Oil and Gas Overview 2010

ENERGY AND NATURAL RESOURCES

Vikram Utamsingh Head - Markets kpmg.com/in T: +91 22 3090 2320 E: [email protected]

Arvind Mahajan Head - Energy and Natural Resources T: +91 22 3090 1740 E: [email protected] www.kpmg.com/in

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Printed in India FOREWORD

The oil and gas sector in India has been instrumental in fuelling the growth of the Indian economy, hence presenting a significant opportunity for investors in the years to come. The government has also been doing its bit in recent times to to deregulate the industry and encourage greater foreign participation.

The New Exploration Licensing Policy (NELP), conceived to address the increasing demand supply gap of energy in India, has proved to be successful in attracting the interest of both domestic private sector players and some foreign players with eight rounds of bidding, with Reliance Industries and Cairn being particularly active in this arena1. Arvind Mahajan Other segments such as Refining, LNG, City Gas Distribution etc. are also seeing some Executive Director and action. Head of Energy and Natural India is now surplus in refining capacity and aims to establish itself as a refining hub due to Resources Sector KPMG in India various geographical aspects in its favour as well. New refineries may eventually be built by domestic companies and in partnerships as well, with Reliance Industries doubling the size of its already dominant refinery in order to meet future products demand.

Moreover, the government is planning its first ever offer of shale gas exploration in 2011, a potential game-changer with regard to the price economics of the oil and gas sector.

This document intends to provide the reader with a concise overview of the various segments comprising the oil and gas sector in India and a basic understanding of the players, size, major developments and dynamics of the sector across the value chain.

We have attempted to summarize all these aspects in the document giving facts and our views and analysis regarding this space.

Keeping with this, the following chapters apprise us about the Energy Market, the Upstream sector, Coal Bed Methane, Refining, Gas Transmission and Distribution, LNG, Shale Gas, Retailing of Fuels and the Taxation Regime specific to the Indian oil and gas sector

I hope you find this report insightful and helpful in your study of the Indian Oil and Gas sector

1 KPMG Analysis FOREWORD

Moreover, the government is planning its first ever offer of shale gas exploration in 2011, a potential game-changer with regard to the price economics of the oil and gas sector.

We have attempted to summarize all these aspects in the document giving facts and our views and analysis regarding this space.

I hope you find this report insightful and helpful in your study of the Indian Oil and Gas sector

1 KPMG Analysis ACRONYMS USED TABLE OF CONTENTS

Overview of the Indian economy 01

The Indian oil and gas market 02

India’s upstream sector 03 E&P Exploration & Production Refining in India 05 CBM Coal Bed Methane

DGH Directorate General of Hydrocarbons Gas transmission and distribution 06

MT Metric Tonne Coal bed methane 08

MMT Million Metric Tonnes Liquefied natural gas 09

MMSCMD Million Standard Cubic Metres Per Day Shale gas 10

MoPNG Ministry of Petroleum and Natural Gas Fuel retailing in India 11

NELP New Exploration Licensing Policy Overview of the Indian taxation regime 12

NG Natural Gas Regulatory and tax regime for

PNGRB Petroleum and Natural Gas Regulatory Board upstream sector 15 ACRONYMS USED TABLE OF CONTENTS

Overview of the Indian economy 01

The Indian oil and gas market 02

India’s upstream sector 03 E&P Exploration & Production Refining in India 05 CBM Coal Bed Methane

DGH Directorate General of Hydrocarbons Gas transmission and distribution 06

MT Metric Tonne Coal bed methane 08

MMT Million Metric Tonnes Liquefied natural gas 09

MMSCMD Million Standard Cubic Metres Per Day Shale gas 10

MoPNG Ministry of Petroleum and Natural Gas Fuel retailing in India 11

NELP New Exploration Licensing Policy Overview of the Indian taxation regime 12

NG Natural Gas Regulatory and tax regime for

PNGRB Petroleum and Natural Gas Regulatory Board upstream sector 15 01 02

OVERVIEW OF THE INDIAN ECONOMY THE INDIAN OIL AND GAS MARKET

India booming India is the world’s fifth-biggest energy The oil and gas sector is dominated by state- Indian Energy basket - 2009 India GDP Growth Rates consumer and continues to grow rapidly. It controlled enterprises with ONGC the India is gaining strategic importance globally Oil is the third-biggest global coal producer, but largest upstream-oriented oil company, 32% owing to the impressive economic growth 10.0 has limited its supplies of oil. Oil accounts dominating the exploration and production pattern and market attractiveness. After 9.5 9.7 9.7 9.0 for about 31 percent1 of India’s total energy (E&P) segment and accounting for roughly coming out successfully from the financial 8.0 consumption, with its share of the mix around three-quarters of the country’s oil Coal crisis, economy is set to demonstrate robust 7.4 6.7 having fallen from 35 percent earlier this output. India’s downstream segment is also 52% growth again with the GDP growth rate of 6.0 decade. India’s 5.80bn bbl of proven oil dominated by state-controlled entities, around 9.7 percent for 2010-111. With a GDP reserves (BP Statistical Review of World although private companies have increased of USD 1.36 trillion2, India is currently the 4.0 Gas Energy, June 2009) represents just 0.5 their market share. Indian Oil Corporation 10% world's fourth largest economy in Hydro 2.0 percent of the world’s total, with Mumbai (IOC) is the largest state-controlled Purchasing Power Parity (PPP). 5% Nuclear High being the biggest producing field. downstream company, operating 10 of 1% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-2011E India’s average oil production (total liquids) in India’s 17 refineries and controlling about 2008 was 766,000b/d. three-quarters of the domestic oil Source: NCAER, IMF Estimated Indian Energy basket - 2025 transportation network1. In terms of gas, India currently accounts for Oil 0.4 percent of global reserves and just over 25% 1 percent of production1. While most of the Supported by high rate of domestic saving Growth in savings has also supported the developed gas is in Mumbai High, major and capital formation… surge in capital formation, which is discoveries by a number of domestic Coal indicated by a steady increase in the rate of companies hold significant medium-to long- 51% India’s growth has been financed by a Gross Domestic Rate of Capital Formation term potential, with Reliance Industries, steady rise in corporate and household (GDCF) from 32.73 percent in 2004-05 to state-controlled Oil & Natural Gas savings. Domestic savings have been the Gas 34.93 percent in 2008-09. Corporation (ONGC) and Gujarat State 20% dominant source of national savings, where Petroleum Corporation (GSPC) all the rate of Gross Domestic Savings Hydro confirming significant deepwater finds that 2% Nuclear touches 32.53 percent (2008-09), one of 1 International Monetary Fund, World Economic Outlook, are now under development or in early-stage 2% April 2010 the highest among emerging economies. 1 BMI India Oil and Gas Report Q4 2010 2 Reserve bank of India, April 2010 production.

Source: BP statistical review of world energy 2010 01 02

OVERVIEW OF THE INDIAN ECONOMY THE INDIAN OIL AND GAS MARKET

Source: BP statistical review of world energy 2010 03 04

INDIA’S UPSTREAM SECTOR

NELP IX

NELP IX was announced in October 2010 As a result, Indian service providers will be with various road shows being planned in scaling up their activities and capabilities, major Indian and international cities by the enhancing their fleet size and widen their government to attract private investment. portfolio by offering different specialised services and developing their manpower. Also, with an increased exploration activity Some of the local players might also aim to in India post NELP, we are likely to witness offer their services to other E&P (Exploration increased demand for oil and gas allied & Production) firms across the world e.g. services in India, particularly given the focus Aban Lloyd. On the other hand, MNC on deepwater blocks and frontier basins. players such as Baker Hughes, BJ Services, Schlumberger, Aker Kvaerner, etc. are likely to find that the market for their services in

Although the story of the Oil & Gas government introduced the NELP in 1997- The weightage to the above three India continues to grow. industry can be traced all the way back to 98, with an aim of encouraging private parameters has varied from one round to October 1889 when oil was first explored sector investment in the oil and gas sector the other over the eight rounds of NELP. in Digboi, Assam, India still has vast and providing a level playing field to the As on 30 June 2010, the total investment unexplored/poorly explored territories. public and private sector through allocating made by Indian and foreign companies was Exploration activity, prior to The New acreages on the basis of competitive around USD13.8 billion. After concluding Exploration Licensing Policy (NELP), was bidding as opposed to a nomination basis eight rounds of NELP, 239 production- dominated by public sector firms such as of earlier. Companies are expected to bid Outlook for E&P activity in India sharing contracts (PSCs) have been Oil and Natural Gas Corporation Ltd. on the following parameters: signed2. The eighth round of the NELP was (ONGC) and Oil India Ltd. (OIL). The sector • The Work Programme committed to be launched in April 2009 offering 70 blocks, Given the commencement of production On the other hand, the promise offered by received a major boost in 1974, when the undertaken the highest number of exploration blocks from RIL's KG Basin fields, the certain acreages, particularly off India's east massive Mumbai High fields were ever. A total of 62 companies comprising commencement of Cairn India's production coast, means that the prospects for the discovered off India's west coast. Even • Percentage of value of annual 10 foreign and 52 Indian companies have and the potential development of the growth of the upstream sector remains after three decades, these fields continue production sought to be allocated made bids and 31 PSCs were signed with discoveries announced by GSPC and ONGC, bright with an expected positive spin-off to be the mainstay of India's indigenous towards cost recovery 20 companies in the NELP VIII. the E&P sector is poised to see effect on the provision of off-shore services. production1. • Profit petroleum share offered to the considerable activity in the near future. This The government has also shown positive Realising that these fields would gradually government at various levels of could mean an increased interest in intent in terms of monetising deplete over time and no major discoveries Investment multiples . exploring India's hydrocarbon potential by unconventional resources like shale gas and 1 NELP VIII website were being brought into production, the foreign players. However, the recent could be prepared to organise bid rounds as 2 Notice Inviting Offers for NELP VIII, from NELP-VIII website economic downturn as well as the perceived early as mid next year. government intervention on freedom to market gas could serve as a dampener. Snapshot of previous rounds of NELP

NELP-I NELP-II NELP-III NELP-IV NELP-V NELP-VI NELP-VII NELP-VIII

No. of blocks offered 48 25 27 24 20 55 57 70

No. of blocks bid for 28 23 24 21 20 52 45 36

No. of bids received 45 44 52 44 69 185 181 76

No. of Blocks awarded 25 23 23 21 20 52 44 31 03 04

INDIA’S UPSTREAM SECTOR

NELP IX

NELP-I NELP-II NELP-III NELP-IV NELP-V NELP-VI NELP-VII NELP-VIII

No. of blocks offered 48 25 27 24 20 55 57 70

No. of blocks bid for 28 23 24 21 20 52 45 36

No. of bids received 45 44 52 44 69 185 181 76

No. of Blocks awarded 25 23 23 21 20 52 44 31 05 06

REFINING IN INDIA GAS TRANSMISSION AND DISTRIBUTION

India, with its current capacity of around the small refineries in the North-east, Outlook for refining sector The transmission and distribution segment to construct four new cross country Iran-Pakistan-India pipeline 180 million tones per annum (mtpa) is which are land-locked and possess a sub- of the natural gas sector remains relatively pipelines1 . Gujarat State Petronet Ltd. Regardless of above, some players are The IPI Gas Pipeline Project has been poised to emerge as a major refining hub, optimal economic size. Similarly major under-developed, but this is likely to change (GSPL), a GSPC Group company involved in mulling over setting up inland refineries conceived as a tripartite arrangement with considerable capacity additions being technology upgrades are necessary to be in the medium term. gas transmission arm also has an extensive close to demand centers thus reducing the between Iran, Pakistan and India, with the planned over the next few years1. Of a total able to produce output from relatively network of around 2400 Km in Gujarat,and cost of distribution (e.g. BPCL plans to set volumes being divided between the two of 20 refineries in India, public sector units lower grade crude which reduces sourcing recently, PNGRB has completed the up a 12 mtpa refinery in Allahabad). This may importing countries of India and Pakistan. have a capacity of 107.5 MMTPA while the costs thus increasing margins as well as Gas transmission bidding process for three new pipelines result in substituting products of other The pipeline is estimated to cost around private sector players comprising of RIL meet new fuel specification standards. too. refineries and hence creating pressure on The gas transmission domain in India has USD 7.5 billion and is expected to be 2300 and Essar have a capacity of close to 72 3 Capacity additions as well as Greenfield the coastal refineries to look at exports. been dominated by the GAIL India Limited. The existing pipeline capacity of ~220 Km in length . MMTPA. refineries announced by public and private mmscmd is expected to increase to ~ 660 It operates the Hazira – Vijaipur – Although some progress was made, sector players indicate that almost 40-50 mmscmd in the medium term2. This Jagdishpur (HVJ) , Dadri Vijaipur Pipeline several outstanding issues remained. MMTPA of additional refining capacity will expansion in infrastructure would lead to (total 3452 Km long), and a few other Issues around safe delivery of gas through Status of the sector be added by 2013-14 bringing the total better gas availability, better tapping of pipelines, connecting the LNG terminal at Pakistan and price of gas lead to the talks available capacity to nearly 240 MMTPA. In demand and thus in turn increase the The country has further large expansions Dahej to Vijaipur and Uran and the power being suspended in 2008. In April 2010 the medium term this surplus supply 1 natural gas demand. planned and is aiming to emerge as a plant at Dabhol to Panvel . some progress was made when India indicates that there may be reservations refining hub even as global refining markets 4 With the recent domestic gas finds in the proposed to discuss the pipeline with Iran . have tightened with the closure of small against making more investments in the 1 MoPNG KG basin off the East coast of India the refineries in North America and Europe refinery space till the time domestic Transnational pipelines transmission of gas to the demand centres mainly due to challenges in investing in demand catches up. based in the west and north of the country Turkmenistan-Afghanistan-Pakistan-India cleaner fuels and high compliance costs. In has assumed greater importance. Reliance (TAPI) pipeline addition, permits for Greenfield refineries 300 Gas Transportation Infrastructure Limited are hard to obtain in these countries due to The Asian Development Bank (ADB)-backed 241 (RGTIL) has implemented the 1385 Km the environmental concerns. Therefore, 250 Capacity 1,680-km long pipeline is likely to connect East West Gas Pipeline to carry 80 capacity addition is primarily coming from the gas fields in Turkmenistan to India. The 200 mnscmd (million standard cubic metres per emerging economies like India, China and A pipeline traverses through Afghanistan and day ) of natural gas from Kakinada in some Middle Eastern countries . 150 127 Pakistan (including 145 km in Turkmenistan, 1 RGTIL website, September 2010

MMTP Andhra Pradesh to Bharuch in Gujarat and 735 km in Afghanistan and 800 km in 2 PNGRB Many of the private sector refineries are 100 traverses through the states of Karnataka Pakistan upto the India border). It would 3 Wikipedia, September 2010 (Iran-Pakistan-India Pipeline) focusing on the export market. As far as and Maharashtra and it has further planned supply 38 mmscmd of gas to India. 4 Times of India, July 2010 (IPI Pipeline: India to resume talks the PSU refineries are concerned, concerns 50 with Iran) have been expressed over the viability of 2005 2006 2007 2008 2009 2010 2011 2012 2013 05 06

REFINING IN INDIA GAS TRANSMISSION AND DISTRIBUTION

Myanmar-Bangladesh-India pipeline PNGRB has already completed two rounds Outlook for transformation and COAL BED METHANE of bidding for awarding licenses for city gas A 1,575 km long pipeline connecting the distribution distribution for various cities. These Shwe field in the A-1 block in Myanmar, in licenses are awarded through an open The main driver for the development of gas which both ONGC Videsh and GAIL own a competitive bidding process, with there transmission and CGD shall be the stake, was considered to bring gas to India, being a level playing field for both domestic availability of requisite volumes of gas. while passing through Bangladesh. In and foreign entities. PNGRB has also called With the development of RIL's KG Basin February 2010 Bangladesh lifted its for the third and the fourth round of bids for and other fields, the opportunity could be opposition to a gas pipeline linking India the states of Gujarat, Punjab, Haryana and available; what now matters is whether the and Myanmar and running through its West Bengal (Round 3) and Kerala, Andhra CGD license-holders can obtain gas territory, paving the way for the Pradesh, Maharashtra , Madhya Pradesh supplies and develop gas distribution establishment of a regional gas grid5. and Uttar Pradesh (Round 4). infrastructure.

The CGD space is seeing bidding from not City gas distribution only the firms already in the gas transportation and distribution business but The City Gas Distribution (CGD) space in also other firms which would like to India has been steadily increasing with diversify into this sector. EPC contractors, many cities being added into the fold after engineering consultants, foreign gas New Delhi, Mumbai and others in Gujarat. majors, manufacturing firms, infrastructure The notification of Section 16 of the players and others have shown interest in PNGRB Act in March 2010 allowing PNGRB this sector. to grant licenses for CGD is likely to quicken the pace of rollout of CGD services In addition to the above, stricter in cities and geographical areas. The environmental norms around urban centres government is also playing its part. It has and increasing urbanisation is likely to allocated 3.39 mmscmd of gas on firm and increase the demand for piped natural gas as a clean and efficient fuel. Going forward fall back basis from RIL’s D-6 block in the In order to exploit India's vast coal reserves Major Terms and conditions offered to the This sector has attracted public sector 6 more cities are likely to have access to KG Basin . 5 Livemint.com, February 2010 (‘Bangladesh agrees to tri- and the methane gas trapped in coal seams, bidders for Round four enterprises – ONGC and GAIL, domestic local gas distribution networks. nation gas pipeline’) the government formulated a Policy for Coal private sector companies – Great Eastern 6 Infraline and Secondary Research • Fiscal stability provision in the contract Bed Methane (CBM) in 1997. The MoPNG Energy Corporation (GEECL), Reliance (Ministry of Petroleum and Natural Gas) was • No govt. participating interest Energy Ltd, Reliance Natural Resources Ltd, to be the administrative ministry with the • No up-front payment Essar and foreign players – Arrow Energy, DGH (Directorate General of Hydrocarbons) BP Exploration, GeoPetrol etc2. Some of the as the implementing agency and • No signature bonus required companies have also entered into accordingly, a MoU was signed between the • No customs duty on imports commercial long term Gas Sale Agreement. MoPNG and Ministry of Coal in September • Freedom to sell gas domestically at The policy regime is also favourable to 1997. The first round of CBM was held in market-determined rates. exploration and commercialisation of the 2001, on the lines of NELP, with competitive CBM opportunity in India. bidding deciding the award of acreages. So far four rounds of bidding have been 14.0 completed and 33 blocks have been 13.49 12.0 awarded. 10.0 The potential of CBM as a primary energy resource in India is being established and 8.0

increasingly efforts are being made to Btoe 6.0 commercialise the same. The proven CBM reserves in India are equivalent to the Oil 4.0

1 and Natural gas reserves in India . At USD 2.0 4.2/mmbtu it translates to a USD 130 billion 1.22 1.10 0.79 0.77 opportunity. Coal Lignite Oil Gas CBM

1 Integrated Energy Policy, Report of Expert Committee, Planning Commission, August, 2006 pipeline’) 2 KPMG Research 07 08

increasingly efforts are being made to Btoe 6.0 commercialise the same. The proven CBM reserves in India are equivalent to the Oil 4.0

1 and Natural gas reserves in India . At USD 2.0 4.2/mmbtu it translates to a USD 130 billion 1.22 1.10 0.79 0.77 opportunity. Coal Lignite Oil Gas CBM

1 Integrated Energy Policy, Report of Expert Committee, Planning Commission, August, 2006 pipeline’) 2 KPMG Research 09 10

LIQUEFIED NATURAL GAS A NOTE ON SHALE GAS

Liquefied Natural Gas (LNG) trade has The LNG imports in India in 2008-09 were operational LNG terminals both located in Shale gas is natural gas produced from attention of a large number of nations like first of its kind in India. In order to truly picked up significantly in recent years estimated at 30 mmscmd. This constituted Gujarat, one each in Dahej and Hazira, with shale, which are fine-grained sedimentary Canada, Australia, China, Sweden, exploit the potential of shale gas in the owing to increasing demand, declining about 29 percent of total natural gas supply total capacity of 12.5 MTPA2. rocks formed by compaction of clay and Hungary, Germany, UK and India. country the following needs to be domestic natural gas resources in gas- in India in 2008-09. Out of total LNG other minerals. The shale formations act as expedited: Besides the existing LNG terminals at In the Indian context, although more consuming countries and efforts of gas- imports, 63 percent was imported on firm both reservoir as well as source rock. Shale Dahej and Hazira and their expansion plans, studies are required to assess the true • Technical assessment of shale deposits producing countries to commercialise their contract basis while 37 percent was formations have low matrix permeability few other LNG terminals of combined potential of our geological basins, and identification of possible gas resources. The LNG market has also seen imported on the spot basis1. and to produce gas in commercial capacity of 21 MTPA are planned to be prospects of large shale deposits exists producing areas key developments in the past few years quantities it requires fractures to improve The historic demand-supply gap of natural added in India over the next few years. across the Cambay basin, Assam – Arakan including declining capital costs of LNG the permeability. Similarly, horizontal drilling • Comprehensive policy on shale gas gas has provided an impetus in setting up basin, KG basin and Cauvery basin. India's liquefaction plants and more flexibility in is often used with shale gas to create exploration, development and LNG terminals. Currently India has two current policy on exploration doesn't cover tenure and pricing of LNG Contracts maximum surface area in contact with the production unconventional resources and hence a new shale and hence improve gas recovery. policy especially for shale gas may be • Participation from firms with technology Sr. No. Terminal Promoter Capacity (MTPA) Expected timelines The interest in shale gas really picked up required in the future. The fiscal and and infrastructure to bring down costs during 2005-06 when the Henry Hub prices contractual regime for such exploration is of development and production. 1) Dabhol Ratnagiri Gas and Power Projects Ltd 5 2012 1 were at an all time high . Over the last also something the government needs to Shale gas definitely is an opportunity in the 2) Kochi PLL 2.5 in Phase I To be increased to 5 beyond 2012 decade, the costs of drilling and fracturing look at as the option could be between a near future and, if large resource bases are techniques have come down substantially royalty regime (like in US) and a Production established, it could be a big boost to a 3) Mundra Adani Group and GSPC 6 2014 and now shale gas is able to compete even Sharing Contracts (conventional oil and gas country which needs energy security for a 1 4) Ennore IOCL 2.5 2014 at prevailing lower gas prices. This has resources in India) . The government plans fast developing economy. resulted in huge negative impact on to launch the first round of Shale gas 5) Mangalore ONGC 2.5 2014 imported LNG in the US and severe under bidding in mid 2011. utilisation of the LNG regasification In anticipation of the above, some of the terminals. Overall, India is expected to have LNG liquification, shipping and re-gassification. segments like Industrial consumers, major players have taken a keen interest in terminals of ~20 MTPA capacity by 2012 This leads to higher landed price for LNG to Petrochemical plants and CGD. The This whole cycle of developing cost shale gas. Reliance has already acquired and ~38.5 MTPA capacity once the consumers than most of the alternative proposed pooled pricing mechanism may efficient technologies to bring down the stakes in Marcellus shale and Eagle Ford operations in all the proposed terminals fuels. also help in boosting the LNG demand in cost of monetising unconventional acreage in US1. ONGC is carrying out a pilot commence. other sectors as well. resources in the US has captured the project in the Damodar basin, which is the 1 Oil and Gas journal 2010 One of the key drivers to improve LNG Acceptability of natural gas as a fuel is demand in domestic market will be India's dependent on its price vis-à-vis alternate ability to source long term LNG at fuels. LNG is more expensive than competitive prices. At current prices, LNG domestic gas due to the additional cost of may be cost efficient to few consumer 1 Crisil 2 Hazira and Dahej Terminal Website 09 10

LIQUEFIED NATURAL GAS A NOTE ON SHALE GAS

FUEL RETAILING IN INDIA OVERVIEW OF THE INDIAN TAXATION SYSTEM

Indian private sector was not allowed in the effects on the economy given that it is the market, they have found it difficult to Direct tax1 Scheme of taxation Minimum alternate tax (MAT)4 retailing of fuel up to 2002. Subsequently, main fuel for the movement of goods in sustain operations given the price • Taxation of a person depends upon its • MAT is applicable to a company, if tax the government decided to open the sector India. regulation in place. India has a federal level tax structure legal status (a person being an payable by the company on its total to private participation subject to certain governed by the provisions of the Income In addition to this, the government also However, there are indications that private individual, firm, company, etc.) and income, as computed under the normal restrictions. The government, with its aim Tax Act, 1961. It has a network of treaties announced a hike in prices of Petrol (MS), sector interest has renewed in this space. residential status provisions, is less than 18 percent of its of insulating the Indian consumer from with over 90 countries across the globe to Diesel (HSD), Kerosene and LPG. Petrol Recent media reports have shown that book profits volatility of crude oil prices in the avoid double taxation of income. In wake of • Indian tax system recognises an entity currently accounts for only a tenth of all Shell India, the domestic arm of Royal international markets, has been subsidising economic reforms, the taxation system has level taxation. • In computing 'book profits' for MAT petroleum products consumed where as Dutch Shell Plc, plans to have 200 fuel end-user prices of HSD, MS, SKO and LPG. undergone tremendous changes in the past purposes, certain positive and negative diesel accounts for nearly one-third of all outlets by the end of FY 09-101. This has translated into a large subsidy ten years. The tax rates have been adjustments are made to the net profit products consumed within India. being given to the domestic consumer, The Indian fuel market does hold some rationalised and compared favourably with Corporate income-tax as shown in the books of account Although this is a commendatory step, promise, more so if the market forces are many other countries. Further, over the with the burden being shared between the • For Indian income tax purposes, a • Carry forward and set off of MAT is even after this decision, the government allowed free reign as indicated by recent period of time, the tax laws have also been oil marketing firms, the government (which corporation income comprises income available for 10 subsequent years. simplified to ensure better compliances. has been issuing oil bonds to the PSU and the public sector oil companies are measures. Another opportunity lies in from business or property, capital gains marketers to compensate them for their expected to bear an estimated under- exploiting the potential of non-fuel retail at The brief overview of India taxation system realised on any disposition of under-recoveries) and the upstream PSU recovery of about INR 53,000 crore as the existing fuel outlets, particularly given is outlined below: corporation’s capital assets and residual firms of ONGC and OIL. opposed to INR 74,000 crore in revenues in the prime location of fuel outlets at metros. income arising from non-business 2010-11 fiscal. Convenience shopping and the In June 2010, a major step was taken in the income. establishment of ATMs provide an 2 area of moving towards market determined Scope of total income opportunity. Fuel retailing outlets with such pricing. The government through its • A resident in India is liable to tax on its Outlook for fuel retaling additional facilities are also likely to invest 3 Empowered Group of Ministers (EGoM) led world wide income irrespective of the Corporate tax rate in modernisation and branding initiatives, by the Finance Minister of India, Pranab The fuel retail market in India continues to source of income • Domestic companies are subject to tax with 'Club HP' of HPCL being one such Mukherjee decided to give a free hand to be dominated by PSU firms with Indian Oil at the rate of 30 percent whereas initiative. • A non resident in India is liable to tax on oil companies to determine petrol (MS) boasting of an approximately 50 percent foreign companies are subject to tax at income received or deemed to be prices in line with the market price market share, while the other public sector the rate of 40 percent received in India or any income accruing following the Kirit Parikh Committee fuel marketers HPCL and BPCL have five or arising or deemed to be accruing or • The tax rate is enhanced by surcharge & recommendations1. Diesel prices, however, and approximately 25 percent market share arising in India. education cess as may be applicable to were not allowed the same freedom, each. Although the private sector firms of 1 Business Standard the tax payer. arguably, due to the significant inflationary RIL, Essar and Shell have entered the

1 Indian Income-tax Act, 1961 3 Finance Act, 2010 2 Section 5 of Indian Income-tax Act, 1961 4 Section 115JB of Indian Income-tax Act, 1961 11 12

FUEL RETAILING IN INDIA OVERVIEW OF THE INDIAN TAXATION SYSTEM

1 Indian Income-tax Act, 1961 3 Finance Act, 2010 2 Section 5 of Indian Income-tax Act, 1961 4 Section 115JB of Indian Income-tax Act, 1961 13 14

Dividend distribution tax (DDT)5 Transfer pricing regulations7 Other features8 Key indirect taxes12 • DDT is levied at the rate of 16.609 • India has a Transfer Pricing regime under • Loss carry forward permitted upto eight Service tax VAT legislation Custom duty percent on the amount of dividend which international transactions between years, however, depreciation can be • Since its inception in April 2005, VAT • Custom Duty is payable on import of declared, distributed or paid by an Indian associated enterprises are required to be carried forward indefinitely • Service tax is applicable on identified has been implemented in almost all goods/ equipments into India company computed with regard to their arm's services provided or received in India • No tax on remittance of profits by foreign Indian States and Union Territories with length price. These regulations also apply • It is levied as per rates specified in the • DDT is payable in addition to regular companies (project office/branch office to • Current scope of taxable services is exception of Andaman and Nicobar and to cost sharing arrangements Customs Tariff laws depending upon the corporate income tax. head office)9. very wide and covers a vast majority of Lakshadweep prescribed HSN classification • Transfer Pricing Regulations prescribes service categories • VAT is a multi-point taxation system • Peak rate of Customs Duty is 10 6 the information and documents which • Mining, Survey & exploration of Corporate tax rates at glance entailing a VAT at every point of sale and are required to be maintained by every percent. minerals, Transportation, , scientific and sale includes transfer of right to use person who has entered into an technical consultancy, construction, IPR, Rates applicable for the financial year 2010-2011 are goods and transfer of property in goods international transaction with its as follows: insurance, manpower supply, in the course of execution of works associated enterprises. telecommunication, online database Excise duty Domestic Foreign contracts Resources Corporation Corporation access, training, business auxiliary • Generally levied at the rate of 10 • Dealers are allowed to avail credit of services are some of the key categories percent plus education cess of 3 Corporate tax rate 33.22%* 42.23%* input VAT paid on inputs and capital percent on manufacture of goods • Service tax is applicable at 10.30 goods for set-off against output VAT/ Minimum Alternate tax 19.93%* 19.0035%* percent CST • Payable at the time of removal of goods from factory gate Dividend Distribution tax 16.609% N.A. • Export of services are not subject to • Common rate of tax adopted across all service tax - export determined as per States with rates generally ranging from • Excise duty paid by the buyer to the Branch Profit Tax NA NA prescribed rules 4percent to 15percent for different seller is available as input credit and may *In case net income exceeds 10 million be utilized to set-off the buyer’s output • Import of service liable to service tax in categories of goods. Also, some Excise duty/ Service tax liability hands of recipient in India - import category of goods have been declared determined as per prescribed rules. exempt from levy of State VAT • Interstate sale of goods is subject to a Taxation of individuals10 CST levy and currently applicable at 2% Taxability subject to conditions. CST is a non- • Taxability of an individual is dependent on creditable levy. his/her residential status Worldwide income Indian income Residential Status • The residential status of an individual is Received in India Received outside India Received in India Received outside India determined on the basis of his/her ROR ü ü ü ü physical presence in India

• Based on the satisfaction of certain RNOR* ü û ü ü conditions, an individual could be: NR ü û ü ü - Resident and ordinarily resident (ROR) * Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India - Resident but not ordinarily resident

(RNOR) Tax rates applicable for the financial year 11 2010-2011 - Non-resident (NR) Taxable Income Rate percent • Income of non-resident is generally * In the case of resident woman below the age of 65 computed in the same manner as the Upto 160000* Nil years the basic exemption limit is 190,000 resident. * In case of resident individual of the age of 65 or 160,001 - 500,000 10% above the basic exemption limit is 240,000

500,001 - 800,000 20% * Surcharge is not applicable * Education cess is applicable at the rate of 3 Above 800,001 30% percent on income tax

5 Section 115-O of Indian Income-tax Act, 1961 8 Section 72 and Section 32 of Indian Income-tax Act, 1961 10Section 6 of Indian Income-tax Act, 1961 12Comprises of relevant provisions of Finance Act, 1994, The 6 Finance Act 2010 9 Indian Income-tax Act, 1961 and the Exchange Control / 11Finance Act 2010 Customs Act, 1962 and State-specific VAT legislations, as 7 Chapter X of Indian Income-tax Act, 1961 Regulatory provisions amended from time to time, the rules and regulations thereunder 13 14

500,001 - 800,000 20% * Surcharge is not applicable * Education cess is applicable at the rate of 3 Above 800,001 30% percent on income tax

REGULATORY AND TAX REGIME FOR UPSTREAM SECTOR • PSC also lay down the manner of Taxation of service providers16 service, in relation to location or deduction as: exploration of deposits of mineral, oil • There is a special tax regime for non- or gas - Allowable expenditure is aggregated till resident service providers engaged in the commencement of commercial the business of providing services or • Site formation and clearance services production facilities or supplying plant and (effective from 16 June 2005) - Accumulated expenditure allowed in the machinery on hire in connection with - Includes drilling, boring and core year of commencement of commercial prospecting for, or extraction or extraction services in relation to site production or permitted to be amortized production of, mineral oils. formation and clearance, excavation over a period of 10 years. • Ten percent of the gross receipts and earth moving and demolition deemed to be business income • Mining services (effective from 1 June resulting in an effective tax rate of 2007) No ring fencing of expenditure 4.223 percent of gross revenues (rate - Introduced to tax 'any service provided All unsuccessful exploration costs in other as applicable for financial year 2010- in relation to mining of minerals, oil & contract areas can be set off against 2011) gas’ income in the contract area in which • The tax payer has an option to claim commercial production has commenced. lower profits, subject to following • Commercial or industrial construction conditions: - Includes construction of well head and civil works at site. 14 - Keep/maintain books/documents Tax holiday • Service tax also leviable on the • Hundred percent tax holiday available in - Get accounts tax audited following services: respect of profits earned from - Furnish tax audit report production of mineral oils. - Dredging services - Compulsory scrutiny assessment. • Hundred percent tax holiday available in - Technical testing and analysis respect of profits earned from - Pipeline transportation production of natural gas from the 17 Regulatory and tax regime for Custom duty Income tax Special provision blocks licensed under NELP VIII and - Cleaning (including services for tank, 13 • Subject to certain procedures and upstream sector India also provides a customized tax • Specific allowances [in addition or in lieu CBM IV reservoir of commercial or industrial conditions, Custom Duty exemption is regime for the upstream sector and non- of allowances under normal provisions] building and premise). India also provides a customized tax • Tax holiday is available for seven available for: resident service providers in relation to as specified in the PSC are permitted. regime for the upstream sector and non- consecutive years from the year of Exploration and Production operations. • Equipments etc. imported for exclusive resident service providers in relation to • The specific allowances relate to: commencement of commercial use in petroleum operations Excise duty Exploration & Production operations. There is a special mechanism for taxation production. - Expenditure by way of infructuous or of income of companies which have • Specified goods required in connection • Equipment and machinery procured for A brief overview of the regulatory and tax abortive exploration • However, companies availing deduction entered into a Production Sharing Contract with petroleum operations under exploration and production operations regime for upstream sector is outlined under these provisions would still be (PSC) with the Government of India for - Expenditure incurred for exploration or specific exemption notification are eligible for deemed export benefits below: liable to pay MAT on 'book profits'. undertaking exploration and production drilling activities or services or assets which include Excise duty drawback/ • Parts and raw materials for manufacture activities. used for these activities. exemption / advance authorization. of goods for the purpose of off-shore Regulatory • As per these provisions, taxable profits Deductibility of site restoration fund15 petroleum operations undertaken under of a tax payer, who has entered into a specified contracts. • FDI up-to 100 percent permitted under PSC • Special deduction is available for PSC with the Government for automatic route (i.e. without approval) in contribution to site restoration fund Service tax18 participation in the business of • Hundred percent deduction of exploration activities of oil and natural prospecting, exploration or production of exploration and drilling expenses (both • Amount of deduction being lower of: Relevant Service Tax Category gas fields, infrastructure related to mineral oil, to be determined in capital and revenue allowed) and other marketing of petroleum products, actual - Sum deposited either in a special • Survey and exploration of mineral, oil & accordance with the special provisions expenses (including production trading and marketing of petroleum account or in a "Site Restoration gas services (effective from 10 contained in the PSC expenditure) allowed under normal products, market study and formulation. Account" or September 2004) provisions of the Income-tax Act This will however be subject to the • The provisions of the domestic tax law - Twenty percent of the profits - Includes geological, geophysical or existing sectoral policy are deemed to be modified to that calculated in the prescribed manner. other prospecting, surface and extent. • A foreign company can setup a project subsurface surveying or map making office or an Indian company for undertaking upstream operations in India. 13Comprises of Foreign Direct Investment Guidelines, Section 14Section 80IB(9) of Indian Income-tax Act, 1961 16Section 44BB of Indian Income-tax Act, 1961 18The Finance Act, 1994 and the rules and regulations 42 of Indian Income-tax Act, 1961, Article 17 of PSC and 15Section 33ABA of Indian Income-tax Act, 1961 17Custom Act, 1962 and the rules and regulations thereunder relevant indirect tax provisions thereunder 15 16

Proposed legisation - Direct Tax Proposed legisation - Goods and Key areas of relevance under the

Code Bill 2010 • Provisions related to Controlled Foreign Taxation of service providers services tax proposed GST regime Corporations (CFC) have been In an attempt to simplify the direct tax • Income of non-resident service • The Finance Minister while presenting Although, the precise impact of GST on Oil introduced and it gets attracted when a provisions, the government proposes to providers engaged in the business of the Union Budget 2010-11 expressed and Gas sector needs to be analyzed in foreign company is controlled by replace the existing tax regime with the providing services or facilities or the Government's 'earnest endeavour' light of the GST provisions, in due course resident tax payers. new Direct Tax Code Bill, 2010 (DTC). The supplying plant and machinery on hire in to roll out GST on 1 April 2011, however, of time, the following is the likely impact on DTC is likely to be effective from 1 April • The DTC provides for General Anti- connection with prospecting for, or due to lack of consensus between the same, based on the existing 2010 and the key features are as under: Avoidance Rules (GAAR) provisions extraction or production of, mineral oils States and Centre, the said deadline information in the public domain: which empower the revenue authorities and mineral oil is classified as Special may be extended • Income has been proposed to be • Likely increase/ change in tax rates of with sweeping powers to declare any Source income classified into two broad group (i) • GST would be a destination-based tax goods and services with a proposed arrangement impermissible if entered Income from Ordinary Sources and (ii) • 14 percent of the gross receipts levied on consumption, applicable on a GST rate of 20/16 percent with the objective of obtaining a tax Income from Special Sources. deemed to be business income comprehensive base of both goods and benefit and lacks commercial • Stock transfers are likely to be taxable resulting in an effective tax rate of 4.2 services • The tax rate for companies (domestic as substance. under GST at par with inter-state percent of gross revenues (at tax rate of well as foreign companies ) have been • GST in India is proposed to be a dual supplies 30 percent) pegged at 30 percent. In addition, levy (i.e. Centre and State level) and is • Fate of existing Customs/ Excise duty foreign companies are also liable to a 15 Tax regime for upstream sector • The tax payer has an option to claim likely to subsume most, if not all, of the exemptions for equipment unclear in percent branch profit tax (BPT) on post lower profits, subject to following current Central and State levies like light of overall intent of GST DTC has proposed specific tax regime for tax income conditions: Excise duty, VAT/ CST, Service tax, etc. the upstream sector (Schedule Eleventh) • Imports to be brought under the GST • MAT applicable to a companies, if tax and non-resident service providers - Keep/maintain books/documents • Free flow of credits are proposed under net for the first time payable by the company on its total (Schedule Fourteenth) in relation to GST regime (i.e., input taxes paid on - Get accounts tax audited • Concessional CST rate (2 percent) on income, as computed under the normal Exploration & Production operations. Key procurement of goods and services can inter-state purchases likely to be provisions, is less than 20 percent of its features of the DTC provisions are as under - Furnish tax audit report be set off against output taxes payable discontinued book profits. Carry forward and set off on supply/ provision of goods/ services) • Income from business of exploration - Compulsory scrutiny assessment. of MAT is available for 15 subsequent • The definition of 'India' may be widened and production of mineral oil is • Whether petroleum products would be years under GST regime to cover all the off- classified as Special Source income included in GST ambit is still uncertain. shore supply of goods and services • DDT is levied at the rate of 15 percent • Specific computation mechanism within the Exclusive Economic Zones. on the amount of dividend declared, prescribed in Schedule Eleventh distributed or paid by an Indian company • Deduction for capital expenditure and • Corporate tax rates at a glance: revenue expenditure, infructuous and abortive expenditure allowed Domestic Foreign Resources • Deduction for deposit made to Site Corporation Corporation Restoration Fund

Corporate tax rate 30% 30% • Profit-linked deductions are replaced with investment based incentives are Minimum 20% 20% introduced Alternate tax • DTC provides for grandfathering of tax Dividend holiday available to oil and gas 15% N.A. Distribution tax undertaking which are eligible for such benefit under the present tax regime. Branch Profits Tax N.A. 15% 17 18

Proposed legisation - Direct Tax Proposed legisation - Goods and Key areas of relevance under the

Appendix I: Map of Existing and Proposed Gas Pipelines Appendix II: Existing and Proposed LNG Terminals

Dahej I&II (10mtpa)

Dahej III (2.5mtpa)

Mundra (6mtpa)

Hazira I (2.5mtpa)

Hazira II (2.5mtpa)

Dabhol (5mtpa)

Mangalore (2.5mtpa)

Kochi (2.5mtpa) Ennore (2.5mpta)

Kochi (2.5mtpa)

Expected to come up by FY 12 Existing LNG Terminal

Proposed LNG Terminal Expected to come up after FY 12

Source: PNGRB Source: KPMG Analysis 19 20

Appendix I: Map of Existing and Proposed Gas Pipelines Appendix II: Existing and Proposed LNG Terminals

Dahej I&II (10mtpa)

Dahej III (2.5mtpa)

Mundra (6mtpa)

Hazira I (2.5mtpa)

Hazira II (2.5mtpa)

Dabhol (5mtpa)

Mangalore (2.5mtpa)

Kochi (2.5mtpa) Ennore (2.5mpta)

Kochi (2.5mtpa)

Expected to come up by FY 12 Existing LNG Terminal

Proposed LNG Terminal Expected to come up after FY 12

Source: PNGRB Source: KPMG Analysis 21

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KPMG is a global network of KPMG in India, the audit, tax and The firms in India have access to more professional firms providing Audit, Tax advisory firm, is the Indian member than 3000 Indian and expatriate and Advisory services. We operate in firm of KPMG International professionals, many of whom are 146 countries and have 140,000 Cooperative (“KPMG International.”) internationally trained. We strive to people working in member firms was established in September 1993. provide rapid, performance-based, around the world. The independent As members of a cohesive business industry-focused and technology- member firms of the KPMG network unit they respond to a client service enabled services, which reflect a are affiliated with KPMG International environment by leveraging the shared knowledge of global and local Cooperative (“KPMG International”), a resources of a global network of firms, industries and our experience of the Swiss entity. Each KPMG firm is a providing detailed knowledge of local Indian business environment. legally distinct and separate entity and laws, regulations, markets and describes itself as such. competition. We provide services to over 2,000 international and national clients, in India. KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata, Pune and Kochi. 21

ABOUT KPMG IN INDIA

Oil and Gas Overview 2010

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