Bangladesh: Natural Gas Export
Monzur Hossain |
Introduction
One of the most controversial issues in Bangladesh is the export of its natural gas. Bangladesh has been divided into 23 blocks for gas exploration and, among them, the 8 richest blocks were allotted to the International Oil Companies (IOCs). The IOCs are now investing 52 per cent of the country's total foreign direct investment (FDIs) in the energy sector, and there has been a Production sharing contract (PSC) with the IOCs. The PSC allows Petrobangla (a government-owned corporation) to buy gas from the IOCs as cost recovery and it sells it to the domestic market at a lower price. Since Bangladesh has very limited capacity for payment, multinational companies know that only the way of getting their money back quickly is to export gas. In PSC, there is a provision of gas export in LNG form, but now the issue is of export of gas through pipeline to India. It is being argued with good reason that export of gas would not be for the national interest. The question related to this issue is of the quantum of gas to be exported and the country's own short-term as well as long-term requirements.
Table 1: Gas in Place And Reserve Of Different Gas Fields As Declared By Petrobangla
S.
No |
Fields |
Year of
Discovery |
Reserve Estimated by
Company......
Year |
GIIP
(proven +
probable) |
Recoverable
roven + probable) |
Cumulative
Production
(Dec. 2000) |
Net Recoverable |
| A. Producing |
| 1 |
Bakhrabad |
1969 |
IKM |
1992 |
1432 |
867 |
586.568 |
280.432 |
| 2 |
Habiganj |
1963 |
IKM |
1992 |
3669 |
1895 |
818.315 |
1076.685 |
| 3 |
Kailashtilia |
1962 |
KM |
1992 |
3657 |
2529 |
231.820 |
2297.180 |
| 4 |
Rashidpur |
1960 |
IKM |
1992 |
2242 |
1309 |
194.920 |
1114.080 |
| 5 |
Sylhet |
1955 |
HHS |
1986 |
444 |
266 |
166.084 |
99.916 |
| 6 |
Titas |
1962 |
IKM |
1992 |
4138 |
2100 |
1783.400 |
316.600 |
| 7 |
Narsingdi |
1990 |
IKM |
1992 |
194 |
126 |
29.205 |
96.795 |
| 8 |
Meghna |
1990 |
IKM |
1992 |
159 |
104 |
23.278 |
80.722 |
| 9 |
Sangu |
1996 |
Cairn/Shell |
1997 |
1031 |
848 |
91.026 |
756.974 |
| 10 |
Saidanadi |
1996 |
Bapex |
1996 |
200 |
140 |
14.816 |
125.184 |
| 11 |
Jalalabad |
1989 |
Unocal/PB |
2000 |
1195 |
815 |
52.298 |
762.702 |
| 12 |
Beanibazar |
1981 |
IKM |
1992 |
243 |
167 |
4.681 |
162.319 |
| |
Total A |
|
|
|
18604 |
11166 |
3996.411 |
7169.589 |
| B. Non
Producing |
| 13 |
Begumganj |
1977 |
Welldrill |
1991 |
25 |
15 |
0 |
15 |
| 14 |
Fenchuganj |
1988 |
Bapex |
1988 |
350 |
10 |
0 |
210 |
| 15 |
Kutubdia |
1977 |
Welldrill |
1991 |
780 |
468 |
0 |
468 |
| 16 |
Shahbazpur |
1995 |
Bapex |
1995 |
514 |
333 |
0 |
333 |
| 17 |
Semutang |
1969 |
HHS |
1991 |
164 |
98 |
0 |
98 |
| 18 |
Bibiyana |
1998 |
Unocal |
2000 |
3150 |
2401 |
0 |
2401 |
| 19 |
Moulavibgazar |
1999 |
Unocal |
2000 |
500 |
400 |
0 |
400 |
| |
Sub
total B |
|
|
|
5483 |
3925 |
0 |
3925 |
| |
Sub
total A+B) |
|
|
|
240087 |
15091 |
3996.4 |
11094.59 |
| |
C. Production Suspended |
| 20 |
Chattak |
1959 |
Niko/Bapex |
1998 |
447 |
268 |
27 |
241.5 |
| 21 |
Kamta |
1981 |
Niko/Bapex |
1998 |
33 |
23 |
21.1 |
1.9 |
| 22 |
Feni |
1981 |
Niko/Bapex |
1998 |
178 |
125 |
40 |
85.49 |
| |
Grand Total (A +B+ C) in BCF |
|
24745 |
15507 |
4083.52 |
11423.48 |
| |
Grand Total (A +B+ C) in Tcf |
|
24.745 |
15.507 |
4.08 |
11.42 |
| Source:Marketing and Production Division, Petrobangla (Revived on 15/02/2001) |
Natural gas is a non-renewable energy source and perhaps Bangladesh's only resource of great value. In a recent study of Petrobangla, it is estimated that the total gas initially in place (GIIP) and initial recoverable reserve of Bangladesh is 24.745 TCF and 15.51 TCF, respectively. Out of this reserve, 4.07 TCF has already been produced (up to February 2001), and the remaining reserve is 11.42 TCF (Table 1). Since all gas-prone blocks have been distributed to foreign operators, it could be foresee that within a very short period of time, Bangladesh may be left with almost nothing of its only real resource, having palmed off 80 per cent to the foreigners -- whatever the reserve at 7.5 per cent of annual extraction of total discovered reserve, it would all be exhausted by the year 2011 or thereabouts1. Around 12 multinational energy companies signed Production-Sharing Contracts (PSC) with GoB, which is also questionable to some extent for some controversial clauses in the contract, and two are now engaged in gas production and exploration with about 16 per cent participation in gas production and supply to the domestic market2.
At a dialogue organised in 2002 by the Centre for Policy Dialogue (CPD), Dhaka, politicians, bureaucrats, business leaders, representatives from IOCs, experts, academicians and noted economists observed that the export option of gas could be considered only after ensuring a reserve for long-term domestic consumption. They also demanded that production-sharing contracts (PSCs) with international oil companies (IOCs) should be renegotiated if it is certain that the country is paying much more than the existing international gas price. They, however, observed that all aspects of energy security must be taken into account while taking a major policy decision about the sector. Some selected comments and thoughts from the policy makers are outlined below3:
- State Minister for Energy and Mineral Resources A. K. M. Mosharraf Hossain (sacked in June, 2005 for allegedly taking a luxurious car from a Canada-based IOC, NIKO) said that the country required huge investment for meeting local demand of gas supply. According to him, by the year 2030, 20-40 billion US dollars will be required for supplying gas to the local people. He observed that the government is giving a huge subsidy to Independent Power Producers (IPPs) for making huge profits. He also agreed that different aspects of energy security should be taken into consideration and there should be transparency at the time of taking any policy decision.
- Political Secretary to the opposition leader in the parliament, Saber Hossain Chowdhury, said the Awami League is not against the export of gas, but before that, domestic consumption of the natural resource should be ensured for a long period. He also pointed out that the national resources should be utilised for national development.
- Former state minister for foreign affairs, Abul Hasan Chowdhury, said only four per cent people were getting gas from pipelines and only 20 per cent people have access to electricity. ‘…there (seems to be) a consensus that under the present circumstances, the question of (exporting) gas (does not arise),’ he said. Awami League lawmaker Kazi Zafarullah also said the contracts with IOCs were not right. ‘(They were) against the interest of the country and must be renegotiated,’ he said. Another member of parliament from the opposition Awami League, Faruk Khan, said there was no logic behind export of gas from the present reserves. He expressed the fear that the security and sovereignty of the country might be jeopardised if the pipeline was installed to export gas.
- Opposing the gas export, general secretary of the Communist Party of Bangladesh (CPB) Mujahedul Islam Selim said that, if necessary, public opinion could be mobilised internationally for terminating the 'unfair PSCs with IOCs'.
- Acting managing director of Unocal Bangladesh Limited, James R. Stone, said Bangladesh has huge gas reserve potential. ‘There is a significant number of high quality and creditworthy customers in Delhi, who have the ability to pay better prices for surplus gas of Bangladesh’, he said. Mr. Stone also said a clear-cut policy decision to allow export of gas through pipeline is required in order to attract more investments into the sector.
- Leader of the Jatiya Samajtantrik Dal (JSD), Hasanul Haq Inu, warned that if the IOCs installed pipelines for gas export, people of the country will blow it up.
It is evident from the above comments that the people of the country were against the export of natural gas. Some government ministers have been trying to convince people in favour of exporting gas. In this connection, it is important to have answers to the following questions:
- Is gas export unavoidable?
- Do we have enough gas to export?
- What is the domestic demand?
- Do we need to explore all reserves?
- What would be the benefit of export earnings?
- What is the world's energy scenario?
Estimated Gas Reserves
Table-1 shows number of gas fields, year of discovery, name of multinational energy company, estimated reserves and net recoverable gas, etc. The total GIIP and initial recoverable reserves of Bangladesh are 24.745 TCF and 15.51 TCF respectively. Out of this reserve, 4.07 TCF has been produced already (up to February 2001), and the remaining reserve is 11.42 TCF.
Various studies have been conducted with differing results. Table 2 summarises the GIIP, reserve, field growth, and resource potential of various studies conducted so far. It should be observed that the scope as well as the result of various studies is quite different.
Table 2: Summary Of Giip, Reserve And Resource Potential Of Different Studies
| Name of the Study |
GIIP
(TCF) |
Reserve
(TCF) |
Field Growth
(TCF) |
Resource Potential
(TCF) |
| IKMa |
15.65 |
9.04 |
- |
- |
| Petrobangla |
24.745 |
15.51 |
- |
- |
| BUET b |
24.4 |
- |
- |
- |
| Shell |
- |
18 |
56 |
2040 |
| Unocal |
- |
- |
12.8 |
13.2(50%) |
| Petrobangla
USGS |
- |
16.1 |
- |
13.2(50%) 32.1 (50%) |
| HCU
NPD |
28.79 e |
20.44 |
2.03 |
41.6 (50%) |
Gas Demand in Bangladesh and Projections
The use of natural gas in different sectors of Bangladesh can be broadly divided into following categories: power, fertiliser, industrial, commercial, domestic and seasonal (e.g. brickfield). The consumption pattern during the past decade shows that power sector consumes approximately 45 per cent, fertiliser 35 per cent, and the others 20 per cent. In domestic fuel use, only 4 per cent people have access to the piped gas. Most people still depend on other traditional fuel sources, like wood and kerosene, which have an adverse effect on the environment. The demand for gas is rapidly rising in the country as it moves towards industrialisation.
Since the creation of Bangladesh, there have been several projections of natural gas demand. These are reported in the planning documents of various plans (five 5 year plans and one 2 year plan), ADB studies, Task Force Report, National Energy Policy Report and Petrobangla's own reports/studies. These documents have envisaged considerable annual growth of the power and fertiliser sectors. Some of the important underlying assumptions include4:
7-10% increase in gas demand for fertiliser yearly, 10-13% growth of natural gas fuelled power generation yearly, industrial growth in excess of 7% requiring 7% rise in gas demand yearly, growth of gas demand to exceed the growth in GDP. Newspapers predict approximately 10% annual growth of gas demand in Bangladesh.
Petrobangla: Pricing and Fund Constraint
Petrobangla is currently paying 50 per cent of the production as cost recovery (CR), it shares the remaining 50 per cent with IOCs, implying that it is getting some gas free of cost. The price Petrobangla is paying is greater than what it has paid earlier. Petrobangla has to pay 92.5 per cent in foreign exchanges and 7.5 per cent in local currency for the contractor's share of gas. The foreign exchange will obviously come from the government coffers, but Petrobangla will have to generate the local currency component (Taka) from its own resources. Annual payments to the contractor will be around Tk.4000 million at US$ 2/MCF and more if the price escalates.
The additional problem facing Petrobangla is the price differential between supplies to particularly bulk consumers like fertiliser and power and the gas supplied by the contractor. For example, at present the subsidised price for fertiliser is around one US Dollar/MCF whereas at the minimum it is US$ 2/MCF for the contractor. Further, there are defaulters with considerable overdue to Petrobangla such as power, whereas the terms under the GPSA are stringent with penalty provisions for delayed payment. The price differential for Petrobangla would become more onerous if Taka is devalued against the US Dollar.
Therefore, as a result, Petrobangla is exposed to double jeopardy -- having to pay to the Contractor without being paid by at least some consumers and having to meet the difference in prices as well. Petrobangla managed to arrange some funds in terms of Bangladesh Petroleum Exploration Company's (BAPEX) share and also introduced a Hydrocarbon Development Fund (HDF). These are being used to cover the gap between what Petrobangla is buying and selling (see CPD Report # 24).
Export of Gas
Petrobangla is already having difficulty meeting its obligations to the gas companies, which, in turn, will not be willing to continue investing in Bangladesh unless they can count on a market in foreign exchange. This makes a strong case for Bangladesh to authorise some level of exports, most probably to India. Petrobangla is faced with a shortage of funds; it is not in the position of buying CR gas from foreign IOCs. Since demand and production are rising sharply, Petrobangla faces a difficult situation. So the export of gas issue has come up to get the money the IOCs invested. The PSC allows them to export gas in a LNG form. Liquefied Natural Gas (LNG) was less profitable as compared to the export of gas by pipeline. This is why they are looking into options of a pipeline. In that case, it will require amendment of PSC and some other bilateral treaties.
A US study5 showed that Bangladesh might get US$ 1.50 by exporting 1,000 cubic feet gas through pipeline to India. It is estimated that if Bangladesh opts for gas through pipeline, it would take at least five years to build the pipeline and the relevant infrastructure. Alternatively, another view is that the country could earn US$ 1.25 by export of power by using the same amount (1000 CF) of gas (value added) (see CPD Report # 24).
Other theories: Bangladesh has approximately a US$ 48 billion economy and the foreign oil companies are offering around US$ 180 million annually through taxes and other revenue from the pipeline export. This is charity in terms of the economy and Bangladesh can earn a lot more by selling only fruits and vegetables. Bangladesh has proven recoverable natural gas reserves of 13 trillion cubic feet (TFC). With the proper utilisation of this sector, Bangladesh can exhaust this reserve within 10-15 years. Can it afford to export the most needed commodity?
Another important factor is the country's sovereign right over its own resources. Since all blocks (including gas-prone as well as discovered) are being parted with under internationally enforceable contracts, one may question whether at the end of the day the country would at all have any control over the disposal of its only valuable resource.
Besides this, Bangladesh could maximise its benefits by investing export earnings from gas into productive sector like power generation, plant for diversified use of gas, alternative source of fuel generation after finishing gas reserve etc. From past experience, it can be said that since Bangladesh has no capability, expertise and efficiency to make the best use of gas export earnings, there is a fear of fungibility of export proceeds, and/or Dutch Disease6. There is also fear and distrust about India that once export of gas starts, it would not be possible for Bangladesh to stop it in case of any violation of contract by India due to its geographical and military superiority over Bangladesh.
The IOCs are continuously pressurising the government to export gas through pipeline although there is no provision for this in the PSCs. The situation in Nigeria and some Latin American countries, where rapid inflow of energy resources seems to be strongly correlated with high levels of corruption, also add to the fear about the fate of gas export in Bangladesh.
It is also clear that gas production rate is higher than the consumption rate. The government will have to decide whether they need to explore gas with the present rate, and also they need to take care of the benefits of the IOCs.
Government's Dilemma
There are many impediments to development in Bangladesh, some of them being low income, high population growth, scarcity of resources and corruption. Gas is the only valuable natural resource of Bangladesh. The best utilisation of natural resource could be the basis of the economic development of Bangladesh. It is the government's responsibility to make sure natural resources are utilised in the most efficient manner. Due to lack of resources, expertise and technology, the Bangladesh government was not able to accelerate natural gas production and discovery till 1990. After liberalising the economy in the early 1990s, the government invited the IOCs to produce and discover natural gas. The Government of Bangladesh signed PSC with the IOCs that Petrobangla will buy gas from IOCs as Cost Recovery (CR) and distribute it in the country.
It is thought that the PSCs were not fair and were signed under great pressure from the international community (like USA, UK, who owned the IOCs). Some international organisations like the World Bank, ADB are also financing energy sector development and exerting pressure to sign the PSC and allocate rich blocks to the IOCs. During the 1990s, the then Prime Minister of U.K., John Major and U.S. President Bill Clinton visited Bangladesh and one of the main issues discussed was to get gas business in favor of their own IOCs.
Under PSC, Petrobangla has to buy gas from IOCs at a higher cost than the international and local markets. The government is providing subsidy to this sector. As discussed earlier, there was a provision in the PSC of gas export, but in LNG form. The provision was made with the aim of getting benefits by establishing and transferring technology of LNG plant that will also encourage motor vehicle owners to use environment friendly and less costly fuel. It is true that Petrobangla is facing shortage of funds and domestic private market is not capable to meet-up the costs of IOCs. But it would not pose any serious problem if they maintain PSCs. Before investing, IOCs also knew the situation of Bangladesh’s economy.
It is now clear that export of gas will not give benefit more than that of its diversified utilisation for productive purposes. The IOCs are continuously threatening to leave the country if no decision is taken. The then U.S. Ambassador to Bangladesh, Ms. Marry Ann Peters gave an ultimatum to the government to take a decision by January 2003. On the other side, civil society and opposition political parties often give threatened to burn out the pipeline in case of a decision.
The government is in a dilemma: if it concedes to the pressure by the IOCs, it annoys the public at home, and if it represents the public view, it annoys the investors. Developing countries like Bangladesh have to depend highly on assistance and support from the bigger powers. Bangladesh economy is dependent on foreign assistance. It is also important to note that donor countries and agencies play a vital role in the political process of developing countries like Bangladesh. The issue of gas export from Bangladesh is a case that explains the global political economy of energy. Until now (2005), the ruling party has not taken any decision in favor of gas export; no quick decision is expected until next general elections in 2006.
India's Interest
The Indo-Bangladesh relationship can be explained through the term: 'good neighbours with bad taste'. The people of Bangladesh do not trust India for many reasons. The apprehensions about India are further reinforced due to the galloping trade deficit. In formal terms India's exports to Bangladesh exceeds US$ 2 billion. Despite being urged by Bangladesh, which reduced its tariffs, Indian authorities did not take any steps to reduce their existing tariff structure. India continues to pressurise Bangladesh to allow transit to transport goods and services to other parts of India.
There is tension over land and maritime borders with India. As different disputes and misunderstandings continue to mar Indo-Bangladesh relations, the steps being taken by the IOCs, on the one hand, and India, on the other, are seen as a conspiracy against the national interest of Bangladesh, even if their interests are coincidental.
Challenges of Globalisation
Globalisation involves a large variety of human activities that cut across technological innovation, global communications, and the internationalisation of commercial, financial and economic activities across countries and political and cultural dimensions.
Flow of FDI is the result of economic globalisation and it involves most of the dynamic factors of globalisation. The dilemma is between short term gains and long term unsustainability. Natural gas export could be a litmus-test for Bangladesh to meet the challenges of globalisation.
Advanced countries prioritise their interest in terms of profitability by ignoring the interests of developing countries. The unrestrained commercial exploitation of natural resources, regardless of what is in the interest of a developing country, creates a no-win situation that leads to the depletion of natural resources.
There are several major limitations that should be taken into consideration while inviting FDI. The multi-national companies have clear objectives when invests in abroad. They are the global players and can benefit from lower variable costs due to economies of scale. Export of gas to India has added a regional dimension to this dilemma. The forces of globalisation and regionalisation are acting in a manner that hurts Bangladesh.
Conclusion
The export of natural gas of Bangladesh brings out some issues.
- If Bangladesh does not export, it will not be able to pay the IOCs.
- If it does export, within a short period of time the gas reserves will be finished. And there is no optimistic view that export proceeds will be utilised in a productive manner.
- If it does not export, it can use the gas to meet the domestic demand and further investment of IOCs in gas-based power generation, fertiliser production can recover IOCs cost as well as helping the country move toward sustainable economic development.
- If it does not allow IOCs to export, they will leave the country and gas will remain unexploited under soil or will be exploited at a slow rate and economic growth will be stunted.
The above situations are modeled diagrammatically in two ways. There is no problem with the second model and the Government of Bangladesh signed the contract with the IOCs keeping this objective in mind. But at present the IOCs are interested in acting more as Model-1 depicts. Model-1 implies that we have no choice, which is not only Bangladesh's predicament, but also the problem of other developing countries.
(Monzur Hossain is a Phd candidate at Monzur Hossain is a Phd candidate at the National Graduate Institute for Policy Studies (GRIPS),
Tokyo and may be contacted at: scqjk313@ybb.ne.jp)
Author's Note: I am grateful to Prof. Ryokichi Hirono for his inspiration and encouragement to write such a challenging paper. The views expressed in this paper are my own and in no way reflect those of the institutions with which I am affiliated. I was heavily dependent on the information available, and proper citations have been made.
End Notes
1 Optimising Use of Bangladesh's Gas Resources, Report # 14, Center for Policy Dialogue (CPD), October 1999.
2 Nasiruddin M. Kamal, ‘The tricky business of gas exploration’, The Daily Star, December 13, 2002
3 The Financial Express, October 18, 2002
4 An Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further Research, The National Bureau of Asian Research, 2001.
5 United States Geographical Survey (USGS)-Petrobangla joint study
6 The deindustrialisation of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The term originated in Holland after the discovery of North Sea gas.
a. Based on 8 gas fields
b. Based on producing gas fields of Petrobangla
c. Includes reservoir management, 3D, thin bed and compression
d. Based of 30 selected prospects of 6 PSC blocks
e. Re-estimated four fields, rest Petrobangla figures
f. Includes compression only
Bibliography
Allen V. Kneese, Natural Resource Economics, Edward Elgar, USA, 1995.
Alfredo Eric Calcagno and Eric Calcagno, The Sustainability of Development (pp. 289-310), G-24 The Developing Countries in the International Financial System, Central Bank of Venezuela, (London: LYNNE RIENNER Publishers, 1999)
Annual Report, Bangladesh Bank, 2000-2001.
An Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further Research, The National Bureau of Asian Research, 2001.
Board of Investment (BOI), Bangladesh.
Report No. 14, Center for Policy Dialogue (CPD), Bangladesh, (October 1999) and Report No. 24.
The Financial Express, October 18, 2002.
Michael Du Pont, Foreign Direct Investment in Transitional Economies, A case study of China and Poland, (McMillan Press Ltd., 2000)
Nasiruddin M. Kamal, ‘The tricky business of gas exploration’, The Daily Star, December 13, 2002.
