What price Bangladesh gas?

We have no information on who the consultants were and what have been their findings. We are of the view that the government should share the findings of the consultants' report with the energy experts in the country, and the civil society and intellectuals in particular. We do not, however, expect this to happen, since the negotiations are being guided by the Advisor of the Energy Ministry, who is also the Executive Chairman of the Board of Investment.

Admittedly, natural gas pricing in Bangladesh has always been a difficult and sensitive issue. It has assumed increasing significance in the context of ongoing discussions on sale of gas to an international investor. Knowledgeable circles point out that this investor became interested in Bangladesh gas only after its international bids did not produce any offer for gas price less than $2.3 per thousand cubic feet (MCF). Bangladesh has a history of selling cheap gas to international investors in the fertilizer and the power sectors, in the name of serving the best interests of the country, as determine by these investors and not the people of the country.

Some consider the latest billion dollar initiative as a form of gas export, since the gas will be utilised for fertilizer production, power generation, and steel production, most of which will be exported. Economists would find nothing wrong in such investments as long as they do not jeopardise national interests. Those promoting this investment proposal consider this as a golden opportunity to derive the maximum benefit from the country's natural gas resources by exporting the products, while the people of the country could use liquefied petroleum gas, most of which will have to be imported. To them, present economic growth appears more important than future energy security. Yet another section would consider it hara-kiri, as according to latest government projections, the country will have to secure additional natural gas supply beyond what could be made available from the presently discovered gas fields in ten years or so.

The principle of energy pricing, particularly natural gas, is well established, and has been practised in the country, particularly in relation to well-head prices for gas produced by international oil companies (IOCs) under production sharing contracts (PSCs). The major public sector holding company, Petrobangla buys gas from the IOCs at contractual prices linked to international fuel oil prices and sells it to the distribution companies at prices fixed by the government. The IOC prices have a minimum and maximum, with the contract price related to 75 per cent of the Singapore Heavy Fuel Oil (HSFO) price, which was designed to provide revenues and guaranteed recovery of investments by IOCs and limit top gas prices in the Bangladesh gas market. These prices were negotiated at a time when oil prices were in the $12 to $24 per barrel range. At current world prices and the gas price formula, without the limits range, the IOC gas prices would be more than twice the current maximum.

Petrobangla also buys gas from several fields owned by its companies, most of which were inherited from the Shell and Burma Oil companies for $10 million in 1972. These fields presently provide 76 per cent of the gas supply. The supply from IOCs has risen from 4 per cent in 1998 to 24 per cent in 2004. By 2007, the share of the Petrobangla gas fields will decrease to 63 per cent and to 57 per cent by 2011. Increasing the proportion of much higher cost gas coming from PSCs will have a large impact on the financial performance of the gas distribution network companies without appropriate changes in gas prices. Changes will have to be made in the prices to end users to accommodate the changes that are very likely to occur in the gas supply cost structure.

The gas purchase prices from PSCs are related, with some adjustments, to 75 per cent of Singapore HSFO, but locked into the range between $70 and $140 per ton, which amounts to $1.40/MCF and $2.90/MCF. These prices are between 12 and 25 times higher than the present price for gas produced by Petrobangla subsidiaries.

In the cost recovery phase of the PSC, the IOC receives a higher share of the gas to enable the IOC to recover its development costs over a shorter period. Before cost recovery, the government's share of gas is approximately 25 per cent, which will be about 75 per cent after investment recovery, with range 55 per cent to 80 per cent. After cost recovery, the royalty share varies with volume. The estimates presented are for the highest production level blocks. The gas costs vary greatly between different PSCs and the stage that they are at in their life cycle from start of production to final abandonment of wells. A large switch in the average cost of gas occurs when a PSC's status changes from being in cost recovery phase to post-cost recovery. In real terms, the price of onshore gas would average $2.00 per MCF, and that for offshore gas would be $2.20 per MCF, before cost recovery, and $1.24 per MCF on an average after cost recovery.

End-user prices will have to add the transmission costs, estimated at a minimum of $0.12/MCF. These well-head prices are based on existing PSCs that were entered into several years ago when the international price of well was much below $30 per barrel. It is well known that the price of oil has been hovering around $60 per barrel in recent months. This would suggest that Bangladesh gets nothing for its gas if the price is set at about $2/MCF. However, in the future, based on the World Bank crude oil projections in the medium to long-term, when the oil price will be hovering around $35-40 per barrel, the value of gas as alternate fuel would be $4.21 per MCF.

The IOCs' share of gas production and hence pricing of new gas was increasing, while that of old gas in Petrobangla gas fields was being sold cheaply. This did not reflect practices internationally, with the price of future gas exploration and production increasing worldwide. Moreover, at least $4 billion will be required for just purchasing gas from the IOCs in the next sixteen years. If we export or sell local gas to international buyers who would pay in dollars at IOC price, we do not have to pay this amount, but we lose 3-4 TCF of gas to international buyers. So what should be the price of Bangladesh gas sold to the investor?

Dr. Aminul Huq is the former Chair of the Energy Sector Network and Committee, Asian Development Bank.