Regulatory Mechanism and Issues

1. Regulatory Mechanism and Issues International Experience and the Indian Perspective W. W. “Dub” Crook February 3, 2004

2. ExxonMobil Natural Gas Marketing Current Gas Sales Marketing Office Development Activity Headquarters World Scale Gas Reserves Alaska North Slope N.W. Europe Mackenzie Delta Eastern Canada Sakhalin Gulf of Mexico Qatar Indonesia W. Africa PNG Southern Cone S. E. Australia N.W. Shelf • 180 TCF of net discovered resources • 18 BCFD (0.5 Bcm/D) of total gas sales • Currently selling gas in over 25 countries

3. Current Global Regulatory Coverage Active Regulatory Oversight Monitoring Initiatives

4. Global Regulatory Trends Potential Impacts Regulatory Trends Key Drivers • Consumer focus • Desire for lower energy costs • Increased market liquidity • Increased market efficiency • Protection from market gaming • Growing environmental concerns • Introduction of competition • Removal of monopoly positions • Increasing private sector participation • Open access on all gas infrastructure • Unbundled services • Capacity release • Independent regulatory authorities • Demand • Supply • Prices

5. Key Elements In Gas Market Reform Competitive Market • Detailed Implementation Plans Development of Codes / Regulations Government Controlled Gas Monopoly Non-Discriminatory Regulatory Oversight Comprehensive Gas Law or Policy Statement of Market Reform Objectives

6. Objectives of Gas Industry Reform • Gas reform is designed to introduce the creativity of Private industry participation in the gas sector and to stimulate industry growth through the introduction of competition while: • (1) Enhancing the country’s Security of Supply • (2) Strengthening the gas infrastructure network through expanded investment • and • (3) Providing efficiency benefits to the public

7. Comprehensive Gas Law or Policy • Enabling legislation provides operating framework for industry participants • Should embrace free market mechanisms • Underpinned by core set of principles: • Stability of fiscal / legal frameworks • Administration of legislation in non-discriminatory manner • Sanctity of all commercially negotiated contracts • No obstacles to build, own & operate gas infrastructure • No import / export restrictions • Market-based, non-subsidized commodity pricing

8. Key Elements Addressed In A Gas Law • A Comprehensive Law should address following key issues: • Vertical integration / infrastructure unbundling • Affiliate Code of Conduct • Infrastructure construction and ownership • Access to infrastructure • Determination of surplus or available capacity • Capacity trading rules • Infrastructure tariff and service transparency • Pipeline interconnections and standards • Franchise monopolies / retail contestability • Eligible / non-eligible customers • Purchase and resale of gas

9. Characteristics of Regulatory Oversight • Successful markets have Regulators characterized by: • Independence from Government gas holdings • Clear framework of operating rules • Mandate to promote competition • Empowered to enforce laws / regulations • Rapid decision making process • All decisions published • Effective appeal mechanism • Sufficient skilled staff and resources • Major focus needs to be protection of industry participants

10. Development/Implementation of Codes & Regulations • Must fit within overall framework established by Gas Law • Need to be clear and unambiguous • Provide guidance on procedures • Not overly prescriptive; let free market solutions develop • Must have mechanism to handle complaints/grievances • Balanced industry consultation process is key

11. What Would Work for India?

12. India Gas Market • Market Characteristics • Small, developing market (2.3 BCFD) • Demand supply constrained • Demand focused in two sectors: • Power (39%) • Fertilizer (38%) • Limited transportation infrastructure • No transnational grid • No cross-border interconnections • LNG imports starting in 2004 • Limited number market players • Private participation limited • Government-set gas pricing • No specific Gas Law Shahjahanpur Anta Bijaipur Dahej Khera Hazira Dabhol Kakinada

13. Forward Policy Recommendations • No single way forward • Many options to establish a competitive gas market • Key is to match reform with Government goals • Successful markets have adopted a three-step approach: • (1) Ensure Security of Supply by protecting long-term contract base • (2) Adopt industry structure that facilitates reform goals • (3) Design new Gas Law/Policy that promotes demand growth and infrastructure development

14. Forward Policy Recommendations (Cont.) • Clear statement of future industry objectives • Future role of Government-controlled entities • Rate of reform (single process, phased approach) • Creation of comprehensive Gas Law or Policy • Designed to match Indian Government/market objectives • Adoption of “best aspects” of existing global law • Creation of custom-tailored law for India • Establishment of Gas Law most important part of reform process

15. Forward Policy Recommendations (Cont.) • Establishment of independent gas regulatory authority • Passage of Petroleum Regulatory Board Bill (2002) • Implementation of complementary codes/regulations • Designed to expand on legislative framework • Can be modeled from existing global codes/regulations • Establishment of competitive gas market for India • Facilitate private investment in new gas infrastructure • Spur development of new gas supplies • Promote gas demand growth