The second half of 2022 served as a rude awakening for the country into a new reality that it had sleepwalked into: one where more and more of its growing demand for energy has to be met through imports. 'Sleepwalked', because policymakers had fatally miscalculated the burden this would place on the state's coffers in the long run, and adopted a misguided policy of transitioning to imported LNG as the primary fuel in the energy sector, to replace rapidly depleting domestic reserves of natural gas.
It was misguided, in how it failed to account for the volatility that is inherent in international energy markets. In 2018, when Bangladesh started importing LNG, its price on the international market was between $8-10 MMBtu (Metric Million British Thermal Unit). The government managed to sign long-term contracts with Qatar and Oman, two friendly Middle Eastern states, under which the negotiated price over the course of the two contracts (15 years with Qatar, 10 with Oman) is expected to range between $11-17 per MMBtu.
Under the deal with Qatar, RasGas, the world's biggest LNG exporter, would supply 1.8 million tonnes a year of LNG for the first five years and 2.5 million tonnes a year for the next 10 after that. The eventual deal was for less gas than the 4 million tonnes a year Bangladesh had agreed to take in a 2011 memorandum of understanding with state-owned RasGas. Instead the plan was to take more spot cargoes amid a supply glut that had lowered prices at the time. It's a decision the government likely regrets to this day.
The Qataris rejected a request when Prime Minister Sheikh Hasina was in Doha recently, to increase the supply by 1 million tonnes a year, saying it wouldn't be possible before 2025. That came against the background of Bangladesh being forced to halt spot purchases of LNG last July, after prices of the super-chilled fuel spiked globally. Asia spot LNG hit record highs in August 2022, amid the tussle over Russian gas supplies to Europe. Of course a rally in energy markets as the world opened up again following the end of the COVID-19 pandemic (in late 2021), and the start of the Russia-Ukraine war soon after had already combined to set the steep upward trajectory in oil and gas prices.
LNG prices lurched from record lows of under $2 per mmBtu in 2020 to record highs touching almost $70 in 2022. They have since eased, falling by a third since the start of the year on slower demand and high inventory levels in Europe and North Asia. In February, it allowed Bangladesh to seek tenders on the spot market once more. State-owned Rupantarita Prakritik Gas Company Ltd (RPGCL) sought one LNG cargo for delivery in late February, and the lowest offer was made at $19.74 by TotalEnergies. The spot market price currently stands at around $14 per MMBtu.
A study by London-based energy think tank Ember says that spot market purchases of LNG could cost Bangladesh a whopping $11 billion between 2022 and 2024.
Meanwhile with gas reserves drying up, domestic gas production that peaked at 2700 mmcfd in 2015-16 is already down to 2300 mmcfd. Around 700 mmcfd gas is being imported from abroad to meet the daily demand of almost 4000 mmcfd - leaving a deficit of around 1000 mmcfd. The country has around 10 trillion cubic feet (tcf) of gas left for extraction in 22 different gas fields, while the annual consumption is close to 1 tcf, which means it could last another 10 years at most.
The situation is particularly frustrating in view of the fact that putting all the eggs in the LNG basket also caused a paralysis of sorts, when it comes to domestic exploration. In the last 13 years, the state-owned exploration companies along with international oil companies drilled just 17 exploratory wells in Bangladesh, according to Petrobangla.
Bangladesh Petroleum Exploration and Production Сompany Ltd (Bapex), one of the subsidiaries of Petrobangla, drilled 13 wells, Sylhet Gas Fields Ltd drilled three and the Bangladesh Gas Fields Сompany Ltd drilled just a single well. Of the 17, seven wells were found commercially viable for gas exploration, though the estimated reserves were not very significant.
Generally, the global average success rate of gas exploration is one in every seven wells, but the ratio is one in three in Bangladesh - it's a point Dr Badrul Imam, honourary professor at the Geology department of Dhaka University, is fond of reminding everyone. He has lamented the state of exploration in the country as 'ridiculously ignored'. For years, he has been warning that unless rigorous gas exploration is taken up as soon as possible, the gas-based industrial infrastructure that keeps everything from readymade garment factories to power plants and fertiliser factories running, is not sustainable.
Even more frustratingly, Bangladesh has failed to reap any advantage from its Exclusive Economic Zone in the Bay of Bengal, even after the settlement of its dispute over territorial waters with Myanmar and India, that was celebrated with such fervour in 2014. But the subsequent history of deriving any economic advantage out of that settlement by a UN court paints a grim picture of chequered attempts, repeated failure and outright neglect.
The Daewoo debacle
Deepwater exploration in the country probably suffered its biggest setback with the exit of South Korea's Posco International from deepsea block DS-12 in 2020. Before packing their bags, Posco had sought an extension of its production-sharing contract (PSC) with better 'commercial terms', but Petrobangla refused to budge.
The Posco-Daewoo Corporation, a joint venture of two South Korean firms, had inked the PSC in December 2016 with Petrobangla under the Speedy Supply of Power and Energy (Special Provisions) Act 2010, that empowers the government to bypass the tendering process in energy deal-making.
Posco later acquired Daewoo interests to become the lone stakeholder of block DS-12.
Under the PSC, the South Korean company was entitled to get natural gas at around US$6.50 per MMBtu with a 2 percent annual price escalation from the date of first gas production.
Posco carried out a 2D or two-dimensional seismic survey in a 3,580-kilometre area, double its committed area for the survey, before exiting. The company detected around half a dozen potential spots having hydrocarbon reserves through the 2D survey, it claimed.
Petrobangla had earlier awarded the DS-12 block along with two other deepwater blocks, DS-16 and DS-21, to a joint venture of ConocoPhillips of the United States and Norwegian Statoil, under the previous 2012 bidding round. But both backed out from inking a PSC on 'poor fiscal terms' in the model contract.
Previously, ConocoPhillips relinquished operations from two separate deepwater blocks, DS-08-10 and DS-08 -11, in December 2014 after carrying out 2D seismic surveys because of 'poor' fiscal terms. It had inked PSCs for carrying out oil and gas exploration activities in these two deepwater blocks in June 2011.
ConocoPhillips in 2013 had also shied away from signing a deal for shallow-water block SS-07, again as the fiscal terms were deemed not conducive.
Push comes to shove
Now faced with the harsh new reality, the government has finally come around to making the model production sharing contract (Model PSC) more attractive for international oil companies (IOCs) to invest in hydrocarbon exploration in the Bay.
"We're going to offer the price of gas at 10 percent of Brent Crude," a top official of Petrobangla, the state hydrocarbons agency, told our sister newsagency UNB recently, referring to the most traded of all the oil benchmarks.
The official, preferring anonymity to discuss the sensitive issue, said if Brent oil is traded at $75 per barrel, the gas price would be $7.5 per thousand cubic feet (MCF). The gas price will always remain linked with the international oil price, he said, referring to the new provision of the 'Model PSC 2023'.
Prof. Badrul Imam told Dhaka Courier he finds this new provision reasonable, if only to 'let the ball start rolling' when it comes to exploration of Bangladesh's 15 offshore blocks in the Bay, of which only two in shallow waters are currently being explored by Indian companies.
There will also be no difference between the price of gas in shallow and deep water blocks, in the new Model PSC.
"If the oil price goes down or up, the gas price will follow it rationally and Bangladesh will purchase the explored gas from the IOCs at this rate," said the Petrobangla official UNB spoke to.
Under a Model PSC, the government buys the IOC's gas at a certain price. So if the gas price is raised, IOCs feel encouraged to invest in exploration works. The government had last amended the Model PSC in mid-2019, whereby the price of gas for any participating IOC, that is, the price at which they would sell the gas to the government, was raised to $5.5 per MCF for shallow water blocks, and $7.25 per MCF for gas extracted from its deep sea blocks.
The new proposal has been prepared as per the recommendations of a Scottish consultancy firm, Wood Mackenzie, which was appointed last year to work out the new plan for Petrobangla to attract the international bidding for IOCs.
Talking to reporters in his office recently, Petrobangla chairman Zanendra Nath Sarker recently said the organisation has recently forwarded its proposal with the Scottish consultancy firm Wood Mackenzie's recommendation to the Energy and Mineral Resources Division of the Ministry of Power, Energy and Mineral Resources seeking its approval for the plan.
"The ministry will now seek the approval of the Prime Minister's Office for Petrobangla's plan.
Once we receive the nod of the PMO and the ministry, we would place a proposal to the Cabinet Economic Affairs Committee for the final approval," he added.
The Petrobangla official also said that as soon as the Cabinet body approves the proposal, the organisation will invite international bidding - within two months being the aim.
"In this case, we hope we can go for bidding within July or August next," he further said in the interview with UNB.
Noting that previously many IOCs were reluctant to participate in the bidding for the country's offshore blocks due to the price offered by Bangladesh, he said now they hope the new PSC will be a lucrative offer for the IOCs to invest in the offshore areas of Bangladesh for gas exploration.
Petrobangla appointed Wood Mackenzie last year to help amend the Model PSC 2019, to attract international oil companies amid the volatile international fuel market. Official sources said the recent excessive hike in petroleum fuel price, especially that of liquefied natural gas (LNG), has prompted the government to go for further amending the existing PSC so that the IOCs get interested to invest here.
The country has a total of 48 blocks of which 26 are located offshore and 22 onshore. Of the 26 offshore blocks, 11 are located in shallow sea (SS) water while 15 are located in deep sea (DS) water areas.
Of these, 24 offshore gas blocks remain open for IOCs while two blocks -SS-04 and SS-09-are under contract with a joint venture of ONGC Videsh Ltd and Oil India Ltd where drilling works have recently started. There was a target to invite international bidding in March 2020 for exploration in offshore areas, but that got postponed due to the Coronavirus pandemic.
"The recent upward trend in oil and gas price has pushed the policymakers to further raise the gas price by introducing much more flexibility and incentives including keeping the export option open in the PSC," said another Petrobangla official.
He mentioned that the government had to bite the bullet to import LNG at $36 per MMBtu last year, after paying just $10 per MMBtu before the hike started.
The latest Russian invasion of Ukraine further deepened the global market volatility pushing up the petroleum fuel price over $100 per barrel. Now again the oil and gas prices are on a downward trend and Brent crude oil is being traded at $85 per barrel while LNG price is at below $14 per MMBtu.
'Let the ball start rolling'
Against this background, the news that there is a proposal from the storied hydrocarbons giant ExxonMobil to explore the country's untapped deepwater blocks under the new production-sharing contract model, as well as to carry out oil and gas exploration in some onshore blocks, sounds almost like a godsend.
Petrobangla chairman Zanendra Nath Sarker has confirmed receiving the offer, which he said is now under consideration.
Dr Imam is used to casting a critical eye on the business model often adopted by the giant IOCs in developing countries like Bangladesh, but has come out in full support of the development, and is rooting for it go ahead. Given the level of expertise and experience required to explore for oil and gas in the deep seas, we may have no other choice but to simply 'sit' on them.
"Look we all know the IOCs can be very aggressive in their business practises in how they try and extract every opportunity to their advantage, but here we have potentially vast resources lying unexplored, and the imported LNG bill is getting higher and higher," he told Courier.
"ExxonMobil is one of the world's leading companies in this sector, and so given the overall circumstances, this represents a good opportunity for us," he added.
"We have to let the ball start rolling," he repeats, for emphasis.
ExxonMobil, which was formed out of a merger between two of the original 'Seven Sisters', denoting the seven leading oil companies in the world at the time, is also in talks with government officials to secure exploration rights over all 15 deepwater blocks situated in the Bay of Bengal, according to a senior official of the Ministry of Power, Energy and Mineral Resources who spoke to S and P Global Commodity Insights.
The US firm in its proposal is seeking to first sign off on a production-sharing contract before carrying out 2D seismic surveys within two years and then completing 3D seismic data acquisition, processing and interpretation within the next three years.
If awarded, it would be a key deal for Bangladesh as ExxonMobil would have to invest several billion dollars to delineate new reserves, which could boost the country's dwindling foreign currency reserves and help meet its growing appetite for energy.
In its bid to woo back foreign investors, Bangladesh is also set to offer the international oil companies enhanced output share, and in future offshore exploration projects the right to export natural gas after meeting domestic demand.
Under the proposed pricing formula, Petrobangla's offer price to international oil companies would be around $10/ MMBtu, considering the Brent crude price, which is hovering around $85/b.
In the draft model that is expected to be used in the next bidding round, Petrobangla has also proposed reducing the government's share of "profit gas" to around 40%-70% from 55%-80% earlier. If it does the trick, and leads to gas discoveries that contribute towards reducing the insecurity that has descended on the energy sector, no one in this country of at least 160 million will mind.
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