Bangladesh in a stalemate situation in exploration for petroleum

by Engr. Khondkar Abdus Saleque

A serious stalemate situation has reportedly been created in exploration initiatives for gas and oil in different exploration blocks in Bangladesh. International oil companies (IOC) holding PSCs in different blocks are relinquishing these one after another without doing any exploration works.
On the other hand the creation of a fund for exploration and production of gas with injection of Tk 600-1,000 crore annually has also become uncertain as the National Board of Revenue has rejected the proposal of the Energy Division for exempting it from taxation.

It is definitely a matter of great anxiety for Bangladesh's energy sector at a time when a serious energy crisis is dealing a killer punch to normal functioning of economic activities and is also causing serious miseries to civic life of the citizens. Bangladesh desperately needs a new discovery of natural gas in its onshore and offshore frontiers to feed its power generation and to meet its rapidly expandingenergy demand.
The present huge deficit of power in mono fuel based energy generation is mainly attributed to gas shortage. It is very unfortunate that IOCs holding exploration rights of several apparently potential blocks for many years are now relinquishing virtually without doing any exploration activities. It definitely speaks of novice handling of PSC activities by Petrobangla and lack of vision of the Government of Bangladesh.

Ironically, Petrobangla and the Government also did very little over the years to support Bangladeshi Exploration Company -- Bapex -- to make it self reliant for assuming leadership in upstream activities. We are landed in a situation where neither IOCs nor Bapex may carry out required exploration in the near future to explore and exploit our substantial gas resources.
Obviously it will make government's efforts to achieve its vision in the energy sector extremely difficult. PM Sheikh Hasina is also Energy Minster. We hope she has done the correct homework to confront such a situation and right resources to manage the crisis.

IOCs relinquishing assigned blocks
It is unfortunate that after formation of a new democratic government some IOCs in rapid succession have announced their intention to relinquish the blocks assigned to them in the PSC. Scottish company Cairn and its Australian partner Santos Cairn, the operator of Block 5 & 10, announced its intention not to proceed with the exploration. They informed Petrobangla of intention for block 5 in March 09 and for block 10 in April.
French oil giant Total which bought shares from Irish company Tullow for exploration in the Bay of Bengal off Coxsbazar shore (Block 17 & 18) adjacent to some blocks of Myanmar also announced its intention to quit. Cairn, after carrying out some exploration at Magnama and Hatiya and announcing some encouraging findings, brought up new propositions outside the PSC provisions as conditions for exploration.

Chevron, the operator of Block 13 & 14 (original operator was Occidental, then Unocal) Sylhet has now proposed to take over part of assigned activity of Petrobangla company GTCL to set up a pipeline compressor station at Muchai. It appears that Petrobangla is playing into the hands of international oil companies. For a virtually non-performing Petrobangla, IOCs are already in the driving seat on the upstream and now they tend to encroach midstream also.
There is no denial that we need investment of IOCs to carry out exploration in frontiers to expand our resource base. But can we become their hostage? Can we let IOCs blackmail us with our own resources?

Whether we like or not we have been drawn to this situation because of our own incompetence, our own failures. The way things are taking shape in some years IOCs may take over the entire upstream of Bangladesh's petroleum activities.
They may even encroach mid stream and eventually downstream also as we find from the Chevron proposal for setting up a GTCL pipeline compressor station to be set up on its owned and operated national gas grid. Let us discuss the developments in some details.

Exploration activities
We earlier on many occasions observed that the provision of market development and leasing gas blocks to IOCs allowing them a cooling period of 5 years in 1998 was not correct. IOCs should have been advised to carry out normal exploration activities and in the event of discovery, decisions could be taken based on the size of the discovery and scope for use when to approve the development plan and how to market gas.
It is hard to believe that the energy hungry south-western region of Bangladesh could not absorb the production of gas from some major discoveries. We were working on WRIP at that time on a Unocal proposal to develop Shabajpoor gas field and set up three power plants constructing a gas transmission pipeline from Shabajpoor, Bhola to Digholia Khulna.

The Shell-Cairn joint venture (JV) was given the exploration right for block 5 & 10 with a sugar coating of 10 % for Bapex and similarly block 7 was awarded to Unocal which subsequently was handed over to Chevron. Block 5 covers extensive areas in Bagerhat and Khulna with some areas of Mangrove Forest -- the World Heritage Sundarban -- and some shallow water areas of the Bay of Bengal.
Cairn virtually did nothing in initial years after signing of the PSC in 2001. The PSC was extended up to 2009 after its expiry of 2005. Cairn carried out a magnetic survey for 50 km only. Petrobangla had the right to scrap the PSC if no work was done within 5 years of the PSC. In March 2009 Cairn has relinquished block 5.

Block 10 covers 3,864 sq km of coastal areas of Noakhali, Lakhsmipoor and Bhlola Districts. Unocal professionals working with the writer in the WRIP initiative thought this block to have great potential. The adjacent Block 15 has been allotted to Bapex for exploration.
Cairn in its letter to Petrobangla on 17 April 2006 requested for restructure of the PSC. After some discussion, Cairn's proposal was approved on 12 June 2006. Unfortunately Cairn did not undertake the preparatory works for the exploration.

Cairn's response to a Petrobangla letter came up with two conditions for carrying out their assigned responsibility. They wanted to carry out joint exploration activity with Bapex in areas between block 10 & 15 and they also asked for the right to sell gas directly to third parties.
Both the conditions are outside the purview of the PSC. Cairn in April 2009 has expressed inability to continue exploration at block 10. The extended term of the PSC will expire on 11th June 2009. Cairn was obligated to carry out seismic survey in 1,300 km and complete 2 exploratory wells.

So in its effort to explore petroleum in Block 5 & 10, Bangladesh unfortunately could achieve nothing in 10 years. Cairn possibly did substantial business in share market showing possession of gas blocks in Bangladesh.
Cairn discovered the Shangu offshore gas field, developed it, showing inflated investment in the name of fast track. It dodged Petrobangla submitting false evidences of a higher recoverable reserve. Petrobangla on the other hand -- ignoring the suggestions of its own reservoir expert Late Quazi Shahidur Rahman -- let Cairn produce at a much higher than acceptable rate. Cairn did this for expediting its cost recovery.

Now production from Shangu has been drastically reduced to 55 mm cfpd from 180 mm cfpd at one stage. In the name of sustaining higher production Cairn was allowed to invest more, which ultimately proved a futile exercise.
The platform, pipeline and onshore gas plant set up to handle 512 mm cfpd now can handle 55 mm cf only. Cairn is pursuing for further investment for setting up a booster compressor for secondary recovery from Shangu.

Cairn also did not carry out exploration at Magnama and Hatiya as per the approved development plan. In many pretext it delayed exploration. After some initial exploration at one stage it gave information of some discovery.
And now they have come up with some conditions like increase of gas price, right to sell gas directly to a third party within Bangladesh. These are beyond the scope of the signed PSC.

Cairn's track record in Bangladesh amply has evidence that it is out to blackmail Bangladesh. It is exploiting the prevailing situation. It has taken Bangladesh for a ride on many occasions. We suggest Bangladesh must deal with them very strongly. Enough is enough for us. If there is any scope in the PSC, Petrobangla must insist on immediate commencement of exploration at Magnama and Hatiya or to scrap the PSC.
If Cairn's operation of Shangu has already cost recovered, Bangladesh can then take it over and engage another operator through a transparent tendering process. We may need the offshore platform and offshore pipeline in connection with importing LNG and setting up of a Floating LNG terminal beside the Shangu offshore platform.

Chevron however is continuing works at block 7. It is operating the Jalalabad, Moulavibazar and Bibiyana gas fields. It supplies about 850mm cfpd of gas out of 1,850 mm cfpd in the national gas grid. In recent times, it is allowed to supply 650 mm cf from Bibiyana against its capacity of 500 mm cfpd.
Chevron is due to appear in arbitration with Petrobangla in May disputing against Petrobangla's deduction of a wheeling charge for gas that it supplies to the national gas grid from Jalalabad gas field. According to Chevron, it has no obligation for transmission and marketing of gas after it delivers it to the GTCL operated gas grid at the custody transfer point.

Chevron is a production company and it has Production Sharing Contracts with Petrobangla. PSCs do not deal with gas transmission at all. A Gas Purchase and Sales agreement defines battery limits. In Bangladesh GTCL is the only company which has a natural monopoly for gas transmission.
Yet Chevron has reportedly proposed to set up a gas pipeline compressor station at GTCL operated Muchai Manifold station under its PSC. We consider that Chevron's proposal in the prevailing circumstance has no merit to be considered. A national transmission company cannot part with its assigned responsibility with an IOC operator.

The offshore blocks 17 & 18 off the Coxsbazar coast were awarded to Redwood and Orkland. Subsequently Marks Oilie joined them. At one stage Irish company Tullow took over the major share. Tullow sold its share to French giant Total.
These blocks are believed to have good prospects being adjacent to Myanmar's offshore blocks where they have discovered some gas structures. Total carried out 3D seismic surveys. There were some media reports of success, but at a later stage it expressed inability to carry on further explorations terming the findings as insignificant and economically not viable.

Niko is sitting on the Feni and Chatak gas fields and violated the Tengratilla structure. Allegations against two main stream political party chiefs and several ministers of their terms are under investigation.
Can there be any further progress or will this remain likethis? Why can Bangladesh not scrap the contract with Niko or let it proceed to progress according to it? Feni is strategically located. Some additional gas from Feni may be very useful now. Chatak and Tengratilla have good prospects. We must short out the Niko syndrome as soon as possible.

We heard of a Bangla proverb: Exquisitely beautiful maiden in a poor man family is a serious problem.
Unfortunately that is our case. We get a bridegroom who makes golden promises to marry our daughter but never treats her well and abandons after using her indiscriminately. Some IOCs kept most of our gas blocks for almost 10 years. They virtually did nothing during this period. Now they are leaving. This may trigger a negative signal not only to prospective IOCs in future investment initiatives but also to others planning to invest in other sectors. Government must investigate our track record in PSC management. We must not proceed for new PSCs in offshore before reorganising PCD of Petrobangla with appropriate professionals.

With IOC's exploration operation in limbo, national exploration company Bapex must step up its exploration activity. The caretaker government took several initiatives to support Bapex's activities. But a recent development as can be seen from the Meia report has evidence that even Bapex will be seriously handicapped to carry on exploration:
Quote: "... the NBR had flatly rejected the energy division's proposal for keeping out of the tax net the fund that will be created through hiking the gas price at consumer level," a high official told. The rejection of the proposal is a blow to the idea of creating the fund for gas exploration and production as the country is facing a severe gas crisis, he observed. He said that the state minister for power and energy, Shamsul Haque Tuku, would send a letter to the finance minister Abul Mal Abdul Muhith to review the NBR decision.

Earlier on November 30 last year, the Bangladesh Energy Regulatory Commission ruled that the commission would considerhiking of the gas price by 10 %-15 % at consumer level if Petrobangla got approval from the government that the increased portion of the gas price would go to the tax-free fund that would be dedicated for gas exploration and production. Petrobangla had applied to the commission in July last year, for allowing it to increase the gas price by 65 % for different categories of consumers, including household, power and fertiliser plants, and industries.
"If Petrobangla is allowed to increase the gas price by 10 %, the increased portion will go to the tax-free fund and no gas distribution company will be allowed to take any portion of it," the commission ruled. "Petrobangla has to ensure that the total fund will be dedicated for gas exploration and production as the country was facing a gas shortage and it was difficult to arrange investment for high-risk gas exploration," BERC chairman Ghulam Rahman said on November 30 last year.

The commission estimated that around Tk 600-1,000 crore could be injected to the fund annually from the increased portion of the gas price and the state-run gas exploration and production companies could go for renewed search for gas at a bigger scale. Energy experts hailed the commission's decision for creating the fund for gas exploration and production as the gas distribution companies took away a huge portion of the money earned through gas sale over the years.
Sources at Petrobangla and the Energy Division said usually the NBR collects 55 % of the gas sale money as tax.
"Any increase in gas price means that NBR will collect 55 % of the increased portion," the sources said.

A high official of the BERC told that the commission would not allow Petrobangla to increase the gas price if it failed to get the NBR's approval for keeping the fund tax-free.
"We have heard that the NBR has rejected the energy division's proposal for exempting the fund from taxation and now it's up to the government to decide. We will not allow the government to take the money through increasing gas price at consumer level," he said. Sources at the energy division said that if the NBR approved the tax exemption proposal and the decision on creating the fund was taken, still it would be tough for the BERC to raise the gas price now because of the ongoing global economic recession and its impact on local industries.
Unquote

Impacts
The reluctance of IOC over the years to go for exploration after holding possessions for several years and now relinquishing the blocks one after another and financial constraints of the national exploration company to continue exploration will only aggravate the gas crisis. We hope the situation will attract the attention of Government's energy think tank.
We must accept that our PSC management is like a toothless tiger. We are not only incompetent but also we have ulterior motives. We play to the hands of vested quarters ignoring national interest.

The energy sector is on the threshold of a serious challenge. There is no doubt that we need a massive flow of FDI in the energy sector and gas sector, but first we must cure our own contagious disease. We must set up a professional unit to monitor and manage Production Sharing Contracts.
We must find out ways to support Bapex to grow into an exploration company of international repute. It must be made self sustaining. It can then form joint venture with proper exploration companies.
How long can it rely on Government support?

Engr. Khondkar Abdus Saleque is ex-Director (Operation) GTCL Bangladesh.