FE Report

The International Monetary Fund (IMF) has termed Bangladesh's domestic natural gas price 'below-cost' and suggested raising it gradually to help ensure the country's overall growth for poverty reduction.

"The 'below-cost' gas price needs to be gradually increased and indexed to the international fuel oil price to attract more investments in the sector," IMF said in a joint staff advisory note on the Poverty Reduction Strategy Paper for Bangladesh recently.

The IMF and the International Development Association (IDA) jointly prepared the advisory note for the country.

In Bangladesh, state-owned gas entities sell natural

gas to consumers at an average price of Tk 147.3 per unit (1,000 cubic feet, or 1Mcf), but buy gas from the International Oil Company (IOC)-operated fields at Tk 210 per Mcf (US$ 2.62), thus incurring loss of Tk 62.7 per Mcf in natural gas trade, a senior Petrobangla official said.

Conversely, the average cost of natural gas being produced by state-owned gas companies and the 'profit gas' from the IOCs is apparently arbitrarily set at Tk 65.1 per Mcf, well below its economic opportunity cost, he said.

Although the natural gas price the country pays to IOCs is much below the international level, the country still undergoes losses in purchasing gas as the domestic end-using gas tariffs do not reflect the economic cost of delivering it to consumers, the official at state-owned Petrobangla said.

Pricing gas at less than economic cost encourages inefficient and unsustainable end-using of gas, he said.

Petrobangla is currently purchasing natural gas from the IOCs under a production- sharing contract, where gas prices are set at 75 per cent of the Singapore high-sulphur fuel oil (HSFO) price, but in the range of a $70 per tonne floor and a $120 per tonne mt cap, which equates with a minimum gas price of $1.40 and a maximum gas price of $2.90 per MCF, the Petrobangla official said.

From June 2012, Australian Santos is, however, selling natural gas from the country's lone producing offshore Sangu-11 well at a higher price at $4.50 per Mcf to state-owned Bangladesh Power Development Board (BPDB), as the country has for the first time allowed any IOC to sell gas to any third party bypassing Petrobangla.

Petrobangla had the first right of refusal for Santos' gas.

Bangladesh is currently receiving bids from the interested IOCs for oil and gas exploration in 12 offshore gas blocks-nine in shallow waters and three in deep waters-in the Bay of Bengal.

In the model production-sharing contract of the currently open offshore bidding round, the gas price has been pegged to high-sulphur fuel oil (HSFO) prices, with the floor price of HSFO fixed at $100 per tonne, and the ceiling price at $200 per tonne.

For shallow-water gas blocks, the gas price will be 100 per cent of the HSFO price ex-Singapore, with biddable discounts, said a Petrobangla sources.

For deep-water gas blocks, the gas price will be 110 per cent of the HSFO price ex-Singapore, with biddable discounts, he added.

But the International Oil Companies are seeking higher prices for gas from Bangladesh's offshore blocks offered in the latest bidding round.

The IOCs argued at a pre-bid meeting in Dhaka on February 7 that the gas price offered in the model production-sharing contract, or MPSC, for the offshore bidding round was not attractive, Petrobangla chairman Hussain Monsur said.

Bangladesh is now considering a 10 per cent hike in the price for gas produced at offshore blocks being offered in its latest bidding round after prospective bidders deemed the current price too low.

In its proposal to the ministry concerned to raise the price, Petrobangla argues that the ceiling price for HSFO should be $220 per tonne, instead of $200 per tonne.

Bangladesh's previous bidding round was in 2008, and for that the floor price for HSFO was fixed at $70 per tonne and the ceiling price at $180 per tonne.

The IMF in its advisory note also stressed the need for more exploration work that needed to be undertaken quickly to cover the immediate energy shortfall in the country.

The availability of natural gas for supporting the government's ambitious power generation expansion plan is a major challenge, it identifies.

The IMF also suggested reduction of the country's high dependence on gas for power generation.

Bangladesh has limited collaboration between gas and power sectors and relatively poor governance in the energy sector, it pointed out.

Bangladesh received $138 million last week as the second tranche of credit from the IMF under its extended credit facility (ECF) following the fulfilment of certain conditions including a hike in domestic oil product prices.

The $987 million credit deal was signed in April 2012 between the Bangladesh government and IMF.