1. Indian gas regulatory framework: Industry issues

2. Page 215 April 2008Page 2 Overview of the Indian gas market ► Power and fertilizer sectors – dominant consumers ► Unmet gas demand ► Demand encouraged by LNG, NELP and CBM ► Existence of multiple price points ► Emergence of niche consumers willing to pay higher prices ► Key drivers: ► Growth in power and fertilizer demand ► Reduction of pollution in major cities – increasing focus on CNG ► Compliance with global environment norms

3. Page 315 April 2008Page 3 Current sector-wise consumption of gas in India Source: MoPNG ► Power and fertilizer sectors remain the dominant consumers of gas in the country ► City gas distribution (CGD) is the emerging segment

4. Page 415 April 2008Page 4 Indian gas regulatory framework ► “Petroleum and Natural Gas Regulatory Board Act 2006” (PNGRB) passed in March 2006 ► Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks (“Pipeline Policy”) notified in December 2006 ► Appointment of PNGRB members – regulator comes into effect from October 1, 2007 ► Notification of: ► Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Network) Regulations, 2008 ► Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Network) Regulations, 2008 ► Petroleum and Natural Gas Regulatory Board (Determination of Network Tariff for City or Local Natural Gas Distribution Network) Regulations, 2008 ► “Proposed Gas Utilization Policy” being formulated by GoI

5. Page 515 April 2008Page 5 Proposed gas utilization policy ► Natural gas – a scarce natural resource ► Proposed guidelines based on the following principles: ► NELP contractors to sell gas to customers based on priorities set by the government ► Pricing of gas to be based on pricing formula approved by the government ► Priorities do not imply ‘reservation’ of gas; in case a customer is not in a position to buy, the customer next in order of priority becomes eligible for consideration ► Only the customers connected to existing pipeline network would be considered under priorities determined by the government ► Pricing of gas not be affected by priorities set by the government ► Guidelines to be reviewed every 5 years in the light of demand- supply position of gas

6. Page 615 April 2008Page 6 Proposed gas utilization policy (contd.) ► Proposed order of priority for customers with existing units: ► Fertilizer plants ► LPG and petrochemical plants ► Power plants ► CGD (PNG + CNG) networks ► Refineries ► Other industries (like steel, ceramic) ► On fulfillment of demand by existing units, proposed order of priority for new greenfield expansion units: ► Fertilizer plants ► Petrochemical plants ► CGD (PNG + CNG) networks ► Refineries ► Power plants

7. Page 715 April 2008Page 7 Industry issue: Gas pricing ► Traditionally, APM gas produced by NOCs (ONGC & OIL) sold at controlled prices linked to a basket of fuel oils ► PSCs signed under NELP mandate competitively determined prices ► However, there is government intervention in approval of pricing formula ► Government approved pricing formula for gas from RIL’s KG basin discovery in September, 2007 ► Industry players seek price discovery through open market mechanism as provided under PSCs, without intervention of the government ► Terms and conditions of competitive bids should also be market determined in order to maintain prevalence of free market dynamics ► In cases where valuation of gas is to be necessarily done by the government, the same should be done based on most recent competitively determined price

8. Page 815 April 2008Page 8 Industry issue: Govt share of profit petroleum ► Industry players are concerned about the government taking its share of profit petroleum in kind ► The government may choose to sell its share of profit petroleum gas at subsidized prices thereby hampering the prevalence of an open market mechanism

9. Page 915 April 2008Page 9 Budget 2008 proposals  100% tax holiday available to an undertaking in respect of profits earned from commercial production of mineral oil  As per the Memorandum document of Budget 2008, for tax holiday purposes ‘mineral oil’ does not include petroleum and natural gas -Mineral oil as defined elsewhere in tax provisions “mineral oil includes petroleum and natural gas” -The Oilfields Act, 1948 and Oil Industry Act 1974 defines mineral oil as “mineral oil includes petroleum and natural gas” -Production sharing contract defines Petroleum as “petroleum means crude Oil and natural gas existing in their natural condition.”

10. Page 1015 April 2008Page 10 Whether city gas distribution network eligible for tax holiday  100% tax holiday available to undertaking engaged in business of laying and operating cross-country natural gas distribution network, including gas pipelines and storage facilities* * Introduced by Finance Act 2007

11. Page 1115 April 2008Page 11 Whether city gas distribution network eligible for tax holiday Rationale  The PNGRB Act and the Natural Gas Pipeline Policy talks about development of both natural gas pipelines, as well as city or local natural gas distribution network – the term “cross country” not defined/specified in the GOI policy  Natural gas pipelines as well as city natural gas distribution network form an integrated network and CGD network cannot function/ operate without it  Memorandum to Finance Bill, 2007 explains that tax subsidy for gas pipelines will enable substitution of the existing subsidy on LPG * Introduced by Finance Act 2007

12. Page 1215 April 2008Page 12 Whether city gas distribution network eligible for tax holiday Rationale  Since PNG distributed through city gas distribution network is a substitute for LPG; claim for tax holiday for CGD is in line with legislative intent * Introduced by Finance Act 2007

13. Page 1315 April 2008Page 13 Whether city gas distribution network eligible for tax holiday Applicability to CGD network  Whether CGD network is included within the ambit of cross-country natural gas distribution network  How to fulfill the condition pertaining to one third excess capacity on common carrier basis

14. Page 1415 April 2008Page 14 Industry issue: ‘declared good’ status ► Currently, coal and crude oil enjoy ‘declared good’ status – only 4% sales tax applicable ► Natural gas and re-gasified LNG (RLNG) are subject to varying sales tax rates in different states of the country – some charging as high as 20% ► Some states do not permit input credit in levy of VAT on gas thereby resulting in higher taxation ► Industry players seeking ‘declared good’ status – to reduce levels and high rates of taxation

15. Thank you