Oil and Gas Overview 2010

Transcription

1 ENERGY AND NATURAL RESOURCES Oil and Gas Overview 200 kpmg.com/in

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3 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 arena. Other segments such as Refining, LNG, City Gas Distribution etc. are also seeing some action. India is now surplus in refining capacity and aims to establish itself as a refining hub due to 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. Arvind Mahajan Executive Director and Head of Energy and Natural Resources Sector KPMG in India Moreover, the government is planning its first ever offer of shale gas exploration in 20, 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 KPMG Analysis

4 ACRONYMS USED E&P CBM DGH MT MMT MMSCMD MoPNG NELP NG PNGRB Exploration & Production Coal Bed Methane Directorate General of Hydrocarbons Metric Tonne Million Metric Tonnes Million Standard Cubic Metres Per Day Ministry of Petroleum and Natural Gas New Exploration Licensing Policy Natural Gas Petroleum and Natural Gas Regulatory Board

5 TABLE OF CONTENTS Overview of the Indian economy The Indian oil and gas market India s upstream sector Refining in India Gas transmission and distribution Coal bed methane Liquefied natural gas Shale gas Fuel retailing in India Overview of the Indian taxation regime Regulatory and tax regime for upstream sector

6 0 OVERVIEW OF THE INDIAN ECONOMY India booming India is gaining strategic importance globally owing to the impressive economic growth pattern and market attractiveness. After coming out successfully from the financial crisis, economy is set to demonstrate robust growth again with the GDP growth rate of around 9.7 percent for With a GDP 2 of USD.36 trillion, India is currently the world's fourth largest economy in Purchasing Power Parity (PPP). India GDP Growth Rates E Source: NCAER, IMF International Monetary Fund, World Economic Outlook, April Reserve bank of India, April 200 Supported by high rate of domestic saving and capital formation India s growth has been financed by a steady rise in corporate and household savings. Domestic savings have been the dominant source of national savings, where the rate of Gross Domestic Savings touches percent ( ), one of the highest among emerging economies. Growth in savings has also supported the surge in capital formation, which is indicated by a steady increase in the rate of Gross Domestic Rate of Capital Formation (GDCF) from percent in to percent in

7 02 THE INDIAN OIL AND GAS MARKET India is the world s fifth-biggest energy The oil and gas sector is dominated by stateconsumer and continues to grow rapidly. It controlled enterprises with ONGC the is the third-biggest global coal producer, but largest upstream-oriented oil company, has limited its supplies of oil. Oil accounts dominating the exploration and production for about 3 percent of India s total energy (E&P) segment and accounting for roughly consumption, with its share of the mix around three-quarters of the country s oil having fallen from 35 percent earlier this output. India s downstream segment is also decade. India s 5.80bn bbl of proven oil dominated by state-controlled entities, reserves (BP Statistical Review of World although private companies have increased Energy, June 2009) represents just 0.5 their market share. Indian Oil Corporation percent of the world s total, with Mumbai (IOC) is the largest state-controlled High being the biggest producing field. downstream company, operating 0 of India s average oil production (total liquids) in India s 7 refineries and controlling about 2008 was 766,000b/d. three-quarters of the domestic oil transportation network. In terms of gas, India currently accounts for 0.4 percent of global reserves and just over percent of production. While most of the developed gas is in Mumbai High, major discoveries by a number of domestic companies hold significant medium-to longterm potential, with Reliance Industries, state-controlled Oil & Natural Gas Corporation (ONGC) and Gujarat State Petroleum Corporation (GSPC) all confirming significant deepwater finds that are now under development or in early-stage production. BMI India Oil and Gas Report Q4 200 Oil 32% Gas 0% Indian Energy basket Hydro 5% Nuclear % Estimated Indian Energy basket Oil 25% Gas 20% Hydro 2% Nuclear 2% Coal 52% Coal 5% Source: BP statistical review of world energy 200

8 03 INDIA S UPSTREAM SECTOR Although the story of the Oil & Gas government introduced the NELP in 997- The weightage to the above three industry can be traced all the way back to 98, with an aim of encouraging private parameters has varied from one round to October 889 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 unexplored/poorly explored territories. Exploration activity, prior to The New Exploration Licensing Policy (NELP), was eight rounds of NELP, 239 productiondominated by public sector firms such as Oil and Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd. (OIL). The sector received a major boost in 974, when the massive Mumbai High fields were discovered off India's west coast. Even after three decades, these fields continue to be the mainstay of India's indigenous production. Realising that these fields would gradually deplete over time and no major discoveries were being brought into production, the and providing a level playing field to the public and private sector through allocating acreages on the basis of competitive bidding as opposed to a nomination basis of earlier. Companies are expected to bid on the following parameters: As on 30 June 200, the total investment made by Indian and foreign companies was around USD3.8 billion. After concluding sharing contracts (PSCs) have been 2 signed. The eighth round of the NELP was The Work Programme committed to be launched in April 2009 offering 70 blocks, undertaken Percentage of value of annual production sought to be allocated towards cost recovery Profit petroleum share offered to the government at various levels of Investment multiples. the highest number of exploration blocks ever. A total of 62 companies comprising 0 foreign and 52 Indian companies have made bids and 3 PSCs were signed with 20 companies in the NELP VIII. NELP VIII website 2 Notice Inviting Offers for NELP VIII, from NELP-VIII website 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 No. of blocks bid for No. of bids received No. of Blocks awarded

9 04 NELP IX NELP IX was announced in October 200 with various road shows being planned in major Indian and international cities by the government to attract private investment. Also, with an increased exploration activity in India post NELP, we are likely to witness increased demand for oil and gas allied services in India, particularly given the focus on deepwater blocks and frontier basins. As a result, Indian service providers will be scaling up their activities and capabilities, enhancing their fleet size and widen their portfolio by offering different specialised services and developing their manpower. Some of the local players might also aim to offer their services to other E&P (Exploration & Production) firms across the world e.g. Aban Lloyd. On the other hand, MNC players such as Baker Hughes, BJ Services, Schlumberger, Aker Kvaerner, etc. are likely to find that the market for their services in India continues to grow. Outlook for E&P activity in India Given the commencement of production from RIL's KG Basin fields, the commencement of Cairn India's production and the potential development of the discoveries announced by GSPC and ONGC, the E&P sector is poised to see considerable activity in the near future. This could mean an increased interest in exploring India's hydrocarbon potential by foreign players. However, the recent economic downturn as well as the perceived government intervention on freedom to market gas could serve as a dampener. On the other hand, the promise offered by certain acreages, particularly off India's east coast, means that the prospects for the growth of the upstream sector remains bright with an expected positive spin-off effect on the provision of off-shore services. The government has also shown positive intent in terms of monetising unconventional resources like shale gas and could be prepared to organise bid rounds as early as mid next year.

10 05 REFINING IN INDIA India, with its current capacity of around the small refineries in the North-east, 80 million tones per annum (mtpa) is which are land-locked and possess a subpoised to emerge as a major refining hub, optimal economic size. Similarly major with considerable capacity additions being technology upgrades are necessary to be planned over the next few years. Of a total of 20 refineries in India, public sector units have a capacity of 07.5 MMTPA while the private sector players comprising of RIL and Essar have a capacity of close to 72 MMTPA. Status of the sector The country has further large expansions planned and is aiming to emerge as a refining hub even as global refining markets have tightened with the closure of small refineries in North America and Europe mainly due to challenges in investing in cleaner fuels and high compliance costs. In addition, permits for Greenfield refineries are hard to obtain in these countries due to the environmental concerns. Therefore, capacity addition is primarily coming from emerging economies like India, China and some Middle Eastern countries. able to produce output from relatively lower grade crude which reduces sourcing costs thus increasing margins as well as meet new fuel specification standards. Capacity additions as well as Greenfield refineries announced by public and private sector players indicate that almost MMTPA of additional refining capacity will be added by bringing the total available capacity to nearly 240 MMTPA. In the medium term this surplus supply indicates that there may be reservations against making more investments in the refinery space till the time domestic demand catches up. 300 MMTPA 250 Capacity Outlook for refining sector Regardless of above, some players are mulling over setting up inland refineries close to demand centers thus reducing the cost of distribution (e.g. BPCL plans to set up a 2 mtpa refinery in Allahabad). This may result in substituting products of other refineries and hence creating pressure on the coastal refineries to look at exports. MoPNG 24 Many of the private sector refineries are focusing on the export market. As far as the PSU refineries are concerned, concerns have been expressed over the viability of

11 06 GAS TRANSMISSION AND DISTRIBUTION The transmission and distribution segment to construct four new cross country Iran-Pakistan-India pipeline of the natural gas sector remains relatively pipelines. Gujarat State Petronet Ltd. The IPI Gas Pipeline Project has been under-developed, but this is likely to change (GSPL), a GSPC Group company involved in conceived as a tripartite arrangement in the medium term. gas transmission arm also has an extensive between Iran, Pakistan and India, with the network of around 2400 Km in Gujarat,and volumes being divided between the two recently, PNGRB has completed the importing countries of India and Pakistan. Gas transmission bidding process for three new pipelines The pipeline is estimated to cost around too. The gas transmission domain in India has USD 7.5 billion and is expected to be been dominated by the GAIL India Limited. The existing pipeline capacity of ~220 Km in length. It operates the Hazira Vijaipur mmscmd is expected to increase to ~ 660 Although some progress was made, 2 Jagdishpur (HVJ), Dadri Vijaipur Pipeline mmscmd in the medium term. This several outstanding issues remained. (total 3452 Km long), and a few other expansion in infrastructure would lead to Issues around safe delivery of gas through pipelines, connecting the LNG terminal at better gas availability, better tapping of Pakistan and price of gas lead to the talks Dahej to Vijaipur and Uran and the power demand and thus in turn increase the being suspended in In April 200 plant at Dabhol to Panvel. natural gas demand. some progress was made when India 4 With the recent domestic gas finds in the proposed to discuss the pipeline with Iran. KG basin off the East coast of India the transmission of gas to the demand centres based in the west and north of the country has assumed greater importance. Reliance Gas Transportation Infrastructure Limited (RGTIL) has implemented the 385 Km East West Gas Pipeline to carry 80 mnscmd (million standard cubic metres per day ) of natural gas from Kakinada in Andhra Pradesh to Bharuch in Gujarat and traverses through the states of Karnataka and Maharashtra and it has further planned Transnational pipelines Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline The Asian Development Bank (ADB)-backed,680-km long pipeline is likely to connect the gas fields in Turkmenistan to India. The pipeline traverses through Afghanistan and Pakistan (including 45 km in Turkmenistan, 735 km in Afghanistan and 800 km in Pakistan upto the India border). It would supply 38 mmscmd of gas to India. RGTIL website, September PNGRB 3 Wikipedia, September 200 (Iran-Pakistan-India Pipeline) 4 Times of India, July 200 (IPI Pipeline: India to resume talks with Iran)

12 07 Myanmar-Bangladesh-India pipeline A,575 km long pipeline connecting the Shwe field in the A- block in Myanmar, in which both ONGC Videsh and GAIL own a stake, was considered to bring gas to India, while passing through Bangladesh. In February 200 Bangladesh lifted its opposition to a gas pipeline linking India and Myanmar and running through its territory, paving the way for the 5 establishment of a regional gas grid. City gas distribution The City Gas Distribution (CGD) space in India has been steadily increasing with many cities being added into the fold after New Delhi, Mumbai and others in Gujarat. The notification of Section 6 of the PNGRB Act in March 200 allowing PNGRB to grant licenses for CGD is likely to quicken the pace of rollout of CGD services in cities and geographical areas. The government is also playing its part. It has allocated 3.39 mmscmd of gas on firm and fall back basis from RIL s D-6 block in the 6 KG Basin. PNGRB has already completed two rounds of bidding for awarding licenses for city gas distribution for various cities. These licenses are awarded through an open competitive bidding process, with there being a level playing field for both domestic and foreign entities. PNGRB has also called for the third and the fourth round of bids for the states of Gujarat, Punjab, Haryana and West Bengal (Round 3) and Kerala, Andhra Pradesh, Maharashtra, Madhya Pradesh and Uttar Pradesh (Round 4). The CGD space is seeing bidding from not only the firms already in the gas transportation and distribution business but also other firms which would like to diversify into this sector. EPC contractors, engineering consultants, foreign gas majors, manufacturing firms, infrastructure players and others have shown interest in this sector. In addition to the above, stricter environmental norms around urban centres and increasing urbanisation is likely to increase the demand for piped natural gas as a clean and efficient fuel. Going forward more cities are likely to have access to local gas distribution networks. Outlook for transformation and distribution The main driver for the development of gas transmission and CGD shall be the availability of requisite volumes of gas. With the development of RIL's KG Basin and other fields, the opportunity could be available; what now matters is whether the CGD license-holders can obtain gas supplies and develop gas distribution infrastructure. 5 Livemint.com, February 200 ( Bangladesh agrees to trination gas pipeline ) 6 Infraline and Secondary Research

13 08 COAL BED METHANE In order to exploit India's vast coal reserves and the methane gas trapped in coal seams, the government formulated a Policy for Coal Bed Methane (CBM) in 997. The MoPNG (Ministry of Petroleum and Natural Gas) was to be the administrative ministry with the DGH (Directorate General of Hydrocarbons) as the implementing agency and accordingly, a MoU was signed between the MoPNG and Ministry of Coal in September 997. The first round of CBM was held in 200, on the lines of NELP, with competitive bidding deciding the award of acreages. So far four rounds of bidding have been completed and 33 blocks have been awarded. The potential of CBM as a primary energy resource in India is being established and increasingly efforts are being made to commercialise the same. The proven CBM reserves in India are equivalent to the Oil and Natural gas reserves in India. At USD 4.2/mmbtu it translates to a USD 30 billion opportunity. Major Terms and conditions offered to the This sector has attracted public sector bidders for Round four enterprises ONGC and GAIL, domestic private sector companies Great Eastern Fiscal stability provision in the contract Energy Corporation (GEECL), Reliance No govt. participating interest Energy Ltd, Reliance Natural Resources Ltd, No up-front payment Essar and foreign players Arrow Energy, 2 BP Exploration, GeoPetrol etc. Some of the No signature bonus required companies have also entered into No customs duty on imports commercial long term Gas Sale Agreement. Freedom to sell gas domestically at The policy regime is also favourable to market-determined rates. exploration and commercialisation of the CBM opportunity in India Btoe Coal Lignite Oil Gas CBM Integrated Energy Policy, Report of Expert Committee, Planning Commission, August, 2006 pipeline ) 2 KPMG Research

14 09 LIQUEFIED NATURAL GAS Liquefied Natural Gas (LNG) trade has The LNG imports in India in were operational LNG terminals both located in picked up significantly in recent years estimated at 30 mmscmd. This constituted Gujarat, one each in Dahej and Hazira, with 2 owing to increasing demand, declining about 29 percent of total natural gas supply total capacity of 2.5 MTPA. domestic natural gas resources in gas- in India in Out of total LNG Besides the existing LNG terminals at consuming countries and efforts of gas- imports, 63 percent was imported on firm Dahej and Hazira and their expansion plans, producing countries to commercialise their contract basis while 37 percent was few other LNG terminals of combined resources. The LNG market has also seen imported on the spot basis. capacity of 2 MTPA are planned to be key developments in the past few years The historic demand-supply gap of natural added in India over the next few years. including declining capital costs of LNG gas has provided an impetus in setting up liquefaction plants and more flexibility in LNG terminals. Currently India has two tenure and pricing of LNG Contracts Sr. No. Terminal Promoter Capacity (MTPA) Expected timelines ) Dabhol Ratnagiri Gas and Power Projects Ltd ) Kochi PLL 2.5 in Phase I To be increased to 5 beyond 202 3) Mundra Adani Group and GSPC ) Ennore IOCL ) Mangalore ONGC Overall, India is expected to have LNG liquification, shipping and re-gassification. segments like Industrial consumers, terminals of ~20 MTPA capacity by 202 This leads to higher landed price for LNG to Petrochemical plants and CGD. The and ~38.5 MTPA capacity once the consumers than most of the alternative proposed pooled pricing mechanism may operations in all the proposed terminals fuels. also help in boosting the LNG demand in commence. Acceptability of natural gas as a fuel is dependent on its price vis-à-vis alternate fuels. LNG is more expensive than domestic gas due to the additional cost of One of the key drivers to improve LNG demand in domestic market will be India's ability to source long term LNG at competitive prices. At current prices, LNG may be cost efficient to few consumer other sectors as well. Crisil 2 Hazira and Dahej Terminal Website

15 0 A NOTE ON SHALE GAS 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 shale, which are fine-grained sedimentary Canada, Australia, China, Sweden, exploit the potential of shale gas in the rocks formed by compaction of clay and Hungary, Germany, UK and India. country the following needs to be other minerals. The shale formations act as both reservoir as well as source rock. Shale formations have low matrix permeability and to produce gas in commercial quantities it requires fractures to improve the permeability. Similarly, horizontal drilling is often used with shale gas to create maximum surface area in contact with the shale and hence improve gas recovery. The interest in shale gas really picked up during when the Henry Hub prices were at an all time high. Over the last decade, the costs of drilling and fracturing techniques have come down substantially and now shale gas is able to compete even at prevailing lower gas prices. This has resulted in huge negative impact on In the Indian context, although more expedited: studies are required to assess the true Technical assessment of shale deposits potential of our geological basins, and identification of possible gas prospects of large shale deposits exists producing areas across the Cambay basin, Assam Arakan basin, KG basin and Cauvery basin. India's current policy on exploration doesn't cover unconventional resources and hence a new policy especially for shale gas may be required in the future. The fiscal and contractual regime for such exploration is also something the government needs to look at as the option could be between a royalty regime (like in US) and a Production Sharing Contracts (conventional oil and gas resources in India). The government plans to launch the first round of Shale gas imported LNG in the US and severe under bidding in mid 20. utilisation of the LNG regasification In anticipation of the above, some of the terminals. major players have taken a keen interest in This whole cycle of developing cost shale gas. Reliance has already acquired efficient technologies to bring down the stakes in Marcellus shale and Eagle Ford cost of monetising unconventional acreage in US. ONGC is carrying out a pilot resources in the US has captured the project in the Damodar basin, which is the Comprehensive policy on shale gas exploration, development and production Participation from firms with technology and infrastructure to bring down costs of development and production. Shale gas definitely is an opportunity in the near future and, if large resource bases are established, it could be a big boost to a country which needs energy security for a fast developing economy. Oil and Gas journal 200

16 FUEL RETAILING IN INDIA Indian private sector was not allowed in the effects on the economy given that it is the market, they have found it difficult to retailing of fuel up to Subsequently, main fuel for the movement of goods in sustain operations given the price the government decided to open the sector India. regulation in place. to private participation subject to certain restrictions. The government, with its aim of insulating the Indian consumer from volatility of crude oil prices in the international markets, has been subsidising end-user prices of HSD, MS, SKO and LPG. This has translated into a large subsidy being given to the domestic consumer, with the burden being shared between the oil marketing firms, the government (which has been issuing oil bonds to the PSU marketers to compensate them for their under-recoveries) and the upstream PSU firms of ONGC and OIL. In June 200, a major step was taken in the area of moving towards market determined pricing. The government through its Empowered Group of Ministers (EGoM) led by the Finance Minister of India, Pranab Mukherjee decided to give a free hand to oil companies to determine petrol (MS) prices in line with the market price following the Kirit Parikh Committee recommendations. Diesel prices, however, were not allowed the same freedom, arguably, due to the significant inflationary In addition to this, the government also However, there are indications that private announced a hike in prices of Petrol (MS), sector interest has renewed in this space. Diesel (HSD), Kerosene and LPG. Petrol Recent media reports have shown that currently accounts for only a tenth of all Shell India, the domestic arm of Royal petroleum products consumed where as Dutch Shell Plc, plans to have 200 fuel diesel accounts for nearly one-third of all outlets by the end of FY products consumed within India. The Indian fuel market does hold some Although this is a commendatory step, promise, more so if the market forces are even after this decision, the government allowed free reign as indicated by recent and the public sector oil companies are measures. Another opportunity lies in expected to bear an estimated under- exploiting the potential of non-fuel retail at recovery of about INR 53,000 crore as the existing fuel outlets, particularly given opposed to INR 74,000 crore in revenues in the prime location of fuel outlets at metros fiscal. Convenience shopping and the establishment of ATMs provide an opportunity. Fuel retailing outlets with such Outlook for fuel retaling additional facilities are also likely to invest in modernisation and branding initiatives, The fuel retail market in India continues to with 'Club HP' of HPCL being one such be dominated by PSU firms with Indian Oil initiative. boasting of an approximately 50 percent market share, while the other public sector fuel marketers HPCL and BPCL have five and approximately 25 percent market share each. Although the private sector firms of Business Standard RIL, Essar and Shell have entered the

17 2 OVERVIEW OF THE INDIAN TAXATION SYSTEM 4 Direct tax Scheme of taxation Minimum alternate tax (MAT) India has a federal level tax structure Taxation of a person depends upon its MAT is applicable to a company, if tax governed by the provisions of the Income legal status (a person being an payable by the company on its total Tax Act, 96. It has a network of treaties individual, firm, company, etc.) and income, as computed under the normal with over 90 countries across the globe to residential status provisions, is less than 8 percent of its avoid double taxation of income. In wake of book profits Indian tax system recognises an entity economic reforms, the taxation system has level taxation. In computing 'book profits' for MAT undergone tremendous changes in the past purposes, certain positive and negative ten years. The tax rates have been adjustments are made to the net profit rationalised and compared favourably with Corporate income-tax as shown in the books of account many other countries. Further, over the For Indian income tax purposes, a Carry forward and set off of MAT is period of time, the tax laws have also been corporation income comprises income available for 0 subsequent years. simplified to ensure better compliances. from business or property, capital gains The brief overview of India taxation system realised on any disposition of is outlined below: corporation s capital assets and residual Scope of total income A resident in India is liable to tax on its world wide income irrespective of the 2 income arising from non-business income. source of income Domestic companies are subject to tax A non resident in India is liable to tax on income received or deemed to be received in India or any income accruing Corporate tax rate 3 at the rate of 30 percent whereas foreign companies are subject to tax at the rate of 40 percent or arising or deemed to be accruing or The tax rate is enhanced by surcharge & arising in India. education cess as may be applicable to the tax payer. Indian Income-tax Act, 96 2 Section 5 of Indian Income-tax Act, 96 3 Finance Act, Section 5JB of Indian Income-tax Act, 96

18 3 Dividend distribution tax (DDT) 5 DDT is levied at the rate of percent on the amount of dividend declared, distributed or paid by an Indian company DDT is payable in addition to regular corporate income tax. Corporate tax rates at glance 6 Rates applicable for the financial year are as follows: Resources Domestic Corporation Foreign Corporation Corporate tax rate 33.22%* 42.23%* Transfer pricing regulations 7 India has a Transfer Pricing regime under which international transactions between associated enterprises are required to be computed with regard to their arm's length price. These regulations also apply to cost sharing arrangements Transfer Pricing Regulations prescribes the information and documents which are required to be maintained by every person who has entered into an international transaction with its associated enterprises. Other features 8 Loss carry forward permitted upto eight years, however, depreciation can be carried forward indefinitely No tax on remittance of profits by foreign companies (project office/branch office to 9 head office). Minimum Alternate tax 9.93%* %* Dividend Distribution tax 6.609% N.A. Branch Profit Tax NA NA *In case net income exceeds 0 million Taxation of individuals 0 Taxability of an individual is dependent on his/her residential status The residential status of an individual is determined on the basis of his/her physical presence in India Based on the satisfaction of certain conditions, an individual could be: - Resident and ordinarily resident (ROR) - Resident but not ordinarily resident (RNOR) - Non-resident (NR) Income of non-resident is generally computed in the same manner as the resident. Taxability Worldwide income Indian income Residential Status Received in India Received outside India Received in India Received outside India ROR RNOR* NR * Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India Tax rates applicable for the financial year Taxable Income Rate percent * In the case of resident woman below the age of 65 Upto 60000* Nil years the basic exemption limit is 90,000 60,00-500,000 0% * In case of resident individual of the age of 65 or above the basic exemption limit is 240, ,00-800,000 20% Above 800,00 30% * Surcharge is not applicable * Education cess is applicable at the rate of 3 percent on income tax 5 Section 5-O of Indian Income-tax Act, 96 6 Finance Act Chapter X of Indian Income-tax Act, 96 8 Section 72 and Section 32 of Indian Income-tax Act, 96 9 Indian Income-tax Act, 96 and the Exchange Control / Regulatory provisions 0Section 6 of Indian Income-tax Act, 96 Finance Act 200

19 4 Service tax VAT legislation Custom duty Key indirect taxes 2 Service tax is applicable on identified Since its inception in April 2005, VAT Custom Duty is payable on import of services provided or received in India has been implemented in almost all goods/ equipments into India Indian States and Union Territories with Current scope of taxable services is It is levied as per rates specified in the exception of Andaman and Nicobar and very wide and covers a vast majority of Customs Tariff laws depending upon the Lakshadweep service categories prescribed HSN classification VAT is a multi-point taxation system Mining, Survey & exploration of Peak rate of Customs Duty is 0 entailing a VAT at every point of sale and minerals, Transportation,, scientific and percent. sale includes transfer of right to use technical consultancy, construction, IPR, goods and transfer of property in goods insurance, manpower supply, in the course of execution of works telecommunication, online database contracts Excise duty Generally levied at the rate of 0 access, training, business auxiliary services are some of the key categories Dealers are allowed to avail credit of percent plus education cess of 3 input VAT paid on inputs and capital Service tax is applicable at 0.30 goods for set-off against output VAT/ percent on manufacture of goods percent CST Payable at the time of removal of goods from factory gate 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 prescribed rules 4percent to 5percent for different seller is available as input credit and may Import of service liable to service tax in categories of goods. Also, some be utilized to set-off the buyer s output hands of recipient in India - import category of goods have been declared Excise duty/ Service tax liability determined as per prescribed rules. exempt from levy of State VAT Interstate sale of goods is subject to a CST levy and currently applicable at 2% subject to conditions. CST is a noncreditable levy. 2Comprises of relevant provisions of Finance Act, 994, The Customs Act, 962 and State-specific VAT legislations, as amended from time to time, the rules and regulations thereunder

20 5 REGULATORY AND TAX REGIME FOR UPSTREAM SECTOR Regulatory and tax regime for Income tax Special provision upstream sector 3 India also provides a customized tax Specific allowances [in addition or in lieu India also provides a customized tax regime for the upstream sector and non- of allowances under normal provisions] regime for the upstream sector and nonresident service providers in relation to as specified in the PSC are permitted. resident service providers in relation to Exploration and Production operations. The specific allowances relate to: Exploration & Production operations. A brief overview of the regulatory and tax regime for upstream sector is outlined below: Regulatory FDI up-to 00 percent permitted under automatic route (i.e. without approval) in exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products, actual trading and marketing of petroleum products, market study and formulation. There is a special mechanism for taxation of income of companies which have entered into a Production Sharing Contract (PSC) with the Government of India for undertaking exploration and production activities. As per these provisions, taxable profits of a tax payer, who has entered into a PSC with the Government for participation in the business of prospecting, exploration or production of mineral oil, to be determined in accordance with the special provisions contained in the PSC This will however be subject to the The provisions of the domestic tax law existing sectoral policy A foreign company can setup a project office or an Indian company for undertaking upstream operations in India. are deemed to be modified to that extent. PSC - Expenditure by way of infructuous or abortive exploration - Expenditure incurred for exploration or drilling activities or services or assets used for these activities. Hundred percent deduction of exploration and drilling expenses (both capital and revenue allowed) and other expenses (including production expenditure) allowed under normal provisions of the Income-tax Act 3Comprises of Foreign Direct Investment Guidelines, Section 42 of Indian Income-tax Act, 96, Article 7 of PSC and relevant indirect tax provisions

21 6 6 PSC also lay down the manner of Taxation of service providers service, in relation to location or deduction as: exploration of deposits of mineral, oil There is a special tax regime for nonor 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 6 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 0 years. Ten percent of the gross receipts and earth moving and demolition No ring fencing of expenditure All unsuccessful exploration costs in other contract areas can be set off against deemed to be business income resulting in an effective tax rate of percent of gross revenues (rate as applicable for financial year ) Mining services (effective from June 2007) - Introduced to tax 'any service provided in relation to mining of minerals, oil & income in the contract area in which gas The tax payer has an option to claim commercial production has commenced. lower profits, subject to following Commercial or industrial construction 4 Tax holiday Hundred percent tax holiday available in respect of profits earned from production of mineral oils. Hundred percent tax holiday available in respect of profits earned from conditions: - Keep/maintain books/documents - Get accounts tax audited - Furnish tax audit report - Compulsory scrutiny assessment. 7 production of natural gas from the Custom duty blocks licensed under NELP VIII and Subject to certain procedures and CBM IV conditions, Custom Duty exemption is Tax holiday is available for seven available for: consecutive years from the year of Equipments etc. imported for exclusive commencement of commercial use in petroleum operations production. Specified goods required in connection However, companies availing deduction with petroleum operations under under these provisions would still be specific exemption notification liable to pay MAT on 'book profits'. Deductibility of site restoration fund Special deduction is available for contribution to site restoration fund Parts and raw materials for manufacture of goods for the purpose of off-shore petroleum operations undertaken under specified contracts. Amount of deduction being lower of: Relevant Service Tax Category - Sum deposited either in a special Survey and exploration of mineral, oil & account or in a "Site Restoration gas services (effective from 0 Account" or September 2004) 5 Service tax - Twenty percent of the profits - Includes geological, geophysical or calculated in the prescribed manner. other prospecting, surface and 8 subsurface surveying or map making - Includes construction of well head and civil works at site. Service tax also leviable on the following services: - Dredging services - Technical testing and analysis - Pipeline transportation - Cleaning (including services for tank, reservoir of commercial or industrial building and premise). Excise duty Equipment and machinery procured for exploration and production operations are eligible for deemed export benefits which include Excise duty drawback/ exemption / advance authorization. 4Section 80IB(9) of Indian Income-tax Act, 96 5Section 33ABA of Indian Income-tax Act, 96 6Section 44BB of Indian Income-tax Act, 96 7Custom Act, 962 and the rules and regulations thereunder 8The Finance Act, 994 and the rules and regulations thereunder

22 7 Proposed legisation - Direct Tax Code Bill 200 Provisions related to Controlled Foreign In an attempt to simplify the direct tax provisions, the government proposes to replace the existing tax regime with the new Direct Tax Code Bill, 200 (DTC). The DTC is likely to be effective from April 200 and the key features are as under: Income has been proposed to be classified into two broad group (i) Income from Ordinary Sources and (ii) Income from Special Sources. Corporations (CFC) have been introduced and it gets attracted when a foreign company is controlled by resident tax payers. The tax rate for companies (domestic as substance. well as foreign companies ) have been pegged at 30 percent. In addition, Income of non-resident service providers engaged in the business of providing services or facilities or supplying plant and machinery on hire in The DTC provides for General Anti- connection with prospecting for, or Avoidance Rules (GAAR) provisions which empower the revenue authorities with sweeping powers to declare any arrangement impermissible if entered with the objective of obtaining a tax benefit and lacks commercial foreign companies are also liable to a 5 Tax regime for upstream sector percent branch profit tax (BPT) on post tax income DTC has proposed specific tax regime for the upstream sector (Schedule Eleventh) MAT applicable to a companies, if tax and non-resident service providers extraction or production of, mineral oils and mineral oil is classified as Special Source income 4 percent of the gross receipts deemed to be business income resulting in an effective tax rate of 4.2 percent of gross revenues (at tax rate of 30 percent) The tax payer has an option to claim lower profits, subject to following conditions: - Keep/maintain books/documents payable by the company on its total (Schedule Fourteenth) in relation to - Get accounts tax audited income, as computed under the normal Exploration & Production operations. Key provisions, is less than 20 percent of its features of the DTC provisions are as under - Furnish tax audit report book profits. Carry forward and set off Income from business of exploration - Compulsory scrutiny assessment. of MAT is available for 5 subsequent and production of mineral oil is years classified as Special Source income DDT is levied at the rate of 5 percent Specific computation mechanism on the amount of dividend declared, prescribed in Schedule Eleventh distributed or paid by an Indian company Corporate tax rates at a glance: Resources Domestic Corporation Foreign Corporation Corporate tax rate 30% 30% Minimum Alternate tax Dividend Distribution tax 20% 20% 5% N.A. Branch Profits Tax N.A. 5% Deduction for capital expenditure and revenue expenditure, infructuous and abortive expenditure allowed Deduction for deposit made to Site Restoration Fund Profit-linked deductions are replaced with investment based incentives are introduced DTC provides for grandfathering of tax holiday available to oil and gas undertaking which are eligible for such benefit under the present tax regime. Taxation of service providers

23 8 Proposed legisation - Goods and services tax The Finance Minister while presenting the Union Budget 200- expressed the Government's 'earnest endeavour' to roll out GST on April 20, however, due to lack of consensus between States and Centre, the said deadline Although, the precise impact of GST on Oil and Gas sector needs to be analyzed in light of the GST provisions, in due course of time, the following is the likely impact on the same, based on the existing information in the public domain: may be extended Likely increase/ change in tax rates of GST would be a destination-based tax goods and services with a proposed levied on consumption, applicable on a GST rate of 20/6 percent comprehensive base of both goods and Stock transfers are likely to be taxable services under GST at par with inter-state GST in India is proposed to be a dual supplies levy (i.e. Centre and State level) and is Fate of existing Customs/ Excise duty likely to subsume most, if not all, of the exemptions for equipment unclear in current Central and State levies like light of overall intent of GST Excise duty, VAT/ CST, Service tax, etc. Imports to be brought under the GST Free flow of credits are proposed under net for the first time GST regime (i.e., input taxes paid on Concessional CST rate (2 percent) on procurement of goods and services can inter-state purchases likely to be be set off against output taxes payable discontinued on supply/ provision of goods/ services) Whether petroleum products would be under GST regime to cover all the offincluded in GST ambit is still uncertain. Key areas of relevance under the proposed GST regime The definition of 'India' may be widened shore supply of goods and services within the Exclusive Economic Zones.

24 9 Appendix I: Map of Existing and Proposed Gas Pipelines Source: PNGRB

25 20 Appendix II: Existing and Proposed LNG Terminals Dahej I&II (0mtpa) 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 2 Expected to come up after FY 2 Existing LNG Terminal Proposed LNG Terminal Source: KPMG Analysis

26 2 ABOUT KPMG IN INDIA 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 46 countries and have 40,000 Cooperative ( KPMG International. ) internationally trained. We strive to people working in member firms was established in September 993. provide rapid, performance-based, around the world. The independent As members of a cohesive business industry-focused and technologymember 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.

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28 Contact us Vikram Utamsingh Head - Markets T: E: vutamsingh@kpmg.com Arvind Mahajan Head - Energy and Natural Resources T: E: arvindmahajan@kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 200 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. Printed in India