Académique Documents
Professionnel Documents
Culture Documents
in India 2009
KPMG IN INDIA
Contents
·Acronyms Used 02
-
·Refining in India 14
-
·A Note on LNG 20
-
·Fuel Retailing 22
-
·Appendices 31
-
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.
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.
The Oil and Gas Sector Overview in India - 2009 02
Acronyms Used
MT Metric Tonne
NG Natural Gas
© 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.
The Oil and Gas Sector Overview in India - 2009 03
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
Singapore
Malaysia
Taiwan
Thailand
Korea
China
Philippines
Indonesia
India
(%)
Hong Kong
0 20 40 60 80 100
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
© 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.
The Oil and Gas Sector Overview in India - 2009 04
0
2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50
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.
© 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.
The Oil and Gas Sector Overview in India - 2009 05
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
! 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).
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'
© 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.
The Oil and Gas Sector Overview in India - 2009 06
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’s Primary Energy Mix in 2006 World Primary Energy Mix 2006
5. Planning Commission
© 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.
The Oil and Gas Sector Overview in India - 2009 07
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).
Supply
Pvt. / JVs (as per DGH) (B) 23.3 ~62 ~62 ~62
Total projected supply (conservative scenario) (A+B) 80.5 ~120 ~118 ~117
Total projected supply (optimistic scenario) (A+B+C) 111.0 ~153.6 ~245 ~271
© 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.
The Oil and Gas Sector Overview in India - 2009 08
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 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 weightage to the above three parameters has varied from one round to the other over
the seven rounds of NELP.
© 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.
The Oil and Gas Sector Overview in India - 2009 09
! 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
! Income Tax Holidays were granted for seven years from start of commercial production
of “Mineral Oil”
! The option to amortise exploration and drilling expenditures over a period of 10 years
from the first commercial production is allowed
! 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
! 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
© 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.
The Oil and Gas Sector Overview in India - 2009 10
! A one time Bank Guarantee (BG) needs to be provided at a lower rate for the total
committed work programme
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%
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.
© 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.
The Oil and Gas Sector Overview in India - 2009 11
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.
© 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.
The Oil and Gas Sector Overview in India - 2009 12
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.
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.
© 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.
The Oil and Gas Sector Overview in India - 2009 13
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.
Blocks Awarded 26
© 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.
The Oil and Gas Sector Overview in India - 2009 14
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.
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
© 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.
The Oil and Gas Sector Overview in India - 2009 15
2 GUWAHATI 1
3 BARAUNI 6
4 KOYALI 13.7
5 HALDIA 6
6 MATHURA 8
7 PANIPAT 12
9 NARIMANAM 1
12 VISAKHAPATNAM 7.5
13 BPCL MUMBAI 12
14 KOCHI 7.5
15 NRL NUMALIGARGH 3
18 RIL JAMNAGAR 33
19 RPL JAMNAGAR 29
The Government of India has been providing tax incentives and fiscal incentives to new
© 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.
The Oil and Gas Sector Overview in India - 2009 16
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.
© 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.
The Oil and Gas Sector Overview in India - 2009 17
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'.
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:
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'
© 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.
The Oil and Gas Sector Overview in India - 2009 18
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.
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.
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
4. Financial Express, February 2008 ('GAIL to lay TAPI pipeline') 6. KPMG knowledge based on news reports, InfraLine, PNGRB
5. Project Monitor website
© 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.
The Oil and Gas Sector Overview in India - 2009 19
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'
© 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.
The Oil and Gas Sector Overview in India - 2009 20
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.
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'
© 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.
The Oil and Gas Sector Overview in India - 2009 21
LPG Pipelines
Crude Pipelines
© 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.
The Oil and Gas Sector Overview in India - 2009 22
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.
17627
8238 8329
1432 1250
Source: MoPNG
© 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.
The Oil and Gas Sector Overview in India - 2009 23
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')
© 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.
The Oil and Gas Sector Overview in India - 2009 24
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.
Scheme of Taxation
! Taxation of a person depends upon its legal status (a person being an individual, firm,
company, etc.) and residential status
Other Features3
! Loss carry forward permitted upto eight years, however, depreciation can be carried
forward indefinitely
! 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
© 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.
The Oil and Gas Sector Overview in India - 2009 25
! 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 from domestic companies is exempt from tax in the hands of recipient
! 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.
! 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
- 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
© 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.
The Oil and Gas Sector Overview in India - 2009 26
Taxability
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.
*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.
© 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.
The Oil and Gas Sector Overview in India - 2009 27
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
! 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
! 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
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
© 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.
The Oil and Gas Sector Overview in India - 2009 28
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.
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.
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
© 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.
The Oil and Gas Sector Overview in India - 2009 29
! 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).
Custom Duty16
Subject to certain procedures and conditions, Custom Duty exemption is available for:
! 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
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
© 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.
The Oil and Gas Sector Overview in India - 2009 30
! Mining services
- Introduced to tax 'any service provided in relation to mining of minerals, oil & gas'
© 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.
The Oil and Gas Sector Overview in India - 2009 31
Public Sector
1 Indian Oil Corporation Limited, Haldia 1.5
8 BPCL, Kochi 2
Private Sector
© 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.
The Oil and Gas Sector Overview in India - 2009 32
NANGAL
BHATINDA
DADRI
HISSAR
JHAJAAR
CHAINSA
AURAIYA KOHIMA
DHOLPUR JAGDISHPUR
JAISALMER
MALANPUR PHOOLPUR
MATHANIA IMPHAL
KOTA
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
Source: InfraLine
© 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.
The Oil and Gas Sector Overview in India - 2009 33
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
Prospective Pipeline
Source: InfraLine
© 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.
The Oil and Gas Sector Overview in India - 2009 34
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
! Competition analysis
© 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.
The Oil and Gas Sector Overview in India - 2009 35
- 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
Acquisition or Divestiture
! Evaluation of buy/sell side options
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
! Post-deal integration
! Diversification strategy
! Exit strategy including partner scan, partner selection, and commercial, financial and
operational due diligence on the selected partner
© 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.
The Oil and Gas Sector Overview in India - 2009 36
! Advising on availability of deduction under Section 42 for certain capital and revenue
expenditures.
Corporate Governance
! Strengthening corporate governance through developing charters and procedures for
the Board and its sub-committees.
© 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.
The Oil and Gas Sector Overview in India - 2009 37
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.
© 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.
in.kpmg.com
Chennai
No.10 Mahatma Gandhi Road
Nungambakkam
Chennai 600 034
Telephone: +91 44 3914 5000
Fax: +91 44 3914 5999
Hyderabad
8-2-618/2,
Reliance Humsafar, 4th Floor,
Banjara Hills, Hyderabad 500 034
Telephone: +91 40 6630 5000
Fax: +91 40 6630 5299
Kolkata
Infinity Infotech Park Limited, 10th Floor,
Infinity Bench Mark, Plot G-1,Block EP & GP,
Sector - 5, Salt lake Electronics Complex,
Kolkata 700 091
Telephone: +91 33 2217 2858
Fax: +91 33 2217 2868
The information contained here in is of a general nature and is not intended to address the circumstances of any ©2009 KPMG, an Indian Partnership and a member
particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no firm of the KPMG network of independent member
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the firms affiliated with KPMG International, a Swiss
future. No one should act on such information without appropriate professional advice after a thorough examination of cooperative.
the particular situation. All rights reserved.
Printed in India.