Bangladesh News

The caretaker government’s cabinet body today considers the energy ministry’s proposal to float the third round block bidding for oil and gas exploration in off-shore blocks as an urgent solution for impending gas supply crisis from 2011.

The bidding will offer eight shallow-water blocks and 20 deep-sea blocks–each having exploration area between 3,000 square km and 7,000 square km.

If the cabinet approves the proposal, Petrobangla would go for publicity from Wednesday, sources said.

However, this proposal has been toggling between the cabinet and the cabinet’s purchase committee and the energy ministry for the last two months. The cabinet body earlier discussed the proposal and forwarded it to the purchase committee and the purchase committee sent it to the energy ministry to scrutinise it further before submitting it back to the cabinet.

The original proposal as it is being submitted to the cabinet today, remains substantially unchanged, sources said.

“The most important issue is how the government would handle the third round bid,” said a well-placed ministry source.

“We hear that the government may not stage international road shows to attract oil companies and the only road shows being planned are going to be held in Dhaka. This would be a blunder,” he said.

Bangladesh had previously held three road shows in Dhaka, London and Houston during the second round block bid and in London and Houston in the first round. “Even a large country like India is currently planning to hold road shows in five spots for its upcoming bidding. Road shows are not pleasure trips… it’s business promotion for Bangladesh,” he added. “In fact, if the government does not promote this bid, we will not get good offers and our whole effort will be wasted.”

Third round block bidding has become very important as Petrobangla’s forecast shows a grim picture of gas supply shortfall beginning from 2011. With energy demands rapidly increasing, Bangladesh has no option but to tap all its potentials immediately.

The government is going for only off-shore blocks, as a court injunction bars bidding of on-shore blocks. Gas from off-shore blocks will be obviously costlier than that of on-shore blocks because of higher exploration and development expenditure but presently the government has no choice.

“We also need to have the legal issue resolved to ensure exploration in the on-shore blocks,” said an official of Petrobangla.

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 block bids. The bid documents will readily offer a model Production Sharing Contract (PSC) to the bidders.

The Bay of Bengal holds enormous prospects of oil and gas discovery. Between 2005 and 2006, India discovered at least 100 trillion cubic feet (tcf) of gas, mostly in the Bay, close to Bangladeshi waters. Myanmar also discovered seven tcf gas in the Bay close to Bangladeshi boundary.

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 a few other oil companies.

THIRD ROUND BID FEATURES
The oil companies will have tax-free consumable and equipment imports, with some exceptions.

The biggest incentive for the third round bidding would be a new gas pricing formula where Bangladesh is ready to pay higher prices for gas extracted by deep-sea rigs. The past PSC models spelled out maximum three gas price structures. The new PSC adds a fourth price structure.

Gas price 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 price at 75 percent of the price of HSFO for gas produced from regular on-shore areas, 93 percent of HSFO price for gas in off-shore area and 93 percent of HSFO price for the gas found in the western region. The new PSC gives 100 percent of HSFO price for gas found in deep waters in the Bay.

The ceiling price of gas has been raised to $180 from the present $140 per thousand cubic feet, while the floor price remains at $70.

In case of oil discovery, the contractor will have to sell 85 percent of the oil to the local market at a price 15 percent less than international price.

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.

Contractor will be obliged to arrange for the systematic transfer of its technology, know-how and experience to Petrobangla. Contractor shall establish a programme to train Petrobangla personnel locally and abroad to improve technical and management skills.