India Oil & Gas Retailing Distribution 2005

India Oil & Gas Retailing Distribution 2005 City Gas In India – Issues and Imperatives TRANSACTION ADVISORY SERVICES January 28, 2005

Discussion Structure 1 Sector Overview – Gas Market In India 2 Segment Overview – City Gas Distribution In India 3 City Gas Projects – Drivers & Issues 4 Suggestive framework for successful CGDs In India

Demand & Supply Conditions Actual Supply of ~ 81 MMSCMD Against an Allocation of ~120 MMSCMD Huge Latent Demand – Demand to Be 231 MMSCMD by 2007 (1) Gas Market In India - Snapshot • Infrastructure • Limited Infrastructure – HBJ, Parts of AP, Tamilnadu and North East • Key Players • Upstream – ONGC, OVL, Reliance, BG, Cairn, Niko, HOEC • About 85% Supplies From ONGC, OVL • Midstream – GAIL, GSPL, OIL • About 90% of Transportation Volumes by GAIL • Downstream – GAIL, GGCL, IGL, MGL, GAEL Large Demand Supply Gap, Limited Infrastructure and Few Dominant Players Source: (1) Hydrocarbon Vision 2025

NELP V – Blocks on offer (1) Gas Market In India – Recent Developments Upstream • India’s First LNG Project of 5 MMTPA Set up at Dahej Received Its First Shipment in January 2004 • Reliance Discoveries in KG Basin and Orissa Blocks – 50 MMSCMD Supplies to Start in 3 – 4 Years • Total Investment of ~ $ 4 Billion in NELP I – IV to Culminate in Additional Supplies • 25 Year - 7.5 MMTPA Contract With Iran Signed in January 2005 – Supplies to Commence in 2009 • Talks Underway for Transnational Pipelines From Iran, Myanmar • NELP V Announced in Jan 2005 – 20 Blocks (6 Deep Water, 2 Shallow Water and 12 Onshore) – Bid Submission Date 31 May 2005 New Supply Sources – Domestic and Imported and Increasing Share of Private Players in Production Source: (1) DGH

Pipeline Infrastructure Existing and Proposed Gas Market In India – Recent Developments Midstream • 1,100 KM Pipeline Planned to Be Commissioned by 2006 From Kakinada to Uran – Connecting East – West • Plans of ~ 6000 KM National Gas Grid by GAIL • Draft Regulatory Bill and Revised Draft Pipeline Policy Under Circulation Downstream • Power Sector Reforms - Electricity Act Passed in 2003, Open Access Introduced • Demand From Gas Based Expansions Development of Pipeline Networks, Regulatory Initiatives and Downstream Reforms

Encapsulating the market transition Upstream Transportation Downstream Large Domestic Finds & NELP – Increased PSP in E&P Activities Extensive Pipeline Development – GAIL Gas Grid, Kakinada Pipeline Reforms - Regulatory and User Sectors (Power and Fertilizers) Increasing Imports – LNG & Transnational Pipelines Open Access and Increasing PSP Environmental Concerns & Newer Downstream Applications – City Gas Multiple Supply Sources & Increasing Share of Pvt. Gas Upcoming Infrastructure & Level Playing Field Increase in Realizable Demand Transition Marked by – New Supply Sources, Increasing Share of Deregulated Gas, Upcoming Infrastructure, Reforms and Increase in Realizable Demand

Discussion Structure 1 Sector Overview - Gas Market In India 2 Segment Overview - City Gas Distribution In India 3 City Gas Projects – Drivers & Issues 4 Suggestive framework for successful CGDs In India

City Gas In India – CNG and PNG • History • Pilot Study for Introduction of Natural Gas As Alternate Commercial Fuel Launched in 1992 by GAIL in Delhi, Mumbai, Vadodara • Networks Currently Operative in Four Locations – Delhi, Mumbai, Vadodara and Surat • City Gas Consumption Account for ~ 5% of Current Consumption • Segment Wise Consumption • Domestic Consumption in India Has Been Lower Compared to Global Peers Due to Tropical Climate, Low Per Capita Energy Consumption • Regulatory Imperatives – Such As the Supreme Court Directive – Drive Transportation Consumption in Select Cities • Transportation and Industrial Segments Are the Key Consuming Segments in India • CNG (Compressed Natural Gas) Refers to the Transportation Fuel and PNG (Piped Natural Gas) Refers to the Industrial, Commercial and Residential Fuel

Domestic connection layout City Gas In India – PNG Project Description • Natural gas piped to homes and establishments of end users • Primarily offers substitution of LPG • PNG applications in India include cooking, water heating, space heating and air conditioning • Network components • Connecting point to the transmission pipeline network receiving gas at 19-22 kg/cm2 • District Regulator Stations for reducing pressure to 4 kg/cm2 • 12” main steel pipeline • 2”, 4”, 6” and 8” spur pipeline • MDPE pipeline network • Galvanized Iron pipeline connecting to household connections • Pressure regulator – reducing the pressure further down to 21 milli bar for domestic consumers and 300 milli bar for commercial consumers

Typical CNG Mother Station City Gas In India – CNG Project Description • Natural gas compressed to 200 – 250 kg/ cm2 pressure enhancing its fuel on the board capacity • 4 categories of CNG stations • Mother stations – Gas received at 19-22 kg/cm2 from the pipeline. Provision for filling mobile cascades. • Online stations - Gas received at 19-22 kg/cm2 from the pipeline. No provision for filling mobile cascades • Daughter stations – Not connected to the pipeline networks. Gas filled into vehicles on pressure equilibrium principle • Daughter booster stations – Not connected to the pipeline networks. Gas filled into vehicles by using boosters • Higher O&M and higher margins as compared to PNG • Higher depreciation; Equipment replacement in 5-6 year period

City Gas In India – Operating networks • Delhi • Indraprastha Gas Limited – promoted by GAIL, BPCL and Delhi Govt. • 125 CNG stations – 1.18 MMSCMD • 15000 household and 91 commercial PNG connections – 0.07 MMSCMD • Vadodara • CNG by GAIL • 2 CNG stations – 0.001 MMSCMD • Mumbai • Mahanagar Gas Limited – promoted by GAIL, BG, Maharasthra Govt. • 64 CNG stations – 0.543 MMSCMD • 1.3 lac household, 500 commercial and 40 industrial PNG connections – 0.279 MMSCMD • Surat, Bharuch, Ankleshwar • Gujarat Gas Company Limited (GGCL) – promoted by BG. GSPC signed an MOU for CNG with GGCL • 3 CNG stations – 0.003 MMSCMD • 1.5 lac PNG connections – 2.2 MMSCMD

City Gas In India – Proposed networks Ahmedabad and Vadodara • Gujarat Adani Energy Limited – promoted by Adani Group • First CNG station at Ahmedabad inaugurated on 31 December 2004 • First station at Vadodara to be on by March 2005 • Proposed volume requirement (CNG and PNG) of 1 MMSCMD in the initial phase Bangalore, Chennai and Kolkata • Among the 11 cities directed by honorable Supreme Court Noida, Gurgaon, Faridabad and Ghaziabad • To be set up by IGL at an investment of INR 1.2 billion by 2008, starting supplies by 2005

City Gas In India – Proposed networks Pune, Lucknow, Agra, kanpur and Bareilly • GAIL and BPCL for Pune and Kanpur • GAIL and IOCL for others • 0.4 MMSCMD and 0.1 MMSCMD allocations respectively for Pune and Kanpur • Investment of INR 5500 million proposed for the five cities together Hyderabad and Vijayawada • Bhagyanagar Gas Limited – promoted by GAIL, HPCL, APIDC • 0.6 MMSCMD for Hyderabad and 0.1 MMSCMD for Vijayawada in the initial phase • Proposed investment of INR 1960 million for Hyderabad and INR 570 million for Vijayawada What is driving these new City Gas projects?

for Transportation fuels .. .. and for Industrial and domestic fuels Drivers for City Gas • Pricing in Delhi(1) • 10% discount pricing for fuel replacement by PNG • Rs 16.83 / KG pricing for CNG • Compared on operating cost per KM, CNG is ~3 times more economical than Petrol (1) • Upfront petrol conversion cost have a recovery period of 1-2 years (2) • PNG at current pricing offers 10-20% savings for industrial and domestic consumers • Cost competitiveness improves with increasing prices of transportation fuels and phasing out of subsidies for LPG by the Govt. • Sensitivity to price expected to continue Economic alternative Source: (1) Broad pricing comparison based on prices of INR 30.4 and 19.18 respectively of petrol and diesel and INR 16.83 per kg of CNG and mileages of 16 KM per KG of CNG, 16 KM per litre of Diesel and 12 KM per litre of Petrol; (2) At an assumed conversion kit cost of INR 45,000 and annual average distance of 3000 KM

Drivers for City Gas • Reduction of harmful emissions • Especially those of particulate matters • Particularly relevant in Indian case where (more polluting) Diesel consumption is almost five times the consumption of Petrol • For domestic and commercial consumers, City Gas offers a cleaner, more convenient fuel alternative – indoors Cleaner fuel % Reduction in Emissions – Diesel Vs CNG 120 100 80 60 40 20 0 CO NO2 PM 2.4 21 0.38 Diesel 0.4 8.9 0.012 CNG 84 58 97 % Reduction Emissions in g/km Source: Empirical data based on a study undertaken in United States by The World Bank Group, ESMAP, International Experience with CNG vehicles

Drivers for City Gas • High safety, lower tear and wear and quieter operation • Higher Auto Ignition Temperatures and Flammability Range • Higher Octane Number • Less Vibrations • Lesser Odor Than Diesel • Efficiency as fuel – 90% energy efficiency (in the cycle of producing, processing, transporting and using)(1) • Regulatory imperatives • Supreme court directive covering 11 cities • Gujarat Govt proposal to pass ordinance for compulsory use of CNG • Growth in GDP and per capita energy consumption – consumption to shift to higher share of city gas (around 25% in OECD nations) from the current 5% levels Other drivers Despite of the clear advantages, development of City Gas networks in India has been limited… Source: (1) Department of Energy, USA

Key Constraints for CGD projects in India • Absence of commensurate supply • Current practice of priority allocations towards power and fertilizers Supply availability • Limited development of connecting transmission infrastructure impacts development of CGDs in areas not close to the supply sources Supporting infrastructure • Lack of clarity regarding the exclusivity and forms of regulation (ROR, Price cap etc) • Lack of clarity regarding the access to transmission network • Administered pricing in case of end user prices Regulatory clarity

Key Constraints for CGD projects in India • Tropical climate and absence of heating requirements in domestic segments in most parts of the country • Lower per capita consumption (400 KGOE vis a vis world average 1500 KGOE) implies higher per capita capital cost • Capital intensive conversions Climate conditions and usage patterns • Larger tank sizes • Lack of indigenous technology and economic conversion kits • Safety issues due to improper conversions by unauthorized agencies Technical Issues Successful City Gas projects require addressal of these issues…

Key pointers for successful CGDs Access to economic gas supplies and proximity to pipeline network • Economic availability of gas • Proximity of supply sources and existence of pipeline network connecting the urban center – lower capital investment for city gas project • Western and Southern regions offer higher feasibility for CGD projects Clear regulation and conducive investment framework • Clarity regarding • Exclusivity – project development issues • forms of regulation of city gas investments (end-user price regulation or rate of return regulation) • Effective private sector participation (PSP) framework • investment policies • procedures regarding right of use and other approvals • freedom regarding end user pricing, contractual mechanisms and customer mix

Key pointers for successful CGDs (Cont’d) Proactive Government support • Fiscal measures • Incorporating the economic pricing of environmental benefits into fuel pricing • Tax incentives (such as reduction of customs duty, tax waiver on CNG in Delhi) • Directives on demand side • Supreme Court’s directive in the case of CNG conversion in 11 cities • Gujarat Govt’s proposal to make CNG use compulsory • Phasing out of subsidies for alternative fuels as committed – Adherence to phasing out schedule of the subsidy on LPG cylinders (in three to five years) as announced by the Govt., would make the piped gas more competitive

Key pointers for successful CGDs (Cont’d) Appropriate project/ contract structuring and diligent feasibility assessment • Strategic investors - Equity participation from gas supplier, transmission pipeline operator and from the local government bodies would help reduce the supply and regulatory risks (preferred project structure in India and internationally) • Last shut down provisions in the transportation/ supply contract (IGL on HBJ) • Feasibility Assessment – Population distribution and demographics, degree of apartmentalisation, level of environmental awareness etc., impact the project feasibility. Future risks such as competition from other transportation modes (impact of MRTS on number of CNG vehicles) shall be assessed

Key pointers for successful CGDs (Cont’d) Efficient implementation and operations • Efficient operations - Decisions regarding outsourcing of operations and operating procedures for meter reading, billing, and collection etc, would help reduce operating costs. Adoption of the latest technologies for carcassing would help reduce capital costs • Implementation of project plan • Simultaneous undertaking of marketing and construction operations securing incremental revenues for the utility in the early stages • Focussing on the commercial areas and connecting households on the way, managing public expectations, creating awareness etc • Tying up with NOCs

Successful CGD Projects Suggestive framework for successful CGDs • Clarity and conduciveness • of regulatory/ fiscal • framework • Clear and consistent regulation – clarity regarding exclusivity and forms of regulation for investment returns • Effective PSP framework – decisions regarding end user pricing, contractual mechanisms and customer mix • Fiscal measures – economic pricing of environmental benefits • Directives for adoption of clean fuel • Appropriate Project • conceptualization, • structuring and • implementation • Capital Structuring and strategic investors • Market assessment – right assessment of demand for feasibility, identification of critical demand centers and patterns • Market development – simultaneous undertaking of marketing and construction operations and ensuring early revenues • Operations structure – decisions regarding outsourcing of operations, adoption of technologies • Economic availability of gas • Indigenous / economic sources • Well developed trunk infrastructure • Proximity of the project to PL network

Thank You Discussion document

India Oil & Gas Retailing Distribution 2005