GAIL (India) Ltd

Indian Economy

Indian economy is emerging from an exceptionally difficult and challenging period whereit had to face an unprecedented global financial crisis. After growing at an impressiveaverage of about 9% per year for four years during 2004-2008, the economy slowed down toabout 6.5% in 2008-09 and then recovered to 7.4% in 2009-10. in the currentfinancial year, the economy is expected to grow at about 8-8.5%.

Going forward, Indian economy is expected to maintain its status as one of the fastestgrowing economies in the world, with the projected average growth rate of about 9%.

Driven by strong economic growth, the growth in commercial energy demand in India isalso expected to grow at one of the fastest rates in the world

Indian Energy Sector

India is the 5th largest energy consumer in the world and is expected to become the 3rdlargest energy consumer by 2020 (after US & China). Today, over 70% of India's oilrequirements are being met by imports. Per capita consumption of energy in India is one ofthe lowest in the world (around 0.3 tonnes of oil equivalent compared to world average of(1.8) but in the long run. this will rise and so will the share of natural gas within theenergy basket. India has made a voluntary commitment to reduce its carbon intensity by 20%by 2020. One of the measures to achieve this includes switch over to clean fuels andtherefore, natural gas will get an increased focus to meet the energy requirements of thenation.

Natural Gas Demand Supply Outlook

Globally, natural gas constitutes about 24% or the energy basket, while in India, itaccounts for about 9-10%. The relatively low share or gas in India's energy consumption isattributed mainly to the limited availability of Natural Gas in India.

in order to increase gas supplies in India, through a Joint Venture of your Company,India commenced gas imports in the form of Liquefied Natural Gas (LNG), through specialships, from the year 2004. Since then, the last 6-7 years have particularly seensignificant developments in terms of establishing a reliable domestic market for importedLNG and its price acceptability by consumers across different industries.

The other important demand driver is the success of reforms in the upstream oil &gas sector, adopted by the Government of India. Various rounds of New ExplorationLicensing Policy (NELP) of Government of India, between 1999 and 2009, threw open theExploration & Production of oil & gas sector for various domestic andinternational players, and this has yielded exceptional results in terms of multiplediscoveries, which are gradually being commercialized and are playing a crucial role inbridging the demand-supply gap of Natural Gas in India.

The other important driver for gas demand would be the development of natural gas trunkpipelines in various parts of the country. To promote the reach of natural gas in variousparts of the country, the Government of India has given authorizations for laying 9 newgas pipelines, which would more than double the existing length of trunk pipelines in thecountry.

Due to measures like these, it is estimated that by 2015,Indian gas demand is likely togo upto the level of 300 MMSCMD and meeting this demand requires not only continualinvestments in the upstream side for increased volumes of gas supply, but also significantexpansion in infrastructure and downstream facilities.

Furthermore, in order to sustain its economic growth at 8-9%. it is also projected thatgas demand in India could be over 600 MMSCMD by 2030. By that time, per capita energyconsumption could rise to 1.3 tonnes of oil equivalent and the share of Natural Gas couldbe around 11% as against 9% of the energy basket today.

Currently. Power, Fertilizers, Industries and Refineries consume more thanthree-fourths of gas in India. Growth in demand from these sectors, their investments andprice acceptability at higher levels will unlock the supply potentials, mainly imports inthe form of LNG. Continued investments in upstream, further investments in the midstreamfor gas infrastructure expansion and substantial investments in the downstream will beessential for ensuring availability of adequate gas supplies from domestic sources /imports and consumption at the demand centres. All this is bound to make India one of thelargest consumers of gas in the world.

The year 2009-10 has seen substantial increase in Natural Gas volumes in India owing tothe commencement of supply from KG Basin D6 gas field. Total gas supply increased from 110MMSCMD in 2008-09 to 147 MMSCMD for the year 2009-10. The steep growth in demand coupledwith likely increase in supplies owing to the large discoveries on the east coast andpossible enhancement of LNG imports instill confidence that the Natural Gas contributionin Indian energy sector will further increase in the coming years. Likely increase ofshare of gas in consumption pattern in Indian context is further supported by the factthat only around 20% of India's sedimentary basin has been relatively well explored.

Transmission of Natural Gas

Your Company is the market leader in the field of pipeline transmission of natural gas,commanding a share of around 72% of the entire gas available in India.

Your Company has been authorized by MoPNG for 5 new Natural Gas pipelines in 2007 andyour Company is also implementing the upgradation of 2 existing pipelines, having a totallength of 7,500 km. This will further strengthen your Company's position as India'spremier Natural Gas transmission Company and expand the length and capacity of itsexisting transmission network. These pipelines will be built by your Company on an openaccess and common carrier principle and are expected to be completed in two phases in thenext 3-4 years.

When these pipelines are commissioned, the total capacity of your Company's pipeline isexpected to increase from about 150 MMSCMD to around 300 MMSCMD.

Your Company has signed Gas Transmission Agreements (GTAs) with 30 shippers, includingPower & Fertilizer units such as Indian Farmers Fertilizer Cooperative Ltd (IFFCO),National Fertilizers Ltd. (NFL) and NTPC Ltd. etc. for transmission of RlL D6 KG Basin gasresulting into tie up of over 31 MMSCMD. Gas transmission commenced for RIL KG D-6 gas forvarious shippers from April 2009.

Your Company has formulated Model GTA conforming to the regulatory framework notifiedby PNGRB for pipeline transmission of natural gas. All the existing GTAs with shippershave also been amended for complying with PNGRB regulations.

Sourcing of Gas

Sourcing of Natural Gas includes sourcing from domestic supplies, from imports throughtrans-national pipelines and LNG and also from unconventional sources like Shale Gas, CBMetc. However, in the Asian context, apart from domestic supplies, LNG is expected to drivethe growth in consumption of gas in the immediate future and trans-national pipelines inthe longer run.

Your Company, country's leading marketer and transporter of gas, has been proactive insourcing gas to maintain and increase its market share. These efforts have led to tying upof 4.6 MMSCMD of gas from western offshore region and other domestic sources. Your Companyhas signed separate Gas Sale & Purchase Agreements (GSPAs) with Hindustan OilExploration Company for 1.5 MMSCMD of gas from Its Cauvery Offshore block and with SGLConsortium for 0.95 MMSCMD of gas from its on-shore RJ-ON/6 block in Rajasthan, and hassigned corresponding downstream contracts with M/s PPN Power Generating Company PrivateLtd., Pondicherry, and M/s Rajasthan Rajya Vidyut Utpadan Nigam Ltd, Ramgarh respectively.Your Company is in the process of tying up additional 1 MMSCMD of gas from Bandraformation gas fields of ONGC in the western off-shore region.

To meet the requirements of customers, your Company has sourced around 280 MMSCM ofSpot RLNG in 2009-10 from sources like Petronet LNG Ltd. (PLL) and Hazira LNG Private Ltd(HLPL). RUNG contracts for around 10.53 MMSCMD were renewed with 81 consumers during theyear. Your Company has also sourced through PLL, 5.26 MMSCMD of Tranche-A LNG from Rasgas,Qatar and 3.6 MMSCMD long term LNG from Gorgon, Australia signed with PLL.

In addition, your Company also contracted 2.59 MMSCMD of RlL D6 gas for usage in yourCompany's LPG production plants.

Your Company is also in talks with several overseas and domestic players for sourcingof additional gas required to meet the shortfall in demand.

E&P

Your Company is participating in 27 E&P Blocks and 1 CBM Block. Out of these 27blocks, so fat, hydrocarbon discoveries have been made in 9 E&P blocks. Developmentactivities have started in 2 E&P blocks in Myanmar where as one block in the Cambaybasin is already in commercial production, in the remaining blocks with hydrocarbondiscoveries, appraisal activities are in progress. So far, 6 out of 9 hydrocarbondiscoveries appear to be commercial as on date.

Seismic data acquisition and drilling is planned as per the Annual Work Programme inthe rest of the blocks under exploration. Going forward, your Company has opportunities toacquire more E&P blocks and to carry out exploration in blocks offered under futureNELP / CBM bidding rounds in India and overseas.

Your Company has built capabilities to reduce risk through skill development of itsE&P personnel and infrastructure related to geological and geophysical interpretation.

Inter-State Gas Grid

Your Company plans to complete the following seven new Natural Gas Pipelines spreadover 7,500 km at an estimated investment of Rs. 30,000 crores. MoPNG has authorized yourCompany to lay the following Natural Gas pipelines:

1. Dadri Bawana Nangal pipeline

2. Chainsa Gurgaon Jhajjhar Hissar pipeline

3. Jagdishpur Haldia pipeline

4. Dabhol Bangalore pipeline

5. Kochi Kanjirkkod Bangalore / Mangalore pipeline

6. Capacity augmentation:

> HVJ/DVPL Pipeline

> GREP Pipeline

Your Company is also executing a gas pipeline from Langetala gas fields to RRUVNL Powerplant at Ramgarh in Jaisalmer district and pipeline connectivity to Bhilwaraand Chitorgarhin Raiasthan. Your Company is also planning to lay offshore pipeline from Kochi LNGterminal to NTPC Kayamkulam for supplying RLNG to NTPC power plant.

Petrochemicals

Petrochemical has been identified as a major thrust area for the growth of yourCompany. In this direction your Company has already taken up a number of initiatives. YourCompany owns and operates a gas based integrated petrochemical plant at Pata, UttarPradesh, with a capacity of producing 4,10,000 TPA of Polymers I.e. HDPE and LLDPE; withan additional gas cracking furnace slated to be commissioned in this year, the capacity isexpected to increase up to 450,000 TPA. Your Company is also in the process of evaluatingthe possibility of capacity expansion of its petrochemical plant to double the existingcapacity by 2014.

Your Company is currently also setting up a 2.80.000 TPA Petrochemical Complex atLepetkata in District Dibrugarh. Assam at an investment of about Rs. 5,460 crores, throughits subsidiary, Brahmaputra Cracker and Polymer Limited (BCPL).

Your Company is acquiring equity in ONGC Petro- additions Limited (OPaL), along withthe co-promoter status. OPaL is setting up a green field petrochemical complex of 1.1MMTPA ethylene capacity (dual feed cracker) in Dahej, Gujarat.

Policy & Regulatory Framework

In 2006, the Petroleum and Natural Gas Regulatory Board Act, 2006 has been enacted byParliament. The Act has been promulgated for the establishment of Petroleum and NaturalGas Regulatory Board (PNGRB) to regulate the refining, processing, storage,transportation, distribution, marketing and sale of petroleum, petroleum products andnatural gas, excluding the production of crude oil and natural gas.

In October 2007, the Government of India has appointed and established the 5 -memberPetroleum & Natural Gas Regulatory Board for carrying out the various provisions ofthe PNGRB Act, 2006.

The functions of the Regulatory Board, inter-alia, include granting authorizations forlaying, building, operating or expanding common carrier or contract carrier pipelines andfor laying, building, operating or expanding city gas distribution networks, registeringentities for marketing petroleum products and natural gas and for establishing andoperating LNG terminals, regulating access to common carrier or contract carrier pipelinesand regulating transportation rates of common carrier or contract carrier pipelines etc

So far, PNGRB has notified more than 20 numbers of regulations/ amendments, mainlypertaining to Natural Gas Pipelines and City Gas Distribution (CGD). and there are manymore regulations at draft stage.

In respect of Natural Gas Transmission tariff, PNGRB has issued Regulations,namely,'Petroleum & Natural Gas Regulatory Board (Determination of Natural GasPipeline Tariff Regulations), 2008' which, inter-alia, includes:

> Natural Gas pipelines includes spur line and excludes dedicated pipeline and CGDnetworks.

> Capacity of Natural Gas pipeline means the sum of capacity requirements of theentity, firmed-up contracted capacity with other entities and at least 33% of sum of ownrequirement and firmed-up capacity.

> Tariff shall be uniform within a zone. Each zone shall be of 300 km. Eachtariff zone shall have a corridor of 50 km or 10% of the length of the pipeline, whicheveris lower, on either side of the pipeline. The first zone shall start from the point oforigin of pipeline.

> Tariff shall be worked out on DCF methodology based on the balance economiclife of the pipeline.

> Economic life of the pipeline shall be a period of 25 years beginning from thedate of commencement of physical activity for laying the pipeline.

Tariff Review shall be done by the PNGRB after every five consecutive years.

In 2006, Natural Gas Pipeline Poky has been announced by Government of India and theGovernment has also issued the gas utilization policy, which governs the sale of naturalgas by NELP contractors and the priority areas for gas supply from Reliance Industries D-6Block in KG Basin. As per the Government policy, NELP Contractors would sell gas from NELPblocks to consumers in accordance with the marketing priorities determined by theGovernment. The selling price would also be on the basis of the formula for determiningthe gas price as approved by the Government. At present. Fertilizer. Power, City Gas, etc.are major beneficiaries under the policy. As regards price, gas is being marketed undermultiple pricing mechanism, which is being governed as per various Production SharingContracts (PSCs), on the basis of the formula for determining the price as approved by theGovernment, and considering the priority areas for consumption.

Prices of Natural Gas and others

During the financial year, APM gas was supplied to Power & Fertilizer sector atbase price of Rs. 3200/1,000 SCM. Price for city gas & small consumers is around Rs.3,840/1,000 SCM, while same is supplied to non-APM consumers at USS 4.75/MMBTU. Price ofgas supplied from Ravva Satellite is around USS 430/ MMBTU and RLNG is supplied atex-terminal pooled price as declared by PLL on monthly basis.

In respect of gas pricing methodology, based on directive from Government of India,MoPNG, Mercados Energy Markets India Private Limited (Mercados) had conducted a study onarriving at a uniform pooled price for various categories of consumers in India. Mercadoshad submitted their report, which is under review by Government and various stakeholders.

Government of India is a major shareholder of the Company. Major decisions likefixation of price of natural gas and subsidy sharing are taken by the Government of India.

Petrochemical and LPG prices are influenced by global demand supply position and varyfrom time to time.

Natural Gas Pipeline Tariff Review

PNGRB has notified various regulations including the Petroleum and Natural GasRegulatory Board (Determination of Natural Gas Pipeline Tariff) Regulations, 2008. As perthe Tariff Regulations, each natural gas pipeline, for which there is Acceptance ofCentral Government Authorization/ Grant of Authorization by PNGRB. has to submit to thePNGRB the financial costs and other data for determination of natural gas pipelinetariffs. PNGRB has prescribed the methodology for working out the transportation tariff ofnatural gas pipelines.

In accordance of which, your Company submitted financial costs and data of its variousnatural gas pipelines viz. HBJ-GREP-DVPL and its up-gradation, DUPL-DPPL. Agartala, KGBasin Network. Cauvery Basin Network. NCR Network. Mumbai Region Network to PNGRB fordetermination of pipeline tariffs. For Gujarat network data compilation and tariffcomputation is under process.

Price of APM Natural Gas

Vide Letter No.L-12015/8/10-GP dated 31-May-2010. Government of India. MoPNG, hasrevised the prices of APM Natural gas produced by National Oil Companies (NOCs), which areeffective from 01 -June-2010.

As per the revised prices, the earlier APM gas price of 3200/1,000 SCM to Power andFertilser consumers as well as the earlier APM price of Rs. 3,840/1,000 SCM for city gas& small consumers, have been revised to US$ 4.2/MMBTU. in addition, marketing marginof Rs. 200/1000 SCM shall be charged from customers by the companies marketing the gasproduced by NOCs

Natural Gas Pipeline Tariffs

Vide a Tariff Order No. TO/03/2010, PNGRB has determined and approved the 'provisional'initial unit natural gas pipeline tariffs on zonal basis for the HVJ-GREP-DVPL pipelineand the DVPL/GREP upgradation. to be applicable w.e.f 20.11.2008 and 01.04.2010respectively.

The tariffs are now determined by PNGRB on 'provisional' basis. The final computationsin respect of the initial unit natural gas pipeline tariff shall be made consideringadjustments required for, inter-alia, actual capital and operating costs etc. andaccordingly, the pipeline entity shall adjust with customers the difference between theprovisional tariff and final tariff, retrospectively.

Subsidy

As per Government of India's directives, in order to make LPG affordable to domesticconsumers, your Company is sharing the subsidy on account of under-recoveries of nationalOil Marketing Companies (OMCs), since the year 2003-04.

Your Company has borne a subsidy of Rs. 8,539 crores since FY 2003-04. During the yearunder review. Company has made a provision of Rs. 1,327 crores on account of subsidy.

PHYSICAL PERFORMANCE

Income

On the back of improved physical performance particularly in the Gas Transmissionsegment, your Company registered a turnover (net of Excise Duty) of Rs. 24,996 crores inFY 2009-10, a 5% increase, as against net turnover of Rs. 23,898 crores in the previousyear. The increase in turnover was achieved despite subsidy provision of Rs. 1,327 croresduring FY 2009-10 against Rs. 1,781 crores during last year. The other income was Rs.541crores as against Rs. 797 crores in the last year. The total income was Rs. 25,558 croresagainst Rs. 24,700 crores during last year, registering a growth of 3%.

Cost of Sales

Cost of sales including depreciation and interest was Rs 20,980 crores as against Rs.20.496 crores during the previous year showing an increase of 2%. The increase wasmainly on account of increase in volume of PMT gas purchase, increase in salaryexpenditure due to provision on account of wage revision etc.

Profitability

Your Company achieved a Profit After Tax (PAT) of Rs. 3,140 crores in the currentfinancial year 2009-10 against Rs. 2,804 crores during the previous year, with an increaseof 12%. The increase in PAT was mainly due to increased Transmission Volume, increase inLiquid HC sales quantity, increase in LPG transmission quantity, lower subsidy by Rs. 454crores and increase in polymer price.

Segment Wise Turnover (Net of ED)

(Rs. in crores)

Shareholders' Fund

The reserves and surplus increased to Rs. 15,331 crores at the end of the currentfinancial year as compared to Rs. 13,501 crores in the corresponding previous year. As on31st March 2010, net worth of the Company stood at Rs. 16,607 crores as compared to Rs.14,575 crores as on 31st March. 2009.

Ratio Analysis

Return to Networth for the Company during the current financial year stood at 18.91%.Return on Capital Employed (ROCE) was 2363% for FY 2009-10. Debt-Equity ratio is at a verycomfortable position of 0.09 as on 31st March, 2010. Diluted EPS has gone up to Rs. 25during the year 2009-10 from Rs. 22 per share for the period ended on 31st March 2009.Market capitalization as on 31st March, 2010 was Rs. 51,982 crores as against Rs 30,983crores as on 31st March, 2009.

Funds Flow

The source of funds comprising equity, loan and deferred tax liability stood at Rs.19,669 crores as compared to Rs. 17,296 crores in the previous year. There has been anincrease in reserves and surplus from Rs. 13,501 crores to Rs. 15,531 crores. The capitalwork in progress stood at Rs 2,330 crores as against Rs. 2,426 crores in the previousyear.

MATERIAL DEVELOPMENT IN HR AND INDUSTRIAL RELATIONS

Your Company believes that a continuous thrust on learning by the employees has beenits unique preposition, which has always yielded results and is the source of sustainablekey competitive advantage. Towards this end, your Company has been quite proactive in thearea of Human Resource Development.

The total employee strength of your company stood at 3.703 as on 31st March, 2010.

Company continues to focus on employee oriented initiatives with a view to tappotential of employees while synergising individual development and organizational growth.

ENVIRONMENT PROTECTION AND CONSERVATION/RENEWAL ENERGY DEVELOPMENTS/FOREIGN EXCHANGECONSERVATION

Your Company is committed to operational excellence along with improvement inenvironmental performance. It is highly sensitive to the changing requirements of theenvironment and stakeholders, which reflects in our activities.

Your Company is extremely environment friendly, being Natural Gas Company, spreadinggreen energy by transportation of Natural Gas and LPG through pipelines, Promoting CNG asalternate fuel for transport sector, Promoting PNG for household use and developing greenand healthy environment in and around its work stations.

Few of the important initiatives undertaken during the year under review to protect andsustain the environment are mentioned as under:

> Environmental Performance and initiatives

Your Company's sustainability initiatives are focused on resource conservation and areaimed at preserving and protecting the natural resources for future generations. YourCompany continues to recognize the importance of all the National & Internationalregulations and ensures compliances at all times. Your Company's environmental performanceis well within the emission limits as per statutory guidelines. Your Company has taken upvarious projects on renewable energy sources like wind energy for meeting our energyneeds, tapping Solar Energy for solar water heating systems at various plants and variousprocess engineering related energy efficiency projects at each plant.

> Greenbelt Development

Your Company constantly endeavors to minimize the direct and indirect environmentalimpact of its business operations and strives to enrich the environment, whereverpossible. Many tree planting and Horticulture related improvement programmes have beenimplemented and are ongoing process in your Company to enhance the pollution freeenvironment in and around its units. The green cover together with large water bodies inour units has created an ideal habitat for birds. Your company has so far developed agreen belt of over 1 million trees and the process of encouraging tree plantation in thebarren areas is continuing.

> Water Conservation

Your Company's water conservation efforts are directed at prevention of water wastage.This is in full evidence at our establishments where wasteful water use is eliminated atthe design stage itself for ensuring productive & efficient utilization of water inthe process plants. The comprehensive wastewater management facilities comprise of oilremoval facilities, chemical treatment and Biological treatment facilities with ExtendedAeration process. Treated wastewater is used for Horticulture and firewater use. YourCompany makes continuous efforts to maximize recycle of treated wastewaters. By treatmentof wastewater, your Company ensures conservation of this precious resource and in turndevelops sustainability.

> Rainwater Harvesting

Rainwater Harvesting was also undertaken at most of our work centers, to recharge thegroundwater strata effectively.

> Air Monitoring

Your Company continuously monitors ambient air quality. The pollutants are maintainedbelow stipulated norms, by providing adequate stack heights for effective dispersiontogether with the use of clean fuel. Continuous monitoring of ambient air quality is doneby State of the Art Ambient Air Quality Monitoring Stations at our process plants.

> Solid Waste Management

In your process plants, the solid wastes are collected, stored and handled, in a mannerwhich has no detrimental effect on the ground water or other environment.

CORPORATE SOCIAL RESPONSIBILITY

Your Company has been emphasizing the cause of community development and empowerment.Your Company has adopted a policy whereby 2% of its profit after tax of the previousfinancial year is utilized for meeting its corporate social responsibilities. Details ofvarious activities undertaken during the year under review has already been covered as aseparate section in this Annual Report.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

Your Company has developed internal control system in its various business processescommensurate with size and nature of business. Your Company has an independent in-houseInternal Audit Department functionally reporting to the Audit Committee which isconsidered as global best practice.

Internal Audit Department consists of professionally qualified executives from variousdisciplines who carry out audit of financial, technical and other business activities ofthe Company besides reviewing the adequacy of internal control systems, risk managementprocess etc, under Internal Audit Charier which contains best global practices in theprofession of Internal Auditing.

CAUTIONARY STATEMENT

Statements in the Directors' Report and Management Discussion & Analysis,describing the Company's objectives, projections and estimates, expectations, predictionsetc. may be "forward looking statements" within the meaning of the applicablelaws and regulations. Forward looking statements contained herein are subject to certainrisks and uncertainties that could cause actual results to differ materially from thosereflected in the forward-looking statements. Actual results, performances or achievementsmay vary materially from those expressed or Implied, economic conditions. Governmentpolicies and other incidental factors such as litigation and Industrial relation. Readersare cautioned not to place undue conviction on the forward looking statements.