AmCham in India

1. AMCHAM I N D I A AmCham in India Officers Executive Committee Sector Committees Energy Sub-Committee Power Oil & Gas -Active interaction with government -Policy and position papers -Industry and market studies -Legislative and regulatory process Business & Industry Focus

2. AMCHAM I N D I A Factors to Attract U.S. Industry Key Aspects of Foreign Direct Investment (FDI) • Return on capital must be assured, attractive and appreciable • Market-driven policies must mitigate investment risk • Secure revenue stream must be ensured to service debt and equity Indian Energy Sector

3. AMCHAM I N D I A Key Areas of Bi-Lateral Cooperation • Create a national energy strategy/plan • Develop implementation plan with mission objectives • Initiate supply and demand forecasting based on market conditions • Address supply side issues

4. AMCHAM I N D I A Key Areas of Bi-Lateral CooperationContinued Overview • Support the Vision: Support liberalization process. Also support: a) sustainable development; b) energy and environment management/conservation; c) increased generation/production, transmission & distribution • Policy Side: Guidance in framework for market driven policies/legislation which promote increased foreign direct investment • Regulatory Aspects: Proactive participation which will allow effective and timely project development and implementation activities to support commercial operation(s) of facilities • Advisory Board: Formation of a beneficial partnership propagating a long term and stable relationship between the U.S. and India wherein industry, Central and State government participate together throughout to achieve a common viable energy agenda

5. AMCHAM I N D I A Key Areas of Bi-Lateral CooperationContinued Create a National Energy Strategy/Plan • Establish a National Advisory Board with emphasis on techno-economic aspects to provide stability in government polices and to support continuation of effective reforms • Emphasis on the energy chain: production/generation, transmission, and distribution, with promotion of efficient end use and conservation • Representation from industry, Central and State Government • Market driven policies with realistic milestones/targets • Both Central and State level objectives must match and be commensurate with each other • Develop a suitable environmental policy which is integrated as part of a comprehensive energy policy

6. AMCHAM I N D I A Key Areas of Bi-Lateral CooperationContinued Implementation Plan (Mission Objectives) • Financial services sector with key milestones which are structured to support policy aspects and project development activities • Technical services support with key milestones which are integrated as part of ongoing project development • Fiscal incentives for projects with key milestones which enhance project viability as well as supporting execution schedules • Regional benefits allocation with rationale to support distribution on the state and local levels • Regulatory structuring which propagates effective policies/legislation, monitoring, and enforcement • Top-down model for all execution in order to provide lateral consistency as well as proper flow of policies and plans to support project development

7. AMCHAM I N D I A Key Areas of Bi-Lateral CooperationContinued Demand-Side Forecasting • Establish quantitative criteria for energy demand forecasts, e.g., power demand and fossil fuels at both central and state levels • Development of a standardized model for forecasting demand which is computer based with real-time updating and simulation • Incorporate both sensitivity and scenario analysis into demand forecasting • Establish accurate database for both base-load and peak-load demand requirements to support forecasting of additional generation capacity as well as assisting transmission and distribution assessments • Assess market conditions to determine the true energy costs and capacity to pay

8. AMCHAM I N D I A Key Areas of Bi-Lateral CooperationContinued Supply Side Issues • Assertive support to pending fast-track projects and on-going IPP’s in achieving financial closure. This would includes issues related to; permits and clearances, escrow accounts, foreign exchange risk • Rational structuring of Mega Power Projects in order to allow level playing field for existing projects • Bankable structuring with other major energy related projects such as LNG based IPP’s, refinery based power projects and barge mounted projects • A market driven liquid fuel policy which will allow both fuel selection based on techno-economic considerations as well as producing cost effective energy

9. AMCHAM I N D I A Power Sector • State Electricity Board (SEB) Financial Viability Issues • Meter/Bill/Collect aspects • Direct subsidies to consumer from government • Electricity Bill 2000 • Support passage • Deregulated supply company function • Contract-based power transmission

10. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Highlights • Current Installed Capacity in the Country: > 93,000 MW • Additional capacity targets: • 9th Plan (1997-2002): 52,820 MW • 10th Plan (2003-2007): 45,370 MW • 11th Plan (2007-2012): 55,593 MW • Low Per Capita Consumption • Post-Liberalization: after 1992, only 2700 MW per year has been added

11. AMCHAM I N D I A Power Sector Aspects/IssuesContinued • Present stakeholders in the Power Sector • SEB’s 59% • PSU Corporations 32% • Private Sector Utilities 5.65% • IPP’s 2.77% Increase Private Sector Role

12. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Areas Requiring Investment • To fill the gap and to meet economic growth, the following investment needs to be injected over the next 10 years: • Generation (200,000 MW) ~US$ 200 Billion • Power Evacuation Infrastructure ~US$ 200 Billion • Energy Infrastructure ~US$ 100 Billion • Total: US$ 500 Billion • Upgrade andmodernization of existing units (which are technically obsolete) • Increase PLF from the current 64% • Minimize T&D Losses from the current 40-50% • Eliminate Theft of Power • Metering and Distribution of existing generation

13. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Government of India Financial Resources In Year 2000-2001: • The Central Sector Plan Outlay US$ 26 Billion • Defense Allocation US$ 13 Billion • Planned Outlay for PSUs US$ 2.04 Billion Need FDI !!!!

14. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Largest Challenge to Current Projects - SEB Financial Viability • Financial viability of State Electricity Boards (SEBs) • Currently approximately US$ 5 billion in the red • Cross subsidies (tariffs set based based on politics rather than cost) • Consumers feel power is a “right” and tend not to pay. Thus, collection levels low • Theft and transmission losses high • Deficits made up by States (also now having financial difficulties) • Little metering • Result: Inability to obtain SEB escrow cover

15. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Liberalisation Challenges • Pace of reforms uneven • Current focus only on formation of regulators and accounting separation of business units; market structure neglected • State regulators being challenged by SEBs and state governments • States racing Centre to pass limited reform measures

16. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Electricity Bill 2000 • Comprehensive legislation that consolidates power statutes • Provides a blueprint for restructuring the market • Legitimate effort to establish competitive markets • Goal: Support passage of final draft through Parliament without substantial change

17. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Electricity Bill 2000: Draft VI’s Competitive Scorecard • Functional Unbundling of SEBs: No • Accounting separation only • States can elect to continue SEB • Deregulated Commodity Pricing: No • Supply Company pricing fully regulated • Third party access: Yes • Customer choice: Yes • Independent Regulator: Qualified yes

18. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Electricity Bill 2000 Draft VI Challenges • SEBs not required to fully unbundle • Full regulation of supply companies (price and performance). Solution is to phase in residential/commercial choice • Interference with transmission to divert power to deficit areas

19. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Electricity Bill 2000: Solutions • Require full unbundling and corporatization of SEBs • No regulation of Supply Company price; regulation only of wires function • No interference with free flow of transmission according to supply contract and operations (maintain sanctity of contracts)

20. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Summary:Urgent Sector Focus Areas • Support passage of Electricity Bill • SEB financial viability • MBC: Meter/Bill/Collect • Subsidies must come directly from the government, not the utilities • Focus on full competitive markets, not only regulators and functional separation • Trust the market • Avoid over-regulation

21. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Pending Project(s) Challenges • Facilitate financial closure • Extensive project schedule delays • Lack of bankable fuel supply agreements • SEB financial viability problems • Competing vested interests • Foreign company departures result • Dividend Tax must be reduced from 22% to 11% • Prioritize merit of pending power projects and focus on higher priority projects • Government of India should offer guarantees for a few low-cost, high-value projects as an interim solution

22. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Industry Viewpoint on Commercial Nuclear Power • Encourage proliferation resistant nuclear systems with indigenous fuel systems based on thorium • Safety related aspects achieved via proper design features and conduct of operations to international standards • Address the entire fuel cycle including waste management to protect the environment

23. AMCHAM I N D I A Power Sector Aspects/IssuesContinued Industry Viewpoint on Hydroelectric Power • Expedite development of projects pending financial closure • Provide encouragement of foreign investment in hydroelectric power plants by reducing front-end loading of fixed costs • Allow optimum energy mix by increasing hydroelectric power capacity addition

24. AMCHAM I N D I A Oil & Gas Sector • Upstream • Form separate regulator/facilitator/contract administrator • Access to quality acreage • Remove minimum alternate tax • Natural Gas • Pass the Gas Act and avoid conflict of law • LNG policy: support development of infrastructure

25. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Structure of Oil and Gas Regulatory Authority • Common question for designers of regulatory frameworks is whether to have multiple regulators or one regulator with multiple responsibilities • Optimal solution: • One regulator per sector with minimum of three directors, headed by a Director General • Divisions within the regulator for specialized segments of the sector (such as upstream, gas transmission and distribution, and downstream) • Saves on overhead expenses • Assists in resolving responsibility overlap • Facilitates accumulation of experience

26. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Structure of Oil and Gas Regulatory Authority-continued • Upstream:Separate three functions • Regulator creates underlying regulations for safety, environmental, permitting and data management • Facilitator: Appoint MoP&NG Representative • Contract Administration Executive • Government of India Representative to sit on Production Sharing Contract Management Committee • Decision-making authority delegated with initial MoP&NG policy direction • Guided by PSC provisions • Business approach (perhaps retired sector executive)

27. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Structure of Oil and Gas Regulatory Authority-continued • Gas Transmission and Distribution • Regulator creates underlying regulations • Safety • Environmental • Permitting • Data management • Light-handed to encourage development of the infrastructure

28. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Exploration & Production • Activate New Exploration and Licensing Policy • Prospective Acreage • Access to quality acreage • Known production fields and basins • Access to all available data (in public domain after initial period) • Bankable terms and conditions

29. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Exploration & Production-continued • Undeveloped or Marginal Fields • Allow ONGC or OIL to enter into farm outs (or other structured relationships) with companies to develop discovered fields, marginal fields, or fields that require expertise/ technology that ONGC or OIL does not posses • Offer the above categories of fields for bid by private and foreign companies

30. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Exploration & Production-continued • Infrastructure status • Grant infrastructure status to the E&P sector to enable E&P companies to claim the tax holiday to the fullest, as well as any applicable fiscal and financial incentives to promote the sector • Simplify the fiscal provisions • Remove gaps in the legal framework

31. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Exploration & Production-continued • Remove Minimum Alternate Tax • Requirement to pay tax either on basis of taxable income or 30% of book profits • Penalizes oil & gas exploration companies that must make large, up-front investments • E&P companies should only pay tax on taxable income when and if generated

32. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Exploration & Production-continued • Assistance for MoP&NG • MMS or BLM to work with MoP&NG to develop effective underlying regulations

33. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Structure of Oil and Gas Regulatory Authority • Central Gas Act must be passed with blueprint for the Indian regulatory framework • Delay has resulted in potential Centre/State conflict of law • Gujarat State attempting to pass a state Gas Law • May result in multiplicity of gas laws that complicate the market and create barriers to interstate movement of gas Regulation of Gas Transmission and Distribution

34. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued Structure of Oil and Gas Regulatory Authority-continued • Gujarat State plans to introduce a state law that will attempt to preempt the field • Will create both a regulatory authority and Gujarat State Petronet Limited (GSPL) • GSPL will be a state company that controls the construction, operation and maintenance of the transmission grid and will set rates • Many areas where GSPL role overlaps with and usurps that of a regulator Regulation of Gas Transmission and Distribution

35. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector LNG Policy: Shipping • Newspapers report core group of secretaries will require all LNG shipping transactions be FOB • Government goal is to encourage development of Indian LNG shipping • Policy will have unexpected effects on commercial LNG operations

36. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector Less-than-full-ship Capacity • FOB mandate requires new ships to be built to lift cargoes that are less-than-full-ship capacity • With an FOB mandate, a developer must delay the import of an incremental load until a full ship load is aggregated. The delay may lead customers to switch to alternate fuels/feedstock, decreasing LNG market share • Commercial reality dictates that existing ships with spare capacity should be utilized to transport less-than-full-ship loads on a CIF basis • Less-than-full-ship capacity transaction must be excluded from the LNG policy

37. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector Spot/Short Term Transactions • There is an emerging spot market for LNG resulting from some excess capacity in liquefaction plants • The price of spot LNG is very favorable to the end user and its import must be encouraged • Spot/short term transactions will not occur absent the availability of the CIF option • Spot/short term transactions must be excluded from the LNG policy

38. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector Indian Flag Vessels • Challenges in obtaining financing • Experience requirement • Liquidated damages • Union rules and tax laws • Reconsider FOB mandate when these challenges are met • Require Indian participant in all new-build ventures

39. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector Honor Existing Contracts • There are current binding agreements in existence • Newspapers report government intent to require restructuring of such contracts • Currently existing CIF supply agreements must be honored

40. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector • Limited universe of LNG producing countries • All suppliers are not amenable to shipping FOB (e.g., Malaysian Petronas) • CIF price can be lower than FOB (+ shipping) price because suppliers with large fleets can provide shipping on existing depreciated vessels at a lower cost • Flexibility of developers must be maintained to negotiate FOB or CIF results in the lowest price for the end user Flexibility Must Be Maintained

41. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector Market Solution Is Best • Ventures to build a new ship to deliver full ship capacity contracts must include an Indian entity holding aggregate of at least 20 percent of the equity • Will solve the financing problems of lack of experience • Indian companies could negotiate takeover of operations

42. AMCHAM I N D I A Oil & Gas Sector Aspects/IssuesContinued LNG Sector • Less-than-full-ship capacity transactions must be excluded from the LNG policy • Spot/short term transactions must be excluded from the LNG policy • Honor existing contracts • Maintain flexibility of developers to negotiate FOB or CIF to obtain the lowest price for the end user • Require Indian participant in all new-build ventures LNG Policy: Shipping Summary

43. AMCHAM I N D I A US-DOE Action Items • Power Sector • Support revision and passage of Electricity Bill 2000 • Provide technical assistance to correct SEB Meter/Bill/Collect problems • Refocus liberalization on competitive markets • Upstream/Exploration & Production • Expedite separation of Director General Hydrocarbons into three entities: Regulator/Facilitator/Contract Administrator • Provide technical assistance on underlying regulations • LNG/Natural Gas Transmission & Distribution • Expedite passage of the Gas Act • Ensure collective participation in development of comprehensive LNG Policy • Advocate energy information exchange via the Internet • Institutionalize U.S. industry participation in legislative and regulatory processes