The Oil and Gas Scenario in India-2009 - kpmg.de · The Oil and Gas Sector Overview in India 2009....

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The Oil and Gas Sector Overviewin India 2009

Contents

·Preface and

·Acronyms Used

·Overview of the Indian Economy

·Overview of India’s Energy Sector

·The Indian Upstream Sector

·A Note on Coal Bed Methane (CBM)

·Refining in India

·Gas Transportation and Distribution

·A Note on LNG

·Petroleum Product Pipelines

·Fuel Retailing

·Overview of the Indian Taxation Regime

·Appendices

·KPMG’s Service Offerings

Executive Summary -01

-02

-03

-05

-08

-13

-14

-17

-20

-21

-22

-24

-31

-34

This document provides an overview of the various segments comprising the oil and gas

sector in India. It aims at providing the reader a basic understanding of the players, size,

major developments and dynamics of the sector across the value chain.

Accordingly, this document comprises chapters overviewing the Indian economy and the

Energy Sector, the Upstream sector, Coal Bed Methane, Refining, Gas Transportation and

Distribution, LNG, Petroleum Product Pipelines, Retailing of Fuels and the Taxation Regime

applicable to the oil and gas sector.

Finally, it sets out how KPMG can assist you in achieving your business goals in the oil and

gas sector.

The oil and gas sector in India presents a significant opportunity for investors and is

exhibited to demonstrate robust growth in line with the growth of the Indian economy. The

New Exploration Licensing Policy (NELP), conceived to address the increasing demand-

supply gap of energy in India, has proved to be successful in attracting the interest of both

domestic and some foreign players. The success of Cairn India and Reliance Industries

Limited in their Indian operations has underscored this.

Other segments such as Refining, LNG, City Gas Distribution etc. are also seeing some

action. India is now surplus in refining capacity and aims to establish itself as a refining hub.

The Petroleum and Natural Gas Regulatory Board aims to make available Piped Natural Gas

(PNG) and Compressed Natural Gas (CNG) in new cities across the country, besides

facilitating the construction of infrastructure to transport natural gas to demand centres. The

lack of available supplies has so far hindered the growth of this segment. In addition, some

gas-based power plants have been operating at low load factors, owing to the shortage of

fuel.

The increased availability of hydrocarbons from domestic sources is thus perceived as

necessary to sustain the rapid growth of the Indian economy.

I hope that this document shall provide you with a broad understanding of the oil and gas

sector in India across various segments.

Preface and Executive Summary

© 2009 KPMG, an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

01The Oil and Gas Sector Overview in India - 2009

Jai Mavani,

Executive Director,

KPMG India Private Ltd.

Acronyms Used

E&P

CBM

DGH

MT

MMT

MMSCMD

MoPNG

NELP

NG

Exploration & Production

Coal Bed Methane

Directorate General of Hydrocarbons

Metric Tonne

Million Metric Tonnes

Million Standard Cubic Metres Per Day

Ministry of Petroleum and Natural Gas

New Exploration Licensing Policy

Natural Gas

02


The Oil and Gas Sector Overview in India - 2009

1With a GDP of USD 1.23 trillion India is currently the world's fourth largest economy in

Purchasing Power Parity (PPP) terms (the GDP in PPP terms is estimated at approximately

1USD 3.2 trillion) and the fifth largest energy consumer in the world. However, due to its

1high population of approximately 1.1 billion , the per-capita consumption of most energy

related products is extremely low. The per capita energy consumption is estimated to be a

very modest 530 kg of oil equivalent (kgoe) of oil equivalent while the world average is

2approximately 1800 kgoe . Per-capita incomes, in turn, were estimated at USD 2800 in

12008 in PPP terms.

After recording a sustained growth of over 9 percent for the last 3 consecutive years

(growth rates were estimated at 9.5, 9.7 and 9 percent respectively over the last 3 fiscal

years), the Indian economy is expected to continue to demonstrate robust growth going

1forward; the growth rate is estimated to be approximately 6.6 percent in 2008-09 .

Optimism regarding the sustenance of India's future growth potential stems from its

relatively high levels of domestic demand (and consequent lower dependence on exports)

and its favourable demographic dividend-the median age stood at 25.3 years in 2008 with

1only 5.3 percent of the population being above 65 years of age . The chart below illustrates

the fact that India's export dependence is far lower than that of its Asian counterparts of

Singapore, Malaysia, Thailand etc. This robust domestic demand is best illustrated by the

fact that the months of January and February 2009 saw telecom wireless subscriber

3additions at an astounding 15.41 and 13.44 million respectively.

When compared with other countries, India's GDP is likely to continue to grow at rates

above 5 percent in the short term and higher going forward. As China's growth moderates,

as the chart below demonstrates, India is likely to grow at a pace in excess of its eastern

neighbour.

1.

2. Bureau of Energy Efficiency, Govt of India

3. Telecom Regulatory Authority of India (TRAI) Press Releases

CIA WorldFactbook

03

Overview of the Indian Economy

Singapore

Malaysia

Taiwan

Thailand

Korea

China

Philippines

Indonesia

India

Hong Kong

20 40 60 80 100

(%)

0

Source: CEIC, CLSA Asia – Pacific Markets


India's export dependence is lower as compared to its Asian counterparts


Meanwhile, India's current macro-economic ratios continue to be robust, with its forex

4reserves estimated to be around USD 250 billion in March 2009. Some concerns have been

5expressed about its increasing fiscal deficit, estimated at around 6 percent of GDP for

2009-2010, up from 3.1 percent of GDP for 2007-08. However, this must be seen in the

context of the large fiscal packages announced by the Government in the wake of the

economic slowdown and the fact that the current rate of inflation is at historic lows, well

6below 1 percent. Its gross fixed investment rate at around 40 percent of GDP in 2008 and

savings ratio continue to remain high, pointing to the continuance of high growth levels.

Projected GDP Growth Rates for Select Upcoming Economies

Source: BRIC report, India Brand Equity Foundation

8

6

4

2

02005-10 2010-15 2015-20

Brazil China India Russia

2020-25 2025-30 2030-35 2035-40 2040-45 2045-50

GD

P G

row

th R

ate

(%)

04

4.

5. EIU

6. CIA WorldFactbook

Reuters, March 2009



Background

India's per capita energy consumption compared to other countries:

Two major events this year, the commencement of production of natural gas from Reliance

1Industries Ltd's (RIL) Krishna Godavari (KG) fields and the scheduled commencement of

2production of crude oil from Cairn India Ltd's fields later this year have provided a major

boost to the domestic oil and gas sector in India and have meant that upstream activities

have received major attention over the past years.

Given India's targeted GDP growth, India's fuel needs are likely to expand at a substantial

rate. India's per-capita consumption of energy and electricity is well below that of

industrialized nations and the word average, meaning that there is scope for rapid

3expansion. At the same time, India already imports over 70 percent of its crude oil

4requirements, with its oil import bill being close to USD 90 billion in 2008-09 .

In addition, some of the existing oil and gas fields were experiencing a decline in their

production since they had already been in production for several years and were past their

3plateau phase. Given this context, particularly the high import dependence , the New

Exploration Licensing Policy (NELP) was envisaged in 1997 (and operationalized in 1999) by

the MoPNG, as part of its Hydrocarbon Vision 2025, a landmark 25-year planning document.

These factors also meant that the issue of energy security was brought to the forefront of

strategic decision making and an urgent need was felt to augment the domestic supplies of

oil and gas. In addition to NELP, other efforts were made to address the need for achieving

energy security such as:

! Acquisition of Oil and Gas assets abroad, the latest being ONGC Videsh's acquisition of

Imperial Energy

! Developing strategic storage facilities at identified locations

! Exploring alternate sources of Energy, including Coal Bed Methane, gas hydrates, etc

! Improving the recovery of oil and gas from existing fields through methods such as

Enhanced Oil Recovery (EOR) and Increased Oil Recovery (IOR).

India's per capita consumption of energy is extremely low as compared to other countries

and the world average. For example, the Total Primary Energy Consumption (TPES) in India

is just 0.51 tonnes of oil equivalent, while the world average is more than three times this

figure, as the table below indicates. Similarly, the per-capita electricity consumption stands

at just 503 Kilowatt-Hour (KwH) per year, less than one-fifth that of the world average of

32659 KwH and a massive 13515 KwH in the United States. These figures illustrate the fact

Overview of India's Energy Sector

05


1. The Business Standard and other press sources, April 2, 2009 'Reliance commences gas production from KG-D6'

2. The Business Standard, May 8, 2009 'Cairn to begin crude oil production from Rajasthan this month'

3. The Financial Express, 'Import dependence on crude oil at 70 percent: Aiyar'

4. The Hindu Business Line, April 2nd, 2009 'Reliance's D6 gas output to reduce oil import bill by 10 percent'


that there is a massive potential in India for the growth of energy consumption, should the

supply rise to meet the demand as it increases.

Role of Oil & Gas in India's Energy Mix:5The importance of oil in India can be gauged from the fact that it accounts for 36 percent of

the Primary Energy Mix in India. Taken with natural gas, this percentage rises to 45 percent.

However, the proportion of natural gas is approximately one-third that of the world average,

once again indicating the potential for rapid growth. It may be noted in this context, that a

heavy reliance on coal in India is not optimal, given that coal is a far more polluting fossil fuel

as compared to natural gas

5. Planning Commission

Per capita TPES consumption (toe/capita) Per capita Electricity consumption (Kwh)

India (2006)

OECD (2006)

World Avg (2006)

US (2006)

China (2006)

Korea (2006)

Japan (2006)

0.51

4.7

1.8

7.74

1.44

4.48

4.13

India (2006)

OECD (2006)

World Avg (2006)

US (2006)

China (2006)

Korea (2006)

Japan (2006)

503

8381

2659

13515

8063

2060

8220

Source: International Energy Agency, Key World Statistics 2008

India’s Primary Energy Mix in 2006 World Primary Energy Mix 2006

Coal 51%

Nuclear 2%

Hydro 2%

Gas 9%

Oil 36%

Source: Planning Commission of India, BP Statistics

Hydro Electric 6%

Nuclear Energy 6%

Natural Gas 24%Oil 36%

Coal 28%

06



Demand-Supply Imbalance

Stagnating crude-oil production and the rapid economic growth have served to increase the

demand-supply mismatch for crude oil and gas in India (the gas shortage is likely to be

mitigated to some extent though RIL's KG Basin gas production). Consumption in India

grew by 6.8 percent in 2007, the third largest volumetric increment after China and United

6States on a yearly basis . This growth in demand is likely to be sustained over time, creating

an ever-increasing need for imports.

Similarly, natural gas demand in the country has far outstripped its supply, in the past, with

shortfalls before RIL's production estimated at close to 100 million metric standard cubic

metres per day (mmscmd). This in turn, resulted in the inadequate or sub-optimal use of

infrastructure: both gas-based power plants and fertilizer units were allowed to remain idle,

or forced to operate using expensive liquid fuels, such as naphtha, resulting in higher a

subsidy burden on the Government (which was forced to subsidize urea manufacture or

import fertilizer from abroad).

6. BP Statistical Review of World Energy, June 2008

(MMSCMD)

Total

Supply

Total projected supply (optimistic scenario) (A+B+C)

Over / (under) supply

Power

Fertilizer

City Gas

Industrial

Petrochemicals / Refineries / Internal consumption

Sponge iron / Steel

ONGC + OIL (A)

Pvt. / JVs (as per DGH) (B)

Total projected supply (conservative scenario) (A+B)

Additional gas anticipated (C)

R-LNG (all expansions coming on stream)

Demand-supply balance over FY08-11

FY08

179.0

79.7

40.8

12.1

15.0

25.4

6.0

FY09

196.4

91.2

42.7

12.9

16.1

27.2

6.4

FY10

221.9

102.7

52.2

13.8

17.2

29.1

6.9

FY11

265.2

114.2

79.4

14.8

18.4

31.1

7.4

54.7

~62

~117

84.0

70.0

~271

~6

55.7

~62

~118

74.0

52.5

~245

~22

58.4

~62

~120

-

33.6

~153.6

~(43)

57.3

23.3

80.5

-

30.5

111.0

(67.9)

Source: IDFC-SSKI Research, Industry sources, Crisil, Infraline

07



Background

The New Exploration Licensing Policy (NELP)

Although the story of the Oil & Gas industry can be traced all the way back to October 1889

when oil was first explored in Digboi, Assam, India remains a vastly unexplored territory by

far, with only a small percentage of its sedimentary basins under exploration and

development.

Exploration activity, prior to NELP, was dominated by public sector firms such as Oil and

Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd. (OIL). The sector received a major

boost in 1974, when the massive Mumbai High fields were discovered off India's west

coast. Even after three decades, these fields continue to be the mainstay of India's

indigenous production. Realizing that these fields would gradually deplete over time and no

major discoveries were being brought into production, the Government introduced the

NELP, with an aim of encouraging private sector participation in the oil and gas sector.

In addition to the efforts to discover new fields, ONGC, in particular in current times, has

been trying to reverse or stem the decline in its existing ageing fields through Improved Oil

Recovery (IOR) or Enhanced Oil Recovery (EOR) techniques. In addition, new technologies

such as Underground Coal Gasification (UCG), harnessing Coal Bed Methane and the

exploration of Gas Hydrates are some of the initiatives taken up to enhance domestic

production.

Recent rounds of NELP have proved attractive in gaining the interest of Indian private sector

and foreign players, with the private sector giant, RIL, winning the maximum number of

blocks after the state-owned ONGC. A number of foreign players such as Cairn, BHP Billiton

etc have also participated in the bidding rounds, forming consortiums with domestic and

other foreign players. However, some of the super-majors, such as ExxonMobil, Shell etc.

continued to watch from the sidelines, rather than mark their presence in the bidding

rounds.

1The NELP was formulated by the Government during 1997-98 to provide a level playing field

to both the Public and the Private sector, through allocating acreages on the basis of open

competitive bidding as opposed to the nomination basis as earlier. Companies are expected

to bid on the following parameters:

! The Work Programme committed to be undertaken

! Percentage of value of annual production sought to be allocated towards cost recovery

! Profit petroleum share offered to the Government at various levels of Investment

2Multiples .

The weightage to the above three parameters has varied from one round to the other over

the seven rounds of NELP.

The Indian Upstream Sector

08

1. NELP VIII website (Background Section)

2. Notice Inviting Offers for NELP VIII, from NELP-VIII website



2Main features of the NELP VIII

The eighth round of NELP was announced in April 2009, but was subsequently deferred.

The declared features of NELP-VIII were:

There shall be only one exploration phase of seven years for all blocks. There will be no

compulsory relinquishment after four years (by which time the mandatory and

committed programme are to be completed) and operators will have option to

relinquish the entire area after completion of minimum work programme or retain the

block by committing to carry out drilling of one well per year in case of on-land and

shallow water blocks or one well in 3 years in case of deepwater blocks. In any case,

the entire area (apart from the Discovery Area and the Development Area) would need

to be relinquished at the end of seven years of exploration

Upto 100 percent participation by foreign companies is allowed

No mandatory State participation

No signature, discovery or production bonus is to be paid

No interest carried by the National Oil Companies (NOCs)

Income Tax Holidays were granted for seven years from start of commercial production

of “Mineral Oil”

No custom duty on imports required for petroleum operations

Biddable cost recovery limit allowed upto 100 percent

The option to amortise exploration and drilling expenditures over a period of 10 years

from the first commercial production is allowed

Sharing of profit petroleum with the Government to be based on the pre-tax

investment multiple achieved by the contractor and this is biddable

Royalty for on-land areas was payable at the rate of 12.5 percent for crude oil and 10

percent for natural gas. For shallow water offshore areas, royalty was payable at the

rate of 10 percent for both crude oil and natural gas whereas for deepwater areas,

royalty was fixed at 5 percent for both crude oil and natural gas for the first 7 years of

commercial production and thereafter at the rate of 10 percent

Fiscal stability provision is provided for in the contract

Freedom to the contractor for marketing of gas in the domestic market

Liberal provisions for assignment

Arbitration and Conciliation Act, 1996, based on United Nations Commission on

International Trade Law (UNCITRAL) model is applicable

! To facilitate investors, a Petroleum Tax Guide (PTG) compiled in 1999 has been provided

! Predetermined Liquidated Damages (LD) have been specified for unfinished Minimum

Work Programme

!

!

!

!

!

!

!

!

!

!

!

!

!

!

!

09

2. Notice Inviting Offers for NELP VIII, from NELP-VIII website



!

!

A one time Bank Guarantee (BG) needs to be provided at a lower rate for the total

committed work programme

A nominal bid bond at specified rate to encourage serious bidders.

Seven rounds of NELP have been conducted so far. The success of the rounds can be

measured in the increased exploration activities in the country. The proportion of unexplored

acreages has witnessed a significant drop, from 40 to 15 percent, according to the

upstream regulator, the Directorate General of Hydrocarbons (DGH). Similarly, there are now

14 producing basins, as opposed to just three in 1990. Several new operators too have

entered the fray as opposed to just the Government owned ONGC and OIL earlier.

A glance at the number of blocks and bids received during the previous rounds of NELP

indicates the increased interest that the bidding process has received in recent times from

both domestic and foreign players, particularly NELP VI that received 165 bids for 52 blocks.

In recent times, the MoPNG has been offering more blocks of smaller sizes based on

feedback received from earlier rounds. NELP VIII shall see 70 blocks on offer in the first

phase, comprising 24 deepwater blocks, 28 shallow water blocks and 18 on-land blocks.

These 70 blocks cover a sedimentary area of about 164,000 square kms, which is 3approximately 5.2 percent of Indian sedimentary basin area .

Some of the major discoveries in the last decade have been that of Reliance in the KG Basin

and Mahanadi fields, ONGC and Gujarat State Petronet Corporation's (GSPC) claimed finds

also in the KG Basin and the discovery of oil in Barmer, Rajasthan, by Cairn in 2002-03. RIL

is expected to be able to produce over 80 mmscmd of gas by 2010-11, thus doubling

domestic availability and ameliorating the large-scale shortages currently prevalent in the

country (the company has recently commenced production of gas and the first 40 mmscmd

of gas volumes have been allocated by the Government to fertilizer, City Gas Distribution 4(CGD), petrochemical and power units). Cairn, in turn, is likely to produce close to 175,000

barrels of oil by 2010-11 from its Mangala, Bhagyam and Aishwarya fields, helping to

address energy security issues to some extent.

3.

4. The Hindu Business Line, March 31st, 2009

Press Note by MoPNG on the occasion of launch of NELP-VIII

Exploration Status 1998-99 (3.14 million sq.km) Exploration Status 2006-07 (3.14 million sq. km)

Moderate to well explored 16%

Poorly Explored 17%

Unexplored 40%

Exploration

Initiated 27%

Source: DGH

Moderate to well explored 20%

Poorly Explored 21%

Unexplored 15%

Exploration Initiated 44%

10



Pricing Regime in India

Prior to the commencement of RIL's gas production, out of the total gas availability of

around 96 mmscmd in the country, around 53 mmscmd is Administered Pricing Mechanism

(APM) gas and 43 mmscmd in non-APM gas (which includes 20 mmscmd produced by Joint

Ventures between ONGC & Private sector (JV) under Production Sharing Contracts (PSCs)

5and 23 mmscmd Regassified LNG .

Although the Government has dismantled the APM it continues to set the end-consumer

prices of fuel sold at retail pumps, and upstream companies such as ONGC and OIL are

asked to partially bear the burden of under-recoveries of the Oil Marketing Companies. APM

prices are revised from time-to-time, but are currently well below prevailing market prices.

In the case of NELP blocks, the PSC provides for marketing freedom for the contractor;

however, the recently announced allocation policy hampers this to some extent.

The table gives the various price-points of privately-produced domestic gas in the country,

with the highest price being charged by the Panna-Mukta-Tapti (PMT) consortium of ONGC-

BG-RIL. In addition, gas from domestic Joint Venture (JV) fields and imported LNG is also

sold at non-APM prices; and some customers have shown the willingness to pay relatively

high prices for spot Liquefied Natural Gas

(LNG) imported by Petronet LNG or Shell

at their Dahej and Hazira terminals

respectively.

5. InfraLine, Industry Estimates

Snapshot of Previous Rounds of NELP

No. of blocks offered

No. of blocks bid for

Total No. of bids received

No. of blocks awarded

NELP-I

48

28

45

25

NELP-II

25

23

44

23

NELP-III

27

24

52

23

NELP-IV

24

21

44

21

NELP-V

20

20

69

20

NELP-VI

55

52

185

52

NELP-VII

57

45

181

44

11

FY10EFY09Volumes (MMSCMD)CompanyField

Various gas price points for domestic gas

PMT

PMT

Lakshmi

Gauri

Ravva

GSPC

Bheema

North Surat

RIL KGD6

RIL,ONGC, BG

RIL,ONGC, BG

Cairn

Cairn

Cairn

Niko

Niko

RIL

5.3

10.7

1.7

1.3

2.1

3.6

0.1

0.2

40-80

5.7

5.6

4.5

3.7

4.4

5.0

5.0

4.5

4.2

5.7

5.6

4.5

3.7

4.4

5.0

5.0

4.5

4.2

Price (USD / mmbtu)

Source: IDFC-SSKI Research, March 2009, Industry sources


Source: InfraLine


Oil Field Services

Outlook for E&P activity in India

With the increased exploration activity in India post NELP, the coming years are likely to

witness increased demand for oil and gas allied services in India, particularly given the focus

on deepwater blocks and frontier basins. Services such as 2-D and 3-D seismic surveys,

processing and interpretation, drilling rigs, well-logging, etc. are all likely to witness robust

growth. In addition, shipping and supply related activities such as the use of tug-boats, Off-

Shore Supply Vessels (OSVs), catering etc. are also likely to see an increased demand. For

example, the DGH has estimated that USD 1.9 billion worth of investments could be made

for onshore seismic surveys alone in the next few years (of which 50-55 percent would be

met through captive crews of oil exploration companies such as ONGC and Oil India, while

the rest could be outsourced to oil-allied services companies).

As a result, the coming years are likely to see the Indian service providers scaling up their

activities and capabilities. Besides enhancing their fleet size, they are likely to widen their

portfolio by offering different specialized services and developing their manpower. Some of

the local players might also aim to offer their services to other E&P firms across the world.

For example, companies such as Aban Lloyd, which acquired the Norwegian firm Sinvest,

already offers rigs to players across the world. On the other hand, MNC players such as

Baker Hughes, BJ Services, Schlumberger, Aker Kvaerner etc. are likely to find that the

market for their services in India continues to grow.

Given the commencement of production from RIL's KG Basin fields, the scheduled

commencement of Cairn India's production and the potential development of the

discoveries announced by GSPC and ONGC, the E&P sector is poised to see considerable

activity in the near future. This could mean an increased interest in exploring India's

hydrocarbon potential by foreign players. However, the economic downturn (and the

consequent cut-back in capital expenditures by some players) as well as some ambiguity on

freedom to market oil and gas and the applicability of tax concessions for the production of

natural gas could serve as a dampener.

On the other hand, the promise offered by certain acreages, particularly off India's east

coast-the KG and Mahanadi Basins, means that the prospects for the growth of the

upstream sector remains bright. It is expected that this is also likely to have a positive spin-

off effect on the provision of off-shore services.

12



In order to exploit the country's vast coal reserves and the methane gas trapped in coal

seams, the Government formulated a Policy for Coal Bed Methane in 1997. The MoPNG was

to be the administrative ministry with the DGH as the implementing agency and

accordingly, a MoU was signed between the MoPNG and Ministry of Coal in September

1997.

The first round of CBM was held in 2001, on the lines of NELP, with competitive bidding

deciding the award of acreages. So far 3 rounds of bidding have been completed and 26

blocks have been awarded. The fourth round of CBM has been announced along with the

latest round of NELP. The table below provides an overview of the current progress on CBM

so far; it must be mentioned that the potential of CBM remains still largely unexploited. On

a more positive note, reserves of 6 trillion cubic feet (tcf) have been established.

Major players in the sector have been Arrow Energy, Gas Authority of India Ltd. (GAIL),

ONGC, Great Eastern Energy Corporation, BP Exploration, Reliance Energy Ltd, Reliance

Natural Resources Ltd, GeoPetrol etc.

A Note on Coal Bed Methane (CBM)

Coal Bed Methane Overview

Blocks Awarded

Area Awarded

Total CBM Resources

CBM Wells drilled so far:

CBM reserve established

Commercial Production

Approved gas sale Price

Present Gas Production

Expected CBM Gas Production

26

13,600 Sq.Km.

1374BCM(50TCF)

250

6.4 TCF (in 4 blocks)

Commenced w.e.f 14.07.07

6.79 USD / MMBTU

0.1 MMSCMD

7.0 MMSCMD By 2013

13

Source: InfraLine



1. MoPNG

Refining in India

India, with its current capacity of around 178 million tones per annum (mtpa) is poised to

emerge as a major refining hub, with considerable capacity additions being planned over the

next few years. After the commissioning of Reliance Petroleum Ltd (RPL) (the company has

now being merged with RIL) 29 million tonnes per annum (mtpa) refinery at Jamnagar and

1the 10.5 mtpa refinery by Essar at Vadinar, both located close to each other in Gujarat.

Further, large expansions are being planned by Essar at its existing refinery complex and by

the public sector refiners such as Indian Oil, Bharat Petroleum Corporation Ltd. (BPCL) and

Hindustan Petroleum Corporation Ltd. (HPCL).

Taking a look back in time, it would be fair to state that the Refining sector has come a long

way since the Mumbai Refinery of HPCL was commissioned post independence. Starting

with relatively modest capacities, the public sector units (PSU) refiners have gradually

ramped up capacities at existing locations or constructed Greenfield refineries at new

locations. Today, there are 20 refineries, both large and small, in the country with even

further additions being planned (refer to the table below and Appendix I).

India, which is already surplus in refining capacity, aims to emerge as a refining hub. Its

favourable location, close to the oil-producing regions of the Middle East renders it an

advantage in this quest and the ability of the latest refineries to process heavy, low-grade

crude, will further help in this regard. The erstwhile RPL's new refinery in Jamnagar, in

particular, was established as an export-oriented one, with an aim to sell its refined products

in the US market. The Gross Refining Margins (GRM) of RIL's existing refinery are among

the highest in the region, due to its high complexity index and consequent ability to process

sour, high-sulphur crude.

India today boasts of surplus refining capacity, with further large expansions planned. The

major expansions are for the Vadinar refinery of Essar, the Indian Oil Corporation (IOC)

refinery at Paradeep and the planned refineries at Bina in Madhya Pradesh by BPCL and

1Bhatinda in Punjab by HPCL-Mittal Energy .

Most of the private sector refineries are focusing on the export market to a large extent. As

far as the PSU refineries are concerned, concerns have been expressed over the viability of

the small refineries in the North-east, which are land-locked and possess a sub-optimal

economic size. Most of the older refineries are also expected to upgrade themselves to

meet new fuel specification standards.

Status & Size of the Refining Sector

14



S. No.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

SUB TOTAL (PSU)

18

19

20

SUB TOTAL (PVT)

TOTAL REFINING CAPACITY

MMT: Million Metric Tonnes

REFINERY

IOCL

CPCL

BRPL

HPCL

BPCL

NRL

ONGC

MRPL

RIL

RPL

EOL

LOCATION

DIGBOI

GUWAHATI

BARAUNI

KOYALI

HALDIA

MATHURA

PANIPAT

CHENNAI

NARIMANAM

BONGAIGAON

MUMBAI

VISAKHAPATNAM

MUMBAI

KOCHI

NUMALIGARGH

TATIPAKA

MANGALORE

JAMNAGAR

JAMNAGAR

JAMNAGAR

CAPACITY (MMT)

0.65

1

6

13.7

6

8

12

9.5

1

2.35

5.5

7.5

12

7.5

3

0.078

9.69

105.47

33

29

10.5

72.5

177.97

Installed Capacities of Refineries (As on January 1, 2009)

Source: MoPNG

Outlook for the Refining Sector

India is aiming to emerge as a refining hub even as global refining markets have tightened

with the closure of small refineries in North America and Europe mainly due to challenges in

investing in cleaner fuels and high compliance costs. In addition, permits for Greenfield

refineries are hard to obtain in these countries due to environmental concerns. Therefore,

capacity addition is primarily coming from emerging economies like India, China and some

Middle Eastern countries.

The Government of India has been providing tax incentives and fiscal incentives to new

15



refineries. The new RPL refinery, for example, benefited from its Special Economic Zone

(SEZ) status. However, current tax holidays would not be available to non-public sector

2refiners that commence activities after April 1, 2009 . Meanwhile, India does have several

other competitive advantages such as its favourable location, lower construction and

operating costs etc. However, given the current economic crisis, some analysts feel that

export markets for all the products produced by the Indian refineries may be hard to find.

16


2. BMR Advisors, May 2, 2008 document


1.

2. The Hindu Business Line, May 4, 2009, 'The strategic East-West gas pipeline'

3. The Hindu, January 2009, 'IPI pipeline faces uncertain future'

InfraLine

The transmission and distribution segment of the natural gas sector remains relatively

under-developed, but this is likely to change in the medium term.

For a long time in India, there was only one major long distance gas transportation

pipeline, connecting ONGC delivery point near Hazira in Gujarat to demand centres in

the north-west corridor of the country including Jagdishpur in Uttar Pradesh and Vijaipur

in Madhya Pradesh. This pipeline, 3187 kms long and with a capacity of around 34

1mmscmd was operated by the erstwhile public sector monopoly GAIL India Ltd and

continues to serve a number of large power and fertilizer plants, besides smaller

industrial units lying along its route. In recent times, GAIL has constructed a few other

pipelines, connecting the LNG terminal at Dahej to Vijaipur and Uran and the power

plant at Dabhol to Panvel (refer to the table).

In addition, major pipeline developments have also been initiated by the private sector,

particular Reliance Gas Transportation India Ltd (RGTIL), which has constructed the

1,386 km long East-West pipeline connecting RIL's fields in Kakinada to centres of

2demand and culminating at Bharuch in Gujarat . RGTIL also plans to connect the KG

Basin fields to Haldia in West Bengal and Chennai and Bangalore.

The map in Appendix II illustrates the major existing pipelines and the ones planned as

part of the 'National Gas Grid'.

I. Gas Transportation

Trans-national Pipelines

The Government has been exploring the possibility of importing gas from countries such

as Iran, Turkmenistan, Bangladesh and Myanmar through pipelines. Various initiatives are

under consideration, which include:

The Iran-Pakistan-India (IPI) Gas Pipeline Project:

The IPI Gas Pipeline Project has been conceived as a tripartite arrangement between

Iran, Pakistan and India, with the volumes being divided between the two importing

countries of India and Pakistan. The pipeline is estimated to cost around USD 7.5 billion

3and is expected to be 2300 kms in length.

Although some progress was made, several outstanding issues remain. Issues around

Gas Transportation and Distribution

GAIL's Trunk Pipelines

Pipeline

HVJ/GREP

DVPL

Dahej-Uran

Dabhol-Panvel

Length (Km)

3187

612

386

320

Design Capacity (MMSCMD)

33.4

24

12

12.5

17


Source: InfraLine, MoPNG


4.

5. Project Monitor

Financial Express, February 2008 ('GAIL to lay TAPI pipeline') 6.

website

KPMG knowledge based on news reports, InfraLine, PNGRB

pricing, delivery point transit fees to be paid to Pakistan, certification of reserves of the

fields meant to supply gas are yet to be resolved.

Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project:

This Asian Development Bank (ADB) sponsored project is likely to connect sources of

supply, in Turkmenistan to sources of demand in Pakistan and India. The pipeline being

considered will have a length of approximately 1680 kms (including 145 km in

Turkmenistan, 735 km in Afghanistan and 800 km in Pakistan upto the India border) and

4a capacity of 90-100 mmscmd . Once again, while some headway has been made in

discussions, issues regarding gas pricing, transit price and security of the pipeline in

Pakistan, transmission tariffs etc. are to be decided.

Myanmar-India pipeline:

5A 1,575 km long pipeline connecting the Shwe field in the A-1 block in Myanmar, in

which both ONGC Videsh and GAIL own a stake, was considered to bring gas to India,

while passing through Bangladesh. However, not much progress has happened on this

front in recent times.

The increase in gas supplies and gas transmission infrastructure is also likely to provide

a fillip to City Gas Distribution (CGD) players. So far, only a handful of major players are

present in the market: these are Indraprastha Gas, Mahanagar Gas, Gujarat Gas and

GSPC Gas which distributes Piped Natural Gas and Compressed Natural Gas to cities in

6Delhi, Mumbai and Gujarat respectively . Recent years have seen some activity, with a

number of players registering their presence. In particular, GAIL has formed Joint

Ventures with other PSU firms to distribute gas in a number of cities, mentioned in the

attached table. With the emphasis being

laid on a cleaner environment and lower

pollution levels in cities, CGD is expected

to get a push in the coming years. Thus,

apart from GAIL, a few players have

drawn up ambitious plans to roll out city

gas infrastructure across a number of

cities in the country. States which are

likely to see further activity include Uttar

Pradesh, Maharashtra, Andhra Pradesh,

Rajasthan, Karnataka, Kerala, Madhya

Pradesh and West Bengal.

The establishment of the Petroleum and

Natural Gas Regulatory Board (PNGRB)

following the passage of the PNGRB Act

is likely to help in the further

II. City Gas Distribution

Cities with CGD

Mahanagar Gas Limited-(Mumbai, Thane, Mira-Bhayendar, Navi-Mumbai

Indraprastha Gas Limited-Delhi & Noida

Bhagyanagar Gas Limited-Hyderabad, Vijayawada

Aavantika Gas Limited- Indore, Ujjain and Gwalior

Central UP Gas Limited - Kanpur & Bareilly

Green Gas Limited - Agra, Lucknow

GAIL-HPCL JV: Vadodara, Ahmedabad

GGCL - Surat, Bharuch, Ankleshwar

Adani Energy -Ahmedabad, Vadodara

GSPC Gas-Rajkot, Murbi

Sabarmati Gas-Gandhinagar, Mehsana, Sabarkantha

Tripura Natural Gas Company Limited- Agartala

Maharashtra

Delhi

Andhra Pradesh

Madhya Pradesh

Uttar Pradesh

Gujarat

Tripura

18


Source: KPMG knowledge based on news reports, InfraLine, PNGRB website


7.

8. The Business Standard/ Rediff.com, March 4, 2009, '8 in race for city gas distribution'

Chairman of the PNGRB, quoted at the Natural Gas Vehicles conference, March 2009

development of the sector. The Board shall regulate existing players, and promote the

development of CGD networks in new cities. In fact, the Chairman of the PNGRB was

quoted stating that natural gas would be available in 84 cities by 2011 and 250 cities by

72018 .

The PNGRB has begun the process of inviting applications for CGD licences in the country.

Licenses are to be awarded through an open competitive bidding process, with their being a

level playing field for both domestic and foreign entities. Recently, applications were

8received for six cities put up for bidding .

The main driver for the development of gas transmission and CGD shall be the availability of

requisite volumes of gas. With the development of RIL's KG Basin and other fields, the

opportunity could be available; what now matters is whether the CGD license-holders can

obtain gas supplies and develop gas distribution infrastructure.

Outlook

19



1.

2. InfraLine, primary research, The Hindu Business Line-Jan 1, 2009 ('Shell plans to bring spot LNG cargo to Hazira in Jan')

3. The Financial Times, March 25, 2009, 'Big guns in race for Dabhol LNG terminal'

IDFC-SSKI Research, Projects Monitor, The Hindu Business Line-Jan 1, 2009 ('Shell plans to bring spot LNG cargo to Hazira in Jan')

A Note on LNG

India currently has two operational LNG terminals, both located in Gujarat, one by Petronet

LNG Ltd. (PLL) at Dahej and the other at Hazira established as a Joint Venture between

Shell and Total. While the capacity of the Dahej plant is being expanded from 5 to 7.5 and

1 1later to 10 mtpa de-bottlenecking operations have resulted in the merchant Hazira terminal

2being able to process around 3.6-4 mtpa of LNG. A couple of other terminals are also being

planned, at Kochi in Kerala (also by PLL) and Mundra in Gujarat.

Meanwhile, some progress is also being made to bring the partially constructed terminal at

Dabhol into operation in which GAIL and National Thermal Power Corporation (NTPC) have a

majority stake. Besides the gas meant for the Ratnagiri (the erstwhile Dabhol) plant, it

appears that other parties may be allowed to use this terminal to re-gassify LNG obtained

3from various sources in return for a fee .

India is in discussions with various entities in the Middle East, particularly Qatar, and

Australia to source LNG for the terminals currently under operations or planned for the

future.

LNG: Existing and Proposed Capactiy

(MTPA)

Petronet LNG-Dahej

Petronet LNG-Kochi

Shell Hazira debottlenecking

Spice Energy, GSPC-Mundra

Dabhol

Total

Existing Capacity

5.0

NIL

4.0

NIL

NIL

9

Expansion

2.5

2.5

2.5

5.0

14.0

Commissioning by

early 2009

FY11

FY12

FY10

Source: IDFC-SSKI Research, Company websites, Industry sources

20



Petroleum Product Pipelines

Source: MoPNG

Product Pipelines in India

Name of the Pipelines Length Kms 1.4.2008 CAPACITY MMTPA 1.4.2008Oil Company

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

IOC

BPCL

HPCL

HPCL

HPCL

Petronet

Petronet

Petronet

TOTAL

POL Pipelines

LPG Pipelines

GAIL

GAIL

Total

Crude Pipelines

OIL

IOC

IOC

IOC

Total

Barauni-Patna-Kanpur

Guwahati-Siliguri

Haldia-Barauni

Haldia - Mourigram - Rajbandh

Koyali - Ahmedabad

Koyali-Viramgam-Sidhpur

Mathura-Jallunder

Panipat - Bhatinda

Digboi - Tinsukia

Mathura - Tundla

Koyali - Navgam

Koyali - Navgam

Chennai-Madurai

Koyali-Dahej

Mumbai-Manmad-Mangliya

Mumbai-Pune

Vizag-Vijaywada-Secundarabad

Mundra-Delhi

Vadinar - Kandla

Kochi - Coimbatore

Mangalore-Hasan-Bangalore

Jamnagar-Loni

Vizag-Vjaywada-Secunderabad

Duliajan-Digboi-Bongaigaon-Barauni

Salaya-Mathura-Panipat (incld. Loop Lines)

Halida-Barauni

Mundra-Panipat

745

435

525

277

116

1056

763

219

75

56

78

155

683

103

1389

508

572

1054

100

292

362

9563

1250

600

1850

1405

1870

943

1174

5392

5.30

0.82

1.25

1.35

1.10

4.10

3.70

1.50

1.00

1.20

1.80

1.50

1.73

0.66

8.93

3.67

5.38

5.00

7.25

3.30

2.14

62.7

2.50

1.33

3.83

7.68

21.0

7.50

3.78

39.96

21

India has a network of

petroleum product

pipelines connecting

sources of supply /

refineries to sources of

demand. IOC has the

largest network, with

pipelines such as the

Haldia-Barauni, Barauni-

Kanpur product lines and

the Mundra-Panipat crude

oil pipeline. GAIL has

established two LPG

pipelines, from Jamnagar

to Loni and

Vishakhapatnam to

Secunderabad

respectively, as the table

below indicates, while

Appendix III provides a

map of the existing and

proposed Product

Pipelines.



4. Infraline

5. MoPNG

6. The Hindu Business Line, March 21st 2009 ('IOC evinces

interest in RIL fuel retail biz')

1. The Hindu Business Line, 'Shell returns to fuel retailing’

2. IndiaMart.com, May 2003, 'Shell gets licence for retail outlets'

3. Domain-b.com, May 21st, 2008 (Subsidies driving top oil

companies bankrupt)

Fuel Retailing

1The private sector was not allowed in the retailing of fuel upto 2002 . Subsequently, the

Government decided to open the sector to private participation subject to certain

restrictions. In particular, private players were required to commit investment of at least

USD 400 million in refineries, pipelines or other energy-related assets in the country over a 2period of time .

The Government, with its aim of insulating the Indian consumer from volatility of crude oil

prices in the international markets, has been subsidizing end-user prices, as mentioned

before. Very often, this has translated into a large subsidy being given to the domestic

consumer, with the burden of this subsidy being shared between the oil marketing firms,

the Government (which has been issuing oil bonds to the PSU marketers to compensate

them for their under-recoveries) and the upstream PSU firms of ONGC and OIL. For

example, in May 2008, the oil marketing companies were forced to take daily losses of 3around USD 120 million on the retail sales of diesel, petrol, LPG and kerosene .

At present, the total petroleum subsidy bill is close to USD 20 billion comprising USD 11.8

billion for diesel, USD 1.3 billion for petrol, USD 3.2 billion for LPG and USD 5 billion for 4kerosene . Since the Government does not compensate the private marketing firms for their

losses, their operations turn unviable at the time of high global crude oil prices.

Due to indirect control of the Government over end-user fuel prices, the fuel retail market in

India continues to be dominated by PSU firms with Indian Oil boasting of an approximately

50 percent market share, while the other public sector fuel marketers HPCL and BPCL have 5an approximately 25 percent market share each (refer to the chart). Although the private

sector firms of RIL, Essar and Shell have entered the market, they could not sustain their 6operations. In fact, RIL's nearly 1,450 fuel pumps have been lying idle for many months.

Another feature of the Indian market is that the Government heavily taxes fuels, particularly

petrol; it has been estimated that almost 50 percent of the current prices of petrol

comprises of various taxes levied by the Central or State Governments.

Company-wise retail outlets as on FY08-09

17627

8238 8329

1432 1250

IOC BPCL HPCL RIL ESSAR

Source: MoPNG

22



Outlook for Fuel Retailing

The Indian fuel market does hold some promise, more so if market forces are allowed free

reign. The number of vehicles on Indian roads is expected to increase substantially, in line

with projections of economic growth.

Meanwhile, falling crude prices have re-awakened the interest of private sector players.

Recent news items indicate that RIL is looking for a strategic partner for its fuel retailing

7business .

Another opportunity lies in exploiting the potential of non-fuel retail at the existing fuel

outlets, particularly given the prime location of fuel outlets at metros. Convenience

shopping and the establishment of ATMs provide an opportunity. Fuel retailing outlets with

such additional facilities are also likely to invest in modernization and branding initiatives,

with 'Club HP' of HPCL being one such initiative.

7. The Hindu Business Line, March 21st 2009 ('IOC evinces interest in RIL fuel retail biz')

23



1.

2. Section 5 of Indian Income-tax Act, 1961

3. Section 72 and Section 32 of the Income-tax Act, 1961

Indian Income-tax Act, 1961 4. Income-tax Act, 1961 and Regulatory Provisions

5. Proposed

6. Section 115JB of the Income-tax Act, 1961

Overview of the Indian Taxation System

1I. Direct Tax

India has a federal level tax structure governed by the provisions of the Income Tax Act,

1961. It has a wide network of treaties with over 90 countries across the globe to avoid

double taxation of income.

In wake of economic reforms, the taxation system has undergone tremendous changes in

the past ten years. The tax rates have been rationalized and compared favorably with many

other countries. Further, over the period of time, the tax laws have also been simplified to

ensure better compliances.

The brief overview of India taxation system is outlined below:

! A resident in India is liable to tax on his or her world wide income irrespective of the

source of income

! A non resident in India is liable to tax on income received or deemed to be received in

India or any income accruing or arising or deemed to be accruing or arising in India.

! Taxation of a person depends upon its legal status (a person being an individual, firm,

company, etc.) and residential status

! Indian tax system recognizes an entity level taxation.

! Loss carry forward permitted upto eight years, however, depreciation can be carried

forward indefinitely

! No tax on remittance of profits by foreign companies (project office/branch office to 4head office) .

2Scope of total income

Scheme of Taxation

3Other Features

Resources

Corporate tax rate

Minimum Alternate tax

Dividend Distribution tax

Fringe Benefit tax

India Company

33.99%*

11.33%*

16.995%

33.99%

Foreign Company

42.23%*

10.5575%*

N.A.

31.6725%

*In case net income exceeds INR 10 million

5Rates applicable for the financial year 2009-2010 are as follows:

6Minimum Alternate Tax (MAT)

! MAT is applicable to a company, if tax payable by the company on its total income, as

computed under the normal provisions, is less than 10 percent of its book profits

! Due to the MAT regime, a company may be required to pay tax even during tax holiday period

24



! In computing 'book profits' for MAT purposes, certain positive and negative

adjustments are made to the net profit as shown in the books of account

! Carry forward and set off of MAT is available for seven subsequent years

! Set off is allowed to the extent of difference between tax on total income under normal

provisions and MAT payable.

! DDT is levied at the rate of 16.995 percent on the amount of dividend declared,

distributed or paid by an Indian company

! Dividend from domestic companies is exempt from tax in the hands of recipient

! DDT is payable in addition to regular corporate income tax.

! FBT is payable by an employer on the benefits provided or deemed to have been

provided to the employees

! Tax is payable on value of fringe benefit as prescribed i.e. 5 percent, 20 percent or 100

percent of the costs incurred on such benefits.

! Transfer pricing provisions were introduced in the financial year 2001-02. Under these

provisions, international transactions between associated enterprises are required to

be computed with regard to their arm's length price

! The domestic law prescribes the information and documents which are required

to be maintained by every person who has entered into an international

transaction with its associated enterprises.

! Taxability of an individual is dependent on his/her residential status

! The residential status of an individual is determined on the basis of his/her physical

presence in India

! Based on the satisfaction of certain conditions, an individual could be:

- Resident and ordinarily resident (ROR)

- Resident but not ordinarily resident (RNOR)

- Non-resident (NR).

7Dividend Distribution Tax (DDT)

8Fringe Benefit Tax (FBT)

9Transfer Pricing provisions

10Taxation of Individuals

25


7.

8. Chapter XII-H of Income-tax Act, 1961

Section 115 O of the Income-tax Act, 1961 9. Section 92 of the Income-tax Act, 1961

10. Section 6 of the Income-tax Act, 1961


Taxability

Residential Status

ROR

RNOR*

NR

*

Worldwide income

Received in India Received outside India Received outside India

Indian Income

Received in India

* Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India.

Tax rates applicable for the financial year 2009-2010

Taxable Income

Upto INR 150000*

INR 150,000 - INR 300,000

INR 300,000 - INR 500,000

Above 500,000

Rate percent

Nil

10%

20%

30%

26



*Basic exemption limits for a resident woman is INR 180,000 and for a resident citizen (having age of 65 years) is INR 225,000

Note: The above tax rate would be further increased by surcharge of 10 percent if taxable income of the individual exceeds

INR 1000,000. Additionally, education cess of 3 percent would also be levied.

11II. Indirect Tax

12III. Regulatory and Tax Regime for the Upstream Sector

Service Tax

VAT Legislation

Custom Duty

Regulatory

! Service tax is applicable on identified services provided or received in India

! Current scope of taxable services is very wide and covers a vast majority of service

categories

! Engineering, management, scientific and technical consultancy, broadcasting,

construction, IPR, insurance, manpower, communication, online access, training, cargo

handling, business auxiliary services are some of the key categories

! Service tax is applicable at 10.30 percent

! Export of services are exempt from service tax - export determined as per prescribed

rules

! Import of service also liable to service tax - import determined as per prescribed rules.

! Since its inception in April 2005, VAT has been implemented in almost all States and

Union Territories with exception of Andaman and Nicobar and Lakshadweep

! VAT is a multi-point taxation system entailing a VAT at every point of sale/lease

! Dealers are allowed to avail credit of input tax on input and capital goods for set-off

against out-put VAT

! Common rate of tax adopted across all States with rates of 12.5 percent, 4 percent and

1 percent prescribed for different categories of goods. Also, some category of goods

have been declared exempt from levy of VAT

! Interstate sale of goods is not governed by VAT (liable to a central sales tax).

! Custom Duty is payable on import of goods/ equipments into India

! It is levied as per rates specified in the Customs Tariff Act

! Peak rate of Customs Duty is 10 percent.

India also provides a customised tax regime for the upstream sector and non-resident

service providers in relation to Exploration & Production operations.

A brief overview of the regulatory and tax regime for upstream sector is outlined below:

! FDI upto 100 percent is permitted under the automatic route in the upstream sector

! A foreign company can setup a project office or an Indian company for undertaking

upstream operations in India.

27


11.

12. Comprises of Foreign Direct Investment Guidelines, Section 42 of the Income-tax Act, Article 17 of PSC and relevant Indirect tax provisions

Comprises of relevant provisions of Finance Act, 1994 (time-to-time amendments), Custom Act and VAT legilsation


Income Tax

Special provision

PSC

No Ring Fencing of Expenditure

13Tax Holiday

There is a special mechanism for taxation of income of companies which have entered into

a Production Sharing Contract (PSC) with the Government of India for undertaking

exploration and production activities.

! As per these provisions, taxable profits of a tax payer, who has entered into a PSC with

the Government for participation in the business of prospecting, exploration or

production of mineral oil, to be determined in accordance with the special provisions

contained in the PSC

! The provisions of the domestic tax law are deemed to be modified to that extent.

! Specific allowances in addition or in lieu of allowances under normal provisions] as

specified in the PSC are permitted.

! The specific allowances relate to:

- Expenditure by way of infructuous or abortive exploration

- Expenditure incurred for exploration or drilling activities or services or assets

used for these activities.

! Allowability of expenditure

- Special deduction - 100 percent of exploration and drilling expenses (both capital

and revenue allowed)

- Other expenses (including production expenditure) allowed under normal

provisions.

! Manner of deduction

- Allowable expenditure is aggregated till the commencement of commercial

production

- Accumulated expenditure allowed in the year of commencement of commercial

production or permitted to be amortized over a period of 10 years.

! All unsuccessful exploration costs in other contract areas can be set off against income

in the contract area in which commercial production has commenced.

! One hundred percent tax holiday available in respect of profits earned from production

of mineral oils.

! Tax holiday is available for seven consecutive years from the year of commencement of

commercial production.

! However, companies availing deduction under these provisions would still be liable to

pay MAT on 'book profits'.

28


13. Section 80IB(9) of the Income-tax Act, 1961


14Deductibility of Site Restoration Expenses

15Taxation of service providers

16Custom Duty

17Service Tax

! Special deduction is available for site restoration expenses

! Amount of deduction being lower of:

- Sum deposited either in a special account or in a "Site Restoration Account" or

- 20 percent of the profits calculated in the prescribed manner.

! Applicability

Special tax regime for non-resident service providers engaged in the business of

providing services or facilities or supplying plant and machinery on hire in connection

with prospecting for, or extraction or production of, mineral oils.

! Mechanics

10 percent of the gross receipts deemed to be business income resulting in an

effective tax rate of 4.223 percent of gross revenues (rate as applicable for financial

year 2009-2010).

! Option to claim lower profits, subject to following conditions:

- Keep/maintain books/documents

- Get accounts tax audited

- Furnish tax audit report

- Compulsory scrutiny assessment

Subject to certain procedures and conditions, Custom Duty exemption is available for:

! Equipments etc. imported for exclusive use in petroleum operations

! Specified goods required in connection with petroleum operations under specific

exemption notification

! Parts and raw materials for manufacture of goods for the purpose of off-shore

petroleum operations undertaken under specified contracts.

Relevant Service Tax Category

! Survey and exploration of mineral, oil & gas services (effective from 10 September

2004)

- Includes geological, geophysical or other prospecting, surface and subsurface

surveying or map making service, in relation to location or exploration of deposits

of mineral, oil or gas

! Site formation and clearance services (effective from 16 June 2005)

- Includes drilling, boring and core extraction services in relation to site formation

and clearance, excavation and earth moving and demolition

29


14.

15. Section 44BB of the Income-tax Act, 1961

Section 33ABA of the Income-tax Act, 161 16.

17. Includes relevant notifications

Customs Act and relevant Rules thereunder


! Mining services

- Introduced to tax 'any service provided in relation to mining of minerals, oil & gas'

! Commercial or industrial construction

- Includes construction of well head and civil works at site.

! Service tax also leviable on the following services:

- Dredging services

- Technical testing and analysis

- Pipeline transportation

- Cleaning (including services for tank, reservoir of commercial or industrial building

and premise)

30



Appendix I: Capacity Addition Planned

in the Refining Sector

Refinery wise Capacity Addition during XI Plan

MMTPA

1.5

3

15

2.4

7.5

9

6

2

1.7

5.31

0.08

53.49

3.5

6

38.5

91.99

S. No.

1

2

3

4

5

6

7

8

9

10

11

Total Public Sector

13

14

Total Private Sector

Grand Total

Public Sector

Refinery

Indian Oil Corporation Limited, Haldia

Indian Oil Corporation Limited, Panipat

Indian Oil Corporation Limited, Paradeep

Hindustan Petroleum Corporation Limited, Mumbai

Hindustan Petroleum Corporation Limited, Visakh

HPCL-Mittal Energy Ltd, Bhatinda

Bharat Petroleum Corporation Limited, Bina

BPCL, Kochi

Chennai Petroleum Corporation Limited, Chennai

Mangalore Refinery & Petrochemicals Limited, Mangalore

Oil & Natural Gas Corporation Ltd. Tatipaka

Essar Oil Limited, Vadinar

Nagarjuna Oil Corporation Limited ( NOCL)

Private Sector

31


Source: MoPNG, InfraLine


Gail’s Existing pipelines and pipelines under execution

KG Basin Network

Cauvery Basin Network

Proposed Gail Pipelines

Private Players Existing Pipelines

Private Players Proposed Pipelines

NANGAL

BHATINDA

JAISALMER

MATHANIA

JAMNAGAR

BANGALORECHENNAI

VIJAIPUR

HYDERABAD

TUTICORIN

KOHIMA

IMPHAL

AIZAWAL

KAKINADA

GAYA

VIZAG

BHUVANESHWAR

DEWAS

PITAMPUR

GANDHAR

BHADBHUT

GADAG

NELLORE

KOTA

MEHSANAAHMEDABAD

DHOLPUR

CHAINSA

HISSARJHAJAAR

HALDIA

PARADEEP

KOCHI

GOA

MANGALORE

KOLHAPUR

RAJKOTDAHEJ

HAZIRA

DADRI

MALANPUR PHOOLPUR

AURAIYAJAGDISHPUR

BARODAGODHRA

MUMBAI

DABHOL

PUNE

Source: InfraLine

Appendix II:

Proposed Gas Pipelines

Map of Existing and

32



Appendix III:

Proposed Product Pipelines

Map of Existing and

Source: InfraLine

UDHAMPUR

JALANDHAR

AMBALA

SAHARANPURPANIPAT

MEERUT

DELHI

MATHURA

TUNDLA

KANPUR

JHANSI

BINA

ITARSI

NAGPUR

RATLAM

MANMAD

KOYALI

VIRAMGAM

SIDHPUR

KOT KOTA

GWALIOR

BHARATPUR

JODHPUR

BHATINDA

JAMNAGAR

KANDLA

VADINAR

MANGALORE

BANGALORE

TRICHY

S

CHENNAI

MADURAI

TIRUELVELI

KARUR

COCHIN

PIPAVAV

MUMBAI

ROURKELA

JAMSHEDPUR

ALLAHABAD

LUCKNOWGORAKHPUR

BIRGANJ

BARAUNI

BOKARO

PARADIP

HALDIA

BUDGE BUDGE

MOURIGRAM

RAJBANDH

VIZAG

VIJAYWADA

KURNOOL

RAICHUR

PUNE

SILIGURI BONGAIGAON

GUWAHATI

NUMALIGARH

DIGBOI

BAREILLY

Existing Pipeline

Ongoing Pipeline

Prospective Pipeline

33



KPMG's Service Offerings

KPMG is a network of professional services firms that provide knowledge-focussed,

technology enabled services. Our services in the upstream sector extend from strategic

advisory to the bidding process, transaction management services, bid and post-bid tax

advisory. KPMG has also been associated with various NELP rounds as knowledge partner

of the Directorate General of Hydrocarbons (DGH). In addition, we are supporting the DGH

in the eighth round of NELP and fourth round of CBM.

KPMG has been helping clients create and capture value across the lifecycle of an

Exploration and Production (E&P) asset. The oil & gas team of KPMG can help you in asset

acquisition to post-acquisition consolidation and diversification. A list of indicative services

our clients have sought from us, are defined in the following section:

It is important for a new entrant to understand Indian oil & gas market and formulate the

right entry options before bidding. KPMG has helped clients think through these issues

through a structured analysis of the oil & gas industry in India including key players, supply

chain capacities and infrastructure mapping. Our bid advisory assistance includes:

! Macroeconomic analysis and perspectives on the oil & gas sector dynamics

! Evaluating the bid opportunity:

- Market Assessment including demand, supply and price modeling

- Financial modeling to evaluate bidding parameters including scenario analysis

- Risk analysis / matrix and likely mitigation strategies

! Competition analysis

! Partner scan and selection including synergy assessment

! Commercial, Financial and Operational due diligence on the selected partner

! Preparation of bid packages

! Evaluation of various structuring options, such as Own entity/ Joint Venture/

Consortium with Indian or foreign entities, for making the bids for the blocks on offer.

In doing so, KPMG can help you understand the tax and regulatory structure prevailing

in the country by:

- Reviewing the tax assumptions (including but not limited to tax rate, tax capital

allowances, withholding tax, tax deductions, service tax and other indirect taxes),

and other tax-related issues factored in the financial model for the bid.

- Identifying and evaluating availability of tax incentives/ deductions to the bidders

under Production Sharing Contract (PSC), read with Indian Income Tax Act,

Customs Act and other tax regulations.

- Advising on the tax administrative procedures which the Operator as well as Non-

Bid Advisory

34



operator need to comply with by considering the practical complexities involved in

obtaining credits/ refund of taxes.

- Identifying various funding options for the project and analyzing the feasibility/

implications of the identified options.

- Identifying and evaluating efficient modes of repatriation of profits for the entity

investing in the Project

KPMG has been assisting Exploration and Production (E&P) companies not only in

developing and implementing their vision but also in implementing business and operational

efficiency improvement programmes. The oil & gas team of KPMG includes a combination

of business strategists and sector specialists who work as part of a client centric cohesive

team. Some of the services we have provided to E&P companies in India are depicted

below:

! Evaluation of buy/sell side options

! Commercial due diligence, including assessment of market and competitive trends,

analysis of revenue, cost and capex assumptions and assessment of potential

scenarios

! Financial and tax due diligence

! Growth and Diversification strategies, including expansion into midstream and

downstream businesses, other allied business areas that help in improving the risk-

return profile of the E&P business

! Business planning and organization development, including developing performance

targets and performance management frameworks

! Implementation assistance for strategic initiatives

! Post-deal integration

! Diversification strategy

! Human capital advisory services

! Exit strategy including partner scan, partner selection, and commercial, financial and

operational due diligence on the selected partner

Post-bid Advisory & Compliance

Acquisition or Divestiture

Business Performance

35



Tax and Regulatory

Corporate Governance

! Structuring the contracts for services and evaluating the withholding tax and indirect

tax implications of payments made under the contracts.

! Advising on availability of deduction under Section 42 for certain capital and revenue

expenditures.

! Advice and assistance on the composition of undertakings (well-wise/ block-wise) for

claiming tax holiday under section 80IB.

! Advising on tax implications of farm-in/ farm-out transactions relating to assignment of

exploration rights in the PSC to both the assignor and the assignee.

! Transfer pricing benchmarking study with respect to international transactions entered

into between associated enterprises.

! Assistance in compliance requirements by the operating/ non-operating entity.

! Assistance in dispute resolution including litigation.

! Strengthening corporate governance through developing charters and procedures for

the Board and its sub-committees.

! Assisting in implementing Enterprise Risk Management Frameworks.

! Designing control frameworks and conducting internal audits.

! Conducting strategic review of in-house internal audit functions to enhance its

effectiveness.

! Strengthening the Management Monitoring System including Key Performance

Indicators (KPI) definition and designing of MIS frameworks.

36




37

This document has been drafted by the Research, Analytics and Knowledge (RAK) team

within KPMG. The team consisted of Sidharth Balakrishna, Infrastructure and Government

Lead, and Suman Lala, Analyst, both with the Research, Analytics and Knowledge team.

They were guided in their work by Preeti Sitaram, a Manager with the Research, Analytics

and Knowledge team and Kumar Manish, Associate Director (Markets).

Inputs on the Tax and Regulatory structure were provided by Nabin Ballodia, Director; Neetu

Singh, Manager; and Adika Verma, a Senior; all with the Tax advisory team in KPMG.

This document has been designed and formatted by Remedios D’silva, Senior Graphic

Designer, KPMG.

Acknowledgements


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KPMG and the KPMG logo are registered

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The information contained here in is of a general nature and is not intended to address the circumstances of any

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Pradip Kanakia

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