Under the revised structure, the royalty rate has been reduced from 16.66 per cent to 10 per cent for onshore crude oil, from 9.09 per cent to 8 per cent for offshore crude oil, and from 10 per cent to 8 per cent for natural gas.
The government charges all mineral companies a share of their sales as royalty.The revised structure aims at simplifying calculation methods and lowering the financial burden on energy companies. It is also part of a wider effort by the Centre to increase oil and gas production and reduce India’s energy import bill.
India’s domestic crude oil production has dropped consistently from 30.5 million tonnes (mt) in financial year 2020-21 (FY21) to 28 mt in FY26. During the same period, crude oil imports have doubled from $62 billion to $123 billion, according to data from the oil ministry’s Petroleum Planning and Analysis Cell.
The royalty cuts follow amendments made in 2025 to the Oilfields Regulation and Development Act, and Petroleum and Natural Gas Rules. The most significant intervention is for projects in difficult terrain such as deepwater and ultra-deepwater areas, which have been exempted from royalty payments for the first seven years, with concessional rates kicking in thereafter.
In a bid to simplify the structure, the government has also introduced a flat deduction formula for wellhead price calculations, allowing a fixed deduction of 20 per cent towards post-production costs, which further lowers the effective cash outflow.
The wellhead price refers to the value of oil or natural gas at the point of extraction from the oilfield. It represents the price received by producers before any transportation, refining, or marketing costs are applied.
Almost a month after notifying the new royalty rates, the centre on June 4 restored the 16.6 per cent royalty rate on crude oil produced from onland nomination blocks and areas awarded prior to the New Exploration Licensing Policy (NELP).
The royalty rationalisation exercise marks a new era for India’s oil and gas regime by eliminating inconsistencies and driving growth in the upstream sector, said Hardeep Singh Puri, Minister for Petroleum and Natural Gas.
“This landmark decision will be a major step toward regulatory clarity…. The revised Schedule removes long-standing inconsistencies across regimes to ensure a stable, predictable and investor-aligned framework for India’s upstream sector. This decision is a culmination of a decade-long effort to modernise our regulatory landscape by replacing complexity with consistency to fuel India’s energy future,” Puri said in a social media post.
At least one large investor in India’s upstream oil and gas sector, Vedanta Oil & Gas, part of billionaire Anil Agarwal-owned Vedanta Resources, welcomed the government’s decision, saying the measure underscored the government’s commitment to strengthening domestic exploration and production (E&P) at a time of continued volatility in global energy markets and heightened focus on energy security.
“This reflects a progressive and reform-oriented policy approach aimed at building a globally competitive and investment-friendly upstream ecosystem in India. Given the inherently high-risk and capital-intensive nature of exploration and production, long-term policy visibility and fiscal stability are critical.
Rationalisation of taxes and levies will enhance project viability and catalyse fresh investments by reinforcing investor confidence in the sector,” a company spokesperson said.
Experts say the royalty revision signals a clear push towards the upstream investment cycle because, instead of additional windfall taxes or incremental revenues from upstream public sector undertakings, the government has chosen to improve domestic E&P economics.
“We believe this indicates initial signs of a broader policy objective to accelerate oil and gas production by encouraging upstream capex and reducing India’s import dependence,” equity research firm Elara Capital said in a note.
The petroleum sector’s contribution to the central government in the form of royalty on crude oil and natural gas stood at ₹8,214 crore in FY26, with an additional ₹9,721 crore in royalty collected by state governments, taking the total to about ₹18,000 crore. However, the combined royalty outgo has been witnessing a steady decline from around ₹27,000 crore in FY23 to ₹8,000 crore in FY26. The latest reductions are expected to push those collections even lower.
Experts say that while the cut in royalties will also help improve returns for E&P companies, challenges remain.
“For example, the quality of prospectivity data, as we are still in the process of mapping our basins. This step in itself may not be sufficient to attract big oil companies,” said Prashant Vasisht, senior vice president and co-group head (corporate ratings), Icra. “Also, it is a fact that big oil and gas companies are also looking at other more lucrative acreages or geographies globally. India has not been a very prospective region for them. Also, the fact (is) that they are cutting down their own fresh spending under ESG (environment, social, governance) plans, etc, prioritising funds to locations where prospectivity is very high, like Guyana or Nigeria.”
“So, whether they will make a beeline for India — maybe or maybe not. So, overall it is a good step but we will have to see whether it will be a deal-maker.”
Prospectivity data quality refers to the accuracy and reliability of the geological information used to identify potential hydrocarbon reserves. It measures how accurately available data defines the elements of a petroleum system, (for example, a reservoir), to justify drilling.
The reduction in royalty rates and the introduction of a clear, formula-based definition for the wellhead price signify meaningful improvements for current producers, according to Deepak Mahurkar, partner at PwC India.
“These changes make a good bit of difference by easing the financial and procedural burdens on operators, which is expected to encourage them to continue production at existing fields more actively. Moreover, with clearer pricing mechanisms and lower royalties, producers may be incentivised to increase investments toward exploring and developing newer oil and gas plays,” he said.
The clarity around wellhead pricing, in particular, addresses a significant bottleneck, as the earlier flexibility allowed for regulatory delays and some instances of exploitation. By reducing ambiguity and speeding up approvals, this reform enhances operational efficiencies and market confidence.
Mahurkar, however, added that while these measures improve the immediate operating environment, they are unlikely to be the sole drivers for investor decisions. “Although these favourable changes reduce the overground risks related to policy and regulatory uncertainties, there remains a long road ahead to establish confidence among investors about the overall stability and predictability of the policy framework. Furthermore, challenges linked to inadequate subsurface data persist, leaving underground risks largely unmitigated, a critical factor that continues to influence investment appetite,” he said.
Experts say the royalty and wellhead price reforms represent important steps forward that should help sustain production and encourage further investment. However, ongoing efforts to address data gaps and strengthen policy stability will be essential to fully unlocking the sector’s potential and attracting long-term investment.