1. Natural Gas – Some Regulatory Issues Oil & Gas Industry Practice

2. Agenda Natural Gas and India Global Regulatory trends Natural Gas policy framework in India Natural Gas policy framework in India - Implications

3. India’s rapidly growing economy – needs to be fuelled by additional energy Natural Gas share of total energy basket set to increase from 9% in 2003-04 to 23% in 2031-32. Demand far outstrips supply. Natural Gas & allied infrastructure needs strengthening. Gas grid connecting producing and consuming locations LNG receiving terminals Gas Distribution networks Natural Gas and India

4. Agenda Natural Gas and India Global Regulatory trends Natural Gas policy framework in India Natural Gas policy framework in India - Implications

5. The gas industry in every country goes through four stages of development linked to production and consumption growth Stage Description Market Characteris- tics Stage 4: Unbundling and retail competition Stage 3: Open access and wholesale competition Stage 2: Competition in natural gas production Production is separated from the rest of the industry and competition is introduced here Open access is permitted to the transmission segment of pipeline transportation Industry participants in the wholesale market can now choose their gas supplier Natural gas supply is totally unbundled from transmission and distribution Participants at the retail level can also choose their gas suppliers Stage 1: Vertical Integration Production, pipeline transportation and distribution are all performed by one company, in which the government typically has a controlling stake Value added chain breaking up as trade commences Availability of structured trading products Competition commences between value added steps Increased sales activities Increasing price transparency Increasing gas trade First spot markets develop Intensive competition leads to shrinking margins Additional services & structured products Increasing liquidity enables transparent pricing systems 100% market opening High competitive pressure High Market liquidity Established trade markets Defined products Overall price transparency Market Prices Tight market structures (monopoly) with regional limitation Different gas qualities Tight supply chain Very little competition in gas Low trade liquidity Take or Pay Contracts India Global Regulatory trends

6. Increasing regulation of gas transmission and greater competition in gas supply and trading have had significant implications on the strategies of natural gas companies Company Regulatory change Impact on strategy British Gas Plc Duke Energy El Paso Gas Natural SDA Since 1995, UK evolved to Stage 4 of the regulatory framework, where gas transmission had to be unbundled from gas supply and trading Latin America, Europe and Australia are expected go through a reforms towards an open, competitive market The EU Gas Directive adopted in 1998, was to be implemented by Aug. 2000, which aimed at creating a competitive market EU directive was implemented in Spain in 2000 resulting in open access and wholesale competition in natural gas Demerged Centrica - the marketing arm of the group in 1997 Plans to grow aggressively in Europe, Latin America and Australia Entered the European natural gas trading market in 2000 Forward integrated into power as a result of increasing competition Global Regulatory trends

7. Agenda Natural Gas and India Global Regulatory trends Natural Gas policy framework in India Natural Gas policy framework in India - Implications

8. Objective of PNGRB Act is to regulate the sector so as to protect the interests of consumers and entities and ensure uninterrupted and adequate supply of P&NG in all parts of country and to promote competitive markets Natural Gas Policy Framework in India To protect consumers and ensure level playing field To promote efficiency in natural monopoly industries To provide consumers with more choice (not less choice) To set benchmark performance standards To promote competition

9. Regulatory framework imperative for Natural Gas infrastructure development in India Supreme Court : Natural Gas a Central subject State Governments are keen to develop the local gas transmission and distribution business Promote private sector players Promote access to infrastructure PNGRB Act provides that Entities to be registered or authorised Transportation of Natural Gas on Common carrier or Contract carrier basis with non-discriminatory open access basis – also for Distribution Regulator empowered to require Marketing of Natural Gas to be separated from transportation including ownership of pipelines Right of first use Lay down transportation tariffs Natural Gas Policy Framework in India

10. Agenda Natural Gas and India Global Regulatory trends Natural Gas policy framework in India Natural Gas policy framework in India - Implications

11. The restructuring of mature natural gas markets globally provides some insight into what can be expected in India (Contd.) Key Implications of Gas Market Restructuring: Deregulation and restructuring activities have taken place in industrialised as well as developing countries across the world with the UK and USA leading the way These countries have deregulated prices and lowered entry barriers in the industry As a result, many new participants have emerged, promoting competition in the newly created markets With increasing decentralization, regulation focuses on pipeline transportation and distribution, the industry segments which have natural monopoly characteristics Natural Gas Policy Framework in India - Implications

12. The restructuring of mature natural gas markets globally provides some insight into what can be expected in India Key Implications of Gas Market Restructuring: The objective of regulation is to protect both the end users and the participants in the deregulated segments from the market power of companies operating in the monopolistic segments Two major markets emerge as a result of deregulation: — The natural gas market, which facilitates the trading of natural gas as a commodity, and — The transportation market, which enables market participants to trade the transportation services necessary to ship natural gas through the pipeline system Natural Gas Policy Framework in India - Implications

13. Such market restructuring has driven companies to enter and exit specific businesses and markets Regulatory changes have had a significant impact on the strategies of natural gas companies. Increasing regulation of transmission typically causes: — Forward integration into natural gas utilization (like power) to increase margins — Moving closer to the consumer through services like energy management and financial services — Split up into separate companies for transmission and marketing Deregulation in overseas markets has facilitated international expansion Natural Gas Policy Framework in India - Implications