Pricing and Investments in Oil & Gas sector 1

 Historically, oil prices in India were controlled by Government through cross subsidy & pool operation. Oil companies were fully compensated based on a cost-plus formula. The mechanism was called Administered Pricing Mechanism (APM)  Government notified Phased Dismantling of Administered Pricing Mechanism (APM) in 1997 which commenced in 1998 & whereby all price controls were to go by March,  For socio-economic reasons, prices of only PDS Kerosene & Domestic LPG were to continue to be administered and the same to be funded through the Consolidated Fund of India.  Deregulation did start in accordance with time-table. Transport fuels also had an initial brush with Deregulation but could not be sustained due to increasing international prices leading to higher pump prices.  By Apr’02, except for the ‘Sensitive Products’ namely Gasoline, Gasoil, Kero & LPG, all other petroleum products were fully deregulated. 2 Petroleum Products’ Pricing – early days

From 2002 till recently, ……  International Oil prices have been on a steep rise  Selling prices of ‘Sensitive Products’ have remained under Government Control to protect domestic consumers from volatility & runaway increase in-line with international prices.  In contrast, Cost-price to Oil Marketing Companies (Refinery Transfer Price) has been linked to international prices & is based on import-parity principle.  Due to this contradiction, Under-recoveries of Oil Marketing Companies (OMCs) have also been increasing steadily.  Government of India have compensated OMCs from time-to-time during last few years through various mechanisms : o Sharing of subsidy burden by Upstream Companies/ Stand-alone Refiners o Issue of Oil Bonds o Budgetary Support/ Cash Compensation 3 Petroleum Products’ Pricing – the difficult years

4 Pricing in Oil Sector- Kirit Parikh Report Main Recommendations: ♦ Level Playing field and Competition ♦ Petrol- Free both at refinery gate and retail level ♦ Diesel- Free both at refinery gate and retail level ♦ Additional Excise Duty on Diesel cars ♦ Effective Distribution system for PDS kerosene & Domestic LPG ♦ Reduction in Kerosene allocation ♦ PDS kerosene price increase ♦ Domestic LPG price increase

5 Pricing in Oil Sector- Kirit Parikh Report Under-realization: ♦ Under-realization calculation based on IPP (existing method) ♦ Under-realization on petrol/diesel nil –free price ♦ Financing under-realization- SKO(PDS)/LPG(Dom): Reduction in PDS Kerosene allocation PDS kerosene price increase Domestic LPG price increase Mopping up portion from ONGC/OIL Cash subsidy from budget ♦ OMCs should be compensated fully for under-realisation

June, 2010 has seen major Government initiatives on Pricing of Sensitive Petroleum Products ……  Pricing of Gasoline has been decontrolled  Pricing of Gasoil shall also be market-determined in a phased manner. To start with, Retail price has been increased by Rs 2/litre to bring it closer to market-level.  Kerosene Retail prices, that had not been changed since 2002, have been increased 33% by Rs 3/litre.  LPG Retail prices have been increased 12% by Rs 35/ cylinder  All the above measures shall result in increased monthly cash-flows of around Rs 1000 Cr for IOCL. This will boost liquidity & lower need for borrowings. 6 Petroleum Products’ Pricing – Recent developments

Oil Pricing Methodology 7

Administered Pricing Mechanism: Characteristics 8 Fixed parameters Cost Plus Rare revisions Assured returns Averaging effect Supplier- Customer linkages Administered Pricing Mechanism

De-regulated Pricing Mechanism: Characteristics 9 Flexible parameters Market - Determined Frequent revisions No Assured returns Accent on Logistic efficiency Competition De-regulated Pricing Mechanism

De-regulated Pricing Mechanism : Options 10 De-regulated Pricing Mechanism Import Parity Competition- Based Cost-Based Government- Influenced

Steps in Pricing…… Refinery Transfer Price (RTP) Ex-Storage Point Price (ESPP) Selling Price/ Retail Selling Price (RSP) 11

Import Parity Pricing Principle (for De-regulated Products) 12 FOB, PremiumLanded Cost (RTP) Ocean freightInsurance Customs Duty Ocean LossWharfage Landed Cost RTP Marketing CostDLAF Ex-Storage Point Price Marketing Margins

Trade Parity Pricing Principle (for MS & Diesel) 13 FOB, Premium80% of IPP +20% of EPP Ocean freightInsurance Customs Duty Ocean LossWharfage IPP (80%) Marketing CostMargins Net wt. Avg Frt from Port to locn. Stock LossWorking Capital Desired Ex-Storage Point Price FOB, Premium Advance License benefit Export Parity(20%) Actual ESPP fixed by Govt is much lower than Desired ESPP Note : MS has been decontrolled wef

Selling Price for Customer (Bulk Products) Components are …… ♦ Ex-Storage Point price (ESPP) ♦ State Specific cost (based on indirect and Irrecoverable State taxes) ♦ Freight (railway freight from refineries / depots to customers) ♦ Excise Duty ♦ Sales Tax & levies Landed / Selling price for Customer 14

Retail Selling Price (RSP) (Retail products) Components are …… ♦ Ex-Storage Point price (ESPP) ♦ State Specific cost ( irrecoverable state taxes ) ♦ Transportation Charges ( from Depot to market ) ♦ RPO Charges ♦ Excise Duty ♦ Dealer Commission ♦ Sales Tax & levies Retail Selling Price (RSP) 15

Cost price Principle for SKO(PDS) & LPG(Dom) 16 Landed Cost at ports (RTP) Ex-Storage Point Price at Refinery fixed by Govt Marketing CostMargins Freight from Port to locations Stock LossWorking Capital Cost Price at locations (Desired Selling Price as per IPP) Freight from Refinery to locations Issue Price at locations (Actual Selling Price) Difference between Cost Price and Issue Price in March 2002 Fixed as Subsidy for (Thereafter, reduced to 1/3 rd. Current subsidy is Rs 0.82/l for SKO & Rs 22.58/cyl for LPG)

17 Trends in International Prices

Crude :Upward Trend of FOB Prices 18 - $ PER BBL Avg. FOB Average FOBs for the Previous Fortnight

Petrol and Diesel :Upward Trend of FOB Prices 19 - $ PER BBL Petrol Diesel Avg. FOB : MS Avg.FOB: HSD Average FOBs for the Previous Fortnight

Kerosene :Upward Trend of FOB Prices 20 - $ PER BBL Avg. FOB Average FOBs for the Previous Month

LPG :Upward Trend of FOB Prices 21 - $ PER MT Avg. FOB Average FOBs for the Previous Month

Diesel : FOB equivalent to current( ) RSP 22

SKO(PDS): FOB equivalent to current ( ) RSP 23

LPG: FOB equivalent to current( ) RSP 24

25 Under-realisation

Gross Under-realisation 26 Projected Under-recovery for IOC for = Rs. 36,500 Crores (approx) (In Rs. Crore)

Estimated Under-realisation of IOC: Rs. Crores Total Rs. 36,500 Crores

Impact Impact of Under realization: ♦ On Profit ♦ On Borrowings ♦ On interest ♦ On liquidity ♦ On Investments ♦ Physical V/s Financial performance mismatch ♦ On market capitalization 28

29 Capital Investment - Needs Capital Investment required for- ♦ Growth of Organization ♦ Updation of Technology ♦ Removal of operational bottlenecks ♦ Improvement in efficiency & productivity ♦ Enhancement of capacities ♦ Fulfillment of social objectives (Generally include Expansion, Acquisition, Modernization and Replacement)

30 Government initiative Policies of the government - further boost to foreign investment in this industry ♦ 100% FDI is allowed in private refineries via the automatic route and up to 49% in government-owned ones. ♦ 100% FDI is also granted in cases of petroleum products, gas pipelines, exploration, and marketing or retail via the automatic route. ♦ With NELP (New Exploration Licensing Policy) it has helped encourage further explorations for oil and gas reserves in India.

31 Investment in Oil Sector- FDI Norms Activity% of FDI Cap/Equity Entry Route Exploration activities of oil & natural gas fields 100%Automatic Infrastructure related to marketing of petroleum products Actual trading and marketing of petroleum products Petroleum product pipelines Natural gas/LNG pipelines Market study and formulation Petroleum refining in the private sector, subject to- (next slide) Petroleum refining by the Public Sector Undertakings (PSU), without any divestment or dilution of domestic equity in the existing PSUs 49%Government

32 Investment in Oil Sector- FDI Norms 100% FDI subject to- The existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies

33 Capital Investment “There need to be changes in petroleum and gas pricing. If we can get international pricing of gas, then we would be happy to invest in India,” said Peter Voser, CEO, Royal Dutch Shell.

34 Thank you  Indian Oil

RSPs of MS, HSD, SKO & LPG in Neighbouring Countries 35 Prices at India(Delhi) are as on , prices for other countries taken as on CountriesMSHSDSKOLPG Rs/litre Rs/cyl India Pakistan Bangladesh Srilanka Nepal

Diesel: Desired Vs Actual RSP at Delhi (Rs/Litre) 36 Desired RSP Actual RSP

SKO(PDS): Desired Vs Actual RSP at Delhi (Rs/Litre) 37 Actual RSP Desired RSP (Net of Subsidy of Rs 0.82/Ltr)

LPG(D): Desired Vs Actual RSP at Delhi (Rs/Cyl) 38 Actual RSP Desired RSP (Net of Subsidy of Rs.22.58/Cyl