Energy Contracting & Negotiation-2

CHAPTER 2 LICENSING & CONCESSIONARY REGIMS The terms and structures of upstream license agreements between companies and governments determine whether a specific oil and gas field can be developed on a commercial basis and how costs and profits will be divided over the field’s life cycle.

Global comparisons of the economic performance of production sharing contracts (PSCs), tax and royalty, service, risk and joint venture contracts identify strengths, weaknesses, risks and opportunities associated with specific contracts. There are many issues, going beyond just the fiscal terms, that must be considered when negotiating licence agreements

INTERNATIONAL OIL AND GAS UPSTREAM REGIMES AND CONTRACTS Petroleum as a source of energy plays a vital role in the progress of economy of any country. This has led to evolution and development of different concession and contracting practices in the world over the years. Contracting Regimes Various forms and variants petroleum regimes are in vogue depending on priority and objectives sought to be achieved by a country. The practices followed in the international arena, can be divided into following four groups: I)

Concessionary arrangements;

ii)

Contractual arrangements;

iii)

a)

Service Contracts;

b)

Production Sharing Contract (PSC);

c)

Risk Service Contracts/ Exploration Service Contracts

d)

Risk Service Development Contracts

Joint Venture arrangements

46

The contract regime and arrangements differ in terms of distribution of produce, management and control of operations, degree of intervention and participation of the State, risk sharing between the State and Contractor. The salient features, of these regimes are discussed below: Concession Arrangements Under concession arrangement, the State issues a license or grants concession to a Contractor granting the right to use an identified area for exploration and production of petroleum. The ownership of produce, if any, remains with concessionaire. Management and control of the operations, costs and risks associated with the operations remain entirely with the licensee. This arrangement is found in most of the developed countries like USA, UK, Canada, Italy and some of the developing countries like Somalia, etc. The administration of a license arrangement is easy for the State as the State is assured of return in the form of royalty in case of discovery. Contractors like this system since there is no interference in the day to day operations from the government. Up to early 1960 concession arrangements predominated the world scene. The earliest agreements consisted of only a royalty payment to the State. And later on taxes were added once governments gained more bargaining power. In the late 1970s and early 1980s, a number of governments created additional taxes to capture excess profits from unexpected high oil prices. Now there are numerous fiscal devices (like Signature and Production bonuses, rentals, Royalty, etc.), various types of taxation (like Corporate Income Tax, petroleum revenue tax, windfall profit tax, etc.), and sophisticated formulae for profit sharing found in concessionaire system. Contractual Arrangements There are a number of variants so far as contractual arrangements are concerned. It may be a pure service contract where payment is not linked to production or risk associated with oil business is not taken or shared by the contractor. On the other hand it may be linked to risk and production. A contract for exploration and 47

development of petroleum through risk service contract refers as to how the produce is to be divided and shared among contractor and landowners, which is generally a State. The objective of private companies / international oil companies is to get a reasonable rate of return on investment keeping into account the risk of exploration and lead time required to produce from the earth, to gain long term access to new supply of petroleum through the right to export a significant part of production. Under contractual arrangement, the State keeps the right of ownership of petroleum. For better understanding, these arrangements can be classified as follows:a) Pure Service Contracts b) Exploration Service contracts c) Development Service Contract d) Production Sharing Contracts (PSC)

a) Pure Service Contracts In a pure service contract regime a contractor is required to carry out exploration and/or development work on behalf of the State and in turn receives a fee in cash and/or kind. All the risks of operation are borne by the State. Such contract may be for a specified activity or may encompass all the activities starting from exploration and culminating in production. b) Exploration Risk Service Contract In an Exploration Risk Service contract, the Contractor is paid a fee for the exploration and/or development work and also has the right to participate in the profits made by charging a premium. The Contractor bears all the risk in so far as he is required to supply the necessary capital for exploring the petroleum. After a discovery, the field is taken over by the state for commercial exploitation. The

reward of the

Contractor is dependent on the discovery and exploitation of commercial reserves. An Exploration Risk Service contract is similar in nature to the production-sharing contract 48

except that in case of former after development field is taken over by the National Oil Company and exploited by it. These are found in Iran, Iraq etc. Risk service contract is more beneficial to the government as Government keeps the ownership of produce but financing of operations and risk of exploration operations is borne by the Contractor. c) Development Service Contracts Sometimes small discoveries are not developed by National Oil Company because of their small size. These are given on contract. Such contracts may be on the basis of getting all the production by National Oil Company and paying the charges for services provided by the Contractor or sharing of production by then two. d) Production Sharing Contracts (PSC) In this arrangement a contract is entered into among State and/or National Oil Company (NOC) and the Contractor for exploration and production of oil and gas from an area. The Contractor bears all of the exploration and development costs, In case of discovery, the State shares production at predetermined rates as incorporated in the contract. The first Production sharing contract (PSC) was signed in 1966 in Indonesia. At least 50% of host governments now use production sharing contracts regime. PSCs are in use are North Korea, China, Indonesia, Philippines, Sudan, Libya, Oman, Qatar, India, Bahrain, etc. The acreage may be given at different stages to the contractor. It may be awarded at a stage when no exploration work has been done or after some exploration work. Such acreage or blocks are termed as Exploration Acreage or Blocks. There may be acreage in which discovery of oil or gas has been made such acreage is known as Discovered Fields or simply Fields. In India PSC are in operation for Exploration Blocks, Small and Marginal Fields and Medium Size Fields.

49

The PSC contains provision for deciding as to appraisal program, development program and overall sharing of oil or gas on the basis of a formulae given in the PSC. Some Important Features of Contractual Regimes Fiscal Regime Fiscal regime deals with the principles according to which the produce from the contract area is distributed among the State and contractor and levy of taxes, duties etc. In essence it is concerned with the share of Government take and Contractor’s take. There are various fiscal tools for fulfillment of conflicting objectives of the State and Contractor under varying circumstances. The characteristics, of some commonly used tools are as follows:a) Signature and Production Bonuses Bonus payments are common elements of the State's receipt. The two most common forms of bonuses are (I) Signature Bonus and (ii) Production Bonus. In India these are generally confined to and taken in case of discovered fields. Signature bonus is the cash payment to the State at the time of signing of the contract. It is a payment to the State for awarding right to explore in the licensed area. In some cases, it can be a payment for technical information obtained from State. These are generally small and token payments. Production bonuses are cash payments made to the State in the event of a commercial discovery and after commencement of production at various stage s of production. They have no particular purpose other than receipt of certain unquestionable revenues by the State at points in time defined in the contract. There are several tiers of such payments with fresh sums being paid as production continues to rise (i.e. production bonuses linked to barrel of oil per day produced) or it reaches pre-specified levels (i.e. linked to cumulative production achieved). These are triggered, particularly at a high level of production.

50

They are unrelated to profit and could produce disincentive effects if payments are set at high levels. They may prompt companies to avoid reaching threshold level of production to reduce and avoid financial burden of paying production bonuses. b) Profit Oil Sharing Profit oil sharing by State means a portion of oil, which is left after meeting all costs of operating, exploration and development of a field, and therefore called profit oil, is directly shared by State with contractor. This is one of the main features of production sharing contracts. c) Cost Oil Recovery Limit The contractors are asked to bid the percentage of cost oil recovery. This limit is closely associated to profit oil sharing. It lays down what volume of production will be available to company to recover its cost. Cost oil recovery limit has effect of delaying recovery of cost to company and state starts sharing the profits at an early stage of the project. d) Rentals Rentals levied during exploration phase, are payments made per year usually prior to the first day of new license or contract year. They could be a lump sum payment as in Abu Dhabi; a constant payment per measured area in Alberta,

payment that

increases over a time period e.g. in India rental varies per year for year 1 to year 5. e) Royalty Royalty is one of the most commonly used fiscal tools for the State's revenue. It is linked to top gross value and/or amount of production. Royalty can be a fixed amount or percentage or alternatively linked to a sliding scale. In India royalty is payable even it follows a production sharing regime.

51

f) Corporate Income Tax All countries in the world have some form of Corporate Income Tax (CIT). Petroleum exploration activities would normally be subject to provisions of this tax legislation. The rate of Income Tax applicable to petroleum operations is generally same as that applicable to other business activities in the country. g) Hydrocarbon Tax (HT) Hydrocarbon tax was first introduced in Norway and Denmark. It is calculated in the same manner as Corporate Income Tax except that an additional uplift on investment is allowed. HT may or may not be deductible for CIT and vice-a-versa. In India it can be compared with cess. h) Additional Profit tax (APT) Additional profit tax is a profit sharing, fixed or sliding scale, which is linked to rate of return (ROR), earned by the project on a given date. It is also to avoid and take care of windfall profit. Certain contracts also contain separate provisions for windfall profits. REFORMS IN UPSTREAM AND DOWNSTREAM PETROLEUM SECTOR A series of policy changes and reforms in the Petroleum Sector were initiated in the year 1991 through Industrial Policy Resolution. The policy to promote private participation is guided by the need for attracting additional investment, introduction of better technology and competitiveness. Reforms in Petroleum sector have concentrated on opening up of this sector to private participation in upstream and downstream activities and restructuring of Public Sector oil companies through disinvestment of holdings of the Government. The Restructuring Group for the Oil sector (R-Group) has estimated an investment of about US $ 100 billion in the Petroleum and Natural Gas sector up to the year 2010 for ensuring the security of oil and gas supplies to various sectors of economy. In this background, Ministry of Petroleum and Natural Gas in order to 52

attract larger private participation has launched new exploration licensing policy (NELP) in the upstream sector in 1999. In down stream oil sector, refining and marketing operations have been opened to private sector. The structural reform is being considered in the form of providing regulatory mechanism so that functions of regulator and controller can be separated. Basic Components of Reformation and Restructuring The following are the basic components of reformation and restructuring process in oil industry:


Dis-investment




Deregulation,




privatization




Dismantling of the Administered Pricing Mechanism (APM)

Restructuring The Government

has initiated dis-investment of its share of equity in

upstream as well as downstream public sector companies as an important step in the process of de-regulation and restructuring of oil sector. However the process has been slow because of one or other reasons like persisting depression in the international market and opposition from some quarters. There is also a proposal for horizontal integration of upstream and downstream public sector companies. Based on the realization that assured returns from downstream petrol business should be ploughed to provide exploration risk capital, national oil companies are entering into down stream or upstream business as the case may be. The dis-investment in GAIL has been initiated and stakes have been taken initially by ONGC Ltd. Petronet LNG and Petronet India has been established. The companies like ONGC, Oil India and Indian Oil Corporation have become interested to take up stakes in gas companies and entering in down stream or upstream business as the case may be. GAIL is also participating in upstream business.

53

As per news paper reports, proceeds from the dis-investment in oil sector during 1998-2001 amounted to Rs. 7217 crores which is about 80% of the disinvestment of all sectors put together.

Private Participation The private participation in upstream oil sector started in 1980 when Government put blocks on First Round of Exploration Bidding. Since then bids from private companies are being invited on regular basis. A number of medium, small and marginal fields have been offered for private participation in upstream sector. The participation of private Indian and multinational companies is providing the much-needed risk capital required for the upstream industry, helping in infusing new technology input and has resulted in more exploratory effort. The economic reforms, initiated in 1991, further seek to de-license the industry, remove procedural bottlenecks and encourage private sector initiatives for supplementing and speeding up economic growth. The Government has started NELP rounds for bidding by the domestic and foreign companies with definite time frame for invitation and finalization of bids and award of the contracts and has adhered to the time table. The Third NELP Round of Bidding is under process. This provides a level playing field to all players in oil business.

The Petroleum Tax Guide, 1998 This guide is a compilation of provisions of law relating to income tax, custom duty, central excise, cess, royalties and license or lease fees as applicable to prospecting for or extraction or production of petroleum which also includes natural gas existing in natural condition [Para 3(9)] under Production Sharing Contracts entered in to on or after 1 January 1999 in terms of New Exploration Licensing Policy (NELP).This guide will help in better understanding of tax structure and aims at attracting private investment in the petroleum sector.

54

Down–Stream The Government has de-licensed the refining and marketing sector. Since July 1998, private and joint sector refineries have been allowed to import crude oil for their requirements. The Government has also come up with following policy initiatives in refining and marketing sectors. i)

The setting up of new grass-root refineries by private sector either on their own or as joint ventures with downstream sector Public Sector Undertakings (PSU).

ii)

Setting up of lube refineries by private sector.

iii)

Parallel marketing of petroleum products by private sector.

iv)

The oil sector Public Sector Undertakings may also form joint ventures among themselves and with Indian and foreign companies.

The Government has allowed parallel marketing of number of petroleum products by private sector and decanalised the imports. However, due to constraints at ports and inland transport facilities, parallel marketing had a limited success. Marketing rights have been given to a promoter bringing in a minimum investment of Rupees two hundred (2000 ) crores for setting up grass root refineries. This minimum investment may be in terms of equity and debt. Since there is a cap of twenty six (26) per cent foreign equity holding so debt has also been allowed to be included in the minimum investment.

2. 3 Dismantling of Administered Price Mechanism The prices of petroleum products in India were fixed for a long time under an Administered Pricing Mechanism (APM) based on the retention price concept under which the oil refineries and oil marketing companies were compensated for operating costs and are assured a return of 12 per cent post tax on net worth. As per notification issued by the Government, the APM has been dismantled by the year 2002 beginning on 1 April 1998 [Gazette Notification, Extraordinary, Part I Section I No. 224 dated 24 November 1997, Resolution NO.P-20012/29/97-PP].

55

3. The Petroleum Regulatory Board Bill, 2002 The Petroleum Regulatory Board Bill 2002 has been introduced in the Parliament. The details of this proposed legislation have been described in detail elsewhere. The other two proposed legislation have yet to reach the Parliament. The main features of Petroleum Regulatory Board Bill 2002 , are as follows: Some important terms used in petroleum industry have been defined in the Bill as follows:. “natural gas” means gas consisting of methane, ethane, propane, butane, pentane and other gas with similar characteristics produced from gas wells, gas condensate wells or oil wells and includes – (i)

any residual gas which is obtained after processing such gas upon removal of liquefied hydrocarbon and impurities there from ;

(ii)

gas in liquid state, namely, liquefied natural gas;

(iii)

methane obtained from coal seams, namely, coal bed methane; and

(iv)

compressed natural gas;

“Oil Company” means a company registered under the Companies Act, 1956 and includes an association of persons, society or firm by whatsoever name called or referred to for carrying out an activity relating to petroleum and petroleum products. “entity” means a person, association of persons, firm, company or cooperative society , by whatsoever name called or referred to , other than a dealer or distributor, and engaged in refining, processing , storage, transportation, distribution, marketing, import and export of petroleum and petroleum products including laying of pipelines for transportation of petroleum and petroleum products, or establishing and operating a liquefied natural gas terminal; Petroleum” means any liquid hydrocarbon or mixture of hydrocarbons, and any inflammable mixture (liquid, viscous or solid) containing any liquid hydrocarbon, including crude oil, liquefied petroleum gas and natural gas, and the expression ‘petroleum product’ shall mean any product manufactured from petroleum; Since Petroleum has been defined to include gas, therefore this legislation when enacted will also deal with the gas business.

56

A description of the main features of this proposed legislation is given below: a) Petroleum Regulatory Board The Bill provides for the composition, establishment and incorporation of the Petroleum Regulatory Board with its head office in New Delhi. The Board will be a body corporate having perpetual succession, a common seal and shall by the said name sue and be sued. The Board shall consist of a Chairperson and not more than four other members and will have its head office at New Delhi. The Central Government shall appoint the Chairperson and other members of the Board from amongst persons of eminence in the fields of petroleum industry, management, finance, law, and administration or consumer affairs (Clause 3 &4) The Chairperson and the other members shall hold office for a term of five years from the date on which he enters upon his office or until he attains the age of 65 years, whichever is earlier and that he will not be eligible for reappointment. Chairperson or other members of the Board. The Chairperson or the other members ceasing to hold office in the Board shall not be eligible for further employment under the Central Government, State Government and will not accept any commercial employment for a period of two years from the date he/she ceases to hold such office. The Chairperson, members, officers and other employees of the Board shall be deemed to be public servants (Clause 45).Civil court shall not have jurisdiction in respect of any matter which the Board is empowered to determine (Clause 47). Court can take cognizance of any offence punishable only on a complaint made by the Board. No court inferior to that of a Chief Metropolitan Magistrate or a Chief Judicial Magistrate shall try any offence punishable under the Bill. The offences punishable under the proposed legislation are cognizable (Clause 48). b) Secretary and consultants There is provision for the appointment of Secretary, other officers and employees of the Board and for the determination of the salaries and allowances and the other terms and conditions of service of the Secretary, other officers and employees of the

57

Board. .It also provides for appointment of consultants as may be required to assist the Board (clause 10). c) Regional Offices The Board can establish regional offices, the functions of which are to be determined by the Board by regulations (Clause 11). d) Powers and Functions of Board (Clause 12) The powers and functions of the Board, apart from others, are to – (a)

protect the interest of consumers by fostering fair trade and competition amongst the entities;

(b)

authorize entities to market notified petroleum and petroleum products, or to establish and operate liquefied natural gas terminals, or to lay, build, operate or expand a common carrier.

(c)

declare pipelines as common carrier;

(d)

regulate access to common carrier and transportation rates for common carrier;

(e)

ensure adequate availability and display of information about the maximum retail prices fixed by the entity of such petroleum and petroleum products as may be notified by the Central Government;

(f)

monitor prices of notified petroleum and petroleum products

and take

corrective measures to prevent profiteering by the entities; (g)

lay down and enforce retail service obligations for retail outlets and marketing service obligations for entities;

(h)

levy fees and other charges as determined by regulations etc.

The Board is empowered to settle any dispute or matter arising amongst entities or between an entity and any other person on issues relating to refining, processing, storage, transportation, distribution, marketing and sale of petroleum and petroleum products. The Board will also receive any complaint regarding contravention of 58

provisions of the proposed legislation and pass suitable orders to decide the complaint. (Clause 13) e) Maintenance of Record of Authorization Board shall maintain records including a register of authorization containing details of entities authorized by the Board to undertake any activity requiring authorization under the proposed legislation (Clause15). No entity shall market any notified petroleum or petroleum product, or lay, build, operate or expand any pipeline as a common carrier, or establish or operate a liquefied natural gas terminal, without obtaining authorization under this Bill. However, an entity marketing any notified petroleum and petroleum product, and establishing or operating a liquefied natural gas terminal on the appointed day shall be deemed to have such authorization (Clause 16). Clause 17 deals with the filing of application by an entity for grant of authorization by the Board and Clause 19 seeks to empower the Board to grant authorization subject to such terms and conditions as it may specify, after hearing the interested parties. f) Laying of pipeline as a Common Carrier Clause 20 contains the procedure for declaring, lying, and building, operating or expanding a pipeline as common carrier by the Board. Provision has been made for giving the right of first use for requirement of the owner of a pipeline. It also provides for payment of transportation rates for use of common carrier to the authorized entity (Clause 21).Board can suspend or cancel the authorization granted by it on failure of authorized agency to comply with any condition of authorization (Clause 22 ). Central Government has been empowered to take over control and management of facilities and business premises of any entity and retail outlets in public interest after affording an opportunity of hearing to the affected entities (Clause 35).

g) Dispute Settlement Disputes shall be decided by a Bench consisting of two members nominated by the Chairperson and neither the civil court nor the Monopolies and

59

Restricted Trade Practices Commission shall have any jurisdiction in the matters which the Board is empowered to decide. (Clause23)

h) Filling of Appeal Any person aggrieved by any decision or order of the Board can file an appeal to the High Court (Clause 28).

i) Petroleum Regulatory Board Fund A Fund with the name of ‘Petroleum Regulatory Board Fund’ shall be constituted. Provisions have been made for grants, fees, penalties and charges to be credited thereto and all payments to be made there from. j) Punishment Contravention of directions of the Board is punishable. Marketing any notified petroleum or petroleum products without a valid authorization and establishing or operating a liquefied natural gas terminal without authorization, laying, building, operating or expanding a common carrier without authorization are punishable (Clause 36,37, 38, 39).Any offence committed by a company and punishable under the Bill would cover the person in charge of the company (clause 42). k) Data Bank A data bank is to be maintained and information to be given to the Board relating to activities of entities dealing with petroleum and petroleum products. Further, the Board shall have power to verify the data supplied by the entities.

l) Obligations of Authorized Bodies or Entities The obligations of entities authorized by the Board inter alia, include commencement of activities for which authorization has been granted within time specified by the Board, maintenance of documentary records as specified by the Board, and allow inspection of such facilities and documentary records by any person authorized by the Board. The entity shall also register documents as may be specified

60

by the Board. The Board may call for any information from an entity and shall also have the power to inspect and obtain information from any authorized entity (clause 43). m) Rules & Regulations Central Government has the power to make rules for carrying out the provisions of the Bill (Clause 50) and Board is empowered to make regulations in respect of certain matters consistent with the proposed legislation and the rules made hereunder (Clause 51).The Rules and Regulations made under the Bill would be laid before Parliament (Clause 52).

n) Monitoring by the Board Board is empowered to monitor the implementation of agreements entered into between one oil company and another for sharing of petroleum products or infrastructure facilities as approved by the Central Government for the transition period. The Board shall also monitor setting up of dealerships and distributorships by the entities without affecting the retail network of the existing entities during the transition period. The expression “transition period” shall mean a period of two years commencing from 1.4.2002 and, where the Central Government thinks fit so to do, it may extend the period of two years by a further period of one year (Clause 53). Indian oil and gas majors intensify oil and gas hunt abroad In the year 2006 Indian oil and gas majors further strengthened its international operation and diversified its portfolio, which was predominately in Middle East to new areas like Latin America. Further, India companies also joined hands with foreign companies to explorer foreign territories. The some of important ones are discussed below.

ONGC Videsh Ltd.

OVL-Cuba Assets ONGC Videsh Limited (OVL) signed a Production Sharing Contract on 10th September, 2006 at Havana with CUPET, the State oil Company of the Republic of Cuba for two 61

offshore exploration Blocks N-34 and N-35 located in Exclusive Economic Zone of Cuba. The ceremony was held at Nacional Hotel, Havana and was presided over by H.E. Ms. Yadira Garcia, Minister for Basic Industries, Republic of Cuba. OVL had earlier submitted Expression of Interest for these two blocks located in the deep water of Cuba offshore and negotiated the Production Sharing Contract. Government of Cuba has the option to take 20% participating interest in these Blocks. OVL will be the operator of the Block. The Blocks are spread over an area of approximately 4300 sq. km. The blocks are located in a very favorable geological set up and are estimated to hold considerable hydrocarbon resources. Exploration period is spread in three phases over a period of six years. During the first phase of exploration, acquisition, processing and interpretation of seismic data would be carried out for identification of prospects. Earlier in May 2006, OVL had acquired 30% Participating Interest in six exploratory blocks in offshore Cuba from Repsol YPF who hold 40% Participating Interest and balance 30% Participating Interest is held by Norsk Hydro.

ONGC and SINOPEC’s joint acquisition of producing Colombian Oil Assets A 50:50 joint venture comprising a subsidiary of ONGC Videsh Limited (“ONGC-VL”) and a subsidiary of Sinopec International Petroleum Exploration and Production Corporation (“SIPC”) has acquired Omimex de Colombia Ltd. ("Omimex”) from Texas based Omimex Resources, Inc for an undisclosed sum

Omimex has oil & gas

operations exclusively in Colombia, which include onshore production and exploration areas with gross proved reserves of more than 300 million barrels of oil and current production at approximately 20,000 barrels of oil per day. Omimex's assets constitute a 100% interest in the light oil Velasquez fee mineral property and a 50% interest in the Nare and Cocorna association contracts where the Colombian national oil company, Ecopetrol S.A. (“Ecopetrol”) holds the remaining 50%.

OVL signs MoU with INTEVEP, Venezuela ONGC Videsh Limited (OVL) signed a Memorandum of Understanding (MoU) with INTEVEP, S.A., a subsidiary of National Oil Company of Venezuela, PDVSA for Skill 62

Development in various aspects of exploration and production on September 11, 2006. Venezuela holds large reserves of heavy and very heavy crude. The country is looking for partners to exploit it. The program to start offshore operations from next year has already been chalked out. The related areas under MOU include: technical assistance and specialized services, joint research and development, organization of conferences, symposiums and seminars, training activities, oil and gas exploration and production, refining, gas industrialization and petrochemical, process engineering, clean fuels, automation and computing, (information technology) and intellectual property rights.

ONGC completes transaction of acquisition of producing asset in Syria A 50:50 Joint Venture Company, Bergomo Holding B.V. (to be renamed as Himalya Energy (Syria) B.V.) of ONGC Nile Ganga BV, and Furlin Investments S.A.R.L., a subsidiary of China National Petroleum Company International (CNPCI) had entered into an agreement with Petro-Canada, a Canadian oil company, on December 19, 2005 to acquire entire shares of Petro-Canada’s interest in four Production sharing Contracts (PSC) namely:- Ash Sham PSC (33.33%); Dier EZ Zor(old) PSC (37.5%); Dier EZ Annex IV PSC (37.5%); Gas Utilization Agreement (36%), covering 36 producing fields in Syria. Government of Syrian Arab Republic has approved the transaction and participation of the Joint Venture Company in the upstream hydrocarbon sectors through above mentioned PSCs. Pursuant to the agreement, the transfer of shares of the German subsidiary of Petro-Canada which holds its interest in these PSCs to the Joint Venture was completed on 31st January, 2006 at Zurich, Switzerland. The purchase is retroactive to 1st July, 2005.

OVL’s first foray in Latin America-15% stake in Brazilian deepwater block In yet another significant acquisition abroad, OVL, formally makes its maiden entry in Latin America, with 15% stake in BC-10 deep water block, located approximately 120 km southeast of the city of Vitória in Brazil. Technical and commercial studies are underway for the development of resources in BC-10, which would be shell’s second operated development in Brazil, with the potential for production of around 100,000 barrels a day. Shell has exercised its pre-emption option for an additional 30% of 63

participating interest in the Shell operated BC-10 block located offshore Brazil. Shareholdings in the partnership will stand at Shell 50%, Petrobras 35% and OVL 15% once the transaction has been finalised and approved by Brazil’s National Petroleum Agency. BC-10 was declared commercial in December 2005. The Declaration of Commerciality occurred after a substantial exploration and appraisal program involving 13 wells and significant engineering and technological studies. In total six discoveries were made in the block, which resulted in four development areas: Ostra, Argonauta, Abalone and Nautilus. The block is located approximately 120 km southeast of the city of Vitória, in water depths ranging from 1500 to 2000 meters. The Oil and Gas Block BC-10 is located in the Campos Basin approximately 120 kms southwest from the city of Vitoria off the coast of Brazil.

OMEL wins two prospective oil & gas blocks in the Nigeria In July 2005, OVL signed an MOU with Mittal Investments Sarl, the investment holding arm of Mittal Steel, formed ONGC Mittal Energy Ltd. (OMEL). In its maiden venture in an international bidding round, OMEL has won two prospective oil & gas blocks in the Nigeria 2006 Mini Bid Round. In the bidding held in the port city of Lagos in Nigeria on 19th May 2006 by the Department of Petroleum Resources, Government of Nigeria, OMEL won two blocks OPL 209 and OPL 212. The bidding round, named Nigeria 2006 Mini Bid round, was aimed primarily to award the upstream oil & gas blocks to companies that had made commitment to invest in the strategic sectors in Nigeria like refineries, power, transport, rail etc. OMEL was one of the invitee companies, in light of the MOU entered between OMEL & Government of Nigeria in November 2005, envisaging downstream and strategic investment by OMEL in Nigeria. OVL was also invited by the Government though it had not committed any downstream investment separately. OMEL was granted the right of first refusal in three blocks OPLs 212, 209 & 216 and OVL was similarly given the right of first refusal in OPL 218. The technical assessment of all the 4 blocks was carried by ONGC/OVL in-house team.

64

OVL signed MOU with PETROBRAS in oil field exploration and development The MOU encompasses strategic cooperation and participation in the exploration and production of hydrocarbon resources on-land, as well as in shallow and deepwater, areas. The MOU will facilitate opportunities for joint collaboration by these two companies in India, Brazil and third countries. In April 2006, Petrobras accommodated OVL’s acquisition of 15% of the equity in Block BC- 10, located on the prolific Campos basin in Brazil’s deepwaters. Shell is the Block operator, holding a 50% participating interest, with Petrobras holding the remaining 35% interest. BC- 10 Block is located in approximately in 1800 m water depth, 120 km off the Brazilian coast, and hosts eight exploration and five appraisal wells drilled to date. Initial studies suggest a substantial estimated recoverable reserve of Oil and Gas over the producing life of the field. The Block is currently under development and the production is scheduled to commence in the last quarter of 2009, with OVL’s equity share at peak production expected to reach approximately 1 MMPTA. BC10, OVL’s first venture in South America, calls for an upfront investment of about US$410 million, including the acquisition consideration, plus an upside capex.

ONGC Videsh & PetroVietnam sign production sharing contracts for blocks 127 & 128, offshore Vietnam OVL has signed the PSC with PetroVietnam for Blocks 127 & 128, offshore Vietnam in the Phu Khanh Basin. OVL shall be the operator of the block and will have a 100% interest. In the event of a commercial discovery, PetroVietnam through a wholly owned affiliate has the option of obtaining up to a 20 percent participating interest in the Blocks. Blocks 127 & 128 cover approximately 9,246 sq.km and 7,058 sq.km. area respectively and lie alongside the eastern coastline of Vietnam, northeast of Ho Chi Minh City. The exploratory phase of both the contracts is seven years, with a firm minimum work program during the first three years that includes the acquisition of new 3-D seismic data and the drilling of two exploratory wells in Block 127 and one exploratory well in Block 128. The exploratory phase is followed by two optional two-year periods during which a well has to be drilled in order to retain the acreage.

65

Gujarat State Petroleum Corporation GSPC is to form an overseas investment arm to explore hydrocarbon exploration and production opportunities in Oman, Qatar and Syria. It has submitted bids for five oil and gas blocks of Muscat and Syria. GSPC is also planning to expand its gas distribution network over south India channelling natural gas from the Krishna-Godavari (KG) basin. It has bid for blocks along with Oilex of Australia, GAIL and the Prize Petroleum-HPCL joint venture. GSPC has decided against tapping the capital market to develop India’s largest gas find of 20 trillion cubic feet (TCF) in the KG basin. Instead, it is exploring the joint venture route with international oil majors to develop the basin, which would require funds of over Rs 15 billion. GSPC has turned its subsidiary, Fuel Management Group, into a piped natural gas distribution company GSPC Gas Company which will be distributing fuel in 20 cities across the state. Royal Dutch Shell and GSPC have signed a long-term memorandum of understanding whereunder Royal Dutch will provide 2 million tonnes of liquefied natural gas (LNG) per annum, starting 2010, to GSPC. Gujarat State Petronet Limited (GSPL) has plans to invest Rs 14.5 billion to expand the gas grid network across the state by 2007.

IOC-Oil India SPV A project-specific special purpose vehicle (SPV) of the Indian Oil Corporation (IOC) and Oil India Limited (OIL), floated for overseas acquisitions and exploration, is scouting for new oil and gas blocks in Indonesia. Indonesian state-owned Pertamina will open tenders in February for exploration of 10 oil and gas blocks, as well as 40 oil and gas brownfields. The IOC-OIL combine is close to acquiring 90 per cent stake in an exploration block at Gabon in West Africa at a total cost of $1.2 billion. The Indian oil SPV won two blocks in Libya recently and is expecting production from these in five years. The SPV is close to clinching a deal for offshore Block 239 in Nigeria. The block was originally won by Canadian firm Inlaks Petroleum Resources, which was unable to pay for it. According to the conditions laid down before the bidding process, the IOCOIL SPV is the second preferred bidder and has asked the Department of Petroleum Resources (DPR) of Nigeria to allow it to exercise the option of a second preferred bidder in taking up Block 239. The two Indian PSUs will hold around 40 per 66

cent each in the block while the remaining 20 per cent will be held by a Nigerian company a partner in the consortium. OIL will invest around $150 million in the coming fiscal year on acquisition of international oil blocks including a few in Nigeria.

Essar Oil In Madagascar, EOL has bagged three exploration and production blocks on December 18, 2006, and an MoU will be signed soon," company sources said. EOL is the owneroperator of all the three blocks in the African nation.

Reliance Industries

RIL and ONGC jointly eye Iraq oil field RIL and State-run ONGC and its private competitor Reliance Industries Ltd (RIL) are in talks to jointly develop Tuba oil field in southern Iraq. ONGC and RIL are expected to hold a 30 per cent stake each in the project-specific consortium and Sonatrach would hold the remaining 40 per cent. Iraq is expected to enact an oil law that would allow the regions to negotiate oilfield contracts with foreign investors.

RIL signed PSC for offshore exploration block in Timor-Leste On November 16, 2006 Minister of Natural Resources, Minerals and Energy Policy of the Government of Timor Leste, signed a Production Sharing Contract for the offshore Contract Area K in Dili, capital of Timor Leste. In January 2006, the Government of Timor Leste had invited bids for 11 offshore exploration blocks in shallow to ultra deep waters in their country. The acreage offered lies in the proven petroleum province of Australian North West Shelf and is adjacent to the Timor Sea, which is a joint petroleum development area between Timor Leste and Australia. This region contains world class discoveries like Bayu – Undan (commenced production in 2004) and Greater Sunrise. The Government of Timor Leste announced the awards on May 23, 2006. Of the 11 blocks offered under the licensing round, six blocks have been awarded. In a keenly contested bid with substantial participation from international players, RIL was awarded

67

one block. The area of the awarded block K is 2,384 Sq. Km. Reliance will have majority interest and operator-ship in the block.

RIL wins blocks in Yemen On December 2, 2006 RIL won two oil exploration blocks in Yemen. Yemen awarded onshore exploration Blocks 34 and 37. Blocks 34 and 37, each measuring around 7500sq km and located on the border with Oman, were among the seven blocks offered by Yemen in its second licensing round. RIL is likely to sign Production Sharing Contract (PSC) for Blocks 34 and 37 in 2007. The company already partners Hood Oil in producing Block 9, where the two companies hold 25 per cent each. The block currently produces 7,500 barrels of oil per day and the output will go up to 10,000 barrels this month.

GAIL

GAIL buys 30 pc stake in Myanmar Expanding its base in oil and gas exploration and production (E&P) activities, GAIL (India) Ltd has acquired stake in Block A-7 in Myanmar. GAIL, as consortium partner, along with Silver Wave Energy of Singapore, signed a production-sharing contract (PSC) with Myanmar Oil and Gas Enterprise on December 6 for the block located in Rakhine offshore area of Myanmar. GAIL would hold 30 per cent participating interest whereas the rest would be held by Silver Wave Energy. The block will be developed in phases. Under phase-1, the consortium is going to study the prospects of the block.

GAIL wins onshore block in Oman On June 28,2006 GAIL signed the Exploration and Production Sharing Agreement (EPSA) with Government of Oman for Block 56 in Muscat. The consortium consisting of GAIL, Oilex Australia, Videocon, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd was awarded Block No 56 in Oman for exploration and production of hydrocarbons, a GAIL release said. GAIL, Oilex and Videocon hold 25 per cent interest each in the consortium. Oilex Australia is the operator. "The Block 56 (adjacent to 68

producing fields) is an onshore block located in the South Oman Salt Basin area located in the eastern flank covers an area of 5,809 square kilometers and drilling is to begin in 2007. Oman had in January offered five blocks (Block 54,55,56,57 and Block 58) in the fringes of the south Oman salt Basin under competitive bidding round. The blocks 54, 55 and 56 were in the eastern flank where as block 57 and 58 are in the western flank. As per the commitment by consortium under the EPSA, the work will commence with reprocessing of existing seismic data followed by acquisition of 2D and 3D seismic in last quarter of 2006, depending on availability of seismic contractors. Drilling activity in the block is expected to start some time in the first half of 2007.

Indian Oil Corporation

IOCL-Oman foray On December 16, 2006 state-owned OIL-IOCL combine and GSPC won five onshore oil blocks in Yemen. Oil India and its government-appointed partner for overseas exploration, IndianOil, won Blocks 82 and 83 in the third round of auction. The two state-owned companies have 15 per cent stake each in the consortia led by Medco Energy with 45 per cent stake. Kuwait Energy Co has the remaining 25 per cent stake. A total of 14 blocks were on offer in the third round. Blocks 82 and 83 are located near an oil-producing field operated by Canadas Nexen in the southeastern Hadhramount province of Yemen. Block 82 measures 1,853 square kilometers, while Block 83 is spread over an area of 364 sq km. Gujarat government-run GSPC won three out of four blocks it had bid. GSPC, which is the operator with 45 per cent stake, and its partners Jubilant Enpro (30 per cent) and Alkor Petrol (25 per cent) won blocks 19, 28 and 57, sources said. Block 19 and 28 lie in the producing Marib and Masila basins, while Block 57 lies on the border with Saudi Arabia. GSPC lost out Block 84 to Norways DNO. Reliance Industries had won two blocks, 34 and 37, in the second round of auction. Hood Oil of Yemen is RILs local partner in the two blocks. Blocks 34 and 37, each measuring around 7,500-sq km and located on the border with Oman, were among the seven blocks offered by Yemen in its second licensing round.

69

IndianOil set for Indonesia retail foray On November 14, 2006 IndianOil planed to set up retail outlets there through a wholly owned subsidiary. This will be the third IndianOil venture for marketing of petroleum products overseas. The company release said they are also eying a stake in the petrochemical company PT Tuban Petrochem (Tuban Petro). The Indonesian government owns 70% stake in the petrochemical company. Besides auto fuels, the Indonesian venture will retail lubricants.

IOCL and OIL jointly picked up equity stakes in oil blocks in Gabon and Nigeria IOC and its government-nominated exploration partner Oil India Ltd (OIL) jointly picked up equity stakes in oil blocks in Nigeria and Gabon. In Nigeria, the two companies will buy into an oil block by picking up a stake in Suntera Nigeria, which is the Nigerian subsidiary of Russian oil and gas firm Suntera Resources Ltd. The strategic deal will enable the two Indian companies to own 17.5 per cent each in the block. Each company will have to shell out about $11 million for the stake. Nigerian company Summit Oil is the licensor for the block. A senior OIL official confirmed that the production sharing agreement had already been signed. “The final agreement is yet to be inked,” the official said. In Gabon, IOC and OIL have picked up 45 per cent stake each in an onshore oil block from Singapore company Marvis. Each partner will put in $36.5 million for the stake. Marvis had signed a production-sharing contract for the Shakti block - which has estimated oil reserves of 588 million barrels - with the government of Gabon last November. The total exploration and development investment 3,700 sq km block is estimated at be close to $1.3 billion.

6. Major Oil and Gas Discoveries in 2006 All gas & oil discoveries made so far under the Product Sharing Contract regime are monitored with respect to time frame provided in respective PSCs. Therefore, the brief status of gas and oil finds of blocks of Reliance, GSPC and ONGC is given below:

70

i. Reliance (R1L) fields: Dhirubhai 1 and 3 The exploration block KG-DWN-98/3 was awarded to the consortium of Reliance Industries Ltd. and Niko Resources Ltd. during NELP I round. The first exploratory well D6-A-1 resulted in a major gas discovery in May, 2002 (named as Dhirubhai-1). The operator in this block has reported 12 more discoveries as on date. The discoveries (Dhirubhai-1 & 3) were notified on 29th October, 2002. The initial development plan of Dhirubhai 1 and 3 discoveries has been approved by the Management Committee on 5.11.2004. The corresponding development area comprises 339 Sq. Kms. which represents 4.5% of the block area. The DGH approved Original Gas in Place (OGIP) at 5.5 TCF. The development plan of Dhirubhai 1 & 3 envisages drilling of 34 development wells in two phases, installation of sub-sea templates and wellheads, gas transport line and shallow water gas compressor and onshore processing facility. Complete status of the development plan : • Wells required: 34 (all sub sea). Drilling of 2 development wells has been completed. Ran to start drilling of rest of the wells from April, 2007. • Procurement of long lead items, Subsea well head, X-Mas tree, Subsea templates: LOA issued & work awarded before schedule. Construction of Jelly and onshore terminal is in progress. Dredging activity for filling at onshore site raising to +4.2m is in progress. • Technical problem anticipated : NIL • Envisaged plateau rate of production: 40 MMSCMD • Plateau period : 10 years • Date of availability of First Gas: June, 2008. For the remaining discoveries in block D-6, appraisal work are in progress and are within the schedule provided in the Production Sharing Contract (PSC).

ii. Gujarat State Petroleum Corporation (GSPC) field The well KG#8 drilling by GSPC in the shallow water block KG-OSN-2001/3 (NELP-III) in Krishna Godawari offshore flowed gas during production testing. The well has been 71

drilled down to a depth of 5061 m at water depth of 60m. Two more tests were carried out in layer EFR-A and ERF-Ba in perforation intervals 4825-4993m and 4629-4660m respectively. In the first test initially gas flowed to surface but on account of sand ingression problem, test became inconclusive. During 2nd test, no flow observed on account of low permeability of formation damage. The operator GSPC intimated the discovery of natural gas in KG# 8 well, under Article 10.1 of PSC to GOI on 1.7.05. A potential gas discovery report was submitted to DGH by the operator on 14.10.05 based on analysis of available data. As per that report, the original gas in place (OGIP) for the five identified layers considering the Lowest Known Gas (LKG) is estimated to be of the order of 912 BCF to 3611 BCF when considered at Max. Closure.

Current status in the block

• The block is under extended Phase-I of exploration. As per the PSC, Committed Minimum Work Programme (MWP) is to drill 14 wells during phase-I period of exploration. KG#8 was third well 4th well KG#17 has been drilled up the depth of 5601m and is currently under production testing. Earlier drilled two wells i.e. KG#1 and KG#11 were dry and abandoned. • The Appraisal Plan of the discovery of KG#8 is yet to be submitted by the operator. • No reserve or production can be realistically estimated until the completion of appraisal of the discovery.

iii. ONGC

• ONGC is currently developing G-1 & G-15 discovery in KG basin. • Earlier, ONGC had indicated that gas production of about 1.5 MMSCD was expected to commence from Mid-2006. However, now ONGC has indicated that due to slippage in implementation of development plan, the production of gas is expected in March, 2007. • The estimated gas production from the above two fields is about 2.1 MMSCMD for a 72

period of 7 years. iv. Reliance Industries discovers huge oil reserves in its gas-rich D6 block in Krishna Godavari basin off the east coast: December 18, 2006

Reliance Industries Ltd discovered huge oil reserves in its gas-rich D6 block in Krishna Godavari basin off the east coast."The MA-2 well has encountered the thickest hydrocarbon column discovered to date in D6," Niko Resources said in a release. Niko Resources has 10 per cent interest in the block KG-DWN-98/3, also known as D6. Reliance is the operator of the block with 90 per cent interest. "MA-2 reached a target depth of 3581 metres and penetrated a gross hydrocarbon column of 194 metres consisting of 170 metres of gas/condensate and 24 metres of oil in the Cretaceous section," the release said. MA-2 is located approximately 2-km from the previous MA-1 oil discovery well. The MA-1 well in June 2006 reached a total depth of 3783 metres and hit 26 metres of net oil pay and 72 metres of net gas pay. Reliance has till date made about a dozen gas discoveries in D6 and put combined reserves in the block at around 50 Trillion cubic feet (TCF). MA-2 is the second oil discovery on D6 after MA-1. Niko said the Deepwater Frontier drilling rig has moved to drill development wells for the Dhirubhai gas development project. An addendum to the Field development plan for the Dhirubhai 1 and 3 gas fields has been approved and provides for the gas production rate to be increased to 2.8 billion cubic feet per day with a corresponding phase-1 field development costs of $5.2 billion. Commencement of production is scheduled for mid 2008. The approved field development plan of Dhirubhai 1 and 3 provides flexibility in the critical portions of the facilities to facilitate gas production to 4.2 BCF per day in future as and when additional reserves are added. This work included the acquisition of an additional 7600 sq km of 3D seismic, drilling and testing of additional exploratory wells, drilling and extensive coring of two development wells in the development area, along with various detailed technical studies by international consultants. As a result, the hydrocarbon potential has increased significantly.

73

7. RIL up the ante on KG Basin production and ONGC find huge reserves The biggest of them all was the news that shook the oil and gas industry was the news of RIL doubling its out in KG Basin. Reliance Industries Ltd (RIL) today announced that it would invest $5.2 billion (Rs 23,293 crore) to double the output from its productive D6 block in the Krishna Godavari (KG) basin to 80 million standard cubic meters per day (MMSCMD). The company said that it has filed an amendment to the initial development plan for the deepwater block KG-D6 with the Director-General of Hydrocarbons (DGH) for approval. RIL had earlier proposed investment of $2.47 billion to produce 40 MMSCMD for 7.5 years from discoveries Dhirubhai 1 and 3 (in the D6 block) out of a total 34 wells. As per estimates, the country's current gas production was 32.2 billion cubic m (BCM) in 2005-06. ONGC's crude oil (26 mt) and natural gas production (little more than 23 BCM) account for 78 per cent of the country's production. Despite the increase in production rate, the RIL project is on schedule for first gas by the second half of 2008-09, a company statement said. The project is the first deepwater gas development project in India and, on commissioning, would be among the largest and most complex deepwater gas production systems in the world. It will be completed in about six years from the first discovery, making it among the fastest deepwater gas developments in the world. According to industry sources, the increase in the company's investment in the D6 block would be accounted for mainly due to an almost 250 per cent jump in rig chartering rates. Subsequent to the approval of the initial approved development plan for Dhirubhai 1 and 3 gas fields, a lot of exploratory work has been done in the block to assess the overall hydrocarbon potential and the recoverable reserves in these fields. This includes acquisition of additional 3D seismic data, drilling of additional exploratory wells as a result of 13 discoveries and extensive coring of two development wells. RIL has also obtained independent assessment of 2P reserves for the Dhirubhai 1 and 3 gas discoveries at 11.3 trillion cubic feet, almost double the earlier estimates. "In view of the significantly higher hydrocarbon potential and large projected deficit of gas 74

demand, RIL has sought approval for the following: increase in production rate from 40 MMSCMD to 80 MMSCMD and enhanced facilities for production, collection, evacuation and handling of gas, both onshore and offshore," the company statement said. Of the total discoveries RIL has made from the 15 wells drilled in the deep-sea block KG-D6, only the first four - Dhirubhai 1, 2, 3 and 6 - have been declared commercial. The discoveries declared commercial would be developed in the first phase. The deepwater block was awarded to RIL and NIKO Resources Ltd of Calgary, Canada under the first round of New Exploration Licensing Policy round. RIL, as operator of the block, holds 90 per cent of the participating interest, and NIKO the rest.

The ONGC find huge reserves State-run Oil and Natural Gas Corporation has made a huge gas find in the Krishna Godavari Basin with initial estimates suggesting reserves of about 21 trillion cubic feet, and also struck a big gas field in Mahanadi Basin off Orissa coast. ONGC, which had previously discovered 2-3 TCF of gas reserves in about half-a-dozen wells in the Krishna Godavari Basin block KG-DWN-98/2, struck a 28 meter net gas pay zone when deep sea drill ship Belford Dolphin reached 5,300 meters depth at well UD-1, 55-km from the coast. Separately, ONGC has struck an estimated 3-4 TCF of gas in Block MN-OSN-2000/2 in water depths of about 1200 mts, sources said. They said ONGC has also found 15-20 million barrels of oil reserves in an Assam block.

Corporate News and Views 8. Reliance Petroleum IPO

Mukesh Ambani group company Reliance Petroleum (RPL), may not have found much favour with investors during its nearly eight-month stay on the bourses, but the company has found mention in a list of the world's 15 biggest IPOs in 2006. Reliance Petroleum made its debut on the Indian stock market in May of this year following a much-hyped initial public offer (IPO) that is oversubscribed by more than 50

75

times and generated total proceeds of about Rs 8,200 crore ($1.83 billion) for the company. RPL's public issue has emerged as the world's 13th biggest IPO in 2006, and is the only Indian entry in the list of top-20 IPOs, according to the data compiled by global research major Ernst & Young (E&Y) and financial information providers Dealogic and Thomson Financial. While the stock debuted at a sharp premium of 70 per cent over the IPO price of Rs 60 a share on May 11, it has pared nearly the entire premium and is trading near its offer price over the past few months. After listing at Rs 102 per share, RPL shares have remained below Rs 70 a share since the end of May and closed at Rs 63.05 a share on Friday last week. Still, the hugely succesfull IPO has earned the company a place with China's Industrial & Commercial Bank of China (ICBC), which has emerged as the biggest IPO with total proceeds of about $22 billion in Hong Kong. There are as many as seven Asian companies that figure in the top 20 list, while six IPOs is from the emerging markets, the data compiled by E&Y, Dealogic and Thomson Financial shows. The IPO from a Chinese bank -- Bank of China -- raised $1.19 billion in Hong Kong and earned the second slot in the biggest ever IPO list. Along with China's Daqin Railway Co (ranked 12th with proceeds of $1.88 billion), there are three Chinese companies in the top-20 list, while there are four companies from the UK and two from the US. However, ICBC's, IPO size is nearly 12 times of the total proceeds raised by the only Indian entity in the list. The market analysts believe although there is not much nearterm upside potential in the share price, RPL can give good returns in the long term as the company's new refinery in Jamnagar will commence production only in December 2008. The new 5,80,000 barrels per day refinery, which is being built at an estimated cost of Rs 27,000 crore ( $ 6 billion), is expected to earn better margin than its parent company Reliance Industries' existing refinery in Jamnagar. RIL, owns a 75 per cent stake in RPL, while US based energy giant Chevron Corp has acquired a 5 per cent stake as a copromoter in the company with an option to raise this stake by another 24 per cent. Earlier in October, the company signed a deal with a consortium of 14

76

international banks for a loan of $ 2 billion to finance its Jamnagar refinery. This is part of the $ 3.5 billion debt that the company is planning to pick up for the refinery. The loan of $ 2 billion is 33 per cent higher than the originally planned $1.5 billion loan, while the rest of the loan is expected to be mobilised in 2007.

9. Hazira LNG terminal connection with HVJ / DUPL systems

The HVJ and Hazira have finally interconnected after several delays. A brief status of Hazira LNG terminal connection with HVJ / DUPL systems is as follows: i. The hydro-test of the entire 30", 7.5 km pipeline section from GAIL Hazira Compressor Station to the Hot-tap point at Mora completed on October 3, 2006. ii. The section has been pressurized with dry air as per the requirement of ASME code and the pipeline system was made ready for hot-tapping work since Oct 3, 2006. However, the Hot Tapping Work could not take place due to some problem with Hazira

LNG Pvt. Ltd. iii. The Hot Tapping activities however started on Oct 25, 2006 and completed in first week of November after meeting all the requirements. iv. The pre-commissioning / commission safety checks to be undertaken by a team of OISD and GAIL officials approved the project and the pipeline is now being charged with gas.

10. RIL-RNRL pricing war

In a new twist to the ongoing war between the two Ambani brothers on the issue of gas price, the Government did not agree with the Mukesh Ambani led Reliance Industries Ltd (RIL's) proposed valuation formula for gas sales to Reliance Natural Resources Ltd (RNRL) belonging to Anil Ambani Group. The Petroleum Ministry in a statement issued said that it did not agree to the formula on the ground that it has not been derived on the basis of competitive arms length sale pricing for similar sales under similar conditions in the region from where the gas is procured. 77

"It may be noted that the transaction between RIL and RNRL is part of their de-merger agreement and therefore does not meet the production sharing contract (PSC) criteria of arms length sales. The prevailing domestic gas price from fields operated by Joint Venture/private companies commands a significantly higher price than the proposal of RIL," the Ministry said. This move may affect the proposed 7,480 MW Dadri power project of Anil Ambani Group. The proposal of RIL regarding the gas price formula for sale of gas to RNRL for D-6 block in KG Basin had been submitted to the Government as per the requirement under the production sharing contract. RIL is selling gas from its Panna/Mukta and Tapti fields at $4.75 per million British thermal unit (mBtu). The proposed price of $2.34 per mBtu by RIL for sale to RNRL was significantly lower than the prevailing market price, the Petroleum Ministry said. "The Government has now examined the proposal in the light of the provisions, in particular Article 21.6 of the PSC, which provides the principles for valuation of natural gas for the purposes of the contract. The Government as a party to the contract is concerned with the formula or basis on which the gas under the PSC is to be valued for the purposes of computing cost recovery linked to the valuation of cost petroleum, the profit share of the parties including the Government and the royalty," the statement said. The Petroleum Ministry held that, ideally, any price discovery should be the result of an open and transparent competitive bidding process that allows fair and equal opportunity to all gas consumers to participate in the price discovery. The same procedure has already been followed by companies including RIL in the Panna-Mukta and Tapti product sharing contracts, it said. The Ministry has not received so far any proposal for approval of the formula or basis for valuation of gas for sale to NTPC from the same fields. Hence the question of a Government decision on this does not arise at this stage, the statement clarified.

78