BG India

1. BG India Need for Development of Regulatory/Legislative Framework for the Energy Sector in IndiaThe Natural Gas PerspectiveNigel ShawCEO, BG IndiaCII, Energy Security of IndiaNew Delhi, 31 October 2003

2. Outline • Policy Objectives for Energy Security • India – Growing but Deficit Market • Energy Security – The Natural Gas / LNG Perspective - Increased Domestic E&P - Integrated LNG Policy - Improved Fiscal Climate - Appropriate Regulatory Framework - Power Sector Reforms • Key Conclusions

3. India – Policy Objectives for Energy Security • Enhance fuel supply to match demand • Promote optimal mix of fuels to reduce dependence on one/few • Ensure diversity of sources for a fuel to reduce dependence on one/few

4. India – Growing and Deficit Market Growing Energy Deficit – Demand Growing by ~ 6% p.a. Constraints in Supply of Coal, the Primary Fuel Growing unfulfilled fuel demand Over Two-thirds of Crude Requirement is Imported Inadequate Support for Alternative Fuels (NG/LNG) Increased domestic oil & gas production and viable imports is key

5. Energy Security – Natural Gas/LNG Perspective Increasing need to supplement conventional energy sources Emphasis on fuels supporting efficient technologies Hence, Natural Gas/LNG will be a primary fuel for India Emphasis on environment friendly fuels Hydrocarbon Vision 2025 recognises increased role Enabling policy initiatives required to ensure its supply security

6. Energy Security – Natural Gas/LNG Perspective II THE PUSH FACTOR Measures to Increase Domestic Output/ Imports THE PULL FACTOR Measures to Develop Market and, hence, induce Supply BOTH ARE ESSENTIAL TO COMPLETE THE SUPPLY SECURITY CYCLE

7. Energy Security – Natural Gas/LNG Perspective III Advantages Well Established • CCGT – Efficient Power Technology • Preferred Fertiliser Feedstock • Easier Logistics • Clean Fuel • Required by Law (CNG) Increased Domestic E&P Improved Fiscal Climate But Supply Security must be ensured by… Regulatory Framework Integrated LNG Policy Power Sector Reforms (Creditworthiness) Encouraging changes in the past but many more required

8. ISSUES Attractive acreage needs to be worked Good quality data should be available MITIGANTS Relinquish Acreage Ideally, all acreage should be worked and relinquished if not worked Exploiting all acreage with proven/known hydrocarbon reserves is key Make Available all Data for Open Acreage Develop New High Quality Data Increased Domestic E&P Participation of private E&P Companies must be encouraged

9. ISSUES Fiscal elements have a major impact on LNG price MITIGANTS An Integrated Policy will enhance Customer, Supplier and Investor Confidence Customers will consider LNG as a long-term fuel Suppliers will consider better prices for India Better fiscal terms expected under LNG Policy will reduce delivered price Declared Good Status (ST @ 4% like coal, crude) Infrastructure Status (Tax Holiday) Lower Duty on Capital Goods (At par with IPPs) Integrated LNG Policy LNG has high supply security – long-term contracts; spot market

10. ISSUES Sales Tax on Natural Gas is too high (15-20%) There is uncertainty over the treatment of Natural Gas in the imminent VAT regime MITIGANTS Key consuming states like Gujarat & Maharashtra must rationalise Sales Tax Lower rates will enhance usage Enhanced volumes will maintain/enhance revenue Natural Gas/LNG must be included in the VAT regime Input Tax Credit must be available to customers Being an industrial input into priority sectors, must be classified in the 4% category Improved Fiscal Climate The existing fiscal anomaly (high taxes and then subsidies) must be corrected

11. Appropriate Regulatory Framework 1 MITIGANTS • Imminent Federal Regulation should: • Ensure an investment-encouraging framework for the nascent natural gas industry • Clearly address third party access and right to build new pipelines • Minimise regulatory risk for new investors • Promote an interconnected gas grid • Regulation must evolve appropriately as the industry develops ISSUES • The rules for gas transmission, distribution and supply must be clearly established A well-developed and clear system for bringing gas to market is key

12. Appropriate Regulatory Framework 2 MITIGANTS • Draft Interim Pipeline Policy should: • Include all existing, approved and new Inter-State pipelines • Allow non-discriminatory, transparent, third party access to existing pipelines • Tariff Regulation should ensure efficient operation and development of capacity: • Best achieved through price control, rather than profit control • Cost plus approach does not provide adequate incentives to achieve efficiencies ISSUES • There is insufficient transmission infrastructure. Access to key existing pipelines may not be easy Principles defining access and tariff need to be transparent and equitable for both consumers and investors

13. ISSUE Commercial viability is questioned given the low creditworthiness of the State Electricity Boards MITIGANTS Vital need to accelerate power sector reforms to improve the financial health of SEBs Unbundling of SEBs to make Generation, Transmission and Distribution entities accountable and, ultimately, financially viable is key Achieving parity between cost of power and tariffs is a must Power Sector Reforms Power sector reforms are critical to create robust demand

14. Key Conclusions • Use of Natural Gas/LNG as a Primary Fuel Imperative Mitigant… • Increase E&P activity through private sector • Early passage of Policy • Address ST/VAT • Ensure supporting regime for natural gas • Accelerate Power reforms Issue… • Domestic E&P • Integrated LNG Policy • Fiscal Climate • Downstream Regulation • Power Sector Reforms Natural Gas/LNG Supply Security There are issues today… But we look forward to a policy framework ensuring Gas Security BG India geared up to play a pivotal role in India’s natural gas story

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