City Gas Distribution in India Key Trends and Outlook

5th Annual Conference

9th March 2010

2.

Presentation Outline

Key Market Drivers and Developments

CGDCGDBusiness Business

EconomicsEconomics

Gas Supplies InfrastructureInfrastructure

PolicyPolicy Regulations

Key Discussion Points

Key Discussion Points

3.

Domestic discoveries and LNG sources provide a strong impetus to CGD development…

Supply ProjectionsSupply Projections

• Traditional sources of supply (APM gas) are declining

• Fields discovered in early NELP rounds have started production and some more expected to start in the medium term

• CBM fields to add to regional gas supplies

• Greenfield LNG import terminals as well as expansion plans of existing LNG terminals are proposed

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Existing Fields New Domestic Fields CBM New Gas Finds LNG

4.

• Domestic Supplies– As per the Gas utilization policy, CGD sector is prioritized after fertilizer,

petroleum and power projects

– Allocation from RIL’s KG-D6 field is 5 MMSCMD for domestic and CNG segments and additional of 2 MMSCMD on a fallback basis, for industrial & commercial segments

– Many power plants are being planned in expectation of additional natural gas supplies

– Demand of a city is relatively small with a slow build up phase, making it unattractive from the perspective of volumes

• RLNG Supplies– Significant LNG import capacity exists/planned, but securing volumes for a

sustainable CGD business could be an issue

…however it is important to secure supplies for the CGD sector

Though supplies have increased, securing gas could be a challenge for the CGD sector

Though supplies have increased, securing gas could be a challenge for the CGD sector

5.

New gas supplies have stimulated gas transmission development…

Current Future

• New pipelines to connect new demand centers – bidding initiated

• National Gas Grid to integrate sources with demand centers

• Gas Highways (under NGHDAI) being proposed to increase connectivity

6.

Regulations to have a significant bearing on investment flow in infrastructure…

2006 2007 2008 2009 2010

PNGRB Act Enacted

CGD regulations notified by PNGRB

Pipeline regulations notified

Potential refinements in regulations

More Cities

GOI notified the Board and the Act

PNGRB published EOIs for more than 60 cities and commenced bidding process for identified cities

7.

• Board has:

– Shown commitment to the spirit of the PNGRB Act

– Shown keenness to move with speed

– Adopted a consultative approach

– Laid emphasis on transparency

– Shown preference to less intrusive regulation

– Signaled independence

PNGRB has shown a proactive approach to ensure rapid development…

8.

A number cities bid out and a number of CGD projects are under implementation…

PNGRB has published EOIs for more than 60 citiesPNGRB has published EOIs for more than 60 cities

IGL

MNGL- Pune

CUGL – Agra & Lucknow

TNGCL - TRIPURA

VMSS – Baroda

BGL – VIJAYWADA

MGL- Mumbai

GGCL- Surat, Ank, Bharuch

UNDER IMPLEMENTATION

IMPLEMENTED

CGD BIDDING - PNGRB

AGL – M.P

Sabarmati Gas

Bokaro

GAEL- Faridabad

GAEL – A’bad & Baroda

BGL – HYDERABAD

GGL- Kota

GGL- Dewas

GGL - SONIPAT

CHANDIGARH

GHAZIABAD GGL- MEERUT

DSM -MATHURA

BGL – KAKINADA

RAJMUNDRI

YANAM

Green Gas- Kanpur & Bareilly

Allahabad & Jhansi

Shahdol

9.

…however recently the authorization power of PNGRB has been contested leading to a temporary pause

• High court order implies that PNGRB needs to secure powers for authorization.

• Steps are being taken to ensure that pace of development of infrastructure is not reduced.

• The recent bidding rounds have evoked an interest in the investor community and also among some companies not in the CGD business.

Many projects have been planned so that regions across India are covered in the next 5-10 years. An empowered regulator could facilitate faster

development of the infrastructure in CGD.

Many projects have been planned so that regions across India are covered in the next 5-10 years. An empowered regulator could facilitate faster

development of the infrastructure in CGD.

10.

Regulations have been conceptualized considering many parameters…

Intention to have serious bidders with thorough

workings

Intention to have serious bidders with thorough

workings

Level playing field to non-energy sector players

Level playing field to non-energy sector players

Flexibility of entering into technical tie-ups likely to allow entry of non-energy sector entities into the CGD space

Flexibility of entering into technical tie-ups likely to allow entry of non-energy sector entities into the CGD space

Benefits to new entity (Exclusivity)

Benefits to new entity (Exclusivity)

Time allowed by PNGRB for bid submission to allow entities to do a thorough working before submission of bids

(having 25 year validity)

Time allowed by PNGRB for bid submission to allow entities to do a thorough working before submission of bids

(having 25 year validity)

Five year marketing exclusivity for new cities to encourage faster network penetration with a view to capture

maximum customer base and enjoy commodity margins

Five year marketing exclusivity for new cities to encourage faster network penetration with a view to capture

maximum customer base and enjoy commodity margins

CGD Regulations encourage faster network coverage with benefits to both CGD entity and end- consumers

CGD Regulations encourage faster network coverage with benefits to both CGD entity and end- consumers

Benefits to consumer (Open Access)

Benefits to consumer (Open Access)

Open access of the distribution network after the exclusivity period to allow competition and choice to consumer

Open access of the distribution network after the exclusivity period to allow competition and choice to consumer

11.

…However recent bids show significant variation in the biddable parameters suggesting a ‘Need to Rethink’

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COMPRESSION CHARGECOMPRESSION CHARGE

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12.

Rethinking may be required on several counts such as …

To provide consumers lowest possible network tariff & compression charge. This would eventually reduce the delivered price to customer

To provide consumers lowest possible network tariff & compression charge. This would eventually reduce the delivered price to customer

Regulation’s IntentionRegulation’s Intention

Will lowest tariff hamper future network expansion plans ?

Should low/zero tariff be encouraged?

Will lowest tariff hamper future network expansion plans ?

Should low/zero tariff be encouraged?

Question ?Question ?

Faster penetration of distribution network and reach to all segments of consumers

Faster penetration of distribution network and reach to all segments of consumers

Regulation’s IntentionRegulation’s Intention

Is there some assumption made in respect of monitoring mechanism?

Is there some assumption made in respect of monitoring mechanism?

Question ?Question ?

Recent bids and authorization process have raised questions on efficacy of regulations. However, it should be appreciated that regulation evolves over a period of time and a healthy debate among the stakeholders would

assist the evolution process to be faster.

Recent bids and authorization process have raised questions on efficacy of regulations. However, it should be appreciated that regulation evolves over a period of time and a healthy debate among the stakeholders would

assist the evolution process to be faster.

13.

Some rethinking on policy front could make the CGD segment more attractive…(Report of the Expert Group)

• Domestic Segment - LPG

– Prices to be increased by at-least Rs 100

– Prices to be periodically revised based on increase in paying capacity

• CNG Segment – Petrol and Diesel

– Prices to be market determined both at the Refinery gate and Retail

level

Reduced subsidization in pricing of alternative fuels will further enhance business economics of CGD entities

Reduced subsidization in pricing of alternative fuels will further enhance business economics of CGD entities

14.

Climate change related initiatives to further boost market attractiveness of CGD business…

India’s target on reducing carbon intensity

India’s target on reducing carbon intensity

• Days before the Copenhagen Summit India had declared a target of reducing amount of CO2emissions per unit of GDP by 20-25% between 2005 and 2020

• This should lead to greater emphasis on natural gas, which produces for the same amount of heat lesser CO2 relative to liquid fuels (30% lesser) and coal (45% lesser)

• Days before the Copenhagen Summit India had declared a target of reducing amount of CO2emissions per unit of GDP by 20-25% between 2005 and 2020

• This should lead to greater emphasis on natural gas, which produces for the same amount of heat lesser CO2 relative to liquid fuels (30% lesser) and coal (45% lesser)

Methane-to-Market (M2M) initiative

Methane-to-Market (M2M) initiative

• Goal of promoting recovery and usage of methane from coal mines, landfills, oil and gas fields, etc

• Potential to reduce net methane emissions by up to 50 MMTPA of carbon equivalent by 2015 and continue at that level or higher in the future

• Goal of promoting recovery and usage of methane from coal mines, landfills, oil and gas fields, etc

• Potential to reduce net methane emissions by up to 50 MMTPA of carbon equivalent by 2015 and continue at that level or higher in the future

15.

Going forward, some concerns of the stakeholders would need to be addressed (1/2)

• Players

– Will sector be able to secure gas supplies?

– Will the PSU domination in bidding continue?

– Will aggressive bidding be allowed?

– Would pricing reform for alternative fuels be implemented?

•Consumers

– If a license is issued for a city does it mean that consumers will get

connected as envisaged?

– What if the selected entity is weak or underperforming?

16.

Going forward, some concerns of the stakeholders would need to be addressed (2/2)

Investors

– Will the CGD business economics continue to remain attractive?

– How will the business risks change?

– What type of new players would be interested in the CGD business?

Regulator

– How should the bid process change taking into account the experience

from the past bidding rounds?

– Will all the required powers be vested in PNGRB to enable it function

effectively?

17.

To summarize…Significant infrastructure projects

planned to cover the key regions of

country

Government initiatives on

climate change, pricing

of alternative fuels are all supportive of CGD market development

Improved availability of domestic gas supplies but securing supplies would be important

Gas Supplies

Regulations

First ever competitive bidding of

CGD in the country.

Learnings and “need for rethink”

Healthy debate required for further evolution of regulations.

CGDCGDBusiness Business

EconomicsEconomics

Gas Supplies InfrastructureInfrastructure

PolicyPolicy Regulations

18.

CRISIL Risk and Infrastructure Solutions LimitedA Subsidiary of CRISIL Limited

www.crisil.com

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Delivered Price of Gas Alternate Fuel Prices

Though CGD business looks profitable but underlying risks needs to be appreciated

Margins of various segments

Volume intensity

High margin segment doesn’t offer good volume intensity

Industrial Retail

Bulk

Low High

High

LowDomestic

CNGCommercial

ProfitabilityWeighted Average

Cost of Gas + Network charge

Margins•Commodity•Infrastructure

Discount to Alternate Fuel

Long gestation period coupled with low volume off-take can adversely impact the CGD business.

Long gestation period coupled with low volume off-take can adversely impact the CGD business.

A typical CGD networks costs around Rs.250-300 Crores to service volumes of a level of around 1.5 MMSCMD. The build-up of volumes is quite slow and customer penetration of a reasonable

level of 50-60% is achieved only after 9-10 years.

20.

Returns of CGD business is a function of margins on commodity , infrastructure and overall volumes

Margins Commodity

Operational Costs

Demand

Supply of Commodity

Profitability

Volumes

Pricing[Alternate Fuels]

Commodity Costs

Margins Infrastructure

Asset Utilization

External Factors

• Crude Prices• Regulations• Policy Issues•Demand-Supply dynamics

There are significant external factors such as crude prices, regulations / policies that can impact the overall returns

There are significant external factors such as crude prices, regulations / policies that can impact the overall returns

21.

Implementation of City Gas Distribution - Benefits to all stakeholders

• Industrial consumers

– Continuous supply

– Low inventory cost

– Increased operational efficiency

• Domestic and commercial customers

– Cleaner fuel

– More convenient fuel alternative –indoors

• Transportation

– Reduces emissions

– Higher safety in combustion (higher flash point)

– Quieter operation (less vibration and less odour than diesel)

• Reduction of import dependence as NG replaces FO, LPG and Diesel

• Reach of LPG cylinders in rural areas

• Feel good factor – convenience, savings

Benefits to GovernmentBenefits to Government

The returns of CGD business is not only limited to the CGD entity but benefits all the stakeholders

The returns of CGD business is not only limited to the CGD entity but benefits all the stakeholders

Benefits to ConsumersBenefits to Consumers

• Better environment as adoption of NG significantly reduces the CO2 emissions

Benefits to SocietyBenefits to Society

• Higher realization at retail level compared to bulk sales acts as an incentive for gas suppliers

Benefits to Upstream entitiesBenefits to Upstream entities