Cutting energy subsidy? Bangladesh already faces price challenges amid global volatility

Russia’s invasion of Ukraine has fuelled oil prices to surge worldwide and stoked fears of major disruptions to the global energy supply. Bangladesh, which is heavily reliant on imports, is expected to take a hit, as oil prices are set to spike further. Oil prices surged past $100 a barrel for the first time since 2014 on Thursday after Russian President Vladimir Putin ordered a full-scale military assault on Ukraine, bdnews24.com reports.

Bangladesh has already suffered from exposure to the price-volatile global LNG market. LNG prices soared to record highs in 2021, forcing Bangladesh to pay record spot LNG prices. Analysts don’t expect stability in that market any time soon.

Bangladesh always keeps enough oil to use for over a month. But the reserve cannot be relied on even as the supply chain has remained almost undisrupted until now, said an official of Bangladesh Petroleum Corporation, or BPC.

“We must buy fuel oil to meet domestic demands no matter how much the price increases in the international market,” said Kazi Mohammad Mozammel Hoque, director of finance at BPC.

As it cannot stop import even if it has to spend much more than usual, now the government faces a tough choice – shall it continue subsidising import of fuel or raise prices, according to State Minister for Power, Energy and Mineral Resources Nasrul Hamid.

Global gas prices are also rising, he observed and said: “Power will be costlier if oil prices rise. And increased power price will lead to a hike in the prices of products in other sectors. We're thinking about our options now. But we haven’t made a decision.” 

The BPC posted profits for the past five years after incurring huge losses for a long time. It slumped back to losses amounting to Tk 130 million daily only in sales of diesel even after fuel prices were raised in November as international prices soared, said Mozammel. “If you throw other products in the mix, the loss will be a lot higher.”

According to the BPC accounts, 73 per cent of the 6.3 million tonnes of fuel sold by BPC in 2020-21 was diesel.

Minister Nasrul estimates the BPC’s daily loss will reach Tk 200 million if Bangladesh imports oil at the current international rate.

The high fuel oil cost is directly affecting power production. Bangladesh Power Development Board suffered a loss of more than Tk 115 billion in 2020-21 partly as a result of the soaring fuel costs, according to a report by the Institute for Energy Economics and Financial Analysis.

To cover the losses and ease pressure on the government, Prime Minister Sheikh Hasina recently ordered officials to gradually cut subsidies for power and gas. Defending the plan, State Minister for Planning Shamsul Alam said it is unfair to give the same incentive to the poor and the rich alike.

However, energy policy expert M Tamim says the subsidies should continue until the price stabilises at a tolerable level. Or the government can set a deadline until which it will wait for the global price to get back to normal.

“But, if the price goes up quite high in the international market, the domestic price will have to be raised. How much we should raise the price will depend on the government’s ability to provide subsidies.”

“The biggest challenge of raising the fuel oil price is that it will fuel a further rise in inflation. But there won't be much to do. Prices are increasing everywhere. Power prices have nearly doubled in Europe.

“The reality is that we're having a hard time,” said the former caretaker government advisor.

Bangladesh has two options to take the heat of further oil price hike, according to him.

It can pause or slow down its development projects to continue subsidies and save the people from having to spend more for most products. Or it can put the burden of huge bills on the people. “Inflation will rise. Everything will be out of people’s reach.”

“It’s the entire world’s problem now, especially for those who are importing fuel, not just ours,” said Tamim.

To further compound problems, he pointed out, volatility in the market has made taking a decision very difficult. “One prediction says oil price will stay above $100 for the next six to eight months, while another says the price will come down again.”

Oil prices slipped Friday after sharp rises early in the session on concern over potential global supply disruptions from sanctions on major crude exporter Russia, falling back below $100 a barrel as investor nervousness eased.

Britain, Japan, Canada, Australia and the European Union also unveiled sanctions, including a move by Germany to halt certification of an $11 billion Russian gas pipeline.

However, Russia will not have its oil and gas flows specifically targeted by sanctions, Reuters reported citing a US official. Russia is the world's second-largest crude producer and a major natural gas provider to Europe.

Top buyers of Russian oil, however, are reportedly struggling to secure guarantees at Western banks or find ships, the report said, citing sources.

HIGH DEMANDS, AND COST

Irrigation during the dry season has led to high demands for diesel.

Power generation cost is also rising due to last year’s diesel price hike. Bangladesh depends on many oil-based power plants for electricity and the demand for power is expected to soar in spring and summer.

Although gas-based power plants hold 51.35 per cent of Bangladesh’s total power production capacity, the government relies mostly on the oil-based plants with a combined capacity of 33.31 per cent of the total due to a lack of gas, according to the BPDB.

High oil prices have driven the price of power purchased by the government.

On Wednesday, gas-based plants produced 105 million kilowatt/hour of power with fuel worth Tk 110 million.

It took Tk 430 million fuel for the oil-based plants to produce 61 million kilowatt/hour of electricity.

A lack of gas pushed the power generation below 4,600 megawatt on that day, according to the BPDB.

Petrobangla data show 2,916 million cubic feet gas was supplied to the country on Wednesday.

The power plants received 794 million cubic feet of gas against a demand for 2,252 million cubic feet.

GAS PRICES SOARING AS WELL

The government on Wednesday approved the purchase of LNG at four times the rate from only a year ago as global prices skyrocketed amid strong growth and the Russia-Ukraine conflict.

The cargo price of 3.36 million metric million British thermal units (mmBtu) of LNG from Singapore’s Vitol Asia has been set at $29.7 per unit, up from $7.21, the rate at which Bangladesh bought LNG from the same company in March 2021.

According to Petrobangla, the national grid received 888 million standard cubic feet gas from the two floating LNG terminals on Jul 1, 2021.

The LNG supply was 848 mmcf on Nov 1 and it dropped to 584 mmcf a month later. After the supply neared 400 mmcf in mid-January, it was 553 mmcf on Thursday.

Natural gas prices around the world soared late last year due to a combination of tightening supplies, weaker renewable power generation and a strong growth after COVID-19.

LNG prices lurched from record lows under $2 per mmBtu in 2020 to record highs of $56 in October 2021.

The government had at that time decided to stop buying LNG from the spot market due to the high prices. The decision led to a fall of up to 130 million cubic feet of gas daily from Sept 15, forcing the government to ask the power stations to use diesel and furnace oil. Finally, the power, energy and mineral resources ministry asked for Hasina’s nod to buy three cargoes.

Benchmark prices stood at about $25 per mmBtu on Monday. Germany on Tuesday had halted a key gas pipeline project, designed to double the flow of Russian gas direct to it, in response to Russia’s threat to invade Ukraine. The move sent gas prices higher on Tuesday.

Many countries around the world are facing an energy crisis with a 500 per cent surge in prices of liquefied natural gas within a year. That has piled pressure on Bangladesh, which is among the biggest LNG importers in South Asia.

Record gas prices are hitting countries such as Bangladesh hard as they typically import bigger volumes of spot cargoes than other nations in Asia, leaving them exposed to price volatility.

Some of the world's biggest importers of LNG are reducing orders in the face of the price hike, raising concerns among major producers about potential long-term destruction of demand.