Impact of rising oil prices and possible solutions Industry Perspective

Crude Increase in finding and development cost Increased marginal cost of production esp. Non-OPEC Market uncertainty affecting fresh investments by oil producers Rising producer taxes, transportation and quality premiums Products Inadequate refining and upgrading capacity Better and environmental friendly fuels needing high investment in technology upgradation 2 What is behind rising oil prices ? Current price rise due to structural changes in fundamentals and business drivers

3 What is the Outlook for Crude ? World adjusting to new OPEC unofficial price band of $ 40 - $ 50 per barrel Source:PEL, PIRA, ESAI Based on Saudi Arabia’s Oil minister, Mr. Naimi’s statement

4 What is the Outlook for Products ? Demand for transportation fuels expected to grow faster than other fuels in line with growth in GDP Refining / upgrading capacity is currently constrained leading to high crack margins and subsequent high prices Changes in product quality driven by environmental considerations are further constraining the upgrading capacity Most incremental crude in future likely to be heavy and sour there by necessitating higher investments in cracking / upgrading capacities Refining business is highly capital intensive and cyclical in nature with prolonged periods of zero / negative margins following periods of high margins Structural changes stable enough to keep product prices high in the near term

5 Refining - a hedge to achieve Energy Security Investments in upstream essential to achieve Energy security They are high risk in nature due to huge earnings variability / uncertainty Investments in downstream especially refining can provide stable earnings during good times like at present This can mitigate the risk involved in upstream and help achieve product sufficiency in the country Fresh investments possible only if refineries are allowed to generate profits during good times Any attempt to prevent refineries from generating profits by way of subsidy burden would be detrimental to Energy security in the long run Investments in refining can hedge risky investments in E&P sector

6 Need for stable long term policy To minimise the impact of high oil prices there is a need for adopting a stable / consistent policy - Eliminate / Reduce subsidies and move towards completely market determined pricing Encourage investment in upstream and downstream assets and allow them to realise full legitimate margins Rationalise / reduce taxes, duties and other levies and implement VAT on a speedy basis to moderate prices State governments should help by reducing the sales tax rates Promote energy conservation among consumers by true pricing of products Integrated model of energy, economy and environment using country specific data necessary for stable long term policy development to meet growth objectives. Opportunity to become a global player through higher investment in refining and upgrading capacity

7 Responses of other countries to high oil prices Passing of oil price rise to final consumer only long term viable option for oil importing nations Developed nations (eg. OECD nations) Oil price rise passed to the final consumer Source: IEA

8 Responses of other countries to high oil prices Passing of oil price rise to final consumer only long term viable option for oil importing nations Developed nations (eg. OECD nations) Oil price rise passed to the final consumer Source: IEA

9 Responses of other countries to high oil prices Passing of oil price rise to final consumer only long term viable option for oil importing nations Oil importing nations (eg. India, Pakistan) Oil price rise partially passed to the final consumer Source:PSOCL, EPPO, Fuelwatch, Shell Singapore Gasoline($/bbl) Pakistan Thailand Australia Singapore India Nov RSPCountry Crude Cost (estimated) Taxes R & M margins India Current Source:PSOCL, EPPO, Fuelwatch, Shell Singapore

10 Responses of other countries to high oil prices Passing of oil price rise to final consumer only long term viable option for oil importing nations Oil importing nations (eg. India, Pakistan) Oil price rise partially passed to the final consumer Source:PSOCL, EPPO, Fuelwatch, Shell Singapore Gasoil($/bbl) Pakistan Thailand Australia Singapore India Nov RSPCountry Crude Cost (estimated) Taxes R & M margins India Current

11 Responses of other countries to high oil prices Passing of oil price rise to final consumer only long term viable option for oil importing nations Oil exporting nations (eg. Malaysia, Indonesia) Oil price rise borne by the government through subsidy

12 Response of China to high oil prices Passing of oil price rise to final consumer only long term viable option for oil importing nations Source: ESAI

13 Options for India Current oil price rise is long term fundamental increase due to structural changes and not a speculative increase The only viable option for India is to pass this price increase to the final consumer RBI governor Sh. Y V Reddy has also acknowledged in a recent interview “As the policy itself has indicated, the headroom is less. If the supply shock persists for long, the relative burden sharing will have to change. For instance, if we assumed that the oil shock is temporary, the entire burden cannot be shifted to the consumers. If it is seen to be less temporary, then we will have to start shifting the relative sharing of the burden.” Completely deregulated market need of the hour

14 Conclusion Indian oil industry is highly matured matching best global standards. Indian refining company (RIL) became the 1st Asian company to be recognised as “International Refiner of the Year 2005” by World refining magazine Golden opportunity for India to become a global player and hence need to encourage investment in upstream and downstream sector Reduced product prices in domestic market will lead to inefficient utilisation of petroleum and affect cashflows of oil industry preventing them from making fresh investments in India and abroad. Elimination / reduction of subsidies / taxes / duties and move to a market determined pricing regime in the long term interest of consumer, oil industry and the government Pragmatic solution required to deregulate the pricing process

Thank You

16 Increase in F & D costs predicts increase in price of oil Increase in Finding and Development Cost Source: Goldman Sachs Commodities Research Average day rates have increased more than 50% over 2002 levels The prices for tubings and well casings have more than doubled over 2002 levels in line with increase in international steel prices

17 Higher marginal cost predicts increase in price of oil Increase in marginal cost of production Source: Goldman Sachs Commodities Research Nearly 14% of current non OPEC production needs a WTI breakeven price above $30/bbl to generate 8 % return on capital

18 Expected Demand (MMBPD) OECD Developing Countries Transition economies Total Expected Supply (MMBPD) OECD Developing Countries (excl OPEC) Russia Non OPEC Call on OPEC Investments required by OPEC Uncertainty may hold back investments and drive up prices OPEC’s capital requirement $ billion $ billion If growth slows - $ 25 billion can become dead investment by 2010 Source: OPEC Research division

19 Cumulative OPEC investment required Uncertainty may hold back investments and drive up prices Huge uncertainties in future oil demand translate into high uncertainties and risks for future OPEC investment Impact of lower economic growth Source: OPEC Research division

20 Higher producer taxes predicts increase in price of oil Rising producer taxes, transportation and quality premium Source: Goldman Sachs Commodities Research Rising producer taxes have increased the price by $6/bbl Transportation and quality premium have risen by $5/bbl

21 Investments in refining dropped after late 1990s due to low oil prices Inadequate refining and upgrading capacity Source: PEL Investment in refining assets dropped after late 1990s due to glut in the oil products market

22 Refining a cyclical business Asian refining margins below break even levels since late 1990s No new investment planned during this period leading to capacity constraints Tremendous opportunity for India to become a Global Player in refining by investing in world class assets Refineries should be allowed to make legitimate margins for future investments Source: IEA

23 Responses by OECD countries Consumer prices raised in line with crude prices Source: IEA Diesel Prices v/s Marker Crude Prices Jan- 04 Feb- 04 Mar- 04 Apr- 04 May- 04 Jun- 04 Jul- 04 Aug- 04 Sep- 04 Oct- 04 Nov- 04 Dec- 04 Jan- 05 Feb- 05 Mar- 05 Month RSP (incl taxes) ($/bbl) FranceGermanyItaly SpainUnited KingdomJapan CanadaUnited StatesDubai BrentWTI

24 Responses by OECD countries Consumer prices raised in line with crude prices Source: IEA Gasoline Prices v/s Marker Crude Prices Jan- 04 Feb- 04 Mar- 04 Apr- 04 May- 04 Jun- 04 Jul- 04 Aug- 04 Sep- 04 Oct- 04 Nov- 04 Dec- 04 Jan- 05 Feb- 05 Mar- 05 Month RSP (incl taxes) ($/bbl) FranceGermanyItaly SpainUnited KingdomJapan CanadaUnited StatesDubai BrentWTI

25 Responses by Other oil importing countries Developing nations responding differently than developed nations Source:PSOCL, EPPO, Fuelwatch, Shell Singapore

26 Responses by Other oil importing countries Source:PSOCL, EPPO, Fuelwatch, Shell Singapore Developing nations responding differently than developed nations

27 Responses by oil exporting countries Consumer prices subsidies by government Source:ESAI

28 Responses by oil exporting countries Consumer prices subsidised by government Source:ESAI