This paper highlights the importance of India’s energy security and the possible repercussions of Government’s policy paralysis, which is hurting the endeavors of energy firms. India’s energy security is not attributed and confined to just oil & gas industry, whose role cannot be denied in India’s overall growth story. The Government has indeed taken steps in the right direction but now it has become critical for India to introduce policy reforms to secure India’s growing energy needs. Starting from making the present Production Sharing Contract (PSC) structure more remunerative for the investors, to rationalizing the taxation regime for the sector, changes are indispensable. The biggest hurdle currently is the sector’s slow decision-making process. The dwindling interest of foreign investors and their exodus are big concerns, especially at a time when India needs them and the technology they possess. Not to forget, the reforms that India needs in the downstream and midstream sectors and the coordination among various Ministries.

1. INDIA’S ENERGY (IN)
SECURITY
White Paper
Study

2. EXECUTIVE SUMMARY
• Highlights:
▫ Importance of India’s energy security
▫ Possible repercussions of Government’s policy paralysis, which is hurting the
endeavors of energy firms
• India’s energy security is not attributed and confined to just oil & gas industry, whose
role cannot be denied in India’s overall growth story.
• It has become critical for India to introduce policy reforms to secure India’s growing
energy needs. Starting from making the present Production Sharing Contract (PSC)
structure more remunerative for the investors, to rationalizing the taxation regime
for the sector, changes are indispensable.
• Biggest hurdle currently: The sector’s slow decision-making process
• The dwindling interest of foreign investors and their exodus are big concerns,
especially at a time when India needs them and the technology they possess.

3. INTRODUCTION
• India’s 12th Five Year Plan Economic scenario does not look very encouraging
• Fluctuating crude price, on which India’s dependence is precariously high at ~80%
currently, is increasing the uncertainties
• Despite crude prices showing signs of relief, the depreciation of Indian Rupee vis-à-
vis US Dollar is not helping
• This also underlines the issue of India’s growing dependence on energy. Analysts
believe that situation will not change much, be it high crude prices or lower valuation
of Indian currency
• Neither of the problems augurs well for Indian economy
QUESTION:
So, then what are the possible options we have? How do we navigate through the crisis?

4. OPTION 1
• Reduce imports and solve both the problems. With the population, substantially over
one billion, and growing energy demand this is not a policy solution.
Table 1 highlights the precarious Indian situation.
TABLE 1: Proved Reserve at the end of 2011
Thousand Thousand Million
Country Share of Total (%)
MnTonnes Barrels
US 3.7 30.9 1.9
Canada 28.2 175.2 10.6
Mexico 1.6 11.4 0.7
Venezuela 46.3 296.5 17.9
Kazakhstan 3.9 30 1.8
Russia 12.1 88.2 5.3
Iran 20.8 151.2 9.1
Iraq 19.3 143.1 8.7
Kuwait 14 101.5 6.1
Saudi Arabia 36.5 265.4 16.1
Qatar 3.2 24.7 1.5
UAE 13 97.8 5.9
Gabon 0.5 3.7 0.2
Libya 6.1 47.1 2.9
China 2 14.7 0.9
Malaysia 0.8 5.9 0.4
India 0.8 5.7 0.3
(Source: BP Statistical review 2012)

5. OPTION 2
• Maximize self-sufficiency? This perhaps is one of the more sustainable options
• Though India has the 4th biggest reserves of coal & is the 2nd biggest coal producer,
petroleum sector still continues to play a pre-eminent role in meeting the energy
requirements of the country. 45% of the total energy needs are met by oil and gas
• With economy expected to grow between 7%-9%, energy consumption is set to
increase (see Table 3). Other sources of energy will remain important (see table 2),
but Petroleum sector is crucial in determining India’s energy security
TABLE 2: Energy Source Mix (%) TABLE 3: Per capita Energy
consumption (million tonnes of oil
Year Coal Oil Gas Hydel Nuclear equivalent)
Country/Region
2010-11 53 30 14 2 1 World 1.5
India 0.4
2024-25 50 25 20 2 3 China 0.9
North America 6.3
Europe 3.3
Russian Federation 3.4
Rest of the World 0.8
(Sources: Planning Commission 2012) (Source: BP Energy Statistics 2012)

6. OPTION 2
525 MTOE*
India’s energy 2nd half of the last
decade
consumption
382 MTOE*
Maximizing self-sufficiency through
▫ Increasing the exploration activity in the country
▫ Bringing in more technology and liaison with mature countries in the oil & gas
sector, like Norway
▫ Inviting more foreign investments and making the environment more investor
friendly
Needless to mention, for all these India needs – bureaucracy, polity, tax regime working
in tandem to achieve nation’s energy security.
*MTOE: Million Tonnes of Oil Equivalent

7. HURDLES IN INDIA’S ENERGY SECURITY
• Bureaucratic and political hurdles : Domestic production stagnated
• Lower indigenous production and exploration: Fizzling NELP
• Energy security vs. national security : Defence hurdles
• International force: Fear of supply disruption
• Gas imports and international negotiation
• Overseas merger & acquisitions: Chinese aggression
• Non-remunerative taxation regime
• New technology for new source of energy – CBM, Shale Gas, Oil Sand, etc.
• Interrelated policy framework for upstream, midstream and downstream

8. ACHIEVING ENERGY SECURITY
• India’s energy demand is growing by about 7%
• Based on the growth rate, International Energy Agency (IEA) estimates India may
need to invest $800 billion by 2030 for meeting its demand
• What makes this imperative is the fact that India’s annual production is 2.3% of
world energy production, but India’s consumption is 3.3% of the world energy supply
• The deficit is estimated to surpass Japan and Russia by 2030 placing India in the
third position in terms of annual energy consumption.

9. 1. Growing imports with growing
economy: Domestic production stagnates
FACT
• India:
▫ Domestic production stagnated to around 33-35 MMT
▫ Imports have gone up from 120-142 MMT between 2007-11
Clearly, domestic production remained flat, probably because of slow pace of decision-making,
bureaucratic hurdles, limited prospectivity, delays in commissioning of new projects and
declining production from existing fields (See Table 4).
TABLE 4: India’s import vs. domestic oil production
Domesti Import %imports Domesti %
MMT (BCM)
c s dependence c Growth
2006-07 O I L 34 121 72 G A S 31.7 -1.4
2007-08 34.1 128 73.4 32.4 2.1
2008-09 32.8 1.3
33.5 133.6 75
2009-10 47.4 44.6#
33.7 137.8 75.6
2010-11* 38 142 73 52.2 9.95
* Cairn-ONGC Rajasthan production started
#KGD-6 gas production starts
(Source: Petroleum Planning & Analysis Cell)

10. 1. Growing imports with growing
economy: Domestic production stagnates
REASON
• Delay in approvals to the already discovered fields.
▫ Example: Cairn-ONGC JV in Rajasthan. Indirectly, the bureaucracy & politics held back the
decision on allowing ramp up from Barmer oil block, by almost an year. Timely approval for
ramp-up in Rajasthan would have reduced oil imports and save forex reserves.
• Crucial time and money was lost
• Many of the oil blocks await approvals from DGH/Petroleum Ministry/Other Ministries
• Exploration in many of the pre-NELP and NELP blocks stopped because of hurdles Annexure 1
REMEDY
• PMO principal secretary has formed a group to resolve inter-ministerial issues. Annexure 2
• The inter-ministerial group is focused on petroleum sector. Steps in such direction would surely
help
• PMO should make sure that the petroleum ministry will expedite the clearance process

11. 2. Lower indigenous production and
exploration: Fizzling NELP
FACT
• No significant increase in exploration expenditure in NELP blocks (See Table 5)
• No significant increase in investments seen, despite few big discoveries in some of the NELP
blocks
• Under NELP-IX committed investment in the awarded blocks is about US$582.29 million
• Thus significant dip between NELP 8 and 9
Table 5: No significant growth in exploration capex
$ Mn 2006-07 2007-08 2008-09 2009-10 2010-11 Total
NELP- I -
1168.53 1625.6 1857.9 1942.05 2293.9 8888
VIII
(Source: Petroleum Ministry Data, 2012)

12. 2. Lower indigenous production and
exploration: Fizzling NELP
REASON
• NELP was meant to attract global energy giants but India’s low prospectivity is a deterrent (see
table 1)
• Experience of global giants in Indian E&P sector: some example s
▫ Bureaucratic hurdles in BP’s $7.2 billion investment to pick up stake in RIL’s assets
▫ Vedanta faced 16 months delay for acquiring majority stake in Cairn India
▫ Delays in approvals finally forced ENI to minimize its operation
▫ BHP Billiton NELP blocks have issues with Defence Ministry clearances
• Investors don’t get a smooth exit route
• Production sharing contract is regressive and confusing in nature
• Long process for allowing investors and technology experts, if they want to invest
• Arbitrary rules for clearances

13. 2. Lower indigenous production and
exploration: Fizzling NELP
REMEDY
• PMO* principal secretary has formed a group to resolve inter-ministerial issues. Annexure 2
• Petroleum Ministry/DGH# should make sure that before the block is offered for NELP** rounds,
all the negotiations and clearances are in place
• Move towards the Open acreage system
• DGH should complete the national data repository soon to make the open acreage bidding
possible
• Change in the PSC. Annexure 4
• Exploring various contract models with a view to minimize monitoring of expenditure of the
contractor without compromising, firstly, on the hydrocarbons output across time, and secondly,
on the Government’s take Annexure 4
*PMO: Prime Minister’s Office **NELP: New Exploration Licensing Policy (international bidding rounds of oil & gas blocks in India) #DGH: Directorate General of
Hydrocarbons (Technical advisory wing of Petroleum Ministry)

14. NATIONAL SECURITY vs. ENERGY
SECURITY
• India’s endeavor to minimize dependence on imported hydrocarbons is facing
hurdles from Defence Ministry
NEL-IX BLOCKS: MoD in BLOCK: PR-OSN-2004/1 WEST COAST: ALL BLOCKS
action (Cairn India bagged the OF MINING MAJOR BHP
block under NELP-VI) UNDER THREAT
• For the two blocks - MB-DWN-
• Defence ministry withheld
2010/1 and MB-OSN-2010/2 – • Cairn asked for invoking force
clearances for all 10 blocks
that were offered in NELP-IX, majeure
operated by BHP
MoD is yet to give clearance
• After a sunk cost of $30 million,
•As per Defence Ministry all 10
• Empowered Committee of now 40% of the block falls in a
blocks are inside Naval Exercise
Secretaries (ECS) too was prohibited zone (as per MoD)
Area
helpless as Ministry of Defence
(MoD) clearance for the blocks • The block falls near the missile
•GVK Group of India is partner of
has not come as yet testing range in Sriharikota
BHP in these blocks
•Offshore Defence Advisory
Group (ODAG), under the MoD,
is restricting any seismic surveys

15. NATIONAL SECURITY vs. ENERGY
SECURITY
The Blocks in question:
• NELP VII Blocks: KK-DWN-2005/1, MB-DWN-2005/2, MB-DWN-2005/2, MB-DWN-2005/3,
MB-DWN-2005/4, MB-DWN-2005/5, MB-DWN-2005/7, MB-DWN-2005/9
• NELP VIII Blocks: MB-OSN- 2009/3, MB-OSN- 2009/6 and MB-OSN- 2009/7
EAST COAST:
FUTURE OPERATIONS DEFENCE MINISTRY
DEFENSIVE HURDLES
• Clearances from MoD were • In 16 exploration blocks of • 100 major missions of national
held up for four blocks meant Eastern offshore, 60 oil and importance & this work cannot be
to be offered under NELP-IX gas discoveries made so far compromised
•DRDO says they are in the • 25 major E&P companies • Andaman: ideal missile launch location
rocket flight path from the are operating in the
missile test range in Eastern offshore with an • Machlipatnam (AP) is of strategic
Machalipatnam exploration commitment of importance
Rs 31,500 crore
•RESULT: So much so all the •DRDO says it has made it clear that it’s
blocks were NOT OFFERED not possible to give long notice period on
in the NELP-IX round a missile launch due to technical
complexities and secrecy involved

16. NATIONAL SECURITY vs. ENERGY
SECURITY Exhibit 1
EAST COAST: LOST OPPORTUNITY
Estimates: Out of 6.40 lakh sq km in Exclusive Economic Zone (EEZ) off eastern coast, 3.75 lakh
sq km is where DRDO is putting hurdles
Andaman offshore: Out of 6 lakh sq km (High prospects) DRDO’s restrictions reduced exploration
by as much as 1.42 lakh sq km
Due to high prospectivity petroleum companies are more keen for East coast
HISTORY
In 2005, DRDO asked to set up exploitation and extraction equipment at the seabed (remember
there is no technology in the world that would ensure that all exploration facilities could be seated
at the seabed)

17. NATIONAL SECURITY vs. ENERGY
SECURITY
Exhibit 1
IMPACT
DRDO’s "danger corridor" covers virtually the entire East Coast, leaving little scope for carrying
out exploration activities
Major international E&P companies such as ENI, NIKO, BHP Billiton, Cairn Energy, British Gas,
British Petroleum have entered India through liberal Foreign Direct Investment (FDI) in NELP
(New Exploration Licensing Policy), but are now finding it difficult
FINANCES - Estimates show that earnings of about Rs.8.55 lakh crore (at $80/barrel) in next 15-
20 years is at stake. Plus nine new oil & gas fields are being developed in this area with an
expenditure of $16,275 million and likely to generate revenue of Rs.9.69 lakh crores in the next 20
years
ONGOING OPERATIONS
• Existing field: Ravva, PY-1, PY-3 and KG-D6 is being continuously bullied from Defence Ministry
• These fields currently produce60.68 MMSCM of gas per day out of India’s present production of
140 MMSCMD of gas
• These fields have estimated hydrocarbon reserve of 693.12 MMT (recoverable reserves of 337.023
MMT

18. CRUDE REALITY
Exhibit 2
• India: INDIA’S TOP CRUDE OIL SUPPLIERS
▫ Highly dependent on crude supplies from Middle East &
North Africa Saudi Arabia: 27 MT
▫ Accounts for 60% of supplies to India Iran: 19 MT
▫ Geopolitical volatility in the regions is a cause for concern Iraq: 15 MT
for India Nigeria: 13 MT
Kuwait: 12 MT
Automatically trigger a drop in crude production resulting
UAE: 11.5 MT
in increased crude oil imports and higher prices in turn
Angola: 9 MT
driving inflation in India. Venezuela: 7 MT
Oman: 5 MT
REMEDY Qatar: 5 MT
• Expedite domestic exploration and production Egypt: 3 MT
Malaysia: 2.5 MT
Brazil: 2.5 MT
• Lower dependence on Middle East and North Africa Ajarbaizan: 2.2 MT
Mexico: 2 MT
• Look at other supply sources Russia: 1.6 MT
Ecuador: 1.2 MT
Libya: 0.9 MT
• Increase the percentage of gas in India’s energy mix

19. STEP ON GAS
More than 30% of India’s Domestic production has not delivered
Situation getting grimmer
gas demand not fulfilled as per expectations
• Other problems include :
▫ Delayed/failed negotiations for international pipelines (IPI: Iran-Pakistan-India pipeline)
▫ Problems in sourcing long term LNG
▫ Competition from China, Japan and South Korea that have smoother decision making process
compared to India
▫ Diplomatic & bureaucratic failures in Qatar and even IPI
▫ Even price issues delayed TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline
▫ Limited LNG import infrastructure in the country and concentrated only in western India
Goldman Sachs study shows increase of $10/barrel can lower the GDP growth by 0.4%. Also higher
oil prices result in outgo of forex reserves impacting India’s trade deficit.
REMEDY
• Petroleum ministry’s “International Cooperation” wing should be strengthened
• At the time of Mani Shankar Aiyar’s tenure as minister, a special wing focused just on international
opportunities was created. It should be revived (under an IFS officer)
• REGULATED domestic gas prices acts as a major deterrent

20. FOCUS ON OVERSEAS M&A
India’s overall
Will not able to
hydrocarbon
OPTION support future
reserves are
needs
limited
Look for assets in oil &
gas rich countries, apart
from diversifying import
sourcing countries
REMEDY
• Petroleum ministry’s “International Cooperation” wing should be strengthened
• At the time of Mani Shankar Aiyar’s tenure as minister, a special wing focused just on
international opportunities was created. It should be revived (under an IFS officer)
• Create a sovereign fund or consolidated war chest for acquiring assets overseas
• Promote public private partnership for overseas M&A

21. SOVEREIGN FUND FOR ENERGY: Push
For Energy Security Exhibit 3
• Group of Ministers (GoM) already in place to discuss creation of sovereign wealth
fund for energy security
• GoM looking for possibility of creation of a $10 billion sovereign wealth fund
• GoM may consider budget allocation of Rs 4,500 crore as a first tranche towards the
fund
Options being Considered:
Create sovereign fund with Use forex reserves to create Use part of surplus cash
budgetary allocation sovereign fund reserves lying with large PSUs
SOVEREIGN FUNDS
The Global Benchmark
Norway: $ 550 bn China: $ 400 bn
Saudi Arabia: $ 450 bn Qatar: $ 60 bn
Singapore: $ 400 bn Malaysia: $ 40 bn

22. BITTER EXPERIENCE: CHINESE
AGGRESSION Exhibit 4
• 2005: OVL lost out on acquiring 45% in the giant Akpo oilfield in Angola vs. China’s
CNOOC (for $2.268 billion)
• 2009: OVL lost out to Sinopec, that acquired Swiss oil exploration firm Addax
Petroleum for $7.2 bn 2009: CNPC-CNOOC outbid ONGC for 75% stake in YPF, the
Argentine unit of Repsol, Spain ($13-14 billion)
• 2011:OVL lost bid to buy Exxon Mobil’s 25% stake at a deep-sea oil block in Angola
(Bid $2.1-2.2 billion) vs. Chinese and Korean
• 2010: ONGC lost out in Algerian oilfield to a consortium led by a Chinese oil firm
• 2010: OVL lost bid for Halfaya oilfield in Iraq to CNPC and Petronas (remuneration
five times higher) 2009: OVL lost the Zubair oil field in the first Iraqi round

23. RATIONALISE TAXATION: GIVE AND
TAKE FOR ENERGY SECURITY
• In India, the revenue collection is a hybrid system. It is a system where the petroleum
companies contribute to government coffers through royalty payment and also
through profit petroleum.
Royalties Income Tax
SHALLOW Domestic Companies Foreign Companies
ONSHORE DEEPWATER
WATERS
30% +surcharge* 5% on tax + 40% + surcharge* 2% on tax +
Crude 12.50% 10% 5-10%*
3% education cess 3% education cess
Natural Gas 10% 10% 5-10%*
*Royalty on deepwater production is 5% for the first seven years
*Surcharge is applicable when income is more than Rs.1 cr
and 10% thereafter
(Source: Petroleum Ministry, 2012) (Source: Petroleum Ministry, 2012)
Taxing times
• Cess increased by Rs.2000/tonne to Rs 4,500
• Service related to oil and gas production brought under service tax net

24. RATIONALISE TAXATION: GIVE AND
TAKE FOR ENERGY SECURITY
• Discoveries in KG-D6 (for gas) and Barmer block (for oil) revived the investment
hopes. However, higher cess on crude production, bringing upstream activities
under service tax and taking away tax holiday on gas production certainly are not
going to negatively impact the investment sentiments. Exploration is a high-risk
activity and it needs sufficient incentive to attract investments.
REMEDY
• Income tax should be levied on all E&P companies uniformly
• Service tax on E&P services may continue (move towards GST) but the cess on crude should be
reduced
• India’s present form of PSC regime has attracted lot of criticism, especially from CAG, which
suggested royalty based contracts
• Seeing India’s need for more investment in the sector the present form of profit sharing under
PSC should not be tinkered
• Allow tax benefit uniformly on LNG imports (presently LNG meant for power sector is exempted)

25. NEW TECHNOLOGY AND NEW FORM
OF ENERGY (CBM, Shale Gas, Oil Sands, etc.)
Interrelated Policy
• After the traditional form of oil and natural gas, the other form that has Framework for Upstream,
taken some shape in India is CBM Midstream & Downstream
• DGH is working on data and policy framework for auctioning shale gas
assets •Insufficient oilfield technology
• National program on gas hydrate is being conducted with US and services
companies
• Problems with pipeline
• Coal blocks for Coal to Liquid has been allocated to Tata and JSPL in
infrastructure
Orissa
Non-commercialization of discovery: Inadequate E&P infrastructure
• Lower investment in the past has resulted in inadequate E&P infrastructure in India
• India’s gas pipeline density (per sq. km) is one of the lowest leading to lower share of natural gas in
the overall energy mix (10% vs. global average of 24%)
• Production of oil and gas remained stagnant (Table 4)
• Limited participation from foreign players in NELP rounds
• Inadequate infrastructure leading to non-commercialization of discoveries
• Out of 60 discoveries in nine NELP rounds since 1999, only two have entered production phase
• Shortage of oil rigs too has played spoilsport

26. SUBDUED GAS PRICING: GOVERNMENT
REGULATION KILLING SENTIMENTS
• NELP has provision for charging market discovered price for gas
• However, operators have to follow the government determined price
• Even under regulation: No uniformity in pricing of domestic gas
Foreign firms participation in NELP
NELP-VII NELP-VIII NELP-IX
21 10 8
REMEDY
• Let the market decide the gas prices
• Expedite the national gas grid program (as announced in the Budget) to enhance
infrastructure
• The natural gas infrastructure in the country needs an overhaul
• Promote more CITY GAS DISTRIBUTION projects and allow market-driven pricing
• More LNG terminals, especially in the East Coast, need to be promoted

27. CONCLUSION…
Though hydrocarbon will remain one of the key sources for India’s energy security, policy makers,
however, can’t ignore the other sources – viz coal, hydro power, nuclear, and solar.
• In fact, coal is going to play a significant role in India’s energy security. Not just as a big source of fuel
(50%), but also because India has huge reserves of coal.
• Within hydrocarbon sector prospect of shale gas and natural gas needs to be identified as soon as
possible.
• As far as the present form of allocation and contracts of oil & gas blocks are concerned, India needs lot
of changes. It should be appreciated that Rangarajan committee is looking at overhauling the present
format of PSC. One big move that India needs to make is the shift from annual auctioning of oil & gas
blocks under NELP to open acreage.
▫ For open acreage, DGH needs to finalize the national data repository, so that companies can visit the always open
data rooms and can bid whenever they want. This will keep the competition alive and also allow speedy
exploration program in the country.
▫ DGH/Government also needs to finalize the terms for shale gas block bidding, so that India can take advantage of
the development in the rest of the world.

28. CONCLUSION…
On regulation front:
• Government needs to stop regulating gas prices and let the market decide the prices. This will make
the market more competitive and more remunerative for the investors. Also this will give the much
needed impetus to the gas retail sector in the country, which ultimately has the potential to lower the
dependence on imports of liquid fuel.
• Focus also needs to be given to the PSU oil companies, who for all these years have contributed to the
growth of Energy security of the country.
Overall, India’s energy sector needs a concerted coordination between the departments, and
more public-private partnership will do the trick. We should also ensure that foreign
companies, such as ENI and mining major BHP Billiton, having deep pockets should get the
right platform to drill deep for ensuring India’s energy security.

29. INDIA’S ENERGY (IN)
SECURITY
Thank you !