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The Financial Express

Evolution of PSCs in Bangladesh gas exploration

| Updated: January 24, 2023 22:08:09


Evolution of PSCs in Bangladesh gas exploration

Bangladesh has failed to attract bids for gas exploration since the discovery of the Bibiyana gasfield in 1998. This is one of the main reasons why Bangladesh has failed to increase its gas reserves in the last two decades. These failures can be traced back to the Production Sharing Contract (PSC). There are several clauses of PSCs that can cause no bids or negotiations to fail. Some of these clauses are -

  •  Cost recovery (percentage and profit of gas share)
  •  Maximum production per year
  •  The price of gas
  •  Export provision

There are many more clauses in a PSC that can be a point of contention, but the above four can lead to serious divergence of opinion. Of course a country will always want to maximise on these four issues but in doing so may make the PSC so tight that there are no offers, or only companies without the requisite qualifications make offers. It is therefore very difficult to draw up a PSC that protects the interests of the country and at the same time provides sufficient incentives for reputable companies.

The foremost incentive and probably the trickiest is the price of gas. After all, it is through this that the company first recovers the cost of exploration, development and production and later makes a profit. The whole investment decision from a company's point of view is dependent on this price. The reason this price (from a country's perspective) is difficult to determine is that it is based on the company's risk assumption. If a company assumes the exploration effort is very risky, it will look for a high gas price. On the other hand, if the company perceives that it would be easy to find gas and that there are no political or other risks such that it can recover all its costs and make profit, its risk assumption would be low and it will settle for a low price of gas. The question is how to determine this risk factor. This is very difficult and it is probably the main reason that Bangladesh has failed to attract investors in the earlier bids. A lot of experience and knowledge is required to determine this. The past, present and future prospects of gas sales all come into the picture. The volatility of the gas market along with issues relating to the continued use of fossil fuels in the context of climate change and development of alternative fuels determine this price. If a low price is offered, which is often the case, there will be no bids. On the other hand if an excessively high price is offered, the country can lose a lot of money especially if the discovery is large. In this kind of situation allegations of corruptions and other mismanagement may arise and those responsible for allowing such a high price for gas in the PSC are often held accountable. Those responsible for determining this price are therefore wary of setting high prices. The history of price setting in the Bangladesh's PSCs has been rather disappointing.

The lack of provision for export in the PSC is the other important clause that can discourage bids. The reason behind this is that if the country is not able to absorb the quantity of gas that can be produced according to the contract then without the export clause, the company will not be able to produce the excess gas. This situation is particularly critical if a large field is discovered after a long and expensive exploration effort that has drained millions of dollars. The export clause in a PSC thus provides the real incentive to keep on exploring in difficult situations in the hope of finding a large field that will help the company to recover all expenses and also make a profit. Without the export clause, the company will be hesitant to explore beyond a certain risk point because the time to recover the invested capital would be very large if the company had to rely only upon the country's gas demand. For example if a 5 Tcf (trillion cubic feet) gasfield is discovered, which is by no means an unusually large discovery, the company would be allowed to produce more than 1,000 MMcfd (million cubic feet per day) of gas; It is usually standard practice for PSCs to allow companies to produce annually 7.5% of the proven reserve. If the demand of the country at that point is say 500 MMcfd, then the production is two times the country's requirement. In that case it is simply impossible for the country to absorb the full produced volume without cutting back on its own production. In all situations export of gas is a justified addition to the contract.

The Table summarises the Export Provision and Price of Gas aspects of the PSCs of Bangladesh. Starting in the early '90s,six PSCs have been drawn up. The price of gas has gone from around $3/Mcf (million cubic feet) to $8.5/Mcf in the latest PSC to be used for inviting bids. To keep it in country's favor the price was always set low; this was the mistake that resulted in bidders showing no interest. This happened twice, once in 2012 and recently in 2019. The government has finalised a new PSC (No. 6 in the Table). The rumor is that it is being sufficiently sweetened to make it attractive to even hard-bargaining bidders.

Following the PSC of 2008, ConocoPhillips started exploration in the deep sea in the Blocks DS-08-10 and DS-08-11. After their exploration period, they declined to drill unless the gas price was enhanced. At that time they were demanding a gas price premium of $1/Mcf, but the government perceived that to be excessive and outside the purview of the contract. ConocoPhillips argued that the offshore drilling in the Bay will be expensive and they will not be able to make a profit based on their risk perception. One reason for this assertion was that the seismic data was not favorable and even if they find something it is likely to be small.

 

The writer is a retired professor of the Bangladesh University of Engineering and Technology (BUET) and may be reached at
 [email protected]

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