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Indian gas regulatory framework: Industry issues

Indian gas regulatory framework: Industry issues. Overview of the Indian gas market. Power and fertilizer sectors – dominant consumers Unmet gas demand Demand encouraged by LNG, NELP and CBM Existence of multiple price points Emergence of niche consumers willing to pay higher prices

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Indian gas regulatory framework: Industry issues

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  1. Indian gas regulatory framework: Industry issues

  2. Overview of the Indian gas market • Power and fertilizer sectors – dominant consumers • Unmet gas demand • Demand encouraged by LNG, NELP and CBM • Existence of multiple price points • Emergence of niche consumers willing to pay higher prices • Key drivers: • Growth in power and fertilizer demand • Reduction of pollution in major cities – increasing focus on CNG • Compliance with global environment norms

  3. Current sector-wise consumption of gas in India • Power and fertilizer sectors remain the dominant consumers of gas in the country • City gas distribution (CGD) is the emerging segment Source: MoPNG

  4. Indian gas regulatory framework • “Petroleum and Natural Gas Regulatory Board Act 2006” (PNGRB) passed in March 2006 • Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks (“Pipeline Policy”) notified in December 2006 • Appointment of PNGRB members – regulator comes into effect from October 1, 2007 • Notification of: • Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Network) Regulations, 2008 • Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Network) Regulations, 2008 • Petroleum and Natural Gas Regulatory Board (Determination of Network Tariff for City or Local Natural Gas Distribution Network) Regulations, 2008 • “Proposed Gas Utilization Policy” being formulated by GoI

  5. Proposed gas utilization policy • Natural gas – a scarce natural resource • Proposed guidelines based on the following principles: • NELP contractors to sell gas to customers based on priorities set by the government • Pricing of gas to be based on pricing formula approved by the government • Priorities do not imply ‘reservation’ of gas; in case a customer is not in a position to buy, the customer next in order of priority becomes eligible for consideration • Only the customers connected to existing pipeline network would be considered under priorities determined by the government • Pricing of gas not be affected by priorities set by the government • Guidelines to be reviewed every 5 years in the light of demand-supply position of gas

  6. Proposed gas utilization policy (contd.) • Proposed order of priority for customers with existing units: • Fertilizer plants • LPG and petrochemical plants • Power plants • CGD (PNG + CNG) networks • Refineries • Other industries (like steel, ceramic) • On fulfillment of demand by existing units, proposed order of priority for new greenfield expansion units: • Fertilizer plants • Petrochemical plants • CGD (PNG + CNG) networks • Refineries • Power plants

  7. Industry issue: Gas pricing • Traditionally, APM gas produced by NOCs (ONGC & OIL) sold at controlled prices linked to a basket of fuel oils • PSCs signed under NELP mandate competitively determined prices • However, there is government intervention in approval of pricing formula • Government approved pricing formula for gas from RIL’s KG basin discovery in September, 2007 • Industry players seek price discovery through open market mechanism as provided under PSCs, without intervention of the government • Terms and conditions of competitive bids should also be market determined in order to maintain prevalence of free market dynamics • In cases where valuation of gas is to be necessarily done by the government, the same should be done based on most recent competitively determined price

  8. Industry issue: Govt share of profit petroleum • Industry players are concerned about the government taking its share of profit petroleum in kind • The government may choose to sell its share of profit petroleum gas at subsidized prices thereby hampering the prevalence of an open market mechanism

  9. Budget 2008 proposals • 100% tax holiday available to an undertaking in respect of profits earned from commercial production of mineral oil • As per the Memorandum document of Budget 2008, for tax holiday purposes ‘mineral oil’ does not include petroleum and natural gas - Mineral oil as defined elsewhere in tax provisions “mineral oil includes petroleum and natural gas” - The Oilfields Act, 1948 and Oil Industry Act 1974 defines mineral oil as “mineral oil includes petroleum and natural gas” - Production sharing contract defines Petroleum as “petroleum means crude Oil and natural gas existing in their natural condition.”

  10. Whether city gas distribution network eligible for tax holiday • 100% tax holiday available to undertaking engaged in business of laying and operating cross-country natural gas distribution network, including gas pipelines and storage facilities* * Introduced by Finance Act 2007

  11. Whether city gas distribution network eligible for tax holiday • Rationale • The PNGRB Act and the Natural Gas Pipeline Policy talks about development of both natural gas pipelines, as well as city or local natural gas distribution network – the term “cross country” not defined/specified in the GOI policy • Natural gas pipelines as well as city natural gas distribution network form an integrated network and CGD network cannot function/ operate without it • Memorandum to Finance Bill, 2007 explains that tax subsidy for gas pipelines will enable substitution of the existing subsidy on LPG * Introduced by Finance Act 2007

  12. Whether city gas distribution network eligible for tax holiday • Rationale • Since PNG distributed through city gas distribution network is a substitute for LPG; claim for tax holiday for CGD is in line with legislative intent * Introduced by Finance Act 2007

  13. Whether city gas distribution network eligible for tax holiday • Applicability to CGD network • Whether CGD network is included within the ambit of cross-country natural gas distribution network • How to fulfill the condition pertaining to one third excess capacity on common carrier basis

  14. Industry issue: ‘declared good’ status • Currently, coal and crude oil enjoy ‘declared good’ status – only 4% sales tax applicable • Natural gas and re-gasified LNG (RLNG) are subject to varying sales tax rates in different states of the country – some charging as high as 20% • Some states do not permit input credit in levy of VAT on gas thereby resulting in higher taxation • Industry players seeking ‘declared good’ status – to reduce levels and high rates of taxation

  15. Thank you

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