Foot dragging on gas exports!
Monday, 3 September 2007
Forrest Cookson
I am one of the persons who has argued in favour of gas exports to India through pipelines! I am not blushing about being wrong. On the contrary I am convinced that I remain right!
The real issue in exporting gas is apparently not understood. It is how to get exploration carried out. The geological assessment of Bangladesh is that there is substantial natural gas within Bangladesh. The best scientific evidence suggests this. One may be wrong about this potential but this is as I understand it the geological assessment. If this assessment is wrong then the geologists should present the argument that it is not worth doing much more exploration for gas.
But to have gas to use one has to find it! The Production Sharing Contracts (PSC) are designed to encourage just such exploration and development. The alternative to PSC is to assign the exploration to BAPEX and let that organization go forward using its own experts or hiring experts to assist.
If BAPEX does the exploration then the Government has to pay the costs. This can easily be $100 million per block to be spent over 2-3 years. If nothing is found then the money is spent and nothing remains.
The PSC approach draws the International Oil Companies into exploration. However these companies are simply not interested in exploring when they face two risks -
1. The first risk is that they will find nothing - when they enter into a PSC they are prepared to accept this risk.
2. The second risk is that they discover gas but the Government does not need it so there is no way for the IOC to develop the gas to recover the exploration cost. This risk the IOC will not accept.
The problem in Bangladesh is that gas is in short supply as no one is looking for it. There is probably quite a lot of gas but with no major exploration taking place it is unlikely that there will be significant finds. Starting today one might find and develop gas fields in 8-10 years. But focusing on the exploration consider what happens if two IOCs are exploring and each spends $100 million on exploration and each discovers a 2 TCF gas field. What will happen? Both fields are not needed at this time. What should be done? How can the IOCs realize their costs if exports are not allowed!
This is the puzzle that has not been solved. For the last five years there has been virtually no exploration! There is no motivation for the IOCs holding PSC to do much exploration work as being able to sell the gas from a major discovery is doubtful! Petrobangla has to find a formula to encourage IOC exploration or get BAPEX busy.
Furthermore, costs of exploration and development are rising. The PSC reference prices were set more than a decade ago and to encourage exploration need to be revisited.
The critical point is that if exports had been permitted there would have been a great surge of exploration as investors would believe that there was a market.
One proposal was that the Government's share of the earnings from the gas exports [ amounting to several billion dollars] be used to invest in hydro electric projects in Bhutan or Nepal. This has the potential of developing 3,000 MW of hydro power taking up the base load in Bangladesh and saving gas! That is, more gas is left in Bangladesh if one follows this program than by not exporting. Without exports of gas there is no prospect of access to the hydro resources. I am confident such an arrangement could be negotiated with India.
Rather than taking pleasure out of not exporting gas, those interested in the energy sector should be greatly concerned as to how to get the exploration done. If exports are not going to be permitted then there is a strong case for giving lots of money to BAPEX and letting them get on with it. Those who are against exports must stand up to take the responsibility for such a course of action. If Bangladesh is determined to avoid gas exports then it is time to get started on exploration by BAPEX. The Government should give Taka 700 crore immediately to get exploration underway! Why there has been five years of stalling on this I do not know. If the authorities do not have confidence in BAPEX to do the work then there is no alternative to using PSCs and allow exports! In brief, I continue to believe the PSCs are superior to relying on BAPEX to do the exploration and taking all technical and financial risks on Bangladesh! But to use the PSC approach it is necessary to guarantee markets and that means exporting. But I realize that there is a legitimate alternative of handing exploration and probably development to BAPEX and Petrobangla. Then the market issue does not arise. What is not a legitimate position is to oppose exports and not give the resources to BAPEX. Opponents of exports probably have a legitimate positions; proponents of exporting such as me also have a legitimate position. The Ministry does not have a legitimate position - refusing to sanction exports and refusing to sanction appropriate sums to BAPEX leave us in the mess now facing the energy sector.
I am one of the persons who has argued in favour of gas exports to India through pipelines! I am not blushing about being wrong. On the contrary I am convinced that I remain right!
The real issue in exporting gas is apparently not understood. It is how to get exploration carried out. The geological assessment of Bangladesh is that there is substantial natural gas within Bangladesh. The best scientific evidence suggests this. One may be wrong about this potential but this is as I understand it the geological assessment. If this assessment is wrong then the geologists should present the argument that it is not worth doing much more exploration for gas.
But to have gas to use one has to find it! The Production Sharing Contracts (PSC) are designed to encourage just such exploration and development. The alternative to PSC is to assign the exploration to BAPEX and let that organization go forward using its own experts or hiring experts to assist.
If BAPEX does the exploration then the Government has to pay the costs. This can easily be $100 million per block to be spent over 2-3 years. If nothing is found then the money is spent and nothing remains.
The PSC approach draws the International Oil Companies into exploration. However these companies are simply not interested in exploring when they face two risks -
1. The first risk is that they will find nothing - when they enter into a PSC they are prepared to accept this risk.
2. The second risk is that they discover gas but the Government does not need it so there is no way for the IOC to develop the gas to recover the exploration cost. This risk the IOC will not accept.
The problem in Bangladesh is that gas is in short supply as no one is looking for it. There is probably quite a lot of gas but with no major exploration taking place it is unlikely that there will be significant finds. Starting today one might find and develop gas fields in 8-10 years. But focusing on the exploration consider what happens if two IOCs are exploring and each spends $100 million on exploration and each discovers a 2 TCF gas field. What will happen? Both fields are not needed at this time. What should be done? How can the IOCs realize their costs if exports are not allowed!
This is the puzzle that has not been solved. For the last five years there has been virtually no exploration! There is no motivation for the IOCs holding PSC to do much exploration work as being able to sell the gas from a major discovery is doubtful! Petrobangla has to find a formula to encourage IOC exploration or get BAPEX busy.
Furthermore, costs of exploration and development are rising. The PSC reference prices were set more than a decade ago and to encourage exploration need to be revisited.
The critical point is that if exports had been permitted there would have been a great surge of exploration as investors would believe that there was a market.
One proposal was that the Government's share of the earnings from the gas exports [ amounting to several billion dollars] be used to invest in hydro electric projects in Bhutan or Nepal. This has the potential of developing 3,000 MW of hydro power taking up the base load in Bangladesh and saving gas! That is, more gas is left in Bangladesh if one follows this program than by not exporting. Without exports of gas there is no prospect of access to the hydro resources. I am confident such an arrangement could be negotiated with India.
Rather than taking pleasure out of not exporting gas, those interested in the energy sector should be greatly concerned as to how to get the exploration done. If exports are not going to be permitted then there is a strong case for giving lots of money to BAPEX and letting them get on with it. Those who are against exports must stand up to take the responsibility for such a course of action. If Bangladesh is determined to avoid gas exports then it is time to get started on exploration by BAPEX. The Government should give Taka 700 crore immediately to get exploration underway! Why there has been five years of stalling on this I do not know. If the authorities do not have confidence in BAPEX to do the work then there is no alternative to using PSCs and allow exports! In brief, I continue to believe the PSCs are superior to relying on BAPEX to do the exploration and taking all technical and financial risks on Bangladesh! But to use the PSC approach it is necessary to guarantee markets and that means exporting. But I realize that there is a legitimate alternative of handing exploration and probably development to BAPEX and Petrobangla. Then the market issue does not arise. What is not a legitimate position is to oppose exports and not give the resources to BAPEX. Opponents of exports probably have a legitimate positions; proponents of exporting such as me also have a legitimate position. The Ministry does not have a legitimate position - refusing to sanction exports and refusing to sanction appropriate sums to BAPEX leave us in the mess now facing the energy sector.