BD(Global) Economic Note No.11: October 2013

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FOR INTERNAL CIRCULATION ONLY

BD(GLOBAL) ECONOMIC NOTE NO.11

(A review of Macro-economic trends including trends in the Oil and Gas sector )

BD(Global) Department OIL INDIA LIMITED

NOIDA

October 2013

BD(Global) Economic Note No.11: October 2013

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C O N T E N T S

Macro-economic Conditions in Global and Indian Economy- Recent Trends

Analysis of Oil and Gas Production Trends

Analysis of Oil and Gas Price Movements

Analysis of Petroleum Products Production / Consumption Trends

Country Focus: Myanmar

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BD(GLOBAL) ECONOMIC NOTE NO.11

Macro- Economic Highlights of Global and Indian Economy - Recent Trends

World Economic Outlook

The IMF, in its World Economic Outlook (WEO) announced in October 2013, has projected

the global economy to expand by 2.9% in 2013 and 3.6% in 2014 – down by 0.3 and 0.2

points respectively on its last predictions, made in July – despite signs of recovery in the

euro area.

According to the IMF, badly handled budget cuts in the United States and a slowdown in

activity in big developing countries will cause the global economy to expand more slowly

than expected this year.

OECD has projected the world economy to grow 2.7 per cent in 2013 and 3.6 per cent in

2014.

Indian Economic Scenario

GDP Growth: The National Council of Applied Economic Research (NCAER) has

projected India’s growth rate to be in the range of 4.8-5.3 per cent in the current fiscal year

(FY14), lower than its earlier forecast of 5.9 per cent, due to slowdown in key manufacturing

and services sectors.

Recently, IMF had lowered its projection of India's growth rate to 3.75 per cent in 2013, from

5.7 per cent earlier. Asian Development Bank (ADB) had also lowered India's growth

projection for 2013-14 to 4.7 per cent from 6 per cent earlier saying the recent rupee

depreciation and capital outflows could adversely impact the country's economy.

Organisation for Economic Co-operation and Development (OECD) has projected India’s

economy to expand by 3.4 per cent in 2013-14, 5.1 per cent in 2014-15 and 5.7 per cent in

2015-16. According to OECD assessment, the country’s economic activity is expected to

recover gradually as “rupee depreciation supports exports, infrastructure projects cleared by

the Cabinet Committee on Investment come on stream and political uncertainty declines

after the general election due in the spring 2014.

Industrial Growth: Overall growth in the Index of Industrial Production (IIP) rose

2.0% in September 2013, showing increase in growth from 0.4% growth recorded in August

2013. IIP grew by 0.4% in April-September 2013 against 0.1% growth in April-September

2012.

Eight core Infrastructure industries registered 8.0 per cent growth in September 2013 as

compared to growth of 7.9 per cent in September 2012. During April- September 2013-14,

these sectors grew by 3.2 per cent as compared to 6.6 per cent during April-September 2012-

13.

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Exports: Cumulative value of exports for the period April-September 2013 -14 was US $

152105.40 million (Rs 901194.97 crore) as against US $ 144673.91 million (Rs. 790838.40

crore) registering a growth of 5.14 per cent in Dollar terms and growth of 13.95 per cent in

Rupee terms over the same period last year.

Imports: Cumulative value of imports for the period April-September, 2013-14 was US $

232231.64 million (Rs. 1365699.30 crore) as against US $ 236493.90 million (Rs.

1292490.99 crore) registering a negative growth of 1.80 per cent in Dollar terms and growth

of 5.66 per cent in Rupee terms over the same period last year.

CRUDE OIL IMPORTS: Oil imports during September, 2013 were valued at US $ 13196.5

million which was 5.94 per cent lower than oil imports valued at US $ 14029.5 million in

the corresponding period last year. Oil imports during April-September, 2013-14 were

valued at US $ 82876.1 million which was 3.58 per cent higher than the oil imports of US $

80011.6 million in the corresponding period last year.

The Trade Deficit for April-September, 2013-14 was estimated at US $ 80126.24 million

which was lower than the deficit of US $ 91819.99 million during April-September, 2012-13.

Foreign Currency Assets stood at US$ 249.8 billion at end-September 2013 as compared

to US$ 260.7 billion at end-September 2012.

Exchange rate: The rupee depreciated by 0.9 per cent against US dollar, 3.2 per cent

against Pound sterling and 1.1 per cent against Euro and appreciated by 0.5 per cent against

Japanese yen in the month of September 2013 over August 2013.

Inflation: The WPI inflation for all commodities for the month of September 2013 has

increased to 6.46 per cent from 6.10 per cent in the previous month. The all India CPI

inflation (combined) has increased to 9.84 per cent in September 2013 from 9.52 per cent in

August 2013 mainly on account of increase in inflation of vegetables, fruits and spices.

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Analysis of Oil & Gas Production Trends in India

Crude Oil : Crude Oil production having a weight of 5.22 % in Index of Industrial

Production(IIP) increased by 0.6 % in September, 2013 over September, 2012. However, its

cumulative index during April to September, 2013-14 moderated by 1.3 % over the

corresponding period of previous year.

Natural Gas : The Natural Gas production (weight: 1.71 % in IIP) declined by 14.1 % in

September, 2013 over September, 2012. Its cumulative index during April to September,

2013-14 declined by 16.5 % over the corresponding period of previous year.

Natural Gas production by OIL increased by 0.5% during Apr-September 2013 compared

to corresponding period in the previous year.

Sources Unit

2012-13

(Apr-Sept)

2013-14

(Apr-Sept) % change

ONGCL

Crude (in MMT) 11.26 11.15 -0.9%

N Gas (in MCM) 11822 11579 -2.1%

OIL

Crude (in MMT) 1.89 1.80 -0.2%

N Gas (in MCM) 1317 1322 0.5%

Private/JVs

Crude (in MMT) 5.93 5.86 -0.8%

N Gas (in MCM) 8222 4924 -40.1%

Total

Crude (in MMT) 19.08 18.84 -1.3%

N Gas (in MCM) 21361 17826 -16.5%

Source: M/o P&NG

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Analysis of Oil & Gas Price Movements

Oil prices marginally increased but remained in range bound during April-September 2013.

In line with the international crude prices, prices of Indian basket of crude also increased to

$109.4/bbl compared to $104.8/bbl in July 13. The net impact in rupee terms remained

high due to depreciation of rupee against USD.

Movement of World Energy Prices

Energy Commodity

Unit

Annual averages Monthly averages

Jan-Dec

2010

Jan-

Dec

2011

Jan-Dec

2012

July

2013

Aug

2013

Sept

2013

Crude oil, average $/bbl 79.04 104.01 105.1 105.3 108.2

108.8

Crude Oil Price (Indian

Basket)

$/bbl 78.57 108.07 109.95

104.8 108.4 109.4

Natural gas, US $/mmbtu 4.4 4.0 2.8 3.6 3.4

3.6

Source: World Bank and PPAC.

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Analysis of Petroleum Products Production/Consumption Trends- India

Total petro-product demand for the year 2013-14 were estimated at 162.03 MMT. As against

this the actual consumption during Apr-September 2013 stood at 77.53 MMT ( i.e. 47.85% of

the total demand). Taking advantage of the surplus refining capacity the country was able to

export 33.47 MMT of petro-products. The overall refinery capacity utilization during Apr-

September 2013 was 103.7% compared to 99.5% during April-September 2012.

Petroleum refinery production (weight: 5.94 % in IIP) registered a growth of 8.0% in

September, 2013 over September, 2012, and its cumulative growth during April to

September, 2013-14 was 5.3 % over the corresponding period of previous year.

Details Unit 2011-12

( Apr-Mar) 2012-13

( Apr-Mar)

2013-14 (Apr-Sept)

Production of Petro products MMT 204.75 219.02 110.06

Consumption of Petro products

MMT 147.99 155.41 77.53

Export of Petro-Products MMT 60.51 63.76 33.47

Crude Import MMT 172.11 184.45 97.80

Import of Petro-Products MMT 14.92 15.07 7.64

LNG Import MMT 10.13 10.9 5.31

Source: PPAC

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Myanmar- Country Analysis Note

Location: Myanmar is located in Southeastern Asia, bordering the Andaman Sea and the

Bay of Bengal, between Bangladesh and Thailand.

Economy : Burma is a resource-rich country but still suffers from pervasive government

controls, inefficient economic policies, corruption, and rural poverty. Corruption is prevalent

and significant resources are concentrated in the extractive industries are concentrated in a

few hands. The Burmese government has initiated notable economic reforms. In October

2011, 11 private banks were allowed to trade foreign currency. On April 2, 2012, Burma's

multiple exchange rates were abolished and the Central Bank of Myanmar established a

managed float of the Burmese kyat. In November 2012, Burma signed a new Foreign

Investment Law. Despite these reforms, the Burmese government has not yet embarked on

broad-based macro-economic reforms or addressed key impediments to economic

development such as Burma's opaque revenue collection system.

India-Myanmar Relations: India-Myanmar relations are rooted in shared historical,

ethnic, cultural and religious ties. As the land of Lord Buddha, India is a country of

pilgrimage for the people of Myanmar. India and Myanmar relations have stood the test of

time. The geographical proximity of the two countries has also helped develop and sustain

cordial relations and facilitated people-to-people contact. India and Myanmar share a long

land border of over 1600 km and a maritime boundary in the Bay of Bengal.

BASIC STATISTICS

Population: 55.17 Million

GDP : US$53.14 billion (2012)

GDP Growth Rate: 6.3% in 2012

P.C GDP : US$ 1400

Fiscal Year : 1st April to 31st March

Exchange Rate: 853 Kyats per USD

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Commercial and Economic Relations : There has been steady expansion of bilateral trade

from US$ 12.4 million in 1980-81 to US$ 1.92 million in 2012-13. India's imports from

Myanmar are dominated by agricultural items (beans, pulses and forest based products from

90% of our imports). India’s main exports to Myanmar are primary & semi-finished steel

and pharmaceuticals. Following are the export-import figures as per the Central Statistical

Organization (CSO), Yangon.

At the institutional level, an Agreement for setting up of a Joint Task Force between UMFCCI

and CII was signed in 2004. A Bilateral Investment Promotion Agreement (BIPA) and a

Double Taxation Avoidance Agreement (DTAA) were also signed in 2008. India and

Myanmar are both signatories to the India-ASEAN Trade in Goods Agreement, which was

signed in August 2009. Myanmar is also a beneficiary country under India’s Duty Free Tariff

Preference Scheme for LDCs. There has been regular interaction between CII, FICCI and

other important chambers of commerce from India and the Union of Myanmar Federation of

Chambers of Commerce and Industry (UMFCCI).

Oil and Gas Sector of Myanmar

Burma (Myanmar) is an important natural gas producer within Southeast Asia, though its

upstream hydrocarbons sector is underdeveloped. Sanctions, a lack of technical capacity,

opaque regulatory policy, and insufficient investment by foreign firms have significantly

impeded the country's efforts to realize its oil and gas production potential. However, many

U.S. and European Union sanctions were eased or suspended in 2012 in response to political

and economic reforms in Burma.

Govt Policy: The government is keen to attract foreign investment and technical assistance

and is issuing production-sharing contracts through direct negotiations or recent licensing

rounds. The government held licensing rounds for onshore blocks in both 2011 and January

2013, and plans to hold another licensing round in early 2013 for 30 offshore oil and gas

fields. Burma began reforming its foreign direct investment law and providing greater

revenue incentives for international company investments in 2012.

Crude Oil: Burma produces a minimal amount of crude oil and condensates from the onshore

Salin basin and offshore Yetagun field. Total liquids production has gradually increased over

the past decade from 13,000 barrels per day (bbl/d) in 2000 to 21,000 bbl/d in 2011.

However, Burma's limited production and refining capacity are insufficient to meet domestic

demand for crude oil and products, making the country a net oil importer.

Natural Gas: Burma's natural gas production has increased substantially over the past

decade, rising from 61 billion cubic feet (Bcf) in 1999 to 420 Bcf in 2011. The country's

current natural gas output mostly comes from the offshore Yadana and Yetagun fields, but is

forecasted to rise further due to new projects. Burma's natural gas consumption, which was

118 Bcf in 2011, has been increasing, but not at the same pace as production. Exports

to Thailand, which began in 1999, now account for about 75 percent of Burma's natural gas

output. Exports to Thailand could rise further when PTTEP, Thailand's national oil company,

launches commercial operations of the Zawtika gas project, which is supposed to have a

capacity of 300 million cubic feet per day (MMcf/d). Meanwhile, exports to China would

commence with the development of the Shwe gas project in the Rakhine Basin, which could

have a peak production capacity of 500 MMcf/d.

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Pipeline Infrastructure : In a 2009 agreement, Burma and China decided to construct twin

crude oil and gas pipelines running from Burma's port of Kyaukphyu to Kunming in

southwestern China. A consortium of Asian oil companies, including the China National

Petroleum Corporation, plan to commission the onshore gas pipeline by 2014 to carry

exported gas from the Shwe gas project to China. The crude oil pipeline is designed to allow

China to diversify transit routes for its oil imports from the Middle East and Africa, which

must currently pass through the Straits of Malacca chokepoint.

Regulatory Framework

Key Legislation: With the enactment of the Foreign Investment Law in November 1988,

Myanmar is Myanma Oil and Gas Enterprise (MOGE) signed its first PSC with a foreign

operator in 1989.

Regulatory Body: All petroleum licence negotiations are carried out through the Ministry of

Energy, although the terms of the production sharing contracts are negotiated between the

Contractors and MOGE.

State Oil Company: The national oil company of Myanmar is Myanma Oil and Gas

Enterprise (MOGE). MOGE has the exclusive rights to explore, develop and produce

petroleum both onshore and offshore. MOGE is controlled directly by the Ministry of Energy

(MOE).

State Participation: MOGE has a negotiable carried interest in the exploration phase of any

contract, which it can convert into a working interest in the event of a commercial discovery.

This interest is generally 15% to 20%. If MOGE exercises its option, it must pay historic

costs on a pro-rata basis, plus 15% of both the signature and production bonuses.

Repayment can be either in cash within three months, or in kind from 50% of its share of

production.

Licensing: All petroleum licence negotiations are carried out through the Ministry of Energy,

although the terms of the production sharing contracts awarded are negotiated between the

Contractors and MOGE. Licensing has generally been taken place via formal licensing

rounds. However, contracts have also been negotiated and awarded on an ad-hoc basis.

MOGE allows for an initial study and assessment period, which is generally for a duration

of nine months. Should the contractor opt to continue with a PSC, a signature bonus is

payable after the study period is complete.

The initial exploration period is generally three years (in which time the contractor is obliged

to complete an agreed work programme) which can be extended for two one-year periods.

The contractor has the option to terminate the PSC at the end of each sub-period, provided

that the minimum work obligation has been met. MOGE has also negotiated various

contracts with shorter initial phases and study periods, at the end of which, contractors can

opt to withdraw.

In the event of a commercial discovery, the contract term is extended 20 years from the date

of declaration of commerciality. In the event of a gas discovery, the contractor can apply

for 'retention area' status for a period of up to five years. The fields are effectively carved out

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from the rest of the block and the contractor has five years to conclude gas market

assessments and gas sales negotiations.

Current Fiscal Terms

The majority of licences in Myanmar are governed by production sharing contracts (PSCs).

The Ministry of Energy has demarcated deepwater blocks since late-2006. The terms and

conditions for the deepwater blocks are more favourable.

The basic PSC includes the following fiscal elements:

State Participation Rate: MOGE has a negotiable carried interest in the exploration phase of

any contract, which it can convert into a working interest in the event of a commercial

discovery. This interest is generally 15% for onshore blocks but MOGE has the option to

extend up to 25% at its own discretion. For offshore blocks, the interest can be up to 20%,

but if the discovery size is greater than five tcf, this interest can increase to 25%.

Carry & Reimbursement: If MOGE exercises its option, it must pay historic costs on a pro-

rata basis, plus 15% of both the signature and production bonuses. Repayment can be either

in cash form within three months or in kind from 50% of its share of production.

Signature bonuses: A negotiable signature bonus is payable. Historical signature bonuses

(period 2005-2012) have been in the region of US$6-7 million for offshore acreage and

US$0.5-1.5 million for onshore blocks. The signature bonus is not a recoverable cost.

Signature bonuses are payable within 30 days after entering into the exploration period.

Training Fees: The contractor is obliged to employ as many qualified Myanmar personnel as

possible. For offshore blocks, a minimum expenditure commitment of US$50,000 per year

in the exploration period, and US$100,000 in the development and production periods,

should be spent to train and educate Myanmar citizens. For onshore blocks, a minimum

commitment of US$25,000 per year in the exploration period, and US$100,000 in

the production period is required. All costs are fully recoverable.

Research and Development Fund: The contractor must contribute 0.5% of its share of profit

oil to a Research and Development fund.

Production bonuses: Production bonuses are payable and not cost recoverable. Payments

vary depending on the production rate and location of the blocks. Bonuses for onshore

blocks are lower than those for the offshore blocks. Production bonuses in general for

different tiers of production are listed in the tables below.

Royalty: In 2012, royalty was increased to 12.5% of available petroleum for all onshore and

offshore contracts.

Domestic Supply Obligation (DSO) : A "typical" DSO is understood to be around 20% of

contractors' share of oil production and 20-25% of gas production. DSO petroleum is

typically supplied at a 10% discount to the prevailing market price.

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Cost Recovery Ceiling: In each year of production a percentage of production is available to

offset costs. The cost recovery ceiling is set at 40% for onshore blocks, 50% for offshore

shallow water blocks, and up to 70% for deepwater blocks.

PSC Profit Sharing: Production remaining after royalty and cost recovery is termed profit

share and is divided between the contractor and the government. Typical production based

profit splits for both onshore and offshore contracts are given in the tables below:

Corporate (or Petroleum) Income Tax: The contractor is liable for Corporate Income Tax,

subject to an initial three-year tax holiday period from first production. Corporate Income

Tax is charged at the rate of 30%.

Strategic Implications for OIL:

The investment climate in Myanmar has suddenly changed in the recent years. Despite the

United Nations putting Myanmar among some of the least developed in the world,

Transparency International tagging Myanmar as one of the most corrupt countries and

human rights organizations exposing numerous abuses, Myanmar has been making all

possible efforts to put a series of economic and legal reforms to open up its economy.

According to McKinsey Global Institute report, Myanmar’s economy has the potential to

grow fourfold by 2030. Among the sectors most attractive to foreign investors are

telecommunications, mining, oil and gas, financial services, manufacturing of consumer

products, and agriculture.

Government regulatory standards in some sectors are uncertain. While labour is cheap and

plentiful education levels are low, so companies may have to include vocational training in

their business plans. There are infrastructural bottlenecks too. Hotels are few in number and

quite expensive in Yangon. Automated teller machines and credit cards are only now being

introduced into the country. Transportation is a constant challenge.

Laws regulating land tenure and environmental controls are weak and poorly implemented.

Trouble can arise when securing access to land and other resources, particularly in ethnic

minority areas where preliminary ceasefires have been signed after decades of civil war.

Foreign investment projects have been enmeshed in land-grabbing controversies. Foreign

companies also face the challenge of finding local business associates whose hands are clean

of corruption or abuse.

Despite the above challenges, Myanmar provides good opportunities for OIL. It is estimated

that Myanmar is sitting on approximately 50 million barrels of oil and 283.3 billion cubic

metres of natural gas – most of which has seen little to no onshore or offshore exploration.

This represents very good opportunity for new exploration uncovered in recent decades and

can help OIL for its organic growth as the country is offering on-shore and off-shore blocks

on bidding. From a strategic growth point of view, OIL can make efforts in including some of

these assets in its overseas portfolio which has high-risk, high-reward potential. OIL can gain

first mover advantage and plan its strategies for entering into Myanmar by taking advantage

of the favorable diplomatic and bilateral relationship India enjoys with Myanmar. Existing

DTAA and BIPA between India and Myanmar and and should also add to some comforts.

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