India cuts royalty burden on oil and gas producers in push for domestic output

The Centre has reduced royalty rates on the production of crude oil and natural gas from several categories of fields, including deepwater and ultra-deepwater blocks, in a move aimed at boosting domestic exploration and production. The revised rates were notified by the Ministry of Petroleum and Natural Gas on May 8.

The changes are expected to reduce costs for companies exploring difficult and capital-intensive oil and gas fields, areas where India has been trying to attract more investment to boost local energy production and reduce import dependence.

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Under the revised framework, effective royalty on onshore crude oil production has been reduced to 10%, while royalty on offshore crude production has been lowered to 8%, according to the new calculation mechanism.

For natural gas, the effective royalty rate has been reduced to 8% after the government introduced a new flat deduction formula for calculating the “well head price” used to determine royalty payments.

The notification said royalty will now be calculated on the “well head price” after allowing a fixed deduction towards post well-head costs — 20% of the sale price for nomination regime blocks and 15% for all other regimes. Earlier, royalty calculations were linked to actual post-production costs, resulting in higher effective rates for producers.

The government has also retained concessional royalty rates for deepwater and ultra-deepwater fields to incentivise production from difficult geographies.

Under the revised structure, crude oil and condensate production from blocks awarded under the Discovered Small Field (DSF) Policy and Hydrocarbon Exploration and Licensing Policy (HELP) will attract zero royalty for the first seven years in deepwater and ultra-deepwater areas. From the eighth year onwards, royalty rates will be fixed at 5% for deepwater blocks and 2% for ultra-deepwater blocks.

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The same concession has been extended to natural gas production from DSF and HELP blocks, with royalty rates remaining at zero for the first seven years before increasing to 5% and 2%, respectively.