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Download PDF As part of a measure to resolve future gas crisis, the government in October may announce the third round of block bidding for oil and gas exploration in the offshore and deep-sea areas of the Bay of Bengal.
“The amended model production sharing contract (PSC) for the block bidding is now under law ministry’s scrutiny and the government’s committee on marking maritime boundaries has almost completed its task,” said a competent energy ministry source.
However, the government is also ready to open a number of on-shore blocks, especially in the western region of the country, in the same bidding. There is a court injunction on bidding of the on-shore blocks. “If the injunction is lifted, we can open these blocks as well,” the source pointed out.
The bidding will offer attractive gas price prospects, but it also withdraws zero corporate tax facilities for oil companies–a benefit that was offered in the previous bidding of blocks.
“Right now we are fine-tuning some aspects of the model PSC based on our past experience with oil companies in two previous block biddings,” he added.
By the end of this month or early next month, the ministry would be ready to announce the schedule for the third round of bidding which exclusively focuses on the off-shore blocks for the first time.
After the bidding announcement, the government will hold road shows in Dhaka and Singapore promoting the bid round.
The Bay of Bengal holds enormous prospects of oil and gas discovery. In the last two years, India discovered at least 100 trillion cubic feet (tcf) of gas–mostly in the Bay close to Bangladesh waters. Myanmar recently discovered seven tcf gas in the Bay close to Bangladesh boundary.
Bangladesh has been pondering over the offshore exploration for more than two years. But till the recent months it had not finished marking its maritime borders, as per a United Nations mandate, neither did it finalise a fresh model contract under which foreign oil and gas companies would work.
Bangladesh now has 10 operating PSCs with foreign oil companies. The first PSCs were signed in 1994 and 1995, with British company Cairn and US company Occidental (now Chevron) based on unsolicited negotiations. The government continued this trend till 1997 and signed a couple more PSCs which ended without any results. Following the 1998 second round block bidding, the government signed a few more PSCs with Tullow, Unocal (now Chevron) and few other oil companies.
“We always had model PSCs during these negotiations. But we had deviated from the terms and conditions. That was a bad practice. We have decided that we shall not deviate from the model PSC–we shall only bargain over the bid terms in the third round bid,” the source pointed out.
The benefit of a successful third round of bidding would be obtained after seven to eight years from now, he added. The model PSC was revised keeping this aspect in mind.
INCENTIVES FOR BIDDERS
The oil companies will have tax-free consumable and equipment imports, with a number of exceptions.
The biggest incentive for the third round bidding would be a new gas pricing formula where Bangladesh is ready to pay higher for gas to be produced from the deep waters of the Bay. The previous PSC models spelled out maximum three gas price structures. The new PSC adds a fourth price structure.
Gas pricing under the PSC uses a formula where the price of High Sulphur Fuel Oil (HSFO) in the Singapore market acts as the benchmark. Under this formula, oil companies were offered per thousand cubic feet gas priced at 75 percent of the price of HSFO for gas produced from regular on-shore areas, 93 percent of HSFO price for gas from offshore areas and 93 percent of HSFO price for the gas found in western region. The new PSC gives 100 percent of HSFO price for gas found in deep waters in the Bay.
Again, all gas prices had a ceiling price. For Occidental’s two PSCs, the gas price ceiling was $140 and for the other existing PSCs, the ceiling was $120 per thousand cubic feet.
Sources said under the new PSC, the ceiling price for deep-sea gas would be adjusted in accordance with the highest gas price paid within the country. The highest PSC gas price is $3.5 per thousand cubic feet.
Oil companies will not have any compulsion of giving 10 percent carried over interest to local company, namely Bapex, for deep-sea blocks. However, Bapex gets 10 percent carried over interest for PSC for non deep-sea blocks. All payments will be made in dollars.
MODEL PSC
“The first model PSC of the early nineties had some inconsistencies, which we addressed this time. For instance, the PSCs signed with Occidental unduly made Petrobangla pay tax on tax,” said a Petrobangla source. He explained, the Occidental PSC dictates that Petrobangla pays the oil company’s corporate tax based on Occidental’s own assessment. In the following year, Occidental (or Chevron) shows the previous year’s tax amount (which was paid by Petrobangla) as its earning.
Therefore, Petrobangla again pays tax for Occidental on that earning. “We have dropped such confusing benefits,” the source said.
The PSC signed by Tullow in Block-9 allows the company to distort the number of exploratory and appraisal wells. This confusion has also been addressed. Tullow’s PSC also allows it to deplete gas by 7.5 percent “in-place” but this should be 7.5 percent of the proven gas reserve, according to the new model PSC.
The model PSC adds for the first time a provision of “abandonment cost” to ensure that an oil company does not just abandon a gas or oil field without proper de-installation of related equipment.
The model PSC says, “Contractor shall commence payment to Petrobangla into a fund to be hereinafter referred to as the ‘Abandonment Fund’ on the first anniversary of the First Commercial Production.” This clause ensures that an oil company does not try to avoid its responsibility while closing its operations.
Emphasising local manpower employment, the model PSC asks bidders to justify employment of all foreign nationals during production phase. This provision is relaxed for the exploration phase.
The accounting procedure in the PSC has been laid out in details. While the previous PSCs allowed oil companies to get a budget approved on the basis of a broad outline, the new PSC will demand details.
Petrobangla shall have the right to assign any or all of its rights, interests and obligations under the contract to any company or enterprise under its control.
The contractor may with prior written approval of Petrobangla assign any or all of its rights, interests and obligations under the contract to any of its affiliates. Such consent shall not be unreasonably withheld.
In case of failure to fulfil obligations, the government shall have the right to terminate the contract upon giving the contractor 60 days written notice of its intention to do so.
The contractor shall not trade or sell data pertaining to the contract area. The contractor shall not publish a compilation of such data without the prior written consent of Petrobangla. At the end of the term of the contract, the contractor shall deliver all original data to Petrobangla.
The contractor will be obliged to arrange for the systematic transfer of its technology, know-how and experience to Petrobangla. The contractor shall establish a programme to train Petrobangla personnel locally and abroad to improve technical and management skills.
The contractor shall have the right to export any marketable natural gas in the form of Liquefied Natural Gas (LNG). The related LNG facilities shall be constructed and operated on the basis of a special LNG export agreement between the contractor and Petrobangla.
September 23rd, 2007 at 2:21 pm
[...] Govt presses hard for gas exploration in Bay Get Daily News By Email: [ Webmasters: Add Bangladesh News To Your Site… discovered at least 100 trillion cubic feet (tcf) of gas mostly in the Bay close to Bangladesh waters. Myanmar recently discovered seven tcf gas in the Bay close to Bangladesh boundary. Bangladesh… it finalise a fresh model contract under which foreign oil and gas companies would work. Bangladesh… would be a new gas pricing formula where Bangladesh is ready to pay higher for gas to be produced [...]