ONGC Gains from Shift to Royalty

ONGC is expected to gain over Rs 200 crore from the shift to a three-tier ad valorem royalty regime on crude oil, instead of current fixed tax regime.

At the same time, Oil India Limited (OIL) will lose around Rs 120 crore annually.

This is because as per the new policy approved by the Cabinet on Tuesday, crude oil production from onshore fields would be taxed at 20 percent of the wellhead price, while offshore fields would attract a 10 percent tax. Royalty on deepwater fields will be 5 percent.

Since more than half of ONGC's production comes from the offshore Mumbai High field, it will have to pay a lower rate of 10 percent royalty on it. However, since the entire production of OIL is from onshore fields, it will be paying royalty at a higher rate of 20 percent.

The annual additional receipt to oil-producing states will be around Rs 400 crore at crude oil prices of $22 a barrel.

Moreover, major oil-producing states, like Assam and Gujarat, will get Rs 436 crore as arrears for the period between April 1, 1998, and March 31, 2002.

At present, royalty on crude oil produced from pre-NELP blocks is Rs 850 a ton. While the onland royalty revenues go to the respective states, the Center is the beneficiary of royalty revenue from offshore fields. The new royalty regime would be effective from April 1, 1998.

Oil blocks awarded under the new exploration licensing policy (NELP) have a different royalty regime.

Briefing reporters on the new royalty regime, Petroleum Minister Ram Naik said, "Royalty on crude oil production from onland and shallow water offshore areas will be paid 20 percent during the period April 1, 1998, and March 31, 2002. Any additional amount accrued as a result of royalty revision during this period for production from onland areas will be paid by the Center."

For the post-APM period effective from April 1, 2002, royalty will be based on well-head prices of crude oil. The rate of royalty would be 20 percent for onland areas and 10 percent for shallow water areas, Naik said.

The minister said there would be relatively lower rate of royalty for crude oil production from deepwater areas, heavy crude oils and production under enhanced oil recovery (EOR) and improved oil recovery (IOR) schemes.

With the revised royalty rates, Assam would get arrear payment of about Rs 180 crore, Andhra Pradesh Rs 11 crore, Gujarat Rs 220 crore and Tamil Nadu Rs 17 crore for the period 1998-2002, he said.

"The current provisional amount of Rs 850 per ton would increase to about Rs 1,210 per ton on an average and the annual additional receipts to states will be about Rs 400 crore at a crude oil price of $ 22 per barrel," Naik said.

The new policy envisages a royalty rate of 20 percent of the well-head price for onland crude oil production till 2006-07.

From 2007-08, royalty rates would taper by 1.5 percent each year so as to facilitate convergence with NELP rates of 12.5 percent within a period of five years.