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AM CHAM I N D I A. AmCham in India. Officers. Executive Committee. Sector Committees. Energy Sub-Committee. Power. Oil & Gas. -Active interaction with government -Policy and position papers -Industry and market studies -Legislative and regulatory process.

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AMCHAM

I N D I A

AmCham in India

Officers

Executive

Committee

Sector

Committees

Energy

Sub-Committee

Power

Oil & Gas

-Active interaction with government

-Policy and position papers

-Industry and market studies

-Legislative and regulatory process

Business & Industry Focus


AMCHAM

I N D I A

Factors to Attract U.S. Industry

Key Aspects of Foreign Direct Investment (FDI)

  • Return on capital must be assured, attractive and appreciable

  • Market-driven policies must mitigate investment risk

  • Secure revenue stream must be ensured to service debt and equity

Indian

Energy

Sector


AMCHAM

I N D I A

Key Areas of Bi-Lateral Cooperation

  • Create a national energy strategy/plan

  • Develop implementation plan with mission objectives

  • Initiate supply and demand forecasting based on market conditions

  • Address supply side issues


AMCHAM

I N D I A

Key Areas of Bi-Lateral CooperationContinued

Overview

  • Support the Vision: Support liberalization process. Also support: a) sustainable development; b) energy and environment management/conservation; c) increased generation/production, transmission & distribution

  • Policy Side: Guidance in framework for market driven policies/legislation which promote increased foreign direct investment

  • Regulatory Aspects: Proactive participation which will allow effective and timely project development and implementation activities to support commercial operation(s) of facilities

  • Advisory Board: Formation of a beneficial partnership propagating a long term and stable relationship between the U.S. and India wherein industry, Central and State government participate together throughout to achieve a common viable energy agenda


AMCHAM

I N D I A

Key Areas of Bi-Lateral CooperationContinued

Create a National Energy Strategy/Plan

  • Establish a National Advisory Board with emphasis on techno-economic aspects to provide stability in government polices and to support continuation of effective reforms

  • Emphasis on the energy chain: production/generation, transmission, and distribution, with promotion of efficient end use and conservation

  • Representation from industry, Central and State Government

  • Market driven policies with realistic milestones/targets

  • Both Central and State level objectives must match and be commensurate with each other

  • Develop a suitable environmental policy which is integrated as part of a comprehensive energy policy


AMCHAM

I N D I A

Key Areas of Bi-Lateral CooperationContinued

Implementation Plan (Mission Objectives)

  • Financial services sector with key milestones which are structured to support policy aspects and project development activities

  • Technical services support with key milestones which are integrated as part of ongoing project development

  • Fiscal incentives for projects with key milestones which enhance project viability as well as supporting execution schedules

  • Regional benefits allocation with rationale to support distribution on the state and local levels

  • Regulatory structuring which propagates effective policies/legislation, monitoring, and enforcement

  • Top-down model for all execution in order to provide lateral consistency as well as proper flow of policies and plans to support project development


AMCHAM

I N D I A

Key Areas of Bi-Lateral CooperationContinued

Demand-Side Forecasting

  • Establish quantitative criteria for energy demand forecasts, e.g., power demand and fossil fuels at both central and state levels

  • Development of a standardized model for forecasting demand which is computer based with real-time updating and simulation

  • Incorporate both sensitivity and scenario analysis into demand forecasting

  • Establish accurate database for both base-load and peak-load demand requirements to support forecasting of additional generation capacity as well as assisting transmission and distribution assessments

  • Assess market conditions to determine the true energy costs and capacity to pay


AMCHAM

I N D I A

Key Areas of Bi-Lateral CooperationContinued

Supply Side Issues

  • Assertive support to pending fast-track projects and on-going IPP’s in achieving financial closure. This would includes issues related to; permits and clearances, escrow accounts, foreign exchange risk

  • Rational structuring of Mega Power Projects in order to allow level playing field for existing projects

  • Bankable structuring with other major energy related projects such as LNG based IPP’s, refinery based power projects and barge mounted projects

  • A market driven liquid fuel policy which will allow both fuel selection based on techno-economic considerations as well as producing cost effective energy


AMCHAM

I N D I A

Power Sector

  • State Electricity Board (SEB) Financial Viability Issues

    • Meter/Bill/Collect aspects

    • Direct subsidies to consumer from government

  • Electricity Bill 2000

    • Support passage

    • Deregulated supply company function

    • Contract-based power transmission


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Highlights

  • Current Installed Capacity in the Country: > 93,000 MW

  • Additional capacity targets:

    • 9th Plan (1997-2002): 52,820 MW

    • 10th Plan (2003-2007): 45,370 MW

    • 11th Plan (2007-2012): 55,593 MW

  • Low Per Capita Consumption

  • Post-Liberalization: after 1992, only 2700 MW per year

    has been added


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

  • Present stakeholders in the Power Sector

  • SEB’s 59%

  • PSU Corporations 32%

  • Private Sector Utilities5.65%

  • IPP’s2.77%

Increase Private Sector Role


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Areas Requiring Investment

  • To fill the gap and to meet economic growth, the following investment needs to be injected over the next 10 years:

    • Generation (200,000 MW)~US$ 200 Billion

    • Power Evacuation Infrastructure~US$ 200 Billion

    • Energy Infrastructure~US$ 100 Billion

    • Total: US$ 500 Billion

  • Upgrade andmodernization of existing units (which are technically obsolete)

    • Increase PLF from the current 64%

    • Minimize T&D Losses from the current 40-50%

    • Eliminate Theft of Power

  • Metering and Distribution of existing generation


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Government of India Financial Resources

In Year 2000-2001:

  • The Central Sector Plan OutlayUS$ 26 Billion

  • Defense AllocationUS$ 13 Billion

  • Planned Outlay for PSUsUS$ 2.04 Billion

Need FDI !!!!


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Largest Challenge to Current Projects - SEB Financial Viability

  • Financial viability of State Electricity Boards (SEBs)

    • Currently approximately US$ 5 billion in the red

    • Cross subsidies (tariffs set based based on politics rather than cost)

    • Consumers feel power is a “right” and tend not to pay. Thus, collection levels low

    • Theft and transmission losses high

    • Deficits made up by States (also now having financial difficulties)

    • Little metering

    • Result: Inability to obtain SEB escrow cover


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Liberalisation Challenges

  • Pace of reforms uneven

  • Current focus only on formation of regulators and accounting

    separation of business units; market structure neglected

  • State regulators being challenged by SEBs and state governments

  • States racing Centre to pass limited reform measures


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Electricity Bill 2000

  • Comprehensive legislation that consolidates power statutes

  • Provides a blueprint for restructuring the market

  • Legitimate effort to establish competitive markets

  • Goal: Support passage of final draft through Parliament without substantial change


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Electricity Bill 2000: Draft VI’s Competitive Scorecard

  • Functional Unbundling of SEBs: No

    • Accounting separation only

    • States can elect to continue SEB

  • Deregulated Commodity Pricing: No

    • Supply Company pricing fully regulated

  • Third party access: Yes

  • Customer choice: Yes

  • Independent Regulator: Qualified yes


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Electricity Bill 2000 Draft VI Challenges

  • SEBs not required to fully unbundle

  • Full regulation of supply companies (price and performance). Solution is to phase in residential/commercial choice

  • Interference with transmission to divert power to deficit areas


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Electricity Bill 2000: Solutions

  • Require full unbundling and corporatization of SEBs

  • No regulation of Supply Company price; regulation only of wires function

  • No interference with free flow of transmission according to supply contract and operations (maintain sanctity of contracts)


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Summary:Urgent Sector Focus Areas

  • Support passage of Electricity Bill

  • SEB financial viability

    • MBC: Meter/Bill/Collect

    • Subsidies must come directly from the government, not the utilities

  • Focus on full competitive markets, not only regulators and functional separation

    • Trust the market

    • Avoid over-regulation


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Pending Project(s) Challenges

  • Facilitate financial closure

    • Extensive project schedule delays

    • Lack of bankable fuel supply agreements

    • SEB financial viability problems

    • Competing vested interests

    • Foreign company departures result

  • Dividend Tax must be reduced from 22% to 11%

  • Prioritize merit of pending power projects and focus on higher priority projects

  • Government of India should offer guarantees for a few low-cost, high-value projects as an interim solution


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Industry Viewpoint on Commercial Nuclear Power

  • Encourage proliferation resistant nuclear systems with indigenous fuel systems based on thorium

  • Safety related aspects achieved via proper design features and conduct of operations to international standards

  • Address the entire fuel cycle including waste management to protect the environment


AMCHAM

I N D I A

Power Sector Aspects/IssuesContinued

Industry Viewpoint on Hydroelectric Power

  • Expedite development of projects pending financial closure

  • Provide encouragement of foreign investment in hydroelectric power plants by reducing front-end loading of fixed costs

  • Allow optimum energy mix by increasing hydroelectric power capacity addition


AMCHAM

I N D I A

Oil & Gas Sector

  • Upstream

    • Form separate regulator/facilitator/contract administrator

    • Access to quality acreage

    • Remove minimum alternate tax

  • Natural Gas

    • Pass the Gas Act and avoid conflict of law

    • LNG policy: support development of infrastructure


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Structure of Oil and Gas Regulatory Authority

  • Common question for designers of regulatory frameworks is whether to have multiple regulators or one regulator with multiple responsibilities

  • Optimal solution:

    • One regulator per sector with minimum of three directors, headed by a Director General

    • Divisions within the regulator for specialized segments of the sector (such as upstream, gas transmission and distribution, and downstream)

    • Saves on overhead expenses

    • Assists in resolving responsibility overlap

    • Facilitates accumulation of experience


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Structure of Oil and Gas Regulatory Authority-continued

  • Upstream:Separate three functions

    • Regulator creates underlying regulations for safety, environmental, permitting and data management

    • Facilitator: Appoint MoP&NG Representative

    • Contract Administration Executive

      • Government of India Representative to sit on Production Sharing Contract Management Committee

      • Decision-making authority delegated with initial MoP&NG policy direction

      • Guided by PSC provisions

      • Business approach (perhaps retired sector executive)


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Structure of Oil and Gas Regulatory Authority-continued

  • Gas Transmission and Distribution

    • Regulator creates underlying regulations

      • Safety

      • Environmental

      • Permitting

      • Data management

    • Light-handed to encourage development of the infrastructure


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Exploration & Production

  • Activate New Exploration and Licensing Policy

    • Prospective Acreage

      • Access to quality acreage

      • Known production fields and basins

      • Access to all available data (in public domain after initial period)

    • Bankable terms and conditions


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Exploration & Production-continued

  • Undeveloped or Marginal Fields

    • Allow ONGC or OIL to enter into farm outs (or other structured relationships) with companies to develop discovered fields, marginal fields, or fields that require expertise/ technology that ONGC or OIL does not posses

    • Offer the above categories of fields for bid by private and foreign companies


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Exploration & Production-continued

  • Infrastructure status

    • Grant infrastructure status to the E&P sector to enable E&P companies to claim the tax holiday to the fullest, as well as any applicable fiscal and financial incentives to promote the sector

    • Simplify the fiscal provisions

    • Remove gaps in the legal framework


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Exploration & Production-continued

  • Remove Minimum Alternate Tax

    • Requirement to pay tax either on basis of taxable income or 30% of book profits

    • Penalizes oil & gas exploration companies that must make large, up-front investments

    • E&P companies should only pay tax on taxable income when and if generated


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Exploration & Production-continued

  • Assistance for MoP&NG

    • MMS or BLM to work with MoP&NG to develop effective underlying regulations


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Structure of Oil and Gas Regulatory Authority

  • Central Gas Act must be passed with blueprint for the Indian regulatory framework

  • Delay has resulted in potential Centre/State conflict of law

    • Gujarat State attempting to pass a state Gas Law

    • May result in multiplicity of gas laws that complicate the market and create barriers to interstate movement of gas

Regulation of Gas Transmission and Distribution


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

Structure of Oil and Gas Regulatory Authority-continued

  • Gujarat State plans to introduce a state law that will attempt to preempt the field

    • Will create both a regulatory authority and Gujarat State Petronet Limited (GSPL)

    • GSPL will be a state company that controls the construction, operation and maintenance of the transmission grid and will set rates

    • Many areas where GSPL role overlaps with and usurps that of a regulator

Regulation of Gas Transmission and Distribution


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

LNG Policy: Shipping

  • Newspapers report core group of secretaries will require all LNG shipping transactions be FOB

  • Government goal is to encourage development of Indian LNG shipping

  • Policy will have unexpected effects on commercial LNG operations


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

Less-than-full-ship Capacity

  • FOB mandate requires new ships to be built to lift cargoes that are less-than-full-ship capacity

  • With an FOB mandate, a developer must delay the import of an incremental load until a full ship load is aggregated. The delay may lead customers to switch to alternate fuels/feedstock, decreasing LNG market share

  • Commercial reality dictates that existing ships with spare capacity should be utilized to transport less-than-full-ship loads on a CIF basis

  • Less-than-full-ship capacity transaction must be excluded from the LNG policy


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

Spot/Short Term Transactions

  • There is an emerging spot market for LNG resulting from some excess capacity in liquefaction plants

  • The price of spot LNG is very favorable to the end user and its import must be encouraged

  • Spot/short term transactions will not occur absent the availability of the CIF option

  • Spot/short term transactions must be excluded from the LNG policy


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

Indian Flag Vessels

  • Challenges in obtaining financing

    • Experience requirement

    • Liquidated damages

    • Union rules and tax laws

  • Reconsider FOB mandate when these challenges are met

  • Require Indian participant in all new-build ventures


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

Honor Existing Contracts

  • There are current binding agreements in existence

  • Newspapers report government intent to require restructuring of such contracts

  • Currently existing CIF supply agreements must be honored


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

  • Limited universe of LNG producing countries

  • All suppliers are not amenable to shipping FOB (e.g., Malaysian Petronas)

  • CIF price can be lower than FOB (+ shipping) price because suppliers with large fleets can provide shipping on existing depreciated vessels at a lower cost

  • Flexibility of developers must be maintained to negotiate FOB or CIF results in the lowest price for the end user

Flexibility Must Be Maintained


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

Market Solution Is Best

  • Ventures to build a new ship to deliver full ship capacity contracts must include an Indian entity holding aggregate of at least 20 percent of the equity

  • Will solve the financing problems of lack of experience

  • Indian companies could negotiate takeover of operations


AMCHAM

I N D I A

Oil & Gas Sector Aspects/IssuesContinued

LNG Sector

  • Less-than-full-ship capacity transactions must be excluded from the LNG policy

  • Spot/short term transactions must be excluded from the LNG policy

  • Honor existing contracts

  • Maintain flexibility of developers to negotiate FOB or CIF to obtain the lowest price for the end user

  • Require Indian participant in all new-build ventures

LNG Policy: Shipping Summary


AMCHAM

I N D I A

US-DOE Action Items

  • Power Sector

    • Support revision and passage of Electricity Bill 2000

    • Provide technical assistance to correct SEB Meter/Bill/Collect problems

    • Refocus liberalization on competitive markets

  • Upstream/Exploration & Production

    • Expedite separation of Director General Hydrocarbons into three entities: Regulator/Facilitator/Contract Administrator

    • Provide technical assistance on underlying regulations

  • LNG/Natural Gas Transmission & Distribution

    • Expedite passage of the Gas Act

    • Ensure collective participation in development of comprehensive LNG Policy

  • Advocate energy information exchange via the Internet

  • Institutionalize U.S. industry participation in legislative and regulatory processes


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