Opportunities for Citibank in PSUs

1. Opportunities for Citibank in PSUs Commodities Market Global Markets

2. Commodity Hedging Decision by PSUs • Opportunities in PSU companies are directly linked to their Risk Management Policies • Risk management policies are decided at the beginning of the year by Board of Directors keeping RBI guidelines in mind. • Unlike private companies, PSUs have to strictly adhere to decisions taken at the beginning of the year and cannot get into any hedging practice not permitted by RBI

3. Commodity Hedging permitted by RBIand Participating Companies

4. Commodity Hedging permitted by RBIand Participating Companies

5. Oil Marketing and Refining Companies Product Chain Upstream Companies Downstream Companies • ONGC (OVL) • Oil India Limited • Cairn India • HPCL (HMEL) • BPCL (NRL) • IOCL (CPCL) • GAIL • CPCL • Reliance Industries Ltd.

6. Refining Operation

7. Rapidly increasing Refining Capacity- 215 MMT to 302 MMT by 2017 IOCL BPCL HPCL NRL

8. Excess capacity points to weaker Refinery Margin Consideration Refinery Hedging • Refining capacity addition will exceed the incremental demand over 2014-2017, pointing towards weaker refinery margins RBI Regulation PSU companies active in Refining Hedging • BPCL • IOCL • HMEL • Permits hedging of risks to existing refineries like margins, inventory, product sales and freight for oil refining and marketing companies

9. Hedging Instrument: Crack Spread Crack Spreads Naphtha: 15% (Sell 150 bbls) • Crack Spread = Price of Refined Product – Price of Crude Oil • Refiners are LONG crack spreads and to hedge they SHORT crack spreads Common Crack Spreads • Gasoline Crack • Kerosene Crack • Naptha Crack • High Sulphur Fuel Oil (HSFO) Crack Types of Crack Spreads • 1:1 Crack Spread • 3:2:1 Crack Spread • 5:3:2 Crack Spread Kerosene: 15% ( Sell 150 bbls) Crude 100% Buy 1000 bbls Gasoil: 50% (Sell 500 bbls) HSFO 20% (Sell 200 bbls) Competitors Offering Crack Spread Solutions • Barclays • JP Morgan • Goldman Sachs • Deutsche Bank • Morgan Stanley

10. Changing Landscape of Commodities Market is a clear opportunity for Citibank “Barclays has reduced its presence in commodities, while other banks including CréditAgricole and UBS have virtually closed their commodities businesses.” - Financial Times, Dec 2013 “Deutsche Bank slashes commodity trading operations” – Financial Times, Dec 2013 “JPMorgan has put up for sale its physical commodities business” - Reuters, May 14 “Morgan Stanley agreed to sell its physical oil business to OAO Rosneft (ROSN) as the investment bank backs away from owning some physical commodities businesses.” - Bloomberg, Dec 13 • “Citibank increasing its gas and power business • in Europe as competitors such as Bank of • America Merrill Lynch and Barclays are • pulling back” • – Reuters, May 2014

11. Revenue Sizing for Citibank from Crack Spread Hedging

12. Freight Risk 2 Consideration Indian Scenario • Indian OMCs enter into shipping contracts for hiring carriers from different shipping companies to bring oil • The various modes of sea borne transportation used by Indian OMCs are • Voyage Charter: Employment of a vessel for a specific and certain voyage • Time Charter: Employment of a vessel for a specific period • Contract of Affreightment(COA):Extended form of voyage charter where certain number of voyages are covered under one contract at pre specified rate. • Shipping expense is the second most important expense after crude oil purchase for oil refining companies • Freight cost of operating a vessel greatly fluctuates with the cost of shipping fuel, also known as bunker fuel. Pricing Factors • Distance between load port and discharge port • Size of the cargo - Very Large Crude Carriers (VLCC) (260 TMT), Suex Max (130 MT) and Afra Max (80 TMT). • Capability of load port of handing vessels • Availability of vessel • Market Sentiment *Source: Ministry of Petroleum, Report on LONG TERM PURCHASE POLICY AND STRATEGIC STORAGE OF CRUDE OIL

13. Crude Oil Transportation- Scenario in India Time between loading at major Importing countries to unloading at Indian Refinery Norway Azerbaijan Iraq Iran Kuwait Algeria Egypt Saudi Arabia Mexico UAE Sudan Yemen Nigeria Venezuela Brunei Colombia Cameroon Malaysia Congo Eq. Guinea Ecuador Brazil Angola Australia 6-7 Days 10-14 Days Up to 30 days

14. Country-wise Crude Oil Import by Indian Companies *Source: Ministry of Petroleum- Crude Oil Import Data 2012-13 and 2011-12

15. Declining oil production from domestic suppliers will put significant pressure on imports “Supply of crude oil from domestic sources has been on a decline owing to the reduction in ONGC’s production volume. BPCL’s dependence on imports for meeting the crude oil requirements of its refineries therefore has been increasing” - Annual Report 2012-13, BPCL Citibank in Freight Business “Citi Energy Risk’s Freight House of the YearAward – 2010” Opportunities • Indian Scenario • RBI Circular allowing Freight Hedging: “Oil refining and marketing companies, which have substantial overheads on account of freight component, are permitted to hedge the freight risk in international exchanges/OTC markets on the basis of the underlying exposures.” • BPCL undertook hedging of freight cost of the tankers in 2012-13 taken on spot charter and COA. • The freight cost for the year 2012-13 for BPCL amounted to INR 3824 crore

16. Freight Hedging Solutions Freight Forward Agreement A financial forward contract that allows ship owners, charterers and speculators to hedge against the volatility of freight rates Example Seller: Citi Bank Route: TD3 Period: Q4 14 Quantity: 20kt (knot, 1 nautical mile= 1.852 km) Contract Price: XX Contract Regulation: ISDA

17. Potential Revenue for Citibank • Citibank did a trade with State Trade Corporation of India LTD on freight hedging for wheat import in 2008.

18. Inventory Valuation Risk 3 Consideration Indian Scenario • Inventories of LPG, Kerosene, Diesel, Jet Fuel, Petrol and Fuel Oil have to be maintained at numerous locations like Ports, Refineries, Pipeline installations, marketing depots, Airports etc. to ensure uninterrupted availability of products • OMCs carries inventories in the range of 10 MMT of crude oil/feedstock and products which are valued at Rs.25000 crores • Inventory Value= MIN (Acquisition Cost, Net releasable value) • Though not representative of operational efficiency, such fluctuations in oil prices can have a major impact on the inventory value, which in turn can have a disproportionate affect on the profitability. • According to the RBI circular, hedging of inventory up to 50 per cent of the volumes in the quarter preceding the previous quarter is allowed. • Oil companies in India which hedge their inventories- Hedging Solutions • Sell a Swap • Buy a Put Option

19. Inventory exposure is directly linked to number of refineries Refineries of OMCs Recommendations • Target Company -> IOCL • IOCL is active in inventory hedging because of the large number of refineries.

20. Case Study: Indian Oil Corporation Limited (IOCL) Inventory Hedging Commodities Hedged Specifications • Kerosene • High Speed Diesel • Fuel Oil • Market • OTC Singapore • Tenor • Maximum of one year forward • Volume Hedged • A maximum of up to 50% of the inventories based on the volumes in the quarter preceding the previous quarter • Publication • The publication to be used in the OTC tools for hedging inventories shall be Platts in line with prices used for purchases/sales. • Crude Oil • Petrol • Jet Fuel • LPG Risk Management Tools • Swaps on crude oil and petroleum products • Floor on crude oil and petroleum products • Zero cost combination of options like Collars and Seagulls on crude oil petroleum products and spread List of Registered Counter-parties who have signed ISDA Documentation with IOC • BNP Paribas, Paris • Citibank N.A, USA • BP Oil International Limited • Bank of America N.A, USA • PhibroLLC • GlencareCommodities Limited • Morgan Stanley Capital Group Inc • Barclays Bank Plc, London • Mitsui Energy Risk Management Ltd • Hess Energy Trading Company LLC • SocieteGenerale, France • Macquarie Bank Ltd

21. Potential Revenue for Citibank

22. Structured Solutions: Gas Companies (GAIL) 4 Gas Users and Requirements • Power Sector • - Fixed INR or Fixed USD prices • Floating prices with pre-defined worst-case • Fertilizers • Fixed INR prices • Petro Chemical/ Refineries • - Floating USD prices linked to Brent instead of Henry Hub)

23. Structured Solution

24. Problems with pitching Repo Financing Solutions to PSUs • Major bottlenecks- • Easy access to buyer’s credit from RBI and other banks • Not really concerned about their balance sheet management • Too exotic for PSUs to adopt • A lot of other banks are already pitching ideas on repo financing to them but it is too exotic for their board to approve

25. Forex Exposure of Oil and Marketing Companies: BPCL and HPCL

26. Business of Citibank • Was active in Buyer’s Credit business before RBI banned OMCs from interacting with foreign banks • Competitive quotes on forwards and spot but uncompetitive quotes on derivatives • Active in Cash Management Services • Active in aviation collection management • Active in smaller remittance business. No tender is floated for these, usually deal with top 4 favorite banks Recommendation • For smaller remittances they do not float a tender. Rather they only call up a few banks. But in total this amounts to more than 500 Mio USD of the business

27. Hedge for Dearness Allowance – Inflation Linked Bonds • PSU companies pay dearness allowance to their employees which is directly linked to inflation index CPI • Dearness Allowance is a significant cost for labor intensive companies • Mining Companies like Coal India Limited, Neyveli Lignite Corporation etc. are very labor intensive and are hence exposed to significant Inflation Risk.

28. Coal India: Inflation a serious cause of concern • For Coal India Limited, Employee Benefit Expense forms around 50% of the total cost and a major part of it is dearness allowance. Recommendation • Inflation Linked Bonds can be pitched as potential investment solution to Coal India Limited • Coal India does not import any commodity. Cost of material relate to materials used in coal mining and processing operations, primarily petrol oil and lubricant, explosives and timber. FX Opportunity: Plans of prepaying the dollar denominated loan is under consideration

29. MMTC: Metals and Minerals Trading Corporation of India • During October, 2012, the company has taken decision to discontinue availing buyers/suppliers' credit in bullion trade. Further, at present in all cases of Non-Bullion foreign currency credit on MMTC's account, the risk of foreign currency fluctuation is being fully hedged at the time of availing of credit which is being monitored through Corporate Office • TITAN has recently taken approval from RBI to hedge their gold risk position • But gold leasing ban has been lifted by RBI now

30. NTPC • Foreign and Commodity Exposure • Imported Items: Coal- INR 1000 cr (This is approximately 10% of their total coal consumption) • Spare Parts INR 124 cr • No potential outflow in exports • Only 10% of their long term borrowings is foreign denominated • Last year was the first time they hedged . USD 5 Milllion. They have no pland

31. Other Companies to be explored for Commodity Opportunity

32. Other Companies to be explored

33. Forex Exposure of Oil Companies