Energy Conclave 2010 IIT Kanpur International Symposium on

Energy Conclave – 2010, IIT Kanpur International Symposium on New Paradigms for Energy Policy and Regulation 8 th January 2010 Regulatory Framework in Petroleum & Natural Gas Sector L. Mansingh, Chairperson Petroleum and Natural Gas Regulatory Board http: //www. iitk. ac. in/reg

Top Primary Energy Consuming Countries 2005 Total World Energy Consumption: 10537 mtoe 5 th largest energy consumer (Share 3. 7% of global energy) ü Per capita energy consumption - about one third of world average ü Energy consumption projection(2031 -32) ü to grow at 5 % CAGR (8% GDP growth) as ü per Integrated Energy Policy ü 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 ü Oil import dependence is around 72% currently. Likely to go upto 90% level ü Source – Energy Information Administration (EIA) Fig. in MTOE Per-capita Energy Consumption

Primary Commercial Energy Mix World 2003 10517 mtoe World 2030 18040 mtoe CAGR: 2% l Oil & Gas continue to play major role India 2003 -04 327 mtoe India 2031 -32 1651 mtoe CAGR: 6. 2% Coal & Oil continue to play major role; Gas is emerging Source – World: EIA-2006; India: IEP 2006

Import Dependency of Crude & Gas l Oil Import dependency for India is about 71% compared to 67% for US l China fares better in oil import dependency at 51% l Gas accounts for about 25% through LNG imports l Gas demand is expected to be about 390 by 2025 and 500 MMSCMD by 2030

Crude Oil Demand, Production & Import Trends MMT

Refineries & Product Pipelines Refining Capacity: 178 MMTPA Product Pipelines 12017 KMs 68. 17 MMTPA Product Pipelines Length: 12017 KM

Refineries in India Bhatinda (9. 0) Panipat (6. 0), (9. 0) Existing Ongoing/Planned Digboi (0. 7) Bongaigaon (2. 4) Guwahati Numaligarh (3. 0) (1. 0) Mathura (8. 0) Jamnagar (33. 0, 29. 0, 10. 5 Baroda (13. 7) BINA (6. 0) Barauni (6. 0) Haldia (6. 0), (1. 5) Paradip (15. 0) Mumbai (12) (5. 5) (2. 4) Mangalore (9. 7, 5. 3) Cochin (7. 5, 2. 0) Visakh (7. 5, 7. 5) Tatipaka (0. 1, 0. 1) Chennai (9. 5, 1. 7) Narimanam (1. 0) Nos MMTPA Indian. Oil 10 60. 2 BPC 3 22. 5 HPC 2 13. 0 ONGC / MRPL 2 9. 8 Reliance (Pvt. ) 1 62. 0 Essar(Pvt. ) 1 10. 5 Total 19 178. 0 Expected Refining Capacity by 2011 -12: 200 -235 MMTPA

India’s product demand & refining capacity Gap between Refining Capacity & Demand 142 45 68 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

Distribution & Marketing Infrastructure Terminals/Depots No. 383 LPG Bottling Plants No. 170 Aviation Fuel Stations No. 126 Retail Outlets No. 37953 LPG Distributors No. 9366 SKO/LDO Dealers No. 6614

Long Term Demand Supply - Gas

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

Key Decisions Taken on APM dismantling Gas Pricing – July 2005 Govt. order l Consumer price of APM gas increased from 2050/mscm to Rs 3, 200/mscm linked to calorific value of 10, 000 kcal/scm pending Tariff Comm. recommendations l 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 l Rest of consumers to be supplied at market related price l APM gas price for other than power & fertiliser sectors further increased from Rs 3, 200/mscm to Rs 3, 840/mscm wef June 2006 l 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) l NELP introduced in 1999; so far VIII rounds held l Internationally competitive fiscal regime l Transparent Process, International competitive bidding l Contractual Fiscal Stability l Excellent Tax Incentives l Special deepwater concessions l Freedom to market production domestically

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

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

Need for a Regulatory Body 16 l India A Over Regulated Country but Existing Systems Discretionary, Ineffective and Often Obsolete : Obstacle to Growth & Initiative l Statutory Independent Regulators set up in the US through Acts of Congress l In India, This Development Linked to Process of Liberalisation for – Providing level playing field – Promoting Investment / FDI – Protection of Consumers’ Interest – More Effective Regulation

PNGRB Act, 2006 Enacted by Parliament in March’ 06 l All provisions (except Section 16) of the Act notified w. e. f. 1. 10. 2007 l PNGRB formally established w. e. f. 1. 10. 2007 l One Chairperson and four full time Members l l 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 17

Salient Functions of the PNGRB 18 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. ) 19 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

PNGRB - Major Tasks on Hand 20 l Notification of Regulations l Declaring/Authorizing petroleum products & natural gas pipelines and city gas distribution networks on common carrier basis l Specifying market service and retail service obligations to protect consumers’ interests l Fostering Fair Trade and Competition l Laying down Standards and Safety Norms

PROCESS OF FRAMING & FINALISING REGULATIONS 21 Internal Deliberations in PNGRB Draft Regulations approved by Board Draft Regulations posted in public domain Open House on Final Draft Comments from stakeholders considered Open House with Stakeholders Regulations finalized & approved by Board Legal Vetting Notification in Official Gazette 21

Regulations for CGD & NG Pipelines notified so far Regulations for 22 Principal Regulations notified on Authorizing entities to lay, build, operate or expand CGD Networks 19. 03. 08 Exclusivity for CGD Networks 19. 03. 08 Determination of Network Tariff for CGD Networks and Compression Charge for CNG 19. 03. 08 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 Affiliate Code of Conduct for entities in Transporting and Distributing Natural Gas 17. 08

Regulations for CGD & NG Pipelines notified so far 23 Regulations for Principal Regulations notified on Access Code for common carrier or contract carrier natural gas pipelines 17. 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 Technical Standards & Specifications including Safety Standards for natural gas pipelines 11. 09

Authorisation for CGD Networks 24 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%)

Authorisation for Natural Gas Pipelines Bidding Criteria - 25 (weightage) - Least PV of unit tariff for 1 st tariff zone over economic life of project - (40% & 70% for pipelines < 300 KM) - Least percentage increase for determining incremental tariff for 2 nd tariff zone - (20%; nil for pipelines < 300 KM & 30% for pipelines > 300 KM < 600 KM) - Least percentage increase for determining incremental tariff for 3 rd and subsequent tariff zones (10% & nil for pipelines < 600 KM) - Highest PV of natural gas volumes - (30%)

Exclusivity Criteria for CGD Networks 26 l 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 3 rd party access to the network for marketing of natural gas would be available on payment of network tariff l Network Tariff to be generally decided on bid basis

Process for Grant of Authorization Suo-motu by Board EOI 15 days Open Advt. in paper for “Public Consultation process” 27 30 days 15 Firm-up “Authorized days Area” Invite Bids 60 days (extendable by 30 days) Bid evaluation Reject the Proposal No entity gets selected. Board may go for re-bid 30 days Grant of Authorization 90 days Gas Tie-up Consequence of Default & Termination of Authorization Post authorization monitoring of activities /meeting the service obligations/Quality of Standard norms 30 days Financial Closure

GAs Covered Under Two Rounds of CGD Bidding 28 1 st Round of Bidding l l l Kota Dewas Kakinada Sonipat Meerut Mathura 2 nd Round of Bidding l l l l Ghaziabad Allahabad Jhansi Shahdol Yanam Rajahmundry Chandigarh

City Gas and CNG 29 Present Scenario – Total Number of CNG vehicles- 7 lakh – Number of entities – 19 – Number of GAs - 25 l Future Scenario (next three years) – Total Number of GAs - 86 – Expected CNG vehicles(Present Trend) - 25 lakh l Future Scenario (next five years) – Number of GAs – 125 – Expected CNG vehicles(66% of present trend)- 33 lakh l Future Scenario (next ten years) – Number of GAs – 250++ – Expected CNG vehicles(66% of present trend)– 58 lakh l

30 30 December 2008

Oil Pipelines in India 31 Jalandhar Ambala Roorkee Sangrur Najibabad Panipat Meerut Nahorkatiya Tinsukia Delhi Rewari Loni Shahjahanpur Sanganer Mathura Siliguri Bongaigaon Digboi Ajmer Jodhpur Tundla Numaligarh Chaksu Lucknow Kanpur Guwahati Jagdishpur Kot Chittaurgarh Barauni Sidhpur Ahmedabad Rajbandh Kandla Ratlam Navagam Budge Mundra Jamnagar Maurigram Koyali Budge Indore Vadinar Dahej Ankleshwar Haldia Bhatinda Hazira Mumbai High Manmad Paradip Mumbai Vizag Pune Secunderabad Uran Pakni Hazarwadi Vijayawada Mangalore Bangalore Chennai Sankari Asanur Karur ØLength- ~9893 Km. Coimbatore Trichy ØLPG – 2126 kms (4. 5 MMT) Kochi ØCapacity- ~64 mmtpa Madurai ØCapacity utilization- > 78% ØPlayers- IOCL, BPCL, HPCL, Existing Product Crude Oil On-going Product Crude Oil Existing LPG

FDI Policy 32 l Exploration – Up to 100% FDI: Automatic route through Competitive bidding l Refining – Up to 100% FDI – Up to 49% FDI: if project taken up along with Public Sector Undertakings l Marketing – Up to 100% FDI permitted in petroleum products marketing l Petroleum Pipelines – Up to 100% FDI: Under automatic route l Natural Gas Pipelines – Up to 100% FDI: Under automatic route

Estimated Investment in P&NG Infrastructure 33 l Total about Rs. 76, 000 - 84, 000 crore investment is estimated to be required for setting up Petroleum & Natural Gas infrastructure in next five years – Natural Gas Pipelines ~ Rs. 60, 000 crore – CGD Networks ~ Rs. 10, 000 - 15, 000 crore – Petroleum Product Pipelines ~ Rs. 6, 000 - 9, 000 crore

Competition as part of Licensing Conditions 34 l Powers for Grant of Authorization for Transportation Pipelines and CGD Networks with PNGRB l Concept of Natural Monopoly in the P & NG Infrastructure Sector to avoid Stranded Assets and Optimization of Capacity Utilization l For CGD Networks, while monopoly over network is for life, commercial exclusivity limited to five years l After five years, network available to competitors on non discriminatory basis to market gas on payment of network tariff determined by Regulator l Network Tariff decided on bid basis for all new networks

Competition in Natural Gas and Product Pipelines 35 l PNGRB empowered to declare any existing pipeline as common/contract carrier for transportation of natural gas or petroleum products l Under Government Policy and PNGRB Regulations, all common carrier pipelines must have 33% for natural gas and 25% for products as common carrier capacity l All necessary facilities and equipments included in the common/contract carrier pipelines to facilitate third party non discriminatory access l With Emerging National Gas Pipeline Grid and Regional Networks with Regulatory Framework, Foundation of the Market has been laid

Role of Markets in a Modern Regulatory Framework l l l Competitive markets necessary pre-condition for a modern regulatory framework Facilitation of competitive market forces and prevention of distortions and manipulations primary responsibility of the Regulator Section 66 of the Electricity Act, 2003 – Regulator to promote the development of a market (including trading) in power No such provision in PNGRB Act, 2006 Section 11(a) of the PNGRB Act : – The Board shall “protect the interest of consumers by fostering fair trade and competition amongst the entities” 36

Development of Natural Gas Market l No market for gas in the country. A competitive market would lead to – Price discovery – Optimal use of scarce energy resource – Optimization of infrastructure – Lead to flow of investment for E&P, development of infrastructure for transportation and distribution l Bottlenecks – Government fixes prices and allocates gas – No trading can take place unless Government gets out of price fixation and allocation 37

Hurdles in the way of Development of a Competitive Market in the Petroleum Products 38 38 l Dominance of CPSUs in this market even after opening up of the market l Government continues to determine price of Petrol & Diesel marketed by CPSUs inspite of formally abolishing APM l Heavy subsidization of Kerosene & LPG leading to distortions in the product market l Existing transportation and storage infrastructure owned by CPSUs without third

Hurdles in the way of Development of a Competitive Market in the Natural Gas Sector l 39 Production, Supply and Distribution of Natural Gas till now controlled by the Government with APM price and allocation on case-to-case basis l APM Gas highly subsidized distorting market forces as competitive has no access l New discoveries has brought in only one supplier l Even in this case Government have determined price and allocation

Development of a Competitive Market 40 l Market forces should decide pricing and allocation with Regulator preventing manipulations / distortions l Specifications should be made uniform and mandatory to facilitate trading and protect interest of consumers l Active spot and future trading of Petroleum Products and Natural Gas should be allowed in conformity with guidelines and over-view of the Regulator

Steps initiated by PNGRB so far 41 l Affiliate Code of Conduct ØEntities required to maintain separate accounts for different business sections ØProhibition of cross subsidization ØCompetitor cannot be treated less favorably than one’s own division / subsidiary

Steps initiated by PNGRB so far 42 l Access Code (Natural Gas) (contd. . . ) Ø Provides third party non-discriminate Access to Transportation and Distribution Network for Natural Gas at tariffs fixed by the Regulator Ø Lays down technical parameters / obligations to maintain surplus capacity to ensure availability of capacity to third party Ø Technical specifications such as band of calorific value lay down to ensure grid discipline Ø Grid Management System being finalized to ensure smooth functioning of the Gas Grid

Steps initiated by PNGRB so far 43 l (contd. . . ) Product Pipeline ØStorage tanks at beginning and end point and at storage depots being included in the definition of pipeline discriminate access for third party

Thank you