Oil Gas Overview India2009

The Oil and Gas Sector Overview
in India 2009
KPMG IN INDIA
Contents
·Preface and Executive Summary 01

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·Acronyms Used 02
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·Overview of the Indian Economy 03

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·Overview of India’s Energy Sector 05

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·The Indian Upstream Sector 08

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·A Note on Coal Bed Methane (CBM) 13

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·Refining in India 14
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·Gas Transportation and Distribution 17

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·A Note on LNG 20
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·Petroleum Product Pipelines 21

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·Fuel Retailing 22
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·Overview of the Indian Taxation Regime 24

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·Appendices 31
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·KPMG’s Service Offerings 34

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The Oil and Gas Sector Overview in India - 2009 01
Preface and Executive Summary
This document provides an overview of the various segments comprising the oil and gas
sector in India. It aims at providing the reader a basic understanding of the players, size,
major developments and dynamics of the sector across the value chain.
Accordingly, this document comprises chapters overviewing the Indian economy and the
Energy Sector, the Upstream sector, Coal Bed Methane, Refining, Gas Transportation and
Distribution, LNG, Petroleum Product Pipelines, Retailing of Fuels and the Taxation Regime
applicable to the oil and gas sector.
Finally, it sets out how KPMG can assist you in achieving your business goals in the oil and
gas sector.
The oil and gas sector in India presents a significant opportunity for investors and is
Jai Mavani,
exhibited to demonstrate robust growth in line with the growth of the Indian economy. The
Executive Director,
New Exploration Licensing Policy (NELP), conceived to address the increasing demand-
KPMG India Private Ltd.
supply gap of energy in India, has proved to be successful in attracting the interest of both
domestic and some foreign players. The success of Cairn India and Reliance Industries
Limited in their Indian operations has underscored this.
Other segments such as Refining, LNG, City Gas Distribution etc. are also seeing some
action. India is now surplus in refining capacity and aims to establish itself as a refining hub.
The Petroleum and Natural Gas Regulatory Board aims to make available Piped Natural Gas
(PNG) and Compressed Natural Gas (CNG) in new cities across the country, besides
facilitating the construction of infrastructure to transport natural gas to demand centres. The
lack of available supplies has so far hindered the growth of this segment. In addition, some
gas-based power plants have been operating at low load factors, owing to the shortage of
fuel.
The increased availability of hydrocarbons from domestic sources is thus perceived as

necessary to sustain the rapid growth of the Indian economy.
I hope that this document shall provide you with a broad understanding of the oil and gas
sector in India across various segments.
© 2009 KPMG, an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
Acronyms Used
E&P Exploration & Production
CBM Coal Bed Methane
DGH Directorate General of Hydrocarbons
MT Metric Tonne
MMT Million Metric Tonnes
MMSCMD Million Standard Cubic Metres Per Day
MoPNG Ministry of Petroleum and Natural Gas
NELP New Exploration Licensing Policy
NG Natural Gas
Overview of the Indian Economy
With a GDP of USD 1.23 trillion1 India is currently the world's fourth largest economy in
Purchasing Power Parity (PPP) terms (the GDP in PPP terms is estimated at approximately
USD 3.2 trillion)1 and the fifth largest energy consumer in the world. However, due to its
high population of approximately 1.1 billion1, the per-capita consumption of most energy
related products is extremely low. The per capita energy consumption is estimated to be a
very modest 530 kg of oil equivalent (kgoe) of oil equivalent while the world average is
approximately 1800 kgoe2. Per-capita incomes, in turn, were estimated at USD 2800 in
20081 in PPP terms.
After recording a sustained growth of over 9 percent for the last 3 consecutive years
(growth rates were estimated at 9.5, 9.7 and 9 percent respectively over the last 3 fiscal
years), the Indian economy is expected to continue to demonstrate robust growth going
forward; the growth rate is estimated to be approximately 6.6 percent in 2008-091.
Optimism regarding the sustenance of India's future growth potential stems from its
relatively high levels of domestic demand (and consequent lower dependence on exports)
and its favourable demographic dividend-the median age stood at 25.3 years in 2008 with
only 5.3 percent of the population being above 65 years of age1. The chart below illustrates
the fact that India's export dependence is far lower than that of its Asian counterparts of
Singapore, Malaysia, Thailand etc. This robust domestic demand is best illustrated by the
fact that the months of January and February 2009 saw telecom wireless subscriber
additions at an astounding 15.41 and 13.44 million respectively.3
India's export dependence is lower as compared to its Asian counterparts
Singapore
Malaysia
Taiwan
Thailand
Korea
China
Philippines
Indonesia
India
(%)
Hong Kong
0 20 40 60 80 100
Source: CEIC, CLSA Asia – Pacific Markets
When compared with other countries, India's GDP is likely to continue to grow at rates
above 5 percent in the short term and higher going forward. As China's growth moderates,
as the chart below demonstrates, India is likely to grow at a pace in excess of its eastern
neighbour.
1. CIA WorldFactbook
2. Bureau of Energy Efficiency, Govt of India
3. Telecom Regulatory Authority of India (TRAI) Press Releases
Projected GDP Growth Rates for Select Upcoming Economies
GDP Growth Rate (%)

6
0
2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50
Brazil China India Russia
Source: BRIC report, India Brand Equity Foundation
Meanwhile, India's current macro-economic ratios continue to be robust, with its forex
reserves estimated to be around USD 250 billion4 in March 2009. Some concerns have been
expressed about its increasing fiscal deficit, estimated at around 6 percent5 of GDP for
2009-2010, up from 3.1 percent of GDP for 2007-08. However, this must be seen in the
context of the large fiscal packages announced by the Government in the wake of the
economic slowdown and the fact that the current rate of inflation is at historic lows, well
below 1 percent. Its gross fixed investment rate at around 40 percent of GDP in 20086 and
savings ratio continue to remain high, pointing to the continuance of high growth levels.
4. Reuters, March 2009

5. EIU
6. CIA WorldFactbook
Overview of India's Energy Sector
Background
Two major events this year, the commencement of production of natural gas from Reliance
Industries Ltd's (RIL) Krishna Godavari (KG) fields1 and the scheduled commencement of
production of crude oil from Cairn India Ltd's fields later this year2 have provided a major
boost to the domestic oil and gas sector in India and have meant that upstream activities
have received major attention over the past years.
Given India's targeted GDP growth, India's fuel needs are likely to expand at a substantial
rate. India's per-capita consumption of energy and electricity is well below that of
industrialized nations and the word average, meaning that there is scope for rapid
expansion. At the same time, India already imports over 70 percent3 of its crude oil
requirements, with its oil import bill being close to USD 90 billion in 2008-094.
In addition, some of the existing oil and gas fields were experiencing a decline in their
production since they had already been in production for several years and were past their
plateau phase. Given this context, particularly the high import dependence3, the New
Exploration Licensing Policy (NELP) was envisaged in 1997 (and operationalized in 1999) by
the MoPNG, as part of its Hydrocarbon Vision 2025, a landmark 25-year planning document.
These factors also meant that the issue of energy security was brought to the forefront of
strategic decision making and an urgent need was felt to augment the domestic supplies of
oil and gas. In addition to NELP, other efforts were made to address the need for achieving
energy security such as:
! Acquisition of Oil and Gas assets abroad, the latest being ONGC Videsh's acquisition of
Imperial Energy
! Developing strategic storage facilities at identified locations
! Exploring alternate sources of Energy, including Coal Bed Methane, gas hydrates, etc
! Improving the recovery of oil and gas from existing fields through methods such as
Enhanced Oil Recovery (EOR) and Increased Oil Recovery (IOR).
India's per capita energy consumption compared to other countries:

India's per capita consumption of energy is extremely low as compared to other countries
and the world average. For example, the Total Primary Energy Consumption (TPES) in India
is just 0.51 tonnes of oil equivalent, while the world average is more than three times this
figure, as the table below indicates. Similarly, the per-capita electricity consumption stands
at just 503 Kilowatt-Hour (KwH) per year, less than one-fifth that of the world average of
2659 KwH and a massive 13515 KwH3 in the United States. These figures illustrate the fact
1. The Business Standard and other press sources, April 2, 2009 'Reliance commences gas production from KG-D6'
2. The Business Standard, May 8, 2009 'Cairn to begin crude oil production from Rajasthan this month'
3. The Financial Express, 'Import dependence on crude oil at 70 percent: Aiyar'
4. The Hindu Business Line, April 2nd, 2009 'Reliance's D6 gas output to reduce oil import bill by 10 percent'
that there is a massive potential in India for the growth of energy consumption, should the
supply rise to meet the demand as it increases.
Per capita TPES consumption (toe/capita) Per capita Electricity consumption (Kwh)
India (2006) 0.51 India (2006) 503
OECD (2006) 4.7 OECD (2006) 8381

World Avg (2006) 1.8 World Avg (2006) 2659
US (2006) 7.74 US (2006) 13515
China (2006) 1.44 China (2006) 2060
Korea (2006) 4.48 Korea (2006) 8063
Japan (2006) 4.13 Japan (2006) 8220
Source: International Energy Agency, Key World Statistics 2008
Role of Oil & Gas in India's Energy Mix:

The importance of oil in India can be gauged from the fact that it accounts for 36 percent5 of
the Primary Energy Mix in India. Taken with natural gas, this percentage rises to 45 percent.
However, the proportion of natural gas is approximately one-third that of the world average,
once again indicating the potential for rapid growth. It may be noted in this context, that a
heavy reliance on coal in India is not optimal, given that coal is a far more polluting fossil fuel
as compared to natural gas
India’s Primary Energy Mix in 2006 World Primary Energy Mix 2006
Coal 51% Hydro Electric 6%
Nuclear 2% Nuclear Energy 6%
Hydro 2% Natural Gas 24%

Oil 36%
Gas 9%
Coal 28%
Oil 36%
Source: Planning Commission of India, BP Statistics
5. Planning Commission
Demand-Supply Imbalance
Stagnating crude-oil production and the rapid economic growth have served to increase the
demand-supply mismatch for crude oil and gas in India (the gas shortage is likely to be
mitigated to some extent though RIL's KG Basin gas production). Consumption in India
grew by 6.8 percent in 2007, the third largest volumetric increment after China and United
States on a yearly basis6. This growth in demand is likely to be sustained over time, creating
an ever-increasing need for imports.
Similarly, natural gas demand in the country has far outstripped its supply, in the past, with
shortfalls before RIL's production estimated at close to 100 million metric standard cubic
metres per day (mmscmd). This in turn, resulted in the inadequate or sub-optimal use of
infrastructure: both gas-based power plants and fertilizer units were allowed to remain idle,
or forced to operate using expensive liquid fuels, such as naphtha, resulting in higher a
subsidy burden on the Government (which was forced to subsidize urea manufacture or
import fertilizer from abroad).
Demand-supply balance over FY08-11
(MMSCMD) FY08 FY09 FY10 FY11
Power 79.7 91.2 102.7 114.2
Fertilizer 40.8 42.7 52.2 79.4
City Gas 12.1 12.9 13.8 14.8
Industrial 15.0 16.1 17.2 18.4
Petrochemicals / Refineries / Internal consumption 25.4 27.2 29.1 31.1
Sponge iron / Steel 6.0 6.4 6.9 7.4
Total 179.0 196.4 221.9 265.2
Supply
ONGC + OIL (A) 57.3 58.4 55.7 54.7
Pvt. / JVs (as per DGH) (B) 23.3 ~62 ~62 ~62
Total projected supply (conservative scenario) (A+B) 80.5 ~120 ~118 ~117
Additional gas anticipated (C) - - 74.0 84.0
R-LNG (all expansions coming on stream) 30.5 33.6 52.5 70.0
Total projected supply (optimistic scenario) (A+B+C) 111.0 ~153.6 ~245 ~271
Over / (under) supply (67.9) ~(43) ~22 ~6

Source: IDFC-SSKI Research, Industry sources, Crisil, Infraline
6. BP Statistical Review of World Energy, June 2008
The Indian Upstream Sector
Background
Although the story of the Oil & Gas industry can be traced all the way back to October 1889
when oil was first explored in Digboi, Assam, India remains a vastly unexplored territory by
far, with only a small percentage of its sedimentary basins under exploration and
development.
Exploration activity, prior to NELP, was dominated by public sector firms such as Oil and
Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd. (OIL). The sector received a major
boost in 1974, when the massive Mumbai High fields were discovered off India's west
coast. Even after three decades, these fields continue to be the mainstay of India's
indigenous production. Realizing that these fields would gradually deplete over time and no
major discoveries were being brought into production, the Government introduced the
NELP, with an aim of encouraging private sector participation in the oil and gas sector.
In addition to the efforts to discover new fields, ONGC, in particular in current times, has
been trying to reverse or stem the decline in its existing ageing fields through Improved Oil
Recovery (IOR) or Enhanced Oil Recovery (EOR) techniques. In addition, new technologies
such as Underground Coal Gasification (UCG), harnessing Coal Bed Methane and the
exploration of Gas Hydrates are some of the initiatives taken up to enhance domestic
production.
The New Exploration Licensing Policy (NELP)

Recent rounds of NELP have proved attractive in gaining the interest of Indian private sector
and foreign players, with the private sector giant, RIL, winning the maximum number of
blocks after the state-owned ONGC. A number of foreign players such as Cairn, BHP Billiton
etc have also participated in the bidding rounds, forming consortiums with domestic and
other foreign players. However, some of the super-majors, such as ExxonMobil, Shell etc.
continued to watch from the sidelines, rather than mark their presence in the bidding
rounds.
The NELP was formulated by the Government during 1997-981 to provide a level playing field
to both the Public and the Private sector, through allocating acreages on the basis of open
competitive bidding as opposed to the nomination basis as earlier. Companies are expected
to bid on the following parameters:
! The Work Programme committed to be undertaken
! Percentage of value of annual production sought to be allocated towards cost recovery
! Profit petroleum share offered to the Government at various levels of Investment

Multiples2.
The weightage to the above three parameters has varied from one round to the other over
the seven rounds of NELP.
1. NELP VIII website (Background Section)

2. Notice Inviting Offers for NELP VIII, from NELP-VIII website
Main features of the NELP VIII2

The eighth round of NELP was announced in April 2009, but was subsequently deferred.
The declared features of NELP-VIII were:
! There shall be only one exploration phase of seven years for all blocks. There will be no
compulsory relinquishment after four years (by which time the mandatory and
committed programme are to be completed) and operators will have option to
relinquish the entire area after completion of minimum work programme or retain the
block by committing to carry out drilling of one well per year in case of on-land and
shallow water blocks or one well in 3 years in case of deepwater blocks. In any case,
the entire area (apart from the Discovery Area and the Development Area) would need
to be relinquished at the end of seven years of exploration
! Upto 100 percent participation by foreign companies is allowed
! No mandatory State participation
! No signature, discovery or production bonus is to be paid
! No interest carried by the National Oil Companies (NOCs)
! Income Tax Holidays were granted for seven years from start of commercial production
of “Mineral Oil”
! No custom duty on imports required for petroleum operations
! Biddable cost recovery limit allowed upto 100 percent
! The option to amortise exploration and drilling expenditures over a period of 10 years
from the first commercial production is allowed
! Sharing of profit petroleum with the Government to be based on the pre-tax

investment multiple achieved by the contractor and this is biddable
! Royalty for on-land areas was payable at the rate of 12.5 percent for crude oil and 10
percent for natural gas. For shallow water offshore areas, royalty was payable at the
rate of 10 percent for both crude oil and natural gas whereas for deepwater areas,
royalty was fixed at 5 percent for both crude oil and natural gas for the first 7 years of
commercial production and thereafter at the rate of 10 percent
! Fiscal stability provision is provided for in the contract
! Freedom to the contractor for marketing of gas in the domestic market
! Liberal provisions for assignment
! Arbitration and Conciliation Act, 1996, based on United Nations Commission on

International Trade Law (UNCITRAL) model is applicable
! To facilitate investors, a Petroleum Tax Guide (PTG) compiled in 1999 has been provided
! Predetermined Liquidated Damages (LD) have been specified for unfinished Minimum
Work Programme
2. Notice Inviting Offers for NELP VIII, from NELP-VIII website
! A one time Bank Guarantee (BG) needs to be provided at a lower rate for the total
committed work programme
! A nominal bid bond at specified rate to encourage serious bidders.
Seven rounds of NELP have been conducted so far. The success of the rounds can be
measured in the increased exploration activities in the country. The proportion of unexplored
acreages has witnessed a significant drop, from 40 to 15 percent, according to the
upstream regulator, the Directorate General of Hydrocarbons (DGH). Similarly, there are now
14 producing basins, as opposed to just three in 1990. Several new operators too have
entered the fray as opposed to just the Government owned ONGC and OIL earlier.
Exploration Status 1998-99 (3.14 million sq.km) Exploration Status 2006-07 (3.14 million sq. km)
Exploration
Initiated 27% Unexplored 15%
Moderate to Exploration
Unexplored 40% well explored 20% Initiated 44%
Poorly Explored 17%
Poorly Explored 21%

Moderate to
well explored 16%
Source: DGH
A glance at the number of blocks and bids received during the previous rounds of NELP
indicates the increased interest that the bidding process has received in recent times from
both domestic and foreign players, particularly NELP VI that received 165 bids for 52 blocks.
In recent times, the MoPNG has been offering more blocks of smaller sizes based on
feedback received from earlier rounds. NELP VIII shall see 70 blocks on offer in the first
phase, comprising 24 deepwater blocks, 28 shallow water blocks and 18 on-land blocks.
These 70 blocks cover a sedimentary area of about 164,000 square kms, which is
approximately 5.2 percent of Indian sedimentary basin area3.
Some of the major discoveries in the last decade have been that of Reliance in the KG Basin
and Mahanadi fields, ONGC and Gujarat State Petronet Corporation's (GSPC) claimed finds
also in the KG Basin and the discovery of oil in Barmer, Rajasthan, by Cairn in 2002-03. RIL
is expected to be able to produce over 80 mmscmd of gas by 2010-11, thus doubling
domestic availability and ameliorating the large-scale shortages currently prevalent in the
country (the company has recently commenced production of gas and the first 40 mmscmd
of gas volumes have been allocated by the Government to fertilizer, City Gas Distribution
(CGD), petrochemical and power units). Cairn, in turn, is likely to produce close to 175,0004
barrels of oil by 2010-11 from its Mangala, Bhagyam and Aishwarya fields, helping to
address energy security issues to some extent.
3. Press Note by MoPNG on the occasion of launch of NELP-VIII

4. The Hindu Business Line, March 31st, 2009
Snapshot of Previous Rounds of NELP
NELP-I NELP-II NELP-III NELP-IV NELP-V NELP-VI NELP-VII
No. of blocks offered 48 25 27 24 20 55 57
No. of blocks bid for 28 23 24 21 20 52 45
Total No. of bids received 45 44 52 44 69 185 181
No. of blocks awarded 25 23 23 21 20 52 44

Source: InfraLine
Pricing Regime in India

Prior to the commencement of RIL's gas production, out of the total gas availability of
around 96 mmscmd in the country, around 53 mmscmd is Administered Pricing Mechanism
(APM) gas and 43 mmscmd in non-APM gas (which includes 20 mmscmd produced by Joint
Ventures between ONGC & Private sector (JV) under Production Sharing Contracts (PSCs)
and 23 mmscmd Regassified LNG5.
Although the Government has dismantled the APM it continues to set the end-consumer
prices of fuel sold at retail pumps, and upstream companies such as ONGC and OIL are
asked to partially bear the burden of under-recoveries of the Oil Marketing Companies. APM
prices are revised from time-to-time, but are currently well below prevailing market prices.
In the case of NELP blocks, the PSC provides for marketing freedom for the contractor;
however, the recently announced allocation policy hampers this to some extent.
The table gives the various price-points of privately-produced domestic gas in the country,
with the highest price being charged by the Panna-Mukta-Tapti (PMT) consortium of ONGC-
BG-RIL. In addition, gas from domestic Joint Venture (JV) fields and imported LNG is also
sold at non-APM prices; and some customers have shown the willingness to pay relatively
high prices for spot Liquefied Natural Gas
Various gas price points for domestic gas
(LNG) imported by Petronet LNG or Shell
Price (USD / mmbtu) at their Dahej and Hazira terminals
Field Company Volumes (MMSCMD)
FY09 FY10E respectively.
PMT RIL,ONGC, BG 5.3 5.7 5.7
PMT RIL,ONGC, BG 10.7 5.6 5.6
Lakshmi Cairn 1.7 4.5 4.5
Gauri Cairn 1.3 3.7 3.7
Ravva Cairn 2.1 4.4 4.4
GSPC 3.6 5.0 5.0
Bheema Niko 0.1 5.0 5.0
North Surat Niko 0.2 4.5 4.5
RIL KGD6 RIL 40-80 4.2 4.2

Source: IDFC-SSKI Research, March 2009, Industry sources
5. InfraLine, Industry Estimates
Oil Field Services

With the increased exploration activity in India post NELP, the coming years are likely to
witness increased demand for oil and gas allied services in India, particularly given the focus
on deepwater blocks and frontier basins. Services such as 2-D and 3-D seismic surveys,
processing and interpretation, drilling rigs, well-logging, etc. are all likely to witness robust
growth. In addition, shipping and supply related activities such as the use of tug-boats, Off-
Shore Supply Vessels (OSVs), catering etc. are also likely to see an increased demand. For
example, the DGH has estimated that USD 1.9 billion worth of investments could be made
for onshore seismic surveys alone in the next few years (of which 50-55 percent would be
met through captive crews of oil exploration companies such as ONGC and Oil India, while
the rest could be outsourced to oil-allied services companies).
As a result, the coming years are likely to see the Indian service providers scaling up their
activities and capabilities. Besides enhancing their fleet size, they are likely to widen their
portfolio by offering different specialized services and developing their manpower. Some of
the local players might also aim to offer their services to other E&P firms across the world.
For example, companies such as Aban Lloyd, which acquired the Norwegian firm Sinvest,
already offers rigs to players across the world. On the other hand, MNC players such as
Baker Hughes, BJ Services, Schlumberger, Aker Kvaerner etc. are likely to find that the
market for their services in India continues to grow.
Outlook for E&P activity in India

Given the commencement of production from RIL's KG Basin fields, the scheduled
commencement of Cairn India's production and the potential development of the
discoveries announced by GSPC and ONGC, the E&P sector is poised to see considerable
activity in the near future. This could mean an increased interest in exploring India's
hydrocarbon potential by foreign players. However, the economic downturn (and the
consequent cut-back in capital expenditures by some players) as well as some ambiguity on
freedom to market oil and gas and the applicability of tax concessions for the production of
natural gas could serve as a dampener.
On the other hand, the promise offered by certain acreages, particularly off India's east
coast-the KG and Mahanadi Basins, means that the prospects for the growth of the
upstream sector remains bright. It is expected that this is also likely to have a positive spin-
off effect on the provision of off-shore services.
A Note on Coal Bed Methane (CBM)
In order to exploit the country's vast coal reserves and the methane gas trapped in coal
seams, the Government formulated a Policy for Coal Bed Methane in 1997. The MoPNG was
to be the administrative ministry with the DGH as the implementing agency and
accordingly, a MoU was signed between the MoPNG and Ministry of Coal in September
1997.
The first round of CBM was held in 2001, on the lines of NELP, with competitive bidding
deciding the award of acreages. So far 3 rounds of bidding have been completed and 26
blocks have been awarded. The fourth round of CBM has been announced along with the
latest round of NELP. The table below provides an overview of the current progress on CBM
so far; it must be mentioned that the potential of CBM remains still largely unexploited. On
a more positive note, reserves of 6 trillion cubic feet (tcf) have been established.
Major players in the sector have been Arrow Energy, Gas Authority of India Ltd. (GAIL),
ONGC, Great Eastern Energy Corporation, BP Exploration, Reliance Energy Ltd, Reliance
Natural Resources Ltd, GeoPetrol etc.
Coal Bed Methane Overview
Blocks Awarded 26
Area Awarded 13,600 Sq.Km.
Total CBM Resources 1374BCM(50TCF)
CBM Wells drilled so far: 250
CBM reserve established 6.4 TCF (in 4 blocks)
Commercial Production Commenced w.e.f 14.07.07
Approved gas sale Price 6.79 USD / MMBTU
Present Gas Production 0.1 MMSCMD
Expected CBM Gas Production 7.0 MMSCMD By 2013

Source: InfraLine
Refining in India
India, with its current capacity of around 178 million tones per annum (mtpa) is poised to
emerge as a major refining hub, with considerable capacity additions being planned over the
next few years. After the commissioning of Reliance Petroleum Ltd (RPL) (the company has
now being merged with RIL) 29 million tonnes per annum (mtpa) refinery at Jamnagar and
the 10.5 mtpa refinery by Essar1 at Vadinar, both located close to each other in Gujarat.
Further, large expansions are being planned by Essar at its existing refinery complex and by
the public sector refiners such as Indian Oil, Bharat Petroleum Corporation Ltd. (BPCL) and
Hindustan Petroleum Corporation Ltd. (HPCL).
Taking a look back in time, it would be fair to state that the Refining sector has come a long
way since the Mumbai Refinery of HPCL was commissioned post independence. Starting
with relatively modest capacities, the public sector units (PSU) refiners have gradually
ramped up capacities at existing locations or constructed Greenfield refineries at new
locations. Today, there are 20 refineries, both large and small, in the country with even
further additions being planned (refer to the table below and Appendix I).
India, which is already surplus in refining capacity, aims to emerge as a refining hub. Its
favourable location, close to the oil-producing regions of the Middle East renders it an
advantage in this quest and the ability of the latest refineries to process heavy, low-grade
crude, will further help in this regard. The erstwhile RPL's new refinery in Jamnagar, in
particular, was established as an export-oriented one, with an aim to sell its refined products
in the US market. The Gross Refining Margins (GRM) of RIL's existing refinery are among
the highest in the region, due to its high complexity index and consequent ability to process
sour, high-sulphur crude.
Status & Size of the Refining Sector

India today boasts of surplus refining capacity, with further large expansions planned. The
major expansions are for the Vadinar refinery of Essar, the Indian Oil Corporation (IOC)
refinery at Paradeep and the planned refineries at Bina in Madhya Pradesh by BPCL and
Bhatinda in Punjab by HPCL-Mittal Energy1.
Most of the private sector refineries are focusing on the export market to a large extent. As
far as the PSU refineries are concerned, concerns have been expressed over the viability of
the small refineries in the North-east, which are land-locked and possess a sub-optimal
economic size. Most of the older refineries are also expected to upgrade themselves to
meet new fuel specification standards.
1. MoPNG
Installed Capacities of Refineries (As on January 1, 2009)

S. No. REFINERY LOCATION CAPACITY (MMT)
1 IOCL DIGBOI 0.65
2 GUWAHATI 1
3 BARAUNI 6
4 KOYALI 13.7
5 HALDIA 6
6 MATHURA 8
7 PANIPAT 12
8 CPCL CHENNAI 9.5
9 NARIMANAM 1
10 BRPL BONGAIGAON 2.35
11 HPCL MUMBAI 5.5
12 VISAKHAPATNAM 7.5
13 BPCL MUMBAI 12
14 KOCHI 7.5
15 NRL NUMALIGARGH 3
16 ONGC TATIPAKA 0.078
17 MRPL MANGALORE 9.69
SUB TOTAL (PSU) 105.47
18 RIL JAMNAGAR 33
19 RPL JAMNAGAR 29
20 EOL JAMNAGAR 10.5
SUB TOTAL (PVT) 72.5
TOTAL REFINING CAPACITY 177.97
MMT: Million Metric Tonnes

Source: MoPNG
Outlook for the Refining Sector

India is aiming to emerge as a refining hub even as global refining markets have tightened
with the closure of small refineries in North America and Europe mainly due to challenges in
investing in cleaner fuels and high compliance costs. In addition, permits for Greenfield
refineries are hard to obtain in these countries due to environmental concerns. Therefore,
capacity addition is primarily coming from emerging economies like India, China and some
Middle Eastern countries.
The Government of India has been providing tax incentives and fiscal incentives to new
refineries. The new RPL refinery, for example, benefited from its Special Economic Zone
(SEZ) status. However, current tax holidays would not be available to non-public sector
refiners that commence activities after April 1, 20092. Meanwhile, India does have several
other competitive advantages such as its favourable location, lower construction and
operating costs etc. However, given the current economic crisis, some analysts feel that
export markets for all the products produced by the Indian refineries may be hard to find.
2. BMR Advisors, May 2, 2008 document
Gas Transportation and Distribution
The transmission and distribution segment of the natural gas sector remains relatively
under-developed, but this is likely to change in the medium term.
I. Gas Transportation
For a long time in India, there was only one major long distance gas transportation
pipeline, connecting ONGC delivery point near Hazira in Gujarat to demand centres in
the north-west corridor of the country including Jagdishpur in Uttar Pradesh and Vijaipur
in Madhya Pradesh. This pipeline, 3187 kms long and with a capacity of around 34
mmscmd1 was operated by the erstwhile public sector monopoly GAIL India Ltd and
continues to serve a number of large power and fertilizer plants, besides smaller
industrial units lying along its route. In recent times, GAIL has constructed a few other
pipelines, connecting the LNG terminal at Dahej to Vijaipur and Uran and the power
plant at Dabhol to Panvel (refer to the table).
In addition, major pipeline developments have also been initiated by the private sector,
particular Reliance Gas Transportation India Ltd (RGTIL), which has constructed the
1,386 km long East-West pipeline connecting RIL's fields in Kakinada to centres of
demand and culminating at Bharuch in Gujarat2. RGTIL also plans to connect the KG
Basin fields to Haldia in West Bengal and Chennai and Bangalore.
The map in Appendix II illustrates the major existing pipelines and the ones planned as
part of the 'National Gas Grid'.
GAIL's Trunk Pipelines
Pipeline Length (Km) Design Capacity (MMSCMD)

HVJ/GREP 3187 33.4
DVPL 612 24
Dahej-Uran 386 12
Dabhol-Panvel 320 12.5
Source: InfraLine, MoPNG
Trans-national Pipelines
The Government has been exploring the possibility of importing gas from countries such
as Iran, Turkmenistan, Bangladesh and Myanmar through pipelines. Various initiatives are
under consideration, which include:
The Iran-Pakistan-India (IPI) Gas Pipeline Project:

The IPI Gas Pipeline Project has been conceived as a tripartite arrangement between
Iran, Pakistan and India, with the volumes being divided between the two importing
countries of India and Pakistan. The pipeline is estimated to cost around USD 7.5 billion
and is expected to be 2300 kms3 in length.
Although some progress was made, several outstanding issues remain. Issues around
1. InfraLine
2. The Hindu Business Line, May 4, 2009, 'The strategic East-West gas pipeline'
3. The Hindu, January 2009, 'IPI pipeline faces uncertain future'
pricing, delivery point transit fees to be paid to Pakistan, certification of reserves of the
fields meant to supply gas are yet to be resolved.
Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project:

This Asian Development Bank (ADB) sponsored project is likely to connect sources of
supply, in Turkmenistan to sources of demand in Pakistan and India. The pipeline being
considered will have a length of approximately 1680 kms (including 145 km in
Turkmenistan, 735 km in Afghanistan and 800 km in Pakistan upto the India border) and
a capacity of 90-100 mmscmd4. Once again, while some headway has been made in
discussions, issues regarding gas pricing, transit price and security of the pipeline in
Pakistan, transmission tariffs etc. are to be decided.
Myanmar-India pipeline:
A 1,575 km5 long pipeline connecting the Shwe field in the A-1 block in Myanmar, in
which both ONGC Videsh and GAIL own a stake, was considered to bring gas to India,
while passing through Bangladesh. However, not much progress has happened on this
front in recent times.
II. City Gas Distribution

The increase in gas supplies and gas transmission infrastructure is also likely to provide
a fillip to City Gas Distribution (CGD) players. So far, only a handful of major players are
present in the market: these are Indraprastha Gas, Mahanagar Gas, Gujarat Gas and
GSPC Gas which distributes Piped Natural Gas and Compressed Natural Gas to cities in
6
Delhi, Mumbai and Gujarat respectively . Recent years have seen some activity, with a
number of players registering their presence. In particular, GAIL has formed Joint
Ventures with other PSU firms to distribute gas in a number of cities, mentioned in the
attached table. With the emphasis being
Cities with CGD
laid on a cleaner environment and lower
Maharashtra Mahanagar Gas Limited-(Mumbai, Thane, Mira-Bhayendar, Navi-Mumbai pollution levels in cities, CGD is expected
Delhi Indraprastha Gas Limited-Delhi & Noida to get a push in the coming years. Thus,
Andhra Pradesh Bhagyanagar Gas Limited-Hyderabad, Vijayawada apart from GAIL, a few players have
drawn up ambitious plans to roll out city
Madhya Pradesh Aavantika Gas Limited- Indore, Ujjain and Gwalior
gas infrastructure across a number of
Uttar Pradesh Central UP Gas Limited - Kanpur & Bareilly
cities in the country. States which are
Green Gas Limited - Agra, Lucknow likely to see further activity include Uttar
Gujarat GAIL-HPCL JV: Vadodara, Ahmedabad Pradesh, Maharashtra, Andhra Pradesh,
GGCL - Surat, Bharuch, Ankleshwar Rajasthan, Karnataka, Kerala, Madhya
Pradesh and West Bengal.
Adani Energy -Ahmedabad, Vadodara
GSPC Gas-Rajkot, Murbi The establishment of the Petroleum and

Natural Gas Regulatory Board (PNGRB)
Sabarmati Gas-Gandhinagar, Mehsana, Sabarkantha
following the passage of the PNGRB Act
Tripura Tripura Natural Gas Company Limited- Agartala
is likely to help in the further
Source: KPMG knowledge based on news reports, InfraLine, PNGRB website
4. Financial Express, February 2008 ('GAIL to lay TAPI pipeline') 6. KPMG knowledge based on news reports, InfraLine, PNGRB
5. Project Monitor website
development of the sector. The Board shall regulate existing players, and promote the
development of CGD networks in new cities. In fact, the Chairman of the PNGRB was
quoted stating that natural gas would be available in 84 cities by 2011 and 250 cities by
20187.
The PNGRB has begun the process of inviting applications for CGD licences in the country.
Licenses are to be awarded through an open competitive bidding process, with their being a
level playing field for both domestic and foreign entities. Recently, applications were
received for six cities put up for bidding8.
Outlook
The main driver for the development of gas transmission and CGD shall be the availability of
requisite volumes of gas. With the development of RIL's KG Basin and other fields, the
opportunity could be available; what now matters is whether the CGD license-holders can
obtain gas supplies and develop gas distribution infrastructure.
7. Chairman of the PNGRB, quoted at the Natural Gas Vehicles conference, March 2009
8. The Business Standard/ Rediff.com, March 4, 2009, '8 in race for city gas distribution'
A Note on LNG
India currently has two operational LNG terminals, both located in Gujarat, one by Petronet
LNG Ltd. (PLL) at Dahej and the other at Hazira established as a Joint Venture between
Shell and Total. While the capacity of the Dahej plant is being expanded from 5 to 7.5 and
later1 to 10 mtpa1 de-bottlenecking operations have resulted in the merchant Hazira terminal
being able to process around 3.6-4 mtpa2 of LNG. A couple of other terminals are also being
planned, at Kochi in Kerala (also by PLL) and Mundra in Gujarat.
Meanwhile, some progress is also being made to bring the partially constructed terminal at
Dabhol into operation in which GAIL and National Thermal Power Corporation (NTPC) have a
majority stake. Besides the gas meant for the Ratnagiri (the erstwhile Dabhol) plant, it
appears that other parties may be allowed to use this terminal to re-gassify LNG obtained
from various sources in return for a fee3.
India is in discussions with various entities in the Middle East, particularly Qatar, and
Australia to source LNG for the terminals currently under operations or planned for the
future.
LNG: Existing and Proposed Capactiy
(MTPA) Existing Capacity Expansion Commissioning by
Petronet LNG-Dahej 5.0 2.5 early 2009
Petronet LNG-Kochi NIL 2.5 FY11
Shell Hazira debottlenecking 4.0
Spice Energy, GSPC-Mundra NIL 2.5 FY12
Dabhol NIL 5.0 FY10
Total 9 14.0
Source: IDFC-SSKI Research, Company websites, Industry sources
1. IDFC-SSKI Research, Projects Monitor, The Hindu Business Line-Jan 1, 2009 ('Shell plans to bring spot LNG cargo to Hazira in Jan')
2. InfraLine, primary research, The Hindu Business Line-Jan 1, 2009 ('Shell plans to bring spot LNG cargo to Hazira in Jan')
3. The Financial Times, March 25, 2009, 'Big guns in race for Dabhol LNG terminal'
Petroleum Product Pipelines
India has a network of

Product Pipelines in India
petroleum product
Oil Company Name of the Pipelines Length Kms 1.4.2008 CAPACITY MMTPA 1.4.2008
pipelines connecting
POL Pipelines
sources of supply /
refineries to sources of IOC Barauni-Patna-Kanpur 745 5.30
demand. IOC has the IOC Guwahati-Siliguri 435 0.82

largest network, with IOC Haldia-Barauni 525 1.25
pipelines such as the
IOC Haldia - Mourigram - Rajbandh 277 1.35
Haldia-Barauni, Barauni-
IOC Koyali - Ahmedabad 116 1.10
Kanpur product lines and
IOC Koyali-Viramgam-Sidhpur 1056 4.10
the Mundra-Panipat crude
oil pipeline. GAIL has IOC Mathura-Jallunder 763 3.70
established two LPG IOC Panipat - Bhatinda 219 1.50

pipelines, from Jamnagar IOC Digboi - Tinsukia 75 1.00
to Loni and
IOC Mathura - Tundla 56 1.20
Vishakhapatnam to
IOC Koyali - Navgam 78 1.80
Secunderabad
IOC Koyali - Navgam 155 1.50
respectively, as the table
below indicates, while IOC Chennai-Madurai 683 1.73
Appendix III provides a IOC Koyali-Dahej 103 0.66
map of the existing and Mumbai-Manmad-Mangliya 1389 8.93
BPCL
proposed Product
HPCL Mumbai-Pune 508 3.67
Pipelines.
HPCL Vizag-Vijaywada-Secundarabad 572 5.38
HPCL Mundra-Delhi 1054 5.00
Petronet Vadinar - Kandla 100 7.25
Petronet Kochi - Coimbatore 292 3.30
Petronet Mangalore-Hasan-Bangalore 362 2.14
TOTAL 9563 62.7
LPG Pipelines
GAIL Jamnagar-Loni 1250 2.50
GAIL Vizag-Vjaywada-Secunderabad 600 1.33
Total 1850 3.83
Crude Pipelines
OIL Duliajan-Digboi-Bongaigaon-Barauni 1405 7.68
IOC Salaya-Mathura-Panipat (incld. Loop Lines) 1870 21.0
IOC Halida-Barauni 943 7.50
IOC Mundra-Panipat 1174 3.78
Total 5392 39.96

Source: MoPNG
Fuel Retailing
The private sector was not allowed in the retailing of fuel upto 20021. Subsequently, the
Government decided to open the sector to private participation subject to certain
restrictions. In particular, private players were required to commit investment of at least
USD 400 million in refineries, pipelines or other energy-related assets in the country over a
period of time2.
The Government, with its aim of insulating the Indian consumer from volatility of crude oil
prices in the international markets, has been subsidizing end-user prices, as mentioned
before. Very often, this has translated into a large subsidy being given to the domestic
consumer, with the burden of this subsidy being shared between the oil marketing firms,
the Government (which has been issuing oil bonds to the PSU marketers to compensate
them for their under-recoveries) and the upstream PSU firms of ONGC and OIL. For
example, in May 2008, the oil marketing companies were forced to take daily losses of
around USD 120 million on the retail sales of diesel, petrol, LPG and kerosene3.
At present, the total petroleum subsidy bill is close to USD 20 billion comprising USD 11.8
billion for diesel, USD 1.3 billion for petrol, USD 3.2 billion for LPG and USD 5 billion for
kerosene4. Since the Government does not compensate the private marketing firms for their
losses, their operations turn unviable at the time of high global crude oil prices.
Due to indirect control of the Government over end-user fuel prices, the fuel retail market in
India continues to be dominated by PSU firms with Indian Oil boasting of an approximately
50 percent market share, while the other public sector fuel marketers HPCL and BPCL have
an approximately 25 percent market share each5 (refer to the chart). Although the private
sector firms of RIL, Essar and Shell have entered the market, they could not sustain their
operations. In fact, RIL's nearly 1,4506 fuel pumps have been lying idle for many months.
Another feature of the Indian market is that the Government heavily taxes fuels, particularly
petrol; it has been estimated that almost 50 percent of the current prices of petrol
comprises of various taxes levied by the Central or State Governments.
Company-wise retail outlets as on FY08-09
17627
8238 8329
1432 1250
IOC BPCL HPCL RIL ESSAR
Source: MoPNG
1. The Hindu Business Line, 'Shell returns to fuel retailing’ 4. Infraline

2. IndiaMart.com, May 2003, 'Shell gets licence for retail outlets' 5. MoPNG
3. Domain-b.com, May 21st, 2008 (Subsidies driving top oil 6. The Hindu Business Line, March 21st 2009 ('IOC evinces
companies bankrupt) interest in RIL fuel retail biz')
Outlook for Fuel Retailing

The Indian fuel market does hold some promise, more so if market forces are allowed free
reign. The number of vehicles on Indian roads is expected to increase substantially, in line
with projections of economic growth.
Meanwhile, falling crude prices have re-awakened the interest of private sector players.
Recent news items indicate that RIL is looking for a strategic partner for its fuel retailing
business7.
Another opportunity lies in exploiting the potential of non-fuel retail at the existing fuel
outlets, particularly given the prime location of fuel outlets at metros. Convenience
shopping and the establishment of ATMs provide an opportunity. Fuel retailing outlets with
such additional facilities are also likely to invest in modernization and branding initiatives,
with 'Club HP' of HPCL being one such initiative.
7. The Hindu Business Line, March 21st 2009 ('IOC evinces interest in RIL fuel retail biz')
Overview of the Indian Taxation System
I. Direct Tax1
India has a federal level tax structure governed by the provisions of the Income Tax Act,
1961. It has a wide network of treaties with over 90 countries across the globe to avoid
double taxation of income.
In wake of economic reforms, the taxation system has undergone tremendous changes in
the past ten years. The tax rates have been rationalized and compared favorably with many
other countries. Further, over the period of time, the tax laws have also been simplified to
ensure better compliances.
The brief overview of India taxation system is outlined below:
Scope of total income2

! A resident in India is liable to tax on his or her world wide income irrespective of the
source of income
! A non resident in India is liable to tax on income received or deemed to be received in

India or any income accruing or arising or deemed to be accruing or arising in India.
Scheme of Taxation
! Taxation of a person depends upon its legal status (a person being an individual, firm,
company, etc.) and residential status
! Indian tax system recognizes an entity level taxation.
Other Features3
! Loss carry forward permitted upto eight years, however, depreciation can be carried
forward indefinitely
! No tax on remittance of profits by foreign companies (project office/branch office to

head office)4.
Rates applicable for the financial year 2009-20105 are as follows:
Resources India Company Foreign Company
Corporate tax rate 33.99%* 42.23%*
Minimum Alternate tax 11.33%* 10.5575%*
Dividend Distribution tax 16.995% N.A.
Fringe Benefit tax 33.99% 31.6725%

*In case net income exceeds INR 10 million
Minimum Alternate Tax (MAT)6

! MAT is applicable to a company, if tax payable by the company on its total income, as
computed under the normal provisions, is less than 10 percent of its book profits
! Due to the MAT regime, a company may be required to pay tax even during tax holiday period
1. Indian Income-tax Act, 1961 4. Income-tax Act, 1961 and Regulatory Provisions
2. Section 5 of Indian Income-tax Act, 1961 5. Proposed
3. Section 72 and Section 32 of the Income-tax Act, 1961 6. Section 115JB of the Income-tax Act, 1961
! In computing 'book profits' for MAT purposes, certain positive and negative
adjustments are made to the net profit as shown in the books of account
! Carry forward and set off of MAT is available for seven subsequent years
! Set off is allowed to the extent of difference between tax on total income under normal
provisions and MAT payable.
Dividend Distribution Tax (DDT)7

! DDT is levied at the rate of 16.995 percent on the amount of dividend declared,
distributed or paid by an Indian company
! Dividend from domestic companies is exempt from tax in the hands of recipient
! DDT is payable in addition to regular corporate income tax.
Fringe Benefit Tax (FBT)8

! FBT is payable by an employer on the benefits provided or deemed to have been
provided to the employees
! Tax is payable on value of fringe benefit as prescribed i.e. 5 percent, 20 percent or 100
percent of the costs incurred on such benefits.
Transfer Pricing provisions9

! Transfer pricing provisions were introduced in the financial year 2001-02. Under these
provisions, international transactions between associated enterprises are required to
be computed with regard to their arm's length price
! The domestic law prescribes the information and documents which are required
to be maintained by every person who has entered into an international
transaction with its associated enterprises.
Taxation of Individuals10
! Taxability of an individual is dependent on his/her residential status
! The residential status of an individual is determined on the basis of his/her physical

presence in India
! Based on the satisfaction of certain conditions, an individual could be:
- Resident and ordinarily resident (ROR)
- Resident but not ordinarily resident (RNOR)
- Non-resident (NR).
7. Section 115 O of the Income-tax Act, 1961 9. Section 92 of the Income-tax Act, 1961
8. Chapter XII-H of Income-tax Act, 1961 10. Section 6 of the Income-tax Act, 1961
Taxability
Residential Status Worldwide income Indian Income
Received in India Received outside India Received in India Received outside India
ROR
*
RNOR*
NR
* Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India.
Tax rates applicable for the financial year 2009-2010
Taxable Income Rate percent
Upto INR 150000* Nil
INR 150,000 - INR 300,000 10%
INR 300,000 - INR 500,000 20%
Above 500,000 30%
*Basic exemption limits for a resident woman is INR 180,000 and for a resident citizen (having age of 65 years) is INR 225,000
Note: The above tax rate would be further increased by surcharge of 10 percent if taxable income of the individual exceeds
INR 1000,000. Additionally, education cess of 3 percent would also be levied.
II. Indirect Tax11
Service Tax
! Service tax is applicable on identified services provided or received in India
! Current scope of taxable services is very wide and covers a vast majority of service
categories
! Engineering, management, scientific and technical consultancy, broadcasting,

construction, IPR, insurance, manpower, communication, online access, training, cargo
handling, business auxiliary services are some of the key categories
! Service tax is applicable at 10.30 percent
! Export of services are exempt from service tax - export determined as per prescribed
rules
! Import of service also liable to service tax - import determined as per prescribed rules.
VAT Legislation
! Since its inception in April 2005, VAT has been implemented in almost all States and
Union Territories with exception of Andaman and Nicobar and Lakshadweep
! VAT is a multi-point taxation system entailing a VAT at every point of sale/lease
! Dealers are allowed to avail credit of input tax on input and capital goods for set-off
against out-put VAT
! Common rate of tax adopted across all States with rates of 12.5 percent, 4 percent and
1 percent prescribed for different categories of goods. Also, some category of goods
have been declared exempt from levy of VAT
! Interstate sale of goods is not governed by VAT (liable to a central sales tax).
Custom Duty
! Custom Duty is payable on import of goods/ equipments into India
! It is levied as per rates specified in the Customs Tariff Act
! Peak rate of Customs Duty is 10 percent.
III. Regulatory and Tax Regime for the Upstream Sector12

India also provides a customised tax regime for the upstream sector and non-resident
service providers in relation to Exploration & Production operations.
A brief overview of the regulatory and tax regime for upstream sector is outlined below:
Regulatory
! FDI upto 100 percent is permitted under the automatic route in the upstream sector
! A foreign company can setup a project office or an Indian company for undertaking
upstream operations in India.
11. Comprises of relevant provisions of Finance Act, 1994 (time-to-time amendments), Custom Act and VAT legilsation
12. Comprises of Foreign Direct Investment Guidelines, Section 42 of the Income-tax Act, Article 17 of PSC and relevant Indirect tax provisions
Income Tax
There is a special mechanism for taxation of income of companies which have entered into
a Production Sharing Contract (PSC) with the Government of India for undertaking
exploration and production activities.
! As per these provisions, taxable profits of a tax payer, who has entered into a PSC with
the Government for participation in the business of prospecting, exploration or
production of mineral oil, to be determined in accordance with the special provisions
contained in the PSC
! The provisions of the domestic tax law are deemed to be modified to that extent.
Special provision
! Specific allowances in addition or in lieu of allowances under normal provisions] as
specified in the PSC are permitted.
! The specific allowances relate to:

- Expenditure by way of infructuous or abortive exploration
- Expenditure incurred for exploration or drilling activities or services or assets
used for these activities.
PSC
! Allowability of expenditure
- Special deduction - 100 percent of exploration and drilling expenses (both capital
and revenue allowed)
- Other expenses (including production expenditure) allowed under normal
provisions.
! Manner of deduction
- Allowable expenditure is aggregated till the commencement of commercial
production
- Accumulated expenditure allowed in the year of commencement of commercial
production or permitted to be amortized over a period of 10 years.
No Ring Fencing of Expenditure

! All unsuccessful exploration costs in other contract areas can be set off against income
in the contract area in which commercial production has commenced.
Tax Holiday13
! One hundred percent tax holiday available in respect of profits earned from production
of mineral oils.
! Tax holiday is available for seven consecutive years from the year of commencement of
commercial production.
! However, companies availing deduction under these provisions would still be liable to
pay MAT on 'book profits'.
13. Section 80IB(9) of the Income-tax Act, 1961
Deductibility of Site Restoration Expenses14

! Special deduction is available for site restoration expenses
! Amount of deduction being lower of:

- Sum deposited either in a special account or in a "Site Restoration Account" or
- 20 percent of the profits calculated in the prescribed manner.
Taxation of service providers15

! Applicability
Special tax regime for non-resident service providers engaged in the business of
providing services or facilities or supplying plant and machinery on hire in connection
with prospecting for, or extraction or production of, mineral oils.
! Mechanics
10 percent of the gross receipts deemed to be business income resulting in an
effective tax rate of 4.223 percent of gross revenues (rate as applicable for financial
year 2009-2010).
! Option to claim lower profits, subject to following conditions:

- Keep/maintain books/documents
- Get accounts tax audited
- Furnish tax audit report
- Compulsory scrutiny assessment
Custom Duty16
Subject to certain procedures and conditions, Custom Duty exemption is available for:
! Equipments etc. imported for exclusive use in petroleum operations
! Specified goods required in connection with petroleum operations under specific

exemption notification
! Parts and raw materials for manufacture of goods for the purpose of off-shore
petroleum operations undertaken under specified contracts.
Service Tax17
Relevant Service Tax Category
! Survey and exploration of mineral, oil & gas services (effective from 10 September
2004)
- Includes geological, geophysical or other prospecting, surface and subsurface
surveying or map making service, in relation to location or exploration of deposits
of mineral, oil or gas
! Site formation and clearance services (effective from 16 June 2005)

- Includes drilling, boring and core extraction services in relation to site formation
and clearance, excavation and earth moving and demolition
14. Section 33ABA of the Income-tax Act, 161 16. Customs Act and relevant Rules thereunder
15. Section 44BB of the Income-tax Act, 1961 17. Includes relevant notifications
! Mining services
- Introduced to tax 'any service provided in relation to mining of minerals, oil & gas'
! Commercial or industrial construction

- Includes construction of well head and civil works at site.
! Service tax also leviable on the following services:

- Dredging services
- Technical testing and analysis
- Pipeline transportation
- Cleaning (including services for tank, reservoir of commercial or industrial building
and premise)
Appendix I: Capacity Addition Planned

in the Refining Sector
Refinery wise Capacity Addition during XI Plan
S. No. Refinery MMTPA
Public Sector
1 Indian Oil Corporation Limited, Haldia 1.5
2 Indian Oil Corporation Limited, Panipat 3
3 Indian Oil Corporation Limited, Paradeep 15
4 Hindustan Petroleum Corporation Limited, Mumbai 2.4
5 Hindustan Petroleum Corporation Limited, Visakh 7.5
6 HPCL-Mittal Energy Ltd, Bhatinda 9
7 Bharat Petroleum Corporation Limited, Bina 6
8 BPCL, Kochi 2
9 Chennai Petroleum Corporation Limited, Chennai 1.7
10 Mangalore Refinery & Petrochemicals Limited, Mangalore 5.31
11 Oil & Natural Gas Corporation Ltd. Tatipaka 0.08
Total Public Sector 53.49
Private Sector
13 Essar Oil Limited, Vadinar 3.5
14 Nagarjuna Oil Corporation Limited ( NOCL) 6
Total Private Sector 38.5
Grand Total 91.99

Source: MoPNG, InfraLine
Appendix II: Map of Existing and

Proposed Gas Pipelines
NANGAL
BHATINDA
DADRI
HISSAR
JHAJAAR
CHAINSA
AURAIYA KOHIMA
DHOLPUR JAGDISHPUR
JAISALMER
MALANPUR PHOOLPUR
MATHANIA IMPHAL
KOTA
VIJAIPUR GAYA AIZAWAL
MEHSANA DEWAS
AHMEDABAD
PITAMPUR
JAMNAGAR GODHRA
RAJKOT BARODA HALDIA
DAHEJ
HAZIRA GANDHAR
BHADBHUT BHUVANESHWAR
PARADEEP
MUMBAI PUNE
VIZAG
DABHOL HYDERABAD
KAKINADA
KOLHAPUR
GADAG KG Basin
GOA Network
NELLORE
BANGALORE
CHENNAI
MANGALORE
Cauvery Basin
Network Gail’s Existing pipelines and pipelines under execution
KOCHI Proposed Gail Pipelines

TUTICORIN
Private Players Existing Pipelines
Private Players Proposed Pipelines
Source: InfraLine
Appendix III: Map of Existing and

Proposed Product Pipelines
UDHAMPUR
JALANDHAR
AMBALA
BHATINDA SAHARANPUR
PANIPAT
MEERUT
DELHI BAREILLY
MATHURA DIGBOI
TUNDLA GORAKHPUR
BHARATPUR LUCKNOW BONGAIGAON
BIRGANJ SILIGURI NUMALIGARH
JODHPUR GWALIOR KANPUR
GUWAHATI
BARAUNI
KOT KOTA JHANSI
ALLAHABAD
BOKARO
SIDHPUR
JAMSHEDPUR RAJBANDH
BINA
KANDLA VIRAMGAM MOURIGRAM
ITARSI
VADINAR RATLAM ROURKELA BUDGE BUDGE
JAMNAGAR
KOYALI NAGPUR HALDIA
PIPAVAV
PARADIP
MANMAD
MUMBAI
PUNE VIZAG
RAICHUR VIJAYWADA
KURNOOL
BANGALORE
MANGALORE CHENNAI
KARUR
TRICHY
COCHIN
MADURAI Existing Pipeline
TIRUELVELI Ongoing Pipeline
Prospective Pipeline
Source: InfraLine
KPMG's Service Offerings
KPMG is a network of professional services firms that provide knowledge-focussed,

technology enabled services. Our services in the upstream sector extend from strategic
advisory to the bidding process, transaction management services, bid and post-bid tax
advisory. KPMG has also been associated with various NELP rounds as knowledge partner
of the Directorate General of Hydrocarbons (DGH). In addition, we are supporting the DGH
in the eighth round of NELP and fourth round of CBM.
KPMG has been helping clients create and capture value across the lifecycle of an
Exploration and Production (E&P) asset. The oil & gas team of KPMG can help you in asset
acquisition to post-acquisition consolidation and diversification. A list of indicative services
our clients have sought from us, are defined in the following section:
Bid Advisory
It is important for a new entrant to understand Indian oil & gas market and formulate the
right entry options before bidding. KPMG has helped clients think through these issues
through a structured analysis of the oil & gas industry in India including key players, supply
chain capacities and infrastructure mapping. Our bid advisory assistance includes:
! Macroeconomic analysis and perspectives on the oil & gas sector dynamics
! Evaluating the bid opportunity:

- Market Assessment including demand, supply and price modeling
- Financial modeling to evaluate bidding parameters including scenario analysis
- Risk analysis / matrix and likely mitigation strategies
! Competition analysis
! Partner scan and selection including synergy assessment
! Commercial, Financial and Operational due diligence on the selected partner
! Preparation of bid packages
! Evaluation of various structuring options, such as Own entity/ Joint Venture/

Consortium with Indian or foreign entities, for making the bids for the blocks on offer.
In doing so, KPMG can help you understand the tax and regulatory structure prevailing
in the country by:
- Reviewing the tax assumptions (including but not limited to tax rate, tax capital
allowances, withholding tax, tax deductions, service tax and other indirect taxes),
and other tax-related issues factored in the financial model for the bid.
- Identifying and evaluating availability of tax incentives/ deductions to the bidders
under Production Sharing Contract (PSC), read with Indian Income Tax Act,
Customs Act and other tax regulations.
- Advising on the tax administrative procedures which the Operator as well as Non-
operator need to comply with by considering the practical complexities involved in

obtaining credits/ refund of taxes.
- Identifying various funding options for the project and analyzing the feasibility/
implications of the identified options.
- Identifying and evaluating efficient modes of repatriation of profits for the entity
investing in the Project
Post-bid Advisory & Compliance

KPMG has been assisting Exploration and Production (E&P) companies not only in
developing and implementing their vision but also in implementing business and operational
efficiency improvement programmes. The oil & gas team of KPMG includes a combination
of business strategists and sector specialists who work as part of a client centric cohesive
team. Some of the services we have provided to E&P companies in India are depicted
below:
Acquisition or Divestiture
! Evaluation of buy/sell side options
! Commercial due diligence, including assessment of market and competitive trends,

analysis of revenue, cost and capex assumptions and assessment of potential
scenarios
! Financial and tax due diligence
Business Performance
! Growth and Diversification strategies, including expansion into midstream and
downstream businesses, other allied business areas that help in improving the risk-
return profile of the E&P business
! Business planning and organization development, including developing performance

targets and performance management frameworks
! Implementation assistance for strategic initiatives
! Post-deal integration
! Diversification strategy
! Human capital advisory services
! Exit strategy including partner scan, partner selection, and commercial, financial and
operational due diligence on the selected partner
Tax and Regulatory

! Structuring the contracts for services and evaluating the withholding tax and indirect
tax implications of payments made under the contracts.
! Advising on availability of deduction under Section 42 for certain capital and revenue
expenditures.
! Advice and assistance on the composition of undertakings (well-wise/ block-wise) for

claiming tax holiday under section 80IB.
! Advising on tax implications of farm-in/ farm-out transactions relating to assignment of

exploration rights in the PSC to both the assignor and the assignee.
! Transfer pricing benchmarking study with respect to international transactions entered

into between associated enterprises.
! Assistance in compliance requirements by the operating/ non-operating entity.
! Assistance in dispute resolution including litigation.
Corporate Governance
! Strengthening corporate governance through developing charters and procedures for
the Board and its sub-committees.
! Assisting in implementing Enterprise Risk Management Frameworks.
! Designing control frameworks and conducting internal audits.
! Conducting strategic review of in-house internal audit functions to enhance its

effectiveness.
! Strengthening the Management Monitoring System including Key Performance

Indicators (KPI) definition and designing of MIS frameworks.
Acknowledgements
This document has been drafted by the Research, Analytics and Knowledge (RAK) team
within KPMG. The team consisted of Sidharth Balakrishna, Infrastructure and Government
Lead, and Suman Lala, Analyst, both with the Research, Analytics and Knowledge team.
They were guided in their work by Preeti Sitaram, a Manager with the Research, Analytics
and Knowledge team and Kumar Manish, Associate Director (Markets).
Inputs on the Tax and Regulatory structure were provided by Nabin Ballodia, Director; Neetu
Singh, Manager; and Adika Verma, a Senior; all with the Tax advisory team in KPMG.
This document has been designed and formatted by Remedios D’silva, Senior Graphic
Designer, KPMG.
in.kpmg.com
KPMG in India Contact Us:

Mumbai India
KPMG House, Kamala Mills Compound Pradip Kanakia
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The Oil and Gas Sector Overview

·Preface and Executive Summary 01

·Overview of the Indian Economy 03

·Overview of India’s Energy Sector 05

·The Indian Upstream Sector 08

·A Note on Coal Bed Methane (CBM) 13

·Gas Transportation and Distribution 17

·Petroleum Product Pipelines 21

·Overview of the Indian Taxation Regime 24

·KPMG’s Service Offerings 34

Preface and Executive Summary

The increased availability of hydrocarbons from domestic sources is thus perceived as

E&P Exploration & Production

CBM Coal Bed Methane

DGH Directorate General of Hydrocarbons

MMT Million Metric Tonnes

MMSCMD Million Standard Cubic Metres Per Day

MoPNG Ministry of Petroleum and Natural Gas

NELP New Exploration Licensing Policy

Overview of the Indian Economy

India's export dependence is lower as compared to its Asian counterparts

Source: CEIC, CLSA Asia – Pacific Markets

Projected GDP Growth Rates for Select Upcoming Economies

GDP Growth Rate (%)

Brazil China India Russia

Source: BRIC report, India Brand Equity Foundation

4. Reuters, March 2009

Overview of India's Energy Sector

! Developing strategic storage facilities at identified locations

India's per capita energy consumption compared to other countries:

India (2006) 0.51 India (2006) 503

OECD (2006) 4.7 OECD (2006) 8381

Source: International Energy Agency, Key World Statistics 2008

Role of Oil & Gas in India's Energy Mix:

Coal 51% Hydro Electric 6%

Nuclear 2% Nuclear Energy 6%

Hydro 2% Natural Gas 24%

Source: Planning Commission of India, BP Statistics

Demand-supply balance over FY08-11

(MMSCMD) FY08 FY09 FY10 FY11

Power 79.7 91.2 102.7 114.2

Fertilizer 40.8 42.7 52.2 79.4

City Gas 12.1 12.9 13.8 14.8

Industrial 15.0 16.1 17.2 18.4

Petrochemicals / Refineries / Internal consumption 25.4 27.2 29.1 31.1

Sponge iron / Steel 6.0 6.4 6.9 7.4

Total 179.0 196.4 221.9 265.2

ONGC + OIL (A) 57.3 58.4 55.7 54.7

Additional gas anticipated (C) - - 74.0 84.0

R-LNG (all expansions coming on stream) 30.5 33.6 52.5 70.0

Over / (under) supply (67.9) ~(43) ~22 ~6

6. BP Statistical Review of World Energy, June 2008

The Indian Upstream Sector

The New Exploration Licensing Policy (NELP)

! The Work Programme committed to be undertaken

! Percentage of value of annual production sought to be allocated towards cost recovery

! Profit petroleum share offered to the Government at various levels of Investment

1. NELP VIII website (Background Section)

Main features of the NELP VIII2

! Upto 100 percent participation by foreign companies is allowed

! No mandatory State participation

! No signature, discovery or production bonus is to be paid

! No interest carried by the National Oil Companies (NOCs)