Hindustan Petroleum Corporation Limited ASSOCHAM 11 th Energy Summit – Indian Oil & Gas Sector

1. India’s Prospects for Developing as an Export Refining Hub Hindustan Petroleum Corporation Limited ASSOCHAM 11th Energy Summit – Indian Oil & Gas Sector October 17, 2008

2. CONTENTS Introduction Global Trends Opportunities in Asia Pacific Trend in Indian Petroleum Products Exports Key Factors for Refining Hubs and India’s Position Specific Opportunities and Issues Way Forward

3. PETROLEUM REFINING - THE MOTHER INDUSTRY TRANSPORT PETROLEUM REFINING CHEMICALS & FERTILIZERS PETRO CHEMICALS ENERGY

4. Block Flow Diagram of a Modern Petroleum Refinery Kero / ATF

5. GASOLINE SPECIFICATIONS- TREND * Proposed by World Fuel Charter

6. PRODUCT QUALITY UPGRADATION - TREND OF DIESEL SPECIFICATION * Proposed by World Fuel Charter

9. Global Trend Suggests Steady Increase in Demand but Lower Capacity Additions Incremental demand & Supply: 2005 - 09

10. Economic and Regulatory Pressures likely to lead to Consolidation in the Refinery Sector Market Drivers of Rationalization Likely impact • North American and Europe • Cleaner Fuel norms • High compliance cost • Smaller refineries in the region are finding uneconomical to invest for cleaner fuels • 70 (out of 375) refineries in North America & Europe are small with capacity • India, China and SE Asia* • Reduced tariff protection due liberalization • Greater stringent fuel norms call for additional investment • Inefficient refineries are closing down • 16 mtpa of sub-scale capacity has closed down in China during the last two years • Another 21 refineries (~9 mtpa) are facing closure in the Shandong province • Japan and Australia • Old, inefficient assets are becoming uneconomical • Oil majors have rationalized their refining assets in Australia & Japan • Shell has closed Clyde Refinery, Australia The expected increase in demand, coupled with capacity rationalization is expected to lead to shortfall in refining capacity

11. A Combination of these Factors would Potentially Lead to Shortfall Particularly in High Demand Areas Expected supply deficit by 2010 (MTPA) Likely to be met by additional capacity from .. North America: 33 Africa: 20 Middle East: 90 East Europe: 175 South Korea: 15 Total: 333 Shortfall: 112 Source: EIA outlook, Analyst Reports • China likely to invest in indigenous refining capacity • Existing refining hubs such as Singapore and Middle East most likely to add capacity to target the unmet demand • New players with export orientation would emerge e.g. Thailand is building a refining hub with associated infrastructure Given the large demand supply imbalance in Asia pacific there is a significant potential for petroleum product exports out of India However India would have to compete effectively with existing refining hubs as well as emerging hubs to make use of the opportunity

12. Forecast for SAARC Nations* SAARC nations including Bangladesh, Pakistan, Srilanka and Nepal – projected to have a fuels deficit • 17.05 million tons (by 2015) • 20.85 million tons (by 2020) * As per recent publication

13. India’s Petroleum Export on the Rise Since 2005 Driven By Sustained Increase In the refining capacity Driven by cost advantages over erstwhile importing countries. Surplus Refining Capacity Currently India possesses surplus refining capacity generating exportable products. Petrochemical Sales: Significant proportion of exports driven by petrochemicals sale by Reliance & in future by IOCL.

14. Sustaining this Trend & Developing a Refining Hub would require addressing Key Success Factors • Singapore: • Strategic location along major • Asian routes. • Focused product strategy – refineries focusing on both light & heavy distillates, in line with Prevailing requirements in the Asian markets. • Cost competitiveness: Large • refineries with scale benefits • Large infrastructure support- ing trade • Middle East: • Strategic location proximity • to crude supplies. • Port and pipeline infrastruct- ure facilitating trade. • Strategic shift in product mix from mainly diesel and naphtha to gasoline and other lighter products to cater to wider set of markets • Rotterdam & US • Gulf Coast: • Strategic location: US Gulf • coast is close to producing • regions, while Rotterdam is • close to Europe markets. • Port and pipelineinfrastructure facilitating trade Focus oncost Competitiveness. • US gulf: refineries geared to • process cheaper & heavy crude • Rotterdam: Scale economies • and cheaper labour costs • India: • Cost competitiveness: Significant lower cash operating costs mainly on account of cheaper power and labour cost and lower capital costs by as much as 25 to 50 per cent over the Asian counterparts • Location: India is strategically located en route of Middle East crude for ease Asian and Pacific rim markets. • Key Concerns: Refinery complexity, product mix & quality as well as infrastructure.

15. The Key Thrust Areas for Developing as a Sustainable Exports Hub Include… Align product mix to demand in Asia pacific Indian product mix differ widely than product mix in target markets • The pre-dominance of middle distillates in India’s production slate is a reflection of domestic demand conditions. This has also contributed to the low sophistication of Indian refineries • In Asia, however, the demand pattern indicate that expected shortfall is either for high valued lighter distillates or heavy distillate • Most of the Indian refineries are not geared to produce heavy and light distillates. Therefore an export oriented refinery with adequate complexity to address the right product mix would be a requirement Source: ENI Oil & Gas outlook Contd…

16. The Key Thrust Areas for Developing as a Sustainable Exports Hub Include… Contd… Improve product Quality to meet stringent norms There is no mandate to Indian refineries to enhance product quality while most other countries are aggressively shifting toward stringent norms 150 • Besides distillate, significant portion of Asia Pacific demand to be driven by petrochemicals – chemical industry expected to grow at over 9.5 % annually ** • Singapore and China are experiencing huge surge in petrochemical investments. However shortfall in capacity expected looking at demand growth • India is well poised to be a profitable petrochemical player in international markets primarily due to cost advantages. • Transition from Euro III to Euro IV would be an essential condition for Indian refineries to successfully cater to export markets • This would require additional capex and increase in production costs for most existing refineries Develop refining capabilities to target specific segments ** Source: Economic Intelligence unit; Business China Chemical Brothers

17. Key Issues and Addressability • India will face competition in target markets from refining additions by existing hubs (Singapore and middle East) as well as aspirants such as Thailand. • Need to focus on ensuring sustenance of existing cost advantages. • Thrust on achieving greater operational efficiency. • Invest in large and complex refineries leveraging economies of scale and ensuring the right product mix and quality. Competition • Since India imports 70 percent of its requirements, it would be • dependent on imported crude for its export oriented refineries. • Managing crude prices effectively compared to its competitors Will Significantly determine competitiveness in export markets. • Need to develop greater capabilities in managing crude prices for refineries to maintain cost advantage. Managing crude supplies & price • Currently India does not have adequate infrastructure to handle exports, including ports to handle greater volumes, storage and pipelines. • Thrust in investment in ports to handle greater volumes outbound refined trade. • Incentivize third party investments storage and pipelines. Infrastructure

18. Thank You