L&L1 Gas Regulations Presented by Mohit Saraf Partner Luthra & Luthra Law Offices November 20, 2001

L&L2 AGENDA INTRODUCTION EXISTING LEGAL FRAMEWORK EXISTING REGULATORY STRUCTURE & DOMINANT PLAYERS EXISTING POLICY FRAMEWORK: UPSTREAM EXISTING POLICY FRAMEWORK: DOWNSTREAM MISSING LINKS CENTRAL OR STATE GAS ACT? GUJARAT GAS ACT INTERNATIONAL EXPERIENCE INDEPENDENT REGULATORY AUTHORITY LNG SHIPPING POLICY CONCLUSION

L&L3 INTRODUCTION Fuel Risk/Disinvestment of Fertilizer Industry Natural Gas contributes 23% in energy consumption globally v/s 7% in India Gap can be bridged. –Exploration of Indian Reserves –Trans-border Pipeline: Oman, Iran & Bangladesh –LNG

L&L4 EXISTING LEGAL FRAMEWORK Indian Petroleum Act, 1934 – Rules for import by Central Government Oilfield (Regulatory & Development) Act, 1948 – Oilfield and development of mineral & oil resources Petroleum and Natural Gas Rules, 1959 – Petroleum Exploration License and Mining Lease Petroleum & Mineral, Pipelines (Acquisition of Right of User in Land) Act, 1962 – Right of User Oil Industry (Development) Act, 1974 – Levy duty of excise on natural gas Petroleum Rules, 1976 – Importation, Transportation and Handling

L&L5 EXISTING REGULATORY STRUCTURE & DOMINANT PLAYERS Ministry of Petroleum & Natural Gas Directorate General of Hydrocarbon (DGH) Upstream Exploration, Conservation & Development of HC UPSTREAM Exploration & Production - ONGC, Oil India Ltd - Pvt players DOWNSTREAM Gas Marketing & Transportation - GAIL Gas Linkages Committee Allocation of Natural Gas to various Industries. Oil Industry Development Board Levies Cess, Duties on the production of Natural Gas

L&L6 EXISTING POLICY FRAMEWORK: UPSTREAM A. NEW EXPLORATION LICENSING POLICY, “Level Playing Field” –All players including Government Companies would compete on equal terms for production and exploration license –Natural Gas from new discoveries would fetch market related prices. Model production, sharing contract by MoP & NG Infrastructure Status Royalty:10% on-shore & off-shore, 5% Deep Sea A certain percentage of production allocated towards cost recovery.

L&L7 EXISTING POLICY FRAMEWORK: UPSTREAM (Contd….) B.LNG TERMINALS –Open General License (OGL) –Foreign Investment Promotion Board (FIPB) approval

L&L8 EXISTING POLICY FRAMEWORK: DOWNSTREAM Transmission charges –HBJ – postage stamp – Fixed charge & Inflation Indexed. 1% increase for every 10% increase in the consumer price index, with October, 1997 as the base. –Non HBJ- IRR 12% on investment. Gas Linkage Committee –Inter-ministerial Committee – Petroleum & Natural Gas, Power, Steel, Agriculture –Function: Allocation of natural gas to end users.

L&L9 MISSING LINKS The present legal framework: –does not cater to ensuring “level playing field”. Domestic Natural Gas Pricing V/s Imported Gas Pricing -75% of the “ref. price” which is based on pre-determined basket of international fuel oil price (Ceiling & floor level); expected – 100% -No third party access rights (Common Carrier Principle) a regime providing for an obligation, to the extent that there is capacity available, to offer the use of the grid on non-discriminatory basis in return for payment.

L&L10 MISSING LINKS (Contd...) Can a monopolistic transporter be a marketer as well? Can a monopolistic transporter be an equity investor in LNG terminals? –Era of unbundling of vertically integrated utility. –GAIL transports 92% of Natural Gas : Cross holding –In time to come, gas required to transport would be more than the space available in the existing pipeline. –Electricity Bill, 2000 – No cross holding of Transmission Companies.

L&L11 CENTRAL OR STATE GAS ACT? Constitutional Position A. Seventh Schedule – Union List – Entry 53 Regulation & Development of “Petroleum & Petroleum Products B.Seventh Schedule – State List – Entry 25 Gas & Gas works Inter State Pipelines (HBJ) : various Acts, & Regulators, duplication Comparison with Electricity Sector – unified Electricity Law, Central Regulator & State Regulator Gujarat has enacted its own Gas Act. Reference to SC under Article 143 of the Indian Constitution

L&L12 GUJARAT GAS ACT Regulate the transmission of gas through pipelines in the state of Gujarat. Provides for setting up of a regulatory authority to monitor transmission, distribution and licensing for retail distribution. Creation of common carrier transmission facility for gas available in Cambay and Tapti basin. Provides for formation of a nodal agency “Gujarat State Petronet Ltd. (GSPL)” as the sole ‘Operator’ of the gas network within the state.

L&L13 INTERNATIONAL EXPERIENCE USA When US decided to deregulate its gas industry, it went through almost a decade of intense “re-regulation” in order to establish free market. Natural Gas prices kept artificially low by the government, were artificially raised nearly 800% in an efforts to stimulate domestic production. Increase in prices resulted in (i)decrease in demand; (ii) addition of capacity Reduction in demand led to: (i) Crash in prices; (ii) halted upstream investment, development and exploration Only now, after 20 years, the US finally been able to balance supply and demand.

L&L14 INDEPENDENT REGULATORY AUTHORITY Likely functions: –assisting Government of India in policy formulation – International Telephony –Issue: Open Access V/s Closed Access V/s Negotiated Access. –encourage private investment by providing transparent and investor friendly regulatory framework –check misuse of monopolistic power especially because this sector has characteristic of “natural monopoly –encourage expansion of gas transportation and distribution network –Ensure reliability of supply at affordable prices to consumers –promote competition and enhances efficiency –Facilitate dispute resolution

L&L15 SHIPPING Draft LNG Policy in place Controversy over FOB and CIF issue Converting vessels from foreign flag to Indian flag within one year of introduction of tonnage tax Transfer of technology/O&M by Indian crew within 5 years of registration of vessel.

L&L16 CONCLUSION Not like Electricity Bill, 2000 Urgent need for legal framework before the first LNG consignment Needs flexible laws Independent Regulator TRAI