category-II and Category-III sedimentary basins, including frontier regions such as Andaman-Nicobar, Kerala-Konkan and Bengal-Purnea basins.
- This encourages exploration in previously underdeveloped hydrocarbon areas.

Government Reforms Transforming India’s Oil and Gas Sector:

Hydrocarbon Exploration and Licensing Policy (HELP): The government introduced the Hydrocarbon Exploration and Licensing Policy (HELP) to replace the older NELP regime.
- HELP established a uniform licensing system for oil, gas, shale gas and coal-bed methane, while shifting to a revenue-sharing model.
Open Acreage Licensing Policy (OALP): Under OALP, companies can independently identify exploration areas and submit bids throughout the year instead of waiting for government-selected blocks.
- In March 2026, the government launched OALP-XI, offering 21 oil and gas blocks covering about 80,228 sq km.
- The blocks include 12 onland, four shallow-water, one deepwater and four ultra-deepwater blocks across frontier basins.
Ease of Doing Business: The Petroleum Ministry approved several operational reforms including transfer of participating interest, flexible delivery points, and simplified field handover procedures for exploration contracts.
Coal Gasification Promotion Scheme: In May 2026, the Union Cabinet approved a ₹37,500 crore ($3.9 billion) coal gasification support scheme.
- India targets gasification of 75 million metric tonnes of coal annually, with expected investments of nearly ₹3 lakh crore.
Domestic Gas Infrastructure: The government accelerated development of City Gas Distribution (CGD) networks, piped natural gas systems and CNG infrastructure to increase natural gas usage in households, transport and industries under the “gas-based economy” strategy.