Leveraging India’s Strengths to Ensure Energy Security

1. Leveraging India’s Strengths to Ensure Energy Security CII Conference on Energy Security Vipul Tuli, McKinsey & Company October 31, 2003 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

2. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Today’s discussion Energy security – What are our real challenges? Energy security – What are our real challenges? Coal – India as a cost and technology leader Oil – Align multi-lateral interests Gas – Exploit regional surplus to drive changes in global industry structure Nuclear – Expand execution capability Need for an apex view

3. 600 mmtoe 283 mmtoe 1 2 1 DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 India’s energy security challenges Fuel mix for India, 2012 Per cent Other renewables • Oil only flexibility, need to create spare capacity in other fuels • Lowering cost of energy and volatility as important as ensuring supply • Adopt ‘position of strength’ mindset, exploiting global discontinuities 4 3 Hydro 11 Nuclear Gas 15 Oil 25 7 33 Oil Coal 42 56 Coal 1999 2012 Source: Planning Commission Energy Policy Document

4. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 China’s initiatives to improve energy security • Gas demand and supply in year 2005 • bcm • Gas pipelines to fill supply-demand gap of pipeline gas • New regulatory framework for foreign investments • Encourages Chinese companies to set-up overseas O&G production • Heavy investments in coal power generation and technology • BP, Shell, Exxon Mobil investments • NorthEast- Shandong • PetroChina has just completed a pipeline from Hebei supplying 1.05 bcm; up to 2-3 bcm by 2008 • CNOOC is also considering LNG to Shandong-Bohai Bay • East China- Shanghai, Yangtze. River Delta • PetroChina- 2400 km East West pipeline connecting gas from Tarim, Xijiang • CNOOC is also considering LNG terminal • Supply • Demand • Southern China- Guangdong and Pearl River Delta • CNOOC and BP will build a LNG terminal by 2005 • CNOOC is also considering a pipeline from Hainan Island • Fujian province • CNOOC plans to build a 2m t/y LNG terminal at Fujian by 2006/7 Source: Lit search; BP website

5. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Coal: India must drive industry in technology, cost and powergen capacity • Proved reserves at end 2002 • Billion tonnes • Coal consumption in 2002 • Billion tonnes • Coal as % of energy consumption • Per cent • India and China can potentially drive coal industry • India needs to create spare power generation capacity to utilise coal • Companies like BHEL, Coal India Limited (CIL) and NTPC can / should make India a world leader in coal cost, technology, and powergen capacity • US • Russia • China • India • Australia • Germany • S Africa • Ukraine • Kazakhstan • Poland 0.96 0.17 1.15 0.31 0.09 0.15 0.14 0.07 0.04 0.10 Source: BP Statistical Review, 2003; EIA

6. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Oil: Flexible pricing/risk tailoring mechanisms to mitigate volatility risks • Other examples • Shell/Pemex-Deer Park Joint Venture Example • Texaco/Saudi Aramco alliance to secure crude oil supply/products market (Dec 1988) • Shell/Pemex alliance to finance refinery upgrade and secure crude oil/supply products market (Feb 1993) • Petrogal/Saudi Aramaco alliance to secure crude oil supply/products market (June 1997) • (Uplift $/Bb) • Netback holds • JV pays NOC • Crude priced at netback • Market price • NOC pays JV • Risk protection provided via netback limit • Period Source: Morgan Stanley; Merrill Lynch

7. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Gas: The region has massive reserves to fulfil any demand scenario As of 2000, trillion cubic meters • Substantial R/P’s with the existing reserve base ensure ample supply for decades • Massive reserves in the Middle East and Russia will • Ensure that there will be no shortage of potential projects chasing demand • Create significant competition for Asian LNG suppliers • Russia • 56.70 • Middle East • R/P=79.6 • R/P=49.3 • China • Thailand • 52.52 • R/P=11.8 • 1.37 • Bangladesh • Vietnam • India • R/P=6.8 • 0.30 • 0.65 • 0.33 • 0.19 • R/P>100 • Brunei • R/P=29.1 • R/P=24.8 • Malaysia • 0.39 • R/P=33.5 • 2.31 • Indonesia • R/P=52.3 • 2.05 • R/P=32.0 • Australia • 1.26 • R/P=40.6 Source: BP Statistical Review 2001

8. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Wide gap exists between historical price and LNG marginal cost going forward • Marginal cost, delivered to Japan, 2010 • USD/MMBtu • Historic prices • 3.86 • 1.98 • 2.28 • 2.17 • 2.09 • Shipping • 2.07 • 2.01 • 1.96 • 1.30 • 1.74** • Lique-faction • 1.70 • 1.52 • 1.52 • 1.49** • 1.38 • 1.37 • Produc-tion • Projected 2010 LNG capacity, MTA * Marginal cost in year 2010 assuming straight line depreciation of capital cost over 20 years; ** Market shipping cost Source: McKinsey; Petroleum Economist; CERA; team analysis

9. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Significant volumes of LNG will be up forgrabs in a highly competitive market • Forecasted imported natural gas demand* Contracted volume, BCM, 2000-2014 • 193 • (2015) • 172 102 BCM gap in 2010, representing ~26 trains** of LNG to be renegotiated or built • 103 • 123 • (2005) • 99.1 • 98.0 Oman • 87.8 Abu Dhabi • 87.8 • 85.0 Brunei Australia • 69.7 Qatar • 51.3 Malaysia • 38.5 Indonesia * Includes Japan, Korea, Taiwan, China, and India; ** Assumes 4 BCM/train Source: World LNG source book 2001; Energy Information Administration; BP Statistical Review 2001

10. ALL INDIA* DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Is the industry ripe for a massive price restructuring? 2011-12: Projected gas demand-supply curve for India $/mmbtu Price • Multiple new supply options to negotiate with • China already driving prices down • Potential for demand consolidation Demand Price estimate $2.75-3.50 /mmbtu • Various LNG sources • Qatar • Oman • Yemen • Australia • Iran • Egypt • UAE • SE Asia B’desh New local 2 Myanmar North-East Reliance ONGC Private mmscmd * Supply curve drawn on basis of border prices for India including 5% of customs duty on imported gas. Sales tax not considered in above values Source: EIA; MoP&NG publications; McKinsey Global Gas Model; McKinsey analysis

11. Global average 17% DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Nuclear Power Generation: India’s potential as a major player • Nuclear share in power generation, 2000 • Per cent • Nuclear power generation capacity • GW • 1. France • Nuclear power has massive growth potential • Need to expand execution capability • 2. Lithuania • 3. Belgium • 4. Slovakia • 5. Ukraine • Current • Aspiration if India reaches global average of 17% in 2012** • 6. S.Korea • 7. Japan • : • 28. India • : • 30. China **(17% of 212GW – capacity needed to meet peak demand by 2012 according to MOP presentation) Source: EIA; Planning Commission Energy Policy Document; Ministry Of Power

12. INDIA • Govern-ment • PMO • Power • Coal • Petro-leum & Natural Gas • Non- conven-tional energy • Finance • External affairs • Railways • Deptt. of Atomic Energy • Power PSUs • JVs • Private Cos. • Coal PSUs • O&G • PSUs • Private Cos. • JVs • PSUs • MNCs • JVs • Govern-ment • Non-govern-ment entities • Govern-ment • Govern-ment DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Need for an apex body for Energy Security

13. DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 END OF PACK

14. Energy security – What are our real challenges? Coal – India as a cost and technology leader Oil – Align multi-lateral interests Nuclear – Expand execution capability Gas – Exploit regional surplus to drive changes in global industry structure The example of China DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Today’s discussion Coal – India as a cost and technology leader

15. Energy security – What are our real challenges? Coal – India as a cost and technology leader Oil – Align multi-lateral interests Nuclear – Expand execution capability Gas – Exploit regional surplus to drive changes in global industry structure The example of China DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Today’s discussion Oil – Align multi-lateral interests

16. Energy security – What are our real challenges? Coal – India as a cost and technology leader Oil – Align multi-lateral interests Nuclear – Expand execution capability Gas – Exploit regional surplus to drive changes in global industry structure The example of China DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Today’s discussion Nuclear – Expand execution capability

17. Energy security – What are our real challenges? Coal – India as a cost and technology leader Oil – Align multi-lateral interests Nuclear – Expand execution capability Gas – Exploit regional surplus to drive changes in global industry structure The example of China DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Today’s discussion Gas – Exploit regional surplus to drive changes in global industry structure

18. Energy security – What are our real challenges? Coal – India as a cost and technology leader Oil – Align multi-lateral interests Nuclear – Expand execution capability Gas – Exploit regional surplus to drive changes in global industry structure The example of China DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7 Today’s discussion The example of China