Pricing and Investments in Oil & Gas sector

1

Historically, oil prices in India were controlled by Government through cross

subsidy & pool operation. Oil companies were fully compensated based on a cost-plus

formula. The mechanism was called Administered Pricing Mechanism (APM)

Government notified Phased Dismantling of Administered Pricing Mechanism

(APM) in 1997 which commenced in 1998 & whereby all price controls were to go by

March, 2002 .

For socio-economic reasons, prices of only PDS Kerosene & Domestic LPG were to

continue to be administered and the same to be funded through the Consolidated

Fund of India.

Deregulation did start in accordance with time-table. Transport fuels also had an

initial brush with Deregulation but could not be sustained due to increasing

international prices leading to higher pump prices.

By Apr’02, except for the ‘Sensitive Products’ namely Gasoline, Gasoil, Kero &

LPG, all other petroleum products were fully deregulated.

2

Petroleum Products’ Pricing – early days

From 2002 till recently, ……

International Oil prices have been on a steep rise

Selling prices of ‘Sensitive Products’ have remained under Government Control to

protect domestic consumers from volatility & runaway increase in-line with

international prices.

In contrast, Cost-price to Oil Marketing Companies (Refinery Transfer Price) has

been linked to international prices & is based on import-parity principle.

Due to this contradiction, Under-recoveries of Oil Marketing Companies (OMCs) have

also been increasing steadily.

Government of India have compensated OMCs from time-to-time during last few

years through various mechanisms :

o Sharing of subsidy burden by Upstream Companies/ Stand-alone Refinerso Issue of Oil Bondso Budgetary Support/ Cash Compensation

3

Petroleum Products’ Pricing – the difficult years

4

Pricing in Oil Sector- Kirit Parikh Report

Main Recommendations:

♦ Level Playing field and Competition

♦ Petrol- Free both at refinery gate and retail level

♦ Diesel- Free both at refinery gate and retail level

♦ Additional Excise Duty on Diesel cars

♦ Effective Distribution system for PDS kerosene &

Domestic LPG♦ Reduction in Kerosene allocation♦ PDS kerosene price increase♦ Domestic LPG price increase

5

Pricing in Oil Sector- Kirit Parikh Report

Under-realization:

♦ Under-realization calculation based on IPP (existing method)

♦ Under-realization on petrol/diesel nil –free price

♦ Financing under-realization- SKO(PDS)/LPG(Dom):

• Reduction in PDS Kerosene allocation

• PDS kerosene price increase

• Domestic LPG price increase

• Mopping up portion from ONGC/OIL

• Cash subsidy from budget

♦ OMCs should be compensated fully for under-realisation

June, 2010 has seen major Government initiatives on Pricing of Sensitive

Petroleum Products ……

Pricing of Gasoline has been decontrolled

Pricing of Gasoil shall also be market-determined in a phased manner. To

start with, Retail price has been increased by Rs 2/litre to bring it closer to

market-level.

Kerosene Retail prices, that had not been changed since 2002, have been

increased 33% by Rs 3/litre.

LPG Retail prices have been increased 12% by Rs 35/ cylinder

All the above measures shall result in increased monthly cash-flows of around

Rs 1000 Cr for IOCL. This will boost liquidity & lower need for borrowings.

6

Petroleum Products’ Pricing – Recent developments

Oil Pricing Methodology

7

Administered Pricing Mechanism: Characteristics

8

Fixed parameters Cost PlusRare revisions

Assured returnsAveraging effectSupplier-

Customer linkages

Administered Pricing Mechanism

De-regulated Pricing Mechanism: Characteristics

9

Flexible parametersMarket -

DeterminedFrequent revisions

No Assured returns

Accent onLogistic efficiency

Competition

De-regulated Pricing Mechanism

De-regulated Pricing Mechanism : Options

10

De-regulated Pricing Mechanism

Import Parity

Competition-Based

Cost-BasedGovernment-Influenced

Steps in Pricing……

• Refinery Transfer Price (RTP)

• Ex-Storage Point Price (ESPP)

• Selling Price/ Retail Selling Price (RSP)

11

Import Parity Pricing Principle(for De-regulated Products)

12

FOB, Premium Landed Cost (RTP)

Ocean freight Insurance

Customs Duty

Ocean Loss Wharfage

Landed Cost RTP

Marketing Cost DLAF

Ex-Storage Point Price

Marketing Margins

Trade Parity Pricing Principle (for MS & Diesel)

13

FOB, Premium 80% of IPP +20% of EPP

Ocean freight Insurance

Customs Duty

Ocean Loss Wharfage

IPP(80%)

Marketing Cost Margins

Net wt. Avg Frt from Port to locn.

Stock Loss Working Capital

Desired Ex-Storage Point Price

FOB, Premium

Advance License benefit

Export Parity(20%)

Actual ESPP fixed by Govt is much lower than Desired ESPP

Note : MS has been decontrolled wef 26.06.10

Selling Price for Customer (Bulk Products)

Components are ……♦ Ex-Storage Point price (ESPP)

♦ State Specific cost (based on indirect and Irrecoverable State taxes)

♦ Freight (railway freight from refineries / depots to customers)

♦ Excise Duty

♦ Sales Tax & levies

Landed / Selling price for Customer14

Retail Selling Price (RSP)(Retail products)

Components are ……♦ Ex-Storage Point price (ESPP)

♦ State Specific cost (irrecoverable state taxes)

♦ Transportation Charges (from Depot to market)

♦ RPO Charges

♦ Excise Duty

♦ Dealer Commission

♦ Sales Tax & levies

Retail Selling Price (RSP)15

Cost price Principle for SKO(PDS) & LPG(Dom)

16

Landed Cost at ports (RTP)Ex-Storage Point Price at Refinery

fixed by Govt

Marketing Cost Margins

Freight from Port to locations

Stock Loss Working Capital

Cost Price at locations(Desired Selling Price as

per IPP)

Freight from Refinery to locations

Issue Price at locations(Actual Selling Price)

Difference between Cost Price and Issue Price in March 2002 Fixed as Subsidy for

2002-03 (Thereafter, reduced to 1/3rd. Current subsidy

is Rs 0.82/l for SKO & Rs 22.58/cyl for LPG)

17

Trends in International Prices

Crude :Upward Trend of FOB Prices

18

- $ PER BBL

31.8650.16

59.77 60.99

99.76

47.92

78.0781.75

1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10

Avg. FOB 38.25 55.53 67.58 66.30 83.57 69.63

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Average FOBs for the

Previous Fortnight

Petrol and Diesel :Upward Trend of FOB Prices

39.1755.98

64.9772.07

108.57

54.92

88.53

86.93

35.65

64.3073.48 73.03

125.49

52.56

85.97

94.01

1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10

19

- $ PER BBL

Petrol

Diesel

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Avg. FOB : MS 45.21 61.13 77.41 80.20 88.37

76.28Avg.FOB: HSD 47.37 66.94 84.18 80.60 100.60 74.69

Average FOBs for the

Previous Fortnight

Kerosene :Upward Trend of FOB Prices

35.48

64.56

74.43 73.8

124.56

53.84

85.92

92.79

1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10

20

- $ PER BBL

Avg. FOB 47.98 70.04 83.51 79.50 103.24 75.36

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Average FOBs for the

Previous Month

LPG :Upward Trend of FOB Prices

272

388

536510

811

458

721

692

1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10

21

- $ PER MT

Avg. FOB 364 479 500 555 682 584

04-05 05-06 06-07 07-08 08-09 09-10

Average FOBs for the

Previous Month

Diesel : FOB equivalent to current(01.11.10) RSP

Current FOB & Desired RSP

Equivalent FOB & Current RSP

94.0185.11

40.66 37.71

FOB ($/bbl) RSP(Rs/Ltr)

22

SKO(PDS): FOB equivalent to current (01.11.10) RSP

Current FOB & Desired RSP

Equivalent FOB & Current RSP

92.79

34.54

28.82

12.32

FOB ($/bbl) RSP(Rs/Ltr)

23

LPG: FOB equivalent to current(01.11.10) RSP

Current FOB & Desired RSP

Equivalent FOB & Current RSP

692.00

362.64

555.29

345.35

FOB ($/MT) RSP(Rs/Cyl)

24

25

Under-realisation

Gross Under-realisation

26Projected Under-recovery for IOC for 2010-11 = Rs. 36,500 Crores (approx)

(In Rs. Crore)

Estimated Under-realisation of IOC:2010-11

1026

13184

12240

10050

MS HSD SKO LPG

27

Rs. Crores

Total Rs. 36,500 Crores

Impact

Impact of Under realization:

♦ On Profit♦ On Borrowings♦ On interest♦ On liquidity♦ On Investments♦ Physical V/s Financial performance mismatch♦ On market capitalization

28

29

Capital Investment - Needs

Capital Investment required for-

♦ Growth of Organization

♦ Updation of Technology

♦ Removal of operational bottlenecks

♦ Improvement in efficiency & productivity

♦ Enhancement of capacities

♦ Fulfillment of social objectives (Generally include Expansion, Acquisition, Modernization and Replacement)

30

Government initiative

Policies of the government - further boost to foreign investment in this industry

♦ 100% FDI is allowed in private refineries via the automatic route and up to 49% in government-owned ones.

♦ 100% FDI is also granted in cases of petroleum products, gas pipelines, exploration, and marketing or retail via the automatic route.

♦ With NELP (New Exploration Licensing Policy) it has helped encourage further explorations for oil and gas reserves in India.

31

Investment in Oil Sector- FDI

NormsActivity % of FDI Cap/Equity

Entry Route

Exploration activities of oil & natural gas fields 100% Automatic

Infrastructure related to marketing of petroleum products

Actual trading and marketing of petroleum products

Petroleum product pipelines

Natural gas/LNG pipelines

Market study and formulation

Petroleum refining in the private sector, subject to- (next slide)

Petroleum refining by the Public Sector Undertakings (PSU), without any divestment or dilution of domestic equity in the existing PSUs

49% Government

32

Investment in Oil Sector- FDI

Norms100% FDI subject to-

The existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies

33

Capital Investment

“There need to be changes in petroleum and gas pricing. If we can get international pricing of gas, then we would be happy to invest in India,” said Peter Voser, CEO, Royal Dutch Shell.

34

Thank you

Indian Oil

RSPs of MS, HSD, SKO & LPG in Neighbouring Countries

35

Prices at India(Delhi) are as on 26.6.10, prices for other countries taken as on 1.6.10

Countries MS HSD SKO LPG

Rs/litre

Rs/litre Rs/litre

Rs/cyl

India 51.43 40.10 12.32 345.35

Pakistan 36.41 41.44 35.97 577.18

Bangladesh 49.72 29.43 29.43 537.37

Srilanka 47.24 29.90 21.02 822.65

Nepal 51.36 39.24 39.24 782.84

Diesel: Desired Vs Actual RSP at Delhi (Rs/Litre)

36

32.86

36.19

48.78

28.32

42.70

40.66

29.2531.45

31.76

30.86

38.1037.71

25.00

30.00

35.00

40.00

45.00

50.00

2005-06 2006-07 2007-08 2008-09 2009-10 1-Nov-10

3.61

5.94

17.02

-2.54

4.60

2.95

Desired RSP

Actual RSP

SKO(PDS): Desired Vs Actual RSP at Delhi (Rs/Litre)

37

Actual RSP

20.68

24.83

34.32

19.30

27.74 28.82

9.03 9.08 9.09 9.22 9.3212.32

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2005-06 2006-07 2007-08 2008-09 2009-10 1-Nov-10

11.65

15.75

25.23

10.08

18.4216.05

Desired RSP (Net of Subsidy of Rs 0.82/Ltr)

LPG(D): Desired Vs Actual RSP at Delhi (Rs/Cyl)

38

457.39 456.15

610.81

407.60

575.62555.29

294.75 294.75 294.75 279.70310.35

345.35

250

300

350

400

450

500

550

600

650

2005-06 2006-07 2007-08 2008-09 2009-10 1-Nov-10

265.27 209.94

Actual RSP162.64

316.06

127.90

Desired RSP (Net of Subsidy of Rs.22.58/Cyl

161.40