1. Natural Gas Sector- A Review

2. Questions What has been the impact of D6 gas on the oil industry? What has been the impact of CNG conversion on MS/HSD sales in Delhi? What is the projected demand and supply balance for natural gas in India? Does India need to import LNG to meets its natural gas requirements? If yes, what are the developments in LNG industry? What has been the impact of shale gas on LNG market and pricing? |Slide 2

3. Questions What has been the impact of D6 gas on the oil industry? What has been the impact of CNG conversion on MS/HSD sales in Delhi? What is the projected demand and supply balance for natural gas in India? Does India need to import LNG to meets its natural gas requirements? If yes, what are the developments in LNG industry? What has been the impact of shale gas on LNG market and pricing? |Slide 3

4. Natural Gas Supply/Consumption in India Unit-bcm Production starts from D6 53 12 38 35 34 30 Total =27 11 7 9 21 3 0 6 7 7 7 8 7 1 1 2 2 1 2 2 19 18 2003-042004-052005-062006-072007-082008-092009-10 ONGC OIL JV/Pvt LNG |Slide 4

5. Power & Fertilizer sectors have been allocated bulk of the D6 gas… Gas Allocation from D6 Field SectorAllocation (mmscmd)GSPA Signed (mmscmd) Firm FallbackTotalFirm FallbackTotal Power32.6771244.6726.6761238.676 Fertilizers15.708-15.7015.708- CGD1.2222.1653.3870.8210 Steel4.19- - Refineries5.006113.62.816.41 Petrochemicals1.918- - LPG3.00-32.594- Captive Power--0--0 Total63.71520.1683.8855.50714.8170.317 Reliance has indicated that gas production would be limited to 60 mmscmdmmscmd (22 bcmbcm) in near future…) in near future… |Slide 5

6. Gas is cheaper… 30 25 20 15 10 5 0 NaphthaTerm LNG-Ex terminalFO D6 Gas PMT |Slide 6

7. … naphtha demand dropped with increased gas supply 1450055 14000 50 13500 45 13000 40 12500 12000 35 11500 30 11000 25 10500 1000020 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Naphtha ConsumptionGas supply Linear (Naphtha Consumption)Linear (Gas supply) |Slide 7

8. FO/LSHS demand also declined… 1400055 50 13500 45 13000 40 12500 35 12000 30 11500 25 1100020 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 FO/LSHS consumptionGas supply Linear (FO/LSHS consumption) Linear (Gas supply) |Slide 8

9. Questions What has been the impact of D6 gas on the oil industry? What has been the impact of CNG conversion on MS/HSD sales in Delhi? What is the projected demand and supply balance for natural gas in India? Does India need to import LNG to meets its natural gas requirements? If yes, what are the developments in LNG industry? What has been the impact of shale gas on LNG market and pricing? |Slide 9

10. CNG is cheaper compared to alternatives… 1800 Indicative prices of automotive fuels in Delhi 1600 1400 1200 1000 800 600 400 200 200220032004200520062007200820092010 CNG MS HSD |Slide 10

11. …still conversion to CNG has not affected MS consumption trend in Delhi 900 800 700 600 500 400 300 MS-estimated based on linear trend from 90/91-00/01MS-Actual |Slide 11

12. HSD sales went down with conversion … picked up 2-3 years later…although use of HSD for commercial /industrial purposes makes it difficult to isolate the impact of CNG 2000 1800 1600 Higher VAT than Haryana 1400 1200 1000 Relocation of CNG industries 800 conversion 600 HSD-estimated using linear trend from 90/91-00/01HSD -Actual |Slide 12

13. Questions What has been the impact of D6 gas on the oil industry? What has been the impact of CNG conversion on MS/HSD sales in Delhi? What is the projected demand and supply balance for natural gas in India? Does India need to import LNG to meets its natural gas requirements? If yes, what are the developments in LNG industry? What has been the impact of shale gas on LNG market and pricing? |Slide 13

14. Sector-wise estimation of gas demand by Mercados 160 140 120 100 80 60 40 20 0 2009-102010-112011-122012-132013-142014-15 PowerFertiliserCity GasPetchem-RefinerySponge Iron |Slide 14

15. Requests from priority sectors for allocation of gas for upcoming/proposed projects 80 70 60 50 40 30 20 10 0 2010-112011-122012-132013-142014-152015-16 FertiliserPower Petrochem Refineries Steel CGD |Slide 15

16. India is projected to have a supply deficit in near future…and would need to import gas 150 Demand-Supply Projections for India 140 130 120 110 100 90 80 70 DemandSupply-incl LNG 60 2010-112011-122012-132013-142014-15 Source: Demand-Mercados Gas Pooling study; Supply - DGH projections for domestic supply + LNG capacity in India |Slide 16

17. Questions What has been the impact of D6 gas on the oil industry? What has been the impact of CNG conversion on MS/HSD sales in Delhi? What is the projected demand and supply balance for natural gas in India? Does India need to import LNG to meets its natural gas requirements? If yes, what are the developments in LNG industry? What has been the impact of shale gas on LNG market and pricing? |Slide 17

18. Gas consumption declined in 2009 in all regions except ME & Asia-Pacific… 700 600 500 400 300 200 100 0 USAEuropeFSU Middle East Africa Asia-Pacific 20052006200720082009 |Slide 18

19. China and India accounted for bulk of the increase in Asia-Pacific Incremental gas consumption-2009 Unit-bcm 14 11 7 USA Europe FSUAfricaMiddleChinaIndiaRest of EastAP -2 -11 -3 -34 -46 |Slide 19

20. Demand has contracted just as accelerating shale gas production pushed up domestic production in the US… US Natural Gas Production 640 620 600 580 560 540 520 500 480 460 Source: BP Statistical Review 2010 and EIA |Slide 20

21. …and new LNG capacity is coming online. Source: IEA |Slide 21

22. Prices in liberalized markets fell sharply…oil indexed prices less so Source: IEA |Slide 22

23. As markets have been liberalized, trading hubs are developing in Europe… At these hubs, natural gas prices Gas trading and import routes- Europe are based on the supply -demand balance for gas (as in the USA) The most active gas trading hub is the NBP (National Balancing Point (NBP) in the UK, followed by the Zeebrugge Hub in Belgium and TTF (Title Transfer Facility) in the Netherlands. Other countries where some gas is traded include the France, Italy and Germany but the volume is too small for it to be used as a pricing basis for long-term contracts |Slide 23

24. LNG arbitrage has introduced gas-on-gas competition in continental markets The increase in trading is resulting in market prices that reflect gas on gas competition Recent LNG contracts have been indexed to NBP and Zeebrugge market prices: - Qatargas II sales to the UK are based on NBP prices - RasGas II sales to Distrigas in Belgium are based on Zeebrugge hub prices - BP/Sonatrach short-term deliveries to the Isle of Grain are based on NBP prices - Commissioning of South Hook and Dragon LNG import terminals in 2009 has increased UK’s LNG import capacity to about 45 bcm. UK is in position to directly influence continental markets thru IUK(bi- directional pipeline) and Source: Andy Flower and David Ledesma BBL and indirectly through Norwegian network |Slide 24

25. New ME capacity was aimed at US and UK, however, shale gas has reduced expected LNG demand in the US U.S. net LNG imports billion cubic meters Projections History 200 AEO2005 150 100 50 AEO2010 0 20002005201020152020202520302035 Source: EIA, Annual Energy Outlooks |Slide 25

26. Start-up of capacity in Qatar directed at Atlantic basin brought gas-on-gas competition to continental Europe Spot prices fell faster Demand for pipeline imports declined. A number of European buyers re-negotiated penalties or received an extension for take-or-pay deliveries. In February 2010, Gazprom announced that it would index any gas above the minimum take-or-pay volumes to spot rather than to oil prices. |Slide 26

27. Russia fared worst as cheap LNG reduced demand for pipeline imports 40 US productionLNG gained at increased (shalethe expense of gas effect) ;P/L imports 20 Canadian imports suffered 0 USEuropeRussia -20 -40 -60 -80 ConsumptionProductionP/L importsLNG imports |Slide 27

28. Asia-Pacific is the largest consumer of LNG…though incremental demand in 2009 came from Europe, mainly UK and Belgium LNG importsIncremental LNG imports 25 300 20 250 15 200 10 150 5 0 100 -5 50 -10 0 -15 2006200720082009 200720082009 USEurope JapanUSEurope Japan S Korea IndiaTaiwanS Korea Taiwan India ChinaOtherChina |Slide 28

29. Slowdown in FID is likely to reduce potential LNG supply post 2012… Potential LNG Supply Source: Andy Flower and David Ledesma Source: Wood Mackenzie |Slide 29

30. …which could mean return to “sellers market” in medium-to-long term Source: Andy Flower and David Ledesma Firm - Markets which have to have the LNG supply and will pay the price needed to secure cargoes: Asia, southern Europe, Latin America, Caribbean, New England (USA) Flexible - Markets with alternative pipeline gas supplies where price will determine whether LNG is imported- USA (Gulf of Mexico, West Coast), UK, Belgium, Netherlands |Slide 30

31. Over two-thirds of the planned new liquefaction capacity is in four countries- Nigeria, Australia, Russia and Iran Possible new LNG supply projects 2013-2020 Source: Andy Flower and David Ledesma |Slide 31

32. Summary Increasing availability of gas in India has impacted industrial fuel sales. MS sales trend has been unaffected despite CNG being cheaper while HSD sales have been affected to some extent. Fertilizer and power account for bulk of incremental demand for gas. India would need to import gas to meet its demand. Global gas consumption declined in 2009 just as accelerated shale gas production increased gas production in the US and new LNG capacity came online. Startup of Qatar trains and South Hook terminal in UK led to ramp up of LNG imports in UK and Belgium in 2009. |Slide 32

33. Summary It was these imports which provided competition for continental pipeline supply putting pressure on oil- indexed pricing. Prices in Asia are still linked to oil and are not under pressure. Short-term outlook for LNG market is bearish. Estimated uncommitted volumes are about 36 bcm. In the medium to long term, market is expected to tighten up as FID activity had slowed down in last couple of years. |Slide 33

34. Implication As seller of liquid fuels -Impact of gas is highest on industrial fuels as gas has been allocated on preferential basis to power and fertilizer sectors. -Impact on MS is limited. Possible reasons could be - availability issues - long refilling time -Impact on HSD tends to be greater due to mandated use in public transport. However, demand tends to recover within few years with growing transportation demand. As buyer of gas for internal consumption -While Dahej LNG prices are set to rise in next few years, spot LNG prices may hit a soft patch. -Henry hub is likely to set the floor for spot LNG. |Slide 34

35. Implication As seller of gas -Issues involved in entry into gas business - Merchant model vs. Long-term contract- Merchant model does not involve the risk of take or pay. However, exposes the company to cyclical risk - Target Consumer- Big anchor customer such as power or large number of smaller consumers- Anchor consumer provides base demand. However, there is greater competition for anchor customers and preferential allocation from domestic resources. - Greenfield regasification terminal vs acquisition in existing terminal- Acquisition reduces the quantum of investment and allows for gradual build-up of in-house expertise in LNG business. However, this involves taking a minority stake. -Nearly 36 bcm of uncommitted LNG volumes are available. Procurement should not be a problem. However, term LNG in Asia is indexed to oil and prices will probably be higher than that for the domestically produced gas. |Slide 35