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Map of Asia |
CIAO DATE: 01/03
Energy In Bangladesh: Step By Step
The South Asia Monitor
Number 24
August 1, 2000
The Bangladesh government is moving, cautiously and unevenly, to create a sounder policy framework for using the country's natural gas. No major decisions are likely until after the next elections, due before September 2001. The government is likely to move toward commercializing, but not privatizing, the gas and power sector. Exports are still politically controversial, but in circles where policies are debated the tone of discussion is markedly more rational and realistic than a year ago. The economic case for gas exports is overwhelming, but a decision to export will also require Bangladesh to tool up for complex international negotiations both with private companies and with its trading partners.
The resource: Estimates of Bangladesh's total recoverable gas reserves range from 13 to 25 trillion cubic feet (tcf), and the country has recently agreed to collaborate with the U.S. Geological Survey on a new assessment of reserves. Even the lowest estimate provides over 30 years' supply at current rates of use, and most observers believe that the new assessment will be significantly higher. The country's annual per capita commercial energy consumption is about 197 kg of oil equivalent, with natural gas supplying 21 percent. Even though domestic consumption is much lower than the average for developing countries, Bangladesh still spends about U.S. $500 million per year on crude oil and other energy imports. Only 17 percent of the country has access to electricity.
The energy sector: Moving slowly to restructure.
The structure: Two international companies are active in gas exploration and production in Bangladesh, and several more are negotiating to get into the market. They operate in a structure dominated by the state-owned gas and oil company, Petrobangla, which serves as regulator, negotiating partner for production sharing agreements, sole purchaser of their gas, and provider of most transmission and distribution services. Financially, Petrobangla is squeezed between contracts that require it to purchase gas from the international companies at a price based on international energy prices, and subsidized, government-fixed prices of gas for its major customers. As a result, it has been able to finance less than $100 million per year in investments, and the pace of drilling in Petrobangla-controlled fields has been slow. Recent developments suggest that the pace of spinning off transmission operations to the Gas Transmission Company, Ltd. (GTCL) may be picking up. There is little evidence, however, of serious thinking beyond “unbundling” the present state-dominated gas sector.
The power sector, the major consumer of gas in Bangladesh, has a similar structure. The Bangladesh Power Development Board (PDB) produces, transmits and distributes electricity in most of the country, except for areas covered by the two Dhaka electric supply companies (DESA and DESCO) and the Rural Electrification Board (REB). PDB purchases and distributes electricity from the few independent power producers that have started functioning. REB is the most efficient and least subsidized part of the electricity system, but accounts for only 20 percent of the total. Uncollected bills amounting to 30-40 percent of the total and high system losses have left PDB and DESA heavily in the red (the figure for 1997 was the equivalent of $60 million). Following the recent replacement of the PDB chairman by the former REB chairman, PDB is moving more rapidly toward “unbundling” its services and putting itself on a firmer footing, but this process will probably be slow and uneven. Power rates are a perennial political issue, and Bangladesh is already in electoral campaign mode.
The domestic market: At present, Bangladesh uses about one billion cubic feet of gas per day. Over 75 percent of domestic use is for electric power and fertilizer production. Power generation is predominantly from gas, and all new power generation currently being planned is based on gas. Estimates of likely demand growth vary widely. Using the rule of thumb that each percentage point of GDP growth will require 1.5 percent growth in energy use, the 7-9 percent growth that Bangladesh aspires to would presuppose 10-15 percent annual growth in energy use. On the other hand, past projections of demand for electric power and for gas have been consistently overstated, and a serious effort to improve the efficiency of the power sector would further decrease the need for new generating capacity. Most projections show likely demand growth of about 6 percent over the next decade.
There is some scope for increased fertilizer production. Bangladesh already produces urea, single super phosphate (SSP), and triple super phosphate (TSP), and imports diammonium phosphate (DAP), SSP, TSP and muriate of potash (MOP), with a foreign exchange cost of about $120 million per year. Since 1997, demand for urea has outstripped domestic supply. However, some of the major international producers are countries whose feedstock gas is essentially free. This limits prospects for a major increase in Bangladeshi production and especially for significant exports.
The finances of the state-owned gas and power sectors are too fragile to sustain even the current level of gas sector development, not to speak of using gas to move the Bangladeshi economy to a new level. 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 argues strongly for Bangladesh to authorize some level of exports, most plausibly to India, a huge and growing market right next door.
From scarcity to plenty, with frenzied politics
Pressure on exports: Exporting is intensely controversial, however, for three principal reasons. The first is uncertainty about the level of reserves. Bangladesh is more accustomed to dealing with scarcity than with plenty. Perhaps as a result, many people conclude that Bangladesh should avoid sending any of its valuable gas out of the country until its future needs are provided for. This is the stated position of both the prime minister and the leader of the opposition, both of whom have stipulated that Bangladesh needs to provide for fifty years' needs before exporting. The complexities of financing gas exploration, and in particular the fact that the quality of a reserve assessment depends partly on how much money one has invested in drilling, are hard to put into sound-bite form in the country's overheated political atmosphere.
The confrontational atmosphere itself is a second source of pressure. Politics is a rough game in Bangladesh. The leaders of the major parties have bad personal relations, and the tradition of having the opposition take its political differences into the street has made them worse. In fact, there is little ideological difference between the two major parties; the major question is who is in power and who is out.
Finally, relations with India are a political hot potato in Bangladesh. India is the big neighbor, frequently heavy-handed in its dealings with Bangladesh. The present Bangladesh government is run by the Awami League, traditionally closer to India than its rival Bangladesh Nationalist Party (BNP). This makes it especially sensitive to charges that it is giving undue advantage to India, by “giving” India gas or by other means.
In fact, the present government has settled two major problems with India, one concerning the division of the Ganges River waters at Farakka Barrage and the other concerning the border area in the Chittagong Hill Tracts in southeastern Bangladesh. Both agreements were greeted with howls of outrage, which died down within a couple of months; both are now generally accepted. Similarly, one can imagine a decision on exports being accepted, provided it is well prepared, properly presented to the people, and timed to avoid the electoral high season.
Boosting development: Both the gas and power sectors have been magnets for foreign investment. Developing business structures for the energy sector is one of the benefits of expanding this sector. The Bangladeshi business community lacks the capital and experience needed for major generating plants. Some have argued on these and other grounds that power development plans should provide for smaller plants that Bangladeshi businesses can operate.
To provide a boost to development beyond the gas sector, Bangladesh needs to create an efficient gas sector, but also to spend its gas revenues wisely. If those revenues become significant, it should consider creating a rigorously independent and transparently managed “Energy Development Fund”. To ensure that resources are not spread too thinly, this fund could target two sectors, electricity and education. Both sectors are key to the growth of industry and employment in small cities and peri-urban areas, which in turn could provide the momentum for the 7-9 percent sustained annual growth rate needed for medium to long-term national development strategies.
Looking ahead: Bangladesh must have elections no later than September 2001. Many people expect them to come a few months earlier. No major decisions are likely in the interim, though step by step actions on energy sector restructuring will probably continue.
Exports require building new skills
If the government is to adopt a strong strategy after the election, however, work needs to start now in setting the stage for the necessary political consensus-building and in developing the skills needed in the world of international energy trade. The government faces a whole list of decisions:
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