Report of the Committee on Gas Pricing

Transcription

1 Report of the Committee on Gas Pricing - 204

2 ~ NDEX Chapter No. Topic Page No. r ntroduction Natural Gas Price Regimes in ndia. 3-2 Government's role in PSC regime after the Judgment of Hon'ble Supreme Court in Civil Appeal no 4274 of ~ 4 Discussion regarding the Rangarajan 5-2 Committee Report- 5 Suggested Approach for Gas Price Determination '. '. o

3 CHAPTER-. ntroduction: The Government of ndia had constituted a Committee under the Chairmanship of Dr....~ C. Rangarajan, the then Chairman of the Economic Advisory Council to the Prime Minister, in May 202 to look into the Production Sharing Contract (PSC) mechanism in Petroleum ndustry. One of the terms of reference (ToR-v) of the Committee was to suggest structure.and elements of the guidelines for determining the basis or formula for the price ofdomestically produced gas, and for monitoring actual price fixation. A copy of the above mentioned ToR is at Annexure-. n December 202, the Committee submitted its report on Production Sharing Contract ~ ~ l~ l (PSC) mechanism in Petroleum ndustry. The report, inter-alia, recommended a formula for pricing of domestically produced gas. The relevant Chapter (24) dealing with the recommendations on the above ToR is at Annexure-. This issue was considered by the Cabinet Committee on Economic Affairs twice, on 27th June, 203 and 9th December, 203. Thereafter the Government notified the <, Domestic Natural Gas Pricing Guidelines, 204 on 0th January, 204 (Annexure-) setting out the formula for the price of domestically produced natural. gas, based on the recommendations of the Rangarajan Committee. The Notification was to be implemented with effect from stapril, 204. But the same could not be implemented as the Election Commission deferred the notification of Gas Price till the completion of 204 Lok Sabha General Election process. After the new Govt. assumed office, it was decided that the whole issue of gas pricing be comprehensively re-examined and directed that the Domestic Natural Gas Pricing Guidelines, 204 be kept in abeyance up to 30 September, 204, and till that time, the domestically produced gas may continue to be priced at the rate prevailing on 3st March, Constitution of the Committee: On 3thAugust, 204, the Ministry of Petroleum and Natural Gas constituted a Committee comprising the following members: t ---

4 . Sri P K Sinha, Secretary (Power), Govt. of ndia, Member 2. Sri Ratan P Watal, Secretary (Expenditure), Govt. of ndia, Member 3. Sri J K Mohapatra, Secretary (Fertilizers), Govt. of ndia, Member 4. Sri Rajive Kumar, Addl. Secretary, (P&NG), Govt. of ndia, Member Secretary. The Terms of Reference (ToR) of the above Committee was to undertake a comprehensive re-examination of the issue of Gas Pricing. The Committee was also mandated to consult the major stakeholders before submitting its recommendations. The Committee deliberated upon the scope of its ToR, keeping in view the limited ~me available to it. n the backdrop that this issue has already been considered twice bithe CCEA, the Committee felt that all the issues that arise out of the Rangarajan Committee's recommendation on gas.pricing be examined in detail, along with other related issues..3 ssues before the Committee: The Committee discussed the issues related to domestic gas pricing on , , , , , , , and in the light of the Terms of Reference (ToR) mentioned above. The Committee met with the representatives of the major producers and consumers of gas in ndia, including their Associations, on and subsequently reviewed the representations made by them. The comments from the Department of Economic Affairs, Department of Micro, Small and Medium Enterprises, Department of Heavy ndustries and Public Enterprises, Department of Steel and Department of Chemical and Petrochemicals were also invited. The Committee also considered! deliberated in detail on specific issues on gas pricing as suggested by Ministry of Petroleum and Natural Gas. t also considered the views expressed by the Parliamentary Standing Committees relating to Ministry of Petroleum and Natural Gas and the Ministry of Finance on the subject (Annexure-V) and also the comments by various Ministries! Departments at the time of consideration of Rangarajan Committee Report by the CCEA. l. 2 -

5 :~ Natural Gas Price Regimes in ndia CHAPTER-2 The issue of gas pricing has been examined over the years by a number of Committees. The position of gas produced under different regimes and its supply to different sectors during may be seen at Annexure-V. The prevalent pricing regimes for gas in the country are detailed below: The natural gas produced by ONGC and OL from nominated blocks comes either from existing or from new fields (Le. the ones which went into production after May, 200S). There are separate price regimes for these two, viz., Administered Pribing Mechanism (APM) and Non Administered Pricing Mechanism. Of the Million Standard Cubic Meters per day (MMSCMD) of total supply of domestic gas in 203-4, 47.8 MMSCMD (S8.96%) was under the Administered Price Mechanism (APM), while 9.2 MMSCMD (.40%) was under Non-APM mechanism. 2. Administered Pricing Mechanism (APM) Gas produced from existing fields of the nominated blocks of National Oil Companies (NOCs), viz., OL & ONGC, is covered under this mechanism. These gas-producing blocks were allotted to National Oil Companies on a nomination basis under the taxroyalty regime. This gas is being supplied predominantly to fertilizer plants, power plants, court-mandated customers, and customers having a requirement of less than SO,OOOstandard cubic metres per day at APM rates. The price for APM gas was initially fixed on cost plus basis. However, with effect from , the Government fixed APM gas price in the country at $ 4.2/mmbtu (inclusive of royalty), except the Northeast, where the APM price is $ 2.S2/mmbtu, (60% of the APM price elsewhere). The balance 40% is paid to the NOCs as subsidy from the Government Budget. The price of APM gas supplied to customers not entitled for APM gas is being notified by the Ministry of Petroleum and Natural Gas from time to time. This price, effective from.7.200, is as below: --- l. 3

6 Area Zone Price ($/mmbtu) Western & Northern Zones (covering Maharashtra, Gujarat and other States covered by HVJ DVPL, viz., 5.25 Rajasthan, M.P., U.P., Haryana & Delhi) Southern Zone -- KG Basin 4.5 Southern Zone -- Cauvery Basin 4.75 North-East., 4.2 dentified onshore fields in Gujarat & Rajasthan 5.0 Owing to existing supply linkages and operational requirements, it would happen that customers entitled for APM gas physically get market priced gas and vice versa. t was decided to have a Gas Pool Account mechanism with inflows coming from sale of APM gas to consumers not entitled for APM gas at market price and outflow being for purchase of non-apm gas for supply to customers entitled for gas at APM price Non-APM Gas produced by NOes from Nominated Fields National Oil Companies (NOCs), viz., ONGC & OL, are in principle free to charge a market-determined price for gas produced from new fields in their existing nominated blocks. However, Government has issued a pricing schedule & guidelines for commercial utilization of non-apm gas produced by NOCs from such new fields in their nominated blocks. Four supply zones have been identified in the guidelines. The prices of non-apm gas sold by NOCs in these four zones are the same as in the table above. Further, a premium of $ 0.25/mmbtu for production of non-apm gas from offshore fields has been provided, as higher investment is required for development and production from offshore fields. 2.3 Pre-NELP Gas Certain blocks where discoveries were made by NOCs were auctioned under a Production Sharing Contract (PSC) to private sector E&P companies to overcome funding constraints and lack of advanced technologies. n 203-4, these blocks - 4,

7 supplied 9.85 MMSCMD (2.3% of the total) gas to various customers. Under these PSCs, viz., Panna-Mukta, Tapti (PMT) and Ravva, the entire gas produced has to be sold to the GO nominee (vlz., GAL), as per the price formula specified in the PSC. t may be noted that the prices of gas for these PSCs were discovered through limited tender and GAL as Government nominee, in every case, matched the highest price bid. The PSCs for Panna-Mukta & Tapti were executed on December 2, 994 and that of Ravva on October 28, 994. n case of Panna-Mukta & Tapti PSCs, the price formula for gas is linked to an internationally traded fuel oil basket, with a specified floor and ceiling price of US$ 2./mmbtu and US$ 3./mmbtu respectively. These PSCs further have a provision to revise the ceiling price after 7 years from the dat~ of first supply. With this revision, the revised ceiling price in case of Panna-Mukta gas is US$ 5.73/mmbtu and in case of Taptl, it is US$ 5.57/mmbtu. GAL, as 'the Government nominee, is buying gas from the PMT JV at this rate. Out of the total allocation 7.3 mmscmd, 5 mmscmd of PMT gas has been allocated to power & fertilizers sectors, which is being supplied at the APM rate to consumers. The difference in price is recovered from the gas pool account. As regards Rawa & Ravva Satellite fields, under the provisions of their PSC, on expiry of five years from the date of first delivery of gas, the JV and the Government were required to enter into good-faith negotiations to determine the basis for calculation of the purchase price, taking into account all reasonably relevant factors. The present price of the Rawa field is US$ 3.5/mmbtu and that of Rawa satellite is US$ 4.3/mmbtu. Revision of the prices is due, and GAL & the JV are in negotiations. The gas from Rawa field is being supplied at the APM rate to consumers and the difference in price is being recovered from the gas pool account. 2.4 Pricing under Small-sized Discovered Fields & Pre-NELP Exploratory Blocks 24 small-sized discovered fields and 28 pre-nelp exploratory blocks (of which 7 are in operation) were settled under a Production Sharing Contract (PSC) with private E&P companies (viz. Hazira, RJ-ON-90/ etc.). These provide for the sale of gas in the domestic market at prices obtained on arm's length principle, in case the gas is sold other than to the Government nominee. There is no price formula specified under l. 5 --

8 the PSCs and unlike NELP, the price formula does not require prior approval of the Government before sale of gas by the Contractor. 2.5 New Exploration and Licensing Policy (NELP): The following provisions of the PSC (for NELP ) are relevant in the context of sale of natural gas and the price to be adopted for valuation purposes to calculate cost petroleum, profit petroleum share and royalty: Articles 2.6 Valuation of Natural Gas 2.6. The Contractor shall endeavour to sell all Natural Gas produced and s'!:ved from the Contract Area at arm's length prices to the benefits of Parties to the Contract. ;, Notwithstanding the provision of Article 2.6., Natural Gas produced from the Contract Area shall be valued for the purposes of this Contract as follows: (a) Gas which is used as per Article 2.2 or flared with the approval of the Government or re-injected or sold to the Government pursuant to Article shall be ascribed a zero value; (b) (c) Gas which is sold to the Government or any other Government nominee shall be valued at the prices actually obtained; and Gas which is sold or disposed of otherwise than in accordance with paragraph (a) or (b) shall be valued on the basis of competitive arm's length sales in the region for similar sales under similar conditions The formula or basis on which the prices shall be determined pursuant to Article (b) or (c) shall be approved by the Government prior to the sale of Natural Gas to consumers!buyers. For granting this approval, Government shall take into account the prevailing policy, if any, on pricing of Natural Gas, including any linkages with traded liquid fuels, and it may delegate or assign this function to a regulatory authority as and when such an authority is in existence. - 6

9 2.6 Evolution of Gas Prices under NELP Regime: Under NELP, gas pricing has formally been approved only in case of RL's KG Basin discovery, which supplied 3.53 MMSCMD,(6.9% of the total) of domestic gas in n May 2007, the Contractor of KG-DWN-98/3 block, viz., RL submitted a proposal of price formula/basis for approval by the Government. n the proposal, the price formula was benchmarked to international crude price, with a floor and a ceiling price, and also with a constant factor "C' to take care of bidding. The price formula proposed was as under: SP (Rs.lmmbtu) = 2.5*K + (CP-25) O.5*ER+ C Where SP is the sale price of gas in Rs/mmbtu. CP is the annual average Brent crude price for the previous financial year, with a cap of $ 65/bbl and a floor of $ 25/bbl. ER is the average $/Rs. exchange rate for the previous financial year. K is for ER between 25 and 65, or ERl25 when ER is less than 25 or ERl65 when " ER is more than 65. C is the premium quoted by the customer. RL, in its proposal, stated that bids were received from 0 customers (5 each from the power and fertilizer sectors), and based on the bids received, at a value of C=4, most of the gas stood picked up by the bidders. The above price proposal was initially considered by the Economic Advisory Council to the Prime Minister (EAC), chaired by Dr Rangarajan, which examined the pricing. formula and made important recommendations. The Government also constituted a Committee of Secretaries (COS) under the Cabinet Secretary to consider the gas supply and pricing issues. This. committee recommended that the Government may consider framing a Gas Pricing and Gas Utilization Policy, before considering the price proposal. Finally, the matter was considered by an Empowered Group of Ministers (EGoM), constituted on 3th August 2007 to examine and decide issues relating to gas pricing and commercial utilization of gas under the New Exploration & Licensing Policy ~ t JJ 7.~~ ~ ~

10 (NELP). The EGoM, after taking into account the reports submitted by the said two committees and representations made by various stakeholders, at its meeting held on 2thSeptember 2007, took the following decisions: (( i) t will not be in the country's interest to renege from PSCs entered into in good faith under the New Exploration & Licensing Policy (NELP). Sanctity of the contracts signed should be maintained. (ii) The price basis/formula submitted by Mis. RL-Niko under Article for valuation of natural gas may be accepted with modifications as per the recommendations of 'the EAC, including denomination of the entire formula in US Dollars. However, for all NELP- to NELP-V, contracts, for natural gas price calculation, the constant will be pegged at $ Since C is the only biddable component, assigning a value ot zero to this component in the present case will adequately take care of the transparency aspect of the bidding process as the price will be determined by the Government only on the basis of a formula. This should bring the price down by about 8%. Under Article 2.6 of the PSC, this price basis formula will be valid for five years from the date of commencement of supply. The decisions taken in this EGoM meeting will be without prejudice to the NTPC vs. RL and RNRL vs. RL cases which are separately subjudice. (iii) The cap for CP in the formula would be frozen at US$ 60 per barrel. (iv) Though in the present instance the value of C is to be retained at zero, for the purpose of retaining the biddable character of the formula and allocation of gas amongst priority sectors, the formula must retain C as a positive non-zero integer. (v) The price discovery process on arm's length basis will be adopted in the future NELP contracts only after the approval of the price basis formula by the Government. The price discovered through this process would be applicable to all sectors, uniformly. i The price formula finally approved by the EGoM is given below: 5P (U5$/mmbtu) = (CP_25)o.5 Where, 8.

11 ~ SP is the sales price in $/mmbtu (on Net Heating Value / NHV basis) at the delivery point at Kakinada. CP is the average price of Brent crude oil in US$/barrel for the previous financial year, based on the annual average of the daily high and low quotations of the FOB price of dated Brent quotations as published by Platts Crude Oil Market wire. CP is capped at US $ 60/bbl, with a floor of US$ 25/bbl. CP is fixed for each contract year and is based on the CP for the preceding financial year. FY means the financial year, which commences each year on st April and ends on the following 3st March. (~ The selling price comes to US$ 4.2/mmbtu for crude price greater than or equal to US$ 60/barrel. This is equivalent to Rs?,500/mscm at an exchange rate of US$ = Rs. 45. The above Gas Pricing Framework under NELP was examined by the Hon'ble Supreme Court. mplications of this judgement relating to mentioned later in Chapter-3 ~ 2.(: Pricing of CBM: PSC provisions are The sale and pricing of Natural gas from CBM Blocks is defined under Article 8 of the CBM Contract. As per Article 8. of the Contract, the Contractor shall have the freedom to sell CBM at arm's length prices in domestic market. The relevant Articles 8.5 and 8.6 of the Contract deal with valuation of CBM. 8.5 Valuation of CBM 8.5. The Contractor shall endeavour to sell all CBM produced and saved from the Field/Development Area at Arms-Length Prices to the benefit of Parties to the Contract Notwithstanding Article 8.5., CBM produced from the' Field/ Development Area shall be valued for the purpose of this Contractas follows: (a) CBM which is used as per Article 8.2 or flared with the approval of the Government or re-injected shall be ascribed a zero value; L. - 9

12 (b) CBM which is sold to the Government or to the State Government(s) in lieu of either Production Level Payments (PLP) or Royalty shall be valued at the prices actually obtained; and (c) CBM which is sold or disposed of otherwise than in accordance with paragraphs (a) or (b) above shall be valued on the basis of competitive Arms Length Sales in the region for similar sales under similar conditions. 8.6 The formula or the basis on which the CBM prices shall be determined pursuant to Article (c) shall be approved by the Government prior to the sale of the 5BM to consumers/buyers within sixty (60) Business Days from the receipt of proposal or from the date of receipt of clarification/additional information, where asked for by the Government. Such approva/(s) from the Government shall be required to be obtained by the Contractor on one time basis prior to execution of such sale/purchase agreement(s) for the CBM and subsequent modification(s), if any, in this regard. For granting this approval, the Government shall take into account the prevailing policy, if any, on pticini; of CBM including any linkages with traded liquid fuels, and it may delegate or assign this function to a regulatory authority as and when such an authority is in existence and in place. Present Status: The approval for the gas price formula / basis for valuation of CBM has been issued in the following three cases: i) Raniganj (South) CBM Block: The Block is operated by M/s Great Eastern Energy Corporation Limited (GEECl) and commercial production of CBM has commenced from July 2007 (0.3 Million m3 /day). GO has on approved the formula/basis for valuation of CBM gas at a sale price of US$ 6.79/mmbtu. ii) Raniganj (East) CBM Block: The Block is operated by M/s Essar Oil Limited (EOl). GO has on approved sale of incidentally produced CBM gas l. -- 0,

13 iii) at a price of US $ 6.25 mmbtu for a short period up to the end of Phase-. ( ). Further, for Phase- (Development Phase and Commercial Production), GO vide letter dated approved CBM gas price of US $ 4.2 / mmbtu at the well-head. Jharia CBM Block: The Block is operated by ONGC. GO vide order dated approved sale of incidentally produced gas at price of US $ 5. / rnmbtu. The CBM supplies in were limited to only 0.34 MMSCMD (0.42% of the total domestic gas). 2.8 Pricing formula based on Rangarajan Committee Report: Based on the Rangarajan Committee's recommendations on domestic gas pricing, MOPNG notified the Domestic Natural Gas Pricing Guidelines, 204 on 0th January, 204. Para. of the Guidelines (Annexure-) states that the guidelines will be applicable to all natural gas produced domestically, irrespective of the source, whether conventional, shale, CBM etc. Under Para.2 it is also mentioned that these -, guidelines shall not be applicable where prices have been fixed contractually for a certain period of time, till the end of such period. Discussions regarding gas pricing formula recommended by the Rangarajan Committee is in Chapter Pricing of mported LNG: During 203-4, 4. MMSCMD of LNG supplemented the domestic production of MMSCMD of natural gas. The imported LNG sourced from the international markets can be divided into following three categories: i) Long Term ii) iii) Medium and Short Term Spot The price of imported LNG is not controlled / fixed by the Government. The price of Long Term, Medium Term and Short Term R-LNG is based on the pricing formula ~ L. Jr». -- ~

14 agreed between the buyer and the seller, whereas the price of Spot LNG varies from cargo to cargo depending on international demand supply position. 2.0 Pricing of Small/solated fields The Government on 8th July, 203 issued "Guidelines for Selection of Customers for Domestic Gas available from Small/solated Fields" (Annexure-vi). Definition of the fields to which these Guidelines will apply is the Gas produced from fields of Nominated Blocks of National Oil Companies (NOCs), viz. ONGC & OL, whose peak production is less than 0. MMSCMD and which are situated more than 0 km away from gas grid or Fields whose peak production is less than 0. MMSCMD and ha.sa gas pressure less than grid pressure. Allocation of Gas, from these fields is done by NOCs through open competitive bidding and awarded to highest price bidder..ifhe base price of the bid is equal to Non-APM price of gas in that zone. 2. Summary of Gas Prices under different regimes in ndia APM APM to Non APM Customers Non APM APM - North East Price Pre-NELP $ 4.2/mmbtu $ 4.2 to $ 5.2.5/mmbtu $ 4.2 to $ 5.0/mmbtu $ 2.52 mmbtu a) Panna Mukta $ 5.73/mmbtu b) Tapti $ 5.57/mmbtu c) Ravva $ 3.50/mmbtu d) Ravva Satellite $ 4.30/mmbtu NELP Small Sized Discovered Fields (24) - Pre NELP Exploratory Blocks $ 4.20/mmbtu No formula; No prior Approval; Sale on Arms-Length Principle 2 -

15 M l Government's CHAPTER role in PSC regime after the Judgment of Hon'ble Supreme Court in Reliance ndustries Ltd. (RL) vs. Reliance Natural Resources Ltd. (RNRL) case( Civil Appeal no 4274 of 200) Special Leave Petitions were filed by the Union of ndia, Reliance ndustries Ltd. (RL) and Reliance Natural Resources Ltd. (RNRL) before the Hon'ble Supreme Court against the order of the Division Bench of -the Bombay High Court in the matter arising out of a MOU/family agreement between the members of the Ambani family. The judgment in this case has a bearing on the gas allocation and pricing issues under the NELP contracts. ;?: n brief the position which emerged from the judgment of the Hon'ble Supreme Cou~ on these issues is as follows (Para 9 of the judgment): i) The natural resources are vested with the Government as a matter of trust in the name ii) ~ iii) iv) of the people of ndia. Thus, it is the solemn duty of the State to protect the national interest. Even though exploration, extraction and exploitation of natural resources are within the domain of governmental function, the Government has decided to privatize some of its functions. For this reason, the constitutional restrictions on the government would equally apply to the private players in this process. Natural resources must always be used in the interests of the country and not private interests. The broader constitutional principles, the statutory scheme as well as the proper interpretation of the PSC mandates the Government to determine the price of the gas before it is supplied by the contractor. The policy of the Government, including the Gas Utilization Policy and the decision of EGoM would be applicable to the pricing in the present case. v) The Government cannot be divested of its supervisory powers to regulate the supply and distribution of gas.

16 Proper nterpretation of the PSC (Para 92 0 of the Judgement): The objective of the PSC inter-alia is to regulate the supply and distribution of gas. Keeping this objective in mind, Article 2 of the PSC must be interpreted 4~ to give the power to the Government to determine both the valuation and pricing of gas. t is not feasible to restrict the power of the Government in such matters of national importance, especially when the governing contract, the PSC also provides for it. Role of the Government (Para 92 E of the Judgement): n a Constitutional democracy like ours, the national assets belong to the people..the r: Governmentholds such natural resources in trust. Legally, therefore, the Government owns such assets for the purposes of developing them in the interests of the people. n, the present case, the Government owns the -gas till it reaches its ultimate consumers. A mechanism is provided under the PSC between the Government and the contractor (RL, in the present case). The PSC shall override any other contractual obligation between the contractor and any other party. The relevant extracts of the judgment are at Annexure-V. "

17 CHAPTER-4 4. Discussion regarding Rangarajan Committee Report As stated earlier, in December 202, the Rangarajan Committee submitted its report on "Production Sharing Contract (PSC) Mechanism in Petroleum ndustry". The report, inter- alia, recommended a formula for pricing of domestically produced gas. The Rangarajan Committee made the following observations in para 24.2 of their report while discussing "An Approach to Gas Pricing till Such Time When Gas -on Gas Competition Becomes Feasible." "24.2. As discussed above, it may not be feasible to introduce gas-on-gas competition at this juncture. Therefore, a policy for pricing natural gas, till such time when gas-on-gas competition becomes feasible, is discussed below. However, it is recommended that Government review the situation after five years to examine the feasibility of introduction of gas-on-gas competition n the light of the discussion in 24., a policy on pricing of natural gas for ndia is proposed. Since a competitive domestic price for gas does not currently exist and " may not be expected to come about for several more years, the policy will have to be based on searching out from global trade transactions of gas the competitive price of gas at the global level. As the global market is not fully integrated in terms of physical flows and is also not everywhere liquid enough, it is proposed to combine two methods of search for such prices. n The Rangarajan Committee had recommended that their gas pricing formula shall apply uniformly to all sectors, while allocation of gas will be as per the prevailing Gas Utilization Policy (GUP) of the Government ( Para 24.5 of the Rangarajan Committee Report). The report further stated that the proposed formula would only apply prospectively and. would not be applicable to cases where gas prices have already been approved (Para 24.4 of the Rangarajan Committee Report). L 5,Jr dv.>:

18 The Government subsequently vide its Domestic Natural Gas Pricing Guidelines, 204 made the pricing formula, based on the Rangarajan Committee recommendations, applicable for all natural gas produced domestically, irrespective of the source, whether conventional, shale, CBM etc. from st April 204 with the following exceptions: i) where prices have been fixed contractually for a certain period of time, till the ii) iii) end of such period. where the production sharing contract provides a specific formula for natural gas price indexation / fixation. pricing of natural gas from small / isolated fields in the nomination blocks of ; NOCs will be governed by the..extant policy in respect of these blocks issued on 8th July, 203. The prices calculated and determined were to be applicable to all consuming sectors uniformly and these guidelines were also applicable for natural gas produced by ONGC/OL from their nominated fields. Para.0 of the Domestic Natural Gas Pricing Guidelines, 204 provides as below: "n respect of 0 and 03 gas discoveries of block KG..DWN-983, these guidelines shall be applicable subject to submission of bank guarantees in the manner to be notified separately." The Committee has dealt with this specific issue relating to production of gas from KG DWN-98/3 block under NELP- separately in Para 5.2 (iv) later. After consideration of the matter twice by the CCEA, the Guidelines on Domestic Gas Pricing Policy were issued. Hence, the Committee inferred that the issue of legal feasibility and applicability of - Js' Natural Gas Pricing Guidelines, 204(except for categories mentioned in Para.2 of the Notification dated 0th January, 204) to different categories of producers may have already been examined by the Administrative Ministry at that time. 6 (

19 4.2 The formula recommended by Rangarajan Committee is as under: " Netback price, N = A-8-C PAV= (N * V + N2 * V2+ ) / (V + V2 + V3+ ) () Where: A= mported LNG Price on Netback FOB B= Liquefaction costs at the respective loading port c= Transportation and Treatment cost of natural gas from well head to liquefaction plant PAV=Average Producers Netback Price for ndian mports for trailing 2 months. N, N2... are Producers Netback Price - V, V2, are the volumes corresponding to N, N2 etc. V, V2, V3 and A shall be for trailing 2 months period Prices and volumes shall be for trailing 2 months, and PAVshall be arrived at for every month. PWAV= (A* PHH+A2*PNBP+A3*PJAV)/ (A+A2+A3) PWAv=Weighted average price to producers in the global markets A= Total Volume consumed in North America at average Henry Hub prices on yearly basis PHH= Annual average of daily prices on Henry Hub for the relevant year A2= Volume consumed through various hubs in Europe/Eurasia in the relevant year (entire consumption of Europe and FSU) PNBP= Annual average of daily prices on National Balancing Point (NBP) in the UK for the relevant year A3= Volume imported by Japan in the relevant year PJAv=Yearly weighted average producers netback price of gas in Japan for the relevant year (weighted by the total volume of long term and spot imports) PJAVshall also be calculated as PAVis calculated. PAV= (PAV+ PWAV)/ 2 PAV= Simple average of Producer's Netback Price for ndian mports and Weighted average price to producers in the global markets. 7 l. - (V) () ()

20 ,b) Based on the observations /comments of the Parliamentary Standing Committees, various stakeholders and the views of the concerned Ministries/Departments, the Committee deliberated on the different components of the formula in detail and felt that certain aspects of the Rangarajan formula need to be reconsidered.these are mentioned below: a) Consideration of Simple average of Producer's Netback Price for ndian mports and World Average Producer's N.etBack Price: The Rangarajan Committee recommended consideration of simple average of Producer's Netback Price for ndian mports and World Average Producer's Netback Price ( Para 24.3 of the Report) without giving due justification 'for using the simple average here, although weighted averages are used for every other component of the formula. The volume of ndian LNG imports as per the formula works out to be less than % of the total volume considered in the formula. Hence, it would seem that use of weighted average of Producer's Netback Price for ndian mports and World Average Producer's Netback Price may perhaps be more appropriate. Consideration of Henry Hub price for volume of consumption in Canada: The Canadian consumption is approximately % - 2% of the total volume of North American basket (Source: BP Statistical Review of World Energy June 204). A reference price for Canadian market l.e. Alberta Gas Reference Price is available in the public domain according to which the natural gas prices at, Canada's Alberta Hub are approx. 20% lower than the Henry Hub price.( Source: Alberta Reference Price). n this background, it may perhaps be appropriate to account for the Canadian volumes at Alberta Reference Prices rather than at the Henry Hub prices. c) Consideration of NBP price for consumption in Russia: n the Rangarajan Committee formula, it was recommended to consider NBP Price for volume consumed in EU and FSU countries. The sale price of gas within Russia (Source: Russian Govt. website) which is part of FSU countries is substantially lower than the price quoted at NBP hub. Therefore the well head 8

21 prices for Russian gas producers would be less to that extent. This view is also reflected in the Rangarajan Committee Report at Para n 203, the total consumption in Europe was SCM (5% of World Consumption), while the consumption in the same year in Former Soviet Union (FSU) Countries was 656 SCM (9% of world consumption). The average price in FSU countries is around US$ 4 mmbtu while it is approximately US$ mmbtu for Europe (Source: GU-Wholesale Gas Price Survey, 204) (Annexure-V). As a result, the Rangarajan formula would yield a higher price for the FSU volumes. Hence the European volumes and at least the Rusiian volume, (for which prices are available) could possibly be accounted separately at their respective prices. d) Consideration of Hub price in calculation of World Average producer's price: The hub price includes well head price, transportation and treatment cost from well head to trunk pipeline, transportation cost from the trunk pipeline to the respective hub etc. The Rangarajan Committee in its report in Para has acknowledged that the prices of North American hub and NSP are higher than the well head prices. The post well head components for NSP are comparatively substantial, as it includes long distance pipeline supplies and LNG imports. While deductions for calculating Netback prices for LNG imports have been recommended in Para of the Rangarajan Committee Report, however, deductions on account of appropriate transportation and treatment charges from different hub prices viz. Henry Hub, NSP has not been recommended. t is suggested that appropriate adjustment for this needs to be considered for all hub prices including HH, NSP, Alberta and Russian volume. e) Consideration of Japan/lndian LNG import in calculation of World weighted average producers' price. As Japan sets the benchmark for LNG imports in Asia Pacific region, (Para of the Rangarajan Report), it recommended the methodology to calculate netback price that estimates the well head producer's price of natural gas in LNG exporting countries (details of deductions at Para and of l. -- 9

22 Rangarajan Report). However, the calculation, based on the above methodology would give the effective FOB realization of an LNG exporter and not the well head producer's price of the exporting countries. With such a long supply/process chain for LNG, it is difficult to ascertain as to what exactly is the producer's price considering that profits may be getting booked at every stage of the supply/process chain. The recent GU Wholesale Gas. Price Survey, 204 states that the wholesale prices in Japan in 203 are almost US$ 6/mmbtu compared to approximately US$ 0/mmbtu in UK, US$ 6/mmbtu in ndia and US$ 4/mmbtu in USA and ~ approximately US$ 3.5 in Russia (Annexure-V). Japan's LNG has beenthe most expensive in the world. t has negligible domestic production. t may be noted that Japan's LNG's prices..arestructurally expensive as most of the long term contracts the country has entered into, are oil indexed. With steep increase in global crude oil prices over last few years, Japan's LNG import prices have also increased substantially. The ndian LNG imports are similarly oil indexed and also includes the so called "Asian Premium" on the crude oil imported by ndia. The Article on "The mpact of a Globalizing Market on Future European Gas Supply and Pricing: the mportance of Asian Demand and North American. Supply" highlights "Unlike the situation with European pipeline gas contracts, there is no explicit provision in Asian LNG contracts for a periodic price review. Each contract pricing formula is in effect "frozen" for the life time of the contract" (Author: Howard V Rogers, NG 59 January, 202, nstitute of Energy Studies). Source: Oxford n any case, oil indexed LNG term prices do not have much relevance for domestic producers' price, as pricing of about 90% of all global domestic consumption of gas is based either on Gas-on-Gas competition or is under regulated price regimes. (Source: GU Wholesale Gas Price Survey, 204). Additionally, there are major uncertainties in calculating the netback price whenever LNG is involved due to long supply chain, e.g. for imports from Qatar, a major supplier to both Japan and ndia has LNG trains which are both pre and 20,

23 post 200, (with suggested deductions of US$ 2.50 mmbtu and US$3.50 mmbtu respectively). However, it is understood that due to co-mingling at the time of exports, the vintage of the train cannot be ascertained. Thus there are inherent uncertainties in calculating producer's price based on LNG prices. For these reasons, it is suggested by the Committee for consideration of the Government that LNG component in the Rangarajan formula could perhaps be excluded. f) GCV vs. NCV } n ndia gas is historically being priced on NCV basis. n this context, it is relevant to point out that it is not clear whether the price to be determined as. per Rangarajan formula is on GCV or NCV basis, although the input prices being used in the Rangarajan formula are based on GCV ( message from Platts, Annexure-X). The Committee feels that the Administrative Ministry may take an appropriate view in this regard, while considering the modified approach suggested by the Committee in Chapter-5. g) Determination of Gas Price in NR vs. US$ n this context, the Committee felt that it needs to be pointed out that expenditure in US dollars is incurred by the contractor mostly during exploration and development phase. Therefore, the denomination of gas prices in US $ during the production period also, puts the entire foreign exchange risk on the consumers throughout the life cycle of the project. The Committee felt that the Administrative Ministry may consider this aspect, in the light of the contractual provisions, so that there is more equitable sharing of foreign exchange risk between the producers and consumers. Ḻ -

24 ~ CHAPTER-5 Suggested Approach For Gas Price Determination 5. Suggested modification to the formula Given the limited time available to the Committee and the complexity of the subject, the Committee held extensive discussions and arrived at a broad approach. The Committee also considered not only the views on record of the Parliamentary Standing Committees, Ministry of Finance and other Ministries of the Government but also those. of the various stakeholders, including both producers and consumers. After detailed t= deliberations, the Committee would like to suggest the following modifications in the Rangarajan formula for further consideration of the Government: i) Removal of both the LNG import components i.e. PAvandPJAV. ii) Consideration of Alberta Gas Reference price in place of Henry Hub Prices for Canadian consumption iii) Consideration of Russian actual price as published by (e.g. Federal Tariff Service iv) of the Russian Government) in place of NBP price for the Russian consumption considered under FSU. Consideration of appropriate deductions on account of transportation and treatment charges, etc., for different hub prices, i.e., Henry Hub, NBP, Alberta Reference and Russian actual gas prices. v) Regarding the periodicity of price determination, while the Rangarajan Report vi) had envisaged a monthly adjustment, the Domestic Natural Gas Pricing Guidelines, 204 provided for a quarterly adjustment. The Committee felt that the Administrative Ministry may also consider examining the pros and cons of the options of bi-annual and annual price notification. A suitable cap on the price may also be kept, if considered appropriate

25 5.2 Applicability of the Modified Approach: i) The Committee was of the view that the suggested modified approach may not be made applicable to the exclusions as specified in Para.2 of the Domestic Natural Gas Pricing Guidelines, 204. ii) The Committee was also of the view that the suggested modified approach may iii) apply only prospectively and would not be applicable to the gas prices already approved by the Government. Also, the suggested modified approach would apply uniformly to all sectors of the economy and the allocation of gas will be as per the Government's prevailing Gas Utilization Policy. The Committee was of the view that the NOCs may also get the same price as determined under the proposed.dispensation, including for the gas from the nomination fields. iv) The Committee would like to emphasize here that the proposed modified approach would not apply to gas production from 0-03 discoveries of Block KG OWN-98/3 till the shortfall quantity of gas is made good. The Committee would like to further suggest that the Administrative this regard to safeguard the interest of the Government. Ministry may take suitable action in v) The Committee was of the view that the Administrative Ministry may examine the possibility of applying the suggested modified approach to Pre-NELP exploration PSCs also which provide for arm's length pricing but do not provide for any approval of the formula/basis (Rajive Kumar) Addl. Secretary (P&NG) Member Secretary by the Government. l. e~~ - (J.K.Mohapatra) Secretary (Fertilizers) Member 23 (Ratan P.Watal) Secretary (Expenditure) Member ~~ (P.K.Sinha) Secretary (Power) Member

26 ' Annexure No. LST OF ANNUXURE Topic o. Page No. ToR of Rangarajan Committee -2 Chapter 24 of the Rangarajan. Committee 3-2 Report relating to ToR (v) Domestic Natural Gas Pricing Guidelines, V V V Reports of the Parliamentary Standing Committees: i) 74th Standing Committee on Finance on "Economic mpact of Revision of Natural Gas Price" ii) 9th Standing Committee on Petroleum & Natural Gas on "Allocation and Pricing of Gas" Production and Supply of Domestic Gas during Guidelines for Selection of Customers for Domestic Gas available from Small / solated Fields V Relevant extract of the Hon'ble Supreme Court Judgment dated V X nternational Gas Union (GU) - Wholesale Gas Price Survey, Extracts Communication from Platts

27 ):> z Z m X C :::0 m

28

29 Report of the Committee on the PSC Mechanism in Petroleum lqdustry.5.3 The committee also associated Shri R. N. Choubey, Director General (Hydrocarbons) and Dr Alok Sheel, Secretary, Economic Advisory Council to the Prime Minister with its deliberations, and drew upon their expertise as special invitees..5.4 The terms of reference of the committee were as follows: (i) Review of the existing PSCs, including in respect of the current profit-sharing mechanism with the Pre-Tax nvestment M4Jtipie (PTM) as the base parameter;,. (ii) Exploring various contract models with a view to minimis~ the monitoring of expenditure of the contractor without compromising, firstly, on the hydrocarbons output across time and, secondly, on the Government's take; (iii) A suitable mechanism for managing the contract implementation of PSCs, which is being handled at present by the representation of Regulator/Government nominee appointed to the Managing Committee; (iv) Suitable governmental mechanisms to monitor and to audit Government of ndia's share of profit petroleum; (v) Structure and elements of the guidelines for determining the basis or formula for the price of domestically produced g6$, and for monitoring actual price fixation; (vi) Any other issues relating to PSCs..5.5 The committee deliberated on its Terms of Reference (Tofes) and concluded that a careful reading of the ToRs indicates that its recommendations in respect of ToRs (i) and (ii) would apply only to PSCs entered into in future, while its recommendations in respect of ToRs (iii), (iv) and (v) would ~i,isobe applicable to existing PSCs. However, insofar as ToR (v) is concerned, the committee recommended that the pricing formula proposed by it would only apply prospectively and is not proposed for application to gas prices already approved.. in..5.6 n making its recommendations, the main objectives that the co~':i'{mittee kept in view were the following:...::": ~ ,' "''''~.'~.. ~ ~, ""0.. ~ ~..

30 LU 0::: :::J X LU Z Z «

31 .~. " Report of the Committee on the PSC Mechanism in Petroleum ndustry. Recommendations 24. Relevance of Different Price Formations on ToR (v) 24.. Gas pricing mechanism in ndia is presently driven by sectoral prioritization, administered gas allocation and pricing, apart from huge supplyside constraints. While short-term demand changes in international demand due to weather-related causes are quite frequent, the ndian gas market has not seen such volatility in demand in the short-term. This is mainly due to the fact that gas consumption is concentrated in the fertilizer, power and LPG sectors. Other factors resulting in short-term volatility, like business cycles and supply interruptions are also not relevant here. However, all these factors impact international gas price in the spot market and may impact profitability of ndian industry substantially Public sector companies producing gas have a highly regulated pricing system in place. Gas prices in ndia can, in principle, incentivize investment in the ndian upstream sector, so that production in ndia reaches optimum levels and all exploitable reserves put to production expeditiously. ndia also needs to ensure that producers don't cartelise as there is a huge unmet demand. The twin objectives of expediting production and avoiding cartelisation can be achieved by ensuring that producers in ndia get at least the average price of what producers elsewhere are getting Long-term prices in competitive markets in the US, the UK, continental Europe and the Asia-Pacific depend on the marginal supply cost curve, the efficiency of monetization of reserves, demand side factors like economic growth, energy intensity of major countries, ability of consumers to switch between fuels, and technological progress. However, there is no global competitive gas market. There are several regional markets in operation; all of which are heavily constrained by infrastructural, tariff and policy barriers An attempt is made below to contextualize internationally prevalent gas pricing mechanisms to the ndian market ~.- ~'..,_ l~r.; "::'. 3

32 ', Ī Report of the Committee on the PSC Mechanism in Petroleum ndustry Gas-on-gas competition is the soundest of all mechanisms when free trade prevails in the gas market. The supply side in ndia is dominated by two large players, NOGs and RL. Together they control the entire domestic production. RLNG supplies are again dominated by two entities, PLL and GAL. The greatest constraint, however, is the lack of infrastructure for importing gas. All these result in a seller's market, with pricing power, which can lead to~undue benefits. The consumption side is again dominated by PSU fertilizer units and power sector utilities, which are heavily subsidized by the Union and State Governments. Further, both these sectors have been encouraged through state policy to adopt gas-based technologies and they constitute a huge stranded market vulnerable to exploitation by gas suppliers. Thus, the supply curve at present is almost vertical and demand is highly price inelastic. Therefore, pure gas-on-gas competition will remain an aspiration till supply constraints are remedied substantially. However, there are suggestions from several market players that sector-wise price discovery may still be possible in ndia. This idea merits a brief elaboration. Government of ndia has prioritized fertilizer, LPG, power am:l city gas distribution sectors for gas allocation. Proponents of this limited gas-an-gas competition model suggest that entities in each of these sectors can. compete among themselves for allocation on price basis. Any such process will have two stages: the first stage being allocation of gas produced from the field to different sectors as per the Gas Utilization Policy (GUP), and the second being sectorwise price discovery of gas. For example, if a certain portion of the gas produced from a field is being allocated to the urea producing plants, the producer is supposed to invite bids from all urea,producing plants ready to produce urea as on date of gas supply commencement and discover the market price on marketclearing basis and the bids received. All bids from related parties need to be discarded. This has to be repeated for all the sectors. However, this approach may result in two scenarios. n the irst scenario, the demand in a particular sector may be high due to investments getting locked into gas-based technology. n such a scenario, price discovery may result in driving up prices to unviable levels. n the second scenario, consumers may cartelise to drive down prices. The process is likely to get deadlocked unless a very elaborate mechanism with checks and balances is set up. 2 ',,', :,~'. 4

33 a, -,, Report of the Committee on the PSC Mechanism in Petroleum nc::ltjstry Gas-on-gas competition for price discovery will become feasible once import infrastructure is ramped up and domestic production and transportation infrastructure grow. Therefore, Government may consider reviewing the situation after five years to examine the feasibility of its introduction Oil price escalation is one of the mechanisms suggested by several stakeholders. This is also in operation in a few long-term contracts for import to ndia. An EGoM has already approved one such formula for the.gas produced in KG Basin by a consortium of RL, NKO and British Petroleum. All formulae have a base price for crude, a ceiling, and a factor to dampen volatility. The main reason for adoption of oil price escalation formula in the Asia-PaCific and in continental Europe is that gas replaces oil as fuel for domestic and industrial purposes. The share of gas sold globally under an oil price escalation formula is gradually coming down, from 22% in 2005 to 20% in For indigenous production, such a linkage is available in only 5% of the 2,048 billion cubic metres of gas produced globally in Domestic production, consumed in the country of production, accounted for approx. 2,000 billion cubic metres in 2005, around 70% of total world consumption. The two largest price formation categories were gas-on-gas and regulation below cost, with gas-on-gas accounting for approx. 35% of world consumption (mainly in North America, the UK and Australia) and the regulation below cost accounting for 34% of world consumption (mainly in the former Soviet Union, the Middle East and Africa). Regulation on social and political basis, at 6% of world consumption, is spread across all regions. Regulation on cost ofservice basis, at 4% of world consumption, is principally in Africa and Asia, while bilateral monopoly pricing at 5% of world consumption is mainly in the former Soviet Union and the Asia-Pacific The Government of ndia has mandated that fertilizer and power sectors get priority in allocation of domestically produced gas. n both these sectors, oil is not the alternative fuel to gas. n the power sector, as gas is mainly rep~acing coal as a fuel, oil price linkage to indigenously produced gas may net be the most relevant factor. 8% of the existing capacity of urea plants is based on natural gas, while 9% is naphtha-based and 0% is based on fuel oil. Here too replacing gas with oil is not a viable option as urea consumption is highly price- 3 ~,. r

34 , Report of the Committee on the PSC Mechanism in Petroleum npustry elastic. Any increase in gas price for urea plants will certainly lead to a.huqe increase in costs affecting food security Further, oil price indexation works on import parity and replacemen'ffuel principle. While it is clear that replacement fuel principle does not apply fully to the ndian market, import parity also has its limitations. Landed price of LNG includes customs duty, shipping, pipeline tariff, liquefaction costs, handling etc. These costs are extraneous to the producing activity and have no relevance to domestic producers. The competitiveness of domestic production will not be affected by the inclusion or exclusion of that component of the price which does not accrue to the producer at the well-head. Hence, "import parity" will give a huge monetary benefit to domestic producers Planning Commission has correctly observed that high prices prevalent in LNG trade in the Asia-Pacific region can potentially 'kill the goose that lays the golden eggs'.. t is neither in the producer's interest nor in the national interest to take natural gas to unviable levels by linking to crude prices. t is to be borne in mind that fertilizer companies in ndia were actively encouraged by GO to convert to gas-based technology, with the expectation of domestic production at cheaper rates, thereby creating a stranded market for gas supplies. Similar promises and gas sales agreements were also entered into with power plants for domestic supply. f the new price becomes unviable to these two sectors, the demand for gas may slump drastically, as happened in 2005 in the US, and this would be against the common interests of producers and consumers alike, apart from not being in the national interest Further, oil-linked prices are mainly followed in Brazil and Thailand, for domestic production and consumption. n Brazil, Petrobras, which is a Government of Brazil company, is a major producer and the sole supplier and transmitter of natural gas. The benefit of higher prices directly accrues to the Government of Brazil in substantial proportion, which in turn subsidizes other important sectors. Even in Brazil, power companies get natural gas at regulated prices. Production and consumption in Thailand is too miniscule to serve as a viable model for ndia. On the other hand, Japan is a major importer of LNG, with large volumes linked to oil prices. Japan has recently decided to delink oil' prices Planning Commission Report of the nter Mi~isterial Committee on Policy for Pooling. pf:natural Gas Prices and Pool Operating Guidelines (page 32) 4 '. <: '

35 Report of the Committee on the PSC Mechanism in Petroleum fldustry from gas import prices. Russian export contracts too are increasingly indexed to European hub prices. Gas markets are consistently evolving away from oil price indexation and towards gas-on-gas competition Netback from final product mechanism works where the. final product is traded freely. Fertilizer and power sectors are still subject to an administered price mechanism and hence this mechanism may not be relevant in ndia. ndia has consciously moved away from below-cost pricing and cost-of-service based regulation under NELP An Approach to Gas Pricing Till Such Time When Gas-on-Gas Competition Becomes Feasible As discussed above, it may not be feasible to introduce gas-an-gas competition at this juncture. Therefore, a policy for pricing natural gas, tfll such time when gas-on-gas competition becomes feasible, is discussed below. However, it is recommended that Government review the situation after five years to examine the feasibility of introduction of gas-on-gas competition n the light of the discussion in 24., a policy on pricing of natural gas for ndia is proposed. Since a competitive domestic price for gas does not currently exist and may not be expected to come about for several more years, the policy will have to be based on searching out from global trade transactions of gas the competitive price of gas at the global level. As the global market is not fully integrated in terms of physical flows and is also not everywhere liquid enough, it is proposed to combine two methods of search for such prices First, the netback price of ndian LNG import at the wellhead of the exporting countries should be estimated. Since there may be several sources of gas imports, the average of such netback of import prices at the wellheads would represent the average global price for ndian imports. t may be assumed that each gas exporting country also faces competition and, therefore, there is no reason to suppose that ndia faces any bias of being over-charged or undercharged vis-a-vis other competing buyers in the global gas market constructed through such aggregation for averaging. Such a netback average price may be 5

36 Ī Report of the Committee on the PSC Mechanism in Petroleum, ndustry.' interpreted as the arm's length competitive price applicable for ndia, and such price may be estimated on the basis of recent historical transactions A second method of searching for a competitive price for ndia is to take the average of pricing prevailing at trading points of transactions - i.e., the hubs or balancing points of the major markets of continents. Currently, as per British Petroleum statistics, total natural gas consumption across the' globe stands at 3.2 trillion cubic metres in the year 20, of which North America, Europe &. Eurasia, and Japan consumed around 65%. The average prices of natural gas consumed in these regions are also publicly available (British Petreieum Statistics World Energy ntelligence Report, Platts etc.). Theretore, the weighted average of natural gas prices in these three major markets can be used for arriving at the price for domestic gas produced in ndia. For this, (a) the hub price (at the Henry Hub) in the US (for North America), (b) the price at the National Balancing Point of the UK (for Europe)2, and (c) the netback price at the sources of supply for Japan (a big buyer treated in the Asia-Pacific region as setting a benchmark for the region) may be taken as the prices most relevant for the purpose of approximating ndia's average price for producers at their supply points across continents. Such a global average price may also be interpreted as an arm's length competitive price for ndia Finally, the average of the prices arrived at through the aforementioned two methods may be taken. Such an overall average of global prices, derived on the basis of netback and hub balancing point pricing principles, can be taken as the economically appropriate estimates of the arm's length competitive prices applicable for ndia. While the formulae detailed in this section dirl?c,tly or indirectly take into account the data of a wide range of transactions including those with ndia, the methodology neutralizes any bias for ndia and ensures the arm's length aspect of pricing, as best as possible The approach outlined in this section could be formulated into a Policy for Pricing of Natural Gas in ndia. The necessary steps for determlnlnq.the two averages discussed above are presented in According to nternational Gas Union (GU) Report, 20, the UK and Continental Ellrope are physically connected by pipelines and prices in European hubs are following NBP ve-:y closely. Hence, NBP is a good proxy for entire Europe including UK. 6 ~..., ~;'.' ) ~_, t..'.,

37 ".,'.-'~,n""""'"'''''''',';''''''-''.''''',.,,',.. -.,-, -._ '''' ''''''.,..."...,,~~~,.:v. _~"''., Reportof the Committeeon the PSC Mechanismin Petroleumh~~ Before that, certain aspects having a bearing on the merits of. the recommendedpricingformula are discussedbelow Viewed from an investmentperspective,it may be notedthat the weighted averagefor gas productionat well-head prices of NorthAmerica, Europeand the exports to the Asia-Pacificshall indicate, by and large, what global gas players are getting from their investments. Hence, from an investment perspective as well,' such a price may be considered as an appropriate reference price for domesticgas pricingin ndia. -." -',...'~'"''''(_""'~>!'.""_', ""'_Q!t'! ~""Mk 24,2.9t may be noted that although hub prices of natural gas in the US and Europe are slightly higher than well-head prices, since they include pipeline tariffs up to the hub, since such hub prices are readily available from standard sources,these mayserve as better benchmarks The US and European markets have large volumes contrlbuted by conventional/non-conventionalgas sources and they also represent geo!ogical situations present in ndia. Further, the UK, continental Europe and FSU are developing into one single marketplace and hence need not be treated as stranded markets. FSU countries continue to have, by and large, a regulated price lower that the market price, much of the quantity consumedin FSU being below the European hub prices. While using European hub prices for FSU consumptionwill result in a slightly higher average price, it may be noted that even in FSUs, there is a distinct trend towards alignment of gas prices with Europeanhub prices. ' ndianimportsof LNG are likely to grow rapidly over the next few years as domestic production is declining and new discoveries are yet to be commercialized.hence,the netback to producersof LNG from such imports to ndia (both spot and term) can be used as a basis for deciding domestic gas prices in ndia. While currently a majority of ndian LNG imports are fr6m the Middle' East (mainly Qatar), the LNG import prices may not b6";>~:i' true representationof global gas prices. Since ndia's LNG importsfrom international markets are set to grow with time and become a well-diversified pori.lcj9 with supplies coming from all parts of the world (the US, Africa, Europe, Mi':~'~i'~East and Australia),the recommendedmethodologyof netback pricing may ~)K~'.more suitable.,.,.. ", 7.;... c:...~ "... ~~... \. _

38 Report of the Committee on the PSC Mechanism in Petroleum ndustry 24.3 Steps for arriving at the recommended pricing While calculating netback to producers, the following components', are deducted from the FOB price as they do not accrue due to production activit}/: Where: Netback Price, N = A - B - C. A = mported LNG Price on Netback FOB available from World Energy ntelligence B = Liquefaction costs at the respective loading port (source) C = Transportation and treatment costs of natural gas from wellhead to liquefaction plant N, N2 are Producers' Netback, calculated as per Formula (). V, V2 are volumes applicable to Nl, N2... Available from World Energy ntelligence or Platts PAV= Average Producer Net Back for ndian mports for traiiing 2 months V, V2, V3 and A shall be for trailing 2 months period. All imports, including term contracts, shall be included in the calculation. Prices and volumes in the above calculation shall be for trailing 2 months, and PAVshall be arrived at for every month The average price of liquefaction costs with older plants is of the order of $ 2.5/mmbtu3. For plants which started deliveries in 200 or after, the liquefaction cost is of the order of $ 3:5 to 4.0/mmbtu. A recent contracc':signed by GAL with the Sabine Pass facility in United States of America for supplies to commence in the year 206 from a brownfield project is around $ 3.0immbtu. 3 Planning Commission Report of the nter-ministerial Committee on Policy for Pooling' ~j"natural Gas Prices and Pool Operating Guidelines () fo

39 Report of the Committee on the PSC Mechanism in Petroleum lndustry Hence, it is recommended that an average of $ 2.5/mmbtu may be ad~p~ed as the liquefaction cost while calculating the average producer netback for ndian imports and the weighted average price to producers in the global fj~rketsfor older plants, and $ 3.5/mmbtu for exports from plants starting dellverles after 200. These figures may be reviewed after five years. The trend of liquefaction costs can be ascertained from the data available from the reports of Facts Global LNG and Wood Mackenzie The transportation cost from the well-head to the liquefaction plant may be considered as around $ O.5/mmbtu. This includes handling charges and sweetening cost of gas. PWAV= Weighted average price to producers in the global markets A= Total volume consumed in North America at average Henry Hub..~.;. prices on yearly basis PHH= Annual average of daily prices on Henry Hub for the relevant year A2=Volume consumed through various hubs in Europe/Eurasi,a. in the relevant year (entire consumption of Europe and FSU) ":'-' PNBP= Annual average of daily prices on National Balancing Pofnt (NBP) in the UK for the relevant year ~= Volume imported by Japan in the relevant year PJAv=Yearlyweighted average producers netback price of gas in Japan for the relevant year (weighted by the total volume of long term and spot imports) PJAVshall also be calculated as PAVis calculated in Formula () Prices and volumes used in this formula shall be for trailing 2 months period. t is recommended that PWAVbe calculated every month by the above ~. formula. :: The netback price of LNG to be delivered in Japan from vartous potential sources across the globe can be determined from the FOB price afthe loading country. The netback FOB prices and volumes at those prices from various exporting countries are available from LNG Daily and World Energy!ntelligence websites. The FOB price includes liquefaction costs of gas at the plantin the 9 {),,

40 ,. J {~. '- Report of the Committee on the PSC Mechanism in Petroleum'tridustry producing country at the loading port, plus the transportation, including handling and sweetening charges of the gas from the producing asset to the liquefaction plant. Thus, Producer's Netback for LNG mport = Netback FOB Price - Liquefaction Cost - TransP9rtation Cost (including Sweetening and Handling Gharges). (V) The formulae for PAVand PWAVgive an average price which producers ~cross the world are realizing through production of natural gas. PAVis specific t9 ndia as it is calculated from ndian imports. Hence, an average of PAVand PV.JAVwill represent the recommended appropriate price PAVfor domestic producers: PAY= (PAV+ PWAV) t is clarified that the proposed pricing formula would only' apply prospectively and is not proposed for application to gas prices already approved The proposed pricing formula would apply to all sectors uniformly, while allocation of gas will be as per the prevailing Gas Utilization Policy (GUP) of the Government (V)

41 » z Z m X C ;0 m

42 <il -:SMOUOJ Sll'VlOZ; 's:ltlh,ap!tld ~ul:)f<!: SlO l~lln ops:uoa :l'ctl s:!:~ou Aqal0'q 'WlJ. ';0 ~UaWtllaAOO Q'Ctl '(z;toz: '.[:)quqoqc)..~snpur mn~ollod tj ijl~rm:q:y.wl:l'll,oto:> ~S tollonpojd otp" to :lod:)~:):)lljl.utlo:) ll!r-ere~hm~atp JO StOP'PU:>WUlOO:>l MOYAtl 8u!dlY.J{,)':!llQP!~ :>ttl SlJ!lQPlSUOO ~ ':rull :>wos 0J Bwu JO luooxtllqa0f) JO U0!l'llQP!StlOO lqpun UQQClsgq SlDye...~lll'lNlY.":>npold AU80JlSQtl0PJO 2UJOpd 2~Q lqlbw :ltll.- A Q mm-nov /OZZ'oN ttgz: 'hjbnll! tool ;tp '!tqa M;N ~~. r~~.ul'a~ NOUVO!:iUON SV0'VDllVN: «NV W!l:'onad:.f!O X~J.SNW ',' ~~~-!lll;~~~~!hj:.~~~ ~~ ~ l~~-ll~~ b~ ~ ~~~ -~~ ~~.J,g! /96-"''D~g.lY""lY'~ Q,~ or~ ~~~~~~~.J:.!.h.~V~OZ'~ ~l;wli;~h 6'~ " l.lli.hl~~ ~.w. a:ili~ ~.hi ~.LtJtU~.lll?~ ~ lh:~l:tcllll: ~ ~ ~ ~.!hll. ~ ~ ~ ~ s~ (A), :... -,'_' Z/(AVMd+AVld) =Avd :~Avd ~ ~ ~ JJ>~lb')~~.lli.J2.lll?AVMdl..J AVid ~~}'!.bls. ~ ~ ~ ~ '.ij. Q,t:lq.liS)h~~!; ~~:ij:.. ~ ~ ~ ~ ~ ~.!hll ~.Jili. ~ ~ AVMd l..j AVid (A) ~#-~~~~~.! (!!)(!)L ~. ~ (!!) (!) L' ~ ~ ~ ~ ~ (. J!.lM ~ ~ 't.!tl?j>t) ~ ~ l..j ~ lo}tlou) P (A) (~~~~ '.l::!?~) lllilli....~p'tlb -.P-hl.bl lo)tlou:?)p - ~ ~~tbb ~ = ~.L<.e. ~ ~ ~ ~ lj<'t-bl-?'b. ~.~'~.ai.l~~;}.lhls. tkj?tj=d'~~!!.q.~ lo}tlot.r>p ~ ~b!*ub _g.~.lhq :'J.: ~~. ~~?'tlb '~ n)!.oj)}) ~ ~ ~.$!l. -l ll;~ ~}.h hlllil ~ -l.h::lli ~ l~.a~ ~.(J.l.l'a ~ '~ 'ttlt'r"t} ~ ~ ~ ~ ij5lj,.bl-lb~ ~ ~ ~ ~ ~q,b ~~~JJ>~~~~~ l~~~ ~~.\:!-~~~.! J.;~~ ~ ~~.ue l 'J,.b~b.Jilla'~ ~ ~ ~ ~ ~ ~.yillt ~.~Ja.;~ ~ (A!) l~llili~ J,.~!e'tlh.ueflvrd ~ ()~~~~m~ ~~tloz!b.l<.e. flvrd ~lli%l-~6. ~~:ij.ili'ftl'!,jo.)p~~~...~tloz!b ~~.L<.e.~~~tlo}?h?~~ ~ ~ n.m ~ ~ ~ lh:~'l:tbj }.l..e..jilla ~ ~:a.ua $ ~ ~~ ~ =A>;;rd l.illt ~ P BJ' Rilp ~ ~~~'hlt!~~~~~~~~~gili ~-l }E.~ =&'Tf ~~~~~~'l:t(j )jj: ~ ~ ~ 2.l2. $ ~ ~.tlo.h e~'f{!h ~ dsnd ~ ~JlQ )_h. ~ lo)ltm~~ ~~~~D.lt.h4.!hJW.l:t~~~~~~ ~~. ~~~.lll?j!cllt~~~(~)~~~#-~ =dsnd f.--- ~

43 . These guidelines will be applicable to all natural gas produced domestically, irrespective of the source, wbether conventional, shale. CBM etc. These guidelines shall apply from st April 204 with the exception of cases bdicatedin Para.2..2 These guidelines shall not be applicable where prices have ~een fixed contractually ~or a c~ period of ti~, till the end of such period. These guidelines shall also not be applicable where the producnon sharing contract provdesa specific formula for natural gas price indexation fixation. Further, the pri~g o~natural gas from small:;o~d fields in the nomination blocks of NOes will be governed by the extant policy n respect of these blocks SSUedon 8th July, The prices determined under these guidelines shall be applicable to all consuming sectors unifonnly..4 These guidelines shall also be applicable for natural gas produced by ONGClOn. from their nominated fields..s The pricing of natural gas produced domestically shall be based on the following methodology:.5. First, the netback price of all ndian imports at the wellhead of the exporting countries will. be: estimated as detailed in Para.7 below. Since there may be several sources of gas imp()rts. the weighted average of,;;ub~,netbackof import prices at the wellheads would represent the average global price for ndian LNG iltipclrts....,.5.2 Secondly, weighted average of prices prevailing at trading points of transactions - i.e., the hubs' or balancing' points of the major global markets will be estimated. For this, (a) the hub price (at the Henry Hub) in the US (for North America), (b) the price at the National Balancing Point of the UK (for Europe), and (c) the netback wellhead price at the sources of supply for Japan will be taken as the average price for producers at their supply points across continents..5.3 Finally, the simple average of the prices arrived at through the aforementioned two methods will be determined as the price for dome,stically produced natural gas inndia..6 Netback FOB Pricing: Netback FOB, according to Argus, is calculated based on daily spot LNG vessel chartering fates and accompanied and accompanying shipping related costs. These additional costs shall include: _Daily spot LNG vessel chartering rates for east and west of Suez voyages based on 38,000-55,000 eu standard size vessel. a dailyboi! off rate ofo.ls % day based on 98 %"Vesselcapacity utilization rate.. '.:" An average 50 pc of fuel consumption based on daily bunker consumption of 50 t based on local rates An average of 50 pc of LNG fuel consumption based on the boil-off rate. Voyagetiming based on a laden leg speed of 9.5 knots. Netback FOB prices reported ingovernmental or standard industry sources shall be adopted..7 Producer's Net back pricing shall be arrived as per the following procedure:. Calculation of Producer's Netback Price for ndian mports,: (i) While calculating netback to producers, the following components are deducted from the FOB price as they do not accrue due to production activity: Netback Price, N :: A - B - C. PL..v = (N) oj< V + Nl oj< V,. + ) (V + V + V3+ ) Where: A = mported LNG Price on Netback FOB available from standard industry sources. B = Liquefaction costs at the respective loading port (source) C = Transportation and treatment costs of natural gas from wellhead to liquefaction plant Nit Nl are Producers' Netback. calculated as per Fonnula (). :.".. (l) (ll) V>V are the volumes corresponding to N>N.... etc. PlAy'= Weighted average P~ucer Net Back for ndian gas imports for trailing four quarters with a :;. d one quarter. Allimports, term and.spot, Wllbe included in the calculation...:.. V, V2. V3 l;d.da shall be for th: trailing four quarters with a gap of ODequarter. PlAYshall be calculated on quarterly basis for.trailing ~our quarters Wl~ a lag of one quarter. The weighted average of quaiterly P'lAVshaH be the applicable PlAY.This.data will be made avallable by ndian importers and confirmed through customs departm.,i::,,;thiswill be further validated from leading industry publications. 5 '~ 4

44 " 6 THE GAZBTl'E OF NDA ; EXTRAORDNARY [PAf.T-SSC. ] (ii) AD average of $2.5/mmbtu shall be adopted asthe ~quefa~tio~ cost for plants which have s~ deliv~rles in or up to 200. and $ 3.5/mmbtu for exports from plants startmgdelivenes after 200. These figures will be reviewed after a period of five years. The trend of liquefaction costs can be ascertained from the data available from the reports o_ffacts Global LNG and Wood MackenZie. Where it is not possible by any means (through customs or through ndustry sources et:-) to ascertain whether a particular shipment is from pre-zoo or post 200 LNG Train, an average of $ 3.0/l)llbtuwill be assumed as the liquefaction cost (iii) The transportation cost from the well-head to the liquefaction plant will be considered as $ 0.5{jnnbtu This "'ncludeshandling charges and sweetening costs of gas. n. Calculation of World Average Producer'S Netback Price r, PWAV= (A* PHlJi"A2 P~ A3*P'JAV) (Al+Al+Al),_. (ll) PWAV= Weighted average price to producers in the global markets for trailing four quarters with a lag of 4ne quarter. Total volume consumed in North America in the relevant 'year i.e, trailing four quarters with a lag of one quarter. Weighted average of quarterly hub prices at Henry Hub. Quarterly hub prices will be a weighted average of monthly prices. Monthly prices will be based on simple average of daily prices during the month. PHHshall be calculated for trailing four quarters with a lag of one quarter. Volume consumed in EU and FSU in the relevant year i.e. trailing four quarters with a lag of one quarter. Weighted average of quarterly hub prices at National Balancing Point. (NBP) in UK. Quarterly hub prices will be a weighted average of monthly prices. Monthly prices will be based on simple average of, daily prices during the month. PimP shall be calculated for trailing four quarters with a lag of one quarter.. Volume imported by Japan in the relevant year-i.e. trailing four quarters with a lag of one quarter.. P'AY = Weighted average producer's netback price of gas imported by Japan for trailing four quarters With a lag of one quarter. All imports. term and spot, will be included inthe calculation. P,AYshall be calculated in the same manner as PlAYis calculated in Formula (l) (iv) The netback price of LNG to be delivered in Japan from various potential sources across the globe can be determined from the FOB price at the loading country. The netback FOB prices and volumes at those' 'prices from various exporting countries are available from LNG Daily and World Energy ntelligence. Argus. Plaas etc. The FOB price includes liquefaction costs of gas at the plant in the producing COUDtry at the loading port, plus the tl-ansportation, including handling and sweetening charges of the gas from the producing asset to the liquefaction plant. Thus, Producer's Netback for LNG mport = Netback FOB Price - Liquefaction Cost - Transportation Cost (ncluding Sweetening and Handling Charges). (V) Liquefaction costs and transportation costs (including sweetening and handling) are same as in the case of ndian average price in Para L7 (){ii) and.7 () (iii). (v) The. formulae for PlAVand PWAvgive an average price which producers across the world are. l~!?lizingthrough production of natural gas. The average ofp..,vand PWAVwill be the price PAYfor domestic producers: PAv'" (Pu.v + PWAV)2 (V),8 Domestic Gas prices shall be notified in advance on a quarterly basis using the data for four quarters, with a lag of one quarter..9these policy guidelines shall be applicable for a period of five years with effect from lstapril. 204',.0 ~ :espect of D and 03 ~as discoveries of Block KG-DWN-98/3. these guidelines shall be apf'li~a!'ie subject to submission of bank guarantees m the manner to be notified separately. GRDHAR ARAM<?J-E. t. Seey. Printedby themanager. Government oflndia Press,RingRoad, Mayapuri. NewDelhi andpublishedby the Controllerof Publications.Delhi-ll00!54..': : '.~

45 : >Ī u.j 0::: ::J X u.j Z z «

46 .' 9 STANDNG COMMTTEE ON PETROLEUM & NATURAL GAS (203..4) FFTEENTH LOK SABHA - AN M ~ 'j,vr, f, hi MNSTRY OF PETROLEUM & NATURAL GAS, ALLOCATON AND PRCNG OF GAS NNTEENTH REPORT LOK SABHA SECRETARAT NEW DELH October, 203/ Asvina, 935(Saka) 6

47 RecommendationNo. 6 OBSERVATONSANDRECOMMENDATONS Demand and Supply of Natural Gas The Committeenote that Natural Gas has emergedas one of the principal source of energy in the world and accounts for 23.94%of total global energy mix. Due to its inherent advantagesover other fossil fuels there is a global trend of shift in energy mix from oil to natural gas. However,in case of ndia, share of natural gas in total energy mix accounts only 8.7%which is even lower than the Asia Pacific share of.27%. As the Governmentpursued the economic policy to achieve high growth, the demandfor natural gas has also sharply increased in ndia during the past few years, and expected to escalate further. The Committee are however, constrainedto note the widening gap betweendemand and supply of gas in the country, as during 202-3there was only 34mmscmd of gas availableincluding the imported LNG against the demand of 286 mmscmd. Thus there was huge unmetdemandof 52mmscmd. During the year 205-6,the expectedgap would be to the tune of 300 mmscmd as against the demand of 439 mmscmd the available gas supply would be 39 mmscmd only. The chunk of this growing supply deficit is expected to be met through LNG imports from different countries. However,the Committeenote that present LNGterminal capacity is 53 mmscmd only unable to support the increased purchase of LNG. Though the LNGinfrastructure is expected to grow to 80 mmscmd by 206-7it would not still be sufficient to cater to the increasing LNGimport in the coming years. The Committeeare of the view that MoPNGshould evolve a plan to explore all possible options to increase the production and supply of natural gas in the country. Towards this end, the Committee desire that the Ministry should ncreasethe blocks awarded for exploration, intensify activities tor,exploration and production of shale gas, pursue strong diplomatic efforts' to expedite construcrlon of tr~hsriatibnai pipelines from neighbouring regions to bring gas arid try to ehter into long term contract for import of LNG at cheapercost. The CoffiffiiUee further de rethat unconventionalsources of gas like Gas Hydrates, 7

48 62 CBM, Shale Gas should be seriously monitored for exploitation and development. Therefore, the Committee recommend that Ministry should prepare a blue print to improve the production and supply of natural gas in the country so that there is no deficit in meeting the domestic demand. Gas Allocation by EGoM Recommendation No.2 The Committee note that domestic production of Natural gas "during the 2thplan was projected to be.54 mmscmd in the year and is expected to go up to 75 mmscmd by the end of the plan i.e. by The Committee however are surprised to note that the allocations made by EGoM for the year were to the tune of mmscmd, which is more than double the projected production during the same period. This shows huge mismatch devoid of any realistic estimations on part of EGoM. Though the Committee u,:,derstands that the minimal surplus allocations are unavoidable but at the same time such excess allocations is not acceptable. Further the shortfall in the actual production which plunged to 9.36 mmscmd in forced the Ministry to cut back the allocations to various sectors on pro-rata basis. So much so, that the consistent decline in production of gas from KG-06 basin ultimately basin to power sector. These developments resulted in nil gas supply from the KG-06 have an adverse impact on the projects and investment plans of many sectors of the economy which expects assured gas supply on basis of allocations made by the Govetriment. The Committee therefore recommend that the allocations should be' made by adopting a more pragmatic approach, and should not be more than 0% of the projected production. "...,.,r:,

49 Allocation of gas to various sectors 63 RecommendationNo.3 The Committeenote that allocation of natural gas is to be made,to.. ~ various consuming sectors as per the priority order decided by EGoM.. As per this priority order, fertilizer industry comes at first placefollowed by LPGpi,antsat the second and power plants at third place. The city gas distribution' network rank fourth in priority.. The Committee, however note that due to less supply, allocation to the sectors have been much below the demand. n case of power sector, the allocationhas been only 42.53mmscmdagainst demandof 35mmscmdin which is projected to go up to 207 mmscmd in However, large investments have been made in gas based power plants which has become infructous due to non-availability of gas. The power plants have the option of using imported LNGor coal in place of natural gas. As the cost of imported LNG is high, its use is uneconomical. As regardsthe usage of coal, the plants which have been designed for using natural gas have to make extra investments for shifting to coal as fuel. The Committee,therefore,recommendthe Gdvernmen to indicatethe clear picture regardingthe availability of gas for power sector in the next 5 to 0 years so that before making the investments in gas based power plant,the gas availability is factored in by the companies. The Committee note that during 202-3, power and fertilizer sectors cumulatively received 6.6%of natural gas whereas CGD sector -recelved only.6%of the total available gas. Besides being an efficient environmentfriendly fuel, natural gas presently used in PNG and CNG does not alsovcontaln any subsidy element in its cost structure. Even a small quantity of. natural gas allocation can cater to a large number of customers in the CGO'network.The Committee seriously feel that in order to benefit a wider section of society, expansionof PNG/CNGnetwork will be the way forward as this wm;tdsosavethe subsidy burden of the Governmenton the use of LPG and dlesoli Hence,the Conli'hitteerecommendthat the egd netw~rksmust be allocatedan-ncreased._::; - :~

50 64 quota of gas due to a slew of benefits that could be achieved by the use of natural gas over the other conventional fuels. The Committee would also like to point out that requirement ofj)atural gas varies from time to time and hence the allocation policy of Government needs to be dynamic and responsive towards the societal needs and changing economy. Therefore, the Committee desire that the allocation policy should be n~viewedto. reflect the changing demand supply scenario of the various sectors and the direction in which the Government wants to move forward. Recommendation No.4 Production of Natural Gas from KG - D6Basin The Committee note that KG-D6 basin is one of the successful:.discoveries in the NELPregime which gave hope to the country in its quest for exploration of hydrocarbon resources. The Committee note that the planned production as per the approved field development plan (FOP),which was mmscmd in was to go up to mmscmd in However, the production from the KG-D6basin started declining as the actual production was in 200-to 26.8mmscmd in The Committee find that one of the reasons stated by the Ministry for the declinilig production was due to non-drilling of required number of gas producer wells by the contractor in line with Addendum to initial Development Plan (ADP). Whereas according to the contractor, the decline has been due ;:0 substantial variance in reservoir behavior and higher pressure decline than envisaged. The Committee have been further informed that the contractor has been advised certain corrective measures to increase natural gas production i~ 'K.G-D6block. However, the contractor has failed to adhere to the corrective measures. The Comtnittee also observe that DGH had commissioned.~.study by an expert on the decline in production and the expert has concluded that reserves as estilfiat~'~ earli~ri which is around 0 TFC are' still available; and remedial ffi~a~l:tres*ih help the production tb g() up. the expert has also observed that the.' ',.,t, ~ ":"... '~ ~,.' '. ;.:

51 shortfall in gas production 65 is due to non-drilling of adequate number of wells as per ADP (Approved Development Plan) and delays in commissioning additional " producers would trigger water drive in the reservoir and consequent reduction of,. i, the ultimate recovery as a result of water encroachment as well aspermanent :; ~\ loss of some of' the gas reserves. Based on the aforesaid repor~ the cost disallowance amounting to US $.005 billion has been imposed "upon the contractor which the contractor has taken for arbitration. The Committee are worried and express their unhappiness at the whole series of events. The KG - 06 basin was success story of NELP regime which invited private companies and MNCs in the exploration and production regime which until then was a NOCs forte. However, the contractor has not adhered to the measures suggested by the upstream regulator DGH to drill wells to increase natural gas production. Also coincidentally, the demand for increase in the price of natural gas by the contractor over and above the discovered price by arm length mechanism as provided in the PSC has also brought question mark regarding the interest of contractor to abide in the sanctity and stability of the PSC. The Committee has taken serious note of the statement made by the Ministry that the contractor (RL) failed to adhere to the approved field development plan both in terms of gas production as well as drilling and putting on stream the required number of wells, even after repeated reminder. The ',' Committee also note that the action taken by the Ministry in respect of cost disallowance of US$.005 Billion to contractor based on arbitration, procedure. n view of the above, the Committee is of the opinion that non-adherence by the contractor to approved field development plan should be construed as 'default' and not just failure and remedial action by the Ministry in this regard must be premised on 'default' by the contractor and not on 'failure'. The Committee would like to point out that Supreme Court has observed " t/ that natural resources are national assets and are to be utilized for jo:!~gergood of the people. Therefore, the Committee would recommend to MoPNG to explore all possible options and take corrective measures to increase the natural gas production from KG-aS basin, as observed in the study commissior~e'~:bydgh. ".: "{. 2

52 Allocation to States The' Committee note that the 66 Recommendation No. 5,.',',. \\ natural gas produced from' different denominatedfields like APM, Non-APM,KG 06 and PMTare allocated as per the gas utilization policy by the EGoM. As per the policy the allocation otgas is done sectorwise in the order of priority as decided by EGoM and the geographical location of any oil/gas producing asset does not influence the allocation criteria of Government. Hence, this means that even though natural gas' ~~.produced from or adjoining areas of a State, there is no gurantee of any allocation to the Statewhereas industries in the priority sector in any state including far off ones would get preferencein allocation of gas. The Committeeobservethat total gas production during was million cubic metres, out of which the share of private/jv in the KG 06 basin locatedin coastal area adjoining AndhraPradeshwas 3700 million cubic metres. This accounts for 30% of the total natural gas production of the country. However,the allocation to Andhra Pradeshis pegged at mrnscmd in 202-3, out of a total allocation of rnmscmdwhich works out to less than 5%. The Committeenotethat only regional preferencegiven to Andhra Pradeshis that the power plants have been allocated KG 06 gas based on 75% plant load factor whereaspower plants outside Andhra Pradeshhave been allocated to operateat 70% PLF.The Committeeare of the opinion that this is an inalqnlficant privilege given to Andhra Pradesh considering the quantum of gas produced'in the State. Further, ~~oughthe gas producing and nearby states have enoug:.'demand for gas, it is transported from East to West Coast and vice-versa thus entalllnq extra expenditureincreasingthe cost of gas. The Committeefeel that utlllzation of gas in nearby, areas or states, could be more pragmatic and eccnornlcal than ", ~. transporting it to longer distances until a nation vide gas Pipeline network is in place. The Committee are of the strong view that this policy s!lould be re ~x~furnedand the lrtdustrfes in the state concernedor in the neighb )i"ingregions should be given priority in matter of allocation of gas as the state in tvhich the 22.

53 67 field is locatedwill be very eager and interestedto use the gas for its economic development. The Committee,therefore recommend MoPNGto supply atleast 50%of the gas produced to industries belonging to the state where the fields are situated. RecommendationNo.6 Royalty to States on Natural Gas Production.'.,,.' \'. '. The Committee note that oil and natural gas is produced from the fields located in onshore, shallow water and offshore. Some of the' fields for exploration and production were awarded under nomination basis and once NELP regime came into being, the fields were awarded under competitive bidding. As per Production Sharing Contract (PSC)the contractor has to pay royalty to the Central/State Governmentdepending on the area from where the natural gas is produced. The royalty rates on natural gas production are 0%of well head value for onland and shallow water areas applicable uniformly for all regimeand it is paid to respective states in which the fields are located. The royalty rates applicable for gas producedfrom deep water fields under NELPis 5% of well head price for first 7 years and 0%thereafter on ex-royalty basis. However,in case of production from deepwater, royalty accrues on!y to Central Governmenton the consideration that all the resourceswhich are in the offshore areasbelongto the Unionof ndia. The Committeefeel that this policy has put the States where the gas is being produced from offshore fields to disadvantageous position 'as they are beingdeprivedof royalty arising out of the production of natural gas. n the case of KGD 6 basin which is one of the biggest discovery of natural gas in the recent years,the royalty on the production accrues only to Central Governhlentand no revenue is earned by the Andhra Pradesh State Government. As the royalty payments to States where the natural resources are located and ~producedis SUbstantialas seen in the case of Rajasthanwhere State Governm~:J~t is earning to the tune bf Rs.5000 crore/annum by way of royalty from B'~rmer fields, d~ph~ihgtither states of its rightful share of royalty from offs'\-srefields is uhjtistlfi~d~evert th8ugl,the dff~hbrefields lie in coastal areas,the hmtractors c":. (.:. 23

54 would set LP offices and source other infrastructure to carry out the work in the adjoining state to the offshore Hence, it is reasonable for 68,,... "... the state to expect some benefits from such economic activities being carried out adjacent to their coast will incentivize the states to extend all cooperation to carry out the exploration and production activities. As the production of oil and natural gas is expected,to increase substantially with the new discoveries from offshore fields being made, the issue relating to non-sharing of royalty from offshore areas with State GO\Vernments needsto be revisited and the State Governmentshould also be benefited from the economic activities being carried out in their coastal region. Since the exploration and production activities are expected to increase in offshore and deep waters in the years to come, the Committee therefore recommend that MoPNGshould devise a policy for sharing the royalty earned from offshore areas also with the concerned State Governments. Supply of APM Gas to TTZ Area RecommendationNo. 7 The Committee note that in pursuance of Supreme Court order, MoPNGhas been supplying natural gas to the industrial units most of which are g':2ss bottle manufacturing units in Taj Trapezium Area, in Ferozabad near Agra since 996. The allocation of gas for this purpose now stands at.7 mmscmd. The price of the natural gas charged to these units. are APM price which' has remain unchangedsince The Committee are given to understand that the number of factories in this area has grown manifold taking advantage of the low priced APM natural gas. The Committee feel that this has defeated the purpose of the Supreme Court order which wanted that Taj Area should be preserved from environmental pollution from the factories in the nearby area. " The Committee also wish to observe that glass units in other town/cities in the country which buy gas at market related prices are at a distinct competitive disadvantages compared to the blih io ~tea HiTTZ Area. ';',,, 24

55 69 n view of the above, the Committeedesire the MoPNGto implement the SupremeCourt order and the objectives set out in it in the right spirit without creating any imbalancesin competitivefactors for other similar industrial units in the country. Therefore, the Committee recommend that the MoPN<a'toinitiate concrete corrective action and supply natural gas at competitive mar,~etpric~ to these units so as to check the mushrooming of industries in TTZ area':which are taking unfair advantageof low gas price. Rangarajan Committee on PSC RecommendationNo.8 The Committee note that The Production Sharing Contracts are entered between contractors and Government on a host of issues under the NELP. Governmentappointed the RangarajanCommittee,to review Production Sharing Contract (PSC). Some of the important recommendations of the committee include a' new revenue sharing model, pricing formula for natural gas and tax holidays. The revenue sharing model has been proposed to overcome the presentsystem of pre tax investmentmodel and cost recovery mechanism. The Committeedesire that since Rangarajancommittee recommendations have wide ramifications on the investments in the E&P sector, i~ needs to be examinedin greater detail before any decision is taken on the implementationas the E&P activities under NELP has not achieved the desired participation from adequatenumberof both domestic and international companies. RecommendationNo.9 GasPrice' formula by Rangarajan Committee The Committee note that the RangarajanCommittee appointed to review ProductionSharing Contract (PSC)enteredbetweencontractors and'government under NELPregime has devised a new formula regarding the prlce'cf natural gas produced: hi this regard, its report has stated that'...the producers-n ndia get at h~asthe av~rase price of What producers elsewhereare getting'. "The proposed forri;ula is a simple averageof two methodologies.n the first method; it takes the ~Ae~Hi mportsat hnginfo liitlia 6~different suppliers while in th~'e'econd f". ~,'..... ~.~ " -' '..~ :

56 70 method, the weighted average of prices of natural gas prevailing at Henry Hub (HH) in USA, National Balancing Point (NBP) in London and netback import price at the well head of suppliers into Japan in the preceding quarters is considered. The Committee have noted that during the year 202, the natural gas prices in these three selected hubs were around US$ 2.5 to 3.5 per mmbtu in HH(USA), US $ 8to 0 at NBP and $ 4 to 6 at Japan respectively..;., However,t it is to be observed that the benefit of lower gas prices at HH has been at larg~y diluted by the inclusion of Japan's LNG FoB prices which includes 60% royaltyj~omponent. linkage to JCC and host of other factors. The note prepared by Ministry of Finance for EGoM on the Rangarajan Committee formula argues that there is no logic in inclusion therein of the consumption by Japan which is having very high import LNG price and that nowhere in the world, well head prices of natural gas has been linked to spot LNG contract basis. The Committee find merit in this view of the Ministry of Finance. The Committee further observe that Russia, being the second largest among the gas producing and consuming countries, exporting 40 to 50 percent of its gas to Europe at a price of about $8.77 per mmbtu, could be a valuable and better indicator of gas price. The Committee desire that Russian prtces could be.' incorporated as one of the reference price in the pricing formula. The Committee would also like to point out the glaring' omission of factoring of domestic cost of production of natural gas by Noes namely ONGC and OL which was pegged at $ 3.63 and $3.2 respectively during the year Similarly the cost of production for RL in stood a~ US$ 2.48 per MMBTUfrom KG-06 field. The Committee would further like to highlight that the price of domestic natural gas need not be dollar denominated due to huge volatility in 'dollar vis-avis Rupee which often leads to gains to operators for no reasons. c: and adversely impact the Government financials. As the present price of $ 4.2iMMBTU at an exchange tate bf Rs.45J-. works out to be Rs.89/MMBTU and as against Rs.6'OltJSDi equal$ to Rs.252/MMBTU which is 30% windfall gain 'g~crued due to tll ~~He~~ltlathlnfr8th ~sj*5 t'o 60 Against the US dollar.. "

57 7 The Committee taking into consideration all the factors analysed above would like 'to recommend that.the. Rangarajan Committee formula for arriving at.. '.. " f"'... natural gas price should be thoroughly reviewed and reconsidered. The Committee recommend factoring domestic cost of production of gas for arriving at the price, and fixation of price of gas in rupee terms in PSC,!~,~derN,ELP regime.,. Recommendation No. 0 Strategyto attract investments in Exploration and Production sector ' The Committee is not sufficiently convinced on the efficacy of the strategy of the Government on deploying the single instrument of price to achieve multiple objective of incentivizing domestic gas exploration arid production on the supply side and meeting the huge unmet demands for gas at reasonable cost.,,',,,' _':.' Doubts have been raised in the Committee as to whether a big rise in gas price would attract additional investment from within and abroad in the field of' exploration. Data supplied by the Ministry on flow of investment by private/jv ccmpanres in exploration of gas reveal that flow of private investment in exploration has actually started tapering down every year from onward compared to similar investments in and despite there be substantial jump in the gas price from 2009 onward and also country's gas out put marked a drastic decline. The Committee, therefore, recommend a through review of the whole strategy of price-led investment growth. Recommendation No. mpact of Gas Price Revision on Power/Fertilizer Sector "\ The Committee note that under the allocation policy for naturci:fgas, the top priority has been accorded to gas based fertilizer plants, totlowed by power plants su,pplying to grid. The allocation of Natural Gas to Fertilizer and Power sector during 202-3was 40.8 MMSCMDand MMSCMDre'sl;ectivelyand _",'... ;._<.,"',' _,' ) ',_. '-',ri-... C', _,"'-" ',.,.... _', '. - '"i" accouhtedfdr, 29:9%and 3.6%of the total allocation. The Committl;)ehave been ihf&;tm~d: thm ph:~sentiyfertiliz~r~~ctor is getting Natural Gas at.~.'price of $4.2 ~~fmmbfu ahtl i'rl~re~sedf LJSd&t'lar per MMl3tU will result in exttk 27

58 expenditure of Rs 355 crore per annum towards fertilizer subsidy. 72 Similarly the Power Ministry has in its note submitted to CCEA have stated that if base price of domestic Natural gas is increased beyond US $ 5 MMBTU, it would be unviable for power sector. Considering the above it is clear that in the event of increase in gas prices, the Government will have to provide more money for the purpose l-bf fertilizer subsidy. Simultaneously since power is an important input to,m.ost of the ndustries, increase in its cost will have a cascading impact on the economy as a whole. n this regard, the Ministry while justifying the revision of natural gas prices have informed the Committee that the 2th Five Year P~m document has the underlying philosophy of the Government that the energy prices in the country must align with global energy prices. Hence, as the country is thriving on imported fuel, the pricing has to be linked to international prices. The Committee while understanding the need to adopt market linked pricing of energy in the country also wish to point out that being a developing nation and having a huge population with very little surplus purchasing capacity, it would not be advisable to switch to market linked energy prices from a protected price environment. The Committee therefore, recommend that the new formula for natural gas pricing as suggested by the Rangarajan Committee should be reviewed and reconsidered; the issue of market linked price of natural gas should be dealt and considered in due consideration of its impact on other sectors {~:efertilizer, power etc.,.including their viability, resources to fund increased sl!~~sidy by the Government and related issues. Pooling of Gas Recommendation No. 2 "-" The Committee note that natural gas is produced from different category of :: ',; -,'"-",.." ;,,_'.. _',..,..,.., : 'r. "-',.",",_....,...-~' fields like nominated blocks; Pre-NELP blocks and NELP blocks on both onshore ~. ',.:,_ ',; ~.'."',',,;,,,, ';.J '. ','.' ("... ' _,_:.'.. "..."... "'_,.:.._',"'.:) oj,,:.-, alia offshore fields; However by and large the priority in allocation for gas ~H~Htilt~a fr6fhhift~fehtfiela~is same.

59 73 The Committeehave also noted that the price for gas varies depending upon the type of fields from which the gas has been produced. The gas produced from APM fields is 'priced at $4.20/MMBTUwhereas from PMT and Ravvaflelds it is priced at $5.57and $ respectively,whereasfor KG- 06 basi'n'it is priced at $4.2/MMBTU. The Committeehowever,are of the view that the differential pricing of gas do not provide clarity and transparency about gas pricing to consumers. The Committeedesire the MoP&NGto consider pooling of the entire production and then allocateto the sectors as per the priority at a uniform price. The Committee is also of the 'firm opinion that for pooling gas prices, prices of gas from different fields must be premised on the respective cost of production and this necessitate factoring of domestic cost of production for arriving at the gas price. The Committeenote that a Committeewas set up under the Chairmanship of Dr. Saumitra Chaudhari, Member,Planning Commission to examine the need for and to suggest a viable schemefor a pooled price for natural gas deliveredto customers. This Committee have since given the report. The various stake holders like Ministry of Fertilizer and Power have expressed reservations on the recommendations of the Committee. While appreciating the reservations expressed by the stake holders, the Committee recommend that the Ministry should try to evolve a consensus on pooling of gas, so that a uniform price policy can be put in placefor natural gas in the country. New Delhi; 7 October, Asvina, 935 (Saka) -.': ".,... SOMABHA GANDALAL KOLPATEL, Actin!c{Chairman; Standing committe» on Petroleum & N,atural Gas.. f..'l..... " ".',

60 ~,...,",~il.:p." \Of'. '...." " -."..._----_._ AtJ,N'E~:URE-,. STAN.DNG COMMTTt:E ON FN ANti:.;. (202..3).. fifteenth [OK SABHA MNSTRYOF FNANCE. (OEPARTM:ENt.~FREVENUE)..." ", _..,..,~,~~.. '_"'_M'.'_"""_ 'E:CONOMC MPACT OF REVSON OF NATURAL GAS PRCE' SEVENTY F=OURT'HREPORT',. LOK SABHA SECRETARAT' NEW DELH August, 203, Sravana, 935 (Saka)

61 OaSERVATONS PART RECO'MMEN DATONS. The Committeebelieve th~t n~tural gas is a nat,ionalresource and a public asset; and therefore any discou~se on its pricing..policy should reflect this principle so that it is used for the larger national good and notfor profiteering. n the present economic situation with rampant lnflatlon and. a slowdown of the economy,any increase in gas prices will have a derailing effect on the economy generally and the downstream core sectors of fertilizer, power and steel, in particular. The Committeenotethat with gas production from the KG basin fields falling drastically in the last couple of years due to what the contractor claimed were "technical problem", the core sector of the economy dependent on gas as fuel was forced to either use expensive imported gas or operate their plants at sub-optimal capacities.. As production from KG-06 gas basin continued to decline Since April 200, pro-rata cuts were imposed by Governmentacross au sectors betweenjuly 200 and March 20.; in October 20, supply.to City Gas. Distribution (egd) from this basin becamezero and bymarch 203, the supply to. power sector also became zero. However, fertilizer sector Was get,ting its supplies as per priority fixed by Government. The reduction in 9,assupplies resulted in several gas-based power.plants in the Country getting stranded and becoming NPA. The shortfall in production also resulted in zero supply for the steel sector. As regards the impact of gas price increase on prioi-ity sectcrs, the Ministry have admitted that there would be a direct impact on the prices of fertilizers, as increase in the price of gas by $ per MMBlu results in the increase in cost of production of urea by a huge Rs per M:r~ t is thus ~...-.-'..-~ /

62 .....,..,.,._. "._. -r-r--v-._-_ _..:..:..; i; ,.- _---".._ evident that gas pricing has serious repercussions for the economy as a whole,.. which'warrants careful deliberations and prudent decisions. 2. The Committee would thus like to bring into focus the foll()wing critical issues and areas of concern arising out of the government'sdecisloh! to revise sharply the.natural gas price. (i) Deploying the single instrument of price to achlevexhe multiple (ii) (iii) (iv) (v) objectives of lnceritlvlzlng dornestlc gas exploration and production on the supply side and meetlnq the huge unmet demand for gas at reasonable cost. n this regard, doubts have been raised as to whether a large. rise in gas price would at all attract additional investment from home or abroad and relax the supply side constraint. Despite raising the domestic well-head price by almost 300% during the period beginning 2005 tnt date (from as low as $.79/MMBTUto $4.20/MMBTU),private investments in the sector and the country's gas output have actually dropped, To meet serious challenges that have arisen due to the tendency of contractors to manipulate the investment multiple parameter and.controlling production, which adversely affected supply. To frame a long-term vision based on geo-political developments in' the energy sector. To conduct a scientific cost study in the' gas basins warranting justifying a higher price. t cannot be a mechanism rmly' leading to Windfall super-normal profits to entities, thereby putting the cost of private profit on society. The rationale for dollar- denominated gas pricing Whenthe revenues.are all in rupee and the country has a chronic adverse exchange,rate. 23

63 (vii) (viii) (ix) _.--.._._--_._......_---_._ _'_..._--_.:._..._-_...._-----_. Any fixing of input price at a lower level than output price \'Jill meana bloating of subsidles: is the government prepared for' a disproportionately higher subsidy outgo in successive budgets for the fertilizer and power sectors and whether this has been factored in the 2th Plan. The extent of its lnftatlonary mpact needs to be considered..~.~, _...: The need for consultations with the State govemtnents in this process, as they may have to significantly increase.power tariffs to cover the higher costs or drastically raise theirsubsidy expendlture....,. The impact on state budgets should be key determinantas well.. The need to consider views of concerned Ministries, Planning Commission, ndustry and experts before arriving atthe. decision. The counter-productlve effect of such large increases in price by forcing consumers of gas to divert. to less cleaner fuels, thereby. stultifying the.gas prlclng.pollcy itself. 3. The Committee are constrained to note that no due diligence was done before arriving at the decision to revise gas price. mpact study done in this regard. Neither was any cost or in this context, the Committee would recommend that the followinq aspects should be taken into account. as an integral part ofany gas pricing mechanism,which has huge impact on various sectors of the economy:. (i) At this juncture of our economic development,transitioning from a (ii).regulatedto a fully market-basedsystem should be staggered. The Government needs' to rethink certain elements in the pricing formula suggested by the Rangarajanpanel, which only serves to push the ndian gas price higher than it ought to be. A morerealistic 24 33

64 (iii) (iv) (v) (vi) (vii) -. "_..., ~--~.-.--~~~.-..-"..--.~--..-.~ price formulation better suited to our current prlorltles may be evolved. Secondly, there should be a cap on the suggested pr~~~.under the formula and for this purpose; there.shculd be a ceiling price. cannot be the case that gas producers will be. allowed to reap unlimited gains in the event of upswing in global prlces at the expenseof core sectors of the economy. The Government sho-uld also subject gas producers to closer regulatlon, especially on aspects of cost recovery and.technical parametersrelatedto production. A comprehensivetechnical study on cost estimates of gas productlon should be conducted for thls purpose. The Government must ensure that the contractor responsible for.. delivering the major chunk of gas from KG-06 gas field supplies,.. delivers the shortfall he still owes as per the Agreementat the old. price of $4.2 MMBtu,rather than getting the benefit of the new price for previous commitments. The important recommendationof the Rangarajanpanel of movingto a revenue-sharing arranqement with gas producers should be considered.. A new ProductionSharing Contract (PSC.)model should be evolved that will do away with ncentives to control production and manipulating nvestments,while assuring reasonablereturns to the producers.., The governmentneedsto do a thorough impact study of gas pricing..' on different sectors of the economy,particularly the.. GOresectors of power, fertilizer, steel and small scale. industry specially those effected by pollution control laws/orders. The quantum of subsidy required to compensatethese sectors should be pre;';isely'arrived at over the medium.term. Similarly, the extent oftrevenue hjss or t 25

65 .. - ".... _.... _ _._w._, '.=====-========::::.:-... '.._ '-----_._ ~ \ (viii) (x).foregone' should also be quantified over this period in order to gras p fully the implications of the price revision on the Union S,u.dget. As gas pricing will have' implications for power tariffs ~s well, State governments also need to be consulted and taken on board. nstead of hurrying with decisions carrying wlder mport and rarylifications for the country as a whole, broader consultatlve process)nvolving stakeholders should be put ln place. Divergence in views within the government cannot be. ig~ored on such, a major issue and therefore, the valid concerns expressed by key economic Ministries of the government like power, fertlllzer and steel should be duly addressed before finalizing the policy. n the light of the concerns enunciated above, the Committee WOUld. strongly recommend the Government to review forthwith its decision- to raise gas prices and come out with fresh pri'cing which is more balanced and hojistic and closely related to the a.uqitedcost of production and a reasonable return on the...',<,:... capital invested.. New Delhi; 02 August, 203 Sravana, 935 {Sakal YASHWANT SlNHA,. Chairman, Standing Committee<on Finance. all 26

66 _.._ _.._- ):> z Z m X C ;c m <

67 Annexure-V Source wise Production and Supply of Domestic gas during the year 203-4: (MMSCMD) PRODUCTON AND SUPPLY OF DOMESTC GAS DURNG Source % of Total Production Supply % of Total Production supply ONGC OL NELP PRE-NELP CBM Grand Total Source: Ministry of Petroleum & Natural Gas

68 » z Z m X C :::0 m <

69 ..,. To No, L-606/2/20-GP, G6v~rnment of lndio Ministryof Petroleum &; Natural G.as '"...* * Shcstri Bhawan, New D~lhi Dataq'the JulyS, 2.03., TheChairman s, Managing -airector, O'NGe, New DehL, 2. The Chairm.an 8. Managing lirector, GAL, New Delhi. 3. The Chciirman &. MClndgihg Directiir. ca. New Delhi. Sir, SubJect:~,Allocation of domestic 9'05, from small/isolated fields, **** n supersession of this Ministry's "Guidelines for Selection of CUstomers for Allocation of Domesflc Gas from' Smoll{lsol,ated Flelds~' 'forwarded With this MinistrY'sletter of even nlhnber dated '6,.,202, please find enclosed herewith the revi$eq "Guid'elines fot se.rection of Customers fot' Allcoation of Domestic Gas from SmOllilso.latedFields "..Further, necessary oeflon for alloco'ting gos' to.customers from s6ch ' srnoll/lsolored' fields may be taken n' accordance with 'these revised guidelines and such gas allocated to various customers may be informed to this Ministry.. 2. These revised guidelines have the approval of Minister for Petroleum &; Natural Gas. Copy to.-,,. ANNE~UQt~ ~ Yours faithfu\ly,, ~. ". P.K.Singh)" Joint Secretary to the GoVernme'ht of fndia. TeLNo; Technical Drector (NC) for hosting the gui' l~iines:inthe Mlni.stry'swebsite. '.. 37

70 ,. ' ',. MlNSTRY O:F, P:ETR(JLSUM ~N'D NATURAL GAS, GOVERNM Nl 'OF ~J:)A. ' 'GlJU)'E,LU~JjE.S,r-O'R SELECTON :Q"F.,C USTOMERS, :FO R D~OMEstC 'GAS AVAfLAS:lE FROM SM:A.LLilS();:LAi,D,i F'JELDS " Date: 8t~July, 20'3 '. Page,jl

71 ,.. Guide'll)les for selection of custo~ers for domesticgas ay~ilitblefrom silialll tsojated fields 'Governm.,ent had come out with guidelines for selection of customers for domestic gas availabie from small! isolated fields on 6.0.,02.The guid~ineshad 'been issued with a provision to review the PClliCy after one 'ye,ar., Several r:epresentaijois have been ;eceived :fromvarious quartei:s for reviewing the policy. Based on tlie ~xperlen:ceafter ' issue of guidelines and the issues raised.by vmous the inhihl goal ofthe 'reviewed. stakeholders as well as 'keeping inta~ policy aimed at early monetizatio~,of gas, the guidelines 'have been 2. Derlll;itiQ~ o:f.the Fields to which these guidelin~s will ap.ply 'The Fields that Will be covered by this POlicywill be the existing,produoing or new fields, from n.oro.io~tedblocks satisfying one of the followjng'two oncli.tions: "Fields whose peak pro4u~tion is less than 0. J:ru:nscl;lJ,d, and they are situated more than.. " Kmawa,.y nom the gasgrid;. OR Fields whose peak:production is less than 0. Dil~cmdand have a gas pressure which is less than the grid pressure", These fields, Will be,called sm~ and isolated fields heteafte~; 3. Methodology to be followed for allocationof Gas fro:m SmalJsolated Fields:. Supplies to exi.s.tingcustomers from small/isolated fields sliall,eotilitiue as per. th i;r APM allocations.orthe fhllback non-apm allo~atiollsor 'both.:an4s~,, be restri~tedat aevelequal to the a-verage ~pply made to Stich ~toll!ers.~. the'last,six months. Revised Gas Supply Agreement for these quantities shall be finalized by the NOes. '.~', witbi.n 30 days. Gas supplies'sh<ill be made to th.e ' existing customers based 'on this,level SUbject to availability,of g~. 'NOes shall charge the notified APM Pri.c~for SUpplies made against APM aktation,:... ". ;-. 3'Cl

72 !... and at ~on-apmprice, as notified by the Go-v_ent froin ~e to.tane, for the balance supplies (supply level frozen now minus the supply ofap~ gas).. n case of additional avail~b.ilityof gas after providing for gas supplies to the existing customers as indicated at 3 (i) above, and for ari'j new pr()~u.cti()n. from the small isolated fields. s'upply of gas will be.decid,ed'tbr6ugh open, L,.. competitive bidding. iii, There shall be no sectoral priority and the exi$tirig as wel as new ~~t()mers. ~.,.Shanbe treated equally. ". ' ~ V'.. iv. The bids shall be based on the price an.d shall be awarded to Uie'.lUgllest bidder. n'order to ensure higher :i:il6ietization NOes shall,fuca ~trtn reserve price eqlial to the price of Mn...APM gas for the particular region; as notified by the Goveri nelit from time to time. v. An advertisement NT.ande-Tender Will'i:>e'brought ~ut :t:or'such.additional quantitr of gas available from sina.u and isolated:fiel~ rom' Noes meil'iioned in 3 eli) abov~ in at east otie local language daily & one na.ti?,nal &lily mentioning inter alia the quality. tentative. date of availability, co~pressio:n charges (if any), duration of availability, quantity, location and delivery point of the gas field. Detailed information on the evaluation criteria ~,qngwith...,.,"..', btoa~ salientfeatures 'of GaSSale/l'ransj>ortatioD. Agr~ero.ent(as appl,ic~ble)to be executed shall also be made known, vi. n view of limltei;l'life of ;the field.the prospective cusronrers snail also be'.vii..,._' viii.. advised to explore maintenance of dual fuel c~p~hllity,if~o.warrant~d,.... n addition to the price 'bid, the bid submitted by the applicants shall also indicate the quantity of gas required and date Of off take of gas,.applicants may be.a$ked to fun:tish other. firumcialoperational!c,onlulercial details as deemed fit. ix, NOes shall also fumish all information sought by iipplicants durlp.g,the pte-... \. bid conference. x, ill order to ensure early monetization, only such projects shall be ~~je';;tedthat... ", ' are ready to offtake gas witbih 90 days from the; date of readiness ii:!.di.catedby. '!.':..,. the NOCs.. ''''j '" Page 3..." (~ 40,

73 xi, xii. n case of m:utipleapplicants quoting the same price, the gas will be first fully allocate:d to the applicant who' indicates the earliest date of offtake. f mote than one applicalitindicates the same date of offtake, it will be allocated to all. such applicants in proportion to their requirement. Aocati~n lotters will be..... issued to such appllcants and:gas Supply!\:greementS Will be concluded with..... '.. '...,'~~.~~.'~.:".' ',,::. su c.essfulapplicants... f any surplus.gbs is left after ~ch. allocation then ,> ~pp.iicantswith second bigh~ pnce bi'd can be considet'ed. ancl tlie process shall be repeated \lltil all the gas is exhausted, All applicants, without relaxation of any kind whatsoever. are to furnish. Security Deposit (SD) as part of the Bid to cover.rninimimr six weeks GaS cost. inform of either: a~unconditional rrevocable Bank Guarantees (BGs) (sii sepatate.~gs each covering week of cost of gas allocated) OR b. rrevocable Letter of Credit with iastructions which allow the.. beneficiaryto perform multiple part encashmerrt, Such SD shall be issued by a s~heduled/naioiialized bank: The. Security. -. ~, Deposit/a should be valid for at least one year fiottd:b:e'dat~of opei:ingof..,', bids or for a periodof six loiiths.b'ey~nd the promised'ciate of.offtake... whichever is later. t should be ensured that ~&. can be ~e~lis~4on a. weekly basis in the event of delay in utilizarien-of gas as per the offtake date stated by the customer in the bid documeat. The delay should be attribuiable to' delay 'on the part ofthe castomer, After.tetairu:ng the prorata amount for. the aetual nutnbet of days.delay d.fro.m the ~m~ount; : '.'.',... _. :' the balance amount shall he te:fu:ttdedto the.cust6.til.cr..n case of~ocation.lesserthan that required by the a:pplic~~this S:>:shanb~ i~c~erated to the. actual allocation level. The copy of 3D shall also he COmD.'.ili:cated. to the banker. (of the customers providing the SD) to ensure thai SD is m order. These pr()visions shall be adequately ~9. a priori. be e:x~)!r'linedto the customers arid written consent for th~se conditions :wibe t;; btainedf-.om. the customers.... ',.f.'...,.' ~.' ":.. Page'.4

74 .,. ', Xl. n: case of delay by customer beyond six weeks; the allocation need not be cancelled provided the customer prevides additienal SD fer a further period of 6 weeks on the same terms and conditions as in para 3(xii). n ease it is net,. provided withil seven days from th~expiry. of the fitst 6 wepk P~rl,9d,the allocation to'.that customer.shan stand cancenedand gas can be aliq~e4~~" the ap.plicant withsecond highest.price bid,ot prior bids are available. a new bid can be invite4 ifi'r!ovalid. XlV.. The final allocation of gas made 'shall be hostedon.the company' s webst~and....'... also conunu,mcated to' MoP&NG... xv. C~~S not covered under these guid~unes, if.any, may be 'r~fene.d to' " Govemment f.ot a decision. XV. n case gas production frem a field exceeds 0.,n:unSCJ;iO-after the initial allocation, the matter shall be breught to the notice of MoP&NG, fcr further orders. xvii,.the applicants shall be info~ed that ih case the overall produetion from the ~[solated field increases beyond' 0. mmscmd and the field ~ets connected to the grid at a later stage,~the existing customers shall, be as,sut-ed of domestic gas supply.oniy for. a,period of one Ye.a'rnom such coll;o.ectionto.,the grid, Th'ereafter,.the gas shall be alle~a~ as per prevailing 'g~ utilisation policy QfGoyenunent of ndia, in ease there:is \ldfulfiile4 ga-sdeql~d from a higher prierity customer on the grid xviii. n case the production incteas~s to a higher level.than initially..... expected/advertised as part'ofthe buijd'qp (but red:iallis e$8tb.ari{}.l ttm:lsgmd), and is expected to remain So' en a SUstiined basis, the.addltional,gas can be offered to' existing allottees up to' the requirement indicated intheir bids, and thereafter offered to others., xix, n Case of decreasein production fron). a particular field, supplies would be cut..',,...,; :'. on a pro-rata basis for all the, customers being supplied fioi that particular xx;. field.' n case' of reservoir failute, the request fqt,~pply. 'of gas to 'c~mes oftb4t 'reservoir shall be given prierity in the bidcung process for supti-y of.new".'. ".. ::.;:..,,. ~. Page 5

75 ...., additional gas from a nearby field. Such exi~g customers may participate. in the bidding process or match the highest price ih. th~ bidding. process, Sucb.existing 'customers shall also give an undertaking to lay :the.pipeline and, any ~tier'requir~d~eture at their 'own expense for' taking..gas from $e.. n~by :field. "' ',. xxi. n case.ofrevislon in price ofnoi-apm gas..in future to a level.hi~~ ~an what is being paid by customer/s, the NOes shall revise the priee.and chat~e thehigher notified non~apmprice from the date 'of Suchrevision. '.'.: xxii. NOes s~l regularly send a status report to MoP&NG on the ~ei~:~~t are xxiii, proposed to be allotted before and after th~ allotment and MoP &NG.reserves the right to allot gas outside this policy.. The ~gui:delinesfor selection of customers for dqjlesti gas available fr6m sm'alll isolated fields dated ~.O.202win be supersed d 'from the date of.issue of these guidelines. ':.~.~..... < Paee.6

76 _,» z Z m X C :::0 m <

77 ..,. r..._... -_.- _ '-"'_"_'_'.. _'~. '.._~.~ 'o_.'" _' '_' _ -'.-r AN M\~ru~t'':' ;[!. e Gas Rules 959 and. the Articles of the Production Contract referred to above. 52) ;'.~..~;g.*:..~~.::~l~:~, '.' ;q:.~~l:l"i~ :~f'm$, Sharing.~,[~~\~.~a$..Utilitis,ti6n.~fjli'e~ and the Procl:uctioti..Sharing Coniraetj Governm,nk.iib;.,th~,.. capacity as art Executive'" 0..the Ufiion an;..,.,~l~~~t~l.;/~~j~;';;,. i. distribute the. manner of )3.<Jl~ gf,)n';a.tural...qaa allotments and" 53) thto ll h, ~~ h~; :.v;;. J ' Application nor is'f'' ',~~" :~issue which arises ~'8:t of the,~oi_'~~, impu~~~ judgment. 'tlj;~ t~"ja>i"'!.'ljri~..,;eonslitkt;t;~9;;k;:, f.~~~~,d,i~g.. where llycl}~g pgy:l;:l.;~~~.:'~.;, ~~Qti)v rnmentholiey, price '~'~""':',_~ t7:r~'".~{~;i\..}~.~.",/ Fu. r. her without such a fxati0ti;!g.~~. tjw.lt~~ ;'; :"~ :?~;':,'~;i:...,,:" '",' "".. ",_;.' '}8,_--:":".:, "" ' : l'l~' l"~" '"' i :.,-,fi::\j '.. '., _~' '/:'\".,...,._..<i_.._... -., "_. ~J ~-,.~~:.. j '," ~. proceeding in existence and WtirJJlx!fW~'KN!~Gda~m.,i','#~.~~"f::li;~;i;~';;,iU'f:;:tla.e.....~~.,", -,y ~.j.~~(').;! ~~.~~'::t:',~,:,~"..~~'i;7;~" pres, nt ]?,,29:~~8,~g,. ~jt -.issue toudhlbg" tfpol th-~,:'-v~idit,.of pn; e;,. f~~~t~$i,~r.~~~.~!f&;l?mttla:q.:d(e:$:i,~i~;t~i$~~ 54) The) p'ple'e of $ 4,.20/in:rnbtt.i i~!(gase-d.,();h;>'tne;,:f(l~lii;~a approved by the Government under..its.powers pursuatl.l.tq -the

78 t~rt:ns of the esc. Tlle."'''",..,,.,...,".,.'..,", ".,.,..,.;,' poley of th~ GQ~~.mm~,G:t."i ",.n~t ~g,~r".. ;lf~v~i;tmb~til_r; ji~,,;~.~.,~.. g"'i 5$) Mr. Gopal Subramanium, learned Solicitor General explained that up to early 990s, prior to NELParid pre~nelp years, gas was being produced only fromthe fields operated by the Government companies, viz., ONGe and OL,out of blocks which were given to t n.omination b gas was the Government on administered /., the fields, " e given on condly, of the Government.. primarily by.the needs get the g?is a.:,~ G\OJea,'tl~~~.. i-\:r:p.~refore, the basis {or..' '~ ~ ""d g. J ~~,...,,.:~N,. ~.~ ~!.\ Administered Price Mechanism (APM)pricing l:i~~~,~i't~iflll:lis.i _.~.r. Cost of production plus marginal profits as may be determined by Government was the sale price. Fields were given to Government-owned companies on nomination basis till early 990s. There was, however, the problem of augmenting the '(:'; production. Exploration and Production was at the core of 85

79 ,. energy security and hence it was decided to open the fields to Private Sector investment. During mid-990s, known as pre- NELPyears, private investment was sought 0 competition basis and certain blocks were awarded to them under a Production Sharing Contract. departure from a cost,'.,'.. t was thought, e place. Preof oil and gas is associated with considerable risk and no investment would have come if product prices were subjected pricing regime provides for arm's length price which is another name for market price. But since the gas market is n;:}tfully 86 4b

80 ,. v, ~.--,.,-~--.-.,-~~-..-'.. "_,... " ,,~~,- developed unlike markets for crude oil, ~;t!.;~a_~ m;;ti'i'; PSC that. there..will he a formula or.oass fo t."the~eterfuin~~i~,~-."""""":"\"-";".,,,-..,:;,',,-,,,,,._,,.,,:, ;'."i.(.""" " ' pf the ptiges wbi.ch shall be,~pprqy~.g:bmth.e G,Q~ettlment prte>t to sale~g.: {QJ;.graAtiijg.ffiis approval,.q,q.~~m~~fit.;;~oo:n~$jj~e arbitrary "but"shan t~~..into ~~G.Q."\:llnt, th~\.~[~ :~_;.f~~u~y,:j..~.,l any, on priclng of natural gas, inoluding.an.y;,lili~ag~s)~th, which guide t (a) (c)? {: [fw~i_l i """:~'i,:)b...._!.~'.-." t,,.. g of KG D-6 gas, are ie--. the provision the Contract. Contract as follows: or flared.with the.ected or' sold. to shall be NELP-l 87 4

81 t is further pointed out that in accordance with this approach, ---:',:"' ~~-;",.-~,----.-~-..-~' Government asked the Ct>ntrac't:or..!Gi.: SUim~t>i,.~,24~!_l~~;[,~~:~M../ EGOM was constituted 9Y the (:. Government of ndia in Au 007 which looked. into the pricing and examif approved. a newly:.'.w:futb;;c;",~~;wtw.q...,. ~...t.. r )l'- f\ ~..-.' f r ; :m.,.:.. o. -i... ifi'catfofi~, on 2fJJ. ~. 2'0.: 0'7.?r Yiel;... m.,..l..,.r:,., A,h:..... :.;,.,. ~ flu' ~~<.""',;.j~i,;'ll,:lif~~:~~\;~~,.: the EdoM which is tobe applicable tuliror:mly:to.a4tsectofs'"is.:> 56) t is further pointed out that the said exercise was of mind and gbverh:rri.~htdlffer~d f:ro:rb. 't e"~qn:tf,a~thlfl~:;;*~.. 88

82 ". itl:~t~.adof $4.~g Glaim~d by the ee,ntl'arq,~~+n~, This formula is valid for 5 years as per the EGOM decision. According, to the formula, the price may vary between 'i~;"~!l:k(iji.a~],~;u;~_t,f.j;i'j' 2,~'5mrnt8tuaUrlij,g a pefi6d' of :5/~,~~$.., With crude prices of us $ 60jbarrel or more, the price will be US $ 4.2/mmhtu; for US $ 25/barrel, EGOM The formula, 4.2/mmbtu. 57) of this Court th_~f~egom a very senior Minister., Affairs Minister), ~ho was,, Ministers, Ministers of the consuming sectct)sv, ~",Sl,}<;h" il\,'.a~ ie~,rt rtj,ltzer and Power), the ~ ~ t ~ ~,;'til l r\.. j ~', ~..,",,-~ L,J "'" ~ { 4i "", '; i Minister from producing Sector (i.e., Petroleum &.Natural Gas), and the Ministers in charge of Ministry of Finance, Law and Corporate Affairs, besides Planning Commission..'_.. 58) The pricing formula/basis as per the PSC has to be: a) Firstly on arm's length basis; 89

83 '. b) Secondly, to the benefit of the contractor as well as the Govemment; c} Thirdly, having linkages with traded liquid fuels, and d) Fourthly, Government will have to perform Regulator's function till one is appointed for the purpose. 59) The followingtable will indicate the pricing prevalent in ndia in respect of..~!~'"l{"''' \i~~.: ~~~r ' (excluding, of, fields) which 60) The fixation of] t atl.yselbelfote~the. EGOM only in ~~:st, 'wn-en:tne> prree"fsrml::tltf Wars;\V'&~iT '~~ed;~as, Contractor had asked the Government to"}~~i~ :~*,!~t,,,r~i JlHS~.. tn 2006, but the rej~'~t~<ijt. :as~.it.,,,"wa.~jh~ ;\\ir~~~t\,t, 90

84 ', party transacrti on. 'Ar" m s length S ales'.has been defined n Article.8 of the PSC as follows: "Arms Length Sales" means,;~"',4"~; ~~-!~~!!f~;;;;t.. a;jni.~l.'.'; liq,.,.. ~iir.eim '. 'lt~,.~~~~l, ;,,, ~~,::,: ~Jf~~~~~...,."".~l~."",~,rp;.. =~::~~~;~~J~>,~~:i\i, ',r.': ".,:,,:,,:,;;t': r"'~jltf.~ ;~,J:~;#.b'l't;i!f-;;.~~."". ' ~'~~}\,'i(~"ti.l~.~~"!i;:':i;:tlt... '. n~:o:~~;;.,,~,:n,~, re a's~a;si\'!,.l\!w'...!t;aj.t w~,,;;~."~i'::,i.jiy ~li._,\l"")p.~~,.~a~~."."i\"'~i~~~.,;;.!,~ "'..,. 's""'~; t"ri?"(lfftwr""'"~i'~~".:,~~gl;liq:e.i, srues.;.,~wftit<h~l'./fiil~tiii,;;,.jdt.'.: lctl",. " '.. ""',., ".,_\~"._.!. :... ':.,,':'~\~'j'';:'',,-i ''L::'~ }'+,j;(_~';f'~.";~~'<; -"!~~'-"" 6) r",,:r. Q T"""'. th~t...,tbi;~," ~. of the Government VS... "'-'-' $ :~~~:~.., E&~~'l">';'.pr JJ;~i~e. JQ;. t;@ttstand also witn0ut,.~~.(:'j~!2lt,q~.,...,lllr)(::,}?\\~:r~j'l'.... ".,... i to tl~s:l.lhmsslon that ths CQurt',S.ndt called.""up"q.ll.,:l4,j(b~ 'lll~ ~ij;;t. ;ii~~.gsi:~~'i~~r~~j~,.~i~,.;.ii~\ ' 62) n the case on hand, Price formula was approved by Government in September, 2007 when it was expectt;:~jthat gas would be produced from the basin in June, 200{ The utilization of 40 mmscmd of gas was decided upon ;in the months of May, 2008 in terms of sectors and units to which... 9

85 , '''-~~' ,...,...,.,~..~,~ , ,--_.._ ",..-.,-.,--, ~-.--.'~ c~..._ gas would be supplied, As the production stabalized and further volumes of gas were known to become available, the government recently decided on the utilization of ~ further.. volume of (+0.875) mmscmd on firm basis mmscmd on fallback basis in October, 2()09. has been Contract' Gover 63) The position is that Article statesthatnotwithstit~f,e;ml~~r~rlgas is soldnotto the Q9yernmerit or its n@minee.". it'.'must be..sold.:': Qn..)~~"j,p:~i,.i k,)qf..... "sompetitiv,e arm's length sales in the s;;.tegio.n.fe,t simil~:;(seles.:.. ~. that the basis on which such prices are to be determine-d shall... ~ present case, the formula submitted by RL was ooked-jrito by ~;';, 92

86 '. ltgom and examined by the Committee of Secretaries and PM's Economic Advisory Council. Due to this, the price was ~~t~rllun~tl. tobe,,,,"..,,"",,":... <f:. 4' 00 '..'..., th...:- ;', of ~he-igt,mul~,,; -j;i\ride!,p,,.i'4r;.pn.,,_,~, 4~S!lSJ"" ""'" " " ", ",~r ' 54} Another important consideration to be kept in mind is that the PSC overrides any other contract which may be entered into for the 'su '-l;:'...:,.tifc:ll.s principle flows from the competent power ~ff~v",.~~ r~~b~ ~~!9h 0.9no,t. accrue.to. < "'.'. /. i~,., _,s' t "'./~""- ~ ~/ ~t! '''''l. -, l~:j.lltl~q:er 'it~e i'~~'o. --" 65) One of the main "putpos,e~i.q,.t~ ;,~i~:::('i.".:).jt.ir~.\';.:f.il,/ ~~,:;t~~",',7,:i,:~":;u.,.,, tl,.,:":;,q.,,':;!j,,.,.:,:,,'.,,'.' '0!, _'~ ;,f",,;f.i-:,@;,'.,s,',.thouhthere g, is '~lhr:ei;))3i";:;'; ',',";'~}2'~:a~e!'within,"...''','',~:Q:;p.J;;L,Q;~ _~ilt,~,., the PSC, but this freedom is exercised by the contractor tnrough "~' tr.arl. pareqt Ridding process ancl.non~.mtetfer{:nqe,af

87 ,. ca,$'t~rmil:'le ttle valuation formula as w~u...~~i. ;}i~~~':'.. Therefore, keeping these considerations in mind, the OQyernrnenl' ; inte.rpretation of th~..psg as has geen... luoi4y QernQn$tt~t~dby the learned Solicitor General is JZaidK., ' ~~:":. tfie Gbv fm~fl!... igt$.u}y p0w.~.r:-.t9..9;~~.~;:;m~p.:~..x.~lm.iti,.gn,~s;.w~l rnment question that rsc to e valuation a pricing is the. g price price only for th i" ~. ;mination of the s~~ of the Government or is it the pric~)~ \'! " ich RL must sell e gas to if;;" '~t t»: RNRL. The Division ~:._~_. ~h Court has held that tojtjsl:vft ~ven if the price is ~e Government, there S no reason why RL cannot sell the gas to RNRL at a lower price than that. This position is unsustainable for two reasons: ~;~.~~ ) Tn,~ p;ow:~r,of iq,e"g~y ij;mejm;t:biiti(ftigp: :tm.e, ;~ai:i~~ ;/ ~{r-~~j)~j~;'~i,j;'~j;~~'~~~~~:\~'~ilj!~}'i'ii~~fe7~!l;&t~fj.r~~~~;;~~.;.. :'~~' 94

88 , ' 2) g~~~~~rlatf i.ofl.. (ijt.p;ri'~e. det~lt:lfliiism'azj;m'pji:."' ~~i;...;~it~.i;,q,,~m.~{mm~nt. ~li~:~lr~~~~~;r~~~!,t_~lttl;" ~' the.l? Q. i;s ~~nd" ~twpuld-.'~;~~"i~~;';;~fl~.f]f.,~tt ~",'_' ~:' "0 -:.,:':"_-':-_\"((':)''..'.:'_'--.:,~: <':"::;\(-:'_ :<?~~.~:;y~';f.";~t;>/z,(:-,,:,.,-<.:, ~~\.,":0::.: ;;:""'..:.:-/,.:...,:,.:~ ';:-,j '-~:,:l\;'-",';'"" _." ;, ",..t~~f_'w.:::i:~t\~j~:~~,~~ilmu~. The arrangement in pursuance Scheme must t. Government, t' of Clause 9'\of the e shareholders of RL also the grievance of RLthat the Court must take into account the fact that the PSC provides for the legitimate rights of the Contractor to earn certain profits. f these profits are reduced to such a degree, it 'would affect the interest of the shareholders of Rj:L. 95

89 r. provide complete protection to the natural resources as a trustee of the people at large. 86) RL's right of distribution is based on the. PSC~'.which itself is derived from the power of the Government u~det the constitutional provisions. Thus the very basis of RL's mandate is the constitutional concepts that have been discussed by now, including Article and 39(b) and the. RL are expl6ra.fion~ domain qtg()y~x:p.l(le,,~.. a ~~:+,.,,-j~ ":~~;~.t,.~,e ill.",:,'!,~~!!( -&, :.,., j t~' - dut}{,t~{.t.b(:;.union to. make.'_;:,', <':';.;:.: -:-.';:.<:!,\:0;;r:,::-::/-~'-::":. ' sure that :.;. -,.'".'::c'i. "'-" :-. tllese. -, _,.:,-;~-..-.,. '",,:., _" -resources -,._.- ',.:: -'.',-.,.> _:,,-;':::.::,;,:::~,,,:::;.:..are used for tn!~'benefitof ~'.;)f;'~;.',;.""" ' '.. ;. "'-~,',.,". ~'. ',.,..'. technical know-how, the Government has privatized such activities through the mechanism provided under the PSC. t would have been ideal for the PSUs to handle such projects exclusively. t is commendable that private entrepreneurial 09. r-b

90 '" ". '"..._..."..._.._._---,,-_... _._--..._.._-- efforts are available, but the nature of the profits gained from such activities can ideally belong to the State which is in a better position to distribute them for the best interests. of the people. Nevertheless, even if private parties are employed for such purposes, they must be accountable to the constitutional set-up. 88) The statutory sch f natural resources is ds (Regulation Rules, 89) 90) t has been argued by RNRLthat the decision of the EGOM (EmpoweredGroup of Ministers) does not apply to the tights of RNRLunder the Scheme. This argument is based on the text of the decision which states that the pricing.:iecided upon by EGOM is "without prejudice" to the rights.of the ':-l 0 C;-7

91 ,, parties.. '._ , -_... '..- _., ,---".---~-~ '0', """-""",,,,,,,;~...,,,.,.,,;,\.,,,,,,,...,~,...,_.,,,,_,,>,;,,...,,,,. ",""'_~"'"",,",~., '_...-_-... "j.:.-,,,~,"'-~~_.':.:'<<.<... _tlf!lm.~ ;:,_ in the two cases pending before the Bombay High Court, i.e. RL v. NTpC and RL v. RNRL.This is contested by both the Government and RL. This position' or RNRL is unsustainable. ',. """-. As pointed out by RL the right interpretation of "without prejudice" in the EGOM decision is that though EGOM intended it resolution RNRL,it left the questi words, the/ f t has the pow the gas. This d""; y the EGOM decisi ~'heme or the interpre even on pricing to s:pply to f the parties accruing of PSC to the!_', 'on and ation by the co~~': is not "i: ~sit would depend s(;lely on z. /(;~~''';' '" (~~~i\~ the interpretation of th ;;:P,~Q "f~r.:~the PSC itself. But once ''\.:-''.,_,,<.;:,~;:'"} M~'i~~ ':"A'.;-..,.f/._. ~-- "'-'."";0...,... ".;,....-."'_'"'~,j..", "..._...,.~,,,.,:..rl~~" it is determined that ~\by ~i~y:e;rrrpin ~~ l~' h!\'i'~ s- r;' ~\-'-"'~: ~",,,,)( "\ -.,._..~} ~ri. f... ' determine the price/lof gas, EGOM's price would be applicable. 0fS have the p,0wer to ~' decision regarding the " The same goes for the general gas utilization policy and the policy of the Government with regard \;-_ to pricing. Therefore, once the PSC is read to give power to the Government to determine the price of gas, these policy statements will be applicable..:":.

92 , /9) From the above analysis, the following are the 'R~, t su~taj,:l6\:rl~.. ()~9l:'~~~~~;:,~~~2.~.;. ';'~~'~'::'i,)jr:~, ;.~:~j;jy~:a frcirfi... th& p~;siit.~il!h'i.ik W.~~': ) ]:~ ;';ii~it~~m'~~~';~~:$~:~'.!~~~~~;j~'l~.'!~~~'!tm~ h 2) as~':;a;;~i~~~t?qi;'~,&q :$V t~. ~~[~;;;_~;~f~_~;"_~2li"f? Tfj;j~s~~.. ;t~...d;,s;,.~~.~;;~ill~m~. llitifiy.;i;}~~i"m~:t~~~,~?rt'tj;&'~'@ eep..;j.,ely ~~~~_.,'lit."':'."i.~ '~:"~'J", " 'f,,"~~' N~'ijl!{~ai.~mr$lS'r':..~:st;' -" :if! 'V' a int&;r.:~~:t~j,~tjt~e".!!l0~'-m,tt; ail$!!j;~~)i'i\~ ilif:rmr~~~q: '$~f~gl0' '$ '";; '"'4~,;;r~lth. ~', '/' ' ~c ' ~ij:,'" ~ - ~~), 'o')~~~~,~,~:t~~_~:,.; ~,~,~...,':,.' j'l;i~,,.",,,;g'q.(i',' lil; ';:ljj?;,':.i - ~, "~. '." ~frf,l~~'"'~/h~~)i,t;. '!'!f"!w ~\. f ~,_. a. 3) T~~;>J~toader.'c nsti~ufi,q:tia..p~n(ijl~lf~s:~."tfi~""~t~t:titdfy"-" ;~bl\~~ea:$w~lf;~&.; ti~~-;f4~~l>'~'~~.~~~~~i~ftj.i:i!~~;'clt::t~;j~~~'. naa~d~te's,'llh;(,f ~' 'Memmeiitl;* '(;>, w",.,j../:l'::' 7:\f' : ';"y'\.t.;.}j. fi,'" ",,'."; ","',,,' ''',-",..., """"..'.,.,.:!,f,,'\:..." '",.,.."l\' :,":~~,,,,,;.:;,,,.w.:..).:".::,;~,: ":(.;;";};";"<:';".')":~'~:L~:/;;.'~" ': _;'-i: t~:~~~~mlc~; m:~\te. i;tt'..ls. :,g:tji~~~f~i:i:'::i9~'~@i~~'(5pfi ~~~~._:.%j'...:. 2

93 " 4) tfit~ J~~~*~~.~;~,,.~b~,..Q.2.,i.~imJ#; ~$,;".""i~~~~~ ;~t,e"" t~f;l.s~~ 5) RNRLfile U {f~'::;jt\tfll:i:i:t.;~" ;';~;!;;mji!i.!ii.!!~~';''''''~',j;;l;''')ii!~~j",,~..;ji~;;';,}'~ilr.)l'tl~';i,l\;(""~q..q.,m,,,m4~.l,<l,dk,,)a,~ )j;~!'w~;~~~~~<-::- :~:\Y~J,:,;: dt::llj{q:"';t:k ~ -'---': ":~~~~H,S4~~~~ii:.:..:.i~_~4~:if~r ~.'~.i.0fl.jii;;~~~(llfgii.~{(~lf J.;';;~~#,?" %_' Thc~i<i~i't:tm.~iP :~.ilt!;tf;ll~:f;_tl"l!,~ ;,:% p.q,w~r:s to;'w~~~~t~;t~.~;.~!w:b~l~b~,~;~~~i.l~\~~;~~\tr"iii,~}' «,'~'i and 394. Therefore, CO~fF e Companies erne of the Companies Act is wide enough to make necessary s(i}anges for working of the Scheme. This power is specific to the facts and circumstances of the case at hand. Nevertheless, this :... power does not extend to making any substantial or substantive changes to the Scheme..', 3

94 \~:! ';":", "':~:;,":~:;, U-',, _ ')~ - "'''','' " ':\ ' ~ ;,.' - \., ~/:r<,~.;\.: '~ ~,~"_'_,>,,A~ ~;, an arrangement must be suitable for the interests :of the shareholders of RNRL as reflected by the MoU, and RL; the obligation of RL under the PSC; the national policy on gas including the decisions of EGOM and the Gas. Utilization Policy; and the broader national and public interest. D. Proper nterpretation of the PSC T.he 99j~St.!y~9fthy.PS, '.---," _'.. -.",. such resources in tp.:tst.,~gf:l.ll, th~refqj;,the Qq ~U.fl;m~:qt.9}Yg~ '","'.'.',' ",',",',.._,'. ".,.",;:,'';.,,-.' such assets for the purposes of developing them in the.; :'.: :._-..":.. <.-,.".,,.:. :_.::, ',:.>..._:..:'._..'., :.:,:";.r~,)".>,.,..:-,-'-,,.!'~.<,: ",',-'".>\'.:-'..:-:.,.,,:~\ '. '".:._.--,';.,;'_, _,~".'0:":-;, ':',>,. 5 ",

95 ' A mechanism is provided under the PSC between the Government and the Contractor (RL,in the present case). The PSC shall over-ride any other contractual ~: the Contractor and any other party. F. Relief a) obligation between Though the Contractor (RL) has the marketing freedom to sell the product fro approv vitiate ' b) a to other consumers, that it. "i,pprovedby the go~hment. RNRL ~ L. ~ g...,' The EGOM has already set the pnce of gas for the purpose of the PSC. The parties must abide by this, and other conditions placed by the Government policy. The GSMi~/GSPA deeply affects the interests of the shareholders of both the companies. These interests must be balanced. This balance cannot be struck by the court as the court does not have the ~:" 6

96 " _ ~ power under Sections to create new conditions under the scheme. n view of the same, RL is directed to initiate renegotiation with RNRL within six weeks the terrnst-of the GSMA so that their interests are safeguarded and finalize the same within eight weeks thereafter and the resultant be placed before the Company Court for necessary ordet s. decision c) While renegotiati GSMA, the following. e an over..ridi ',- an~\;ttional 3) The parties shou{~:~, i i. ~t(:t:~~~countthe MoU, even ':... ;t, ~ " though it is not l~gr."!l~,9in...~i.. ' ~~'~".~,q_,~,~>_:~~~::~.~ ~!::,.~2,~~~~" ~. :Q..~,..~.,t. isaa commitment which t.. ;l"h. l\/\ t. l''''~~.. reflects the good interests of both the parties; d) The parties must restrict their negotiations within the conditions of the Government policy, as reflected inter alia by the Gas Utilization Policy and EGOM decisions. " ;~. 7

97 - _

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103 iii t,' PC emf,.' / /, ' e) Foreword Tle report 0"Wholesale Gas PlCCFOlUUtiOl", l.rst published in 20 2 for heworld Gas Confm:ll~ in Kuala LlUll.\U; has now been updated with 20.3 <.gures bystudy Groul) 2 of the 00 Sinlt~ti.. Committee (pgcb)~ ')'.'. We have decided to ccntinue the publientiou oftllis GU Aagship 'CPOltas nresult of the greatintcl'~;lt. ill tile extensive research all(l analysis contained in the fonner reports. The 202 lind 203 editions of the report can be clov.'oaucdat no cost from the GU website - Historically, gas prices have not been in the news to the!same extent as oil prices, nus is changing as the share of gas ill global enej-gy COOSLUUptiOllcontinues to increase. volumes ofintemaionally. traded gas arc gl'eatcl' than ever before aud different price: formation mechanisms have. had serious commercial implieatiens both fl)'produculg nnd CoilsuoUllg nations. The rapid growth ill shale: gas pro duotion ill North America and nimlalllqltal shifts ill LNG supply pllttellls across the global gas market continue to impact the illtercontillcnlnl trade, as w~las global supply, dqu8udldprice. Nlllb-m gas is illabundllllt l'csonrc.e:,itis envirollmentally fiienclly andcost-collpetitivc. and shou<! therefore play au impoatlt role in thc mitigation of climate change in evcyregion of the wo'(i. However, the way wholesale gas prices will be ddeluncd in till: future will have.sigmz can; ina\~nce on sustainable market growth, especially in the power sector,. '. :... Promoting international lucli:rstao<ling ofuamral gfls pl'iciug and wholesale gas price fojtu.tiolll'eud;..is impottant for tile futnre success of tile gas industry in bcth aew and established gas regions. t is myhope lhat this publicaticn will continue to serve as :example of bow we all call bcnc<,t wlien vital illfonilatiou is cnrefiuly gathered. nlllysed rule!slwed, AllY qilcstious tq tius report can be addressed to the Chair of Study G'OllP 2, Mike F\uwood c:i Nexlillt [email protected] m. May 204 TOl'Steillhulrebo Secl'etary General ofgu..._----'._--_.._-_._ _..._._._..._--_..._.._."---_._._---.._..-..~

104 GU - WHOLESAFE GAS PRCE, FORMATON 203 tntematonal Gas Union 3,2.4 ANALYSNGTHE RESULTS n looking at the different price formation mechanisms, the results have generally been analysed from the perspective of 3. NTRODUCTON, the consuming country. Within each country gas consumption can come from one of three sources, ignoring withdrawals from This section covers the results of the 203 survey and comprises' (and injections into) storage - domestic production, imported three parts:, ' ",by pipeline and imparted by LNG. n many instances, as will Results at the World level for the differ~tcategories -,.: be shq\\'ll;>elpw"dom,~sti9production, which is not exported, domestic production, pipeline imports, LNG imports, total is priced differently from gas available for export and also from imports and total consumption; imported gas whether by pipeline or LNG. nformation was Results for each individual region for total consumptiorq " collected for these three categories separately for each country and 'ff and, in addition, pipeline and LNG imports were aggregated An analysis of wholesale price levels by region, price " to give total imports and adding total imports to domestic formation mechanism and country. production gives total consumption. For each country, therefore, price formation could be considered in 5 different categories: ~-' ', ~omestic pro,duc"tion (consumed within the country, 3," WORLD LE',VELRESULTS i.e. not exported) " ', ',: ", Pipeline imports ' 3.2. Domestic Production ' LNG imports Domestic productionin 203 accounted forsome 72% of total Total imports (pipeline plus LNG) world consumption - around 2,495 bern..total consumption (domestic production plus total imports) Each country was then considered to be part of one of the GU regions, ~ described above, and the 5 categories reviewed for each region. FinallytheGU regions were aggregated to give the results for theworld as a whole. ' As well as collecting information on price formation mechanisms by country, information was also collected on wholesale price levels in each country. Comparisons of wholesale price levels, however, need to be treated with caution. As noted above, the, wholesale price can cover different points in the gas chain ;_ wellhead price, border price, hub price, city-gate price - so. 25 the comparison comparison. of price levels is not always a like for like 'REPO'RTLAYQUT Section 3 of the report covers the results of the 203 survey and looks at the World level for the different categories=- domestic production, pipeline imports, LNG imports, total imports and total consumption. Results at the individual regional level are then analysed followed by a discussion and analysis of wholes ale price levels byregion, price formation mechanism and country. SectionA of the report provides a comparison ofthe results across all " ve surveys to identify key trends and, similar to Section 3, covers the World level for the different categories, the individual regional level, changes in wholesale price levels, concluding with a special analysis of changes in the GOG category. Section Survey' Results Figure 3,. World Price Formation 203- Domestic Production ~ , tt " '-t.~l. (., ~------; ~----~--,,'~ '-- GOG has the largest share in domestic production at 44%, totalling some,08 bcm, With North America accounting for 784 bcm - ahnostthree quarters of the tote': The next largest share is in the Former Soviet Union; when: the sales of gas in' Russia to the large eligible customers by e~ti~rgazprom or the independent producers is classig ed as GOG,(see the section on Former Soviet Union in the regional inlalysis for further discussion), accounting for some 86 bcm: The balance is in Europe 'at 79 bcm - principally the Netherlands and UK, Asia Pacig c at 39 bem., Australia and New Z;(;aland, and Latin America at 20 bcm - mainly Argentina. ;:;' 'f ',.

105 lope has a relatively sm,alishare in domestic production a!~%, totalling some q6 bern,with 58 bcm in Asia =Paklstan, China and ndia, 35 bcm in Asia Paci., c - mainly Thailand, 7 bcm in Latin America, - Br,~~il.and Colombia, 2 bcm in Europe - mainly some residual contracts in the UK plus Germany,.Norway and, small amounts elsewhere, and under 4 'bcm in Africa, mainly Tunisia.; The regulated categories - RCS, RSP and RBC - in total account for almost halfofdomestic production, with RCS principally in Asia and the Former Soviet Union, RSP principally in the,middle East and Asia Pacil, c and RBC in the Former Soviet Union, Africa, Latin America and the Middle East. A more,detailed breakdown of the regulated categories is contained in the regional analysis sections Pipeline mports Pipeline imports in 203 accounted for Some 9% of total world consumption - around 67' bern, Figure3.2. WorldPrice Formation Pipeline mports r--- _-- ;" f ':~? pipelineimports with the top four countrie~'~eing Germany,. UK,France and Belgium. ' BM has the balance of 8%, totalling some 56 bern. This is.. almost all in the Former Soviet Union and the Middle East ' and is largely just two routes - Russia to B~tflrus and Qatar. to the UAB..".. ~.~i LNG mports LNq imports in 203 accounted for some 9% of total world consumption=- around 34 bcm... Figure 3.3. World Price Formatlon Ztlli -,LNG mports ~.-- LNG imports are split 7%'OPE and 29% d:,,)g. OPE at some 224 bern is mostly Asia PacilG +Japan, Korea and Taiwan, followed by Europe - mainly Spain, France and taly, and Asia - China and ndia. '4',: lr r,,.. _-_._-' --- Pipeline imports are split betweenjust three categories - OPE, GOGandBM; OPE isjust under half of all pipeline imports, totalling some 339 bcm, mostly in Europewith some 86 bern -Turkey, Germany, Spain, France and taly being the main contributors. The Former Soviet Union accounts for SOme58 bern - principally Ukraine and Russia, with 30 bern in Asia - China, 8 bcm in Asia p,acil,c -:-Singapore and Thailand, and.8bern in Latin.America - mainly Bra,zil and A,rgerttina.. There are also small quantities in other reii~ms, apart from North America, including countries such as ran and Tunisia.. ' GOG has a 44%share, totalling some 294 bern, with Europe GOG totals some 90 bcm and can be dividedi;lto imports into countries such as the UK, USA, Canada and Mexico, where the domestic market pricing mechanism is G~_/G,and all other countries Which are importing spot and short ;X'nn priced LNG cargoes, which is almost every other LNG lu;:>ortingcountry -Japan and Korea taking the largest shares;';'.,;'::;:" /t,~ Total mports...", Total imports in20z accounted for SOme2f'Yo of total world consumption - around 963 bern, XF:. ~t 86.bcm and ~0:th America the rest. Most of the gas importtng countries in Europe, have some element of GOG

106 ,,..., 3.3 REGONAL LEVEL RESULTS 3.3. North America North America consumption in 203 was some 26% of total world consumption - around 9 bcm. Figure 3.6. North America Price Formation 203 Nfl 'A Figure 3.7. Europe Price F~rmatiofl 203 r. GOG clearly dominates the North American market with fully liquid trading marketsin the USA and Canada and the wholesale price in Mexico being referenced to prices in the USA. The small amount ofnp is in Mexico where Pemex uses the gas in rel, nery process and lor enhanced oil recovery.,.~ Europe,, European consumption in:wl3 was some 5% oftotai world consumption - atounct 534 bern., GOG is now the largest share in Europe, standing at 53%, totalling around 280 bem. SOne79 bcm is clolriesticproduction, mainly Netherlands and UK.with some 86i:x;tnbeing pipeline imports, predominantly all the northwest Europ:ean countries, but also increasingly the central Europeari countries of Poland, Czech Republic, Slovakia, Austria and Hungary. LNG imports aceount for some 4 bern, over half of which are into the UK. ' with the remaining quantities being largely spot cargoes into the more traditional LNG importing 'countdes. ::. OPE is now down to 42%, totalling arouni.li:27 bern, and is predominantly pipelineimports (86 bcm};:,;;to almost every European country; apart from the UK, Netherl '4s, Denmark and reland, foilowed by LNG imports, (29 bcm)'u:';") Spain, France, taly, Turkey, Portugal and Greece, with don',:~sticproduction (2 bern) in a variety of countries principall~j~:;;rinany, Norway and the UK legacy contracts, :,.,.j:.~),;.,,;,: 76

107 _'"."_' '_''''-' ~'_''~.. ';-v-...~'..._=_~.. f " "'''''''''=.,> WHOLESALEP~CE LEVELS n consideringwholesale price levels across regions, countries or price formationmechanisms, itshould benoted that the wholesale price can cover different points in the gas chain - wellhead price, bqrder price, hub price, city-gate price - so the comparison of price levels is not always "like for like".. Comparisons, therefore; should be treated with caution and' taken only as a broadindication, 3.4. Price Levels by Price Formation Mechanism The l,gure below shows a snapshot of Wholesale prices for 203 by price formation mechanism - a comparison over the six surveys is shown in section 4.., Figure 3.5. Wholesale Prices in 203,:4yRegion.....,. i,~ Figure 3.4. Wholesale Prices in 203 by Price 'Formation Mechanism The highest prices, by some margin, are in the OPE category, at almost $.00per MMBTU, more than double the price of $5.27 for the GOG category, which is only slightly above the Res category. The price level in the GOG category is heavily inalencedby therelativelylowpricesin203 in NorthAmerica, althoughthey were above the 202 levels. n the regulatedcategories, it can be seen that the prices in the RCS categoryarehigherthan those inrsp and, in tum, RBCwhichWerethe lowestatjust under $.50per MMBTU in 203. _ Wholesale prices can obviously vary.signi; candy from year to year, butthe top two regions are Asia Pacil,c followed by Europe - bothwith average prices over Sl.00. OPE remains the primary pricing mechanism inasia Padl, c and still a key. mechanism in Europe. Despite increasing, prices in North Americaare still below those in Asia, Latin America and the Former SovietUnion. Onlythe Middle East andafrica, where prices are often held down to the cost of production or below as a subsidy,'are average prices lower than hi North America. These conclusionsare furtherreinforced whenwholesaleprices are viewed atthe country level. The l.o~re below includes all countries with consumption greater than 8 bern in 203. ' The highest wholesale prices in203 were found in the largely LNG dependentcountries in Asia Pacil,~':::.. SouthKorea, Japan and Taiwan- plus Singapore. These we;;?followedby a whole host of European countries including Turkey, France, taly and Germany. Prices in the UK arid ~EeNetherlands were lower than in the main gas importing countries in Europe, butslightly above those in China, where.prices increased less than in previous years. Spot prices in the USA, Canada a~d Mexico remained lower than in a whole range of countries, where prices had previously been well below NorthAmerican prices. These included countries such r;~ndia, ndonesia and Malaysia. Prices in Russia were slightjy below prices in the USA, having been above them in 202;:At the.bottom of the '. chart were generally countries where wholesale prices were subject to some form of regulation -!rlf,gely Middle East and African countries- and often below thecost of production and transportation.. / <', e

108

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110 ~.K.Jaipuriyar From: Sent To: Subject: Kapur,Atin Monday, June 2, 204 3:00 PM Re:GCVVs. NCV Dear sir, can confirm that Platts usesgcvfor HH, NBPand Japan. Kind regards, Atin Kapur Platts, ADivision of McGraw Hill Financial Mobile: From: R K Jaipuriyar [mailto:[email protected]] Sent: Monday, June 02, 20404:54 PM To: Kapur, Atin Subject: GO Vs. NCV Dear Atin,. "".,..~."",,,_,,,..,.~,_. _,, _,_ ~_,_.._.~,",. ~. " _'''-.n..'_~'.,..,,'..,,' _.,,._,_.._.0... «" ",.,,,.,, "_,.' -"'_"",,,,~ ~,".'..'_.~h.._'~.'.",'." ""''' _ v ''''_,..,_-.,,~,,.. '. ".,'..,.,..,.":"", "'., " -.. ~..,._.""" ',-,. '''' "" ~ - ~.,..~,.', '.,.,,~ ' '".,..-. ",' ~..-. ', As discussed please confirm about the Prices of Henry Hub and NBP,whether these are on GCV{Gross Heating value) on NCV{Net Heating Value) basis. Pleaserespond immediately. With regards, DSCLAMER: This is confidential. t may also be legally p.r.i.v.i Leqed, f you are not the addressee you may not copy, forward, disclose or use any part of it. nternet communications cannot be guaranteed to be timely secure, error or virus-free. The sender does not accept liability for any errors or omissions. We maintain strict security standards and procedures to prevent unauthorized access. The information contained in this message is intended only for the recipient, and may be a confidential attorney-client communication or may otherwise be privileged and confidential and protected from disclosure. f the reader of this message is not the intended recipient, or an employee or agent responsible for delivering this message to the intended reciplent, please be aware that any dissemination or copying of this communication is strictly prohibited. f you have received this communication in error, please immediately notify us by replying to the message and deleting it from your computer. ~,cgrawhill Financial reserves the right, subject to applicable local law, to monitor, review and process the content of any electronic message or information sent to or from McGraw Hill Financial addresses without informing the sender or recipient of the message. By sending electronic message or information to McGr<.w Hill Financial addresses you, as the sender, are consenting to McGraw Hill Financial processing any of your personal data therein. 3