Petroleum in India

Eduardo Bolio
Marcel Brinkman
Kuldeep Jain
Joris Morbée
Yermolai Solzhenitsyn

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June 2007

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Key Messages
Like China, India is a large, high-growth economy with high need for crude imports. Indian upstream and downstream
are dominated by different NOCs, with NOC ONGC and private Reliance gradually building a presence along the
chain. This document describes the background of the country, outlines the overall industry structure, and reviews
the upstream, refining, and retail segments in detail

Upstream: India’s hydrocarbon reserves and production are dominated by a few players, are mostly offshore, and
small on a global scale, although large offshore gas discoveries have been made recently:
• Top players in developed oil assets are the NOCs ONGC and OIL. The most important production is in the Bombay
Offshore basin, but Rajasthan is the only growing basin in oil. ONGC wants to remain the dominant Indian E&P
company, and is expanding vertically and internationally
• Top players in gas are Reliance and ONGC, which both have made numerous discoveries in KG basin since 2002.
While Reliance, being a good project executor, is set to develop its finds on its own, ONGC may be more open to
share equity. 2012 gas production makes LNG import the marginal supplier, with no need for pipeline gas imports.
Indian gas distribution infrastructure is owned by state-owned GAIL, but new capacity is being developed by others
• Smaller entrants like Niko, Focus, and especially Cairn have made significant discoveries. The examples of Cairn
and BG show that foreign players can be successful, although it takes time
• Undiscovered reserves in India are mainly in offshore gas, which is also highlighted by recent finds. The NELP
licensing rounds have succeeded in ramping up exploration, but have had limited success in attracting foreigners.
The fiscal regime (based on PSCs) is generous compared to exporting countries, but onerous compared to other
importers
• Of the unconventional plays, Coal Bed Methane is most interesting
Refining: Strong product demand growth is expected in India, but refinery capacity is expected to overshoot. Current
high margins, resulting from good industry conduct, may break down given that all players are adding capacity, and
that room for additional exports may be limited after 2010. Nevertheless, local opportunities in refining may exist due
to regional supply-demand imbalances

Retail: The retail market is growing given car ownership and road infrastructure development. As government
informally controls NOCs' end-user prices, retail margins are squeezed when crude prices rise. However, entry
barriers make the retail market potentially attractive in the long run
1
Contents

• General Overview
• Upstream

• Refining
• Retail

2
India Lags China in Size and Growth of the Economy, but Is
Similar in Many Respects
Macroeconomics India has a
• Total population (2006) • 1.31bn • 1.10bn significantly smaller
• GDP (2006) • $2.5tn • $0.8tn economy than China,
• Real GDP growth (2005 to 2010) • 6.9% • 6.0% but grows almost as
fast
Oil supply and demand
• Oil consumption (2005/2004) • 6,534 kb/d • 2,450 kb/d India imports
• Oil production (2005) • 3,631 kb/d • 785 kb/d relatively high
• Share of top two players in oil production• 85% • 94% amounts of crude
• % of crude demand imported (2005) • 49% • 70% and has little local
production
Refining and retail
• Total refining capacity • 6,587 kb/d • 2,800 kb/d
• Share of top two players in refining • ~90% • ~70% India has potentially
• Gross margin in refining (2005) • ~$3/bbl • ~ $4-7/bbl higher margins in
• Number of cars (2005) • 13.2mn • 8.0mn refining, but volatile
• Car density (per capita; 2005) • 10 per 1,000 • 7 per 1,000 retail margins
• Products price regulation (Yes/No) • Yes • Informal
• Gross margin in retail (2005) • $1.6-3.2/bbl • $0-5/bbl
• Wholesale margin (2005) • $7/bbl • N/A

IOC presence
• IOC’s share of refining sector • <1% • ~0% Foreign oil
• IOC’s share of retail stations • ~3% • ~0% companies have had
• Partnership requirements • Partnership with • Partnership limited success in
NOC with local player both countries
Source: Team analysis 3
India Is a Large, High-Growth Economy, with Relatively High Energy Intensity
India has been among the fastest growing economies of the world
over the last two decades
GDP Constant Prices, CAGR, %

1980-90
10.1
9.3 1990-00

Energy intensity against nominal GDP in Asia and US, 2002

Thousand tons of oil equivalent per $ billion GDP (nominal)
5.8 5.6

3.2 3.2 2.7

2.6 2.2 China 440
1.9
India 350
Thailand 350
China India Brazil U.S. U.K. Malaysia 310
Indonesia 295

India has a robust future growth position – third largest economy Korea 220
in the world by 2032 Philippine 180
GDP in $, trillions
Singapore 160
CAGR Australia 130
FY 2005 (E) FY 2032 (E) %
New Zealand 124
U.S. 11.7 U.S. 20.8 2.2 U.S. 120
Japan 69
Japan 4.4 China 14.3 8.2

Germany 2.0 India 6.1 9.0

China 1.7 Japan 6.0 1.2

India 0.6 Germany 2.7 1.1

Sources: World Development Indicators; Goldman Sachs, Dreaming with the BRICs: The path to 2050; IEA; UBS estimates 4
 Tier-1 city
India Is Four Different Countries
Eastern region (Kolkatta) Tier-2 city
Northern region (Delhi) • Tier-1 cities 1
• Tier-2 cities 0
• Tier-1 cities 1 • Annual income per 296
• Tier-2 cities 5 capita 2003-2004
• Annual income 417 ($)
Chandigarh
per capita 2003- • Households (mn) 50.7 • Even though
2004 ($) Ludhiana • % of total income 18.1
Delhi the North has
• Households 64.9 • GDP growth (2001- 7.0% the largest
(mn) 04)
Jaipur population,
• % of total 27.3 Lucknow
the West has
income Kanpur
overtaken it in
• GDP growth 4.9%
Ahmedabad terms of
(2001-04) Bhopal
Indore share of total
Baroda Kolkatta income
Western region (Mumbai) Surat Nagpur
Southern region • The West is
Nashik
• Tier-1 cities 3 Mumbai (Chennai) the most
• Tier-2 cities 6 Pune Hyderabad affluent with
• Annual income 594 Vizag • Tier-1 cities 3 the highest
per capita 2003- • Tier-2 cities 6 per capita
2004 ($)
Vijaywada • Annual income 553 income. It is
• Households Bangalore per capita 2003- also the
40.6
(mn) 2004 ($) fastest
• % of total 28.9 Chennai • Households 44.5 growing
income Coimbatore (mn)
• GDP growth 8.6% Madurai • % of total 25.7
(2001-04) income
• GDP growth 5.4%
Sources: NCAER, IRS, Census, CSO (2001-04) 5
 The Middle Class Is Growing Fast and Spending More, a Young Population Will
Propel Growth Further

A burgeoning middle class Increased consumer spend Youngest population among

Number of households* 1995 2004 major economies
(population), million Earnings Youth (1-14 yrs) as percent of
1995-96 2006-07(E) 386 567
(Real GDP/cap, the country’s total population
$)
“Rich:” > India 32
$18,000** 1 5 Income tax rate 50+ 30
(%)
China 23
“Consuming Consumer loan 15 8
class:” $4,000- 32 76 rates
U.S. 21
$18,000**
(%)
Germany 15
“Climbers:” 54 84 Consumer 250 350
$2,000-$4,000** spend per capita Japan 14
($)

• India consumer spend to rise 8% p.a.,

faster than U.S., U.K., Japan and China
• 7mn-8mn households entering the
“climbers” every year
* Average size of a household 5.8 people
** Annual income at PPP levels (PPP=Purchasing Power Parity)
Sources: WEFA-WMM; CMIE; CSO; EIU; SSKI report; team analysis 6
India Has a Significant Demand for Future Crude Imports
Million barrels per day CAGR
2005-2015

3.6 3.9%

3.0
2.6 2.5
2.4 2.4
Consumption 2.3 2.3
2.9 4.7%
2.2
Net import 1.7 1.8 1.9 1.8
1.6 1.6

Production 1.4%
0.6 0.6 0.7 0.7 0.7 0.7 0.9 0.8

2000 01 02 03 04 2005 2010E 2015E

% imported 71% 72% 72% 73% 73% 73% 71% 79%

• Strong demand growth expected in next ten years

• Flat domestic production far from sufficient to cover demand
• Import to make up almost 80% of demand by 2015
Sources: FACTS 06 Fall; BP; EnergyFiles; Wood Mackenzie 7
India Has a Strong Desire to Diversify Its Crude Supply ESTIMATES

India crude oil import mix

million b/d
Total = 1.7
• India is dependent on
imported crude
(especially from the
Middle East), but
geographical situation is
Middle East 68% not suited for increased
diversification

• Indian companies
diversify their supply
base across the world
Africa* 19% (e.g., Sudan, Iran, Libya,
Cuba, Kazakhstan) to
Others** 13% manage the risk

2005

* Nigeria, Angola, Egypt

** Mainly Malaysia, Indonesia, and Mexico
Sources: FACTS; IEA; Energyfiles; team analysis 8
Indian Upstream and Downstream Are Dominated by Different ESTIMATES

NOCs, While Private Reliance Is Building a Presence on the Chain

Market shares

Year Exploration Oil Exploration Gas

2006 Refining Retail
(Oil) production (Gas) production

Volume 4476 708 2781 1358 5497 484

mmbbl remaining kb/d kb/d kb/d gasoline mmboe remaining kboe/d
2P reserves distillation capacity & diesel 2P reserves

ONGC: 8%
IOC: 31%
ONGC: 48%
IOC: 42%
ONGC: 75% ONGC: 73%
ONGC: 81% BPCL: 23%
OIL: 8%
BPCL: 16%
HPCL: 19%
HPCL: 10% Reliance: 37%
Reliance: 6% OIL: 7%
OIL: 14% Other: 3% Reliance: 4%
Reliance: 1% OIL: 10% Reliance: 23%Product export: 18%
Cairn: 8% Reliance: 2% Others: 10%
Others: 3% Others: 10% Others: 7%

Additionally, ~1700 kb/d Additionally, ~900 kboe/d

of oil is imported of gas is imported

Sources: Wood Mackenzie; FACTS; annual reports; press search 9

National Oil Companies Are Profitable and Have Ambitious Future Plans

ONGC OIL IOC BPCL HPCL

• Upstream NOC • Upstream NOC • Downstream focus – • Retail focus – with • Refining – retail focus
Current 50% in retail (10,000 25%-30% share of with 5,950 outlets and
position sites) and refining retail (5850 outlets) 20%-25% share

• Focused on upstream • Focused on E&P, • Investing to retain • Strong focused • Strong focused
Future – 90% of $2bn along three axes: pre-eminent position downstream player downstream player
strategy capex in upstream – Increase in retailing, 1,000 – Retail expansion – Planning to add
assets exploration and outlets planned in by 600 outlets 800 outlets
2005
• Plans to forward production in the – Potential – $2bn investment
integrate into R&M existing area • Upstream ambitions investment in new planned for nine
and LNG – Increase in acreage • Extensive expansion six mtpa refinery in mtpa refinery in
for exploration plans in petrochems Central India North India
through competitive – Integrated PTA/Px • Considered best • Plans foray into LNG
bidding both in plan by 2005 managed
India as well as – Five mtpa plant at
– Evaluating $4bn downstream NOC $500mn
overseas (arising from Shell
petrochem refinery
– Acquisition of facility at Paradip lineage)
producing (by 2008)
properties overseas

• Sales • $11bn • $0.13bn • $32bn • $13bn • $11bn

Ownership • EBITDA • $3.7bn • $0.07bn • $2.6bn • $0.7bn • $0.7bn
and financials
• GOI stake • 86% • 98% • 66% • 66% • 51%
• Market cap • $26bn • - • $12.7bn • $2.9bn • $2.7bn
• ROCE* • 38% • tbd • 42% • 41% • 38%

* ROCE from Prowess financial database and annual reports, these are exceptionally high because the assets are old and depreciated
Sources: Expert interviews; press clippings; annual reports 10
India Has Multiple Private Players

RIL ESSAR Cairn

• Integrated petrochemical • Multi-business group • Independent, public oil

Current player with large refinery trying to complete large and gas exploration and
position and emerging retail refinery and build retail production company
presence business based in Edinburgh,
Scotland
• Focused on refining and • Downstream focus • Upstream focus
Future petrochem – Has struggled to set establish commercial
strategy • Downstream up a 12mn ton refinery reserves from strategic
(70% complete) in an positions in high-
– Largest refinery in India
over-supplied market; potential exploration
with 33mon ton capacity
expected to be plays
(projected expansion to
nearly double) commissioned in 2007 • Geographic focus on
– Currently has 150 South Asia, where the
– Aggressively building retail
stations, plans to Cairn holds material
presence (has ~1200 sites
expand to 1,500 fuel exploration and
in place and licence for
retailing stations production positions in
additional ~4600)
both west and east India
• Building presence in and in Bangladesh
upstream, mainly in KG-basin
– Discovered 11 TCF
Dhirubhai field off the east
coast in 2002
– JV with BGL and ONGC
for PMT field

• Sales • $20bn • N.A. • $0.262bn

Financials • EBITDA • $3bn • N.A. • $0.168bn
• Investment • $6 bn • $2.5bn • $0.165bn
• Market cap • $17bn • $0.3bn • $4.9bn
• ROCE • 16%* • N.A. • 8%

* ROCE lower because of substantial Telecom investments through Reliance Infocomm

Sources: Expert interviews; press clippings; annual reports; company Web sites 11
IOCs Are Trying to Gain a Foothold
Exxon Mobil/Total/Saudi
BP Shell Aramco/Petronas/BG

• Integrated oil company with • Trying to strengthen several • BG has invested nearly
Current vertically integrated operations
businesses organically $2bn, other international
position including upstream operations,
players beginning to show
refining and marketing. One of the
interest
largest lubricants companies in
India (through its subsidiary,
Castrol)
• Focused on exploration, solar power, • Trying to play across the • Exxon-Mobil rumored to
Future and bio-fuels value chain in gas, fuel take stake in Reliance’s
strategy • Upstream retailing offshore gas assets

– Immediate focus on upstream • MOU with Kuwait for • Saudi Aramco rumored to
opportunities in deepwater and downstream investments in take stake in proposed
coal bed methane blocks India Paradip refinery of IOC

– Exploring options to develop an • Has demonstrated group- • Total to help Indian

integrated gas business in India wide commitment to India – government buy LNG from
has created senior and Yemen. JV on an LPG tank
• Trading stable leadership in India, farm with HPCL
– Trades crude oil, bulk chemicals, invested over $600mn in an • Petronas rumored to be in a
and petroleum products with a view LNG terminal and has JV with IOC for LNG
to raising volumes and widening made organic entry in fuel terminal. Long-standing,
product reach retailing, LPG, and lubes high-level relationships with
• BioFuels IOC
– Announced the funding of a
$9.4mn project to be jointly
implemented with TERI in Feb
2006
• Sales • N.A. • N.A. • N.A.
Financials • EBITDA • N.A. • N.A. • N.A.
• Investment • N.A. • $0.6bn • N.A.
• Market cap • N.A. • N.A. • N.A.
• ROCE • N.A. • N.A. • N.A.

Sources: Analyst reports; press clippings; annual reports 12

Contents

• General Overview
• Upstream
– Introduction
– Large Players in Oil
– Large Players in Gas
– Smaller Entrants
– Exploration Potential
– Unconventional Potential

• Refining
• Retail

13
 Oil
India’s Oil and Gas Industry Is Small on Global Scale Gas

Proved oil and gas reserves (Oil & Gas Journal) Future growth in production (EnergyFiles)
Billion boe, as of 2007/01/01 Difference 2015 vs. 2005, in kboe/d

1 Russia 362 1 Saudi Arabia 4,395

2 Iran 312 2 Iran 3,870
3 Saudi Arabia 306 3 Qatar 3,389
4 Canada 190 4 Iraq 2,627
5 Qatar 179 5 Canada 2,485
6 UAE 136 6 Russia 2,450**
7 Iraq 135 7 Kazakhstan 2,280
8 Kuwait 111 8 Nigeria 2,024
9 Venezuela 107 9 Angola 1,493
10 Nigeria 69 10 UAE 1,246
13 Kazakhstan 48 15 China 646
15 China 30 18 India 527
23 India 12*

* Numbers from Oil & Gas Journal, for consistency with the rest of the table. The numbers are slightly higher than the Wood Mackenzie
numbers used in the rest of this document
** Incremental crude production updated based on Wood Mackenzie
Sources: Oil & Gas Journal; EnergyFiles; Wood Mackenzie; team analysis 14
India's Oil and Gas Production from 2P Reserves Is Projected Net import

to Remain Stable While Consumption Is Rising Own production

Crude supply/demand balance Gas supply/demand balance

mmbbl/d mmboe/d

05-15
CAGR

3.6 3.9%

3.0

2.5
2.2 05-15
2.9 5.4% CAGR
2.2 1.9

1.8 1.4 1.3

0.9 7.4%

0.9 21.0%

0.9 -0.3% 1.0 0.9

0.7 0.8 2.0%
0.5

2005 2010 2015 2005 2010 2015

Sources: Wood Mackenzie; FACTS; Energyfiles; team analysis 15

India's Largest Basins Are Offshore Gas
Oil
billion boe reserves
Rajasthan Assam

1.5 1.6
0.5 0.6
2P YTF* 2P YTF
Cambay KG
8.8

2.3
0.7 1.5

2P YTF 2P YTF

Bombay Cauvery
Offshore

4.0 4.4

0.1 0
2P YTF 2P YTF
* Yet-to-find
Sources: Wood Mackenzie; USGS; expert interviews 16
India's Recent Offshore Gas Discoveries Are Large, Even on a Liquids

Global Scale Gas

Oil and gas discoveries outside U.S. Lower 48, 2001-2005

billion boe

Iran 14.1
• Exploration picked
up in 1999 with the
Brazil 9.9 introduction of a
new licensing
China 6.1
regime and more
India 4.5 openness to IOCs
• Key winners of
Angola 4.3 licenses have been
U.S. GOM 3.6 • Two new provinces were ONGC and Reliance
discovered: Rajasthan and KG- • India accounts for
Nigeria 3.5 basin 4th largest discovery
Egypt 2.1 • Largest oil field found: Mangala base over 2001-
(Rajasthan), 0.4bn bbl, 2005, in particular,
Australia 2.1 discovered by Cairn India's recent gas
Malaysia 2.0 • Largest gas field found: discoveries (in KG-
Dhirubhai-1 and -3 (KG-Basin), basin) are large on
Kazakhstan 2.0 1.2bn and 1.1bn boe, a global scale
Saudi Arabia 1.5 respectively, discovered by • Large sedimentary
Reliance basin areas are
• These three fields alone account currently being
for ~60% of discoveries explored

Source: IHS 17
Contents

• General Overview
• Upstream
– Introduction
– Large Players in Oil
– Large Players in Gas
– Smaller Entrants
– Exploration Potential
– Unconventional Potential

• Refining
• Retail

18
Rajasthan Is the Only Growing Basin in Oil x CAGR
Kb/d 2006-2016

872 877 866

852
828
764 778 763 ~0
741
KG 677 661 689 682 688
657 646 642 663 663 662 -21
Rajasthan
8
Cauvery
Assam -12

Cambay 2

-4

Bombay
Offshore -1

1997 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 2016

Source: Wood Mackenzie 19

Top Players in Developed Oil Assets Are ONGC and OIL

Remaining 2P Additional
reserves (Wood discovered
Mackenzie) Production resources (IHS)
Top players mmboe kboe/d, 2006 mmboe

ONGC 3,344 572 564

OIL 606 70

Cairn India 370 13 691

Other 156 53

Total 4,476 708

Sources: Wood Mackenzie CAT file; IHS 20

Current Production Is Dominated by the Bombay Offshore Fields
Remaining 2P Oil
Reserves Production Ownership structure, Gas
Regions mmboe kboe/d, 2006 Feb 2007

Bombay Offshore Basin (ONGC only) 3,388 577 • 100% - ONGC

Krishna-Godavari: Dhirubhai 1,994 0 • 90% - Reliance; 10% - Niko

Assam (OIL) 867 91 • 100% - OIL

Assam & Tripura (ONGC only) 685 40 • 100% - ONGC

Cambay Basin (ONGC only) 678 157 • 100% - ONGC

RJ-ON-90/1 (Mangala) Area 514 0 • 70% - Cairn; 30% - ONGC

Bombay Offshore: Panna & Mukta 335 64

• 40% - ONGC; 30% - BG; 30% -
Reliance

Bombay Offshore: Mid & South Tapti 296 46

• 40% - ONGC; 30% - BG; 30% -
Reliance

Krishna-Godavari Basin (ONGC only) 229 32 • 100% - ONGC

Cauvery Basin (ONGC only) 112 24 • 100% - ONGC

Krishna-Godavari: Ravva 90 61 • 40% - ONGC; 25% - Petrocon; 23% -

Cairn; 12% - Marubeni
Total: Total:
98% of Indian 2P 94% of Indian production
Sources: Wood Mackenzie; team analysis 21
ONGC and OIL Are Owners of the Important Mature Oil Fields
Basin Fields Owners Actions taken / planned

• Bombay • ONGC • ONGC began a $2.2bn rehabilitation plan of the Bombay High (BH) field area
Bombay
High (BH) in January 2001 aimed at reducing production decline rates. The five year BH
Offshore
• Heera redevelopment commenced in 2001 and comprised the drilling of 220 new
• Neelam development wells, split into two phases:
• Bassein – The first phase commenced in January 2001 on the Bombay High North
(BHN) field and was completed in March 2005
– The second phase commenced in October 2001 on the Bombay High South
(BHS) field and is expected to complete in 2007

Assam • Upper • OIL India • Oil India has been employing a variety of secondary and tertiary recovery
Assam techniques in the region for over 30 years. Currently, over half of all production
Basin wells are on some form of artificial lift (peripheral water injection, crestal gas
(Nahor- injection, simultaneous gas and water injection, polymer flooding, water
katiya, flooding)
Jorajan, • The company plans to expand this practice on a much larger scale, as it
Moran, seeks to increase recovery factors from its mature fields. Toward this aim, OIL
and has entered into joint ventures with Western companies to bring in new drilling
Shalmari technology. OIL has budgeted approximately $178mn during its tenth business
fields) plan (2002-07) on Improved Oil Recovery and Enhanced Oil Recovery
projects

Krishna- • Ravva • ONGC, • Cairn's plan for an infill development drilling program in financial year 2005-06
Godavari Petrocon, was postponed as a result of delays securing the required approvals, as well
Cairn, as its inability to secure a drilling rig. The six well program, which included 1-2
Marubeni water injector wells, was expected to cost $55mn. In June 2006, Cairn finally
commenced their drilling campaign by drilling an exploration well. As a result
of an infill drilling program, the field's production plateau is expected to extend
until 2007, after which a gradual decline will begin

Source: Wood Mackenzie 22

ONGC and OIL Might Be Reluctant to Share Indian Assets

ONGC • Norsk Hydro/Statoil, BP, and Shell have • Despite the need for
made several attempts to get a foothold technology, ONGC has not yet
in ONGC's mature oil assets (mainly given foreign players access to
Bombay Offshore area). Despite years of its mature assets, even though
effort, ONGC has never granted foreign there is a good match with the
companies access capabilities of e.g., Statoil
• However, it is rumored that at one point in (given the large offshore fields)
the past one to two years there was a
Heads of Agreement between ONGC and
Shell about collaboration, which included
a section about mature oil fields (deal
was not pursued after ONGC CEO was
fired)

OIL • In May 2006, it was announced that OIL • It is unlikely that the
(together with ONGC) would bring in government (98% owner of
Haliburton to increase production from OIL) will allow OIL to give up
the Assam fields equity stakes in the field
• The decision to bring in experts had
been taken by India’s petroleum ministry
two months before

Sources: Press clippings; team analysis 23

Indian Oil Infrastructure Is Split Between Three Players

Pipeline infrastructure
• IOC owns 2800km of crude pipelines
(36% of the country's network),
mainly in the Northwest
• Key asset is 420kb/d pipeline from
Gujarat to inland refineries Koyali,
Mathura, and Panipat

• OIL owns 20%-30% of the country's

crude pipelines
• Key asset is a 120kb/d transporting
all the crude produced in the
Northeast

• ONGC owns 20%-30% of the

country's crude pipelines
• ONGC's pipelines mainly service
ONGC's many oil fields

Source: Wood Mackenzie 24

Since Existing Pipelines Are Dedicated to Specific Refinery Flows,
Oil Field Development Requires Building Pipeline to Market
Case example: Cairn's Mangala field in Rajasthan

• To evacuate oil from the

Mangala field, Cairn
needs to find an offtaker
(refinery) and build a
pipeline
• The pipeline will cost
$340mn-$500mn
depending on refinery
• Government is likely to
accept pipeline costs as
part of the cost recovery
in the PSC

Source: Merrill Lynch analyst report 25

ONGC Wants to Remain Dominant Indian E&P Company, and Is
Expanding Vertically and Internationally
Background Key financials

• Founded in 1955 by the Government of India, with the objective of Revenues Revenues by
developing oil and gas resources in the country $ bn 11 11 segment 2005
• After successive privatization rounds, government of India still owns
5 7 7 %
84% of the company
• Key activities in the past have been: 100% = $11bn
– Onshore and offshore exploration and production in India (in which 2001 2002 2003 2004 2005
it is by far the dominant player in India)
Other
– Pipeline infrastructure Net Profit
• In 2003, ONGC stepped into downstream by acquiring Mangalore % of revenues
23
Refinery & Petrochemicals Ltd. (MRPL)
30 29 13 64
• Created JV with Mittal Steel in 2005, ONGC Mittal Energy, to seek 26 26 28 Gas
Crude
exploration opportunities overseas
• ONGC’s subsidiary ONGC Videsh has also established E&P
positions abroad 2001 2002 2003 2004 2005

Strategy International positions

• ONGC is focusing on domestic and international oil and gas

Exploration/production positions in Cuba, Venezuela, Brazil, Iran,
exploration and production business opportunities
Kazakhstan, Russia, Myanmar, Australia, Sudan, Libya
• It aims to provide value linkages in other sectors of energy business
• It aims to retain its dominant position in Indian petroleum sector
International oil & gas production
kboe per day 129
101
77

2002/03 2003/04 2004/05 2005/06

Sources: Annual reports; press search 26

ONGC Has a Large Range of Assets in India
Name Resources Type Development status Operator Partners Remaining oil Remaining gas Peak oil Peak gas
production production
mmboe mmboe kbbl/d kboe/d

Bombay Offshore Basin Oil & Gas Fixed Platform Onstream ONGC ONGC* (100.00%) 1974 1414 453 248
Assam ONGC Fields Oil & Gas Onshore Onstream ONGC ONGC* (100.00%) 408 277 63 43
Cambay Basin ONGC Fields Oil & Gas Onshore Onstream ONGC ONGC* (100.00%) 607 71 133 42
RJ-ON-90/1 Fields Oil & Gas Onshore Probable Development Cairn India Cairn India* (70.00%), ONGC (30.00%) 500 14 151 4
Panna & Mukta Oil & Gas Fixed Platform Onstream ONGC, BG, Reliance ONGC* (40.00%), BG* (30.00%), Reliance* 189 146
(30.00%) 55 32
Tapti Mid & South Gas/condensate Fixed Platform Onstream ONGC, BG, Reliance ONGC* (40.00%), BG* (30.00%), Reliance* 0 277
(30.00%) 0 89
Krishna-Godav ONGC Fields Oil & Gas Onshore Onstream ONGC ONGC* (100.00%) 34 195 8 35
KG-DWN-98/2 Fields Oil & Gas Technical Reserves ONGC ONGC* (90.00%), Cairn India (10.00%) 60 158 0 0
Cauvery ONGC Fields Oil & Gas Onshore Onstream ONGC ONGC* (100.00%) 12 100 11 19
Padmavati Oil & Gas Technical Reserves ONGC ONGC* (90.00%), Cairn India (10.00%) 30 53 0 0
Annapurna Gas Technical Reserves ONGC ONGC* (90.00%), Cairn India (10.00%) 0 53 0 0
Kanaka Durga Oil & Gas Technical Reserves ONGC ONGC* (90.00%), Cairn India (10.00%) 30 18 0 0
Ravva (ONGC) Oil & Gas Fixed Platform Onstream ONGC ONGC* (100.00%) 32 4 21 6
N Cluster Gas Technical Reserves ONGC ONGC* (90.00%), Cairn India (10.00%) 0 35 0 0
Guda Oil Technical Reserves Cairn India Cairn India* (70.00%), ONGC (30.00%) 30 0 0 0
G-2 Oil Technical Reserves ONGC ONGC* (100.00%) 20 0 0 0
PY-3 Oil & Gas FPSO Onstream Hardy E&P (India) Hardy E&P (India)* (.00%), ONGC (40.00%), 20 0
Hindustan Oil Expl (21.00%), TATA Petrodyne
(21.00%), Hardy Oil & Gas (UK) (18.00%) 9 0
Raageshwari Oil & Gas Onshore Under Development Cairn India Cairn India* (70.00%), ONGC (30.00%) 5 14 1 4
Gauri Oil & Gas Fixed Platform Onstream Cairn India Cairn India* (40.00%), ONGC (50.00%), TATA 3 12
Petrodyne (10.00%) 3 8
Vandana Oil Technical Reserves Cairn India Cairn India* (70.00%), ONGC (30.00%) 10 0 0 0
Vijaya Oil Technical Reserves Cairn India Cairn India* (70.00%), ONGC (30.00%) 10 0 0 0
Ambe Oil & Gas Technical Reserves Cairn India Cairn India* (40.00%), ONGC (50.00%), TATA 0 6
Petrodyne (10.00%) 0 0
Lakshmi Oil & Gas Fixed Platform Onstream Cairn India Cairn India* (40.00%), ONGC (50.00%), TATA 0 5
Petrodyne (10.00%) 0 19
N-R Oil Technical Reserves Cairn India Cairn India* (70.00%), ONGC (30.00%) 5 0 0 0
Pramoda Oil Onshore Onstream Hindustan Oil Expl Hindustan Oil Expl* (35.00%), Gujarat State 4 0
Petroleum Corp (35.00%), ONGC (30.00%) 0 0
Kameshwari Oil & Gas Technical Reserves Cairn India Cairn India* (70.00%), ONGC (30.00%) 2 0 0 0
Rajasthan ONGC Fields Gas Onshore Onstream ONGC ONGC* (100.00%) 0 2 0 0
Saraswati Oil & Gas Onshore Under Development Cairn India Cairn India* (70.00%), ONGC (30.00%) 1 0 1 0
Pramoda Fields Oil Onshore Onstream Hindustan Oil Expl Hindustan Oil Expl* (35.00%), Gujarat State 1 0
Petroleum Corp (35.00%), ONGC (30.00%) 0 0
CB-X Gas Onshore Under Development Cairn India Cairn India* (40.00%), ONGC (50.00%), TATA 0 1
Petrodyne (10.00%) 0 1
Palej Oil Onshore Ceased Production ONGC ONGC* (30.00%), Gujarat State Petroleum Corp 0 0
(35.00%), Hindustan Oil Expl (35.00%) 0 0
Bakhri Tibba Gas Technical Reserves ONGC ONGC* (100.00%) 0 0 0 0
Lankapalam Gas Technical Reserves ONGC ONGC* (100.00%) 0 0 0 0

Source: Wood Mackenzie 27

In Addition, ONGC Has Several International Positions Producing areas
Projects / opportunities since 2001* Exploration / pursuing
opportunities

Iran Russia
• Farsi bloc Kazakhstan • Sakhalin I (20%)
• JV with Norsk Hydro • Looking at opportunities in • WI reserves 188 mmbbl
• Interest expressed in South Pars partnership with Mittal • JV with Itera to acquire
• Potential awards for development further assets
projects Jufeyr & Yadavaran in lieu
of LNG purchase (MOC with NIOC)

Cuba Myanmar - Exploration

• 30% interest in over • Block A-1 (20%) with
12,000km2 of deepwater recent Shwe discovery
exploration blocks
Australia - Exploration
Venezuela • Enters in 3Q 2004 with
• Pursuing heavy oil 55% WI of WA-306-P
opportunities Sudan
• Greater Nile Project (25%)
Brazil • Thar Jath (24%)
• 15% stake in BC-10
deepwater block
Libya - Exploration
• Planning joint bid with
• Blocks NC-188 & 189 International oil & gas production**
Petrobras in 9th round
(2007) kboe per day
129
77 101
5
* Text highlighting certain projects only
** ONGC Videsh 2002-03 2003-04 2004-05 2005-06
Sources: Wood Mackenzie; literature search; ONGC Videsh Web site 28
Contents

• General Overview
• Upstream
– Introduction
– Large Players in Oil
– Large Players in Gas
– Smaller Entrants
– Exploration Potential
– Unconventional Potential

• Refining
• Retail

29
Gas Production Will Increase, Thanks to KG Basin x CAGR
Mmcf/d 2006-2016

5,721
5,746 5,706 5,694 5,636
5,364
5,040 6
4,843

28
3,169
2,636
2,575 2,603 2,615 2,656
2,332
2,420
KG 2,162 2,205 2,307 0
Rajasthan 1,950 2
Cauvery 10
Assam -20
Cambay
Bombay -2
Offshore

1997 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 2016

Source: Wood Mackenzie 30

Key Players in Gas Are Reliance and ONGC
Additional
Remaining 2P reserves discovered
(Wood Mackenzie) Production resources (IHS)
Top players mmboe kboe/d, 2006 mmboe

ONGC 2,638 354 1,532

Reliance 2,021 20 1,407
Oil India 455 35
Niko 146 13
BG 106 20 166
GSPC 64 23 381
Cairn Energy 21 10 154
Focus Energy 0 0 493
Other 46 9
Total 5,497 484

Sources: Wood Mackenzie CAT file; IHS 31

In Gas, Both Reliance and ONGC Have Made Numerous Offshore
Gas Discoveries Since 2002, Which Need to Be Developed

Size*
Field bcf Date Company

Dhirubhai 1 7,119 • May 2002 • Reliance

Dhirubhai 3 6,040 • Aug 2002 • Reliance
Vashistha 2,800 • Mar 2005 • ONGC
B-1 1,261 • Oct 2004 • Reliance
Dhirubhai 20 700 • Apr 2005 • Reliance • An international
Dhirubhai 2 50 • Jul 2002 • Reliance partner could help
Dhirubhai 18 539 • Dec 2004 • Reliance to develop these
Dhirubhai 9 525 • Nov 2003 • Reliance fields
Dhirubhai 21 419 • Jun 2005 • Reliance
Dhirubhai 6 434 • Apr 2003 • Reliance • Both players have
Dhirubhai 10 325 • Feb 2004 • Reliance indicated interest in
Dhirubhai 8 308 • Mar 2004 • Reliance partnering with
Dhirubhai 7 294 • Jan 2004 • Reliance players with
Dhirubhai 11 287 • Apr 2004 • Reliance experience in
Dhirubhai 24 280 • Jul 2005 • Reliance offshore
KG-DWN-U-1 275 • Jan 2006 • ONGC
KG-DWN-E-1 238 • Apr 2006 • ONGC
D6-MA-1 231 • Dec 2005 • Reliance
Tiphuk 1 48 • Mar 2005 • ONGC
Dhirubhai 19 210 • Feb 2005 • Reliance

Source: IHS 32
ONGC May Be More Open to Share Equity in Its Gas
Development than Reliance, Who Is Unlikely to Share Equity
Reliance
• "In E&P business, the major challenge for RIL is
to bring the gas the from the KGD6 bloc* to the
end users. For accomplishing its objective, RIL
has been working with the leading international
technology and service providers" (Annual report
2005-06)
• However, on March 27, 2007, Reliance
announced that it would "not offer equity stakes in
any of its existing or future gas fields to foreign
energy majors that offer technologies to develop
deepwater gas fields" (Lloyd's List)
• "RIL will be India’s pre-eminent global corporation
in terms of size, scale, portfolio diversification,
and value creation" (Annual report 2005-06)
ONGC
• In 1995, Mosbacher Energy was allowed to
develop the PY-1 gas field (Cauvery basin) which
had been discovered by ONGC in 1980
• ONGC is "ready to offer foreign companies equity
stakes ranging between 10% and 30% in their
recently discovered gas fields in the KG basin"
(Lloyd's list)
• In January 2007, ONGC announced that
Petrobras, Eni, Norsk Hydro, and Petronas would
be given participatory interests in deepwater and
ultra-deepwater acreage within the Krishna
Godavari and Mahanadi Basins (Global Insight)
* Block where large fields Dhirubhai-1 and Dhirubhai 3 are located
Sources: Annual reports; press clippings; IHS
• Reliance needs technology and
service providers partners to develop
its gas assets in KG-basin, but is
reluctant to give equity in return for
technology
• Meanwhile, Reliance is interested in
expanding the scale and scope of
the company. Although unlikely, an
asset swap may therefore be an
option, e.g., giving a 30%-50% stake
in Dhirubhai-1 or Dhirubhai-3, in
return for a stake in assets outside
India
• ONGC is prepared to accept foreign
participation in its development
• There is potential to do a deepwater
exploration partnership at the same
time
• 90 gas discoveries have been
made in KG-basin, totaling 27 tcf
• Reliance made 18 discoveries,
claiming 17 tcf
• ONGC made 67 discoveries,
claiming 7 tcf
33
 Low probability
2012 Gas Production Makes LNG Import the Marginal Supplier,
Demand
with No Need for Pipeline Gas Imports
Natural gas availability and demand in India (2011-12)

• Iran pipeline would come in at 200 250

~$5/mnbtu, so price would still be
set by power demand 10.0-12.0
11 Auto Likely range
8-10 • Construction of pipeline is unlikely of demand
10 in foreseeable future, due to:
Cost to serve/ Switching price ($/mnbtu)

– Political issues with Pakistan

9 – Recent KG-basin gas finds
8.0
8

7 Fertilizer 6.5

LNG
LNG
LNG
LNG
5-6 Domestic
6 5
Industrial
5 5
Power
4 3-4 4.5+

LNG
3 2.5

Others
ONGC

GSPC
2
RIL
APM

0
0 20 40 60 80 100 120 140 160 180 200 220 240
mmscmd

Sources: Wood Mackenzie database; FACTS energy update Jan 2007; team analysis 34
Matching Imported Coal Costs for Power Generation, Implies ILLUSTRATIVE
Delivered Gas Pricing Around $4.2-5mnbtu

POWER PROJECTS IN NORTH INDIA WOULD SWITCH OVER TO GAS

ONLY AT PRICES AROUND US$ 5 /MMBTU AT CURRENT COAL PRICES

Power cost (levelised, baseload)

Rs/ KwH
3.1 3.1
0 0

2.3

Transmission 0.6 2.1 2.3

Variable cost 0.8

POWER PROJECTS IN WEST INDIA WOULD SWITCH OVER TO GAS ONLY
AT PRICES AROUND US$ 4.65 /MMBTU AT CURRENT COAL PRICES
Fixed cost 1.0 1.0 0.8
Power cost (levelised, baseload)
Rs/ KwH Domestic coal Imported coal Gas CCGT
2.6 (Pithead) (Loadcentre) (Loadcentre)
2.6
0 0
0

2.0
Transmission 0.3
1.6 1.8

Variable cost 0.8 • Although some NOC gas contracts are still
at regulated prices, incremental gas sales
1.0 1.0
are at free market prices, and are therefore
Fixed cost 0.8
governed by this supply-demand logic
Domestic coal Imported coal Gas CCGT
• The delivered price translates into $3.5-
(Pithead) (Loadcentre) (Loadcentre) 4.0mnbtu at the wellhead
0
35
Indian Gas Distribution Infrastructure Is Owned by GAIL, but
New Capacity Is Being Developed by Others

• Reliance plans to build a ~1400km Pipeline infrastructure

pipeline to transport gas from KG-
basin to demand centers in the West
• Cost is estimated at $2.8bn (~$0.5 per
MMBtu)
• A $110mn contract to build the first two
sections has been awarded to Russian
Stroytransgaz
• Government-owned GAIL is the sole owner
of India's gas distribution infrastructure
(5460 km of pipelines)
• ONGC owns gas infrastructure to gather
gas from its fields
• Private players are allowed to set up their
own infrastructure (e.g., Reliance will set
up a link between the Dhirubhai gas field
and the onshore network)

LNG terminals

Capacity
Terminal Status mmcf/d

• Dahei • Operational • 700

(2004)
• Hazira • Operational • 350
(2004)
Dotted lines = planned
• Dabhol • Mothballed* • 350-700

* Associated power plant has already 1 unit (out of 3) in place – the unit is currently running on naphtha. Several parties have shown
interest in acquiring and finishing the terminal
Sources: Wood Mackenzie; Zeus 36
Reliance Is a Good Project Executor with Global Ambitions
Background Key financials

• India’s largest company by market capitalization, largest Revenues Revenues by

petrochemicals company and 2nd largest refiner $ bn 20 segment 2005
• Founded as a textile company in 1966 by Dhirubhai Ambani 11
15
%
9 9
• Group underwent a de-merger in 2006, due to disputes between
Dhirubhai’s sons, Mukesh and Anil: 100% = $ 20b
– Pursuant to de-merger, Reliance Industries under Mukesh 2001 2002 2003 2004 2005
Ambani’s management E&P
– Reliance Industries cannot pursue activities in power industry due 2 Pet
Net Profit
to the settlement % of revenues 36 Chem
– Several disputes yet to be resolved between brothers (e.g., price
at which KG Basin gas is supplied to Anil-controlled Reliance 9 10 11 11 62
8 R&M
Energy)

2001 2002 2003 2004 2005

Strategy Business scope

Strategic goals
• Maximize shareholder value (~50% controlled by Mukesh Ambani, Reliance
whose ambition is to emerge as the world’s richest man) Industries
• Become a significant player in the global energy scene
– Pursuit of reliable energy for a self-reliant future for India Refining &
E&P Petrochems
New
– Potential cross-border acquisitions marketing Initiatives
– Execution of E&P efforts in the KG Basin on their own without any • Existing refining • E&P in KG • India’s • $6bn retail
significant partner capacity: 0.6mn Basin, Orissa largest initiative
• Pursue value creating growth opportunities in retail, real estate, and bpd and West Coast petro- expected to
urban infrastructure • RPL to add gas fields chemicals generate
Competitive strengths 0.5mm bpd by • Basin Master in company revenues of
• Execution capabilities to implement large projects end 2008 KG Basin • Global $20bn by 2010
• Scale and vertical integration in India • 1,200 outlets • 2P reserves of positions in • $6bn SEZ
• Best-in-class project executor/operator in downstream: 40% lower • 2nd largest 12 tcf, upside of PTA, PX, investment in
capex than Shell capacity in India 30-50 tcf MEG, PPY, three zones
(25% share) & polyester • Bio-tech foray

Sources: Annual reports; press search 37

Contents

• General Overview
• Upstream
– Introduction
– Large Players in Oil
– Large Players in Gas
– Smaller Entrants
– Exploration Potential
– Unconventional Potential

• Refining
• Retail

38
 High Oil
Most Prominent Smaller Entrants Are Cairn, Medium
Gas
Low
Niko, and Focus
Additional dis- Feasibility
Top players Remaining 2P reserves Production covered resources of
in oil & gas Mmboe; WoodMac kboe/d, 2006 Ownership Mmboe; IHS acquisition

ONGC 5,982 926 • 84% government; 2,095

public

Reliance 2,053 33
• 48% M. Ambani; rest 1,530
with inst. inv. or public

Oil India 1,061 105 • >98% government

Cairn India 391 23 • 70% Cairn Energy; 845

10% Petronas; Floating
Niko 148 14
• Mostly floating
(Canada)

BG 138 33 • Mostly floating 172

GSPC 68 25 • 95% Gujarat state 390

Petrocon 20 16 • Privately owned

Canoro 16 1 • Mostly floating (tbc)

Focus Energy 0 0 • Privately owned 493

Other 96 16

Total 9,973 1,192

Source: Wood Mackenzie CAT file 39

 2P reserves
Among the Smaller Players, Cairn Has the Largest Activities (mmboe)*

Cairn India 391 Niko Resources 147 Focus Energy ~0

• Indian E&P company • Canadian business, listed in • Privately owned (part of a larger
• Owned by Scottish Cairn Toronto industrial group)
Energy, originally a North Sea • Contains Indian activities, plus • Exploration company, no current
E&P Firm smaller activities in Canada and production
Free float: ~100% Bangladesh • Discovered a 2.8 Tcf gas field in
• Market cap $3.0bn Rajasthan in 2006, not
Cairn • Niko Resources seems appraised yet
Energy essentially a financial co-investor
Petronas: 10% with Reliance:
Market cap: $4.9bn
Free float: 21%* (listed in U.K.) – Acquiring Niko Resources is a
way to partner with Reliance
69% 100%
– However, there is significant
risk that Reliance appropriates
Cairn India Capricorn the value, e.g., through
Energy pipeline access prices
Market cap: $5.1bn
(listed in Bombay)
• Indian business • Frontier E&P
• Asets
outside India
Market cap of ~$12 Market cap of ~$20
per 2P barrel per 2P barrel

* Includes 2% institutional investors

** WoodMac
Sources: Wood Mackenzie; press clippings; Bloomberg; company Web sites 40
Example of Cairn Shows That Foreign Players Can Be
Successful, Although It Takes Time
2006 and beyond
Ambitious growth
2003-2005
plans forward
Further investment
2000-2003 step up on back of Actual exploration and
Gradual step up in proven E&P capability development capex:
1994-2000
investment • 2004: $170mn
India entry – humble
• 2005: $283mn
beginning, rapid strides
Estimated
Investments <100 ~300 ~500 >1000
($ mn)

• 1994: Took over Ravva fields • 2000: Cairn gets one more
as operator. Increased
Description production from 3000 bopd to
50,000 bopd
• 1998: Farm out 27.5% stake
in Rajasthan block from Shell
for $12mn
• 1998: Two production sharing
contracts in KG & Cambay
basins
• Made 10 discoveries worth
$750mn
block in KG basin close to its
Ravva field
• 2001: Ravva field potential
was estimated to be 250
million barrels of crude oil
• 2001: Plans to invest $200mn
in Gulf of Khambat
• 2001: Plans $400mn in in
deep water exploration in
southern India
• 2003: Plans $859mn
investment in KG block
• 2004: Purchased Mangala
field from Shell at low price
• 2004: Plans to invest
$100mn-$150mn on the
Barmer block which has
reserves of 450mn to 1.1bn
barrels of oil
• 2006: Won two blocks in
NELP-VI
• 2006: Plans to invest $1.5bn
on Mangala oil field till 2014
• 2006: $150mn to be invested
in Cambay & Ravva basin
• 2006: Petronas of Malaysia
picks up 10% stake

• Cairn is the most successful foreign player and has succeeded in creating a major E&P play:
Salient – 30 discoveries including Mangala, largest find since 1985, which is expected to produce 100,000 barrels of oil almost 20%
achievements of India’s crude demand
– ~600 mmboe of 3P reserves, ~400 mmboe of 2P reserves, ~200 mmboe of 1P reserves. EV / 1P reserves is ~24x, EV /
2P reserves is ~12x, EV / 3P reserves is ~8x
– Production expected to increase from 24,000 boepd in 2005 to 115,000 boepd in 2010
– Sales growth of 17.5% in past five years
– Realized IPO of Cairn India (containing Cairn’s existing assets in India) in the beginning of 2007
Sources: Company Web site; press search 41
Major Upstream M&A Transactions Were All Related to Cairn
Implied
Transaction value per
value 2P reserves barrel
Date Transaction Asset $, billions mmboe $/boe

Nov 06 Petronas/Cairn 10% in Cairn India 697 39 17.9

Energy

Jan 05 ONGC/Cairn 30% of Mangala and Aishwariya

135 150 0.9
fields

Sep 04 ONGC/Cairn 2 gas fields, in asset swap with

Energy ONGC 135 0 N/A

Under pre-NELP licensing rounds, Petronas originally agreed to pay $697mn

ONGC had an option to buy a stake
in oil field at different points in time.
ONGC exercised the options for a
30% stake
(176 rupees/share), but received ~$65mn
back because the IPO in January 2007
took place at only 160 rupees/share. In the
mean time, the share price has declines to
~125 rupees/share, valuing Petronas's
share at ~$500mn

Sources: Morgan Stanley; Dealogic; team analysis 42

Case Study: Starting with Less than $100mn Investment, BG
Has Become an Important Player in Indian Oil and Gas
2006 and beyond
Ambitious plans
2003-2005
forward
Rapid expansion in
2001-2003 exploration and
Capitalizing on India production
1994-2001
presence - entry and
India entry via Gas
rapid growth in
distribution and LNG
upstream E&P
Estimated
Investments ~150 ~350 ~300 ~1,000
($ mn)

• 1995: BG entered India by
entering into 50:50 JV with
Description GAIL in MGL* (gas
distribution company).
• 1997: acquired 65% stake in
GGCL* for $62mn from
Mafatlal
• 2001: bought 100% stake in
Pipavav LNG project from
SKIL
• 2002: Bought Enron’s 30%
stake in PMT* and 63% in
exploration license for a
Cambay Basin block for
$350mn
• 2003: Joint operator ship with
ONGC and Reliance for
PMT*
• 2003: Estimated 3.75 TCF
gas reserves in Tapti. Tapti
starts production
• 2003: Estd 1bn barrels Oil &
1.9 TCF gas in Panna field
• 2004-05: Partners announced • Plans to invest $1bn over
investment of $500mn in next give years
PMT* • Expand gas distribution in
• 2005: partnership with ONGC three southern states
for joint operator ship of 3
offshore deep water
exploration blocks in KG
basin
• 2006: GGCL* invests $36mn
in expansion
• 2004: diversifies into
cogeneration

• In 10 years of operations, BG has created successful upstream and downstream ventures:

Salient – PMT* contributes ~ 8% of India’s total oil and gas production. Tapti field production to increase from 180 mmscfd to 450
achievements mmscfd by 2007
– MGL* is India’s largest natural gas distribution company by customer base and GGCL* is India’s largest natural gas
distribution company by volume. They have a combined customer base of ~600,000 and pipeline network of 4,000km
• Shaping policy: As founder member of GIG* helped shape Draft Pipeline Policy, City Gas Distribution Policy, Petroleum and
Natural Gas Regulatory Board bill, NELP VI
* MGL is Mahanagar Gas Limited, GGCL is Gujarat Gas Company Limited, PMT is Panna Mukta Tapti, GIG is Gas Industry Group
Sources: Company web site; press search 43
Contents

• General Overview
• Upstream
– Introduction
– Large Players in Oil
– Large Players in Gas
– Smaller Entrants
– Exploration Potential
– Unconventional Potential

• Refining
• Retail

44
Undiscovered Reserves in India Are Mainly in Offshore Gas
billion boe

Remaining 2P Undiscovered/YTF*
(Wood Mackenzie) (USGS**)

Onshore Offshore as % of total Onshore Offshore as % of total

Liquids 2.1 2.4 17% 1.7*** 0.8 10%

Gas 1.1 4.1 19% 3.6**** 10.6 54%

Subtotal 3.2 6.3 5.3 11.4

% of total
remaining 12% 24% 36% 20% 44% 64%
+YTF
* Yet to find
** United States Geological Survey; Expert interviews were used to assess KG-basin (basin not included in USGS)
*** 0.9bn boe of Heavy Oil not included
**** 3.2bn boe of Coal Bed Methand not included
Sources: Wood Mackenzie; USGS; team analysis 45
There Have Been a Substantial Amount of Offshore Discoveries
20 largest discoveries 2002-2006 Offshore

Size* Onshore
Field mmboe Basin Company

Dhirubhai 1 1,253 • KG • Reliance

Dhirubhai 3 1,063 • KG • Reliance
SGL-1 493 • Rajasthan • Focus
Vashistha 493 • KG • ONGC • Key opportunity in
Deen Dayal 445 • KG • GSPC exploration is offshore in
Mangala 363 • Rajasthan • Cairn KG basin
Dhirubhai 4 222 • KG • Reliance • Organically building up a
Dhirubhai 23 158 • KG • Reliance material position in
Bhagyam 156 • Rajasthan • Cairn onshore exploration is
Chandmari North 123 • Assam • OIL possible, through frontier
D6-MA-1 109 • KG • Reliance exploration as done by
G-4-2 95 • KG • ONGC Cairn
B-1 92 • Bengal** • Reliance • However, such a strategy
Vasai West 90 • Bombay • ONGC is risky and requires long-
Aishwariya 87 • Rajasthan • Cairn term commitment
Chinnewala Tibba 1 76 • Rajasthan • ONGC
Dhirubhai 20 57 • Bengal** • Reliance
Dhirubhai 18 54 • KG • Reliance
Dhirubhai 16 52 • KG • Reliance
Dhirubhai 2 51 • KG • Reliance
* Not all of these fields are considered 2P, and therefore companies' reserves do not necessarily include these numbers
** North of KG basin
Source: IHS 46
Exploration Is Ramping Up Fast
Percent of sedimentary basinal areas

100% = 3.14 3.14 3.14 3.14 million km²

Moderate to well explored 15 15 19 20

Poorly explored 17 17
22 21
Exploration initiated 18
27 Potential for
exploration
37
44 play is still
large
Unexplored 50
41
22
15

1995-1996 1998-1999 2004-2005 2005-2006

Source: India DGH 47

NELP Licensing Rounds Aimed to Attract Foreign Companies, but
with Limited Success
Timing Blocks offered Blocks awarded Comments

• Jan 1999-Apr • 48 (10 onshore, 26 • 25 (only bids for 27 • 12 blocks for Reliance/Nico
NELP-I 2000 shallow water, 12 blocks) • 6 blocks for ONGC
deep water*) • No IOCs bid
• Dec 2000-May • 25 (9 onshore, 8 • 23 (only bids for 23 • 1 block for Reliance/Hardy
NELP-II 2001 shallow water, 8 deep blocks) • 16 blocks for ONGC
water*) • No IOCs bid
• June 2002-Mar • 27 (11 onshore, 7 • 23 (45 bids for 23 • 22 blocks for Reliance or
NELP-III
2003 shallow water, 9 deep blocks) ONGC consortia
water*) • No blocks for foreign players
• May 2003-Feb • 24 (11 onshore, 1 • 23 (44 bids for 21 • 14 blocks for ONGC
NELP-IV 2004 shallow water, 12 blocks) • 1 block for Reliance
deep water*) • 5 blocks for IOCs

NELP-V
• Jul 2005-Feb • 20 • 20 • 14 blocks for Reliance or
2004 ONGC consortia
• BP present, but lost

NELP-VI • Feb 2006-Nov • 55 (25 on land, 6 • 52 (165 bids for 52 • 25 blocks for ONGC
2006 shallow water, 24 blocks) • 7 blocks for Reliance
deep water*) • No IOCs
• May 2007-... • - • - • Details about blocks to be
NELP-VII
released May 2007

* Beyond 400 meters bathymetry

Source: Wood Mackenzie 48
New Licenses Are Available in the Upcoming NELP-VII
Licensing Round, Including Some in the KG Basin
Tentative area identified for NELP-VII

Some onshore and

offshore (shallow
water) licenses are
available in KG basin

• NELP-VII licensing round will

probably start in August 2007
• 60-100 (most likely ~80 blocks)
will be offered, but no
specifications of blocks are
available yet
• After NELP-VII, government is
planning to introduce Open
Acreage Licensing Policy (OALP),
in which companies can bid round
the year (the government’s
objective being to attract larger
foreign companies)

Source: Directorate General of Hydrocarbons 49

 KAZAKHSTAN
India's Fiscal Regime Is Generous Compared to Former CIS ADE FIELD EXAMPLE
Countries, but Onerous Compared to Other Importers Op. cost
Cap. costs
Remaining present value per boe Gov. take
$ per BOE, $60 scenario Cash flow

100% = 21.9* 21.9 21.8 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9
Op costs 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Capital 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
costs

40% 36%
49%
Gov. take** 64% 66% 62%
76% 70% 71% 71%
78%

47% 50%
38%
Cash flow 23% 20% 25%
10% 16% 16% 15%
8%
Kazakh- Kazakh- Russia Azer- Turkme- Uzbek- India Aus- China Italy Thailand
stan JV stan JV (do- baijan nistan istan tralia
PSC mestic)
Exporting countries Importing countries
* Since the value is discounted from the future production years and it includes gas production, $21.9 is lower than the price scenario $60
** Including royalty, government share of oil, corporate income taxes, and other taxes
Sources: Wood Mackenzie GEM; team analysis 50
Fiscal Regime Is Entirely Based on PSCs
Taxation of E&P under NELP
Rule/rate Comments

State equity • No obligation • Under previous licensing rounds (pre-1999), state used to
have an option to take 25% to 40% at different stages of
project

Bonus • No signature or production bonus • Existed under Field Development rounds (1992-1999)

• Exemption from customs duty on • -

Indirect taxes supplies for operations

• 5-12.5% • Depending on onshore/offshore/deepwater, year (1-7 or

Royalty >7), oil/gas

Domestic market • Government has option to buy oil • Crude is priced according to international basket
obligation and gas at specific price • Gas is priced according to regulated tariffs

• Government take 10%-25% up to • IM is computed each year as cumulative investor pre-tax

Profit sharing 85%-90%, for Investment
Multiple (IM) ranging from <1.5 to
>3.5
cash flow divided by cumulative costs, up to the previous
year
• Before profit sharing, investor can recover costs at a
certain rate (usually 100%), up to a certain limit (usually
100%), with right to carry forward

• Majority of exploration and drilling costs are written off at

Corporate tax • 42% for foreign companies 100%, tangible costs are depreciated at 25%
(waivers are granted for the 1st 7
years)
Profit-sharing rate, cost recovery rate and cost recovery limit are
biddable under recent NELP rounds (including NELP-VII), and
receive "points" that are taken into account for licensing decisions
Source: Wood Mackenzie 51
Contents

• General Overview
• Upstream
– Introduction
– Large Players in Oil
– Large Players in Gas
– Smaller Entrants
– Exploration Potential
– Unconventional Potential

• Refining
• Retail

52
Of the Unconventional Plays, Coal Bed Methane Is PRELIMINARY

Most Interesting Potential

Developed
Billion boe
Potential resource Comments

• There is significant potential in coal bed

methane, most of which is still unexplored and
Coal bed methane 0.2 3.2 3.4 undeveloped. Recently a 3rd licensing round has
been held, attracting interest from local and
foreign players, including BP

0.9 • There are relatively limited heavy oil resources,

Heavy oil 1.0 of which 12% are currently being produced
0.1 (ONGC)

• There is almost nothing know on tight gas and

resources may be underestimated. Cairn is
considering a project in the Barner basin, to be
Tight gas 0.1
used for power generation to benefit oil
production in Cairn's Northern fields

• There are significant resources of shale oil in

coal field in Northeast India, but there are no
Shale oil 100.0 plans for development. The potential resource is
approx. 3% of the worldwide resource base
(world production is approx 4,000bpd)

Sources: Wood Mackenzie; Survey of Energy Resources; team analysis 53

Contents

• General Overview
• Upstream

• Refining
• Retail

54
Strong Product Demand Growth Is Expected in India, x Demand CAGR
2005-2015
but Refinery Capacity Is Expected to Overshoot (%)
Kb/d
"Planned"
4,500
"Firm" refinery capacity buildup without
export-oriented Reliance expansion
4,000

Historic and “firm"

3,500 refinery capacity buildup
Despite current overcapacity, 4.1
3,085
prices are at import parity, because
3,000 2,858
of industry conduct (Reliance LPG 5.6
exports 35% of its volume)
2,524 2,607
2,500 2,302 2,333 2,438 Naphtha 0.7
2,120 2,126 2,155 2,176 2,187
Gasoline 6.0
1,987
2,000 1,866
1,752
1,631
1,500 Diesel 4.6

1,000
4.0
Kero/jet
500 Fuel Oil -0.6

Other 6.2
0
1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 10 2012

Source: FACTS 55
Indian Refining Enjoys High Margins in a Tightly Balanced Market

The gross refining margin is attractive …boosted by continued tariff protection

$ per Bbl, FY2004

Import tariff ($ per Bbl)**

Reliance 6.6 FY 2004 1.8 6.5%

Q3FY2005 1.3 3.7%

IOC 5.30

BPCL 4.6

HPCL 4.4

* At $30 per barrel

Sources: FACTS; Team analysis 56
All Players Are Adding Refining Capacity

Current refinery
Planned new refinery Refining capacity by player – 2006-2012
Distillation capacity, kb/d

1,575
2012 planned
Bhatinda Panipat (IOC)
(HPCL) 300 2012 firm
Bongaigaon Digboi (IOC)
Mathura (IOC) (IOC) Numaligarh (BPCL) 1,232 2006
North 100
Vadinar Guwahati
Bina
(Essar) Barauni (IOC)
(BPCL)
(IOC)
Koyali 580
(IOC) West East
Jamnagar I/II Haldia (IOC)
(Reliance)
Paradip (IOC)
Mahul 600
Mumbai
(BPCL) 1,175 516
(HPCL) 150
Visak (HPCL)
180
328
South 652 64 281
Mangalore 96
(MRPL) Manali (IOC) 450
272 232 281
Narimanam
Ambalamugal 0
(IOC)
(BPCL)
IOC Reliance BPCL HPCL MRPL Essar

Sources: FACTS; Oil & Gas Journal; Petroleum Economist World Energy Atlas; team analysis 57
Adjacent to Its Current Refinery, Reliance Is Building a Similar-Size New
Refinery Geared Toward Export
Capacity
Kb/d Export situation Comment

• Allowed both to sell on • Even though domestic market prices

652 the domestic market are higher than export netbacks,
Current (33 MT)
refinery and to export Reliance exports large volumes,
• In 2005/6: because by doing this, it maintains
– Domestic sales 65% high prices on the domestic market
– Export 35% (i.e., high prices on 65% on the sales
outweigh the potential benefit of
putting the 35% also on the domestic
market)
• As a result, Indian product markets
are at import price parity, and refining
margins are attractive

• Special regime: • Chevron obtained a 5% stake in the

New refinery 580 considered as an refinery
(2008) (29 MT) "external" refinery, and • As part of the deal, Chevron has
as a result, import tariffs concluded an offtake contract to
have to be paid when supply the Californian market with
products are sold on products
domestic market
• Refinery is geared
toward export
Sources: Press search; team analysis 58
India Has a Net Export Position in Multiple Products
2010; product balances; kb/d

Production (Import)/Export

LPG 425 9

Naphtha 450 182

Gasoline 536 267

Diesel 1,469 414

Kero/jet 460 130

Fuel oil 326 101

Other 268 -28

Total 3,934 1,076

~25% export
by 2010
Source: FACTS 59
Room for Additional Exports May Be Limited after 2010, Total

Leading to Potential Margin Collapse in Domestic Market Utilization

ILLUSTRATIVE
Available $50
capacity* base case “2006 forever” “Actively managed
2010 (kbd); % demand scenario demand” scenario
view utilization % utilization % utilization % utilization

100 85 82 84

2003 2010 2010 2010

Refinery capacity additions in India

Beyond Depending on magnitude of

Export to East results in low
Overbuild

2010 overcapacity and Middle East

utilization and low netbacks
import need, excess capacity may
(because of high transport costs
find its way to Middle East, or may
and competition with crude)
have to be exported to East

Excess capacity in India can Export to East results in low

additions

find its way to Middle East so utilization and low netbacks

“Firm”

that 80%-90% utilization is (because of high transport costs

maintained and competition with crude)

Product import Balanced

Middle East product balance

* Total capacity adjusted for 95% average global availability

Sources: Firm Petrosims model; expert interviews 60
Local Opportunities in Refining May Exist Due to Regional
Supply-Demand Imbalances
Regional surplus/(deficit), 2010
Mtpa

Reliance expansion
(export-oriented)
• Despite national oversupply, supply-demand
imbalance varies per region, with the North
most likely to be in deficit
• Inland refineries that can supply the North will
North -23 receive a premium because supply to the
North from other regions will have to be
West 38 29 67 transported by (expensive) rail, due to
insufficient product pipeline capacity
East -3

South 15 The two refinery projects that can supply the North
are Bina and Bhatinda:
National 27 29 56 • The Bina project is a JV between BPCL (50%),
Oman Oil (2%), and financial institutions (23%).
The current plan is to IPO the remaining 25%
• The Bhatinda project was originally a partnership
between HPCL and BP, but eventually, Mittal
Steel entered the venture in February 2007 and
took 49% (the remaining shares are 49% HPCL
and 2% financial institutions)

Sources: FACTS; team analysis 61

Downstream Transactions Highlight International
Interest in Indian Refining
Transaction value
Date Transaction Asset $, millions

Feb 07 Mittal Steel/HPCL 49% in Bathinda (Punjab) 724

refinery

Jun 06 Vadinar Oil/Essar Oil 67% stake in Essar Oil 764

Apr 06 Chevron/Reliance Industries 5% in RPL, owner and operator 300

of Jamnagar refinery expansion*

Jan 05 BPCL/Kochi Refineries Remaining 45% of Kochi Re-

282
fineries not yet owned by BPCL

International players like Chevron

(and, to some extent, Mittal) are
trying to get a foothold in refining

* Under construction
Sources: Morgan Stanley; Dealogic; team analysis 62
Contents

• General Overview
• Upstream

• Refining
• Retail

63
Demand for Vehicles and Car Ownership Are Expected to Show
Stellar Growth
Vehicle demand (in '000) Car ownership (per '000 households)

+22% +12%
3,466 531

340

1,560 229
180
139
788
479
276

1995 1999 2002 2006 2010 1995 1999 2002 2006 2010

Source: National Council of Applied Economic Research 64

Government Is Spending on Road Infrastructure Development

National highway system Road density

Km of paved road per 1,000 sq km of area
Completed
Under implementation
1,539 However, quality
Project preparation and maintenance
started not world class

660 646
441 408
152
34 21 11
U.K. Korea Ger- India U.S. Ma- China Russia Brazil
many laysia

• National Highway Development Project (NHDP) launched

India’s largest highway project with
• 4/6 laning of around 13,146km
• Total cost of about $12bn
• 24% of the project has been completed, while
another 28% is under implementation
• Expected completion is by December 2007
• Construction of 46,800 km of state highways and district
roads also being targeted for 2007
• Expressways for high density corridors are planned. Land
acquisition and feasibility studies of about 1,000 km of
expressways has been planned for 2007

Sources: Planning commission; NHAI; CIA World Fact Book; CMIE Infrastructure Report - 2003
65
Retail Is Subject to Regulatory Risk Because Government
Informally Controls NOCs' Retail Prices

• Government of India (GoI) had liberalized

petroleum product prices in 2002. Street
prices were to be determined by the players
every fortnight
• Over the last two years (2004-06), in light of
high crude prices and political risk of
• Private companies
suffer from the price
passing on the high product prices, GoI has
increases because
effectively controlled street prices of auto
they do not get equal
and cooking fuels through the NOCs
access to
• GoI compensates the NOCs (for the loss)
government bonds
through
– Discounts on local crude oil supplies by
• Despite high margins
in the past, retail
ONGC and other upstream NOCs (33% of
seems currently
loss)
unattractive, and is
– Discounts on product sales by Reliance
likely to remain
and ONGC/MRPL (13% of loss)
unattractive in case
– Oil bonds from GoI to bridge the remaining
of rising oil prices
loss (~40% of loss)
• With the oil bonds, NOCs break even on
retail sales

Source: FACTS 66
Retail Margins Are Squeezed When Crude Prices Rise

Standalone retail is negatively impacted in rising crude price

environment, as price increases are not fully and immediately
transmitted to the customer
Prices and margin in $ per bbl (BPCL – Example)

40
Crude prices
Due to
35 unpredictable
30 nature of
government-set,
25
end-user prices,
20 retail is best
15 integrated with
refining
10
R&M margins
5 Refinery margins
0 Marketing margins
-5 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

FY ’03 FY ’04 FY ’05

Sources: Interviews; Platts; Company Web sites; team analysis 67

Most Players Have Significant Vertical Integration and Expand in
Refining: Retail Put on Hold Given Low Current Margins
kb/d
2006
Refining 2012
capacity 2006
and 2012 2000 Firm capacity
expansion
1800 2006-2012
Planned capacity
1600 expansion
2006-2012
1400

1200

1000 IOC

800

600
Reliance
400
BPCL
200
HPCL
0
0 100 200 300 400 500

Retail sales of gasoline and diesel

Sources: FACTS; annual reports; company Web sites 68

Entry Barriers Make the Retail Market Potentially Attractive in the
Long Run
Impact on retail
Description profitability
• Participation in • Excludes jobbers/
Minimum downstream requires a independents from the Entry barriers
investment minimum commitment of market which prevents likely to remain
requirement $450mn over ten years price-based, micro- • NOCs require
market level competition cross subsidy
for LPG/
• Real estate availability in • Protects the current high kerosene
Lack of urban areas (especially profitability levels of • Retail significant
quality urban top six cities) is low; urban sites contributor to
real estate wherever available is NOC profitability
very expensive • Fuel quality
issues would
arise if entry
Network • Despite networks being • Restricts non-
barriers were
dominance of built by private players, collaborative behavior
removed
incumbents aggressive network build
Potential refining
continues up by established
overcapacity may
players (IOC, BPCL, and
further improve
HPCL) helps them retain
attractiveness
leadership

69