Pricing and Investments in

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• Pricing and Investments in
• Oil Gas sector

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Petroleum Products Pricing early days

• Historically, oil prices in India were controlled
  by Government through cross subsidy pool
  operation. Oil companies were fully compensated
  based on a cost-plus formula. The mechanism was
  called Administered Pricing Mechanism (APM)
• Government notified Phased Dismantling of
  Administered Pricing Mechanism (APM) in 1997
  which commenced in 1998 whereby all price
  controls were to go by March, 2002 .
• For socio-economic reasons, prices of only PDS
  Kerosene Domestic LPG were to continue to be
  administered and the same to be funded through
  the Consolidated Fund of India.
• Deregulation did start in accordance with
  time-table. Transport fuels also had an initial
  brush with Deregulation but could not be
  sustained due to increasing international prices
  leading to higher pump prices.
• By Apr02, except for the Sensitive Products
  namely Gasoline, Gasoil, Kero LPG, all other
  petroleum products were fully deregulated.
• 2

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Petroleum Products Pricing the difficult years

• From 2002 till recently,
• International Oil prices have been on a steep
  rise
• Selling prices of Sensitive Products have
  remained under Government Control to protect
  domestic consumers from volatility runaway
  increase in-line with international prices.
• In contrast, Cost-price to Oil Marketing
  Companies (Refinery Transfer Price) has been
  linked to international prices is based on
  import-parity principle.
• Due to this contradiction, Under-recoveries of
  Oil Marketing Companies (OMCs) have also been
  increasing steadily.
• Government of India have compensated OMCs from
  time-to-time during last few years through
  various mechanisms
• Sharing of subsidy burden by Upstream Companies/
  Stand-alone Refiners
• Issue of Oil Bonds
• Budgetary Support/ Cash Compensation
• 3

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Pricing in Oil Sector- Kirit Parikh Report

• Main Recommendations
• Level Playing field and Competition
• Petrol- Free both at refinery gate and retail
  level
• Diesel- Free both at refinery gate and retail
  level
• Additional Excise Duty on Diesel cars
• Effective Distribution system for PDS kerosene
• Domestic LPG
• Reduction in Kerosene allocation
• PDS kerosene price increase
• Domestic LPG price increase

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Pricing in Oil Sector- Kirit Parikh Report

• Under-realization
• Under-realization calculation based on IPP
  (existing method)
• Under-realization on petrol/diesel nil free
  price
• Financing under-realization- SKO(PDS)/LPG(Dom)
• Reduction in PDS Kerosene allocation
• PDS kerosene price increase
• Domestic LPG price increase
• Mopping up portion from ONGC/OIL
• Cash subsidy from budget

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Petroleum Products Pricing Recent developments

• June, 2010 has seen major Government initiatives
  on Pricing of Sensitive Petroleum Products
• Pricing of Gasoline has been decontrolled
• Pricing of Gasoil shall also be market-determined
  in a phased manner. To start with, Retail price
  has been increased by Rs 2/litre to bring it
  closer to market-level.
• Kerosene Retail prices, that had not been changed
  since 2002, have been increased 33 by Rs
  3/litre.
• LPG Retail prices have been increased 12 by Rs
  35/ cylinder
• All the above measures shall result in increased
  monthly cash-flows of around Rs 1000 Cr for
  IOCL. This will boost liquidity lower need for
  borrowings.
• 6

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Oil Pricing Methodology
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Administered Pricing Mechanism Characteristics
Administered Pricing Mechanism
Fixed parameters
Cost Plus
Rare revisions
Averaging effect
Assured returns
Supplier- Customer linkages
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De-regulated Pricing Mechanism Characteristics
De-regulated Pricing Mechanism
Market - Determined
Flexible parameters
Frequent revisions
Accent on Logistic efficiency
No Assured returns
Competition
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De-regulated Pricing Mechanism Options
Import Parity
De-regulated Pricing Mechanism
Cost-Based
Competition- Based
Government- Influenced
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Steps in Pricing

• Refinery Transfer Price (RTP)
• Ex-Storage Point Price (ESPP)
• Selling Price/ Retail Selling Price (RSP)

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Import Parity Pricing Principle(for De-regulated
Products)
Landed Cost RTP
Ex-Storage Point Price
Ocean Loss
Wharfage
Customs Duty
Marketing Margins
Ocean freight
Insurance
Marketing Cost
DLAF
FOB, Premium
Landed Cost (RTP)
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Trade Parity Pricing Principle (for MS Diesel)
Export Parity(20)
Advance License benefit
Actual ESPP fixed by Govt is much lower than
Desired ESPP
FOB, Premium
IPP (80)
Desired Ex-Storage Point Price
Ocean Loss
Wharfage
Stock Loss
Working Capital
Customs Duty
Net wt. Avg Frt from Port to locn.
Ocean freight
Insurance
Marketing Cost
Margins
FOB, Premium
80 of IPP 20 of EPP
Note MS has been decontrolled wef 26.06.10
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Selling Price for Customer (Bulk Products)

• Components are
• Ex-Storage Point price (ESPP)
• State Specific cost
• (based on indirect and Irrecoverable State taxes)
• Freight
• (railway freight from refineries / depots to
  customers)
• Excise Duty
• Sales Tax levies
• Landed / Selling price for Customer

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Retail Selling Price (RSP)(Retail products)

• Components are
• Ex-Storage Point price (ESPP)
• State Specific cost (irrecoverable state taxes)
• Transportation Charges (from Depot to market)
• RPO Charges
• Excise Duty
• Dealer Commission
• Sales Tax levies
• Retail Selling Price (RSP)

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Cost price Principle for SKO(PDS) LPG(Dom)
Difference between Cost Price and Issue Price in
March 2002 Fixed as Subsidy for 2002-03
(Thereafter, reduced to 1/3rd. Current subsidy
is Rs 0.82/l for SKO Rs 22.58/cyl for LPG)
Cost Price at locations (Desired Selling Price
as per IPP)
Issue Price at locations (Actual Selling Price)
Stock Loss
Working Capital
Freight from Port to locations
Freight from Refinery to locations
Marketing Cost
Margins
Landed Cost at ports (RTP)
Ex-Storage Point Price at Refinery fixed by Govt
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Trends in International Prices
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Crude Upward Trend of FOB Prices
- PER BBL
Average FOBs for the Previous Fortnight
2004-05 2005-06 2006-07
2007-08 2008-09 2009-10
Avg. FOB 38.25 55.53 67.58
66.30 83.57 69.63
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Petrol and Diesel Upward Trend of FOB Prices
- PER BBL
Average FOBs for the Previous Fortnight
Diesel
Petrol
2004-05 2005-06 2006-07
2007-08 2008-09 2009-10
Avg. FOB MS 45.21 61.13 77.41
80.20 88.37 76.28
Avg.FOB HSD 47.37 66.94 84.18
80.60 100.60 74.69
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Kerosene Upward Trend of FOB Prices
Average FOBs for the Previous Month
- PER BBL
2004-05 2005-06 2006-07
2007-08 2008-09 2009-10
Avg. FOB 47.98 70.04
83.51 79.50 103.24
75.36
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LPG Upward Trend of FOB Prices
- PER MT
Average FOBs for the Previous Month
04-05 05-06 06-07
07-08 08-09 09-10
Avg. FOB 364 479
500 555 682
584
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Diesel FOB equivalent to current(01.11.10) RSP
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SKO(PDS) FOB equivalent to current (01.11.10) RSP
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LPG FOB equivalent to current(01.11.10) RSP
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Under-realisation
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Gross Under-realisation
(In Rs. Crore)
Projected Under-recovery for IOC for 2010-11
Rs. 36,500 Crores (approx)
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Estimated Under-realisation of IOC2010-11
Rs. Crores
Total Rs. 36,500 Crores
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Impact

• Impact of Under realization
• On Profit
• On Borrowings
• On interest
• On liquidity
• On Investments
• Physical V/s Financial performance mismatch
• On market capitalization

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Capital Investment - Needs

• Capital Investment required for-
• Growth of Organization
• Updation of Technology
• Removal of operational bottlenecks
• Improvement in efficiency productivity
• Enhancement of capacities
• Fulfillment of social objectives (Generally
  include Expansion, Acquisition, Modernization and
  Replacement)

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Government initiative

• Policies of the government - further boost to
  foreign investment in this industry
• 100 FDI is allowed in private refineries via
  the automatic route and up to 49 in
  government-owned ones.
• 100 FDI is also granted in cases of petroleum
  products, gas pipelines, exploration, and
  marketing or retail via the automatic route.
• With NELP (New Exploration Licensing Policy) it
  has helped encourage further explorations for oil
  and gas reserves in India.

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Investment in Oil Sector- FDI Norms
Activity of FDI Cap/Equity Entry Route
Exploration activities of oil natural gas fields 100 Automatic
Infrastructure related to marketing of petroleum products 100 Automatic
Actual trading and marketing of petroleum products 100 Automatic
Petroleum product pipelines 100 Automatic
Natural gas/LNG pipelines 100 Automatic
Market study and formulation 100 Automatic
Petroleum refining in the private sector, subject to- (next slide) 100 Automatic
Petroleum refining by the Public Sector Undertakings (PSU), without any divestment or dilution of domestic equity in the existing PSUs 49 Government

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Investment in Oil Sector- FDI Norms

• 100 FDI subject to-
• The existing sectoral policy and regulatory
  framework in the oil marketing sector and the
  policy of the Government on private participation
  in exploration of oil and the discovered fields
  of national oil companies

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Capital Investment

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

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• Indian Oil

• Thank you

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RSPs of MS, HSD, SKO LPG in Neighbouring
Countries
Countries MS HSD SKO LPG
Rs/litre Rs/litre Rs/litre Rs/cyl
India 51.43 40.10 12.32 345.35
Pakistan 36.41 41.44 35.97 577.18
Bangladesh 49.72 29.43 29.43 537.37
Srilanka 47.24 29.90 21.02 822.65
Nepal 51.36 39.24 39.24 782.84
Prices at India(Delhi) are as on 26.6.10, prices
for other countries taken as on 1.6.10
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Diesel Desired Vs Actual RSP at Delhi (Rs/Litre)
Desired RSP
Actual RSP
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SKO(PDS) Desired Vs Actual RSP at Delhi
(Rs/Litre)
Desired RSP (Net of Subsidy of Rs 0.82/Ltr)
Actual RSP
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LPG(D) Desired Vs Actual RSP at Delhi (Rs/Cyl)
Desired RSP (Net of Subsidy of Rs.22.58/Cyl
316.06
161.40
162.64
Actual RSP
127.90