Royalty on production of crude oil and gas is payable to the State Governments on wellhead price for production from onshore fields in terms of statutory provisions of Oilfields (Regulation and Development) Act 1948 (ORDA), Petroleum & Natural Gas (PNG) Rules 1959, Petroleum & Natural Gas (Amendment) Rules, 2003 read with notifications or resolutions dated 17th March, 2003, 16th December, 2004, 20th August, 2007 and 28th August, 2009 issued by the Government under the ORDA from time to time.

In order to protect from the inflationary impact of rising international oil prices, the Government has been modulating the retail selling prices of Petrol (upto 25th June 2010), Diesel (upto 18th October, 2014) PDS Kerosene and subsidized domestic LPG.

As a result, the Public Sector Oil Marketing Companies (OMCs) incurred under recoveries on the sale of petroleum products. In this background, the Government has evolved a “burden sharing mechanism” since 2003-04 to ensure that the burden of under-recoveries incurred by OMCs is shared by all the stakeholders.

The National Oil Companies, Oil Natural Gas Corporation (ONGC) and Oil India Limited (OIL) also shared the burden by selling the crude oil at discounted price. However, it was provided that the discount offered by upstream oil companies would not affect the royalty payable to the State Governments.

Upstream oil companies paid the royalty on prediscount price during the years 2003-04 to 2007-08. However, in May 2008, Government withdrew the said provisions. Accordingly, ONGC and OIL started making payment of royalty to State Governments at post discount price for the period 1.4.2008 to 31.01.2014.The burden sharing mechanism has since been discontinued.

Presently, the royalty on crude oil & gas produced from nomination blocks is being paid by ONGC and OIL on well head price derived from actual sale price realized.