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LONG-PAPER: PGPIDM NICMAR-SODE

CHAPTER-1

INTRODUCTION

LNG stands for Liquefied natural gas. It is natural gas that has been cooled to thepoint that it condenses to a liquid, which occurs at a temperature of approximately -

161C and at atmospheric pressure.

1.1 Importance of Natural GasThe demand for primary energy is ever growing.

As the world struggles to find new sources of energy it is clear that the Fossil fuels

will continue to play a dominant role in the foreseeable future .Within the

hydrocarbon family the fastest growing hydrocarbon is Natural gas. Most estimates

put the average rate of growth of 1.5-2.0%.

Let us examine the reasons why Natural Gas is so popular.

Many environmentalists view natural gas as a natural bridge fuel between the

dominant fossil fuels of today and the renewable fuels of tomorrow. For a givenamount of heat energy, burning natural gas produces about half as much carbon

dioxide, the main cause of global warming, as burning coal. Since one of the primary

consumption of natural gas is as a source for electrical generation & it is increasingly

becoming popular because it burns cleaner than oil and coal and produces less

greenhouse gases. This ability of natural gas raises the possibility that it could emerge

as a critical transition fuel that could help to battle global warming.

In nature Natural gas is much more in abundance than Oil. Most oil economists put

the Natural gas reserves at least 50% higher than Oil reserves at the current

consumption rates. At present Natural gas reserves are estimated to last in excess of60 yrs. whereas Oil reserves are estimated at 40 odd years. In the US, over the lastfew years approximately 1800Tcf of Natural gas reserves have been discovered,

bringing the total reserves to approximately 3000Tcf. Even for the US, which is the

worlds biggest gas market this represents almost 100 years of supply. The discovery

of unconventional gas and, in particular, Shale Gas is perceived by many to be a

game changer.

At one point in the past, Natural Gas used to be a regionally based fuel,

frequently flared off in oil fields because it was of little use, but now with the creation

of pipelines and LNG, it is now fast becoming a major international commodity.

LNG has two major benefits compared to natural gas:

Transport:Liquefaction of natural gas reduces the volume by approximately 600

times, making it more economical to transport between continents in specially

designed ocean vessels. Over long distances, traditional pipeline transportationsystems would be less attractive economically. Often, due to geo political

compulsions pipelines are not feasible. LNG technology makes natural gas available

in places where natural gas is not available in great quantities and pipelines are not

feasible.

Storage:Liquefaction also provides the opportunity to store natural gas for use during

high demand periods in areas where geologic conditions are not suitable for

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developing underground storage facilities. In regions where pipeline capacity from

supply areas can be very expensive and use is highly seasonal, liquefaction and

storage of LNG occurs during off-peak periods in order to reduce expensive pipeline

capacity commitments during peak periods.

1.2 The LNG Value Chain

The LNG value chain (excluding pipeline operations) typically consists of

exploration and production, liquefaction, shipping, re-gasification and storage. The

components of the LNG value chain have been elaborated below in the following

paragraphs.

Exploration and Production ("E&P"):Exploring for natural gas deposits is a high-

risk and high cost endeavor. Typically, natural gas is discovered during the search for

oil. The activities under E&P extend from exploring, drilling and assessing new

sources for hydrocarbon reserves; executing projects for development of those

reserves; planning and running production operations to ultimately decommissioningwhen the operation has run its course.

Liquefaction:Feed gas comes to the liquefaction plant from the production field. Thecontaminants found in produced natural gas are removed to avoid freezing up and

damaging equipment when the gas is cooled to a temperature -161C. The feed gas isalso filtered of all impurities and is ready to meet pipeline specifications at the

delivery point. The liquefaction process can be designed to purify the LNG to almost

100 per cent methane. The liquefaction process entails cooling the clean feed gas by

using refrigerants.

The liquefaction plant may consist of several parallel units arranged in a

sequential manner (which is why they are called LNG trains). The natural gas is

liquefied for shipping at a temperature of approximately -161C. By liquefying the

gas, its volume is reduced by a factor of 600, which means that LNG at -161C uses

1/600th of the space required for a comparable amount of gas at room temperature

and atmospheric pressure.

Shipping:LNG tankers are double-hulled ships specially designed and insulated to

prevent leakage or rupture in an accident. LNG is stored in a special containmentsystem within the inner hull where it is kept at atmospheric pressure and -161C.

Storage and re-gasification:In order to return LNG to a gaseous state, LNG is

received at re-gasification plant. LNG is pumped first to a double-walled storage tank,at atmospheric pressure, and then pumped at high pressure through various terminal

components where it is warmed in a controlled environment. The LNG is warmed by

passing it through a heat exchanger using seawater to warm up the gas. The vaporized

gas is then regulated for pressure and enters the pipeline system as natural gas.

Finally, residential and commercial consumers receive natural gas for daily use from

local gas utilities or in the form of electricity.

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Fig.1.1 Gladstone LNG plant: schematic diagram

Source:http://www.lngworldnews.com/australia-lng-limited-wins-gas-pipeline-licence-approval-for-gladstone-lng-project/

Fig.1.2 Process flow diagram of LNG

Source: http://chandra28288.wordpress.com/2009/12/17/largest-tokyo-gas-lng-terminal-sodegaura/

1.3 The LNG Market

The share of LNG in global gas production is increasing. In recent years the share of

LNG in worldwide gas production has grown to 9 %.

The global LNG market is characterized by excess demand relative to

available supplies. This situation is only expected to aggravate as several countries

have made high investments in LNG trains in the past and now wants to wait before

increasing investment or they have put a stop on export development as domestic

demand is increasing.

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The global LNG market is characterized by an overcapacity of regasification

compared to liquefaction. The average utilization load-factor of a liquefaction plant is

approximately 90% whereas for regasification terminals this is around 40%

Traditionally, LNG-production was sold in long-term contracts. However, as more

LNG comes on stream and demand for LNG increases, there is a tendency to sell

some LNG in contracts of intermediate or short-term duration.

In the recent past LNG producers contract less of the output in fixed long term

Contracts in order to profit from market opportunities. In this way much of the new

supplies becoming operational worldwide can be considered as 'flexible'.

As LNG markets develop, short-term trading is also developing. In addition, ifthe arbitrage opportunities taken by integrated companies that can divert flows within

their overall portfolio are included, the flexibility of LNG trading are enhanced.

LNG markets can largely be divided into Asia, Europe and the US. Within

Asia the biggest importers of LNG are Japan and South Korea. Since both countries

have no natural sources of energy and very little prospects of pipelines, LNG is vital

for their economies. Typically these markets are able to pay the highest price for LNGas they value security of supply the highest. The fastest growing markets within

Asia are India and China propelled by rising standards of living and concerns for the

environment.

Europe has a number of sources of natural gas which include Russia, the NorthSea and other sources .In Europe, Spain and France are the biggest consumers of LNG

although the UK is one of the fastest growing consumers in recent times.The US is the worldsbiggest consumer of energy. It consumes approximately

a quarter of all natural gas produced across the world. It has an extensive network of

pipelines all across the country and natural gas is traded in a transparent manner.

However LNG constitutes a minuscule per cent of the natural gas consumption .The

main reason is production of natural gas from unconventional sources such as Shale

gas. A large percentage of LNG available today was originally meant for the US but

with the increase in volumes of Shale gas, this LNG is now being diverted to other

profitable markets such as Asia and Europe.

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Table1.1Sources: ,LNGEvolution&

Development Wall Chart,Petroleum Economist 2004.

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1.4 HYDROCARBON VISION 2025

1.4.1 Salient features:

i. A ministerial group set up by the Prime Minister to give focus on long-term energy

security for India has developed the following vision for the next 25 years.

ii. To assure energy security by achieving self-reliance through increased indigenous

production and investment in equity oil abroad.

iii. To enhance quality of life by progressively improving product standards to ensure

a cleaner and greener India.

iv. To develop hydrocarbon sector as a globally competitive industry which could be

benchmarked against the best in the world through technology up gradation and

capacity building in all facets of the industry.

v. To have a free market and promote healthy competition among players and

customer service.

vi. To ensure oil security for the country keeping in view strategic and defenseconsiderations.

vii. Focus on oil security through intensification of exploration efforts and

achievement of 100% coverage of unexplored basins in a time bound manner to

enhance domestic availability of oil and gas.

viii. Secure acreages in identified countries having high attractiveness for ensuring

sustainable long-term supplies.

ix. Pursue projects to meet the deficit in demand and supply of natural gas, andfacilitate availability of LNG.

x. Maintain adequate levels of self-sufficiency in refining (90% of consumption of

middle distillates).

xi. Establish adequate strategic storage of crude and petroleum products in different

locations. Create additional infrastructure for distribution and marketing of oil andgas.

xii. Open up hydrocarbon market so that there is free and fair competition betweenpublic sector enterprises, private companies and other international players.

xiii. Create a policy framework for cleaner and greener fuels.

xiv. Have a rational tariff and pricing policy, which would ensure the consumer

getting the petroleum products at the most reasonable prices and requisite quality,

eliminating adulteration.

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1.4.2 Recommendations and summary of sub groups:

Exploration & Production

1. Create a policy environment for developing a vibrant, thriving and world class E&P

industry which can mobilize and infuse technology and capital and can stand on itsown in the process of globalization for energy security to the country.

2. Continue intensive exploration efforts in the producing basins for establishing

extension and revaluation of existing reservoirs and discovery Of new resources insubtle traps with appropriate technology.

3. Aggressively pursue extensive exploration in non-producing and frontier

basins including deep-water areas within EEZ for knowledge building, examining

possibility of upgrading the risk-reward category and for finding new oil/gas

resources within a definite time frame.

4. Maximize recovery from currently producing fields/ future discoveries through

technology support, improved reservoir engineering and production practices and

EOR.5. Develop low cost production systems for marginal fields and take up

development of all discovered fields.6. Identify technology gap and introduce state-of-the-art E&P technology,

specific to the requirement of each basin and production process and systems.7. Continue the supportive role of the government in exploration,

particularly for high-risk ventures.

Technology

1. Program continuous technology acquisition and absorption for competitive edge

and for phasing out obsolete technology in a time bound fashion.

2. Pursue new worklines to remain contemporary and take advantage of global

technological advances.

3. Identify business and operational demand and translate them into technological

demand.4. Integrate a wide range of leading edge technologies.

5. Develop indigenous R&D with multi-enterprise funding in a suitable setup.

6. Impart technology investment planning in individual E&P companies.

7. Adopt alternate energy sources like fuel cells, solar cells etc. in E&P operations.

8. Aim technology input through business alliances with technology driven

international companies.

Environment

1. Manage E&P business with diligence with the goal of controlling emissions and

waste to international standards and design, operate and maintain facilities to this end.2. Support R&D efforts to improve understanding of the environment around

operations and for environmental protection.

3. Render operations and productions compatible with the environment within the

framework of sustainable development.

4. Enforce appropriate abandonment practices for restoring the original base line and

decommissioning and restoring to IMO standards.

5. Reduce consumption of resources.

6. Use energy efficient fuels and adopt clean technology in all oil field operations.7. Continue to promote environmental education and awareness at all levels.

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8. Interact with and involve local and global interest groups while exploring

environmentally sensitive areas for preserving bio-diversity and sustainable

development.

9. Provide fiscal incentives in R&D programs aimed at induction of new technologies

for environmental protection.

1.4.3 ROAD MAP TO TRANSIT TO VISION-2025

A. Through M ission M ode

1. Establish a National Energy Modelling System (NEMS).

2. Plan and execute time bound program for upgrading the knowledge of

unexplored/poorly explored domestic basins.

3. Implement an accelerated Exploration Plan based on new knowledge, new concepts

and new technologies and enhance exploration budget for intensive and extensive

exploration in producing and non-producing basins for addition and discovery of new

reserves.4. Program immediately for higher ultimate recovery, EOR, cost reduction and

development of all discovered fields.5. Introduce good archival practices for data collection, management and processing

and re-evaluate the data with latest developments in imaging, interpretation andcomputing techniques.

B. Wi th a supportive role of Government

1. Make arrangement of resources, including earmarking annual OID cess collection

for upgrading the knowledge of unexplored/poorly explored domestic basins for

promotion of such acreages.

2. Evolve and maintain a globally competitive fiscal regime for investment in E&P

activities.

3. Offer special fiscal incentives for EOR processes such as full or partial exemption

from OID cess and Royalty and higher depreciation benefits.4. Provide a level playing field to public and private sector.

1.4.4 Refining

1. Based on considerations of national oil security and stability of supply and

development of the economy, it is desirable that India set up refining capacity to meet

at least 90% of its middle distillate demand.

2. In order to promote the development of the sector, the Government shouldformulate a stable, long-term policy for the domestic refining sector and take concretesteps to ensure its implementation. Over the short term this would imply providing

adequate duty protection and granting infrastructurestatus to the sector. However, from a long term perspective the Government would

need to enunciate a stable fiscal and taxation policy for the refining industry.

The Government should also evolve a long-term policy on product quality and

environmental norms applicable for petroleum products. A sufficient lead time should

be given to the industry players for conforming to the norms.

3. In a free market scenario, the decision to invest in a project, expansion or grass

root, coastal or inland, should be best left to the sponsors and the investors. However,

the Government should extend the tax benefits available for grass root refineries

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under Section 80IA for capacity additions, as well as, for addition of downstream

processing units for modernisation and for meeting environmental norms.

4. The Government would need to allow every refinery the flexibility to source its

own crude, as also the ability to manage the business risk by using commodity hedges

and other risk management techniques. Indian refinery companies should explore the

possibility of investing in crude productionassets overseas.

5. To encourage foreign participation in the sector, the Government could also

consider increasing the ceiling on foreign direct investment in the refinery sector to74% from the present level of 49%.

6. In order to provide a level playing field for the PSU refineries, they should be given

the flexibility in taking decisions on all commercial aspects without the risk of

external scrutiny as per the prevailing norms of corporate governance as applicable to

any private enterprise.

7. An apex body for R&D could be set up which would co-ordinate the efforts of

various companies in the sector. This could be along the lines of the Centre for High

Technology (CHT) which is an existing body under the M/PNG. However, such abody would need to be set up as an independent,

industry funded entity and its roles and powers clearly defined. The Governmentshould provide further incentives for investment in R&D in the petroleum sector.

8. A comprehensive package of incentives for continued operation of North- Eastrefineries is required to be put in place to ensure their economic viability as these

refineries cannot compete in a free market because of size, age, inadequate

infrastructure and deficient demand in the region.

1.4.5 Marketing

1. As the objective of dismantling of APM is to remove the existing controls and

usher in a free market in this sector, it is recommended that this should be done at the

earliest to encourage internal competition.

2. Any company investing Rs.20.00 billion in the exploration and production sector,

the refining sector or a combination thereof should be allowed marketing rights for

transportation fuels. In this context, it is felt that in order to ensure the commitment of

a foreign company to the sector, such funds should be towards additionality of assets

and should be in the form of equity, equity-like instruments or foreign debt with

recourse to the company. In addition, in order to ensure incremental investment in

building the much needed marketing infrastructure, all new entrants would berequired to set up their own distribution network for marketing and not encroach on

the infrastructure of the existing marketing companies.3. The existing PSUs should be given full operating freedom in establishing and

maintaining their marketing networks.

4. After the dismantling of the APM, the products would be priced in line with

international prices and determined by the level of supply and demand. In certain hilly

and remote areas, the Government could recommend a maximum retail price for the

products, involving some amount of subsidy from the central budget.

5. The policy of subsidy should be time bound and should encourage competition in

the remote markets by providing incentives to companies to enter these remote

markets.

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6. While the ownership of the existing pipelines should remain with the present

owners, a regulatory authority would need to be set up which would regulate the

access to others, as also the tariffs for the pipelines. Though the owner will have right

of first use to the extent required, the regulatory

authority would enforce expansion of capacity for the use of the pipeline by other

players if necessary.7. The Government should protect the domestic refiners against dumping by MNCs

by suitable duty protection and anti-dumping duties.

8. The Government should take the steps required to minimise the price distortions,including removal / reduction of subsidies and maintaining a flat duty structure on

products.

9. The Central Government should develop a package on state level taxation of

petroleum products including that on ATF for international airlines in consultation

with the states that would consider the interests of individual states and marry these

objectives with the larger interest of the Union and

the economy as a whole. This solution should be a long-term and sustainable one in

order to deal with the setting up of large refining capacities to meet future demand inthe country.

Marketing Infrastructure

1. Though the choice of carrier would be determined on the basis of competitiveness,for strategic reasons it is desirable to develop Indian shipping tonnage. For this

purpose, domestic oil companies could be encouraged to enter into joint venture

agreements with shipping companies to promote this sector.

2. When the refineries themselves provide the port facilities, port authorities should

levy concessional port charges.

3. Independent investors should also be allowed to take up construction of pipelines

after a pipeline regulator is in place.

4. The pipeline sector should be given infrastructure status to treat it on par with the

other modes of transport.

5. The regulator would regulate the pipeline tariff. The basis for tariff should becompetitive with alternate modes of transport i.e. rail, road or coastal.

6. A single window clearance (within a pre-specified time frame for environmental

approvals) for pipeline projects should be developed for smoother development of this

mode of transportation.

7. Government could develop a suitable cess mechanism for strategic storage of crude

and products.

1.4.6 Development & Utilisation of Natural Gas & LNG etc.1. Given the significant decline in reserves over the last few years, it is clear that

unless reserves in existing fields are significantly upgraded or new fields arediscovered and brought on stream, gas production is set to decline from its current

level. This calls for concerted exploratory efforts to

establish reserves.

2. To develop scenarios of gas demand and update them at appropriate and timely

intervals. A core group, constituting representatives from the relevant Ministries and

associations, and energy experts could undertake this activity at regular intervals. This

activity should be housed at an institution with

continuity of expertise and an extensive database.

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3. The declining production profile coupled with the projection of rising demand

shows a widening demand-supply gap. The implications of this gap are that

exploration efforts need to be stepped up and the feasibility of importing gas from the

neighbouring countries examined seriously.

4. The various proposals for importing gas through pipelines or as LNG should be

examined in a judicious manner, taking into account economic and politicalconsiderations, including those related to energy security.

5. Various proposals for importing piped gas from neighbouring countries such as

Bangladesh and Mynamar, need to be pursued vigorously, as this will be a cheaperoption compared to LNG. In this context, emphasis should be laid on regional

cooperation involving SAARC, BIMSTEC and other

regional bodies such as ASEAN, Gulf Cooperation Council in developing regional

gas trade.

6. The LNG option should be examined closely especially in light of the large

irreversible investments involved, high outflows of hard currency, and the likely

impact of devaluation of the rupee on the landed price of LNG. LNG, should at best

constitute 20-30% of total gas imports into the country.7. The requirement of major gas sector infrastructure as well as other facilities would

depend upon the mix of modes of gas imports i.e., LNG and pipeline gas. Since, gaswould be predominantly used by power and fertilizer sectors, the delivered price of

gas would strongly influence the cost per unit ofpower generation and cost per tonne of urea production. It is therefore proposed that

major projects in the gas sector (LNG terminals, cross-country pipeline etc.) be

granted status of "Infrastructure Sector Projects".

Similarly, Government should permit oil sector PSUs to undertake

investments in the gas/LNG supply chain including upstream development,

liquefaction and transnational gas pipelines on merit.

8. The government is expected to continue the deregulation of the sector to allow

private sector participation at all levels of the gas value chain. With the entry of

private parties, government would need to acquire statutory powers. A Gas Act has

been under discussion and should be passed soon. Itis likely that an independent regulator will be set up under the Act. The regulator is

likely to allow gas prices to be set by the market while regulating the pipeline tariff.

There is a need for the regulator to facilitate an environment that stimulates

investment in the necessary pipeline structure.

9. The regulatory body has to be sensitive to the needs of the pipeline operators who

have to be motivated to set up a network of pipelines. It has also to encourage

exploration and production of gas in the country. There will be conflicts in theinterests of producers and transporters and these haveto be resolved. Issues like unbundling of marketing and transport and third party

access to pipelines need to be resolved at the earliest.10. Meeting India's fast expanding need for oil and gas would call for a number of

alliances at the company level as well as at the level of governments. The objectives

behind such alliances would be the acquisition of latest technologies, which may not

be available commercially for years to come

and also to mobilize the necessary finances for developing the hydrocarbon industry.

In addition, we have to forge linkages with large investors especially in Europe who

can mobilize resources even into projects that attract sanctions under US laws.

Exploration and production of oil and gas would increasingly take place in difficultareas including deep waters. Subsea pipelines would have to be laid at water depths

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exceeding 3000 metres to bring gas from the Middle East. Unconventional gas

sources like CBM and Hydrates will need to be tapped for the next century. The

technologies in these areas would be available to us only to the extent that we

participate in their development and this we have to do in partnerships with the

leading countries/companies. The partnership of GAIL and IOC with BP and Amoco

for the production of DME is an example of such alliances.11. It is only by bringing together a large number of companies, research institutes,

universities and consultants that we may succeed in this program, which involves high

risks and large outlays. It is therefore necessary to revive the organisational structurefor the National Gas Hydrate Program as recommended by the Ninth Plan working

group. That would also ensure the necessary continuity in policy making and

implementation.

12. An alliance between the major consumers would help in making the LNG market

more user friendly. Collaboration is also possible in reducing the incidence of take-or-

pay obligations through exchange of shipments. The consortium may also encourage

research in the development of technology. India should take the lead in forming this

forum.13. The increasing dependence of Asian countries on imported oil from the Middle

East exposes them to sudden disruptions in the oil supply as was seen during the Gulfwar in 1990-91. These countries have to meet this challenge through short term and

long term measures. To meet short and long term objectives in the energy sector,Asian countries need to set up a regional co-operation forum for: -

Sharing of information on energy policy, demand, demand forecasts

and supply strategies;

Stockpiling and stock draw, holding of bilateral stocks;

Regular reviews of emergency preparedness;

Co-ordination with the IEA;

Short term demand restraint measures including taxation;

Long term demand containment measures, such as improving energy

Efficiency;

Regional gas trade;

Development of renewable energy sources;

Defence strategies in protecting sea lanes;

Diplomatic initiatives vis--vis the Middle Eastern oil producers.

14. There is an urgent need to build a co-ordinating agency on the lines of the IEA to

look after these tasks. India should take the initiative to secure the co-operation of

Japan and China to form this agency.

15. It is being increasingly apparent that natural gas will necessarily be the preferredfuel in the future. Extensive research and development is needed to increase theavailability of this fuel and to develop new products and services that can meet the

emerging trends and challenges in the various facets of this industry.

Agenda for immediate action

Accelerated exploration for gas

Expedition of gas regulatory framework

Diplomatic initiatives for pipeline projects

Infrastructure status for LNG and gas pipelines"Green" incentives for clean

fuels

Removal of customs duty on LNG

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1.4.7 Restructuring

1. The core objective of industrial restructuring is to maintain long-term profitability

and strengthen competitive edge of the concerned companies in the context of

changes in market forces. The restructuring can be internal and external.

Internal Restructuring :2. Internal Restructuring has been undertaken with varying intensity by oil PSUs

already with a view to achieve greater cost effective. This is sought to be achieved

through intensive skill and capability development and greater application ofInformation Technology (IT) and revamping organisation structure for better

customer focus.

External Restructuring:3. External Restructuring involving mergers and alliances between companies is

increasing resorted to worldwide. Cost cutting strategy continues to be the prime

move of mega merger of Exxon-Mobil, BP-Amoco-Arco and Total-Petrofina.

Additionally, globalisation of oil markets and progressive removal of trade andinvestment barriers by countries have led to mergers among oil companies to protect

and expand business jurisdictions.

Recommendations on Restructuring:4. On careful consideration of the Governments explicit policy in the oil sector and

the national and global situation in the oils PSUs, it is recommended that Government

should re-examine the Restructuring Exercises with the objective of maximising

shareholder value and enabling the national oil PSUs to become real world class

players in size and success. In the restructure framework for the oil industry,

establishment of commodity exchanges and future markets needs to be pursued

vigorously even from now.

Disinvestment

5. The philosophy of the New Economic Policy is that the State should gradually

leave industries and commerce to the private sector and concentrate in those areas

where it had unique or special responsibility.

Privatisation of PSUs will constitute the cornerstone of the Second Generation

Reforms that Government needs to undertake. The rationale for the cautioned

Government presence in oil PSUs can be :-

To provide sustained energy security,

To enable the pursuit of some social objectives (provision ofSubsidized products),

To ensure availability of products in remote areas, and

To minimise the loss of dividend income, (which is substantial from

oil PSUs)

Other country experiences have shown that the energy security is not

contingent upon Government ownership.

6. It is therefore recommended :-

In view of the concerns for energy security and product availability in remote

areas, Government can retain ownership in one upstream PSU (say ONGC) and one

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downstream PSU (say IOC) and GAIL till such time the market is fully tuned to the

deregulated scenario and the private ownership.

7. To send correct market signals and ensure better valuation of shares of PSUs :-

Government should make an immediate policy announcement regarding

phased withdrawal from the ownership of oil companies.

Reduction of Government equity in at least one company below 51% as soonas possible after the presentation of the next Union Budget 2000-01.

Disinvestment should be made in trenches of say 10% so that at every level,

Government is able to secure progressively higher value for the sharesdivested, it may be necessary to retain Government holding of 26% in all

disinvested PSU for a short, interim period to address

concerns regarding possible asset stripping by any new management.

1.4.8 Regulation

8. Though oil industry will be deregulated, there are still areas where regulation has to

be continued ironically. Even for ensuring that the regulated sector functionseffectively through the market mechanism. The need for regulation can be

summarised as follows:

Ensuring fair competition among all players

Monitoring of the availability and price of petroleum and gas products indifferent regions of the country especially remote areas

Managing the strategic minimum reserve of oil products

Establishing quality specifications and monitoring compliance

Ensuring equitable access to the pipelines and monitoring of the tariff

Establishing environmental standards and targets for technological

Achievements.

9. It is recommended that, though there are close linkages in the structure and

technology of the upstream and downstream activities, there will be need to retain the

powers of licensing areas for explanation and production with the Government for

some time. The oil well extraction rules and safety, it is purely a technical matter andcan be retained separately rest of all the activities relating to oil and gas as well as

related products like distillates, gas hydrates, coal bed methane, etc. should be under

one single regulatory body. This could consist of 35 technical members

representing different

disciplines relevant for regulation. It should be independent, totally accountable to the

consumer and industry and should decide all its decisions after a open public enquiry.

10. The sub-group also suggested an action plan as follows:-- Short term (within one year)

- Announcement of the revised oil policy- Reiterating and implementing deregulation programme on or before April 2002.

- Affirming withdrawal from majority ownership of oil and gas companies before

2005 (except ONGC, IOC and GAIL)

- Assuring that to address concerns for adequacy of supplies to remote areas and

stability in prices, majority holding in one upstream company (say ONGC) and

downstream company (say IOC for

distribution and GAIL for transportation) would be retained. Only when the market

system stabilises the majority in these companies will be brought down.- Setting up immediately single regulatory authority for hydrocarbon sector.

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11. Medium term (within 3 years)

- Internal restructuring of oil PSUs to be completed making full use of IT.

- Implementing proposals of mergers and alliances of oil PSUs with the objective of

enhancing shareholder value.

- Phased disinvestment in all oil PSUs (except ONGC, IOC and GAIL) down to 26%to realise best shareholder value.

- Finalise arrangements for oil security through the oil companies.

Long term (beyond 3 years)

- Bring down the Government holding in all oil companies other than ONGC, IOC

and GAIL to near zero.

- Determine the long term level of Government holding in ONGC, IOC and GAIL.

1-LNG Intro-(1-15)

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