Overview of Petroleum & Natural Gas Sector & Regulatory Perspective in India

Top Primary Energy Consuming Countries 2005 Total World Energy Consumption: 10537 mtoe 5th largest energy consumer (Share 3.7% of global energy) Per capita energy consumption - about one third of world average Energy consumption projection(2031-32) to grow at 5 % CAGR (8% GDP growth) as per Integrated Energy Policy 3.4% CAGR upto 2025 (GDP: 5%) Energy import dependence is 30% (26% on account of oil & 4% for Coal + Power) and is likely to climb to 40-45% by 2025 Oil import dependence is around 72% currently. Likely to go upto 90% level Fig. in MTOE Per-capita Energy Consumption India has been one of the world’s most consistent growth stories, and India’s GDP growth rate has accelerated from about 5% in the 1980’s and 1990’s to about 6% over the past 5 years. Today, Indian policy makers and planners accept that 6-7% annual growth is more likely. Source – Energy Information Administration (EIA)

Primary Commercial Energy Mix World World 2003 2030 10517 mtoe 18040 mtoe CAGR: 2% Oil & Gas continue to play major role India India 2003-04 2031-32 327 mtoe 1651 mtoe CAGR: 6.2% Coal & Oil continue to play major role; Gas is emerging Source – World: EIA-2006; India: IEP 2006

Crude Oil Demand, Production & Import Trends MMT

India - A Net Exporter of Products POL - Imports & Exports Crude Oil Import US$ Billion Gross crude and petroleum products Crude/product Imports : ~ 28% of total imports Product Exports : ~ 8% of total exports Product Export Product Import India - A Net Exporter of Products

Refineries & Product Pipelines Refining Refining Capacity: 178 MMT Product Pipelines Product Pipelines Length: 12017 KM Capacity: 68.17 MMT Capacity Utilisation: 77% IndianOil, through strategic mergers and acquisitions, has strengthened its leadership position in the downstream oil sector in India. The IndianOil group accounts for 41% of national refining capacity, 51% of product pipeline capacity, and 47% of market share.

Expected Refining Capacity by 2011-12: 200-235 MMTPA Refineries in India (1.4.08) Bhatinda (9.0) Existing Ongoing/Planned Panipat (6.0), (9.0) Digboi (0.7) Bongaigaon (2.4) Mathura (8.0) Numaligarh (3.0) Guwahati (1.0) Barauni (6.0) BINA (6.0) Baroda (13.7) Jamnagar (33.0, 29.0, 10.5 Haldia (6.0), (1.5) Paradip (15.0) Mumbai (5.5) (2.4) (12) Visakh (7.5, 7.5) Nos MMTPA IndianOil 10 60.2 BPC 3 22.5 HPC 2 13.0 ONGC / MRPL 2 9.8 Reliance (Pvt.) 2 62.0 Essar(Pvt.) 1 10.5 Total 20 178.0 Tatipaka (0.1, 0.1) Mangalore (9.7, 5.3) Chennai (9.5, 1.7) Cochin (7.5, 2.0) Narimanam (1.0) Expected Refining Capacity by 2011-12: 200-235 MMTPA

India’s product demand & refining capacity Gap between Refining Capacity & Demand 142 68 21 Surplus refining capacity is expected to increase further by 2030 Source: XI Plan Demand India will continue to be product surplus Import/Export requirement for crude/products to be quite substantial

Petroleum Products Pipelines in India Jalandhar Bhatinda Ambala Roorkee Sangrur Najibabad Panipat Meerut Nahorkatiya Tinsukia Rewari Delhi Loni Sanganer Shahjahanpur Mathura Ajmer Siliguri Bongaigaon Digboi Jodhpur Chaksu Tundla Numaligarh Lucknow Kanpur Jagdishpur Guwahati Kot Chittaurgarh Sidhpur Barauni Ahmedabad Rajbandh Kandla Ratlam Mundra Navagam Budge Budge Jamnagar Koyali Maurigram Indore Vadinar Dahej Ankleshwar Haldia Hazira Manmad Mumbai High Mumbai Paradip Pune Secunderabad Vizag Existing Uran Product Crude Oil RR India, already has a network of oil pipelines for supplying crude oil to the inland refineries viz. Guwahati, Mathura, Panipat, Barauni, Koyali etc., and for transportation of the petroleum products from the refineries and port terminals to inland depots and bulk consumers. Most of these pipelines are located in Eastern, western and northern parts of the country. At present the country has about 11,500 km of cross-country pipelines for transportation of crude oil and petroleum products. These pipelines are owned and operated by various oil and gas companies viz. Indian Oil Corporation Limited (IOCL), Gas Authority of India Limited (GAIL), Oil India Limited (OIL), Oil & Natural Gas Corporation Limited (ONGCL), Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Petronet VK Limited (PVKL). Except PVKL, all other companies are state owned. 70% of countries pipeline owns & operated by IOC. Total Pipeline capacity is 61.72 MMTPA   Pakni Hazarwadi Vijayawada Products 9893 KM; 64 MMTPA LPG 2124 KM; 4.5 MMTPA Capacity Utilization Prods. - 78%; LPG - 62% Mangalore Bangalore Chennai On-going Product Crude Oil Sankari Asanur Karur Existing Coimbatore Trichy Kochi LPG Madurai 9

Distribution & Marketing Infrastructure Terminals/Depots No. 383 LPG Bottling Plants 170 Aviation Fuel Stations 126 Retail Outlets 37953 LPG Distributors 9366 SKO/LDO Dealers 6614 IndianOil, through strategic mergers and acquisitions, has strengthened its leadership position in the downstream oil sector in India. The IndianOil group accounts for 41% of national refining capacity, 51% of product pipeline capacity, and 47% of market share.

Long Term Demand Supply - Gas

Gas Pipelines in India Length- ~ 11000 kms Gas Consumption- 39 bcm LNG Import - 8-9 MMT, 1 mmtpa spot) Players- GAIL, GSPCL, GGCL, RGTIL Pipeline length is likely to double in next 4-5 years Total infrastructure inadequate to meet the country’s requirements

Government of India Policies Administered Pricing Mechanism (APM) dismantling effective 1.4.2002 Gas Pricing NELP Policy on Refining Auto Fuel Policy Policy on Marketing of Petroleum Products Gas Pipeline Policy Petroleum Product Pipeline Policy FDI Policy

APM Dismantling – Key decisions Key Decisions Taken on APM dismantling APM Dismantling – Key decisions Crude oil producers/Refineries to be paid on import parity basis from Apr’02 Market determined prices for all products except LPG & Kerosene from Apr’02 Subsidies for LPG/Kerosene from fiscal budget on flat rate basis since Apr’02. Free float thereafter

Gas Pricing – July 2005 Govt. order Key Decisions Taken on APM dismantling Gas Pricing – July 2005 Govt. order Consumer price of APM gas increased from Rs. 2,050/mscm to Rs. 3,200/mscm linked to calorific value of 10,000 kcal/scm pending Tariff Comm. recommendations All APM gas to be supplied to only power & fertiliser sector consumers against existing allocation as well as for specific end consumers under court orders/small consumers having allocation upto 0.05 mmscmd Rest of consumers to be supplied at market related price APM gas price for other than power & fertiliser sectors further increased from Rs 3,200/mscm to Rs 3,840/mscm wef June 2006 As against APM gas price of around $ 1.8/mmbtu, free market gas price varies e.g., RLNG @ $ 3.86/mmbtu, PMT gas @ $ 4.75/mmbtu, spot LNG purchases @ $ 7-8/mmbtu, etc.

New Exploration & Licensing Policy (NELP) NELP introduced in 1999; so far VIII rounds held Internationally competitive fiscal regime Transparent Process, International competitive bidding Contractual Fiscal Stability Excellent Tax Incentives Special deepwater concessions Freedom to market production domestically

Policy on Refining Administered Pricing Mechanism (APM) dismantled for refineries in April 1998 Setting up of refineries de-licensed in June 1998 Refineries may be set up subject to meeting statutory requirements Private refineries by RIL and Essar set up in India Others JV refineries are under implementation

Auto Fuel Policy - Road map for Fuel Quality improvement in India Passenger Cars, LCV & Heavy Duty diesel vehicles 2/3 wheelers BS-II BS-III Euro III Eq BS IV Euro IV Eq 11 Major cities (Delhi/NCR, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur & Agra) Done by 1-Apr-03 1-Apr-05 Target 1-Apr-10 Entire Country by 1-Apr-05 By Preferably from 1.4.2008 but not later than 1.4.2010 Sulphur content in ppm (max) Fuel BS-II BS-III/Euro-III BS-IV/Euro-IV Petrol 500 150 50 Diesel 500 350 50 Source: Auto Fuel Policy, GoI

Policy on Marketing of Petroleum Products Marketing of petroleum products except subsidized products allowed to private companies Marketing of Transportation Fuels authorised: Subject to entities making investment or proposing to invest Rs. 20 billion in exploration / refining / pipelines / terminals /infrastructure etc.

FDI Policy Exploration Refining Marketing Petroleum Pipelines Up to 100% FDI: Automatic route through Competitive bidding Refining Up to 100% FDI Up to 49% FDI: if project taken up along with Public Sector Undertakings Marketing Up to 100% FDI permitted in petroleum products marketing Petroleum Pipelines Up to 100% FDI: Under automatic route Natural Gas Pipelines 20

Petroleum and Natural Gas Regulatory Board

Need for Reform Need for reform on account of - Provision of level playing field capital intensive activities requiring heavy investments promoting competition inviting foreign capital attuning oil & gas sector in line with international practices protection of consumer interest

PNGRB Act, 2006 Enacted by Parliament in March’06 All provisions (except Section 16) of the Act notified w.e.f. 1.10.2007 PNGRB formally established w.e.f. 1.10.2007 One Chairperson and four full time Members Basic Objectives – To protect the interest of consumers and entities To ensure uninterrupted and adequate supply in all parts of the country To provide level playing field To promote competitive markets

Salient Functions of the PNGRB Fostering fair trade & competition amongst entities Register entities for- marketing petroleum, petroleum products & natural gas establishing & operating LNG terminals establishing storage facilities Authorize entities for- Laying, building, operating or expanding a common carrier or contract carrier for transportation of natural gas or petroleum products Laying, building, operating or expanding city or local natural gas distribution network

Functions of the PNGRB (contd.) Declaring pipelines as common carrier or contract carrier & specify access code for allowing access to such pipelines In respect of notified petroleum, petroleum products & natural gas - Ensure adequate availability Monitor prices & take corrective measures to prevent restrictive trade practices Enforce retail service obligations & marketing service obligations Lay down technical standards & specifications including safety standards in activities relating to petroleum, petroleum products & natural gas

PROCESS OF FRAMING & FINALISING REGULATIONS Internal Deliberations in PNGRB Draft Regulations approved by Board Draft Regulations posted in public domain Open House with Stakeholders Comments from stakeholders considered Open House on Final Draft Regulations finalized & approved by Board Legal Vetting Notification in Official Gazette 26

Regulations for CGD & NG Pipelines notified so far Date Notified Authorizing entities to lay, build, operate or expand CGD Networks 19.03.08 Exclusivity for CGD Networks Determination of Network Tariff for CGD Networks and Compression Charge for CNG Authorizing entities to lay, build, operate or expand natural gas pipelines 06.05.08 Technical Standards & Specifications including Safety Standards for CGD Networks 27.08.08 Affiliate Code of Conduct for entities in Transporting and Distributing Natural Gas 17.07.08

Regulations for CGD & NG Pipelines notified so far Date Notified Access Code for common carrier or contract carrier natural gas pipelines 17.07.08 Determination of pipeline tariff for natural gas pipelines 20.11.08 Guiding Principles for Declaring or Authorising Natural Gas Pipeline as Common Carrier or Contract Carrier 21.04.09 Procedure for Development of Technical Standards and Specifications including Safety Standards 14.05.09

Authorisation for CGD Networks Bidding Criteria - (weightage) - Least PV of overall unit network tariff over economic life of project - (40%) - Least PV of compression charge for CNG over economic life of project - (10%) - Highest PV of “inch-kilometer” of steel pipeline during exclusivity period - (20%) - Highest PV of PNG domestic connections during exclusivity period - (30%)

Exclusivity Criteria for CGD Networks Two periods of exclusivity provided to promote flow of investments – Exclusivity of infrastructure over its economic life of 25 years Marketing exclusivity of 5 years after which 3rd party access to the network for marketing of natural gas would be available on payment of network tariff Network Tariff to be generally decided on bid basis

Authorisation for Natural Gas Pipelines Bidding Criteria - (weightage) - Least PV of unit tariff for 1st tariff zone over economic life of project - (40% & 70% for pipelines < 300 KM) - Least percentage increase for determining incremental tariff for 2nd tariff zone - (20%; nil for pipelines < 300 KM & 30% for pipelines > 300 KM < 600 KM) - Least percentage increase for determining incremental tariff for 3rd and subsequent tariff zones - (10% & nil for pipelines < 600 KM) - Highest PV of natural gas volumes - (30%)

Process for Grant of Authorization Suo-motu by Board EOI Reject the Proposal Open Advt. in paper for “Public Consultation process” Firm-up “Authorized Area” Invite Bids Bid evaluation No entity gets selected. Board may go for re-bid Grant of Authorization Gas Tie-up Financial Closure Post authorization monitoring of activities /meeting the service obligations/Quality of Standard norms Consequence of Default & Termination of Authorization 15 days 15 days 30 days 60 days (extendable by 30 days) 30 days 90 days 30 days

City Gas and CNG Present Scenario Total Number of CNG vehicles - 7 lakh Number of entities - 19 Number of GAs - 25 Future Scenario (next three years) Total Number of GAs - 86 Expected CNG vehicles - 25 lakh Future Scenario (next five years) Number of GAs - 125 Expected CNG vehicles - 33 lakh Future Scenario (next ten years) Number of GAs - 250 Expected CNG vehicles - 58 lakh

PNGRB - Major Tasks on Hand Notification of Regulations Declaring/Authorizing petroleum products & natural gas pipelines and city gas distribution networks on common carrier basis Specifying market service and retail service obligations to protect consumers’ interests Fostering Fair Trade and Competition Laying down Standards and Safety Norms

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