ENERGY AND NATURAL RESOURCES

Oil and Gas Overview 2010

kpmg.com/in

FOREWORD

The oil and gas sector in India has been instrumental in fuelling the growth of the Indian economy, hence presenting a significant opportunity for investors in the years to come. The government has also been doing its bit in recent times to to deregulate the industry and encourage greater foreign participation. The New Exploration Licensing Policy (NELP), conceived to address the increasing demand supply gap of energy in India, has proved to be successful in attracting the interest of both domestic private sector players and some foreign players with eight rounds of bidding, with Reliance Industries and Cairn being particularly active in this arena . 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 due to various geographical aspects in its favour as well. New refineries may eventually be built by domestic companies and in partnerships as well, with Reliance Industries doubling the size of its already dominant refinery in order to meet future products demand. Moreover, the government is planning its first ever offer of shale gas exploration in 2011, a potential game-changer with regard to the price economics of the oil and gas sector. This document intends to provide the reader with a concise overview of the various segments comprising the oil and gas sector in India and a basic understanding of the players, size, major developments and dynamics of the sector across the value chain. We have attempted to summarize all these aspects in the document giving facts and our views and analysis regarding this space. Keeping with this, the following chapters apprise us about the Energy Market, the Upstream sector, Coal Bed Methane, Refining, Gas Transmission and Distribution, LNG, Shale Gas, Retailing of Fuels and the Taxation Regime specific to the Indian oil and gas sector I hope you find this report insightful and helpful in your study of the Indian Oil and Gas sector
1

Arvind Mahajan
Executive Director and Head of Energy and Natural Resources Sector KPMG in India

1 KPMG Analysis

ACRONYMS USED

E&P CBM DGH MT MMT MMSCMD MoPNG NELP NG PNGRB

Exploration & Production Coal Bed Methane Directorate General of Hydrocarbons Metric Tonne Million Metric Tonnes Million Standard Cubic Metres Per Day Ministry of Petroleum and Natural Gas New Exploration Licensing Policy Natural Gas Petroleum and Natural Gas Regulatory Board

TABLE OF CONTENTS

Overview of the Indian economy The Indian oil and gas market Indias upstream sector Refining in India Gas transmission and distribution Coal bed methane Liquefied natural gas Shale gas Fuel retailing in India Overview of the Indian taxation regime Regulatory and tax regime for upstream sector

01 02 03 05 06 08 09 10 11 12

15

01

OVERVIEW OF THE INDIAN ECONOMY

India booming
India is gaining strategic importance globally owing to the impressive economic growth pattern and market attractiveness. After coming out successfully from the financial crisis, economy is set to demonstrate robust growth again with the GDP growth rate of around 9.7 percent for 2010-111. With a GDP of USD 1.36 trillion2, India is currently the world's fourth largest economy in Purchasing Power Parity (PPP).

India GDP Growth Rates

10.0 9.5 8.0 6.0 4.0 2.0 2005-06
Source: NCAER, IMF

9.7

9.0 7.4

9.7

6.7

2006-07

2007-08

2008-09

2009-10

2010-2011E

Supported by high rate of domestic saving and capital formation Indias growth has been financed by a steady rise in corporate and household savings. Domestic savings have been the dominant source of national savings, where the rate of Gross Domestic Savings
1 International Monetary Fund, World Economic Outlook, April 2010 2 Reserve bank of India, April 2010

Growth in savings has also supported the surge in capital formation, which is indicated by a steady increase in the rate of Gross Domestic Rate of Capital Formation (GDCF) from 32.73 percent in 2004-05 to 34.93 percent in 2008-09.

touches 32.53 percent (2008-09), one of the highest among emerging economies.

02

THE INDIAN OIL AND GAS MARKET

India is the worlds fifth-biggest energy consumer and continues to grow rapidly. It is the third-biggest global coal producer, but has limited its supplies of oil. Oil accounts for about 31 percent1 of Indias total energy consumption, with its share of the mix having fallen from 35 percent earlier this decade. Indias 5.80bn bbl of proven oil reserves (BP Statistical Review of World Energy, June 2009) represents just 0.5 percent of the worlds total, with Mumbai High being the biggest producing field. Indias average oil production (total liquids) in 2008 was 766,000b/d. In terms of gas, India currently accounts for 0.4 percent of global reserves and just over 1 percent of production1. While most of the developed gas is in Mumbai High, major discoveries by a number of domestic companies hold significant medium-to longterm potential, with Reliance Industries, state-controlled Oil & Natural Gas Corporation (ONGC) and Gujarat State Petroleum Corporation (GSPC) all confirming significant deepwater finds that are now under development or in early-stage production.

The oil and gas sector is dominated by statecontrolled enterprises with ONGC the largest upstream-oriented oil company, dominating the exploration and production (E&P) segment and accounting for roughly around three-quarters of the countrys oil output. Indias downstream segment is also dominated by state-controlled entities, although private companies have increased their market share. Indian Oil Corporation (IOC) is the largest state-controlled downstream company, operating 10 of Indias 17 refineries and controlling about three-quarters of the domestic oil transportation network .
1

Indian Energy basket - 2009 Oil 32%

Coal 52%

Gas 10% Hydro 5% Nuclear 1% Estimated Indian Energy basket - 2025 Oil 25%

Coal 51%

Gas 20% Hydro 2% Nuclear 2% 1 BMI India Oil and Gas Report Q4 2010
Source: BP statistical review of world energy 2010

03

INDIAS UPSTREAM SECTOR

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 still has vast unexplored/poorly explored territories. Exploration activity, prior to The New Exploration Licensing Policy (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 . Realising that these fields would gradually deplete over time and no major discoveries were being brought into production, the
1

government introduced the NELP in 199798, with an aim of encouraging private sector investment in the oil and gas sector and providing a level playing field to the public and private sector through allocating acreages on the basis of competitive bidding as opposed to a nomination basis of 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 multiples .

The weightage to the above three parameters has varied from one round to the other over the eight rounds of NELP . As on 30 June 2010, the total investment made by Indian and foreign companies was around USD13.8 billion. After concluding eight rounds of NELP 239 production, sharing contracts (PSCs) have been signed2. The eighth round of the NELP was launched in April 2009 offering 70 blocks, the highest number of exploration blocks ever. A total of 62 companies comprising 10 foreign and 52 Indian companies have made bids and 31 PSCs were signed with 20 companies in the NELP VIII.

1 NELP VIII website 2 Notice Inviting Offers for NELP VIII, from NELP-VIII website

Snapshot of previous rounds of NELP NELP-I No. of blocks offered No. of blocks bid for No. of bids received No. of Blocks awarded 48 28 45 25 NELP-II 25 23 44 23 NELP-III 27 24 52 23 NELP-IV 24 21 44 21 NELP-V 20 20 69 20 NELP-VI 55 52 185 52 NELP-VII 57 45 181 44 NELP-VIII 70 36 76 31

04

NELP IX
NELP IX was announced in October 2010 with various road shows being planned in major Indian and international cities by the government to attract private investment. Also, with an increased exploration activity in India post NELP we are likely to witness , increased demand for oil and gas allied services in India, particularly given the focus on deepwater blocks and frontier basins. As a result, Indian service providers will be scaling up their activities and capabilities, enhancing their fleet size and widen their portfolio by offering different specialised services and developing their manpower. Some of the local players might also aim to offer their services to other E&P (Exploration & Production) firms across the world e.g. Aban Lloyd. 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 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 recent economic downturn as well as the perceived government intervention on freedom to market gas could serve as a dampener. On the other hand, the promise offered by certain acreages, particularly off India's east coast, means that the prospects for the growth of the upstream sector remains bright with an expected positive spin-off effect on the provision of off-shore services. The government has also shown positive intent in terms of monetising unconventional resources like shale gas and could be prepared to organise bid rounds as early as mid next year.

05

REFINING IN INDIA

India, with its current capacity of around 180 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 . Of a total of 20 refineries in India, public sector units have a capacity of 107 MMTPA while the .5 private sector players comprising of RIL and Essar have a capacity of close to 72 MMTPA.
1

the small refineries in the North-east, which are land-locked and possess a suboptimal economic size. Similarly major technology upgrades are necessary to be able to produce output from relatively lower grade crude which reduces sourcing costs thus increasing margins as well as meet new fuel specification standards. Capacity additions as well as Greenfield refineries announced by public and private sector players indicate that almost 40-50 MMTPA of additional refining capacity will be added by 2013-14 bringing the total available capacity to nearly 240 MMTPA. In the medium term this surplus supply indicates that there may be reservations against making more investments in the refinery space till the time domestic demand catches up.

Outlook for refining sector

Regardless of above, some players are mulling over setting up inland refineries close to demand centers thus reducing the cost of distribution (e.g. BPCL plans to set up a 12 mtpa refinery in Allahabad). This may result in substituting products of other refineries and hence creating pressure on the coastal refineries to look at exports.

Status of the sector

The country has further large expansions planned and 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 the environmental concerns. Therefore, capacity addition is primarily coming from emerging economies like India, China and some Middle Eastern countries . Many of the private sector refineries are focusing on the export market. As far as the PSU refineries are concerned, concerns have been expressed over the viability of

1 MoPNG

300 250 200 150 100 50

Capacity

241

MMTPA

127

2005

2006

2007

2008

2009

2010

2011

2012

2013

06

GAS TRANSMISSION 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.

to construct four new cross country pipelines . Gujarat State Petronet Ltd. (GSPL), a GSPC Group company involved in gas transmission arm also has an extensive network of around 2400 Km in Gujarat,and recently, PNGRB has completed the
1

Iran-Pakistan-India pipeline 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 billion and is expected to be 2300 .5 Km in length . Although some progress was made, several outstanding issues remained. Issues around safe delivery of gas through Pakistan and price of gas lead to the talks being suspended in 2008. In April 2010 some progress was made when India proposed to discuss the pipeline with Iran .
4 3

Gas transmission
The gas transmission domain in India has been dominated by the GAIL India Limited. It operates the Hazira Vijaipur Jagdishpur (HVJ) , Dadri Vijaipur Pipeline (total 3452 Km long), and a few other pipelines, connecting the LNG terminal at Dahej to Vijaipur and Uran and the power plant at Dabhol to Panvel . With the recent domestic gas finds in the KG basin off the East coast of India the transmission of gas to the demand centres based in the west and north of the country has assumed greater importance. Reliance Gas Transportation Infrastructure Limited (RGTIL) has implemented the 1385 Km East West Gas Pipeline to carry 80 mnscmd (million standard cubic metres per day ) of natural gas from Kakinada in Andhra Pradesh to Bharuch in Gujarat and traverses through the states of Karnataka and Maharashtra and it has further planned
1

bidding process for three new pipelines too. The existing pipeline capacity of ~220 mmscmd is expected to increase to ~ 660 mmscmd in the medium term . This expansion in infrastructure would lead to better gas availability, better tapping of demand and thus in turn increase the natural gas demand.
2

Transnational pipelines
Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline The Asian Development Bank (ADB)-backed 1,680-km long pipeline is likely to connect the gas fields in Turkmenistan to India. The pipeline traverses through Afghanistan and Pakistan (including 145 km in Turkmenistan, 735 km in Afghanistan and 800 km in Pakistan upto the India border). It would supply 38 mmscmd of gas to India.
1 2 3 4 RGTIL website, September 2010 PNGRB Wikipedia, September 2010 (Iran-Pakistan-India Pipeline) Times of India, July 2010 (IPI Pipeline: India to resume talks with Iran)

07

Myanmar-Bangladesh-India pipeline A 1,575 km 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. In February 2010 Bangladesh lifted its opposition to a gas pipeline linking India and Myanmar and running through its territory, paving the way for the establishment of a regional gas grid .
5

PNGRB has already completed two rounds of bidding for awarding licenses for city gas distribution for various cities. These licenses are awarded through an open competitive bidding process, with there being a level playing field for both domestic and foreign entities. PNGRB has also called for the third and the fourth round of bids for the states of Gujarat, Punjab, Haryana and West Bengal (Round 3) and Kerala, Andhra Pradesh, Maharashtra , Madhya Pradesh and Uttar Pradesh (Round 4). The CGD space is seeing bidding from not

Outlook for transformation and distribution

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.

City gas distribution

The City Gas Distribution (CGD) space in India has been steadily increasing with many cities being added into the fold after New Delhi, Mumbai and others in Gujarat. The notification of Section 16 of the PNGRB Act in March 2010 allowing PNGRB to grant licenses for CGD is likely to quicken the pace of rollout of CGD services in cities and geographical areas. The government is also playing its part. It has allocated 3.39 mmscmd of gas on firm and fall back basis from RIL D-6 block in the s KG Basin .
6

only the firms already in the gas transportation and distribution business but also other firms which would like to diversify into this sector. EPC contractors, engineering consultants, foreign gas majors, manufacturing firms, infrastructure players and others have shown interest in this sector. In addition to the above, stricter environmental norms around urban centres and increasing urbanisation is likely to increase the demand for piped natural gas as a clean and efficient fuel. Going forward more cities are likely to have access to local gas distribution networks.
5 Livemint.com, February 2010 (Bangladesh agrees to trination gas pipeline) 6 Infraline and Secondary Research

08

COAL BED METHANE

In order to exploit India's vast coal reserves and the methane gas trapped in coal seams, the government formulated a Policy for Coal Bed Methane (CBM) in 1997 The MoPNG . (Ministry of Petroleum and Natural Gas) was to be the administrative ministry with the DGH (Directorate General of Hydrocarbons) 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 four rounds of bidding have been completed and 33 blocks have been awarded. The potential of CBM as a primary energy resource in India is being established and increasingly efforts are being made to commercialise the same. The proven CBM reserves in India are equivalent to the Oil and Natural gas reserves in India1. At USD 4.2/mmbtu it translates to a USD 130 billion opportunity.

Major Terms and conditions offered to the bidders for Round four Fiscal stability provision in the contract No govt. participating interest No up-front payment No signature bonus required No customs duty on imports Freedom to sell gas domestically at market-determined rates.
14.0 12.0 10.0 13.49

This sector has attracted public sector enterprises ONGC and GAIL, domestic private sector companies Great Eastern Energy Corporation (GEECL), Reliance Energy Ltd, Reliance Natural Resources Ltd, Essar and foreign players Arrow Energy, BP Exploration, GeoPetrol etc2. Some of the companies have also entered into commercial long term Gas Sale Agreement. The policy regime is also favourable to exploration and commercialisation of the CBM opportunity in India.

Btoe

8.0 6.0 4.0 2.0 1.22 Coal Lignite Oil 0.79 Gas 1.10 CBM 0.77

1 Integrated Energy Policy, Report of Expert Committee, Planning Commission, August, 2006 pipeline) 2 KPMG Research

09

LIQUEFIED NATURAL GAS

Liquefied Natural Gas (LNG) trade has picked up significantly in recent years owing to increasing demand, declining domestic natural gas resources in gasconsuming countries and efforts of gasproducing countries to commercialise their resources. The LNG market has also seen key developments in the past few years including declining capital costs of LNG liquefaction plants and more flexibility in tenure and pricing of LNG Contracts Sr. No. 1) 2) 3) 4) 5) Terminal Dabhol Kochi Mundra Ennore Mangalore Promoter

The LNG imports in India in 2008-09 were estimated at 30 mmscmd. This constituted about 29 percent of total natural gas supply in India in 2008-09. Out of total LNG imports, 63 percent was imported on firm contract basis while 37 percent was imported on the spot basis . The historic demand-supply gap of natural gas has provided an impetus in setting up LNG terminals. Currently India has two
1

operational LNG terminals both located in Gujarat, one each in Dahej and Hazira, with total capacity of 12.5 MTPA . Besides the existing LNG terminals at Dahej and Hazira and their expansion plans, few other LNG terminals of combined capacity of 21 MTPA are planned to be added in India over the next few years.
2

Capacity (MTPA) 5 2.5 in Phase I To be increased to 5 6 2.5 2.5

Expected timelines 2012 beyond 2012 2014 2014 2014

Ratnagiri Gas and Power Projects Ltd PLL Adani Group and GSPC IOCL ONGC

Overall, India is expected to have LNG terminals of ~20 MTPA capacity by 2012 and ~38.5 MTPA capacity once the operations in all the proposed terminals commence. Acceptability of natural gas as a fuel is dependent on its price vis--vis alternate fuels. LNG is more expensive than domestic gas due to the additional cost of

liquification, shipping and re-gassification. This leads to higher landed price for LNG to consumers than most of the alternative fuels. One of the key drivers to improve LNG demand in domestic market will be India's ability to source long term LNG at competitive prices. At current prices, LNG may be cost efficient to few consumer

segments like Industrial consumers, Petrochemical plants and CGD. The proposed pooled pricing mechanism may also help in boosting the LNG demand in other sectors as well.

1 Crisil 2 Hazira and Dahej Terminal Website

10

A NOTE ON SHALE GAS

Shale gas is natural gas produced from shale, which are fine-grained sedimentary rocks formed by compaction of clay and other minerals. The shale formations act as both reservoir as well as source rock. Shale formations have low matrix permeability and to produce gas in commercial quantities it requires fractures to improve the permeability. Similarly, horizontal drilling is often used with shale gas to create maximum surface area in contact with the shale and hence improve gas recovery. The interest in shale gas really picked up during 2005-06 when the Henry Hub prices were at an all time high . Over the last decade, the costs of drilling and fracturing techniques have come down substantially and now shale gas is able to compete even at prevailing lower gas prices. This has resulted in huge negative impact on imported LNG in the US and severe under utilisation of the LNG regasification terminals. This whole cycle of developing cost efficient technologies to bring down the cost of monetising unconventional resources in the US has captured the
1

attention of a large number of nations like Canada, Australia, China, Sweden, Hungary, Germany, UK and India. In the Indian context, although more studies are required to assess the true potential of our geological basins, prospects of large shale deposits exists across the Cambay basin, Assam Arakan basin, KG basin and Cauvery basin. India's current policy on exploration doesn't cover unconventional resources and hence a new policy especially for shale gas may be required in the future. The fiscal and contractual regime for such exploration is also something the government needs to look at as the option could be between a royalty regime (like in US) and a Production Sharing Contracts (conventional oil and gas resources in India) . The government plans to launch the first round of Shale gas bidding in mid 2011. In anticipation of the above, some of the major players have taken a keen interest in shale gas. Reliance has already acquired stakes in Marcellus shale and Eagle Ford acreage in US . ONGC is carrying out a pilot project in the Damodar basin, which is the
1 1

first of its kind in India. In order to truly exploit the potential of shale gas in the country the following needs to be expedited: Technical assessment of shale deposits and identification of possible gas producing areas Comprehensive policy on shale gas exploration, development and production Participation from firms with technology and infrastructure to bring down costs of development and production. Shale gas definitely is an opportunity in the near future and, if large resource bases are established, it could be a big boost to a country which needs energy security for a fast developing economy.

1 Oil and Gas journal 2010

11

FUEL RETAILING IN INDIA

Indian private sector was not allowed in the retailing of fuel up to 2002. Subsequently, the government decided to open the sector to private participation subject to certain restrictions. The government, with its aim of insulating the Indian consumer from volatility of crude oil prices in the international markets, has been subsidising end-user prices of HSD, MS, SKO and LPG. This has translated into a large subsidy being given to the domestic consumer, with the burden 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. In June 2010, a major step was taken in the area of moving towards market determined pricing. The government through its Empowered Group of Ministers (EGoM) led by the Finance Minister of India, Pranab Mukherjee decided to give a free hand to oil companies to determine petrol (MS) prices in line with the market price following the Kirit Parikh Committee recommendations . Diesel prices, however, were not allowed the same freedom, arguably, due to the significant inflationary
1

effects on the economy given that it is the main fuel for the movement of goods in India. In addition to this, the government also announced a hike in prices of Petrol (MS), Diesel (HSD), Kerosene and LPG. Petrol currently accounts for only a tenth of all petroleum products consumed where as diesel accounts for nearly one-third of all products consumed within India. Although this is a commendatory step, even after this decision, the government and the public sector oil companies are expected to bear an estimated underrecovery of about INR 53,000 crore as opposed to INR 74,000 crore in revenues in 2010-11 fiscal.

market, they have found it difficult to sustain operations given the price regulation in place. However, there are indications that private sector interest has renewed in this space. Recent media reports have shown that Shell India, the domestic arm of Royal Dutch Shell Plc, plans to have 200 fuel outlets by the end of FY 09-10 . The Indian fuel market does hold some promise, more so if the market forces are allowed free reign as indicated by recent measures. 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
1

Outlook for fuel retaling

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 five and approximately 25 percent market share each. Although the private sector firms of RIL, Essar and Shell have entered the

additional facilities are also likely to invest in modernisation and branding initiatives, with 'Club HP' of HPCL being one such initiative.

1 Business Standard

12

OVERVIEW OF THE INDIAN TAXATION SYSTEM

Direct tax

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 recognises an entity level taxation.

Minimum alternate tax (MAT)4 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 18 percent of its book profits In computing 'book profits' for MAT purposes, certain positive and negative adjustments are made to the net profit

India has a federal level tax structure governed by the provisions of the Income Tax Act, 1961. It has a 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 rationalised and compared favourably 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:

Corporate income-tax For Indian income tax purposes, a corporation income comprises income from business or property, capital gains realised on any disposition of corporations capital assets and residual income arising from non-business income.

as shown in the books of account Carry forward and set off of MAT is available for 10 subsequent years.

Scope of total income2 A resident in India is liable to tax on its 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. Corporate tax rate3 Domestic companies are subject to tax at the rate of 30 percent whereas foreign companies are subject to tax at the rate of 40 percent The tax rate is enhanced by surcharge & education cess as may be applicable to the tax payer.
1 Indian Income-tax Act, 1961 2 Section 5 of Indian Income-tax Act, 1961 3 Finance Act, 2010 4 Section 115JB of Indian Income-tax Act, 1961

13

Dividend distribution tax (DDT)5 DDT is levied at the rate of 16.609 percent on the amount of dividend declared, distributed or paid by an Indian company DDT is payable in addition to regular corporate income tax.

Transfer pricing regulations7 India has a Transfer Pricing regime under which international transactions between associated enterprises are required to be computed with regard to their arm's length price. These regulations also apply to cost sharing arrangements Transfer Pricing Regulations prescribes

Other features8 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)9.

Corporate tax rates at glance

the information and documents which are required to be maintained by every person who has entered into an international transaction with its associated enterprises.

Rates applicable for the financial year 2010-2011 are as follows: Resources Corporate tax rate Minimum Alternate tax Dividend Distribution tax Branch Profit Tax Domestic Corporation 33.22%* 19.93%* 16.609% NA Foreign Corporation 42.23%* 19.0035%* N.A. NA

*In case net income exceeds 10 million

Taxation of individuals

10

Taxability Worldwide income Residential Status Received in India ROR RNOR* NR Received outside India Received in India Received outside India Indian income

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) Income of non-resident is generally computed in the same manner as the resident.
160,001 - 500,000 500,001 - 800,000 Above 800,001

* 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 11 2010-2011 Taxable Income Upto 160000* Rate percent Nil 10% 20% 30%
* In the case of resident woman below the age of 65 years the basic exemption limit is 190,000 * In case of resident individual of the age of 65 or above the basic exemption limit is 240,000 * Surcharge is not applicable * Education cess is applicable at the rate of 3 percent on income tax

5 Section 115-O of Indian Income-tax Act, 1961 6 Finance Act 2010 7 Chapter X of Indian Income-tax Act, 1961

8 Section 72 and Section 32 of Indian Income-tax Act, 1961 9 Indian Income-tax Act, 1961 and the Exchange Control / Regulatory provisions

10 Section 6 of Indian Income-tax Act, 1961 11 Finance Act 2010

14

Key indirect taxes

Service tax

12

VAT legislation Since its inception in April 2005, VAT has been implemented in almost all Indian States and Union Territories with exception of Andaman and Nicobar and Lakshadweep VAT is a multi-point taxation system

Custom duty Custom Duty is payable on import of goods/ equipments into India It is levied as per rates specified in the Customs Tariff laws depending upon the prescribed HSN classification Peak rate of Customs Duty is 10 percent.

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 Mining, Survey & exploration of minerals, Transportation, , scientific and technical consultancy, construction, IPR, insurance, manpower supply, telecommunication, online database access, training, business auxiliary services are some of the key categories Service tax is applicable at 10.30 percent Export of services are not subject to service tax - export determined as per prescribed rules Import of service liable to service tax in hands of recipient in India - import determined as per prescribed rules.

entailing a VAT at every point of sale and sale includes transfer of right to use goods and transfer of property in goods in the course of execution of works contracts

Excise duty Generally levied at the rate of 10

Dealers are allowed to avail credit of input VAT paid on inputs and capital goods for set-off against output VAT/ CST Common rate of tax adopted across all States with rates generally ranging from 4percent to 15percent for different categories of goods. Also, some category of goods have been declared exempt from levy of State VAT Interstate sale of goods is subject to a CST levy and currently applicable at 2% subject to conditions. CST is a noncreditable levy.

percent plus education cess of 3 percent on manufacture of goods Payable at the time of removal of goods from factory gate Excise duty paid by the buyer to the seller is available as input credit and may be utilized to set-off the buyers output Excise duty/ Service tax liability

12 Comprises of relevant provisions of Finance Act, 1994, The Customs Act, 1962 and State-specific VAT legislations, as amended from time to time, the rules and regulations thereunder

15

REGULATORY AND TAX REGIME FOR UPSTREAM SECTOR

Regulatory and tax regime for upstream sector

13

Income tax
India also provides a customized tax regime for the upstream sector and nonresident service providers in relation to Exploration and Production operations. 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.

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.

India also provides a customized tax regime for the upstream sector and nonresident 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 up-to 100 percent permitted under automatic route (i.e. without approval) in exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products, actual trading and marketing of petroleum products, market study and formulation. This will however be subject to the existing sectoral policy A foreign company can setup a project office or an Indian company for undertaking upstream operations in India.

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.

PSC
Hundred percent deduction of exploration and drilling expenses (both capital and revenue allowed) and other expenses (including production expenditure) allowed under normal provisions of the Income-tax Act

13 Comprises of Foreign Direct Investment Guidelines, Section 42 of Indian Income-tax Act, 1961, Article 17 of PSC and relevant indirect tax provisions

16

PSC also lay down the manner of deduction as: 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.

Taxation of service providers16

There is a special tax regime for nonresident 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. Ten percent of the gross receipts deemed to be business income resulting in an effective tax rate of

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 Mining services (effective from 1 June 2007) - Introduced to tax 'any service provided in relation to mining of minerals, oil & gas

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.

4.223 percent of gross revenues (rate as applicable for financial year 20102011) The tax payer has an option to claim lower profits, subject to following conditions: Commercial or industrial construction - Includes construction of well head and civil works at site. Service tax also leviable on the following services: - Furnish tax audit report - Dredging services - Compulsory scrutiny assessment. - Technical testing and analysis Custom duty17 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 Excise duty Equipment and machinery procured for exploration and production operations are eligible for deemed export benefits which include Excise duty drawback/ exemption / advance authorization. - Pipeline transportation - Cleaning (including services for tank, reservoir of commercial or industrial building and premise).

Tax holiday

14

- Keep/maintain books/documents - Get accounts tax audited

Hundred percent tax holiday available in respect of profits earned from production of mineral oils. Hundred percent tax holiday available in respect of profits earned from production of natural gas from the blocks licensed under NELP VIII and CBM IV 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'.

Deductibility of site restoration fund Special deduction is available for

15

petroleum operations undertaken under specified contracts. Service tax

18

contribution to site restoration fund Amount of deduction being lower of: - Sum deposited either in a special account or in a "Site Restoration Account" or - Twenty percent of the profits calculated in the prescribed manner.

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

14 Section 80IB(9) of Indian Income-tax Act, 1961 15 Section 33ABA of Indian Income-tax Act, 1961

16 Section 44BB of Indian Income-tax Act, 1961 17 Custom Act, 1962 and the rules and regulations thereunder

18 The Finance Act, 1994 and the rules and regulations thereunder

17

Proposed legisation - Direct Tax Code Bill 2010

In an attempt to simplify the direct tax provisions, the government proposes to replace the existing tax regime with the new Direct Tax Code Bill, 2010 (DTC). The DTC is likely to be effective from 1 April 2010 and the key features are as under: Income has been proposed to be classified into two broad group (i) Income from Ordinary Sources and (ii) Income from Special Sources. The tax rate for companies (domestic as well as foreign companies ) have been pegged at 30 percent. In addition, foreign companies are also liable to a 15 percent branch profit tax (BPT) on post tax income MAT applicable to a companies, if tax payable by the company on its total income, as computed under the normal provisions, is less than 20 percent of its book profits. Carry forward and set off of MAT is available for 15 subsequent years DDT is levied at the rate of 15 percent on the amount of dividend declared, distributed or paid by an Indian company Corporate tax rates at a glance: Provisions related to Controlled Foreign Corporations (CFC) have been introduced and it gets attracted when a foreign company is controlled by resident tax payers. The DTC provides for General AntiAvoidance Rules (GAAR) provisions which empower the revenue authorities with sweeping powers to declare any arrangement impermissible if entered with the objective of obtaining a tax benefit and lacks commercial substance. Taxation of service providers Income of 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 and mineral oil is classified as Special Source income 14 percent of the gross receipts deemed to be business income resulting in an effective tax rate of 4.2 percent of gross revenues (at tax rate of 30 percent)

Tax regime for upstream sector

DTC has proposed specific tax regime for the upstream sector (Schedule Eleventh) and non-resident service providers (Schedule Fourteenth) in relation to Exploration & Production operations. Key features of the DTC provisions are as under Income from business of exploration and production of mineral oil is classified as Special Source income Specific computation mechanism prescribed in Schedule Eleventh Deduction for capital expenditure and revenue expenditure, infructuous and abortive expenditure allowed

The tax payer has an option to claim lower profits, subject to following conditions: - Keep/maintain books/documents - Get accounts tax audited - Furnish tax audit report - Compulsory scrutiny assessment.

Resources Corporate tax rate Minimum Alternate tax Dividend Distribution tax Branch Profits Tax

Domestic Foreign Corporation Corporation 30% 20% 30% 20%

Deduction for deposit made to Site Restoration Fund Profit-linked deductions are replaced with investment based incentives are introduced DTC provides for grandfathering of tax

15% N.A.

N.A. 15%

holiday available to oil and gas undertaking which are eligible for such benefit under the present tax regime.

18

Proposed legisation - Goods and services tax

The Finance Minister while presenting the Union Budget 2010-11 expressed the Government's 'earnest endeavour' to roll out GST on 1 April 2011, however, due to lack of consensus between States and Centre, the said deadline may be extended GST would be a destination-based tax levied on consumption, applicable on a comprehensive base of both goods and services GST in India is proposed to be a dual levy (i.e. Centre and State level) and is likely to subsume most, if not all, of the current Central and State levies like Excise duty, VAT/ CST, Service tax, etc. Free flow of credits are proposed under GST regime (i.e., input taxes paid on procurement of goods and services can be set off against output taxes payable on supply/ provision of goods/ services) Whether petroleum products would be included in GST ambit is still uncertain.

Key areas of relevance under the proposed GST regime

Although, the precise impact of GST on Oil and Gas sector needs to be analyzed in light of the GST provisions, in due course of time, the following is the likely impact on the same, based on the existing information in the public domain: Likely increase/ change in tax rates of goods and services with a proposed GST rate of 20/16 percent Stock transfers are likely to be taxable under GST at par with inter-state supplies Fate of existing Customs/ Excise duty exemptions for equipment unclear in light of overall intent of GST Imports to be brought under the GST net for the first time Concessional CST rate (2 percent) on inter-state purchases likely to be discontinued The definition of 'India' may be widened under GST regime to cover all the offshore supply of goods and services within the Exclusive Economic Zones.

19

Appendix I: Map of Existing and Proposed Gas Pipelines

Source: PNGRB

20

Appendix II: Existing and Proposed LNG Terminals

Dahej I&II (10mtpa) Dahej III (2.5mtpa) Mundra (6mtpa) Hazira I (2.5mtpa) Hazira II (2.5mtpa) Dabhol (5mtpa) Mangalore (2.5mtpa) Kochi (2.5mtpa) Kochi (2.5mtpa)

Ennore (2.5mpta)

Expected to come up by FY 12 Expected to come up after FY 12

Existing LNG Terminal Proposed LNG Terminal

Source: KPMG Analysis

21

ABOUT KPMG IN INDIA

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG in India, the audit, tax and advisory firm, is the Indian member firm of KPMG International Cooperative (KPMG International. ) was established in September 1993. As members of a cohesive business unit they respond to a client service environment by leveraging the resources of a global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. We provide services to over 2,000 international and national clients, in India. KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata, Pune and Kochi.

The firms in India have access to more than 3000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technologyenabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.

Contact us Vikram Utamsingh Head - Markets T: +91 22 3090 2320 E: vutamsingh@kpmg.com Arvind Mahajan Head - Energy and Natural Resources T: +91 22 3090 1740 E: arvindmahajan@kpmg.com www.kpmg.com/in

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (KPMG International), a Swiss entity. Printed in India