'Royalty payout to Gujarat,Assam credit positive for ONGC,OIL'

After coming to power, the BJP-led government at the Centre agreed to this but since ONGC and OIL could not be asked to pay royalty on a price they never realised, it agreed to bear the amount claimed by the state governments.

"This settlement is credit positive for ONGC and OIL because it removes the uncertainty over Rs 26,100 crore of contingent royalty liability for both companies without resulting in any further cash outlay from these companies," Moody's said.

The rating agency said royalties on crude-oil production from onshore fields are paid to state governments, while royalties on offshore blocks are paid to the central government.

At the same time, India's fuel subsidy is borne by the central government and central government-owned oil companies.

"ONGC and OIL bear part of the subsidy burden by giving discounts, as determined by the central government, on crude oil sold to the central government-owned refining companies.

"Until March 2008, based on directives from the central government, the royalties have been paid on the pre-discount price of crude oil. Since May 2008, however, the central government directed oil companies to pay the royalty only on post-discount prices," it said.

The state governments, however, maintained that they should receive royalties on the pre-discount prices of crude oil. The matter has been under the adjudication of courts.