BG Group Delivering The Benefits of Natural Gas Infrastructure Challenges Dr Anthony Barker Director – Downstream Business Development, BG India.

BG GroupDelivering The Benefits of Natural GasInfrastructure Challenges

Dr Anthony BarkerDirector – Downstream Business Development, BG India

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Legal Notice

This presentation includes forward-looking statements. Such statements are only predictions and actual events or results may differ materially. For a discussion of important factors which could cause actual results to differ from the forward-looking statements, please refer to BG Group plc’s Annual Report and Accounts 2005.

Nothing in this presentation constitutes or shall be taken to constitute an offer, invitation or inducement to any person to invest in BG Group plc and no reliance should be placed on the information contained in it in connection with any investment decision or for any other reason. BG Group plc and its affiliates do not make any representation or warranty, express or implied, with respect to the completeness, adequacy or accuracy of the information contained in this presentation

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Content

• Demand and supply of Natural Gas

• Existing and proposed infrastructure

• The Natural Gas market in South India

• Bulk customer to anchor load

• Natural Gas demand in power, fertiliser and steel sectors

• Distributed generation benefits

• Investment levels

• Direct marketing

• The regulatory environment

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Demand of Natural Gas Share of segments

Power and fertiliser sectors to continue to be the biggest consumers of Natural GasSource: GAIL Infraline reference book 2006

Demand 2006

Power 36%

Spong Iron 5%

CGD 7%

Others 27%

Fertiliser 25%

Spong Iron4%

CGD6%

Others18%

Fertiliser22%

Power50%

Demand 2012

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Demand of Natural Gas

Primary commercial resources

% Share of Primary Commercial Resources (2003-04)

8.87%

51.07%

36.39%

2.14%1.53%

Hydro

Nuclear

Coal

Oil

Natural Gas

Tremendous scope for growth of Natural Gas consumption

% Share of Primary Commercial Resources (2031-32)

2.36% 6.31%

44.76%

22.71%

23.86%

Hydro

Nuclear

Coal

Oil

Natural Gas

Share of Natural Gas as a primary commercial resource to grow from 9% in 2004 to 23% by 2032Source: Draft Report on Integrated Energy Policy

6Supply will be less than demand

South India – 26 % share by 2012

North, West India 68% share by 2012

East India – 6% share by 2012

Source: GAIL Infraline reference book 2006

Demand and Supply of Natural Gas Emerging demand and supply centres

Total reserves 985 bcm

Tripura18 bcm

Petronet DahejShell Hazira

Dabhol

Krishna Godavri380 bcm

Bombay Offshore380 bcm

Gujarat82 bcm

Rajasthan4.5 bcm

Source: UBS

LNG ~90 MMSCMD

LNG Terminal

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Mangalore

Hyderabad

Kochi

Chennai

Infrastructure a critical issue in developing regional markets

Demand(mmscmd)

2006South India

2012South India

Total ~44 ~85

• With availability of KG supply and consumer willingness to pay, South India is poised to become an emerging hub for Natural Gas demand

• Areas for Natural Gas demand – Metro city gas distribution (CGD)

– Bangalore, Chennai and Hyderabad

– Non-metro CGD– Large industrial areas and

special economic zones (SEZs)

– Anchor loads like power, fertiliser and steel to be the bulk of market share

Demand in South India to almost double by 2012

Demand and Supply of Natural Gas Potential markets in South India

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• Infrastructure to connect demand centers with supply sources

• Infrastructure to develop regional markets –Pipelines connecting Southern states with supply sources –Pipelines connecting Eastern states with supply sources –Pipelines to connect East and West regional markets –Pipelines to connect East and North regional markets –Requires anchor loads e.g. power, fertiliser –State grids to connect major demand centres within states

• National gas market expected to evolve from regional gas hubs once infrastructure is available

Infrastructure Requirement Development of Natural Gas markets

Significant investment requirements and rapidly growing demands are challenges to infrastructure development

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Delhi

Jagdishpur

Vijaipur

Hazira

Chennai

Dabhol

Uran

Existing and Proposed Infrastructure

Existing

Facilitate development of Southern and Eastern regional markets

Existing Transmission Lines

Planned Transmission Lines

Mangalore

Coimbatore

Kakinada

Bangalore

Kolkata

Kochi

Pune

10Thousands of kilometres of new pipelines will require multi-billion dollar investments

0 200 400 km

Infrastructure RequirementNatural Gas market in South India

Hyderabad

Kochi

Mangalore

Chennai

ANDHRA PRADESH

TAMIL NADU

KARNATAKA

Bangalore

KG Basin Supply

Kakinada

KERALA

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Bulk Customers to Anchor Load

• Power/fertiliser plants expected to anchor the transmission capacity

• Required to optimise transmission capacity and transmission tariff

• Instrumental in developing CGD network in adjoining areas

• Instrumental in development of intra-state and regional markets

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• Multi-billion dollar investments necessary to build distribution network in three metros and 20 non-metros in Southern states

• JV promoted by GSPC, IDFC and AP government to invest USD 1.2 billion in 1,500 km network in AP

• USD 25 million needed for CGD network in Noida, Gurgaon and Faridabad

• GAIL identified 22 cities for CGD with investments of USD 2.5 billion

SectorLength(Kms)

Kakinada - Kolkata 1,000

Kakinada - Chennai 580

Kakinada - Hyderabad - Uran 1,035

Bangalore - Chennai 300

Kochi - Kayamakulam - Bangalore 860

Dabhol - Bangalore 850

Mangalore - Bangalore 357

More than USD 5 billion required

Investment Levels

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• Power

– Environmental friendly – competitive when environmental benefits are considered

– Potential to bridge the peak demand deficit

– Existing Natural Gas based plants running at a low PLF due to shortage of Natural Gas

– AP could emerge as biggest market for Natural Gas based power generating capacity due to proximity to KG Basin

• Fertiliser

– Demand of Natural Gas in fertiliser sector is expected to increase by more than 70% by 2012

– Even high priced Natural Gas attractive for consumers since prices of alternative fuels even higher

– Plants operating on liquid fuel (Naphtha/FO) have potential to convert to Natural Gas

– Eventually prices likely to be benchmarked against LNG

Natural Gas for Power, Fertiliser and Steel

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• Steel – States like AP and Orissa likely to emerge as key markets

for steel – Demand in steel sector expected to grow to 10 MMSCMD by

2012– Vizag Steel’s expansion plan utilising Natural Gas which

should increase Natural Gas demand by 5 MMSCMD in coming years

• Rise in Natural Gas demand in steel and fertiliser sectors can be attributed to factors like

– Unmet demand in existing plants – New capacities– Expansion of existing capacities – Plants with economic conversion potential

Natural Gas for Power, Fertiliser and Steel

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• At load centres, rather than at pithead–Synergy with the development of transmission

capacity

• Lower transmission and distribution losses

• Distributed gas-fired generation capacity –Can provide anchor loads for development of

transmission pipelines and CGD networks

• New opportunity – cogeneration–At customer location driven initially by

distribution inefficiencies

Distributed Generation Benefits

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Direct Marketing – Growth

City Delhi Mumbai Gujarat (Surat/ Baruch/ Ankleshwar

CNG Stations 146 120 16

Vehicles on CNG ~106000 ~169000 ~30000

Average Consumption

(mmscmd)

~1 ~1 0.11

• Delhi is one of the fastest growing CGD markets

• Similar potential in the Southern cities of Bangalore, Hyderabad and Chennai

• Infrastructure availability and supply sources are biggest challenges

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Direct Marketing – BG India’s Participation

• Distribution business in Mumbai (since 1995) and Gujarat (since 1997)

– Combined customer base of ~570,000 (domestic, commercial, industrial & NGVs)

– Pipeline network of over 3,800 kms– 2.9 MMSCMD supply of Natural Gas; 3.2 MMSCMD third party

transportation• Gujarat Gas (GGCL) – Gujarat

– 65% owned subsidiary of BG India– India’s largest private distribution company– Significant transmission business

• Mahanagar Gas (MGL) – Mumbai– BG India (49.75%), GAIL (49.75%), Maharashtra

government(0.5%)– Strong growth prospects – Leading the CNG revolution in Mumbai

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Regulation – Recent Developments

• Petroleum and Natural Gas Regulatory Board Act enacted on April 3, 2006

– Main Provisions–Provides for regulatory board (Sec. 3)–Downstream regulator – pipelines and city and local gas

distribution (Sec 11 & 12)–Registration for marketing (Sec 15) and authorisation to lay,

build, operate or expand transmission/distribution (Sec 11) – however, deemed registration and authorization for entities so engaged prior to board appointment date (Sec 16)

–Open access (Sec 20)–CGD exclusivity by board (Sec 20(4))–Affiliate code of conduct (Sec 21(1)) also includes potential

unbundling

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Regulation – Primary Policy Issues

• CGD policy – Licenses should be awarded through a transparent and objective

competitive bidding process – Conveyance and marketing exclusivity should be provided for – Marketing exclusivity in distribution is a world-wide best practice

followed in over 40 countries allowing optimal distribution networks to be built

• Pipeline policy – Pipeline capacity should be based on aggregate demand with

economic expansion options to serve future capacity needs – An in-built excess capacity requirement will impose added cost to the

primary loads (power and fertiliser) and could make Natural Gas an uneconomic fuel alternative in the power sector

– Adoption of a policy to build to aggregate demand keeps transmission costs lower to the benefit of the end user so the nascent Natural Gas industry can develop to its optimal level

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• Transmission authorisation– Award transmission through a bidding process with

objective bid evaluation criteria– Authorise pipelines following an open season procedure

using the international best practice that the US Federal Energy Regulatory Commission has created

– Open seasons with the regulator overseeing future expansions based on the market needs will result in an optimal transmission grid for India to the benefit of its expected economic growth

• Tariff– Distance based tariffs for transmission and a revenue-based

model for CGD

Regulation – Primary Policy Issues

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Thank You