Privatisation of petroleum import in Bangladesh: concerns & priorities

The government is going for a major reform in the energy sector in Bangladesh; private sectors will be allowed to import petroleum products and sell directly to retailers. This is certainly a well-timed move by the government to deregulate the fuel market. However, as we are transitioning to a new dimension of market structure breaking the long-standing tradition of state-owned monopoly, we need to be prudent and cautious before the policy goes for implementation.

Bangladesh imports both crude and refined petroleum products, with refined petroleum products accounting for approximately 90 per cent of the total import cost of petroleum products. Importing refined petroleum is significantly more expensive than domestically refining imported crude oil. Unfortunately, Bangladesh is heavily reliant on imports of refined oil. This high dependency is due to the limited capacity of our refineries to process adequate crude oil to ensure uninterrupted supply of petroleum products.

The Bangladesh Petroleum Corporation (BPC) is the only entity in Bangladesh responsible for the importation of crude oil and subsequent refining operations at its subsidiary company, Eastern Refinery Limited (ERL). This refinery has an annual refining capacity of 15 lac tonnes, which is only 20 per cent of the national demand. The remaining 80 per cent of the fuel oil requirement is met by imports of refined oil. According to sources in BPC and ERL, "some 11 dollars per barrel (158.99 litres) could be saved if diesel was produced in the country by refining crude oil imported from abroad. It means that some 7 taka per litre of diesel can be saved as per the current transaction rate of US dollar (BDT 94, August 2022)". Considering the current USD-BDT exchange rate, this amount will be even higher. Therefore, it has become imperative to increase the capacity of existing ERL or establish new refineries in order to reduce the escalating costs of importing refined petroleum. BPC has already undertaken a project to establish the second unit of the Eastern Refinery (ERL-2) with an estimated project cost of BDT 23,736 crore which is expected to be completed by 2027. Once completed, this project will increase BPC's crude oil refining capacity by an additional 30 lac tonnes.

Besides implementing the ERL-2 project, the government has initiated a major reform, allowing the private sector to import, refine, and distribute crude oil through its own channels. According to the draft policy, the private refineries will have to sell a minimum of 60 per cent of their refined outputs to the BPC at a government-determined price during the first three years of their operations. The next two years will be followed by the BPC's purchase of 50 per cent of private refineries' total outputs, and after five years from the commencement, the BPC's purchase proportion will be determined by the demand for fuel with economic growth and the use of alternative fuels.

The primary concern relates to the pricing mechanism of petroleum products. The market of petroleum products has been regulated by the government since the independence of Bangladesh. The BPC is the sole agency in Bangladesh for the production and supply of petroleum products throughout the country with the involvement of Eastern Refinery Limited and the distribution companies in the supply chain. The Bangladesh Energy Regulatory Commission (BERC) sets the price of petroleum products in consultation with the BPC considering the fluctuating import costs of petroleum products and BPC's profit/loss amounts.

The new policy of allowing the private sector to import fuel directly will surely alleviate the burden of high import costs by facilitating substantial importation of crude oil rather than refined petroleum products. The policy proposes that BPC will procure 60 per cent of the output of private refineries, while the remaining 40 percent of refined oil can be marketed by these refineries through their own distribution networks. Should private refineries encounter challenges in selling the remaining 40 per cent of their processed petroleum, BPC retains the option to purchase any excess products from these private entities. The private companies will be allowed to sell their products by setting up filling stations on roads/highways, upazillas, and metropolitan areas but must maintain the retail price fixed by the government.

Apart from this cost-effective outcome of this commendable policy shift, there are certain concerns that need to be considered. The new policy outlines a new market structure for the next five years and an entirely new supply chain from setting up refineries by private sectors to importing crude oil, processing, and distributing the refined products is expected to be developed within this relatively brief timeframe. Concurrently, the government will have to decide on the allocation of market share between the BPC and private sector entities in the overall petroleum supply across the nation. The forthcoming five years seem to be crucial for the government to evaluate the plausibility of shifting to a deregulated market structure. Given these considerations, it is imperative that we delve into the following issues.

Establishing the retail price of petroleum products in accordance with the new policy initiative would be a challenging endeavour for the government. Currently, there is no automated price-adjustment formula, and the government determines the retail price in consultation with BPC; the pricing is driven by the movement of the international price of petroleum and losses/profits of BPC. As imports of crude oil by private entities will reduce the need to import refined petroleum by the BPC, the private sector will become the major contributor to the supply chain leading them to be the dominant player as most of the crude oil will eventually be imported by the private sector. Considering this cost-effective import strategy, the larger contribution of the private sector may be regarded as an economically optimum solution. However, the concern is whether the government can still determine the price and regulate the market in the absence of an automated price adjustment formula. The draft policy states that there will be an automated price adjustment mechanism but does not elaborate on this, which should be carefully designed in consultation with relevant experts and stakeholders. For instance, the government provides subsidies to BPC when the price goes up in the international market and the BPC has to sell fuel at a price lower than its costs. Now, what will be the business strategies of the private sector if it faces the same difficulties? The next question relates to whether the government will provide full incentives to private enterprises (for offering lower prices) or whether the cost burden will be shared between the government and the private sector. If the government once again finds itself in a position where subsidies or incentives are necessary to maintain retail prices below international levels, there is a high likelihood that the government will fall into the dilemma of cross-subsidisation. This would entail providing subsidies to both the state-owned BPC and private-sector players. Consequently, the government needs to be very strategic in controlling the private sector and ensuring efficiency in the fuel market, particularly in times of unexpected disruptions in the international oil market.

During the Russia-Ukraine conflict, India was one of the few countries that benefited from cheaper crude oil imports. India's ability to import Russian crude despite international sanctions was facilitated by the involvement of the private sector; state-owned enterprises were unable to secure such imports. The role of the private sector in importing crude oil facilitated the government to maintain a steady price of petrol and diesel despite the rise in price in the international market after the breakout of the Ukraine war. The private sector has played a pivotal role in India's petroleum supply chain for a long time now and has reached the "economies of scale" through its long-term operations. This scale enabled them to supply oil at discounted retail prices inside the country which was offset by substantial returns from oil exports during the Ukraine crisis.

As the new policy of Bangladesh allows the private sector to sell 40 per cent of its refined products using its own network, the next concern is who will be the potential buyers of these refined products sold by the private sector at a higher price. Diesel is primarily used in agriculture, power, and transport sectors while petrol and octane are mostly used in transport sectors. Private companies cannot sell their products to these sectors above the government-set retail prices. Even if the government facilitates the procurement of surplus products by private refineries, these private companies will be obligated to sell these products to the government at the government-fixed price, thereby limiting their potential for higher margins. If private companies are allowed to export excess supply, as is the case in India, they may look for more advantageous solutions; under-reporting of total imports, production, and storage of refined products by private companies might become a usual practice. Thus, the imports of crude oil by private companies and the production, storage, and distribution of refined oil need to be constantly monitored to impede the practice of under-invoicing/over-invoicing during the exports of refined products by private sector entities.

A comprehensive review of different countries' experiences and evidence will be helpful in developing the automated pricing mechanism of fuel in Bangladesh. We should take lessons from the countries that have deregulated the fuel market recently as well as focus on the existing practices of auto-pricing under the regulated markets. If we take India as an example, we see that it took them around five years of preparation to deregulate their fuel market. A committee was set up by the government of India in 2005 that was involved in exploring various aspects of pricing and taxation of petroleum products, and subsidies on Public Distribution System (PDS) with a view to establishing a transparent mechanism for autonomous adjustment of prices (Ganguly & Bhattacharyya, 2019). After an in-depth analysis of the feasibility of deregulation in the fuel market, the price of Petrol in India was first deregulated in 2010 followed by deregulated pricing of Diesel in 2014. On the other hand, Malaysia and Vietnam have maintained a state-regulated oil market following certain rules and regulations along with efficient pricing mechanisms. The Malaysian government regulates the retail price of petrol and diesel through the "automatic pricing" mechanism. Product cost, distribution cost, shipping cost, agent commission, company profit, and taxes are key components in this auto-pricing formula. Despite such a regulated price structure, a reasonable profit margin is stipulated, and the profit target is strictly regulated by the state to ensure a reasonable price for consumers as well as reasonable earnings for the producers and distributors. Vietnam is another example of a country that has effectively maintained regulated fuel prices despite recent fluctuations in the international energy market. The government of Vietnam maintains a fund, named as "Petroleum Price Stabilisation Fund" where any profits from the sales of petroleum are accumulated and this fund is used to "stabilise" petrol prices at the retail level when there is a sharp increase in international price. Hence, there is a harmonious sharing of benefits between the State, businesses, and consumers. Moreover, Vietnam follows a unique way of adjusting the base price of petrol every 10-15 days based on the storage, import, and processing costs of petroleum.

It's high time that we expedited the implementation of the ERL-2 project and ensured its timely completion. The project was undertaken by the BPC a decade ago but has yet to be implemented due to difficulties in mobilising funds. However, the forgone benefits that could have been experienced during the recent Ukraine war crisis by importing crude oil at a cheaper rate and producing refined products have prompted the government to expedite the project's completion. The government should strongly focus on the timely implementation of the project by the year 2027 as targeted and equally prioritise the privatisation of oil imports as well as the establishment of ERL-2. The government will be able to import and refine an additional thirty lac tonnes of eco-friendly Euro 5 fuel oil per year, saving USD9-10 per barrel in refined fuel based on current international market prices. It's worth noting that the establishment of ERL-2 will increase the government's market influence while accommodating the presence of the private sector. 

Tahreen Tahrima Chowdhury is Research Fellow, Bangladesh Institute of Development Studies (BIDS).
tahreen@bids.org.bd, eco_tahreen@yahoo.com