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Technical Assistance Consultants Report

Project Number: 38164 April 2009

People's Republic of Bangladesh: Preparing the Gas Sector Development Program


(Financed by the Japan Special Fund)

Prepared by: Technoconsult International Limited Dhaka, Bangaldesh For Petrobangla

This consultants report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed projects design.

Final Report
Volume 2: Main Report

Peoples Republic of Bangladesh: Preparing the Clean Fuel Sector Development Program
TA 4952-BAN

Sena Kalyan Bhaban (7 t h Floor), 195 Motijheel C/A, Dhaka -1000 Tel: 9565122-25, Fax: +880-2-9565127, Email: info@tcil-bd.com, Web: www.tcil-bd.com

Technoconsult International Limited

Project Number: 38164 March 2009

CURRENCY EQUIVALENTS (as of 1 March 2009) Currency Unit Taka (Tk) Tk1.00 = $0.0145 $1.00 = Tk68.95 In this report, a rate of $1 = Tk70.00 has been used

ABBREVIATIONS
ADB ADP BAPEX BCF BERC BGFCL BGSL cm DCFP DEGTP DM DPP EA EIA EIRR EMRD EPZ FIRR FY GDP GHG GSMP GSRR GTCL GTDP GWh HCU HSFO IEE IOC IPO IPP JGTDSL JNGTP kgoe kiloton km kWh LRMC MCF MCM Asian Development Bank annual development program Bangladesh Petroleum Exploration Company Limited billion cubic feet Bangladesh Energy Regulatory Commission Bangladesh Gas Fields Company Limited Bakhrabad Gas Systems Limited cubic meter Dhaka Clean Fuel Project Dhanua-Elenga Gas Transmission Pipeline distribution margin development project proforma executing agency environmental impact assessment Economic internal rate of return Energy and Mineral Resources Division export processing zone financial internal rate of return financial year gross domestic product greenhouse gas Gas Sector Master Plan Gas Sector Reform Roadmap Gas Transmission Company Limited Gas Transmission and Development Project gigawatt-hour Hydrocarbon Unit high sulphur fuel oil initial environmental examination international oil company initial public offering independent power producer Jalalabad Gas Transmission and Distribution Systems Limited Jamuna Bridge (West)-Nalka Gas Transmission Pipeline kilogram of oil equivalent thousand ton (metric) Kilometer kilowatt-hour long run marginal cost millennium (thousand) cubic feet millennium (thousand) cubic meters

ABBREVIATIONS (Continued) MDG MMCF MMCFD MMCM MW NEP NPV O&M BPDB PDF Petrobangla PGCL PRS PSC psig PSMP BREB ROR SCF SD SGCL SER SFR SGC SGFL SWR SWRGDN T TA TABGTP TCF TGTDCL TM TNGDP toe TOR UNDP VAT WACC millennium development goals million cubic feet million cubic feet per day million cubic meter Megawatt National Energy Policy net present value operation and maintenance Bangladesh Power Development Board price deficit fund Bangladesh Oil, Gas and Minerals Corporation Paschimanchal Gas Company Limited poverty reduction strategy production sharing contract pounds per square inch gauge Power System Master Plan Bangladesh Rural Electrification Board rate of return standard conversion factor supplementary duty Sundarban Gas Company Limited shadow exchange rate self-financing ratio state-owned gas companies Sylhet Gas Fields Limited shadow wage rate South West Region Gas Distribution Network ton (metric) technical assistance Titas-Ashuganj-Bakhrabad Gas Transmission Pipeline trillion cubic feet Titas Gas Transmission and Distribution Company Limited transmission margin Third Natural Gas Development Project ton of oil equivalent terms of reference United Nations Development Programme value-added tax weighted average cost of capital
NOTES (i) (ii) The fiscal year (FY) of the Government and its agencies ends on 30 June. In this report, "$" refers to US dollars.

CONTENTS Maps 1 2 3 4 5 6 I.

Natural Gas Fields and Pipelines Gas Fields and Transmission Network Gas Transmission Flow Diagram Natural Gas Based Power Plants and Fertilizer Factories Rehabilitation and Development of Titas Gas Field South Western Region Gas Distribution PURPOSE AND SCOPE A. Introduction B. Project Objectives and Output C. Work Accomplished D. Organization of the Report THE SECTOR: PERFORMANCE, PROBLEMS AND OPPORTUNITIES A. Performance Indicators and Analysis B. Analysis of Key Problems and Opportunities C. Gas Demand Assessment D. Gas Supply E. Gas Pricing F. Government Policies and Plans G. Policy Framework H. Gas Sector Reform Roadmap CLEAN FUEL SECTOR DEVELOPMENT PROGRAM A. Issues B. Impact and Outcome C. Important Features D. The Program E. The Project F. Project Cost Estimates and Financing Plan G. Detailed Project Costs H. Implementation Arrangements I. Financial Review of Gas Sector Operations J. Financial Projections of Executing Agencies K. Social Assessment and Resettlement L. Environmental Aspects PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS AND RISKS A. Expected Benefits B. Economic Analysis C. Financial Evaluation Of The Project D. Risks and Safeguards

i ii iii iv v vi 1 1 1 2 2 3 3 6 15 24 28 36 39 46 51 51 51 51 52 59 71 72 79 83 92 105 108 111 111 112 124 131 133

II.

III.

IV.

APPENDIXES

1 I. A. Introduction PURPOSE AND SCOPE

1. In the face of impending gas shortages as well as continued growth of Bangladeshs energy and natural gas requirements in recent years, the Government has requested ADB financing for several priority projects in the gas sector that would help implement its Poverty Reduction Strategy (PRS).1 In January 2008, ADB engaged Technoconsult International Limited (TCIL, Consultant) to undertake the TA study. This Final Report presents the findings and analysis undertaken since February 2008 under the project preparatory technical assistance (TA) for the Clean Fuel Sector Development Program (the Program).2 B. Project Objectives and Output 2. The sector goal is to facilitate economic growth, poverty reduction and environmental improvement through natural gas sector development. The purpose of the TA is to help the Government prepare a new gas sector development program to build on the progress from the ongoing Gas Transmission and Development Project (GTDP).3 The Program will include (i) a policy agenda for improving the governance of the natural gas sector, and to improve sector institutions, and (ii) priority investments to support implementation of the Gas Sector Master Plan (GSMP) 4 , and (iii) creating facilities for distribution of gas in new areas for which transmission system is being constructed under GTDP. 3. The TA is assisting the Government prepare the Program. Key activities include the following: (i) (ii) Adopting measures to ensure adequate gas supply in the eastern parts of the country. Analyzing the potential for economic growth and social development in less developed areas, particularly with reference to expanding natural gas supply and distribution in the western and southwestern regions of the country with the construction of the pipeline to Khulna under GTDP. Developing an investment package that identifies gas sector infrastructure development components. Reviewing the Programs investment components including cost estimates, financing plan, and procurement packages. Performing detailed financial, economic, environmental, social, poverty reduction, and institutional analyses of the identified project components. Estimating the levels that greenhouse gas emissions will be reduced by the subcomponents.

(iii) (iv) (v) (vi)

1 2

3 4

Government of Bangladesh. 2004. Unlocking the Potential: National Strategy for Accelerated Poverty Reduction. Dhaka. The PRSP is being updated for the period 2009-2011. ADB. 2007. Technical Assistance to the Peoples Republic of Bangladesh for Preparing the Gas Sector Development Program. Manila. The title of the project has been changed by ADB to the Clean Fuel Sector Development Program in the Country Operations Business Plan. ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of Bangladesh for the Gas Transmission and Development Project. Manila The GSMP was prepared by Wood Mckenzie in 2006 with financial assistance from the World Bank, and approved by the Government in 2007.

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2 4. The terms of reference of the TA are in Appendix 1. The outputs of the TA comprise the following: (i) (ii) (iii) (iv) A sector development plan containing an analysis of opportunities for the sectors growth and development. A policy reform agenda for the development of the gas sector including promotion of public and private investments. Identification of priority investment projects with technical, social, economic and financial justification in accordance with relevant ADB guidelines. Assessment of institutional development and restructuring requirements to implement proposed policies and investment components.

5. Bangladesh Oil, Gas and Minerals Corporation (Petrobangla) was the Executing Agency (EA) of the TA and responsible for coordinating with its companies and for providing necessary support to the Consultant including access to information and project sites and facilities. The Energy and Mineral Resources Division (EMRD) of the Ministry of Power, Energy and Mineral Resources coordinated with other ministries and agencies on policy related aspects. C. Work Accomplished 6. The study commenced on 15 February 2008 and was scheduled for completion by the end of February 2009. As part of the TA study, the Consultant submitted the Inception Report on 31 March 2008. An Interim Report was submitted in August 2008 following the stakeholder workshop on Gas Sector Reform Roadmap and Demand Supply Balance that was held on 31 July 2008. The main aspects of the revised roadmap for the gas sector and a tentative policy reform matrix were included in the Interim Report. The Draft Final Report was submitted in January 2009 covering the entire TOR including preliminary assessments of environmental and resettlement issues. The Final Report incorporates, as appropriate, comments from ADB and the Government agencies including the tripartite review from 17-18 February 2009. D. Organization of the Report 7. This Report is presented in four volumes. The first volume contains the executive summary in accordance with the ADB format for the Report and Recommendation of the President. The second volume comprises the main report, which addresses the TOR in a sequential manner. The sector problems are analyzed followed by an assessment of the role of the gas sector in meeting the Governments poverty reduction strategies and objectives, followed by resource assessment, demand supply assessment, gas network analysis, and policy and institutional review and analysis. 8. The Report sets out background on tariffs and financial performance of all Petrobangla companies in the sector. The Report also presents the draft revised Gas Sector Reform Roadmap (GSRR) recently adopted by the Government. A tentative time-bound policy reform matrix developed in consultation with the Government outlining conditions for the release of the two tranches of the Program loan is included. The scope of the investment component of the Program is then defined, and a comprehensive analysis of the technical, financial and economic aspects is presented. The environmental, social and poverty reduction impacts are discussed in accordance with the relevant ADB procedures and guidelines. 9. The third volume provides the related data and appendixes. The fourth volume contains the presentations made in the stakeholders workshop conducted during the project. The decision of the Bangladesh Energy Regulatory Commission (BERC) on Petrobanglas proposal for tariff adjustments is also included.

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3 II. A. THE SECTOR: PERFORMANCE, PROBLEMS AND OPPORTUNITIES

Performance Indicators and Analysis 1. Poverty Reduction Strategy

10. The Governments overarching goal and development vision, as articulated in the PRS adopted in November 2005, is to substantially reduce poverty and invigorate social development in the shortest possible time. The PRS has been replaced by an updated Medium Term Macroeconomic Framework and Policy Matrix. The PRS stresses the links between investment, growth, job creation, and poverty reduction, and identifies key areas where reforms are needed, public investments are required, and public policies merit improvement. The lack of specificity on sectoral governance reforms suggested the need for broad ownership for governance reforms within the government. The authorities are planning to address these issues in the second PRS, now under preparation. 11. In addition to specifying social targets in line with the countrys millennium development goals (MDG),5 the PRS commits the Government to halve the proportion of population living below the poverty line by the year 2015. To attain this target, Bangladesh needs to accelerate the pace of poverty reduction from 1.5% per year observed in the 1990s to 3.3% for the period 2000-2015. The PRS stresses the links between investment, growth and job creation, and poverty reduction, and identifies key areas where reforms are needed, public investments are required, and public policies merit improvement. The strategy recognizes the need for acceleration of economic growth as the main vehicle for reducing poverty. If the past trends of income inequality persist in the next decade, Bangladesh will have to raise the economys growth from about 5% per annum in recent years to 6-7% and sustain this growth rate over the next 15 years for reaching the MDG poverty reduction targets. In parallel, the strategy lays emphasis on improvements in governance, investment in human resource development, womens advancement and social protection. 12. Infrastructure, particularly energy, will play a very significant role in achieving the envisaged economic growth and poverty reduction. Infrastructural deficiencies continue to act as a major impediment to Bangladeshs developmental efforts. Reliable access to energy is essential for economic development and poverty reduction in Bangladesh. However, the energy sector has recently been afflicted by shortages of gas and electricity, stifling economic growth and social welfare. In addition to inadequate infrastructure coverage, poor management and inefficiency of publicly managed energy enterprises have created a huge fiscal burden and constrained the much-needed expansion of energy services to the growing needs of the economy. The Government will adopt a new approach to infrastructure development involving reorientation of sectoral priorities and increased private participation to alleviate infrastructure bottlenecks. To this end, the Government is implementing comprehensive sector reforms in energy development and management through a carefully sequenced approach to ensure reduced physical distribution costs and improve service delivery to the poor and poorer areas. Within this macroeconomic framework, a greater focus was needed on improving governance especially in sectors such as gas that is the prime indigenous source of energy in the country. 13. The natural gas sector, with its enormous potential in contributing to the development of the economy, has to be managed effectively to maximize its role in poverty reduction and generation of equitable benefits. However, in recent years the sector has to meet rapid demand increase while grappling with unsatisfactory management of sector infrastructure, inadequate
5

World Bank. 2003. Poverty in Bangladesh: Building on Progress, joint poverty assessment by the World Bank and the Asian Development Bank. Washington.

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4 tariff and price settings, poor operational performance and poor financial positions of sector institutions, energy security and inefficient use of gas caused by unmetered domestic consumption. The gas infrastructure is in a poor condition because of weak governance, lack of commercial orientation and inadequate funding for maintenance and expansion. The financial and technical capacity of the state-owned gas companies (SGCs) including Petrobangla is less than satisfactory. Poor financial performance and limited financial autonomy of the SGCs is largely due to the Governments inadequate pricing policies as well as operational inefficiencies. The operational performance in the gas sector has been affected mainly by high system loss and to some extent by infrastructure constraints and lack of investment resources. Various measures need to be undertaken to improve the performance of the gas sector. The PRS underscores the need for working out action plans for improving sector governance and the agencies operational efficiency and financial performance. The PRS also emphasizes implementation of policies directed towards expanding the national natural gas grid to cover western, north-western and south-western regions of the country to promote extensive industrialization and accelerate balanced regional development. 14. The strategic goals for the second PRS that is under formulation are to (i) ensure conservation measures for economic and efficient use of energy, and (ii) institutional restructuring of the gas sector entities for improved performance. The key targets are to (i) commercialize the gas sector, (ii) increase oil and gas reserves through extended exploration and development programs, (iii) attract private investment, (iv) expand national grid to cover western, northwestern and southwestern regions, (v) increase usage of compressed natural gas (CNG) as environment friendly clean fuel, and (vi) reform Petrobangla and restructure its companies to improve management capacity. The proposed Program conforms to the approaches outlined in the Governments strategy for the development of the gas sector to support its poverty reduction initiatives. 2. Role of Energy in Poverty Reduction 15. Commercial energy meets 47% of the total energy consumption of the country. Commercial energy is available to about 42% of the population as electricity, and to about 8% of the population as hydrocarbons, liquid fuels, natural gas, or liquefied petroleum gas. Natural gas accounts for almost 75% of the commercial energy and about 90% of electricity generation. In 2005/06, the country consumed 18.5 million ton of oil equivalent (toe) of commercial energy. Bangladeshs per capita consumption of commercial energy in various forms has improved rather slowly, from 82 kilograms of oil equivalent (kgoe) in FY1996 to 130 kgoe in FY2006.6 The total consumption of natural gas increased from 332 billion cubic feet (BCF) or 2.63 million cubic feet (MMCF) per capita in FY2000 to 527 BCF or 3.71 MCF per capita in FY2006. The total consumption of electricity in FY2006 was about 23,430 gigawatt-hour (GWh) or 165 kilowatthour (kWh) per capita. 16. In the energy sector, the two largest greenhouse gas (GHG) emitting sources are electricity generation and non-energy use (urea fertilizer production) amounting to almost half of all the GHGs. The other significant GHG emitting sources are traditional biomass for energy, diesel for transport, kerosene for rural lighting, and coal for manufacturing bricks. In 1990, emission from energy sector was 21,186 kilotons including carbon dioxide and non-carbon dioxide emissions, which was approximately 30% of total GHG emission of Bangladesh. The GHG emission from the projected commercial energy requirements would increase from 10,100 kilotons in 2000 to 64,900 kilotons by 2030. In addition to expanded use of natural gas, rigorous
6

The per capita commercial energy consumption in 2006 was: 437 kgoe in Sri Lanka, 463 kgoe in Pakistan, 494 kgoe in India, 554 in the Philippines, 706 in Indonesia, 905 in the Peoples Republic of China, 1212 kgoe in Thailand and 2126 kgoe in Malaysia.

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5 demand and supply side management, and development of renewable energy resources could help substantially reduce this emission (Appendix 2). 3. Resource Assessment 17. An assessment of the natural gas resources, the production from existing gas fields and the potential availability is in Appendix 3. The opening up of natural gas exploration and production to the international oil companies (IOCs) in the 1990s through production sharing contracts (PSCs) has contributed to improved gas supply in recent years. A study by the Hydrocarbon Unit (HCU) estimates Bangladeshs remaining recoverable proven and probable gas reserves at just over 16 TCF.7 In earlier estimations, government agencies used recovery factors in the range of 52-72% for various fields. However, for fields recently discovered by the IOCs, the assumed recovery factors are in the range of 76-82%. The study reveals that with present day technology and good reservoir management practice, at least 70% recovery of gas could be achieved. As such recovery factors in the range of 70%-75% have been used depending on reservoir characteristics. This resource assessment also considered the option of lowering the abandonment pressure from 1100 pounds per square inch gauge (psig) to 500 psig by using compressor. There is a further possibility of 8 TCF in addition to these reserves (3P), while resource estimates for undiscovered fields are estimated to be 42 TCF at the 50% level (2P) and 64 TCF at the 10% level (3P). There is a 90% probability that undiscovered resources will be at least 19 TCF (1P) and could go up to 64 TCF with a mean of 42 TCF. Taking the discovered and undiscovered reserves together, there is a 90% probability that Bangladeshs gas resource will exceed 30 TCF. Some estimates indicate an undiscovered potential of up to 88 TCF, 8 about 5.5 times the reserves of 15.9 TCF proved and probable recoverable gas discovered to date that have been put on production. 18. Total proven recoverable gas reserves in Bangladesh from 23 fields (19 in the public sector and 4 in the private sector) are estimated at 20.6 trillion cubic feet (TCF), of which 7.68 TCF has so far been consumed. The current net recoverable reserve stands at 12.95 TCF. Out of 23 gas fields, 17 gas fields have so far been brought under production (Map 1); 14 of these fields are currently under production. 9 Production from the remaining three fields was suspended due to various technical reasons. However, these three fields, namely Chhatak, Kamta and Feni, appear to have the potential to produce further with added efforts and IOC participation is in progress to redevelop these two fields. The total proved and probable recoverable reserves not on production at this time amounts to more than 4.0 TCF, of which 3 TCF was discovered in post PSC areas, the largest field being Bibiyana, with estimated recoverable reserves of more than 2.4 TCF. The gas transmission network and flow diagram are in Maps 2 and 3, while the location of the major power plants is in Map 4. 19. Natural gas would provide most of the current and future energy requirements, and the gas market needs to be expanded to optimize the use of natural gas resources and support economic development. Although Bangladesh is producing natural gas for over three decades, all of its major fields are underdeveloped and have not been properly delineated yet, and there are widely varying assessment of the countrys natural gas resource potential. Resources are divided into discovered and undiscovered. The discovered resources are those that have been confirmed by drilling and reliable geological mapping. Undiscovered resources are yet to be confirmed by drilling and therefore have an increased level of uncertainty and risk attached to

Hydrocarbon Unit. Bangladesh Petroleum and Resource Assessment 2001. Hydrocarbon Unit. Bangladesh Gas Optimal Utilization Study. 2002 9 BAPEX recently discovered a gas field at Srikail, which is under investigation.
8

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6 them, depending on the assumed recovery factor that reflects the probability of the resources becoming at least equal to the estimated level.10 20. The HCU study further elaborates that the combined play and prospect probability is only 12%. But according to the report similar geological settings in other parts of the world have proven successful and more and better information can help to reduce the risk, hence, increase the probability. However, in the Surma Petroleum System of Eastern Petroleum Province apart from Block 11, all other blocks have been extensively surveyed by Unocal (Currently Chevron) and Tullow and the only discovery made was 200 BCF Bangora gas field. Similarly in Eastern Delta-Hill Tract Petroleum System of the province, blocks 7, 9, 10, 15, 16, 17, 18, and 22 have been extensively surveyed by, Cairn, Chevron, Tullow in their respective blocks. The only unsurveyed block is part of block 6 in the system. So far there had not been any discovery in the blocks after the studies were made. However, two new structures, one in block 7 by Chevron and the other in block 10 by Cairn were delineated through seismic survey. B. Analysis of Key Problems and Opportunities 1. Natural Gas Resource Availability

21. As most of the attractive on-shore blocks have been surveyed using state-of-the-art seismic technology, it can be confidently said that the undiscovered gas resource potential of the country with 50% probability is neither 32 TCF nor 42.1 TCF as suggested by PetrobanglaUnited States Geological Survey study and HCU study respectively. Similarly, the undiscovered gas resource potential of the country with 90% probability is neither 8.4 TCF nor 19 TCF as suggested by the two studies. After the studies carried out by the two groups, seismic surveys conducted over the potential onshore blocks could only delineate two new structures one in Block 7 and the other in Block 10. However, the offshore blocks 19, 20, and 21 have not yet been surveyed or tested. Blocks 17 and 18 have been surveyed by Total-Tullow joint venture but results are not yet known. The study did not consider the offshore area to be at all prospective. Thus from the resource potential of 32 TCF to 42 TCF as pointed out by the Petrobangla-USGS and HCU studies, no specific reserve should be considered for future planning or any business opportunities, since the failure of delineating any significant structures or gas fields by the recent surveys conducted in the potential blocks has highly downgraded the prospects of the whole area. 22. A major concern in the gas sector is the security of adequate gas supply. Petrobangla's estimates show that there will be shortfall in gas supply from the year 2015. The problem is not only that reserves and infrastructure to supply gas are insufficient, but that, absent better policy mechanisms for allocating gas to different projects and sectors, there is a risk that Bangladesh is over-committing its scarce gas reserves. If the present demand-supply scenario persists, Bangladesh will be unable to meet its commercial energy demand from indigenous sources. There was a move a few years ago among the Governments of Myanmar, Bangladesh, and India on a private sector inter-country investment proposal that would enable the import of about 350-500 million cubic feet per day (MMCFD) of natural gas from Myanmar to India across Bangladesh. However, these discussions have remained inconclusive for various political and economic considerations. Recent Bangladesh initiatives for the import of natural gas from Myanmar have also not led to any successful understanding beyond a general indication that the Bangladesh proposal may be considered against future discoveries of gas reserves as most of the current production has been committed for exports to other countries including Peoples Republic of China and India.
10

When using probabilistic methods in resource estimation, the terms proven, probable and possible are used. Proved (1P) represents 90% probability, proved and probable (2P) represent 50% probability, and proved, probable and possible (3P) together represent 10% probability.

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7 23. Bangladesh has an on-shore area of 144,000 square kilometers (sq km) and an offshore area of 63,000 sq km with only 68 exploration wells drilled countrywide and 22 discoveries. The Bengal Basin is unexplored when compared to other significant hydrocarbon province on a worldwide basis with a relatively high rate of exploration success. As such, intensive hydrocarbon exploration is needed in unexplored frontier and virgin areas. Foreign and local enterprises are to be encouraged to invest for hydrocarbon exploration in the country. 24. Although IOC production has already reached about 50%, Petrobangla predicts that over the next 12 years, IOC production will comprise 30 to 45% of supply with the balance from SGCs. The SGCs will drill 43 wells during the next 12 years at a total cost of $266 million and require an additional $84 million for gas treatment plants. The producing companies are generating sufficient cash resources at the well-head margin of Tk0.75 per cubic meter (cm) that should enable them to make these investments. The IOCs will be required to invest $275 million, most of this from Chevron. Definitive contractual gas supply and investment commitments have been made and its international financial resources are sufficient to fulfill these commitments. 25. Recognizing the acute gas supply situation, the Government has emphasized further exploration and development of onshore and offshore gas fields. The third round of bidding for offshore exploration is underway since March 2008. Although the response has not been highly encouraging, PSCs with successful IOCs may be finalized in FY2008-2009. 26. The potentially substantial natural gas reserves have remained under-exploited. Domestic gas use is under priced considerably, leading to a high opportunity cost in terms of foregone resources that could have been mobilized to support investment within and outside the sector, especially given the countrys massive development financing needs. Performance in the gas sector has been limited well below the potential because of the low gas exploitation, limited use of the domestic market, significant under pricing of gas sales and high system loss. There may still be a large quantity of gas to be discovered under suitable economic and policy conditions. 2. Gas Transmission Issues 27. Petrobangla has moved progressively from separate isolated systems to an integrated transmission network delivering gas to the four distribution companies serving distinct franchise areas. The Jalalabad Gas Transmission and Distribution Systems Limited (JGTDSL) for the Sylhet area, Titas Gas Transmission and Distribution Company Limited (TGTDCL) for greater Dhaka and Mymensingh areas, Bakhrabad Gas Systems Limited (BGSL) for the Chittagong area, and Paschimanchal Gas Company Limited (PGCL) for the Rajshahi division. JGTDCL, TGTDCL, and BGSL used to own dedicated transmission lines to meet their gas demand. 28. The first step towards integration was the implementation of a 20-inch pipeline linking Bakhrabad gas field to Demra, at the inlet of the greater Dhaka distribution network. This line was constructed for supplying gas from Bakhrabad gas field to TGTDCL franchise area. The line remained underutilized for a long time as production from Bakhrabad gas field, which was developed primarily to meet Chittagong gas demand, depleted fast. The 14-inch and 16-inch lines from Titas gas field to TGTDCL franchise area passing through Narsingdi were also saturated and created bottlenecks in supplying required gas to greater Dhaka area. The second step towards an integrated system was the completion of a north-south pipeline allowing gas transfer from Kailastila in the north to Ashuganj. The completion of Ashuganj -Bakhrabad the AB pipeline (59 km of 30 inch pipeline) effected the physical integration of three separate systems.

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8 29. The AB pipeline removed two major bottlenecks. Firstly, the gas flowing from Ashuganj to Bakhrabad supplemented the short supply from the Bakhrabad gas field to the Chittagong area. Secondly, it allowed the creation of a loop feeding Demra from Titas through the AB line and then through the currently idle 20 inch pipeline from Bakhrabad to Demra. 30. The main gas transmission grid in Bangladesh is operated and managed by the Gas Transmission Company Limited (GTCL). Most of the gas fields supply points are in the northeast and central regions of the country, while delivery points are located in the west, greater Dhaka and Chittagong areas, and for the past few years to the region west of the Jamuna River. Pipe lengths and diameters of the current system are shown in Table 1 and the estimated throughput capacities of the major parts of the system are shown in Table 2. Table 1: Existing Gas Transmission Network Pipeline Segment Kailastila Muchai Muchai - Ashuganj Ashuganj-Bakhrabad Bakhrabad-Meghnaghat Meghnaghat-GTCL Demra Bakhrabad- Chittagong Ashuganj-Manohardi Manohardi-Dhanua Dhanua-Elenga Elenga-Jamuna Bridge (East) Jamuna Bridge (East) Jamuna bridge (West) Jamuna Bridge (West)-Nalka Km = kilometer
Source: GTCL

Diameter (inch) 24 24 30 30 20 20 24 24 24 24 24 30 24

Length (km) 93 82 54 58 53 11 175 36 37 52 14 9 16

Table 2: Gas Transmission Capacity System North South AshuganjBakhrabadMeghnaghat Ashuganj Nalka Pipeline Segment Kailastila - Ashuganj AshuganjMeghnaghat Ashuganj-Nalka Manohardi loop with Capacity (MMCFD) 680 370 490 Inlet/Outlet Pressure (psig) 1050/850 850/550 850/550

MMCFD = million cubic feet per day, psig = pounds per square inch gauge Source: GTCL

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9 31. The major bottlenecks in the transmission network are from Ashuganj to Ghorasal and also from Ashuganj to Chittagong. Further, saturation of North-South pipeline reduced available gas pressure at Ashuganj and thus the capacity of the downstream network to a great extent. To meet gas demand in the Ghorasal and Dhaka areas, the 24-inch Ashuganj-ManohardiDhanua-Elenga pipeline was tapped at Dhanua and Elenga, and two 20-inch lines were constructed from Manohardi to Narsingdi and Dhanua to Aminbazar. Installation of compressors at Muchai and Ashuganj will help in transmitting additional gas through the North-South pipeline and raising pressure at Ashuganj to the design levels of the downstream systems. Looping of the 20-inch Bakhrabad-Demra pipeline with a proposed 30-inch pipeline under the Siddhirganj Peaking Power Project funded by the World Bank will ease the supply situation in GTDCL franchise area. However, since the Chittagong area will largely depend on gas supply from the North-Eastern fields because of the depletion of the Bakhrabad and Sangu gas fields, capacity enhancement of the Ashuganj-Bakhrabad-Chittagong pipelines will be required to meet the fast growing demand in the Chittagong area. 32. The pressure gradient of a pipeline gives an indication of the optimum use of the available pipe cross sectional area. The ideal pressure gradient for design and operation is 3-7 psi per mile. Pressure gradients of less than 2 psi per mile imply an oversized pipe, meaning that any expansion will likely require compression. Pressure gradients greater than 8 psi per mile imply higher operation costs and high velocities and any expansion will likely require looping of pipelines. The pressure gradients on the existing system are shown in Table 3. With the exception of the Rashidpur Habiganj segment, any expansion of the indicated subsystems of the GTCL grid will likely require compression first. The current system has no compression, although compressor projects at Ashuganj and Elenga funded through GTDP are under implementation and are expected to be commissioned around 2011. Table 3: Gas Transmission Pressure Gradients Pipeline Segment Habiganj Ashuganj Rashidpur Habiganj Bakhrabad Chittagong Ashuganj Bakhrabad Bakhrabad Meghnaghat Manohardi Elenga
psi = pounds per square inch Source: Consultant estimates

Pressure Gradient (psi per mile) 1.8 6.7 1.2 1.4 4.6 1.3

a.

North-South System

33. Compressor facilities at Muchai will enhance the deliverability of gas from northeast gas fields into the Ashuganj hub. The flow capacity of the compressor has been liberally sized up to 1,735 MMCFD. Based on the current assessment, the gas production in the catchment area of Muchai compressor station could be around 1,450 to 1,500 MMCFD. After meeting the demand of JGTDSL (250 MMCFD), about 1,200 to 1,250 MMCFD of gas would be available for compression at Muchai by 2019-2020. The existing pipelines between Muchai and Ashuganj have transmission capacity of about 1,350 MMCFD with Muchai discharge pressure of 1,050 psig and Ashuganj suction pressure of 680 psig (when the compressor stations at the both ends are commissioned). In the event more than 1,350 MMCFD of gas would be available from

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10 upstream of Muchai in future for transmission to Ashuganj, looping of the Muchai-Ashuganj section may be required. b. West System 34. Under already planned projects, a total compression facility of about 2,267 MMCFD is being installed at Ashuganj hub out of which 1,502 MMCFD is earmarked for the west of Ashuganj demand centers (i.e. TGTDCL, PGCL and SGCL). To make the best use of the compression facilities, the planned downstream pipelines must be completed in parallel. A compressor station is under implementation at Elenga. The flow capacity of the compressor is stipulated to be 500 MMCFD at a discharge pressure of 1000 psig and suction pressure of 600 psig. The proposed addition of a 30-inch pipeline between Dhanua and Elenga is primarily meant to address the transmission capacity limitation between the Ashuganj and the Elenga compressor stations. c. Central-South System 35. The central-south transmission network consists of the Ashuganj-Bakhrabad-Chittagong section plus some spur lines connecting the Bakhrabad hub to the greater Dhaka region. Of the projects already approved for implementation, the installation of reciprocating compressors at Bakhrabad will facilitate the evacuation of medium pressure gas to the Bakhrabad - Chittagong line from the gas fields in the vicinity. For this system, a flow of 795 MMCFD has been earmarked from the Ashuganj compressor station once it has been completed. Until the compressors are installed, deliverability of gas to Chittagong will remain problematic. The erratic and fast-depleting Sangu gas field that feeds directly to the Chittagong ring main further aggravates the problem. 36. The basic difficulties in upgrading the existing gas transmission system arise from the fact that the network has been laid in a piecemeal fashion over a long period and it is only very recently that a serious thought has been given under GTDP to a mix of compressor and pipeline extension to augment transmission capacity. Consideration of existing gas demand and expected future demand growth patterns on a geographical basis is a prerequisite for any planning and analysis for future transmission network expansion and capacity augmentation. The imbalance in demand and supply, in the nine load centers, shown schematically in Appendix 3 underscores the requirement for, and importance of, augmenting and reinforcing gas transmission in Bangladesh.11 3. System Loss 37. The operational performance in the gas sector has been affected by high system loss. The efficiency of gas distribution to non-bulk consumers has been quite unsatisfactory (Appendix 4). The overall gas system loss or unaccounted for gas ranged from 4.5% to 6.5% during FY2000-FY2005 (Table 4). These system losses were much higher than the 2% covenanted for the different gas distribution companies under ADBs Third Natural Gas Development (TNGDP) Project that closed on 23 October 2003,12 and the experience in most countries in the region. The distribution losses were very high, ranging from 13 to 21%, while the transmission loses were within reasonable levels, less than 1-2%. The system losses for TGTDCL have been very high ranging from 7 to 24%, while that for the other three distribution companies BGSL, JGTDSL and PGCL are much less. For instance, BGSL maintained
11

ADB. 1993. Technical Assistance to the Peoples Republic of Bangladesh for Gas System Development Plan. Manila. 12 ADB. 1993. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Peoples Republic of Bangladesh for the Third Natural Gas Development Project. Manila

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11 system losses less than 2% up to FY1999. The losses went up to 4.1% in FY2002 but have come down to about 1% in the past two years. JGTDSL maintained system losses at less than 2% throughout since FY1993, and in recent years the losses came down to less than 1%. PGCL has maintained a system loss at less than 1% since its inception in FY2000. Since then some improvement has been achieved with the average losses falling to 2.8% and non-bulk supply to 5.8% reflecting the impact of the measures undertaken in recent years across all gas distribution companies. 38. Gas losses result from commercial activities or the physical components of the gas production, delivery and marketing system. The losses from the physical components, referred to as fugitive or technical losses, result from small leaks at compressor and pump shaft seals, metering stations, gas meters, pipelines, household appliances, and operating procedures involving flaring, venting, purging, etc. Commercial losses arise during the transfer of gas ownership activities and result from incorrect or no meter readings, nonpayment for billed gas, theft, etc. Table 4: Summary of Gas System Loss (%)
Year (ending June) Total 2000 2001 2002 2003 2004 2005 2006 2007 2008 8.13 8.40 8.28 6.17 7.16 7.57 6.50 5.38 3.66 TGTDCL Distribution 24.56 24.31 17.90 16.61 18.15 18.31 14.91 11.47 7.20 Total 2.81 2.33 4.08 1.28 1.18 2.15 2.25 0.51 (-)0.01 BGSL Distribution 12.08 9.85 15.07 4.91 4.02 6.85 6.53 1.37 (-)0.01 Total 0.06 0.94 0.18 (-)0.29 (-)0.60 1.14 0.52 1.15 JGTDSL Distribution 0.26 4.07 0.67 (-) 1.05 (-) 2.15 3.77 1.34 3.11 Total (-) 12.17 (-) 3.23 (-) 2.44 (-) 1.88 (-) 0.45 (-) 0.40 0.00 0.00 (-)0.06 PGCL Distribution (-) 2635.71 (-) 622.73 (-) 240.77 (-) 143.71 (-) 20.28 (-) 15.19 0.00 0.00 (-0.42) OVERALL (AVERAGE) Total 6.39 6.13 6.49 4.47 5.30 5.78 5.24 4.26 2.79 Distribution 21.61 22.77 23.23 13.61 15.03 15.60 13.11 9.45 5.84

BGSL = Bakhrabad Gas Systems Limited; JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited; PGCL = Paschimanchal Gas Company Limited; TGTDCL = Titas Gas Transmission and Distribution Limited Source: Petrobangla

39. A combination of factors accounts for the high distribution loss resulting in a high overall system loss. These include meter inaccuracy, leakage, or loss due to flat rate domestic use, and theft or fraud, which account for 70% of the system loss. Sales of gas to domestic gas consumers are not metered. The norm for 2 burners per customer, which most customer have, is 87 cm per month but sample tests show that consumption of 110 cm per month is not unusual. The flat charge unrelated to consumption undoubtedly results in burners being left on unnecessarily because of convenience, such as having hot water readily available at all times. 40. The gas system loss of between 5 and 6% that occurred until recently effectively represents a 24% loss on non-bulk distribution (e.g. to industrial, commercial and domestic consumers), rather high compared to levels in other countries.13 Allowing 2% transmission and distribution loss as acceptable norm in the gas industry, the cost of gas system loss is
13

In India, Mahanagar Gas Limited in Mumbai and Indraprastha Gas Limited in Delhi, both privately owned companies, incurred about 5-6% system loss in the beginning, this is now below 1%. This was possible due to the introduction of modern metering system, regular calibration and improved monitoring system.

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12 substantial, estimated at about Tk2.4 billion per year. In addition, the cost of collection inefficiency is also sizable. Assuming a norm of 98% collection-billing ratio, the cost of collection shortfall is estimated at Tk1.8 billion per year. 41. Recently, the TGTDCL has initiated several measures to contain the system losses. These include installation of meters, privatization of meter reading and billing and adoption of measures recommended under an ADB TA provided in conjunction with the TNGDP.14 The TA made several recommendations and developed a plan for reducing system loss that includes installation of meters, and privatization of meter reading and billing. These include increased vigilance, severance of unauthorized connections, legal proceedings to recover outstanding and delinquent payments. The plan was revised into a comprehensive efficiency improvement and system loss reduction plan for the entire gas sector and adopted for implementation under the GTDP (footnote 3). Steps are being taken to install meters for domestic consumption that could bring down consumption considerably, and very likely from the current level of 110 cm to 87 cm per month. Although about 45% of the gas tariff is government taxes, the economic savings from metered sale will still provide a very attractive return. Since the distribution companies are natural monopolies providing a service, all of their costs are to be recovered from the customers in due course. Gas theft by the commercial and industrial consumers could be reduced by more rigid monitoring, and enforcement of relevant regulations. The enactment of the proposed gas act will empower the distribution companies to take legal actions against fraud, theft, malpractices, and delinquent customers. 4. Sector Governance 42. The institutional framework for the energy sector particularly that for the gas sector and Petrobangla including the SGCs, is summarized in Appendix 5. Petrobangla coordinates the gas sector activities in the country while the EMRD provides the overall policy direction. Petrobangla carries out its gas business through nine operating companies. The gas sector companies are: Bangladesh Petroleum Exploration Company Limited (BAPEX), engaged in exploration and production; Bangladesh Gas Fields Company Limited (BGFCL) and Sylhet Gas Fields Limited (SGFL), involved in gas field development and production; GTCL, involved in transmission; TGTDCL, BGSL, JGTDSL and PGCL involved in transmission and/or distribution; and Rupantarita Prakritik Gas Company Limited (RPGCL) involved in liquefied petroleum gas (LPG) and compressed natural gas (CNG) marketing. TGTDCL, being the oldest and largest, operates in the franchise area of Dhaka division (excluding greater Faridpur district) and Brahmanbaria district. BGSL serves the market in Chittagong division excluding Brahmanbaria district. JGTDSL serves the market in Sylhet division while PGCL operates in the franchise area in Rajshahi division. A new company Sundarban Gas Company Limited (SGCL) is being established for the distribution of gas in the Southwestern region. 43. Private sector interest and foreign direct investment in the gas sector has increased significantly since the mid-1990s, when the Government extended opportunities to foreign companies to explore, extract and produce gas under PSCs. The involvement of the IOCs has contributed to improved gas supply in recent years. The situation could have been better if more gas exploration activities could be undertaken. However, 43% of the total energy needs of the country continue to be met by biomass, particularly in rural areas. The situation reflects infrastructural constraints in the supply of gas, including inadequate production and lack of an efficient transmission and distribution system. The countrys natural gas reserves are under exploited, while bulk and domestic gas use is significantly under priced. This results in high opportunity cost with respect to unutilized resources that would have supported investment
14

ADB. 1993. Technical Assistance to the Peoples Republic of Bangladesh for Safety and Efficiency Improvements in the Gas Sector. Manila provided in conjunction with the Third Natural Gas Development Project.

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13 within and outside the sector. The SGCs in practice do not have the governance attributes of a fully corporatized entity. Approval of organizational set up, compensation policy, budget and development projects are still subject to scrutiny and approval by Petrobangla and/or the Government. 44. The gas sector is regulated and administered by the Government, although there have been initiatives for limited private sector involvement during the last few years particularly for retail sale of compressed natural gas to the transport sector and of liquefied petroleum gas to households or commercial establishments. The Government, through the EMRD manages the authority for policy formulation, appointment and transfer of officials, investment decision and regulation. Petrobangla was created under the Presidential Order 27 of 1972, and subsequently incorporated through a series of ordinances as a state corporation for oil and gas exploration, production, transmission and distribution. Since 1994, when the first round of PSCs was entered with the IOCs responsible for drilling, Petrobangla has served as supervisor and sole purchaser of IOC outputs. 45. Petrobangla no longer has a direct operational role and conducts its sector oversight and management activities through nine operating companies. These SGCs are incorporated as public limited companies under the Companies Act of 1994 and governed by separate boards of directors. Petrobangla and EMRD have authority to override major board decisions on matters of pricing, operating and development budgets, operational structure and staffing. The directors of the operating companies are either directors of Petrobangla, or government officials and individuals appointed by EMRD, including representatives from different chambers of commerce and industries, and technical universities. 46. The financial performance of Petrobangla and its subsidiary entities has been affected largely by pricing and taxation policies but also by operational efficiencies and default by consumers. Petrobangla earns an overall modest profit despite significant under pricing of gas sales from its fields and despite purchasing gas from IOCs at a price that is linked to world price of alternative fuels heavy fuel oil. This is largely because production from its entities that account for half the total supply is valued at a very low price, reflecting very low costs of production from fields developed on average 15-20 years ago. This has left very little margin for exploration and production companies. Petrobanglas low cost of production from fields developed many years ago is significantly less than the current opportunity cost of gas, as reflected by its cost of commercial purchases from IOCs under PSCs for recently developed fields. In addition, gas has been underpriced significantly, with about 80% of its gas supply to power, fertilizer and household sectors being subsidized heavily, with no budgetary transfer to compensate Petrobangla. The deficiencies in the supply of gas in relation to the demand experienced in recent years have underscored the need for augmenting gas exploration and production. 47. However, all SGCs are making net profit. As of 30 June 2007, cumulative retained earnings of SGCs except BAPEX stood at Tk27,112.4 million ($396.38 million equivalent). However, on the same date Petrobangla and BAPEXs cumulative losses stood at Tk28,726 million ($420 million equivalent) and Tk1,794 million ($26.2 million equivalent), respectively. During FY2006-07 cumulative profit of Petrobangla and SGCs was Tk3,724 million. Though BAPEX is making operational profit, net losses were due to relatively smaller gas production share compared to asset base and servicing of past liabilities transferred from Petrobangla to BAPEX. Petrobangla losses were due to irrational pricing of IOC gas that allowed SGCs to make substantial profit. Following completion of cost recovery period of Bibiyana and Moulavibazar gas field development by Chevron, Petrobangla is likely to make substantial profit from FY2008-09.

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14 48. The public sector gas companies including Petrobangla are supposed to operate as commercially viable entities but they neither have the desired operational autonomy, nor are allowed market-based well-head prices to fund exploration and gas field development. Consequently, they have not been able to finance investment to expand, upgrade and maintain the infrastructure network adequately. Petrobangla has not undertaken any significant geophysical survey or drilled any exploration well for many years. Its transmission and distribution investments, funded entirely by the Government under the annual development program (ADP), have been inadequate. As a result of the present policy of practically operating as a government department, Petrobangla is indifferent to market signals and has no incentive to improve its efficiency; capital expenditures are incommensurate with the size of its operations, and it has been depleting its gas reserves without replacing these. Recently, the Government brought about major changes in the management of the sector entities by associating nongovernmental individuals and by delegating more authority. The Government has also allowed full autonomy to the gas sector entities, but that is yet to be fully practiced. 49. Another area of inefficiency relates to the unsatisfactory management of gas infrastructure. This is partly due to delayed or inadequate investment in expansion of the gas transmission and distribution network and its operation and maintenance (O&M). This has limited the market and constrained Petrobanglas gas production, causing supply shortages and disrupting economic activities in fertilizer production and power generation. Progress toward institutional reform and improved management in the gas sector has been slow. The main issue appears to be the varying receptiveness to reform among concerned senior officials in the executing agencies, Petrobangla and EMRD. The increasing supply of gas since 1997 through PSCs is believed to have resulted in less pressure on authorities to adopt reforms promoted by ADB and other development partners. 50. Public sector resources are limited to providing adequate support to meet the gas sectors essential investments such as increasing gas exploration, further expanding gas transmission pipelines, and reactivating abandoned gas fields. The scale of the required investments in exploration implies a significant role for the private sector in this area, provided that right incentives are made available. Private sector participation in gas transmission and distribution could help improve operational efficiency in these areas. In this context, an ADB TA executed during 2005-2008 outlined measures for promoting private sector participation and ensuring sustainable development.15 The detailed examination of sector structure, unbundling of companies, and investment planning was undertaken to meet the reform objectives and to facilitate greater private sector participation in the gas sector. 51. Despite the resource constraints, little effort has been made in creating an enabling environment for mobilizing private sector resources to finance required investments in these areas. Some limited private sector involvement in marketing and distribution of oil, LPG and CNG has, however, been initiated. Proposals for restructuring and offloading the shares of two gas companies (BGSL and TGTDCL) have been under consideration for quite some time, but progress in implementing them could be expedited. Future sectoral governance strategies should place emphasis on improving efficiency, mobilizing private sector resources to support demand side of gas development, production and supply, and in assisting the Government to reflect its role in ensuring efficient regulation and oversight and responsiveness to stakeholder interests, expectations, and inputs. Losses in the gas sector largely occur in the distribution phase.

15

ADB. 2004. Technical Assistance for Promoting Private Sector Participation in the Energy Sector. Manila

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15 52. The legal framework for the establishment of BERC was enacted on 13 March 2003 and the BERC was made effective from 27 April 2004. After several years, BERC is now composed of a full complement of members since mid-2008. Measures are now being taken for making the BERC fully operational through approved service rules, licensing regulations and operating procedures. The Government will need to empower BERC in an active way, to provide not just the legal mandate but also the moral authority to carry out its work. BERC has received considerable TA supports from the United States Agency for International Development and the World Bank to help with its work. Such supports cover a range of institutional strengthening and training activities, specific studies of immediate interest, and provision of resident advisory support from experienced consultants with professional experience working within a regulatory agency. However, without adequate funds independent of government budgetary resources and competent staff, BERC will not be able to operate as a true regulatory body as it evolves, and the Government will carry out the regulatory role, as it has done in the past. Furthermore, the BERC Act limits its role to only downstream activities, leaving the upstream operations to direct government control and intervention through Petrobangla. C. Gas Demand Assessment

53. Petrobangla has recently revised its forecast of gas demand through to the year 2020. This forecast supersedes that prepared by Wood Mackenzie in 2006 as part of the GSMP, and is now its official forecast. This section discusses Petrobanglas demand forecasting methodology, compares it with the GSMP forecast, and identifies the forecast adopted for the purposes of analysis in this report. 1. Historic Consumption 54. Gas consumption rose from a total of 365 BCF in FY2001 to 557 BCF in FY2008, a compound average annual growth rate of 7.3% (Appendix 6). Sector-wise, the highest consumption growth rate was in the non-bulk category with an average growth rate over the period of 23%. The non-bulk category comprises the industrial sector, the commercial sector, domestic sector, tea, seasonal, and CNG. In FY2006, industrial and household consumers accounted for approximately 49% and 40% respectively in the non-bulk category. Between FY1999 and FY2007, average annual growth rates in consumption by industry and domestic sectors have been recorded as 12.4% and 16.3% respectively. The high rate of growth in domestic consumption can be attributed to rapid growth in the construction sector (real estates), large scale rural-urban migration of population and scarcity of alternative cheaper fuel for domestic use. CNG recorded phenomenal growth during FY2003 to FY2007, going from 0.003 BCF in FY2003 to 24.2 BCF in FY2008. Government initiatives for arresting air pollution through encouraging use of indigenous natural gas, increase in prices of alternative fuels for use in the automobiles, increase in the number of CNG run vehicles, and expansion of multi-use of indigenous natural gas have been identified as some of the major contributors to such high increase in the consumption of CNG. Growth in gas consumption in the electricity and fertilizer sectors was 1.5% and -6.5% respectively over the period. Table 5 summarizes historic growth in gas consumption for the country and for each of the four distribution companies. 2. Revised Demand Projections a. General Approach

55. Petrobangla has prepared its forecast under four broad sectors: power, captive power, fertilizer and non-bulk. The power sector gas forecast is driven by gas requirements for existing and planned gas-fired power stations. A similar approach was adopted for the fertilizer sector.

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16 For other sectors a growth rate was determined and applied to the most recent full-year consumption data to arrive at a forecast consumption figure. 56. Petrobangla adopted an iterative approach in finalizing its demand forecast, matching available supply to estimated demand to ensure a reasonable balance. For this reason, Petrobanglas forecast does not reflect true demand, as growth rates have been adjusted downwards by Petrobangla to reflect increasingly tight constraints on supply. This is particularly true of the power sector. As such, Petrobanglas forecast is best described as a constrained demand forecast as it does not include demand that Petrobangla does not intend to or is unable to supply.
Table 5: Historical Gas Sales (BCF)
Company Sector FY2002 TGTDCL Electricity Fertilizer NonBulk Total Electricity Fertilizer NonBulk Total Electricity Fertilizer NonBulk Total Electricity Fertilizer NonBulk Total 149.30 37.20 58.80 245.30 23.50 35.90 18.70 78.10 13.60 5.70 5.50 24.80 16.10 0.00 0.20 16.30 FY2003 132.40 52.30 91.00 275.70 26.70 37.60 21.70 86.00 9.80 6.00 5.60 21.40 17.30 0.00 0.20 17.50 FY2004 146.00 49.40 104.10 299.50 23.30 37.70 24.30 85.30 10.90 5.70 6.50 23.10 19.20 0.00 0.40 19.60 FY2005 GasSales FY2006 167.90 48.70 142.50 359.10 28.10 34.60 30.90 93.60 11.60 5.80 7.20 24.60 16.70 0.00 1.10 17.80 FY2007 171.20 50.60 173.60 395.40 24.70 37.10 36.60 98.40 9.60 5.80 9.50 24.90 15.70 0.00 9.50 25.20 FY2008 170.60 38.10 204.80 413.50 20.10 9.10 65.60 94.80 16.00 5.50 9.50 31.00 14.60 0.00 2.70 17.30 CAGR(%) 2.00 0.00 23.00 9.00 3.00 21.00 23.00 3.00 3.00 1.00 10.00 4.00 2.00 0.00 60.00 1.00 1.50 6.50 22.60 7.30

152.10 51.30 117.10 320.50 26.10 36.70 26.80 89.60 11.60 6.00 6.90 24.50 21.20 0.00 0.60 21.80

BGSL

JGTDSL

PGCL

202.50 186.20 199.40 211.00 224.30 221.20 221.30 Electricity 95.90 92.80 94.00 89.10 93.50 52.70 Fertilizer 78.80 83.20 118.50 135.30 151.40 181.70 229.20 282.60 NonBulk Total 364.50 400.60 427.50 456.40 495.10 543.90 556.60 BGSL=BakhrabadGasSystemsLimited;CAGR=compoundaveragegrowthrate;JGTDSL=JalalabadGasTransmissionandDistributionLimited; PGCL=PaschimanchalGasCompanyLimited;TGTDCL=TitasGasTransmissionandDistributionCompanyLimited AllBangladesh Source:Petrobangla

b.

Power Sector

57. The Bangladesh Power Development Board (BPDB), the Bangladesh Rural Electrification Board (BREB) and the independent power producers (IPPs) are the major players who generate and supply electricity to the national power grid. Off-grid captive power generation located in industrial and commercial centers serve electricity for self-consumption and for consumption in adjoining areas. Total installed generation capacity was 5,245 megawatt (MW) as at 31 December 2006, with 3,985 MW owned and operated by PDB and 1,260 MW owned and operated by the private sector. 58. In the period FY2006-FY2008, peak power supply was 4,130 MW. Shortage of gas supply meant that actual peak demand could not be supplied, and an estimated 800MW of load shedding was required to balance demand and supply. During the same period, 22,743 gigawatt-hour (GWh) of generation was dispatched according to BPDB, 87% of which was gas-

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17 fired while the rest was generated from oil, hydro, and coal. Generation of electricity by the public and the private sectors are approximately 65% and 35% respectively. 59. BPDB uses the electricity demand forecast that was prepared as part of the 2005 Power System Master Plan (PSMP) as its base forecast for system planning purposes. The forecast was econometric in nature, and used population growth and a series of assumptions regarding income and power price to derive a base electrical energy demand forecast, from which a peak demand forecast was generated. Network losses were then added to determine generating plant capacity requirements and energy requirements. BPDBs base case generation expansion plan relies heavily on gas as a fuel. An alternative generation expansion scenario was also developed that assumed constraints on gas supply resulting in heavier use of coalfired plant in the generation mix. 60. On the basis of its base case expansion plan, BPDB has proposed 17 new gas-fuelled power plants in the public sector and five new gas-fuelled private sector power plants for commissioning by the year 2012. The capacity of the 17 public sector plants total 3775 MW and would require 744 MMCFD of gas. The 1,840 MW of private sector plant would require 315 MMCFD of gas. The proposed plants are a mix of peaking gas turbines and combined cycle plant (gas turbine and steam turbine) for base and mid-load duties. Supply of gas to 660MW of proposed rented power generating plant and 220MW of proposed small IPPS was also requested by BPDB. Gas requirements were stated as 202 MMCFD and 103 MMCFD respectively. 61. Petrobangla has assessed its ability to supply the new power plants based on expected gas availability and, through negotiations with BPDB, has committed to supplying 12 of the 17 public sector power plants and four of the five private sector plants. However, Petrobangla has said that gas supply to three of the public sector power plants will be possible only after June 2011 and will depend on the progress with the construction of new transmission pipelines and installation of compressors at certain points in the network. Table 6 and Appendix 7 list the power generating facilities that will be supplied with gas by Petrobangla, and Table 7 shows the corresponding gas demand forecast for the power sector. In total, Petrobangla has informed BPDB that it will not be able to provide gas for 1,950 MW of proposed new generation. In the context of a system with total installed generating capacity of 5,245 MW currently, 1,950 MW is a significant block of generating capacity. 62. The base case GDP growth forecast adopted in the GSMP forecast assumes constant real growth of 5.5%. Average GDP growth rates of 6.8% and 7.9% were also tested. Demand growth was assumed moderated downwards by percentage points by an anticipated move to economic cost-reflective gas and electricity tariffs over the period 2006-2010. In converting from electricity demand to gas demand, a theoretically ideal generating plant mix was assumed, and an expected gradual increase in generating plant efficiencies was taken into account. The GSMP electricity demand forecast was similar to the forecast in the PSMP. BPDB commented, however, that the plant efficiency improvement assumed in the GSMP electricity forecast is unlikely to be achieved in practice. The implication of this is that the GSMP forecast for gas demand in the electricity sector is likely to slightly low, especially if tariff rationalization does not occur or is delayed significantly.

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18 Table 6: New Gas-Fired Power Generating Facilities

BGSL = Bakhrabad Gas Systems Limited, JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited, PGCL = Paschimanchal Gas Company Limited, SGCL = Sundarban Gas Company Limited, TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

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19
63. BPDB commented that it is now in a situation where neither of its generation expansion scenarios is realistic, given much tighter than expected gas supply and the absence of any commercial development of Bangladeshs coalfields. BPDB will need to substantially update its master plan to account for the fuel resource constraint that it is facing. The general constraint on gas supply to other sectors of the economy also has an implication for the electricity demand forecast in the PSMP in that some fuel substitution away from gas to electricity would be expected. Fuel substitution towards electricity was not incorporated in the PSMP demand forecast. On the other hand, PDBs base electricity demand forecast assumed reasonably constant growth in Bangladeshs GDP. Given the increasing energy intensity of Bangladeshs economy in recent years, the implication of a substantial gas shortage is that a slowdown in economic growth is very likely. This, in turn, will have an impact on demand for electricity and gas both directly and indirectly. Table 7: Power Sector Gas Demand Forecast (MMCFD)
Distribution Company BGSL JGTDSL PGCL TGTDCL SGCL Total Annual Growth Rate Average Growth Rate (11 years): FY2009 138 137 85 757 0 1,117 FY2010 148 167 85 863 0 1,263 13% 7.4% FY2011 183 242 200 982 135 1,742 38% FY2012 218 206 200 1147 135 1,906 9% FY2013 218 206 200 1162 298 2,084 9% FY2014 218 206 200 1179 298 2,101 1% FY2015 218 206 200 1270 298 2,192 4%

BGSL = Bakhrabad Gas Systems Limited, JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited, PGCL = Paschimanchal Gas Company Limited, SGCL = Sundarban Gas Company Limited, TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

c.

Captive Power Sector

64. The use of gas by captive power generators has increased significantly in the past decade, reflecting the low quality and reliability of grid electricity in some parts of Bangladesh. In the absence of significant investment in electricity infrastructure and construction of new generating plant, strong growth in captive power would be expected to continue. As discussed above, the inability of Petrobangla to commit to new gas supplies for 1,950MW of planned grid power generation would suggest unabated growth in captive power. This is not expected to be the case; gas supply for captive power will also be constrained, meaning that other, more expensive fuels will need to be used to fire captive plant, or demand will remain unserved. This, in turn, will reduce the amount of electricity generated from captive power plants, placing further pressure on grid supply. 65. Petrobangla has assumed near constant growth of 8.1-8.4% for captive power in its gas demand forecast, as shown in Table 8. The GSMP forecast used captive power growth rates in the range 5-7%, but with higher growth during the first few years and significantly lower growth thereafter. Two issues are important when comparing these two forecasts. Firstly, the GSMP forecast noted the impact of consumers switching from captive power to grid power as supply quality improves. For the sake of simplicity, this switching was ignored in the modeling on the basis that this switching effect is neutral from viewpoint of total regional demand for gas. The implication of this is that some gas that might actually be consumed by grid-based electricity generators (assuming that the captive power to grid power switching does actually occur) was included in the GSMP captive power forecast. Secondly, it assumed an increase in gas tariffs to

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20 economic levels during the first few years of the forecast period, resulting in dampening of demand for gas. 66. Petrobanglas forecast does not explicitly take captive-to-grid switching or gas tariff increases into account. Given the expected shortage of grid-based generation after 2011, an increase in gas demand for captive generation would be expected. However, the anticipated tariff increase would be expected to soften demand in the near term. On balance, Petrobanglas forecast rate of demand growth in the captive power sector is considered reasonable on average but may disguise price-driven softening of demand in the near term.
Table 8: Captive Power Sector Gas Demand Forecast (MMCFD)
Distribution Company BGSL JGTDSL PGCL TGTDCL SGCL Total FY2009 30 6 4 198 0 237 FY2010 32 6 5 214 0 257 FY2011 35 7 6 231 0 278 FY2012 37 7 7 250 0 301 FY2013 40 7 8 269 0 325 FY2014 43 7 10 291 0 352 FY2015 47 7 12 314 0 381

Annual Growth Rate 8% 8% 8% 8% 8% 8% Average Growth Rate (11 years): 8.3% BGSL = Bakhrabad Gas Systems Limited, JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited, PGCL = Paschimanchal Gas Company Limited, SGCL = Sundarban Gas Company Limited, TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

d.

Fertilizer Sector

67. Currently seven fertilizer plants six owned by Bangladesh Chemical Industries Corporation 16 and one in the joint venture named Karnaphuli Fertilizer Company are in operation in the country as major source for meeting the demand for fertilizer. All these companies are producing mostly Urea fertilizer and are using natural gas as their major raw material. TGTDCL has been the largest supplier of natural gas to the fertilizer sector meeting the maximum demand of the four BCIC plants, namely Jamuna Fertilizer Company Limited, Urea Fertilizer Factory Limited, Polash Urea Fertilizer Factory and Zia Fertilizer Company Limited, having daily gas demands of 45, 45, 14 and 52 MMCF respectively. CUFL (52 MMCFD) and KAFCO (63 MMCFD) are getting their natural gas supply from BGSL while JGTDSL is meeting the maximum possible demand of NGFF (18 MMCFD). These companies together are currently meeting only 60-70% of the total domestic demand for nitrogenous fertilizer (which accounts for more than 80% of the total nutrient consumption) which is estimated to be about 3 million metric ton per annum. Therefore, to reduce the demand-supply gap Bangladesh Chemical Industries Corporation plans to install two fertilizer plants in the country by 2016 namely Shahjalal Fertilizer Company Ltd in Fenchuganj (already in the tendering process) and Northwest Fertilizer Company Ltd in Sirajganj with production capacity of 1750 metric ton of Urea fertilizer each. However, these two new plants will require 45 MMCFD each of natural gas when commissioned.

16

The plants under BCIC are: Jamuna Fertilizer Company Ltd (JFCL) in Jamalpur, Urea Fertilizer Company Ltd (UFFL) in Ghorasal, Narsingdi; Polash Urea Fertilizer Company Ltd (PUFFL) in Polash, Narsingdi; Zia Fertilizer Company Ltd (ZFCL) in Ashuganj, Brahmanbaria, Chittagong Fertilizer Company Ltd (CUFL) in Rangadia, Chittagong; and Natural Gas Fertilizer Company Ltd (NGFF) in Fenchuganj, Sylhet.

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21 68. Petrobangla has assumed flat demand for gas in the fertilizer sector through to 2015, with no new fertilizer plant being commissioned between now and then. A new plant to be owned by Shahjalal Fertilizer Company Ltd is assumed to be commissioned by 2016, increasing gas demand in the fertilizer sector by approximately 23 MMCFD. Demand is forecast to be flat for the remainder of the forecast period. The forecast is summarized in Table 9. With the exception of the steep increase in demand in 2016, Petrobanglas forecast of gas demand in the fertilizer sector matches that in GSMP.
Table 9: Fertilizer Sector Gas Demand Forecast (MMCFD)
Distribution Company BGSL JGTDSL PGCL TGTDCL SGCL Total FY2009 120 15 0 155 0 290 FY2010 120 15 0 155 0 290 FY2011 120 25 0 155 0 300 FY2012 120 25 0 155 0 300 FY2013 120 25 0 155 0 300 FY2014 120 25 0 155 0 300 FY2015 120 25 0 155 0 300

Annual Growth Rate 0% 3% 0% 0% 0% 0% Average Growth Rate (11 years): 2.2% BGSL = Bakhrabad Gas Systems Limited, JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited, PGCL = Paschimanchal Gas Company Limited, SGCL = Sundarban Gas Company Limited, TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

e.

Non-Bulk Sector

69. Petrobangla has adopted a macro-level approach to its forecasting of gas demand in the non-bulk sector; it has assumed a flat 8% annual growth rate in non-bulk demand for all distribution companies with the exception of PGCL, for which it has assumed a non-bulk growth rate of 20%. The forecast is shown in Table 10. These growth rates are broadly aligned with growth rates in the GSMP. 70. Regression analysis on GDP and gas demand was used in the GSMP to estimate growth rates for each gas distribution company and for each of the non-bulk subsectors i.e. industrial, residential, commercial, captive power, and CNG. Typically, nine years of historical data was used, and a reliable link between the GDP and gas demand was identified in most cases, yielding sector-wise income elasticities of demand. These elasticities were then modified downwards by 2-3%age points during the first few years of the forecast to take account of the anticipated move to economic cost-reflective tariffs.17 Based on the results of the regression analysis and after adjustments for tariff increases, income elasticities in the range 1.21.5 were used in the industrial sector and 0.8-1.0 in the residential sector. Elasticities were lower in the commercial sector, reflecting the relatively unimportance of gas in this sector. 71. Due to lack of good historical data and the recent rapid uptake rates for CNG, an ad hoc approach was used for CNG demand forecasts in the GSMP. An average growth rate of approximately 10% was assumed. It was noted, however, that CNG uptake depends on the number of vehicle owners who view it as economic to switch to this alternative fuel, and that this, in turn, depends on the degree of support that the Government is willing to provide to incentivize
17

It is not clear from the GSMP whether a price elasticity of demand was explicitly used, or whether the income elasticity of demand figure was adjusted downwards. However, the overall impact on demand should be the same whichever approach was used.

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22 CNG use. In the PGCL area, a single non-bulk demand growth rate of 16% was assumed because of lack of historic data, and simple exponential growth was applied to current demand to arrive at a demand forecast. A similar approach was used for the south and southwest regions. Table 10: Non-Bulk Sector Gas Demand Forecast (MMCFD)
Distribution Company FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

BGSL 123 133 143 155 167 180 195 JGTDSL 34 36 39 42 46 49 53 PGCL 11 13 16 19 23 27 33 TGTDCL 551 596 643 695 750 810 875 SGCL 0 0 14 15 16 18 19 Total 719 777 855 926 1002 1085 1175 Annual Growth Rate 8% 10% 8% 8% 8% 8% Average Growth Rate (11 years): 8.5% BGSL = Bakhrabad Gas Systems Limited, JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited, PGCL = Paschimanchal Gas Company Limited, SGCL = Sundarban Gas Company Limited, TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

f.

Impact of Tariff Increases

72. The GSMP forecast used the experiences in other countries to estimate the extent to which tariff increases would dampen demand, with an adjustment of 2-3%age points applied to growth for during the first three years of the forecast (i.e. growth rates determined by applying estimated income elasticities of demand were reduced by 2-3%age points). In the absence of regular historic increase in energy tariffs, it is difficult to evaluate the likely impact of significant increases in tariffs on demand and therefore the reasonableness of the adjustment made in the GSMP. However, given the relatively low per capita energy consumption and low incomes in Bangladesh, price elasticity of demand would be high, meaning that demand would respond strongly downwards to price increases. The GSMP adjustment of 2-3%age points per annum over four years implies elasticity of approximately -0.2, which is possibly on the low side. 73. The expected tariff increases have not yet happened and tariffs now need to be increased by more than 50% to reflect economic cost. In June 2008, Petrobangla submitted a tariff petition to BERC under the new draft tariff regulations proposing about 66% increase in consumer level tariff. BERC held public hearings in September-October, and issued its decision in November 2008 that maintains status quo. In its decision, BERC concluded that Petrobangla failed to prove its proposal, which was based on financial considerations, as just and reasonable. However, a 10-15% increase may be considered from July 2009 provided Petrobangla could provide a strategic plan for increasing the supply of gas by its exploration and production companies. 74. Exactly how this tariff increase if and when effected will translate to end-use tariffs remains unclear; the draft regulations do not appear to place any constraints on the way in which Petrobangla balances the tariff between various consumer groups and Petrobangla has traditionally used heavy cross subsidies in favor of the power and residential sectors. Moreover, the extent to which the Government will directly subsidize consumers, if at all, is unknown. In this context, the validity of the price-related demand softening in the GSMP forecast is yet to be demonstrated. The implication of the GSMP forecasting approach is that: (i) in the absence of the introduction of economic cost-reflective tariffs, the GSMP will underestimate the demand for

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23 gas; and (ii) if cost-reflective tariffs are introduced, the GSMP might overestimate the demand for gas. g. System Losses

75. Petrobangla did not explicitly treat losses in its demand forecast. Implicitly, it assumed only minor further reduction in losses, and distributed these among the utilities taking into consideration that TGTDCL, being the oldest and largest distributor, currently accounts for approximately 95% of losses. h. Summary of Demand Forecast 76. The sector-wise demand forecast up to 2020 is summarized in Table 11. The forecast does not appear to consider the impact of significant tariff increases, which would be expected to soften demand in the non-bulk sector considerably. On the other hand, there is considerable suppressed demand implicit in the forecasting methodology, particularly in the power sector. On balance therefore, the forecast is considered reasonable and will be adopted for planning purposes.
Table 11: Gas Demand Forecast (2008 - 2020)
Figures in MMCFD Customer Category FY2009 Total Power Growth Total Captive Power Growth Total Fertilizer Growth Total Non-Bulk Growth Total Demand Source: Petrobangla 1,117 39 237 9 290 719 8 2,412 FY2010 1,263 13 257 8 290 777 8 2,609 FY2011 1,742 38 278 8 300 3 855 10 3,225 FY2012 1,906 9 301 8 300 926 8 3,450 FY2013 2,084 9 325 8 300 1,002 8 3,728 FY2014 2,101 1 352 8 300 1,085 8 3,846 FY2015 2,192 4 381 8 300 1,175 8 4,060 FY2016 2,210 1 412 8 370 23 1,273 8 4,297 FY2017 2,253 2 446 8 370 1,379 8 4,459 FY2018 2,278 1 484 8 370 1,495 8 4,637 FY2019 2,415 6 525 8 370 1,622 8 4,946 FY2020 2,445 1 569 8 370 1,760 9 5,153

77. The gas demand forecast revised by Petrobangla reflects supply constraints. The overall growth rate assumed in the forecast is 7.3%, the same as the historic growth rate for the 20022008 periods. The projected gas demand by distribution companies is summarized in Table 12 and detailed in Appendix 8.

Table 12: Total Gas Demand Forecast (MMCFD)


Distribution Company BGSL JGTDSL PGCL SGCL TGTDCL Total FY2009 411 191 100 0 1,662 2,363 FY2010 433 224 103 0 1,827 2,587 FY2011 481 312 222 149 2,011 3,175 FY2012 530 280 226 150 2,246 3,432 FY2013 545 283 231 314 2,337 3,711 FY2014 562 287 237 316 2,435 3,837 FY2015 580 291 245 317 2,614 4,047

Annual Growth Rate 9% 23% 8% 8% 3% 5% Average Growth Rate (11 years): 7.3% BGSL = Bakhrabad Gas Systems Limited, JGTDSL = Jalalabad Gas Transmission and Distributions Systems Limited, PGCL = Paschimanchal Gas Company Limited, SGCL = Sundarban Gas Company Limited, TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

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24

78. Petrobanglas demand forecast is compared to the GSMP forecast in Figure 1. The GSMP Case A forecast assumed constant GDP growth of 5.5% and the GSMP Case B assumed average GDP growth of 6.8%. The Case A forecast estimated average gas demand growth of 5.3% for the period 2009-2020, whereas the Case B forecast estimated average demand growth of 7.5% for the same period. Both GSMP forecasts estimated significantly lower consumption in the base year than Petrobangla has used. This appears to be a consequence of the GSMP assumption of the introduction of cost-reflective tariffs over the period 2006-2009. The Petrobangla forecast also shows a step increase in 2011 as series of new gas-fired power plants are commissioned. Beyond 2011, the Petrobangla forecast average growth rate reduces to 5.2%, which is the same as the overall growth rate in GSMP Case A and is significantly lower than the Case B growth rate. This reflects the supply constraints imposed by the shortage of gas, particularly in the important power sector.

Figure 1: Comparison of Gas Demand Forecasts

D.

Gas Supply 1. Production Scenario

79. There are presently 17 gas fields operational in Bangladesh. They are operated by BGFCL, SGFL, BAPEX, Niko, Unocal and Shell/Cairns. The first three are SGCs owned by Petrobangla and the latter three IOCs are working under PSCs and joint venture agreements. Field-wise production is summarized in Table 13 and Appendix 9. Figure 2 compares the gas reserves with production. 80. Petrobangla revised its gas production forecast in July 2008 in conjunction with its reforecasting of demand growth. The production forecast assumes net recoverable resources as at May 2008 of 12,954 BCF, as summarized in Table 14 and detailed in Appendix 10. This is considered to be a conservative estimate. The 2003 Reserve Estimation Report from the HCU indicated that an additional 9,120 BCF was available in possible recoverable reserves and from utilization of wellhead compression to 500 psi. Adding this to Petrobangla estimate of recoverable reserve gives an available reserve from discovered fields of 22,594 BCF. Even at current level of consumption the remaining recoverable reserve will exhaust in 20 years, and,

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25 with 6% growth rate, the remaining recoverable reserve will not last beyond 13 years. Given the current reserve status and anticipated shortfall in meeting growing demand, restriction should be imposed in committing new gas usage.
Table 13: Production Capacity and Current Production from Existing Gas Fields (2008)
Company Field Total Wells Flowing Wells Production Average Total Capacity Production MMCFD MMCFD SGCs: 405 396 923 MMCFD 34 33 246 242 35 35 0 0 7 5 97 97 53 51 18 14 11 10 17 19 60 58 IOCs: 915 MMCFD 230 154 100 82 450 503 70 71 5 4.3 1,838 1,770 BAPEX = Bangladesh Petroleum Exploration Company

16 14 8 4 10 9 2 2 1 1 SGCL 3 2 6 6 7 5 2 2 BAPEX 2 2 2 1 Cairn 7 6 Chevron 5 4 4 4 12 12 Tullow 3 2 Niko/BAPEX 5 3 Total 95 79 BGFCL = Bangladesh Gas Fields Company Limited; Limited; SGCL = Sylhet Gas Company Limited Source: Petrobangla

BGFCL

Titas Bakhrabad Habiganj Narsingdi Meghna Sylhet Kailastila Rashidpur Beanibazar Saldanadi Fenchuganj Sangu Jalalabad Moulavibazar Bibiyana Bangora Feni

Figure2:GasReserveVsProduction AsofMay2008
Recoverable(P3) Recoverable(P3) Possible(P3) Possible(P3) 7.64 7.64 9.87 9.87 12.95 12.95 7.68 7.68 20.63 20.63 28.6228.62 0 5 5 10 10 15 15 20 20 25 25 30 3035

Reserves

RemainingReserve RemainingReserve

CumulativeProduction CumulativeProduction

ProvenRecoverable(2P) ProvenRecoverable(2P) Proven(GIIP) Proven(GIIP) 0

Series3

Gasintrillioncubicfeet(TCF) Series2 Series1

Source:Petrobangla

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26 Table 14: Summary of Production Forecast


Field RecoverableReserve (BCF) Existing SGCs IOCs CumulativeProduction (BCF) RemainingReserve 2009 (BCF) 2010 ProductionForecast(MMCFD) 2011 2012 2013 2014 2015 20092020 (BCF)

15,889 4,743

6,415 1,261

9,473 3,481

1,015 1,025

1,089 905

1,229 855

1,376 825

1,540 815

1,577 785

1,689 730

7,157 3,354

NewDiscoveriesandOffshoreBidding SGCs IOCs Total 20,632

7,676

12,954

0 0 2,040

30 0 2,024

85 0 2,169

110 200 2,511

130 350 2,835

180 400 2,942

180 700 3,299

589 2,172 13,272

BCF=billioncubicfeet;IOCs=internationaloilcompanies;MMCFD=millioncubicfeetperday;SGCs=StateGasCompanies Source:Petrobangla

81. There is every possibility to increase the reserve volume from the discovered gas fields provided the following time bound program is implemented on a priority basis: i) ii) iii) iv) v) vi) 2. Initiate reservoir pressure data gathering program on major gas fields. Drill additional production wells, particularly in Titas, Habiganj and Kailastila. Appraise the already discovered gas fields to prove up current probable and possible reserve estimate. Re-complete all the wells that are currently watered up or are executing sand production problems. Re organize the production companies to create an experience field development team for each field. Ensure each field has a depletion plan a long-term production forecast and field development program. Demand and Supply Balance

82. Even though Petrobangla has developed a demand forecast that assumes significant supply constraints particularly in the power sector, there is a sustained and growing gap between forecast gas demand and forecast gas production. Table 15 shows the supply shortfall reaches 895 MMCFD by 2014, and totals 3,726 BCF over the period 2009-2020 (Figure 3) .This is a significant shortfall, representing 22% of the already constrained forecast demand over the period. In the absence of new gas discoveries or extreme demand side management measures including large tariff increase, this forecast gas shortfall is likely to have a profound impact on the economy in the coming years.
Table 15: Forecast Demand versus Forecast Production (MMCFD)
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Total FY2009FY2020 (BCF) 16,998 13,272 3,726

Forecast Demand Forecast Production Supply Shortfall

2,363 2,040 323

2,587 2,024 563

3,175 2,169 1,006

3,432 2,511 921

3,711 2,835 876

3,837 2,942 895

4,047 3,299 748

BCF = billion cubic feet; MMCFD = million cubic feet per day Source: Petrobangla

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Figure 3: Gas Production Projection vs Demand


4500 3945 4000 3412 3500 2746 3000 Figures in MMCFD 2500 2070 1890 2000 1500 1000 500 0 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 201718 2018-19 2019-20 Petrobangla New Discovery: IOC-2 Petrobangla-New Discovery New Discovery: IOC-3 IOC-1 Demand 2540 3238 2969 3070 3702 3559 4115

83. To meet growing demand and overcome production and transmission deficiencies, large scale investment in exploration, field development, and transmission and distribution segments has to be made. Petrobangla estimates that gas demand will go up to 5,144 MMCFD in FY2020. Probable gas production from existing gas fields is expected to peak to 2,475 MMCFD in FY2017 and then gradually going down to 2,288 MMCFD in FY2020. Petrobangla also projects production to peak to 1,080 MMCFD in FY2017 from new discoveries by the IOCs in both onshore and offshore. Overall peak production by SGCs and IOCs is estimated to reach a level of 3,555 MMCFD in FY2017. 84. To augment gas production, Petrobangla has drawn a program for further exploration; work over of wells in producing gas fields; drilling of new wells in producing and non-producing gas fields with self and government financing. Petrobangla estimates production enhancement up to 400 MMCFD by FY2012, which appears to be optimistic. Production augmentation is likely to be around 250-300 MMCFD. 85. Major production enhancement is estimated to come from IOC operation in both onshore and offshore blocks. Petrobangla has recently divided the country into 54 smaller blocks and gone for a fresh bidding round for 28 offshore blocks. Eleven IOCs participated and proposals are under evaluation. Apparently lack of seismic data and stricter terms and conditions of PSC failed to attract major IOCs. Petrobangla expects to award few undisputed blocks to successful bidders by mid-2009. India and Myanmar have raised objections for some tendered blocks, claiming their jurisdiction of those blocks.

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28 E. Gas Pricing 1. Current Gas Tariffs and Operating Margins a. Gas Price Philosophy

86. Gas pricing remains a sensitive issue in Bangladesh. Currently, end-use gas tariffs do not reflect the economic cost of delivering gas to consumers. Pricing gas at less than economic cost encourages inefficient and unsustainable end use of gas. The Government maintains that the low gas prices play an important role in contributing to industrialization, agricultural output and general improvement of quality of life and evidence suggests that this is at least partially true. However, Bangladesh is now faced with the real possibility of exhaustion of its gas reserves and cannot afford to implicitly encourage inefficient consumption of gas through prices that do not reflect true economic costs. b. Current Gas Tariffs

87. The current retail price for gas is set by the Government through a non-transparent process based on different socio-economic considerations in accordance with the pricing framework outlined in 2003, summarized in Appendix 11. The Government also sets the level of supplementary duty (SD) payable by Petrobangla on gas sales, and determines the margins to be paid for gas transmission and distribution companies. Gas production companies receive a fixed wellhead price estimated by the Government to be adequate to meet their needs. End user prices range from TK2.19/cm ($0.89/MCF) for fertilizer to TK8.07/cm ($3.26/MCF) for commercial, with domestic at Tk4.45/cm ($1.80/MCF). The wellhead price paid to Petrobangla subsidiaries amounts to TK0.25/cm ($0.10/MCF). The spread between the end user price and wellhead prices provides the margin for GTCL transportation, Government taxes, BAPEX, PDF, and gas distribution. The revenue allocation between the nine tariff categories is arbitrary and not cost reflective. Gas tariffs and the notional distribution of revenue under each of tariff classification are shown in Table 16. The Governments margin on gas sales is made up of VAT at 15% of the component of the end user price attributable to gas supplied from state companies, and the SD levy of 96% on all transmission and network costs and on gas supplied by state companies. 88. The end user price to the unmetered residential consumers is based on an estimate of consumption per burner, hot water heater, and other gas appliances likely to be used by consumers. Charges for gas are based on a gas burning unit count and a flat monthly charge per gas burning unit. In the absence of a cost signal, actual household gas consumption is likely to be higher than the assumed level.

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Table 16: Gas Price Distribution between Government and Petrobangla (Effective from 1 January 2005, Tk/cm) Customer Category End Users Price Government Margin @55% VAT SD Total PDF Petrobanglas Margin @45% on End Users Price BAPEX Margin Well head Margin Transmission Margin Distribution Margin Total

Power 2.61 0.34 1.10 1.44 0.32 0.05 0.25 0.32 Fertilizer 2.24 0.29 0.94 1.23 0.27 0.25 0.32 Industry 5.23 0.68 2.19 2.88 0.77 0.05 0.25 0.32 Commercial 8.23 1.07 3.45 4.53 1.34 0.05 0.25 0.32 Seasonal 8.23 1.07 3.45 4.53 1.34 0.05 0.25 0.32 Tea-Estate 8.23 1.07 3.45 4.53 1.34 0.05 0.25 0.32 Domestic 4.59 0.60 1.92 2.52 0.71 0.05 0.25 0.32 Captive 3.73 0.49 1.56 2.05 0.46 0.05 0.25 0.32 Power 9 Feed Gas 2.47 0.32 1.04 1.36 0.32 0.05 0.25 0.32 for CNGa BAPEX = Bangladesh Petroleum Exploration and Production Company; CNG = compressed natural gas; deficit fund; SD = Supplementary duty; VAT = value-added tax a CNG tariff was increased on 18 April 2008

1 2 3 4 5 6 7 8

0.24 0.17 0.97 1.75 1.75 1.75 0.74 0.67 0.17

1.18 1.01 2.35 3.7 3.7 3.7 2.07 1.68 1.11

PDF = price

Source:Petrobangla

c.

Gas Purchased from IOCs

89. IOC-operated fields presently provide approximately 50% of the total gas supply. Petrobangla buys gas from the IOCs under PSCs at contractual prices linked to international fuel oil prices and sells it to the distribution companies at prices fixed by the Government. Gas purchase prices under the PSCs are set at 75% of the Singapore high sulfur fuel oil (HSFO) price, but in a range with a $70 per metric ton floor and a $120 per metric ton cap, which translates to a minimum gas price of $1.40 and a maximum gas price of $2.90/MCF. Under the PSCs, gas from IOCs is characterized as either cost recovery gas or profit gas. Cost recovery gas is the component of extracted gas that is sold by IOCs to Petrobangla to recover IOCs costs incurred in putting wells into production and keeping them in production. No more than 60% (55% in some PSCs) of gas can be deemed as cost recovery gas in any given year. Profit gas is any gas in excess of cost recovery gas, and is shared between IOCs and Petrobangla on the basis of a formulae prescribed in the PSCs. d. Gas Purchased from SGCs

90. At around Tk170 per MCF, IOC wellhead gas is priced generally in accordance with economic principles in that it reflects world oil prices. Conversely, the price paid for SGC gas is apparently arbitrarily set at Tk7.1 per MCF, well below its economic (opportunity) cost. In the Consultants view, this price does not provide sufficient incentive for SGCs to manage their reservoirs and to optimize gas production. If the SGCs are to compete with IOCs and are to have an incentive to improve their reservoir management, they need to have similar gas sales contracts and rights as the IOCs.

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30 e. Transmission and Distribution Margins

91. The transmission and distribution companies receive margins for the volume of gas transmitted and sold to consumers. GTCL, the transmission company, receives a margin for the volume of gas transmitted through its system, which barely covers its operating costs and does not provide any return on capital invested, BAPEX, the exploration company receives Tk0.05 per cm (Tk1.41 per MCF) from the end-user price in the form of a levy. The residual margin that arises as a result of the sale of gas from state gas producers (SGCs) to end-use customers is pooled together as the price deficit fund (PDF), and is used to meet the difference between the cost of gas bought by Petrobangla from IOCs and end-use tariffs. However, the PDF has not been sufficient to cover the costs of IOC gas and penalty interest has been paid because of delays in remittances for gas. The distribution companies sell the gas to consumers on behalf of Petrobangla and remit the proceeds to Petrobangla after keeping their margins. Petrobangla pays the transmission and production companies their margins, and remits supplementary duties and VAT on SGC gas to the Government. f. Past Gas Tariffs and Recent Increases 92. Gas tariffs have not been adjusted adequately for many years. The average yearly nominal increase in gas has been limited, varying in the main consumption categories around 4.0% annually over the last 10 years. In addition, the nominal tariff adjustment in Tkterms has been largely offset by the depreciation of the Tk, averaging 4.4% annually since FY 1995. In addition gas prices have not reflected changes in international oil prices. As a result, gas prices have not increased in dollar terms since the early 1990s. This has adversely affected the viability of Petrobanglas operations, because its payment obligations to IOCs under the PSCs, debt servicing of foreign loans and foreign exchange component of the needed investments for transmission and distribution are linked to fluctuations in the exchange rate. This limits the ability of the sector to finance the future investment necessary for expansion and improving performance. 93. The build-up of the current average tariff and the distribution of the average tariff across the value chain are shown in Figure 3. The figure shows that the notional components in the build-up of tariff are not necessarily matched by revenue distribution, reflecting the fact that the tariffs have not had adequate adjustment in the past and have not been increased since 2005. In particular, the proportion of IOC-sourced gas in the consumer mix has increased from around 27% at the time of the last tariff adjustment in 2005 to approximately 50% in 2008. This means that the weighted cost of gas has increased by around 60% since 2005. Figure 3 shows the total value of IOC gas before netting off Petrobanglas share of profit gas. Because total revenue distribution is greater than total revenue, a subsidy is required. This is shown in the figure as implicit state subsidy, as is currently approximately Tk12 per MCF.

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31 Figure 3: Current Average Tariff Build-Up and Revenue Distribution (FY 2008)

Source: Consultant estimates.

g.

Subsidies in Tariffs

94. The current tariff structure includes both general subsidy and cross subsidy, both of which are undesirable and encourage economically inefficient consumption of energy (gas and electricity). Using the recent tariff petition filed by Petrobangla as representative of the financial cost of supply, the general financial subsidy is currently of the order of 30% (i.e. the tariff is only 70% of the financial cost of supply and the rest is subsidized).18 The industrial, commercial and tea estate sectors are the only three sectors that currently face a tariff above the financial cost of supply as estimated by Petrobangla. Collectively these three sectors provide approximately Tk3.3 per MCF of financial subsidy to the other sectors. 2. Price Regulation and Policy a. Draft Tariff Regulations

95. BERC is expected to provide increasingly transparent and consistent economic regulation to the energy sector pricing. Amongst other activities, BERC has recently circulated gas transmission tariff and gas distribution tariff regulations for public consultation. These regulations, which apply to current government-owned licensees plus any future privatelyowned licensees, build on an economic cost-plus basis for transmission and distribution tariff setting, with licensees able to recover efficient costs and to make a reasonable return on capital invested. The draft distribution regulation, for example, states that [the tariff] determined by this
18

In general, the average incremental financial cost (AIFC) is compared to the average tariff to determine the level of financial subsidy. AIFC is likely to be greater than the average tariff estimated by Petrobangla since the tariff methodology is backward looking whereas AIFC is forward looking. Therefore, the true level of financial subsidy is likely to be greater than the level indicated.

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32 procedure [identified in the regulation] should provide the least cost to consumers, and provide the opportunity for the licensee to earn sufficient revenues to cover all of its operating expenses, provide for continuing improvement of its operating system, and attract capital for investment. The draft distribution tariff regulation also promotes removal of cross subsidization of costs between customer categories by matching tariffs to cost of service. It states that [the] rate schedules for the individual customer classes should be designed to be equitable and reasonable to the customers served. Customers receiving like services should be facing the same charges. Differences in charges should be representative of differences in costs. To achieve this, distribution licensees costs are identified as demand-related, connection-related, or commodity-related, and are allocated to customer groups on this basis. 96. The proposed network tariff methodology encapsulated in the draft regulations for gas transmission and distribution can be summarized as follows: Average tariff = Annual revenue requirement/forecast sales volume where: Annual revenue requirement = + + + O&M costs (excluding interest) depreciation taxes rate of return allowance (weighted average cost of capital x regulatory asset base)

97. The draft regulations indicate that the weighted average cost of capital should be calculated as the weighted sum of the interest rate on outstanding debt and the estimated cost of equity. For estimation of cost of equity, the regulations indicate that: (i) the capital asset pricing model should preferably be used for unlisted private licensees; (ii) listed licensees should use the most recent dividend rate; and (iii) the governments borrowing rate should be used for government-owned licensees. This approach appears reasonable, although the appropriateness of historical dividend rate as a point estimate of cost of equity is questioned. 98. The draft regulations specify the process to be followed in submitting a petition for a tariff revision, and the documents and analysis to be submitted along with the petition. The regulations indicate that transmission and distribution licensees are able to petition for tariff revision once per year or sooner if the licensee can materially demonstrate extreme and undue hardship in the absence of revision. 99. The draft regulations are intended to introduce transparency into network tariff setting. The proposed tariff methodology is simple and in general it reflects typical international practice for regulating network tariffs on a cost plus basis. Over time, tariff setting would be expected to evolve to capture the trade-off between quality of supply and cost of supply, and to set tariffs for up to five years in advance. BERC would also be expected to increasingly challenge transmission and distribution licensees to demonstrate that proposed capital and operating costs are economically efficient.

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33 b. Petrobanglas Tariff Proposal

100. Petrobangla made its first tariff petition to BERC under the draft tariff regulations in June 2008. The petition requested an increase in the average (volume-weighted) tariff from approximately Tk101 per MCF to Tk144 per MCF, and is summarized in Table 17. The petition was made on behalf of Petrobanglas subsidiaries, and consisted of a summary of forecast costs for each part of the gas value chain (i.e. exploration and production, transmission, distribution and marketing) and an annual revenue requirement for the next 12 months based on forecast costs. No cost detail was provided, making it difficult to substantiate the forecasts. Nor was there any breakdown in the allocation to various sectors of the industry, namely exploration, production, transmission and distribution19. Moreover, various aspects of the draft regulations appear to have been overlooked or incorrectly interpreted by Petrobangla. Most notably, income tax was excluded from the revenue requirement and the rate of return on capital requested by Petrobangla (10% for all companies) is far too low and does not include sufficient margin for risk. 20 Petrobangla should be using its tariff petition to push BERC to notify a tariff that is adequate for its operating companies to fund current operations and generate sufficient returns to capital to incentivize ongoing investment in exploration, network expansion and gas retailing. Whist the tariff proposal submitted by Petrobangla appears sufficient to cover current operating costs; it does not go far enough with respect to seeking incentives for capital investment. Table 17: Summary of Petrobanglas June 2008 Tariff Proposal
Item A Description Volume (BCF) 174.94 174.94 310.73 Total Cost (Tkmillion) 3,266.35 322.00 1,126.81 4,715.16 716.80 562.49 872.05 2,151.34 1,908.24 8,774.75

Cost of gas purchased from IOCs Income tax paid for IOCs Cumulative loss of IOCs Total cost of IOC gas B Cost with margin for National Production Companies C Cost with margin for Transmission Companies D Cost with margin for Distribution Companies E Total cost of local gas (B+C) F Supplementary duty and VAT G Total Cost (A+E+F) H Petrobanglas share of profit gas (from IOCs production) I Total Gas Sales Volume J Average Tariff Requirement (Tk/MCF) Source: Petrobangla

310.73 123.61 609.28

144.02

19

Petrobangla advised that, assuming BERC made a determination on retail tariff levels, it would then allocate the margin between operating companies in each sector of the industry. 20 The financial analysis sets out rates of return on capital that more properly reflect risk of each sector, i.e. exploration, production, transmission and distribution.

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34 101. In its proposal, Petrobangla stated that its gas companies have been suffering a large deficit because of purchasing larger quantity of IOCs gas at a higher price while the operating expenses of its companies have increased substantially. However, it was clearly brought out during public hearing on the proposal conducted by BERC that the Petrobanglas companies have been making considerable profit by selling at the existing tariff rates.21 Thus Petrobangla could not justify its proposal.
102. Petrobangla proposed to increase gas tariff to make investment for increasing gas production. Under the petroleum policy, Petrobangla is responsible for fixing the upstream (wellhead) price of both IOCs and SGCs. However, Petrobangla did not furnish any revised price for gas supplied by SGCs. As a result, BERC computed consumers price of gas based on national gas price of Tk. 7.07/MCF. Due to lack of timely action, Petrobangla could not justify its proposal to increase gas tariff for making further investment for gas development. Furthermore, Petrobanglas data base was complex and non-transparent. As a result, BERC had to undertake an interactive process to understand and analyze the data as per regulations.

103. This is reflected in the order of the BERC issued on 30 November 2008. By studying all the records presented, the BERC decided that Petrobanglas proposal to increase consumers level tariff of gas by 65.92% due to purchase of gas from the IOCs at higher price had not been proved as just and reasonable. But in order to increase long-term supply of gas by the SGCs and for public interest, it has become urgently necessary to increase investment for exploration and production of gas. BERC felt that, in order to achieve this objective it would be appropriate to establish a gas development fund through revision of consumer level gas tariff. As per BERC Act 2003, exploration and production of gas does not come under the jurisdiction of BERC. In this context it needs the approval of the appropriate authority to establish tax free gas development fund. If the concerned authorities agree with the proposal and the national gas exploration and production companies submit strategic plans to increase the supply of gas, BERC may consider increasing consumers price of gas by 10-15% on the basis of current hearing. It will be considered as national investment to ensure future energy security and to keep the consumer level gas tariff at reasonable level. 3. Tariff Unbundling 104. The draft tariff regulations require unbundling of tariffs into commodity, transmission and distribution components. Petrobangla presented unbundled costs in its tariff petition but has not indicated unbundled tariff requirements. Tariff unbundling is justified by governments and regulators for three main reasons: (i) (ii) (iii) promotion of upstream and downstream competition; efficient cost signaling; and cost transparency.

105. Pipelines are a natural monopoly (i.e. the average price minimized with one efficient provider and therefore duplication of lines is inefficient). Encouraging competition in the potentially contestable parts of the industry requires transparent open access to the pipeline network for shippers of gas. Internationally, competition in exploration and gas production has demonstrated success in getting supply up and price down. Mass-market retail deregulation has been less demonstrably successful. Efficiency arguments arise from the fact that, typically, distribution networks are sized to meet customers maximum hourly flows whereas transmission
21

In support of companies making profit the Consumers Association of Bangladesh reported that average yearly earning from Workers Profit Participation fund by each of the employees of the respective companies for the year 2007-2008 were as follows: BGFCL-Tk, 1,10,000/-; GTCL- Tk. 3,50,000/-; TGTDCL- Tk. 95,000/-; BGSL- Tk. 1,86,000/-; JGTDSL- Tk. 40,000/-; PGCL- Tk. 20,000/-.

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35 networks have more flexibility because gas is compressible, so costs are related to maximum daily quantities. Producers and processors have other cost drivers. The argument runs that unbundling leads to better price signals and therefore more efficient consumption and/or conservation decisions and more efficient asset utilization. However in Bangladeshs case, the first two justifications for tariff unbundling do not apply since Bangladesh does not have downstream competition and has heavily cross-subsidized end-use tariffs, leaving improving cost transparency for the government, the regulator and the public as the only justification. 4. Network Cost Benchmarking

106. Petrobanglas tariff submission lumped all distribution costs from the four distribution companies into one total. In the absence of external competition, the Consultant encourages BERC and Petrobangla may use the tariff setting exercise as an opportunity to benchmark the costs of the distribution businesses against each other and against appropriate international standards. The intention of benchmarking would be to provide guidelines for efficient operating and capital expenditure and to identify possible under-spend and over-spend. Indicative benchmarks for the distribution companies based on 2005-2006 full-year results are shown in Table 18. The table shows that cost per daily volume is the most consistent benchmark across the four distribution companies, with the highest cost operator (TGTDCL) only 33% more expensive than the lowest cost operator (PGCL). This is expected, since maximum daily throughput is the main driver of distribution network costs and is therefore probably the most useful benchmark. The cost per connection and cost per km benchmarks show a wide variation from the lowest cost operators (BGSL and JGTDSL) to the highest cost operators (PGCL and TGTDCL); this may be reflective of inefficient expenditure or simply reflective of an inappropriate benchmark. Table 18: Distribution Company Cost Benchmarks for Gas Distribution Companies
Benchmark Operating costb per customer per km per MMCFD per customer per km per MMCFD Valuea (Tk) 20018 763351 197 20429 779094 200 Performance Relative to Benchmark TGTDCL BGSL JGTDSL PGCL 156% 100% 100% 315% 461% 168% 100% 224% 133% 106% 111% 100% 152% 100% 100% 313% 452% 167% 100% 223% 132% 106% 112% 100%

Operating + financing costsc

per customer 21536 147% 104% 100% 310% per km 821245 436% 174% 100% 221% per MMCFD 209 129% 111% 113% 100% a The value shown is the calculated value of the benchmark for the lower cost operator for each benchmark. b Operating costs include all maintenance, administration and other cash costs not related to funding the business. c Financing costs are all cash costs associated with funding the business. BGSL = Bangladesh Gas Fields Company Limited; JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited; MMCFD = million cubic feet per day; TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Distribution companies annual reports

Operating + financing costs + depreciation

5.

Funding for Exploration and Production

107. The draft tariff regulations cover gas transmission and distribution but not the contestable activities of exploration and production. The current price paid for non-IOC wellhead gas does not reflect the economic opportunity cost of the gas (i.e. the price at which it could be sold into the world market) and does not include a depletion premium that reflects that long-run

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36 cost to the economy of depleting the countrys gas resources. As a consequence, BAPEX is not incentivized to drill for new gas, SGCs are not incentivized to manage their fields, and end users are not sent price signals that encourage gas conservation. 108. BAPEX receives the bulk of its operational funding from a levy on gas consumers of Tk0.05 per cm. The rationale for allocating money directly to BAPEX out of the gas tariff stream is not supported by economic theory for efficient use of capital. The exploration business is normally carried out by private businesses in both developed and developing countries. Where state exploration companies exist they are typically financed as a direct investment rather than from the Governments annual development program or as a cost on the sector revenue stream. Under the current arrangement, BAPEX secures its revenues whether or not it actively pursues an exploration regime. There are no measures for efficiency with present funding out of gas price stream and ADP funds. If the Government wants to own an exploration entity, it should make a direct investment in BAPEX for this purpose.22 109. If the SGCs are to compete with IOCs and are to have an incentive to improve their reservoir management, they need to have similar gas sales contracts and rights as the IOCs23. However, this would have a significant impact on end-user tariffs and would need to be introduced gradually so as to avoid price shock and to allow the macroeconomic and microeconomic impacts of substantially higher gas prices to be absorbed. Also, the social needs resulting from the low income levels of many Bangladeshis should be reflected in pricing policies, and a life-line tariff should be part of the reform agenda. However, in the context of rapidly depleting gas resource and with gas demand well in excess of gas supply, there is a prima facie economic case for a substantial increase in gas prices. 110. Development of Bangladesh gas resources requires a number of different players as international oil and gas development history shows that this results in new ideas and new discoveries. The involvement of Niko resources in the Chhatak area and discovery of more gas in an area considered to be not worthy of additional investment is testament of the impact of new players with new ideas and interpretation of mysterious data. The long standing experience of SGCs in Bangladesh makes extending their mandate to include exploration, with the financial resources to do this, an important part of the sector reform plan. BERCs recent ruling on Petrobanglas tariff proposal in creating a development fund for exploration and production out of incremental revenue resources, if implemented properly, will be helpful in this direction. Petrobangla has initiated action along this line. F. Government Policies and Plans 111. The Governments development goals are to (i) provide energy for sustainable economic growth and for maintaining energy security in the country; (ii) provide energy to all socioeconomic groups in the country especially to the less developed areas; (iii) diversify use of indigenous energy; and (iv) contribute towards protection of the environment. The Government recognizes that the natural gas sector, with its tremendous potential in contributing to the development of the economy, would have to be effectively managed to maximize its role in poverty reduction and generation of equitable benefits. Efforts to expand energy coverage for the population could be accelerated by improving the poors access to natural gas. The exploration and exploitation of oil, gas, coal and mineral resources will be expedited, foreign and
22

In April 2008, the Government decided in principle to increase the gas price from BAPEX fields to provide it with additional resources for undertaking exploration activities. However, this decision has not yet been fully implemented. 23 BGFCL and SGFCL have combined cash reserves of the order of $97 million (as at 30 June 2007) that could be used for proving gas reserves in existing fields, drilling additional production wells and improving reservoir management. The fact that this cash is not being used for this purpose suggests that the present pricing regime does not provide sufficient incentives to do so.

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37 private investment in oil, gas and mineral sectors will be encouraged and institutional capabilities will be built for achieving the goals and objectives. 112. The Governments stated policy objectives in the energy sector are to make the sector financially viable, improve its efficiency and quality of supply, and increase private sector participation and investment. The Government would implement several measures to improve the performance of the gas sector. Priority elements of the Governments reform strategy to achieve these objectives include (i) ensuring good governance through autonomy of the sector entities, including private sector participation; (ii) designing and implementing competitive and equitable pricing policy; (iii) strengthening and improvement of commercial operation; (iv) enactment of laws to strengthen the legal framework enabling effective private sector participation, and defining the sector restructuring program; (v) implementing an action program to improve the financial performance of gas sector entities; and (vi) strengthening the institutional capability in policy making and monitoring. The separation of policy-making, regulation and operational functions, and corporatizing or privatizing sector entities will also be vigorously pursued. To achieve this objective, the BERC has been made operational to competently and independently regulate relations between suppliers and consumers. 113. The Governments gas sector policy also provides that new exploration and production of gas will predominantly be by the private sector through PSCs. While a public sector company (GTCL), would maintain the monopoly over gas transmission, private sector participation would be encouraged by allowing construction of pipelines through build-own-operate-transfer contracts (BOOT), with operations managed by GTCL.24 In addition, minority equity participation in GTCL and private sector participation in the overall management of GTCLs activities will be encouraged. Gas marketing and distribution will be commercialized and gradually privatized. 114. In recognition of the importance of natural gas in the socio-economic development of the country to support the poverty reduction strategy, the Government has given continuing attention to the overall development of the sector, including survey, exploration, exploitation, production, transmission and distribution of the sector. The Government will make efforts to ensure supply on a non-constrained basis, and enough funds to develop infrastructure such as requisite number of exploration and production wells, process plants and pipeline facilities. 115. Fields will be developed in such a way that they would be able to increase and maintain plateau production until they reach a level of 80% of remaining recoverable reserves. Production will then be reduced by 20% (in some cases 25% to adjust overall production level) every year. Production capacity should be such that it can meet daily overall maximum demand. Fields under the IOCs will be developed based on the principle that the daily contracted quantity should be 125% higher than the take or pay volume whereas the maximum daily contract quantity should be equal to 120% of take or pay volume. 116. The GSMP for the period 2005-2025 envisages investments of almost $2.5 billion in the gas sector including exploration, field development, transmission and distribution (Appendix 12). The plan also includes several projects likely to be taken up by the private sector, including IOCs. An investment of nearly $363 million is envisaged for oil and gas exploration, $179 million will be for appraisal and field development, and $46 million on work over of wells to sustain production. The expected total addition of gas from these projects will be 560 MMCFD of which 126 MMCFD will depend on the success of exploratory wells. Nearly 522 km of gas transmission pipeline will require about $1.8 billion, and 1,300 km of distribution pipeline will require $150 million. The existing sector performance would make it difficult for Petrobangla or
24

In September 2004, the Government announced the Private Sector Infrastructure Guidelines that provides for private sector participation for exploration, production, transmission and distribution of oil and gas under build-ownoperate (BOO) and build-operate-transfer (BOT), with no restriction on foreign direct investment in such initiatives.

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38 its subsidiary SGCs to mobilize the required resources to finance the envisaged investments, unless adequate measures are in place to promote and encourage domestic and foreign private investment in the gas sector. 117. Gas sector reforms, covering governance and finances, are key elements of the overall national strategy to facilitate economic growth. But turning the sector around will not be easy. Investment has lagged for years; while recent gas sector master planning work identified a need of investment of greater than 5% of gross domestic product at 1995-96 constant prices or about $2 billion per year up to 2021, actual investment over the last few years has been less than 1% of that level (Table 19).
Table 19: Investments in the Bangladesh Gas Sector

A. Investment in Gas Sector by IOCs Name of IOC Cairn Energy Chevron Gas Field Sangu Jalalabad Moulavibazar Block 13-14 Bibiyana Tullow Total of IOCs Bangora Mar-07 Mar-06 Commencement of Production Jun-98 Feb-99 Mar-05 Investment in Million $ 495.69 110.11 80.43 41.73 374.19 148.54 1,250.69 Operating Cost 164.08 106.83 19.74 30.90 12.99 334.54 Total 659.77 216.94 100.17 41.73 405.09 161.53 1,585.23

B. Investment in Gas Sector by Public Entities (Petrobangla Companies) Year Local Currency 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total $1 = Tk 890.00 940.00 1,730.00 2,630.00 1,210.00 2,350.00 2,570.00 3,170.00 2,880.00 2,730.00 2,210.00 2,620.00 3,350.00 5,350.00 6,470.00 2,140.00 520.00 43,760.00 70 Investment in Million Tk Foreign Currency 2,550.00 1,460.00 1,720.00 1,050.00 1,390.00 2,270.00 2,070.00 1,920.00 2,680.00 3,580.00 1,520.00 1,600.00 3,030.00 3,220.00 2,390.00 990.00 800.00 34,240.00 Total 3,440.00 2,400.00 3,450.00 3,680.00 2,600.00 4,620.00 4,640.00 5,090.00 5,560.00 6,310.00 3,730.00 4,220.00 6,380.00 8,570.00 8,860.00 3,130.00 1,320.00 78,000.00 Investment in Million Dollar Local Currency 12.71 13.43 24.71 37.57 17.29 33.57 36.71 45.29 41.14 39.00 31.57 37.43 47.86 76.43 92.43 30.57 7.43 625.14 Foreign Currency 36.43 20.86 24.57 15.00 19.86 32.43 29.57 27.43 38.29 51.14 21.71 22.86 43.29 46.00 34.14 14.14 11.43 489.14 Total

49.14 34.29 49.29 52.57 37.14 66.00 66.29 72.71 79.43 90.14 53.29 60.29 91.14 122.43 126.57 44.71 18.86
1,114.29

IOC = international oil company


Source: Consultant estimates.

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39 G. Policy Framework 1. Sector Reforms

118. The gas sector has been undergoing considerable reform and restructuring. However, sector reforms have been implemented in an adhoc manner making it difficult for development partners and private investors to boost their contribution to the sectors substantial investment needs. The exploration and production activities have been segregated into corporate businesses. Similarly, bulk gas transportation has been unbundled to create GTCL, with independent marketing companies. The Government appears convinced of the need for decisive, deep and broad structural reforms in the energy sector as a means of containing losses and improving efficiency in the sector. The Government has committed to implementing a comprehensive reform program. The main elements of this program will include: (a) formulation and announcement of a policy statement that provides the broad guidelines for the reform program; (b) development of a transparent regulatory framework; (c) unbundling of the vertically integrated electricity and gas sector utilities and establishing markets in which electricity and gas are traded at an arms length; and (d) divestiture of state ownership in most of the segments of the markets. Several policy areas have been identified in which further reforms would be necessary consistent with the Governments policy goals. The policy component under the Program could include measures for improving governance in the sector through institutional and financial restructuring to ensure long-term financial sustainability, including strengthening public-private participation in the gas sector aimed at creating an environment for private sector-led growth. Restructuring of SGCs through stock flotation, share offloading and strategic investor involvement would help mobilize additional resources for sector development. Market-oriented energy pricing reflecting energy parity should be adopted, thus eliminating non-economic factors and levies, and equating gas prices from the state-owned gas producing companies to those from IOCs. 119. Pricing of gas remains a major and sensitive issue. While pricing of gas on a commercial basis in line with international oil and energy costs is a desirable policy, the ultimate effect on the macro economy has to be considered. Gas prices for power and fertilizer are examples of subsidized prices far below the cost of alternative fuels or imports. The Government maintains that the low gas prices play an important role in contributing to industrialization, agricultural output and general improvement of quality of life for the people at large. These objectives are reasonable but with an irrational pricing system, there is a very great risk of inappropriate crosssubsidies and less than optimum use of a country's natural and financial resources. Direct transparent subsidies are preferred from a policy point of view. 120. Pursuant to policy dialogue with ADB and the development partners, the Government has given consideration to a more flexible and more transparent mechanism under which gas prices would be linked to the cost of supply for each category of consumer and adjusted periodically. As a first step toward commercializing gas sector operations, the Government in September 2003 adopted an interim-pricing framework for electricity, gas and petroleum products that would help provide policy guideline. 25 The detailed implementation of the above policy guidelines has yet to be formulated. However, the guidelines appear to refer to the pricing
25

Regarding natural gas, the basic formula for price determination will be: Retail price = Commodity gas price (purchase price or production cost) + taxes including value-added tax + transmission and distribution cost + optimal gas utilization tax. Petroleum price would be determined as follows: Retail price = Import parity price + infrastructure and storage charges + internal transportation cost + margins for oil distribution companies and dealers + taxes including value-added tax. The price of electricity will be determined taking into account the cost of generation, transmission and distribution, and debt-service coverage.

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40 of gas supplied by IOCs and not gas from SGCs, which should also be priced at similar value to IOC gas as this reflects its economic value. Such measures have to be implemented step by step, so that the economy can absorb the consequence. 121. Given the substantial revenue earnings from the gas sector, the funds generated by the gas sector would be sufficient to provide adequate funds for reinvestment and expansion. This may require the Government to reduce its tax take, in particular the supplementary duty extracted from the sector. This would in turn have implications for the Government annual budget and development program. Where prices are increased more in line with international parity, both objectives could be achieved. At the same time improving transparency of pricing would likely attract greater private sector investment. Overall such reforms in turn would lead to more rationale investment and operations in the sector as all responded to correct price signals and financial incentives. 122. Eventually, higher natural gas prices are inevitable. But other policy measures are needed as well, particularly if prices are not allowed to rise to global market levels that would allow for market-based allocation of gas. The key measures relate to changes in upstream (exploration and production) policies so that more of Bangladeshs onshore and offshore territory can be explored; attracting more private investments from IOCs will be essential 123. The Government appears convinced of the need for decisive, deep and broad structural reforms in the energy sector to containing losses in the sector. The Government has committed to implementing a comprehensive reform program. The main elements of this program will include: (a) formulation and announcement of a policy statement that provides the broad guidelines for the reform program; (b) development of a transparent regulatory framework for the electricity, gas and petroleum markets; (c) unbundling of the vertically integrated electricity and gas sector utilities and establishing markets in which electricity and gas are traded at an arms length; and (d) divestiture of state ownership in most of the segments of the markets. The Consultant has identified several policy areas in which further reforms would be necessary consistent with the Governments policy goals. A revised draft road map for the gas sector has been developed in consultation with the Government. The policy component could include measures for improving governance in the sector through institutional and financial restructuring to ensure long-term financial sustainability, including strengthening public-private participation in the gas sector aimed at creating an environment for private sector-led growth. 124. The Government establishes the domestic gas price structure by setting the gas sales prices for different consumer groups. The Government also determines the level of taxes and the distribution margins for gas transmission and distribution companies. The gas production companies do not receive a fixed wellhead price, but a netback price that is equivalent to the sales price of gas paid by end-users less the distribution margin for the transmission and distribution companies and the taxes levied by the Government. 125. The major public sector holding company, Petrobangla buys gas from the IOCs at contractual prices linked to international fuel oil prices and sells it to the transmission and distribution companies at prices fixed by the Government. They also buy directly from the two gas producing companies. The relationship between the operating companies, which have limited autonomy, is regulated through a web of transfer prices that have limited economic significance. The current tariff structure includes a tax equivalent to 55% of sale revenue attributable to Petrobanglas production and payable to the Government. In addition, Petrobanglas profitable subsidiaries have to pay corporate taxes (35%) and compulsory dividend (amounting to a total of about Tk1 billion a year). The wellhead margin received by producing companies is only sufficient to cover O&M costs and debt-servicing liabilities (DSL). They do not have resources to finance investment program. The transmission and distribution

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41 companies receive margins for the volume of gas transmitted and sold to consumers, which is hardly sufficient to cover O&M and DSL. GTCL, the transmission company, receives a margin for the volume of gas transmitted through its system, which is not sufficient to cover DSL. BAPEX, the exploration company receives, in the form of levy, Tk0.076 per cm (Tk2.15 per MCF) from the end-user price. The residual margin is pooled together as the price deficit fund (PDF), which is earmarked for meeting the cost of gas bought by Petrobangla from IOCs at contractual prices that is linked to international fuel oil prices. The transmission and distribution companies sell the gas to consumers on behalf of Petrobangla and remit the proceeds to PDF after keeping their margins. However, the PDF has not been sufficient to cover the costs of IOC gas. 126. Gas tariffs have not been adjusted adequately for many years. 26 The average yearly nominal increase in gas has been limited, varying from a minimum 4.0% annually for domestic consumption to 5.2% for fertilizer and power (Appendix 12). In addition, the nominal tariff adjustment in Tkterms has been largely offset by the depreciation of the Tk, averaging 4.4% annually since 1990/91. As a result, gas prices have not increased in dollar terms since the early 1990s. This has adversely affected the viability of Petrobanglas operations, because its payment obligations to IOCs under the PSCs, debt servicing of foreign loans and foreign exchange component of the needed investments for transmission and distribution are linked to fluctuations in the exchange rate. 127. Pursuant to policy dialogue with ADB and the development partners, the Government is striving to adopt a flexible and transparent mechanism under which gas prices would be linked to the cost of supply for each category of consumer and adjusted periodically. The pricing framework of 2003 has been designed to enable the sector entities to cover their operating expenses and debt-servicing liabilities, and generate a surplus to finance part of its investment program, rather than relying on government budget. The pricing framework will allow formulabased frequent tariff adjustments in line with international market prices. Prices of petroleum products will be based on import parity prices; the price of gas will be linked with the international high sulfur fuel oil and power tariffs would reflect movements in gas or fuel oil prices and other variable costs. 128. According to the guidelines spelled out in the pricing framework, the tariffs for the natural gas will reflect the reasonable cost of supply of gas as a commodity including transmission, distribution and taxes to the different classes of consumers consistent with the characteristics of their demand pattern, essentially gas volumes and seasonality of demand. The prices for power will be reviewed quarterly; those for gas and petroleum will be reviewed monthly. Price adjustments will normally be made semi-annually. However, more frequent adjustments would be made if these are necessitated by international price movements and other economic factors and if the monthly variation exceeds 10%. Any required subsidy, such as that for fertilizer, would be made transparent and provided through budgetary provisions. While some adjustments occurred up to 2005, there has been no adjustment to retail gas prices since June 2005, despite the record prices for alternative petroleum fuels.

26

The price of compressed natural gas was increased in April 2008. In June 2008, Petrobangla submitted a proposal to BERC for adjustments in gas transmission and distribution prices that was not considered justifiable by the latter in its decision announced in November 2008.

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42 2. Role of ADB

129. Since 1975, ADB has supported the development of the gas sector by providing eight sector loans so far. The first five loans were for the development of Titas, Habiganj, Sylhet, and Bakhrabad gas fields; as well as for the major transmission system and most of gas distribution networks in urban centers of TGTDCL and BGSL franchise areas. These loans primarily focused on development objectives and financial performance standards of the EAs. These loans had substantial time overruns, and the EAs operational performance in terms of system losses and accounts receivable were deteriorating. The financial authority of the boards of directors of the EAs was curtailed. Moreover, the EAs had to follow the lengthy government procedure for procurement, which was one of the major causes of project implementation delays. During processing of the sixth sector loan for TNGDP (footnote 12), the Government was also negotiating PSCs with some IOCs. Under the PSCs, the cost of gas was linked to international fuel oil price on heating value parity basis. Since Petrobangla was also a designated partner under PSCs, there was a need to redefine its role. Therefore, TNGDP was also designed to address a number of crucial sector reforms, including (i) establishing an appropriate pricing policy, (ii) increasing private sector participation, (iii) improving the efficiency of the gas production, transmission and distribution companies by allowing autonomy to the sector entities, inclusion of private sector directors in the board of directors of the EAs and enacting a gas act, (iv) creating a hydrocarbon unit (HCU), and (v) enhancing energy conservation. 130. Over the years, the implementation of the sector reforms has been mixed. Gas sector entities have been given more autonomy, a pricing policy linked to international fuel oil price had been introduced, private sector directors had been included in the boards of directors of the gas sector entities, and HCU had been established. However, the progress in reducing system losses, offloading shares of the EAs and introducing a gas act had been below expectation. 131. The Dhaka Clean Fuel Project (DCFP) 27 addressed issues critical to sector reform: allowing full autonomy to the EAs, rationalization of gas tariff for feed gas for CNG operated vehicle up to maximum of 50% of diesel price on heating value parity basis, and consolidation of GTCLs operation through transfer of major transmission lines from gas marketing companies to GTCL. Sector entities now have full financial powers for its operation including procurement, except for deciding on compensation packages and organizational set up. GTCL has consolidated its operation, by taking over major transmission lines from gas marketing companies. Other issues addressed under the loan are linked to commercialization of CNG for vehicular use. The Governments compliance with above conditions, and leasing out Government owned land for installation of CNG refueling stations and exempting duties and taxes on import of machineries for CNG operation and dedicated CNG operated vehicles provided a big boost in converting gasoline and diesel operated vehicles to CNG operation. 132. The ongoing GTDP attempted to advance sector reform by introducing an agreed GSRR that included all unfinished sector reform initiatives. But no conditions or covenants were included in the loan agreement that was necessary for implementation of GSRR, which also lacked ownership by the Government and sector entities. Consequently, the Government did not take any concrete steps in implementing dated actions agreed in the GSRR. As a result of the policy dialogue with the Government during preparation of the Program, the Government updated the GSRR with achievable targets.
27

ADB. 2002. Report and Recommendation of the President to the Board of Directors on a proposed loan to the Peoples Republic of Bangladesh for the Dhaka Clean Fuel Project. Manila.

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43 133. However, some reforms, initiated earlier, have been implemented. BERC, which was created in 2004, following approval of the Bangladesh Energy Regulatory Commission Act in 2002 is functional now. TGTDCL has taken steps to offload 25% of its shares through direct listing with the stock exchanges. The Government is likely to offload partial shares of production and other gas marketing companies soon. 3. Key Reform Areas a. Revision of Energy Policy

134. The National Energy Policy (NEP) of 1996 is being revised to provide broad framework for energy sector development. Exploitation of potential coal reserves is held back in absence of proper policy. Coal should be the source of future power generation, freeing gas to cater other segments of economy, particularly rapid industrial growth. Gas supply shortage is hurting fast growing industrial sector. Gas import option deserves consideration for meeting long term energy need of the country, and optimizing use of infrastructures built for marketing of natural gas. Policy framework for energy conservation and use of renewable energy to reduce pressure on hydrocarbon resources should be integrated in the revised NEP. b. Enactment of Gas Act

135. System losses have been substantially improved and overall and distribution losses in FY2007-2008 (up to May) were 2.79% and 5.48%, respectively. Similarly, accounts receivables have also been reduced substantially. In absence of a legal framework, such improvement may not be sustained under changed political scenario in near future, as experienced in the past. 136. The much awaited gas act has been in the drafting stage since 1998. The final draft version is going through the vetting process for over a year. The proposed gas act will include particular provisions for (a) expeditious recovery of unpaid gas bills; (b) empowerment of gas marketing companies to expeditiously disconnect nonpaying and delinquent consumers, and removal or limitation of jurisdiction of civil courts to issue injunctions preventing disconnection in such cases; (c) criminalization of pilferage of condensate/gas and tampering with gas meters, including punishment of abettors; and (d) empowerment of personnel and companies involved in privatized meter reading, assessment, billing, and collection to effectively discharge their functions, including powers to disconnect delinquent/nonpaying customers. Enactment of the gas act is essential for the sector to have legal coverage for facing the challenging tasks of improving the sectors operation in terms of reducing system losses to a reasonable limit and improving bill collection efficiency. c. Strengthening of BERC

137. Strengthening of BERC with adequate staffing is essential for its proper functioning. BERC is to process number of regulations for regulating oil, gas and power sectors. Licensing process requires early completion. Staff recruitment process has started, but needs completion as early as possible. But introduction of Government pay structure in BERC for its staff may not enable BERC to ensure appropriate skill mix. Chairman and members of BERC enjoy separate compensation structure, and there is a need to continue this for attracting qualified people in future too. Staff compensation package needs reconsideration for making it compatible with the compensation package for the Chairman and members of the Commission.

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44 d. Rationalization of Gas Tariff Structure

138. The Government was supposed to introduce a pricing policy to recover full economic price of natural gas i.e. the international price of fuel oil on a heating value parity basis by 1998. BEICIP FRANLAB, France, the consultants engaged by ADB under a technical assistance project,28 recommended a tariff setting framework in 1996. The Government engaged a national committee to examine the same and recommend an appropriate tariff structure for phased implementation. The committee recommended a revised tariff structure for implementation over a period of five years. The Government adjusted tariff four times during 1998 to 2002, but not up to the extent recommended by the consultants. On 24 November 2003, the Government announced a tariff policy linking price of gas produced by the NOCs with 7% of international high sulphur fuel oil price as an agreement with the World Bank, with the provision of quarterly review and adjustment of tariff accordingly. This is inadequate to recover the economic cost of gas. Moreover, the Government had not implemented the policy as and when it was needed. Based on the pricing formula, the Government marginally raised tariff only twice, on 1 July 2004 and 1 January 2005. 139. Petrobangla is purchasing IOC share of gas (cost recovery and profit gas) under PSCs from onshore gas fields at a price equal to 75% of fuel oil price on heating value parity basis varied within a fixed floor and ceiling fuel oil price. Petrobangla is paying 25% premium for gas from offshore fields. Current weighted average purchase cost of IOC share of gas is around Tk187.0/MCF. In FY2007-08 sharing ratio of gas from IOC operated fields between Petrobangla and IOCs is about 38:62. The ratio was about 41.7: 58.3 in FY2006-07. Sharing ratio varies from time to time depending on cost recovery period for initial and subsequent investments. However, Petrobanglas weighted average cost for gas from IOC operated fields, inclusive of its share of profit gas, is about Tk116.0/MCF. Petrobangla expects that the ratio will substantially improve in its favor by end 2009 once recovery of initial cost for development of Bibiyana gas field is completed. 140. In the beginning tariff was structured for five categories of consumers power, fertilizer, industrial, commercial and domestic. With the passage of time, new type of consumers were introduced, e.g. seasonal brick fields, tea estates, captive power generation, and CNG refueling stations emerged and new categories. In initial years, the Government used to take fixed rate excise duty at well head at a much lower rate allowing higher margin for operators. Then variable excise duty was introduced for various consumer categories and government take was raised. Following introduction of value added tax (VAT) in Bangladesh, excise duty was replaced with variable supplementary duty (SD) and VAT, and government take was further raised from time to time and raised to 55% of weighted average end use tariff, which is still continuing. Subsequently, margin for BAPEX and price differential fund (PDF) were introduced to provide BAPEX necessary fund to maintain its establishment cost, and allow Petrobangla to create a fund for offsetting shortfall, if any, in selling IOC gas, respectively. 141. With sharp rise of worldwide drilling cost, IOCs are getting less interested in developing marginal discoveries under present PSC terms. For the same reason, NOCs are also finding it difficult to mobilize internal resources for required development of producing gas fields. GTCLs financial position will deteriorate in near future, if wheeling charge is not raised shortly. Though the financial indicators of existing distribution companies except PGCL are
28

ADB. 1993. Technical Assistance to the Peoples Republic of Bangladesh for the Preparation of a Gas System Development Plan and the Strengthening of the Organizational and Regulatory Framework for Oil and Gas Sector. Manila.

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45 showing positive results, once they go for further investment. Operation of SGCL with high investment cost will be financially unsustainable without proper distribution margin. 142. The Government is providing subsidy to the power and fertilizer sectors at the cost of the gas sector. Tariff for other categories is also below the economic cost of gas. Overall tariff structure is far below the level of prices prevailing in neighboring countries. In absence of relatively cheap alternative fuel, pressure on gas is mounting. Low price is also failing to motivate consumers to conserve gas. With current level of margin, Petrobangla will not be in a position to service cost of IOC gas, and mobilize resources for massive investment needed for development of fields under NOCs, expand and upgrade transmission system, and extend distribution networks in new areas. Sharp rise in steel price and drilling and services cost will make gas production and distribution costly. As such, gas tariff has to be raised to make the sector financially viable. Subsidy should either be eliminated or borne by the Government in a transparent manner. Tariff categories should be minimized to avert the possibility of pilferage and theft. e. Restructuring of Gas Sector

143. The creation of BERC and HCU, involvement of IOCs under PSC for exploration and production of oil and gas, and allowing full autonomy to the gas sector entities necessitated the need for redefining role of Petrobangla. Petrobangla used to exercise full control over sector entities though these were incorporated under the Companies Act 1994. However, it still controls tariff setting and human resource planning of sector entities. This is undesirable and should be eliminated. 144. Petrobangla acts as a partner under PSC, approver of IOCs development budget, buyer of IOC gas, and also upstream regulator. This is causing problem and Petrobanglas some actions have led to arbitration. Regulatory function should be segregated and placed with the ministry, and other functions should also be reviewed and rationalized. Option to convert Petrobangla into a holding company with a provision to making it or a subsidiary under it as a single buyer may be considered. HCU should be strengthened to provide technical support to the ministry in regulating IOCs. In case of sector entities, role of Petrobangla should be limited to coordination and sector planning. It should not get involved in sector entities operation. 145. Remaining transmission lines, except those which are considered internal to distribution companies operation, should be handed over to GTCL for optimizing transmission system operation and improving financial condition. GTCL should introduce interface metering and upgrade supervisory control and data acquisition facilities for proper measurement and system operation. Proper measurement at transmission end will help control losses in distribution. 146. Introduction of policy for recruitment of management staff for GTCL, RPGCL and TGTDCL through open competition with market oriented compensation package as a condition of ADBs DCFP (footnote 27) has not met the desired objectives. Petrobangla did not take follow up steps for organizational restructuring and separating compensation package from government rules and regulations, as has been done in the power sector. Petrobangla even proposed to abolish the policy. 147. The gas sector is facing acute human resource crisis as qualified professionals are either retiring or deserting to join multinationals at home and abroad with much higher compensation package. Low compensation policy is deterring recruitment of competent staff.

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46 The gas sector compensation policy should be delinked from government rules and regulations to adequately staff the sector. H. Gas Sector Reform Roadmap 1. Main Features

148. The Governments GSRR, which was developed through extensive policy dialogue with ADB, to be implemented over five years in parallel with the implementation of the GTDP, 29 covers a wide range of important policy activities including revisions to the energy policy, draft Gas Act, gas tariff setting, and sector regulatory mechanism. The GSRR includes (i) a program and a strategy for development of old and new gas production fields, (ii) expansion of gas transmission and distribution pipelines, (iii) a mechanism for gas sector policy formulation and introduction of required regulatory instruments, (iv) strengthening of corporate and financial governance of gas sector companies, (v) private sector participation, (vi) price reforms, and (vii) system loss reduction plans. The GSRR covers (i) institutional and financial restructuring of gas sector companies to ensure long-term financial sustainability; (ii) strengthening public-private partnership in the gas sector aimed at creating an environment for private sector-led growth; (iii) transformation of gas companies to diversify ownership involving private investors; (iv) restructuring and unbundling of gas sector institutions and enterprises; and (v) a marketoriented energy pricing reflecting energy parity, eliminating noneconomic factors and levies, and equating gas prices from the state-owned gas producing companies with those from IOCs. 149. The short/medium term policy and institutional measures of the GSRR are outlined below: 2. Short and Mid Term Measures a. Policy Framework 2006: EMRD to finalize revised energy policy and submit same to Cabinet for approval; EMRD to finalize Gas Act and submit to Parliament for approval; EMRD to make its Hydrocarbon Unit (HCU) a permanent part of EMRD to provide technical advice; EMRD/HCU/Petrobangla to prepare long term projections for gas productions and ten-yr rolling gas costs and blended prices. b. Regulatory Instruments 2005: EMRD to appoint the remaining two members of BERC, to become fully operational; transfer of regulatory functions to BERC, including tariff setting. 2006: Gas Transmission Company Limited (GTCL) to submit transmission tariff proposal to BERC for approval. 2005-2006: EMRD to finalize and approve the Gas Act 2005: Petrobangla to establish contracts regarding rights of gas sector companies in gas purchase, sale, transmission. 2005-2006: EMRD to develop rules for private sector participation (PSP)

29

The implementation of GTDP was to commence immediately after its approval in October 2005. The GSRR included measures to be undertaken during 2005-2009. However, the loan agreements became effective on 28 November 2006 with completion scheduled on 31 December 2010.

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47 2006-2007: EMRD to identify those transmission and distribution facilities to be undertaken by PSP under different modalities; establish framework concerning rights of all gas companies related to ownership of assets, access to infrastructure. c. Sector Planning 2005 onwards: Petrobangla and state gas companies (SGCs) to implement public sector investment program; update the Gas Sector Master Plan d. Increased Access to Natural Gas 2005-2006: Petrobangla/BAPEX to develop strategy for exploration and utilization of undiscovered reserves; SGCs to develop a framework to expand the gas networks in an acceptable manner 2006-2010: Petrobangla/GTCL to expand gas network to less developed regions e. Corporate Governance 2005-2006: Petrobangla/SGCs to take action to minimize gas losses in distribution, adopt transparent accounting for system loss, carry out systematic inspection to locate and stop gas theft; SGCs to reduce accounts receivable; EMRD/MOF to provide independence to gas sector companies in determining compensation structures, to review Governments dividend policy for gas sector companies f. Gas Sector Restructuring 2006: EMRD/Petrobangla/TGTDCL/ BGSL to establish the latter two into three (four) and two separate companies respectively to decrease system losses and improve management efficiency; and ongoing capacity building of the sector. g. Private Sector Participation 2005-2007: EMRD/Petrobangla/SGCs to take steps to allow private financing and management of sections of the gas transmission network and competitive participation of the private sector in gas distribution. 2005-2007: Petrobangla/SGCs to develop and implement an action plan for offloading shares of gas sector companies. h. Pricing Reforms 2005-2007: EMRD/BERC/BAPEX to eliminate from gas prices noneconomic factors such as levies for BAPEX; BERC to review and restructure pricing framework to reflect gas volume and distance transported, and return on investment for transmission and distribution. i. Further Policy Dialogue In addition, the Government agreed to conduct policy dialogue with ADB for reforming the gas sector through institutional and financial restructuring in the medium term. The measures include (i) (ii) (iii) 2005-2006: EMRD/Petrobangla to transfer role of managing PSCs to an appropriate body; 2005-2006: Time-bound plan for restructuring Petrobangla including review of Petrobangla Act; and 2007-2009: Implement institutional restructuring of Petrobangla.

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48 150. The GSRR was designed to enhance the role of the private sector in natural gas-related activities including (i) upstream gas development; (ii) gas transmission and distribution; and (iii) metering, audit, O&M activities. An improved gas sector has the potential to contribute significantly to the development of the economy. However, it would have to be managed to maximize its role in poverty reduction and ensure an equitable distribution of benefits. The Government is actively following the GSMP prepared in 2006 with assistance from the World Bank. This plan outlines a vision for gas sector restructuring, ownership, private sector participation and regulation, consistent with the measures included in GSRR. Progress in implementing policy reforms can be improved significantly. However, an ADB-financed study concluded about the same time observed that the GSRR contains a long list of reform measures with unrealistic deadlines. Some of the GSRR measures cannot be supported and some of the measures clearly will not be implemented (footnote 15). 3. Implementation Status 151. The implementation status of the GSRR is given in Appendix 13. Major developments are outlined below. a. National Energy Policy 152. An earlier energy planning effort led to the first National Energy Policy (NEP), which brought wide attention within the Government to the urgency of ensuring exploration, production, distribution and rational use of energy resources to meet growing energy demand of the country. In 2004, the EMRD took the initial steps for updating the NEP through stakeholder consultation, and intended to introduce it in 2005. However, subsequently taking into consideration rapid changes in global and national conditions, a more comprehensive updating on the NEP was considered desirable than that was hitherto possible. This updating undertaken under United Nations Development Programme (UNDP) support was completed in June 2007. The updated policy describes the role that energy in all its forms and the energy sector with all its institutional arrangements should play to meet its obligations to the continued advancement and development of the country. The updated energy policy covering power, hydrocarbon, coal, renewable energy and nuclear energy will go farther than NEP 1996 in establishing implementation mechanism and procedures for tracking results to ensure that policies are reflected in practice. An inter-ministerial committee is overseeing the updating process, which will be finalized after the coal policy has been approved in two months time. It is, however, not clear when the coal policy will be approved or the revised energy policy will be adopted for implementation. 153. Progress on the other major institutional aspects relating to the strengthening of the policy formulation and monitoring capacity of the EMRD and the permanency of the HCU has been mixed. The implementation of the TA aimed at strengthening the policy-making capabilities of EMRD has been delayed as issues relating to EA needed time to resolve. On HCU, the organizational framework of the restructured unit has been approved, and a proposal to make it a part of the EMRD has been under submission since August 2007. Final government approval is expected soon. b. Regulatory Instruments 154. Stakeholder consultation on a gas act was held among government, non-government, private sector and development partners during 2005-2006. These consultations led to the finalization of the draft gas act by EMRD and placed before the Law Ministry for vetting. The review process is still ongoing. 155. On BERC, progress has been made by the Government in approving its organizational framework in 2006. Currently there are five members in BERC including the recently appointed

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49 Chairman. EMRD is incorporating Ministry of Laws comments on the BERC service regulations and expects its final vetting soon. Steps have been initiated for the recruitment of staff after the service rules have been published by BERC through a gazette notification. BERC has formulated licensing guidelines and pricing principles with the financial support of the United States Agency for International Development and the World Bank. The launch of these regulatory approvals is important in the development of BERC as an effective sector regulator following a transparent and considered process for approvals. c. Gas Sector Planning 156. The World Bank funded study on GSMP and the ADB-financed study on Promoting Private sector Participation in Energy Sector have outlined public and private sector investment options, and policy and strategies in the medium term. Gas sector investments mentioned in GSMP are being undertaken following acceptable technical, financial, environmental and social considerations. 157. GSMP outlined plans and strategies for the sector. BAPEX is involved in on-shore exploration. It has taken up a program for drilling three exploration wells at) Kapasia, Srikail and Sundalpur), two development wells by 2010 and seismic survey in blocks 11, 15 and 3. Due to court injunction, the third round of bidding announced in March 2008 shall be limited to offering 24 offshore blocks. The selection of the successful bidder and finalization of PSC are expected during FY2008-2009. d. Expansion of Gas Network 158. Public sector investment programs outlined in GSMP are undertaken accordingly. Gas distribution network to Rajshahi, Khulna, and Jessore will be in place by FY2010-11 when GTDP is completed. A set of procedures are now being developed to ensure private sector participation in gas distribution. e. Corporate Governance 159. Gas company boards are entrusted full administrative and financial autonomy. They can take operational, financial and investment decisions within broad parameters and approval procedures set by the government. Self-financed projects can be undertaken without requiring government approval. 160. Accounts receivable from private sector companies and enterprises improved to 1.2 to 2.5 months equivalent, and that from public sector enterprises range from 4 to 8 months. Adoption of action plans has helped reduce average system loss from 6.5% to 4.5% by 2006/2007, including in the franchise area of the TTGTDCL. Current target is 2% by 2009-2009. Procurement of meters and other equipment, and selection of consultants to advise gas distribution companies in system loss reduction, funded by GTDP are being initiated. Overall system loss of the distribution companies has been reduced from 5.24% (776 MMCM) in 200506 to 4.26% (655 MMCM) in 2006-07. TGTDCL has taken up a project to reduce system loss. No transparent accounting system has so far been developed. f. Gas Sector Restructuring 161. Proposal for establishing separate companies out of TGTDCL and BGSL is under consideration. g. Private Sector Participation 162. The establishment of a new joint venture south-southwest gas distribution company (Sundarban Gas Company Limited, SGCL) in the Khulna region is under consideration. This company is planned to have 49% ownership by the private sector, with Government owning

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50 51%. Valuation of assets of TGTDCL by independent auditors completed. Selling of Tk4,300 million worth (20%) of its shares through stock exchanges started in July 2008 with about 51% of the shares on offer sold. BGSL, Jalalabad Gas Transmission and Distribution Systems Limited (JGTDSL) and Paschimanchal Gas Company Limited (PGCL) have also decided to offload similar shares after undertaking valuation o assets. Separately independent auditors are undertaking asset valuation of GTCL to help prepare plan for share diversification. h. Pricing Reforms 163. No significant measures appear to have been taken for pricing reforms. The pricing framework that was adopted in 2003 provides for formula-based tariff adjustments in line with international market prices, and envisages a weighted average gas price based on market prices. In November 2008, BERC issued its order on the tariff adjustment proposal submitted by Petrobangla, requiring the SGCs to prepare strategic business plans and the Government to create a new exploration and production development fund, before the adjustment proposal could be considered. 4. Overall Assessment 164. Several factors influenced the implementation of the GSRR. Although the GSRR was developed through a consultative process within the Government, no single ministry or agency was identified as the focal point for coordinating the different policy measures. It took considerable time for the officials in the different ministries to comprehend the importance and relevance of the GSRR in improving sector performance and efficiency. The lack of clarity in the role of different agencies in the updating of the energy policy and introducing other measures for improved regulatory framework, corporate governance, commercial orientation of SGCs, improving operational performance, reducing system loss, and market-based energy pricing exacerbated the situation. Frequent changes in ministerial responsibilities resulted in lack of ownership and changing priorities, and, with respect to energy policy, greatly diversified the scope based on non-economic considerations without positive benefits. The prevailing political situation added new uncertainties in adopting major governance reforms. Floods, typhoons and other natural calamities stretched the Governments physical and monetary resources that could otherwise be utilized for executing the GSRR. 165. Against this backdrop, the progress in the implementation of GSRR has fallen short of expectations and commitments, particularly those relating to energy policy and regulatory framework. This may in part be from a lack of ownership of GSRR by the government officials and policy makers. The lack of a proper institutional framework for policy formulation, analysis and monitoring affected the introduction of new policy measures. Bureaucratic inertia appears to have played a major part in stifling implementation of GSRR, particularly measures that require executive decisions, especially those relating to system loss reduction. The comprehensive nature of the reform measures that covered a wide range of reform areas may have been a contributing factor in limiting GSRR implementation because of diffused focus. It would have been better if the GSRR could have focused on some key areas than addressing at the same time most of the issues that affect the gas sector. 166. Nevertheless, progress in governance reforms and promoting private sector participation has been significant. The potential policy risk relating to delay in implementing required reform and restructuring measures was recognized in GTDP. Continued policy dialogues with the Government on the agreed upon time frame to implement the GSRR would be essential to encourage and accelerate system efficiency and mobilize private sector resources to augment public sector efforts appear the only way to maintain the initiatives for overall gas sector development. The broad aspects of the revised GSRR outlined by the Consultant and that adopted by the Government in January 2009 are in Appendix 14.

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51 III. A. Issues CLEAN FUEL SECTOR DEVELOPMENT PROGRAM

167. Performance in the gas sector has been below its potential because of low gas extraction, lack of internal investment, and limited use of the domestic market. Also, the price of natural gas in Bangladesh remains low compared with neighboring countries. The under pricing of domestic gas use leads to a high opportunity cost in terms of foregone resources that could have been mobilized to support investment within and outside the sector, especially given the countrys massive development financing needs. The Government recognizes that while an improved gas sector has the potential to contribute significantly to the development of the economy, it would have to be effectively managed to maximize its role in poverty reduction and ensure equitable distribution of benefits. Considering these development imperatives, the Government has adopted a policy of introducing gradual reforms aimed at commercializing the sector and separating operations, regulations and policy making. The problem tree outlining the causes and effects of the problem relating to inadequate supply of gas sector is in Appendix 15. The proposed Program aims at addressing these issues and concerns. The Program Design and Monitoring Framework is in Appendix 16. B. Impact and Outcome 168. The main impact of the proposed Program is to promote sustainable economic growth by addressing policy and institutional constraints, and augmenting sustainable natural gas supply. The Program will also improve sector governance and ensure long-term financial viability and improve efficiency indicators of gas sector entities through institutional strengthening. The Program supports the implementation of the GSRR that is under implementation in conjunction with the ongoing GTDP. The GSRR covers a wide range of important policy activities including revisions to energy policy, draft Gas Act, gas tariff setting, and sector regulatory mechanism. Progress in implementing policy and institutional reforms under the GSRR can be improved significantly with proper monitoring through the strengthened institutional framework being developed under GTDP. 169. The Program will provide further support and incentives to the Government for gas sector reforms consistent with the vision outlined in the recently updated GSRR comprising measures for gas sector restructuring, ownership, private sector participation, and regulation. The Program which is a high priority for the Government is linked to the sector reform road map and is part of the least-cost development plan for the gas sector. Several areas stand out as key areas for focus and improvement. These critical elements include (i) availability and security of the gas supply, (ii) design and implementation of competitive and equitable pricing policies, (iii) reduction of system losses consistent with a properly maintained and operated system, (iv) effective and improved coordination between the power and gas sectors to ensure efficient, and least cost solutions for both sectors, and (v) institutional capacity development in policy making, monitoring and system and investment planning. C. Important Features 170. The Program comprises a policy reform agenda and priority investments in conjunction with the institutional development supported by GTDP. It is designed to promote economic growth to meet poverty reduction and MDG through transformation into an efficiently operating gas sector. The primary outcome will be improved gas sector sustainability through financial and organizational restructuring, and pricing reforms. Building on the policy reforms under implementation as part of the GSRR and consistent with ADBs country strategy and program, the Program will promote sustained development of the gas sector in Bangladesh by pursuing (i) improved sector and corporate governance through further corporatization and

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52 commercialization of the SGCs and other good governance measures,; (ii) enhanced financial status of the sector entities by implementing financial restructuring plan and reduced accounts receivable; (iii) improved operational efficiencies of the sector entities by reducing overall system losses with investments in transmission, gas field development and distribution systems; (iv) promotion of private sector participation and public-private partnership; and (v) implementation of a sector-wide capacity development program. D. The Program 1. Outcome

171. The policy actions supported by the Program will be improved gas sector sustainability through financial and organizational restructuring, and pricing reforms. It will focus on seven key outputs that will (i) develop a national action plan for gas sector reform, and a framework for capacity development in policy formulation and implementation; (ii) establish a fully functioning legal and regulatory framework; (iii) expand exploration activities for assured supply of natural gas; (iv) improve governance in the gas sector; (v) restructure the gas sector companies to ensure long-term financial sustainability; (vi) promote public-private participation in the gas sector aimed at creating an environment for private sector-led growth; and (vii) adopt marketoriented pricing reflecting energy parity, eliminating non-economic factors and levies, and equating gas prices from the state-owned gas producing companies to those from IOCs. The tentative policy matrix along with strategic goals, key targets, and progress to date for each output is in Appendix 17. 2. Outputs a. National Action Plan for Gas Sector Reform

172. The Government has introduced various reforms over the years that helped achieve considerable institutional and operational improvements. The Government has held extensive stakeholder consultation in updating the NEP to provide broad framework for energy sector development. The revised and updated NEP will be approved and launched in 2009 to reiterate the reforms and private sector-oriented energy sector development. The Government is implementing a time-bound sector reform action plan to help achieve sustained economic growth and poverty reduction. Towards this goal, the Program will assist the Government to (i) introduce further gas sector reforms by updating the GSRR, strengthen the policy formulation and monitoring system for the reform process at the EMRD with the ongoing TA provided in conjunction with GTDP; (ii) adopt and implement the GSMP for gas field exploration and development, transmission and distribution including plans for expanding natural gas network to less developed regions in the western, north-western and south-western zones; (iii) and create a framework for its monitoring and updating of GSMP by HCU; (iv) execute the sector-wide medium-term capacity development program focusing on corporate governance, financial management, and system management of gas sector entities that is being developed under GTDP; and (v) make HCU a permanent part of EMRD to provide technical advice on gas reserves and their utilization, and reform process. b. Legal and Regulatory Framework 173. Recognizing that the development of a transparent and independent regulatory framework for the energy sector is crucial for the promotion of a competitive energy sector, the Government established BERC in 2004. BERC will need to address a number of complicated issues during the reform process to ensure sustained growth. The Program seeks to assist the Government and BERC in this effort by setting out specific policy actions. These include (i) defining the roles and responsibilities of the Government and BERC for upstream and downstream activities in the gas sector, (ii) approving gas pricing guidelines prepared by BERC

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53 by the EMRD and Ministry of Finance, and (iii) determining gas prices pursuant to these guidelines. Recruitment of required staff by BERC as per approved set up has been under way. Furthermore, the SGCs such as BGSL, GTCL, JGTDSL, PGCL, RPGCL and TGTDCL have received operating licenses from BERC. 174. EMRD has initiated steps for revising the gas pricing guidelines for interministerial review and stakeholder consultation before its approval. Meanwhile, BERC held public hearing on gas tariff applications during July-October 2008 and promulgated its decision in November 2008. The tariff review will continue in 2009 after the actions required by BERC for price adjustments are taken including submission of strategic business plans for SGCs and the creation of a gas exploration and development fund. 175. To ensure efficient and economic use of natural gas in safe and sustainable manner and promote participation of the private sector in investing in gas infrastructure, the approval of the draft gas act to regulate exploration, production, transmission and distribution of natural gas, and holding stakeholder consultation will be accelerated. The gas act would also ensure better regulation of private sector investment in the gas infrastructure. 176. The petroleum policy of 1993 provides for involvement of IOCs in gas exploration and production activities under PSCs. The inflow of private funds will be crucial for long term financial viability and sustainability of the gas sector. The Government will update the petroleum policy providing for private sector participation in the upstream and downstream activities. c. Exploration Activities for Assured Supply of Natural Gas 177. To promote increased access to natural gas, the Government through the HCU makes assessment of natural gas reserves undertaken on a continuing basis. The Program will facilitate developing a strategy for exploration and utilization of undiscovered reserves. The third round of bidding from IOCs for exploration, development and production of gas initiated in March 2008 will be finalized and decision taken by EMRD on the award of new PSCs. A systematic approach for reservoir management will be developed and implemented by Petrobangla. d. Improvement of Governance in the Gas Sector 178. To establish good governance at sector and corporate levels, the Government has in recent years adopted several policy measures with the aim of developing commercially oriented governance system. The specific policy actions under the Program for improving sector governance includes: (i) providing gas companies with greater autonomy to operate commercially as per 1994 Companies Act including pay structure and recruitment, and be independent from political and other interference including auditing beyond that provided in the Companies Act, (ii) empowering gas sector entities to adequately undertake all operational and financial activities including decision making for pricing formulation for BERC consideration, and investment budgets, and (iii) formulating and executing five and ten year strategic business plans of gas sector entities to strengthen management practices and ensure fiscal transparency for revenues and expenses. e. Restructuring of Gas Sector Entities 179. Technological and financial restructuring of the SGCs will be vital for their sustainability. The Program will assist the Government in the restructuring the SGCs (i) by implementing the three-year technological restructuring program outlined in the GSMP including measures for exploration, field appraisal, production improvement, transmission efficiency and minimizing distribution loss, (ii) upgrading of existing gas production, transmission and distribution facilities for to improve gas supply and efficiency, (iii) implementing the strategy for improving system

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54 efficiency and reducing losses, and (iv) mobilizing required funding from national and international sources. 180. Economically viable unbundling of gas supply into separate production, exploration, transmission and distribution companies all incorporated under the Companies Act of 1994 has been underway for several years. All major gas transmission activities have been consolidated in the GTCL by transferring the transmission activities from the other companies. The Program will support Government to (i) formulate measures for increasing efficiency, accountability and transparency and enhanced delegation of authority, (ii) complete the process of consolidation of transmission operations in GTCL by transferring assets, (iii) redefine the franchise areas of the TGTDCL and BGSL for unbundling into three and two companies respectively, (iv) transform TGTDCL and BGSL into separate companies to improve management efficiency, and (v) constitute the boards of separate companies and transfer of assets to the new companies. 181. System loss on the transmission and distribution of gas has been an area of major concern. Measures taken over the past five years have helped reduce system loss from that 4.5-6.5% to slightly higher than 2.5%. A comprehensive system loss reduction plan is under development under the GTDP for phased implementation. The Program will support further policy reforms in this area that include (i) adopt and implement the system loss reduction plan to reduce system loss to less than 2% by 2010, and (ii) establish proper and transparent accounting of system losses, systematic routine inspection and testing including measures to locate and stop gas thefts and tampering of meters and bypass. f. Private Sector Participation 182. The Program will promote private sector investment in gas sector development. The policy measures include (i) outlining a strategy to allow private financing and management of the gas transmission network, and (ii) competitive participation of the private sector in gas distribution. The Program will assist in the (i) restructuring of the corporate framework of gas transmission SGCs for the induction of strategic investor, (ii) developing a time-bound action plan for off loading shares of gas distribution companies in the market, and (iii) offloading shares of at least 25% of distribution companies. g. Market-oriented Gas Pricing 183. The Program will support the introduction of flexible and transparent pricing mechanism for gas by ensuring a rational and balanced tariff structure that would result in economic price of gas compared to alternative forms of energy. The adoption of the new pricing framework will enable the sector entities cover their operating expenses and debt-servicing liabilities. To achieve this goal (i) gas prices would be linked to the cost of supply for each category of consumer adjusted periodically, and (ii) tariffs would be consistent with the cost of supply, with separation of wellhead gas price, transmission charge, and distribution charge and government taxes. EMRD will adopt a new pricing formula for determining upstream gas prices for national gas companies based on the cost of supply. Subsidy in gas prices should be avoided, and if required for vulnerable groups, should be explicitly defined. 3. Financing Plan

184. The Program will be financed by a loan in various currencies equivalent to $60 million30 from ADBs Special Fund resources. The loan will have a term of 24 years, including a grace period of 8 years, and an interest rate of 1% per annum during the grace period and 1.5% per annum thereafter.
30

The amount of the Program loan will be determined taking into account the adjustment costs of the policy reform agenda. ADB has currently programmed an amount of $60 million for the Program component.

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55 4. Counterpart Funds

185. The counterpart funds to be generated from the proceeds of the program loan will be used to finance the adjustment costs associated with the Program. A preliminary assessment of the counterpart fund requirement for the adjustment costs has been made. Outstanding liabilities relating to government departments, excluding major gas-intensive industries in the fertilizer and power sectors, amounted to $20 million equivalent at December 2007. Of this, $15 million is for TGTDCL alone. Total outstanding liabilities comprising the arrears in the fertilizer and power sectors amount to about $75 million; public sector industries account for $20 million. Discussions with the Government will focus on determining how much of the counterpart fund would be utilized against such liabilities. Tentatively, it is estimated that the Government will incur adjustment costs over the reform period of about $140 million as detailed in Table 20. Table 20: Financial Implications on Costs of Adjustment ($ million)
Cost of Adjustments Installation of meters for domestic consumers Settling outstanding debts of the Government and its agencies Investment support for gas exploration and development Total Source of Funds Government Asian Development Bank Total Source: Consultant estimates.. 5 30 35 5 30 35 35 0 35 35 0 35 80 60 140 FY2010 5 10 20 35 FY2011 5 10 20 35 FY2012 5 0 30 35 FY2013 5 0 30 35 Total 20 20 100 140

5.

Implementation Arrangements a. Program Management

186. For the program loan, the Borrower will be the Peoples Republic of Bangladesh. The executing agencies (EAs) will be the Finance Division of the Ministry of Finance (MOF) and the EMRD, which will be responsible for the overall coordination of the program loan during the implementation period. The EMRD will also coordinate the implementation of the revised GSRR, including implementation of policy reforms and other restructuring measures, and provide regular progress reports to ADB on their implementation. b. Period of Implementation

187. The program period will be from July 2008 to December 2011. The reform supported under the program loan will be completed in three and a half years by December 2011. c. Procurement and Disbursement

188. The proceeds of the policy loan will be used to finance the costs (including local taxes and duties) of items produced in and procured from ADBs member counties, preferably procured for the gas sector, other than those specified in the negative list in Appendix 18 and Imports financed by other bilateral and multilateral sources.

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56 189. The proceeds of the program loan will be disbursed to the Peoples Republic of Bangladesh as the Borrower in accordance with the provisions of ADBs Simplification of Disbursement Procedures and Related Requirements for Program Loans. No supporting import documentation will be required. Loan proceeds will be disbursed on the basis of certification by the Borrower confirming that in each year which policy loan proceeds are expected to be disbursed the value of total imports less (i) imports from nonmember countries, (ii) ineligible imports, and (iii) imports financed under other official development assistance are equal to or greater than the amount expected to be disbursed during such year. The Government will certify that each withdrawal request complies with this formula. Otherwise, import documentation under existing procedures will be required. d. Accounting, Auditing and Reporting

190. The use of loan proceeds will be audited and the accuracy of the Governments certification for each withdrawal application may be verified by ADB. Prior to withdrawal, the Government will open a deposit account at Bangladesh Bank into which the proceeds of the loans will be deposited and from which all withdrawals will be made. The accounts will be managed, operated, and liquidated in accordance with terms satisfactory to ADB. EMRD, in collaboration with MOF, will send quarterly progress reports to ADB. e. Tranching

191. The Program loan of $60 million will be released in two equal tranches of $30 million equivalent, and these will be made available upon the fulfillment of the actions enumerated in Table 21. The conditions for tranche release would be reviewed during subsequent stages and finalized by ADB during loan processing. The first tranche will be released after approval by the ADB Board of Directors expected by September 2009, and the second tranche will be released by June 2011 provided the required conditions have been complied with.

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57 Table 21: Required Actions for Tranche Release31


Output National Action Plan for Gas Sector Reform First Tranche ($30 million) Updating of revised National Energy Policy by Energy and Mineral Resources Division (EMRD) after interministerial consultation. Government approval of GSRR as agreed as agreed between the Government and ADB. HCU is made a permanent part of EMRD to provide technical advice on gas reserves and their utilization, and reform process. Initiate the implementation of the sectorwide capacity development program developed under ongoing TA provided in conjunction with Gas Transmission and Development Project (GTDP) after consultation with ADB and development partners. Adopt GSMP in consultation with the stakeholders comprising plans for expanding natural gas network to less developed regions in the western, northwestern and south-western zones. Advertisement for recruitment of required staff of BERC as per approved set up. BGSL, GTCL, JGTDSL, PGCL, TGTDCL and RPGCL to obtain operating licenses from BERC. BERC holds public hearing on gas tariff applications and promulgates its decision. BERC announces gas price adjustments after review of supplementary documents including medium-term strategic plan for gas development pursuant to its order of 28 November 2008. Revised gas pricing guidelines prepared by EMRD for interministerial review and stakeholder consultation.32 Finalize the gas act by EMRD and place it before the cabinet. Second Tranche ($30 million) Approval of revised NEP and its publication through gazette notification.

Transfer HCU to revenue budget to continually review policies and refine policy direction.

Updating of GSMP by HCU

Legal and Regulatory Framework

Define the roles and responsibilities of the Government and BERC for upstream and downstream activities in the gas sector.

Government approval of revised pricing guidelines and issuing of gazette notification of the gas pricing regulations. Submit the draft gas act to Jatiya Sangsad (National Parliament). Update the petroleum policy by EMRD providing for private sector participation in the upstream and downstream activities.

Assured Supply of Natural Gas

Develop strategy for exploration and utilization of undiscovered reserves. Third round of bidding from IOCs for exploration, development and production of gas initiated.

31 32

As discussed in a meeting of the visiting ADB Mission with Secretary, EMRD on 18 February 2009. To be reviewed.

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58
Output First Tranche ($30 million) Decision on award of contract made by EMRD. Preparation of a reservoir management plan by Petrobangla. Second Tranche ($30 million) Improvement of Governance in the Gas Sector Empower gas sector entities to adequately undertake all operational and financial activities including decision making for pricing formulation for BERC consideration, and investment budgets. Complete the process of consolidation of transmission operations in GTCL by transferring remaining assets. Formal government notification to transform TGDTCL and BGSL into separate companies to improve management efficiency. Invitation of next round of bidding for exploration and development of new gas fields. Adopt and implement systematic approach for reservoir management. Formulate five and ten year strategic business plans of gas sector entities to strengthen management practices and ensure fiscal transparency for revenues and expenditures.

Restructure the Gas Sector Entities

Promote private sector investment in gas sector development Market-oriented Gas Pricing Develop a time-bound action plan for offloading shares of gas distribution companies. Floating of shares of marketing companies in the stock exchange. BERC approval of transmission tariff for GTCL. Distribution tariffs for BGSL, JGTDSL, PGCL and TGTDCL determined by BERC.

Incorporation of separate companies and constitution of boards and transfer of assets to the new companies. Implement the restructuring plan for the agreed companies. Off-load at least 20% shares of gas distribution companies (BGFCL, BGSL, JGTDSL, SGFL and TGTDCL). Formula to be adopted by EMRD for determining upstream gas prices for national gas companies consistent with the cost of supply, with separation of well-head gas price, transmission charge and government tax.

ADB Asian Development Bank; BAPEX Bangladesh Petroleum Exploration and Production Company Limited; BGSL Bakhrabad Gas Systems Limited; EMRD Energy and Mineral Resources; GSMP Gas Sector Master Plan; GTCL Gas Transmission Company Limited; HCU Hydrocarbon Unit, IOC international oil company; JGTDSL Jalalabad Gas Transmission and Distribution Systems Limited; MEMRD - Ministry of Energy and Mineral Resources; PSC- production sharing contract; RPGCL Rupantarita Prakritik Gas Company Limited; SGC State gas companies; TGTDCL -Titas Gas and Transmission and Distribution Company Limited. Source: BERC, EMRD, Petrobangla

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59 E. The Project 1. Network Analysis

192. The main objective of the network analysis is to outline the least cost options for the proposed sub-components. The network analysis is based on the demand and supply projections received from Petrobangla in July 2008, and a review of the project documents provided by the concerned agencies. This review included the (i) status of the projects under implementation, (ii) rationale of the current upgrade proposals, and (iii) likely constraints to be addressed taking a long term view. 193. The investment component includes transmission and distribution pipelines, drilling of appraisal and development wells and servicing of problematic wells at the Titas gas field. The network analysis will involve the following components. (a) Upgrading and reinforcement of pipe line segments of the GTCL network in the South and West of Ashuganj comprising Ashuganj-Bakhrabad-Chittagong Gas Transmission Pipeline Dhanua-Elenga and Jamuna Bridge West Bank-Nalka Gas Transmission Pipeline (b) Southwestern gas distribution network under the franchise area of newly created Sundarban Gas Company Limited

194. The proposed transmission pipelines are intended to cater to the gas demands of BGSL, PGCL and SGCL in conjunction with the upgrade projects now under implementation through the GTDP. However, all these projects are affected by time and cost overruns. Under GTDP, three compressor stations were to be set up at Muchai, Ashuganj and Elenga and a number of pipeline sections were to be added from Manohardi to Khulna through Elenga, Jamuna Bridge and Bheramara and from Bonpara to Rajshahi. All these projects were scheduled to be completed between 2006 and 2010. 195. The pipe line reinforcement and extension components under GTDP are also behind the schedule. Even the line pipes are yet to be procured due to certain issues relating to cost and funding that may warrant fresh procurement action. If these issues could be resolved early, the compressor stations and the pipe lines may be completed only during 2011-2012, three years behind schedule. 196. However, ADBs consolidated comments on the draft final report question the utilization of compression facilities at Ashuganj and Elenga funded under GTDP for augmenting gas supply to the southern and western regions particularly to Khulna because of the prospect of gas supply from the southern off-shore areas to Khulna. The suggestions for transmission reinforcement in lieu of compression are not likely to be operationally useful at this stage. A review of the scope of GTDP is beyond the scope of this report. Moreover, the enabling circumstances for the proposed adjustments do not exist or are too uncertain to make major investment decisions. 197. On the other hand, the expansions under implementation will materially improve the overall GTCL system performance when constructed. These projects will add significant flexibility primarily due to the compressor projects and will allow gas deliveries to all franchise areas. The compression facilities will allow true load management procedures and programs to be implemented, and will help accommodate daily, weekly and seasonal swings far more effectively than the current free flow GTCL system.

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60 198. Initially, a 30-inch, 230 km long pipeline was proposed from Ashuganj to Chittagong through Bakhrabad and Feni. However, taking into account the demand-supply balance, different options have been considered. The south west gas distribution network (SWGTP) proposed by SGCL requires a thorough review in the light of drastic reduction of demand projection. 199. The gas demand and supply projections as furnished by Petrobangla during July 2008 after a great deal of internal deliberations are in Table 22, which also includes the demand forecasts of the GSMP, Case B. The GSMP forecast has been used for medium to long term development of the transmission net works across the various franchise areas and therefore some cognizance has to be taken of the same. However, it should be suitably tuned to the recent demand projections. 200. Considering the technical issues involved over a ten-year time-frame (2009-2020), the medium to long term perspective for scrutinizing a pipe line upgrade projects of the sorts under consideration can be provided (Table 23). The third column shows the adjusted demand figure (80% of second column) as suggested by Petrobangla to keep the demand projections close to the projected supply. The moderated demands of BGSL are about 69% of GSMP. For JGTDSL and PGCL, the moderated demands are respectively 66% and 61% of GSMP. However, the moderated demands of TGTDCL and SGCL have exceeded the projection by 113% and 105%. Considering the present correlation of the moderated demand vis-a vis GSMP for 2008-09 of BGSL franchise area , the current moderated demand is about 5% more than that in GSMP . Since transmission capacity enhancement in this franchise area as being considered now is quite significant as compared to the other franchise areas, it may be prudent to assume the gas demand slightly more than what has been indicated by Petrobangla for the sizing of the pipeline upgrades. A demand figure of 614 MMCFD as projected in Petrobangla Master Plan Case A that itself is quite conservative may be more appropriate, as it gives about 10% more cushion for pipe line sizing. 2. North-South System

201. Under this system of the transmission network, the planned creation of compression facilities at Muchai will enhance the deliverability of gas from the north- east gas fields into Ashuganj gas hub. The flow capacity of the compressor has been liberally sized up to 1,735 MMCFD as against the original recommended capacity of 890 MMCFD. The gas production in the catchment zone of Muchai compressor station may be in the range of 1,450-1,500 MMCFD. Allowing for JGTDSLs demand of about 250 MMCFD, about 1,200-1,250 MMCFD of gas would be available for compression at Muchai around 2019-20. Therefore, gas production will have to be augmented to ensure full capacity utilization of the planned Muchai compressor station. Also the existing pipe lines between Muchai and Ashuganj have got transmission capacity of about 1,350 MMCFD to be delivered by the Muchai end discharge pressure of 1,050 psig and Ashuganj suction pressure of 680 psig once the compressor stations at the both ends are commissioned about three years from now. As such there are no likely constraints, at least for the next 10 yrs, from transmission capacity between Muchai and Ashuganj unless there is increased gas production in the region. The gas demand of the franchise area of JGTDSL served by the system is almost stagnant from year 2010 onward and therefore no regional pipeline upgrade is foreseen as of now.

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61
Table 22: Revised Gas Demand Forecast (2008 - 2020) Company Category BGSL Power Captive Fertilizer Non-Bulk Total (MMCFD): 80% of Total(MMCFD) Total (BCF/year): Cumulative (BCF ): JGTDSL Power Captive Fertilizer Non-Bulk Total (MMCFD): 80% of Total(MMCFD) Total (BCF/year): PGCL Cumulative (BCF ): Power Captive Fertilizer Non-Bulk Total (MMCFD): 80% of Total(MMCFD) Total (BCF/year): Cumulative (BCF ): TGTDCL Power BPDB IPP REB SPP SIPP Rental(15 yrs) Rental(3 yrs) Captive Fertilizer Non-Bulk Total (MMCFD): 80% of Total(MMCFD) Total (BCF/year): Cumulative (BCF ): Power Captive Fertilizer Non-Bulk Total (MMCFD): 80% of Total(MMCFD) Total (BCF/year): Cumulative (BCF ): Total (MMCFD): 80% of Total Demand(MMCFD) FY2009 138 30 120 123 411 328 120 120 137 6 15 34 191 153 56 56 85 4 11 100 80 29 29 757 438 148 55 76 25 15 198 155 551 1,662 1,329 485 485 2,363 FY2010 148 32 120 133 433 346 126 246 167 6 15 36 224 179 65 121 85 5 13 103 82 30 59 863 438 148 111 126 25 15 214 155 596 1,827 1,462 534 1,019 2,587 FY2011 183 35 120 143 481 385 140 387 242 7 25 39 312 250 91 212 200 6 16 222 177 65 124 982 488 204 111 139 25 15 231 155 643 2,011 1,609 587 1,606 135 14 149 119 44 44 3,175 FY2012 218 37 120 155 530 424 155 541 206 7 25 42 280 224 82 294 200 7 19 226 181 66 190 1,147 507 351 111 153 25 250 155 695 2,246 1,797 656 2,262 135 15 150 120 44 87 3,432 FY2013 218 40 120 167 545 436 159 701 206 7 25 46 283 227 83 377 200 8 23 231 185 67 257 1,162 507 351 111 168 25 269 155 750 2,337 1,869 682 2,944 298 16 314 251 92 179 3,711 FY2014 218 43 120 180 562 450 164 865 206 7 25 49 287 230 84 461 200 10 27 237 190 69 327 1,179 507 351 111 185 25 291 155 810 2,435 1,948 711 3,655 298 18 316 253 92 271 3,837 FY2015 218 47 120 195 580 464 169 1,034 206 7 25 53 291 233 85 546 200 12 33 245 196 71 398 1,270 579 351 111 204 25 314 155 875 2,614 2,092 763 4,419 298 19 317 254 93 364 4,047 FY2016 218 51 120 210 599 479 175 1,209 206 8 25 57 296 237 86 632 200 14 70 39 324 259 95 493 1,288 599 328 111 225 25 339 155 945 2,728 2,182 796 5,215 298 21 319 255 93 457 4,265 FY2017 FY2018 218 218 55 59 120 120 227 245 620 643 496 181 1,390 206 8 25 62 301 240 88 720 200 17 70 47 335 268 98 590 1,331 599 328 131 248 25 367 155 1,021 2,873 2,299 839 6,054 298 22 320 256 94 550 4,449 514 188 1,578 206 8 25 67 306 245 89 809 200 21 70 57 347 278 101 692 1,356 599 328 131 273 25 396 155 1,102 3,009 2,407 879 6,933 298 24 322 258 94 644 4,627 FY2019 218 64 120 265 667 534 195 1,773 206 8 25 72 311 249 91 900 200 25 70 68 363 290 106 798 1,493 599 418 151 300 25 428 155 1,191 3,266 2,613 954 7,887 298 26 324 259 95 739 4,931 FY2020 218 69 120 286 693 555 202 1,975 206 9 25 78 317 254 93 993 200 30 70 82 381 305 111 909 1,523 599 418 151 330 25 462 155 1,286 3,426 2,740 1,000 8,887 298 28 326 261 95 834 5,144

SGCL

2,070 2,540 2,746 3,070 3,238 3,412 3,702 3,945 4,115 1,890 2,969 3,559 690 1,182 1,245 755 927 1,002 1,440 1,502 Total (BCF/year): 1,121 1,299 1,351 1,084 1,445 3,375 4,458 8,006 9,305 10,656 12,096 13,598 690 Cumulative (BCF ): 2,373 5,579 6,761 BCF = billion cubic feet; BGSL = Bakhrabad Gas Systems Limited; BPDB = Bangladesh Power Development Board; IOCs = international oil companies; JGTDSL = Jalalabad Gas Transmission and Distribution Systems Limited; MMCFD = million cubic feet per day; PGCL = Paschimanchal Gas Company Limited; SGCL = Sylhet Gas Company Limited; TGTDCL = Titas Gas Transmission and Distribution Company Limited Source: Petrobangla

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62 Table 23: Company-wise Summary of Gas Demand Per Franchise Area


(MMCFD) Gas Demand GSMP Forecast (Adjusted) BGSL 693 554 802 JGTDSL 317 254 168 PGCL 382 305 185 SGFL 326 266 254 TGTDCL 3,426 2,741 2,409 BGSL - Bangladesh Gas Fields Company Limited, JGTDSL - Jalalabad Gas Transmission and Distribution Systems Limited, PGCL - Paschimanchal Gas Company Limited, TGTDCL - Titas Gas Transmission and Distribution Company Limited, SGCL - Sundarban Gas Company Limited Source: Petrobangla Franchise Area Gas Demand (Petrobangla)

3.

Central System (Ashuganj-Chittagong)

202. GTDP is also funding the installation of a compression facility of about 2,297 MMCFD at Ashuganj hub, of which 1,502 MMCFD is earmarked for the west of Ashuganj demand centers. This facility is critical for stabilizing gas flow into Dhaka and gas deliveries to the franchise area of PGCL in the west and to SGCL up to Khulna in the south-west. The planned downstream pipelines must be completed in parallel to make the best utilization of the compression facilities. This includes Manohardi-Dhanua 37 km 30-inch pipeline. Under the current proposal, a 30-inch, 52 km pipeline is to be added between Dhanua and Elenga and to be looped to the existing 24inch pipeline. A detailed analysis of this proposal is furnished in the subsequent pages of this report. The sub-component has been recommended for immediate implementation. 203. Under this system, a compressor station is planned at Elenga for implementation under GTDP. The flow capacity of the compressor is stipulated to be 500 MMCFD at discharge pressure of 1,000 psig and suction pressure of 600 psig. In addition, a 30-inch 14 km pipeline is already planned between Elenga and Jamuna Bridge (E). Under the present proposal a pipeline is also to be laid between Jamuna Bridge (W ) to Nalka having size of 30 -inch and 15 km long. However, this proposal need not be pursued at this stage. Any such pipe line upgrade may be undertaken with future capacity enhancement of the upstream compressor station. Even the planned pipeline upgrade between Elenga and Jamuna Bridge (E) appears redundant with the present size of the Elenga compressors. 204. Further, even the moderated total demand of PGCL and SGCL is 566 MMCFD by 20192020, which exceeds the Elenga compressor capacity of 500 MMCFD. Accordingly, if gas production improves in future, the capacity of Elenga compressors may have to be enhanced suitably along with other linked upgrades further upstream. The western region of Bangladesh is relatively much less developed in terms of gas transmission infrastructure. Major pipe line extensions have already been planned downstream of Nalka but all the projects are much behind the original schedules and may not be completed before 2011-12.33 The distance from Nalka to Khulna is 250 km, which is too long to rely upon a purely free-flow and pipeline centric transmission net work. The present demand can somehow be managed with the ongoing and proposed projects, but in future a compressor station may have to be set up between Nalka and Khulna considering the growth potential of the region. 205. This transmission network consists of Ashuganj- Bakhrabad-Chittagong sections and the spur lines from the Bakhrabad hub to the greater Dhaka region. Under the already planned project activities only one work has been completed the installation of reciprocating
33

These projects include 30-inch, 87 km pipeline from Hatikumrul to Bheramara; 20-inch, 165 km pipeline from Bheramara to Khulna; and 12-inch, 50 km pipeline from Bonpara to Rajshahi.

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63 compressors at Bakhrabad to facilitate evacuation of medium pressure gas to BakhrabadChittagong pipeline from the gas fields in the area. For this system, a flow of 795 MMCFD has been earmarked from Ashuganj compressor station scheduled to be completed in about three years from now. However there is flexibility of flow adjustments between west and south sections of the transmission lines as all the operating compressors would be connected to a common header at Ashuganj hub, and therefore some marginal variation can be effected in allocation of gas to these sections. Until the compressors are installed, the deliverability of gas to the Chittagong area would remain jeopardized. The problem has got further aggravated due to erratic and fast depleting Sangu gas fields directly feeding the Chittagong ring main. 206. Under the initial proposal, 233.5 km long, 30-inch pipeline is proposed to be looped to the entire existing stretch of transmission line from Ashuganj to Chittagong. The existing pipeline consists of 30-inch, 58.50 km from Ashuganj to Bakhrabad and 24-inch, and 175 km long from Bakhrabad to Chittagong. This segment has been analyzed in depth keeping the following factors in view: (i) The total transmission capacity after reinforcement should be able to accommodate some capacity enhancement of the Ashuganj compressor station in future as frequent upgrade options of cross- country pipe line is generally tedious and costly. It is possible to add some cushion in the transmission capacity at this stage at a nominal incremental cost. The pipeline upgrade should be based on higher pressure strata to retain the benefit of higher line pack to preserve stable pipe line hydraulics during peak load hours also. The pipe line should be able to sustain wide variation in the intermediate system inputs and drawls of gas than that assumed for the simulation check.

(ii)

(iii)

207. The analysis has been carried out using one of the most versatile software available for this nature of analysis. All the relevant pipe line attributes such as pipe dia, material of the pipe line, length, efficiency, friction factors etc were duly entered for analysis. Supplemental such as nature of joints, debeaded status of the pipe lines, etc has been duly considered. Wherever considered essential, Optimum Diameter Selection capability of the software has also been utilized before selecting the nearest commercial size of the pipe lines. All critical information such as the facility flows between nodes, velocity, pressure profiles, velocity, Reynolds numbers, line pack across all pipe line segments, pressure drops per unit length of the pipe lines, have been shown in the system generated print outs attached in Appendix 19. 208. The simulation analysis suggests that a 30-inch pipeline should be laid from Ashuganj to Laksam running parallel to the existing line unless deviation is warranted due to terrains factors and suitably looped to the existing pipe line. The pipe line length for this 30-inch pipeline will be 108.50 km as per the recent route survey carried out by GTCL. Further down, i.e. from Laksam to Barabkunda, a 24-inch pipeline is recommended, to be laid parallel to the existing 24-inch pipeline, which will be about 99 km long. The balance 26 km, 24-inch, stretch from Barabkunda to Chittagong will not need any addition but the same can be considered in future to enhance further gas through put to Chittagong at not so high cost. Contribution from Semutang gas fields of about 20 MMCFD directly to the Chittagong ring may also improve the supply in the region. 4. Sensitivity Analysis 209. Sensitivity analysis is needed for the major pipe line up grade between Ashuganj and Chittagong. All other subcomponents are too simple to be analyzed from a sensitivity perspective. For instance, the proposed addition of pipe line between Dhanua and Elenga is

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64 primarily meant to address the transmission capacity limitations between two planned compressor stations, the critical operating parameters of which have already been frozen for procurement. There is hardly any maneuverability left to look at the sizing of the segment. 210. The simulation has been carried out by taking the moderated demand projection which is 80% of maximum assessed demand. Thus , there is no case for considering low throughput induced due to lower than assumed demand. Besides , the moderated demand on the basis of which the pipe lines have been sized is found to be lower by about 10% than GSMP Case A that itself is taken as a conservative figure. a. Low Supply Induced Low-Flow (through put) 211. As per the gas production forecast for the 2008-2020 period furnished by Petrobangla, the gas production is evenly placed with respect to the moderated gas demand up to middle of the above period but in the later years there is deficit in gas supply ranging from 12-18%. Accordingly, a reduction of 15% in through put on above account may be considered for the purpose of sensitivity analysis. On this basis, if the throughput is reduced from 555 MMCFD to 472 MMCFD, 17.5 km of 24-inch pipeline would be redundant resulting in a cost reduction of $16.3 million. b. Higher Flow Sensitivity 212. This case is highly unlikely as no immediate gas production increase is anticipated nor there is much scope for a major diversion of gas from other franchise areas. Even if the historical share of BGSL franchise area is considered, it peaked to about 20% in the past against which their share is shown to only about 13.5% by the year 2019-2020. There may be a likely increase of 5 to 6% at the most considering the strategic importance of Chittagong. Any such flow swing can be easily managed by the upgraded network by lowering the pressure at Chittagong without any extra investments. For more flow requirement in future, the network transmission capacity can be significantly enhanced to up to 704 MMCFD at a reasonable project cost by looping 26 km long BarabkundaChittagong pipeline. 5. Analysis of Individual Subcomponents a. Ashuganj-Bakhrabad-Chittagong Gas Transmission Pipeline

213. The existing 233.5 kms long pipe line caters primarily to the gas demand in the BGSL franchise area except gas- off take from Bakhrabad hub directed to Demra /Siddhirganj spur lines for supplementing the gas demand in the proximity of the capital region. A 30-inch pipe line is proposed to be looped with the existing pipe lines from Ashuganj to Chittagong. Out of above existing 233.5 kms long pipe line, about 58.50 kms of pipe line is of 30-inch from Ashuganj to Bakhrabad and balance from Bakhrabad to Chittagong of 24-inch. 214. As regards the demand projection relevant to BGSL, daily gas demand of 410.50 MMCFD and 693.40 MMCFD have been indicated respectively for the year 2008-2009 and 2019-2020. This covers all sectors. I.e. power, fertilizer and non-bulk. Petrobangla have further reduced the above figures by 20% to make the overall gas demand to some extent close to the supply projection but still retaining a considerable mismatch. 215. When the above demand projection is compared to the GSMP projections, it is seen that BGSL gas demand corresponding to the base case is estimated at 614 MMCFD for year 20192020, the demand is shown as 802 MMCFD for the higher case. Thus the latest estimate is almost mid way if we ignore the 20% reduction applied by Petrobangla. It is to be ensured that the pipe line transmission capacity after upgrade is a bit on the higher side. It is also to be noted that in the GSMP, the gas demand projection for the BGSL franchise area was kept to the extent of 20 to 21% of the aggregate demand for all the companies. The above parity has been

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65 significantly disturbed in the revised estimate as now BGSL share is about 13.5% of the total projected demand. It is because of the higher demand shown for TGTDCL, JGTDSL and PGCL. 216. Considering these factors, the possible pipe line upgrade options have been analyzed. For simulation studies it is assumed that of the total BGSL franchise demand, about 75 to 80% of demand would be on the downstream side of Chittagong and the remaining demand on the upstream side of the Chittagong up to Bakhrabad. This is based upon the break up provided by BGSL and GTCL assessment of the system out puts considered at the initial stage of the network analysis. For the system inputs from the gas fields in the proximities, the supply projection as furnished by Petrobangla has been broadly considered. Demand for Demra Siddhirganj spur lines have been kept apparently on the higher side to allow some extra transmission capacity between Ashuganj and Bakhrabad to meet any future upgrade requirement of the compression facilities, say up to further 27% without any additional pipe line upgrade in the near future. Any pipeline upgrade of such a magnitude is always time consuming and tedious and therefore it is a very good idea to keep the frequency of such upgrade as low as possible. 217. The options considered in this review are in Table 24: Table 24: Analysis of Ashuganj-Bakhrabad-Chittagong Pipeline Network Section
Ashuganj-Bakhrabad Bakhrabad-Laksam Laksam-Barabkund Barabkund-Chittagong City Gate Station Source: Consultant Estimate

Existing Pipeline
Size, inch 30 24 24 24 Length, km 58.5 50.0 99.0 26.0

Proposed Addition
Size, inch 30 30 24 None Length, km 58.5 50.0 99.0 None

218. The requirements that will be met with this network configuration are summarized in Table 25. The flow of 432 MMCFD downstream of Chittagong corresponds to a pressure of 546 psig at CGS. However in case the demand is more in future the flow can be increased to 483 MMCFD at 400 psig, with maximum velocity in the last segment between Barabkund-Chittagong going up to 63 ft/sec (19.2 m/sec) that remains in an acceptable zone. After installation of compressors (at Ashuganj in the case), the gas will be subjected to more efficient filtration, separation and scrubbing process and that the stipulated dry gas seals on the compressors would eliminate any chance of oil-fog contamination usually experienced in the conventional oil seals. With the improved gas quality, it is possible to operate at a higher gas velocity. Table 25: Supply Configuration of Proposed Network
Delivery Points Flow Chittagong, Chittagong City Gate Station (CGS) downstream Design Parameters 432 MMCFD at 546 psig 484 MMCFD at 400 psig Flow Bakhrabad to Chittagong CGS upstream 120 MMCFD Total BGSL Demand Met 552 MMCFD at 546 psig at CGS 603 MMCFD at 400 psig at CGS Maximum compressor flow possible 914 MMCFD at 400 psig at CGS Assured off-take to Demra/Siddhirganj 650 MMCFD Maximum velocity across the upgraded pipe line 12.48 m/s and 19.2 m/s for 400 psig case BGSL - Bakhrabad Gas Systems Limited; CGS - City Gas Station; MMCFD - million cubic feet per day; psig - pounds per square inch gauge Source: Consultant estimates.

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66 219. A second option for upgrading this section of the network is indicated in Table 26. This would involve looping of the Barabkunda-Chittagong CGS (24-inch, 26 km pipeline) in future to an additional 24-inch pipeline in case the requirement is more or if compressor capacity at Ashuganj is required to be enhanced. This is not anticipated at this stage, and is for future consideration to be implemented in conjunction with any compressor upgrade up to 27% of the present capacity earmarked for Ashuganj. Table 26: Supply Configuration of Proposed Network (Alternative)
Delivery Points Flow Chittagong, Chittagong City Gate Station (CGS) downstream Flow Bakhrabad to Chittagong CGS upstream Total BGSL Demand Met Maximum compressor flow possible Design Parameters 548 MMCFD (at 402 psig) 156 MMCFD 698 MMCFD 1010 MMCFD (127% of rated Ashuganj compressor capacity.) Assured off-take to Demra/Siddhirganj 650 MMCFD Maximum velocity across the upgraded pipe line 41.29 ft/sec (12.60 m/sec) BGSL - Bakhrabad Gas Systems Limited; CGS - City Gas Station; MMCFD - million cubic feet per day; psig - pounds per square inch gauge Source: Consultant estimates.

b.

Ashuganj-Bakhrabad-Feni Gas Transmission Pipeline

220. Considering the gas supply constraint and the availability of compression facilities from 2011, GTCL has proposed that, instead of the 230 km pipeline up to Chittagong, a looping of the existing pipeline by laying a 30-inch pipeline from Ashuganj to Feni may meet the requirement. The estimated demands for the period up to 2019-2020 range between 464 and 580 MMCFD. The allocated compression capacity to the Ashuganj-Chittagong pipeline is 795 MM CFD at 1,000 psig. The contribution of gas from the eight fields feeding the pipeline is between 414 MMCFD and 454 MMCFD. This would mean that the total quantity of gas to be transmitted through the Ashuganj-Chittagong pipeline will be 1,209 to 1,249 MMCFD, while gas demand for BGSL for this period is estimated at 559 to 580 MMCFD. 221. As per the present parity of daily gas distribution in the franchise area of BGSL, about 75% of the total gas distribution is required on the downstream of Chittagong CGS. This parity is also seen in such upgrade options worked out by GTCL where upgrade encompasses bigger stretch. Accordingly, about 419 MMCFD of gas would be flowing from CGS and balance 140 MMCFD from the points on the upstream of CGS. This breakup is broadly in line with the analysis done by GTCL. Accordingly, the alternatives analyzed for the Ashuganj-Feni pipeline are summarized in Table 27.

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67 Table 27: Supply Configuration of Alternative Network


Item BGSL demand, MMCFD Demand at CGS, MMCFD Compressor capacity Utilized, MMCFD Minimum pressure required at Chittagong CGS Pressure achieved at CGS Maximum velocity, feet per sec Maximum desirable velocity, ft per sec Pressure drop, psi mile Desirable pressure drop, psi/mile Source: Consultant estimates. 2014-2015 Case A Case B 559 580 419 435 795 776 400 162 134 66 18.59 10 400 (-) 206 135.6 66 38.07 10 2019-2020 Case A 543 407 795 400 256 84 66 14.64 10 Case B 583 438 795 400 -271 103 66 40.20 10

222. The Option A for both 2014-2015 and 2019-2020 fail to meet the pressure requirement at the extreme end of the pipeline, i.e. Chittagong CGS. Also the GTCL proposal does not address the issue of excessive velocity and pressure drop seen on the pipeline section between Feni and CGS. Also, very low pressure drop as seen on Laksam-Feni section and very high press drop /high vel. seen on section beyond Feni to the fact that while LaksamFeni section would be oversized unnecessarily but FeniChittagong section would remain undersized and therefore overstrained. As for Case B in both 2014-2015 and 2019-2020, both cases are infeasible with the GTCL present proposal. The pressure at CGS becomes negative in both the cases. The pressure drop and maximum velocity are also unacceptable. However, when the same system gas inputs and outputs and other relevant conditions are imposed on the network, the optimum upgrade would be a 30-inch loop line from Ashuganj to Laksam, with a 24-inch looping between Laksam and Barabkund. In this case, all the pipe line hydraulic parameters are within limit. Moreover this upgrade option does not impose any restriction on future utilization of the envisaged compressor capacity as against this GTCL suggested upgrade option restricts capacity utilization of the compressor to within 594 MMCFD i.e. 75% of the designed capacity. Thus the upgrade proposal as suggested by GTCL would not ensure proper pipe line hydraulics parameters and suitable pressure at CGS and would restrict full exploitation of provided compressor capacity. c. Dhanua-Elenga Gas Transmission Pipeline

223. As per the initial proposal, a 30 pipeline 52 km long is to be looped with the existing 24 pipeline between Dhanua and Elenga. A technical evaluation of this sub-component is not possible in isolation. This pipe line would form a linkage between the compressor station at Ashuganj on the upstream side and one at Elenga on the downstream side. Accordingly, critical parameters of the compressors have been considered while analyzing this component. 224. As per the technical specifications of the compressors now under procurement, discharge flow from Ashuganj compressor station as allocated to the western side of the transmission network varies from initial 1,050 MMCFD for the first 3 years or so , up to 1,502 MMCFD from year 2015 onwards. The design discharge pressure of the compressor stations to be provided at Ashuganj and Elenga is 1,000 psig. The compressor station at Elenga is to have the rated flow of 500 MMCFD maximum with suction pressure of 800/750 psi in the initial years of the commissioning and stabilizing at 600 psi by year 2015 or may be a bit later now due to the considerable delay in the project implementation.

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68 225. For the purpose of the present analysis, the maximum rated flow condition and the ultimate suction pressure have been considered as these parameters would remain valid on a long term basis beyond a few initial years of the commissioning of the compressors. From the perusal of the compressor station design data, it is obvious that from the view point of long term operation of compressors, major portion of Ashuganj (west) flow of 1502 MMCFD would be distributed to the consumers connected between Ashuganj and Elenga compressor stations subject to meeting the minimum suction pressure requirement of 600 psig for Elenga compressor station. Considering the existing pipeline size, and assuming that small operational charges can be managed to have both 30 and 24 pipeline connecting Ashuganj and Manohardi to operate in a loop, this simulation check has been performed. 226. If the full intermediate flow of 1,002 MMCFD from Manohardi and Dhanua regions is drawn, and a pressure of 600 psig is maintained at Elenga then about 423 MMCFD of gas will be available at Elenga for recompression. Thus in this case Ashuganj compressors can deliver to this sector up to about 1425 MMCFD. If it is desired to make full use of the earmarked capacity of 1502 MMCFD then the intermediate off-take flow will have to be increased further. With the present estimated drawls at Dhanua and Manohardi of 430 MMCFD and 300 MMCFD respectively, Elenga will be receiving about 597 MMCFD at the minimum required pressure of 600 psig, out of which 500 MMCFD can be compressed at the compressor stations and balance distributed from the suction side of the compressor station. 227. However, no upgrading Dhanua Elenga pipe line may result in an infeasible solution as the minimum suction pressure necessary for Elenga compressors would not be achieved. Until this sub-component is implemented along with the planned Manohardi- Dhanua section, the transmission capacity between Ashuganj and Elenga will have a serious mismatch with the planned compression facilities. Considering these factors a pipe line of 30-inch diameter may be laid at the earliest between Dhanua and Elenga which is 52 km long and looped with the present line. d. Jamuna Bridge (West) to Nalka 228. As per the on-going GTDP, expected to be completed by 2011-12, the pipeline will be receiving gas through Elenga compressor station with maximum rated flow capacity of 500 MMCFD at 1000 psig discharge pressure. Unless the capacity of Elenga compressor station is enhanced further in future, the downstream pipeline size would be adequate enough to meet the flow requirement corresponding to the maximum flow achievable from the Elenga compressors presently under procurement. With the analysis done on above basis, the existing 24 Jamuna Bridge (West)-Nalka pipeline is found to be adequate. Nalka downstream flow of about 400 MMCFD can be managed considering intermediate drawl of about 100 MMCFD between Elenga to Nalka. Maximum velocity would remain in the vicinity of 28.70 ft/sec (8.75 m/sec) only and within an acceptable pressure drop (psi/mile) factor. With the proposed up gradation of Elenga Jamuna Bridge (E) segment, the velocity profile would improve further. Accordingly, the up gradation of Jamuna Bridge (West) - Nalka pipeline segment may be clubbed with only future upgrade of Elenga compressors capacity and need not be considered at this stage. 6. Impact on Project Costs (All GTCL Subcomponents) 229. The analysis has outlined some changes in the size and length of some of the pipeline segments proposed by GTCL. The cost estimates have been revised on the basis of unit costs of 30-inch and 24-inch pipe lines arrived at after detailed analysis and updating. The basic costs are expected to be valid till mid 2009. The revised cost estimates are about 77% of the original estimates proposed by GTCL (Table 28).

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69 Table 28: Cost Estimates of Transmission Pipelines ($ million)


Pipeline Section Dhanua to Elenga & Jamuna Bridge (W) to Nalka AshuganjBakhrabad-Chittagong city gate station Total Source: Consultant estimates. Proposed by GTCL Total Foreign Exchange 77.10 292.50 369.60 40.40 149.10 189.50 Total 62.52 222.70 285.22 Revised Cost Foreign Exchange 31.50 111.38 142.38

7.

South Western Gas Distribution Pipeline

230. The SGCL proposal was reviewed during May-June 2008. The unit costs of procurement as well laying costs were discussed in detail with the project in charge of the company. The costs were found to be in order as far as the unit rates were concerned but the growth of gas distribution to the non-bulk segments was assumed to be unrealistic. This resulted in distortions in the capital expenses phasing and the project milestones. The latest demand projections are at variance with the previous assumptions. SGCL and PGCL share the gas transmission network downstream of Elenga. PGCL demand is assessed to be about 305 MMCFD while that of SGCL as 261 MMCFD. Thus total demand comes to 566 MMCFD by 2019/20. However actual transmission capacity even after the installation of the Elenga compressors likely during 2011/12 would be just about 500 MMCFD. Accordingly the SGCL share would be in the vicinity of 230 MMCFD only. Out of above, about 210 MMCFD would be apportioned to power and balance 20 MMCFD to the non-bulk category of the consumers. As against this scenario, 75 MMCFD of gas consumption has been considered in DPP of SGCL for the development of the distribution infrastructures for non-bulk segments, say, within 7/8 years of the project start. 8. Outcome

231. The outcome of the Project is expanded capacity for clean-fuel supply and improved efficiency in natural gas transmission and distribution systems to be achieved by (i) critical priority investments, especially an additional pipeline (looping) to supply gas to the eastern region (ii) improved governance of the gas sector through its restructuring and increased private sector participation by developing an enabling regulatory framework; (iii) ensuring the long-term financial viability of the sector by reducing technical and non-technical system losses and improving management of sector entities; and (iv) increasing the pace of economic development in less-developed regions of the country by expanding the sustainable use and supply of clean natural gas resources to replace fossil and biofuels that would also improve air quality, and reduce deforestation and respiratory diseases. Under the present economic conditions, ADB support is considered crucial to help increase the supply of natural gas to meet the countrys growing energy needs while improving the efficiency of gas sector production, transmission and distribution companies. 9. Outputs

232. The GSMP provides the basis for Petrobangla investment plan. However, since the preparation of the GSMP there has been a major revision of gas reserves for the Sangu field servicing Chittagong. With the need to provide gas to Chittagong from the fields in the North

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70 east such as Titas the investment priorities have now changed. Also, the World Bank is considering funding a transmission pipeline as part of the Siddhirganj Peaking Power Project. 34 233. The proposed physical investments are the most urgent components of the gas sectors priority investment program. The subcomponents have been selected considering their financial and economic viability, and social, environmental and poverty reduction impacts. They would also contribute to the poverty reduction objectives by making clean energy available to less developed areas. Evidence of strong support by the local population and the high likelihood of successful importance are also important. 234. The outputs of the Project comprise six investment components consisting of (i) three transmission pipelines, (ii) appraisal and development of four wells in the Titas gas field, and repair and servicing of existing problematic wells at Titas, and (iii) distribution network in the South Western region. The Project is designed to address all aspects of the problem faced by the gas sector, namely appraisal, production and transmission, and distribution. The scope of the Project will include the following components: a. Part A: Gas Transmission Expansion Three transmission pipelines will transmit gas to the consumption centers including less developed regions of the country. i. Ashuganj-Bakhrabad-Feni gas transmission pipeline The initial GTCL proposal for this subcomponent involved the construction of a 30-inch diameter, 262 km pipeline with a throughput of 300 MMCFD. Later, GTCL revised its proposal to a 30-inch diameter pipeline from Ashuganj to Feni over a distance of 153 km. Based on the network analysis, the proposed configuration will be a 30-inch, 61 km pipeline from Ashuganj to Bakhrabad followed by a 30-inch 92.5 km pipeline from Bakhrabad to Feni through Laksam. However, taking into account the limitations in natural gas supply, only the AshuganjBakhrabad pipeline will be constructed now. The Bakhrabad-Feni pipeline may be constructed provided natural gas supply could be ensured. ii. Dhanua-Elenga gas transmission pipeline The subcomponent will involve the construction of a 30-inch diameter, 52 km pipeline with a throughput of 300MMCFD. iii. Jamuna Bridge West Bank-Nalka gas transmission pipeline The subcomponent will involve the construction of a 30-inch diameter, 14 kilometer (km) gas pipeline from the Jamuna bridge west bank to Nalka with a throughput of 300 MMCFD. In 2005, Petrobangla proposed this subcomponent for financing under GTDP. However, this portion was excluded from the AshuganjManohardi-Dhanua-Elenga-Jamuna Bridge east bank gas transmission pipeline subcomponent of GTDP taking into account the installation of gas compressor at Elenga. However, with the delay in the construction of the compressor station and the growth in demand, this small portion of the network from Dhanua to Elenga has become critical. However, the network analysis conducted under this study does not justify the Jamuna Bride (West Bank) to Nalka pipeline at this stage.
34

Bakhrabad-Siddhirganj 30 inch diameter 60 km pipeline at a cost of about $100 million.

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71 b. Part B: Gas Seepage Control, and Appraisal and Development of Titas Gas Field

This component will include two subcomponents: appraisal and field development and repair and servicing of the problematic wells in Titas gas field (Map 5), and appraisal and development of four producing wells in Titas Gas Field to upgrade the estimated gas in place. The subcomponent will involve drilling of development wells and installation of processing plants at the gas field to increase gas production by 120 MMCFD. Three dimensional surveys of the existing gas fields at Titas gas field are included in the scope of the GTDP. However, given the critical shortage of gas, Petrobangla has requested ADB assistance to drill appraisal wells in the fields adjacent to existing reserves before the survey is completed so as to increase proven gas reserves. The second subcomponent will identify the causes of gas seepages and undertake remedial works in existing problematic wells at Titas.35 c. Part C: Southwest Region Gas Distribution Network Following the extension of the gas transmission network to Khulna under GTDP, there would be the need to support gas distribution projects along this pipeline to provide gas to new towns such as Khulna, Kushtia, Jhenaidah, and Jessore (Map 6). The subcomponent will involve the construction of 2-inch to 20-inch diameter, 1,221 km distribution lines. However, the justification for undertaking this extensive network would need to be examined in the light of known gas reserves and their availability through exploration and development. In the first phase, about 856 km of distribution pipeline will be constructed. F. Project Cost Estimates and Financing Plan

235. The development project proforma (DPPs) for two proposed subcomponents Dhanua Elenga Gas Transmission Pipeline (DEGTP) and Jamuna Bridge (West)-Nalka Gas Transmission Pipeline (JNGTP) were approved in 2006, but will be reviewed by GTCL. The DPPs of the remaining transmission pipeline subcomponents are under preparation and will be processed soon. The Titas Field Appraisal and Development subproject and Southwest Region Gas Distribution Network (SRGDP) subproject DPPs are complete subject to approval. 1. Assumptions

236. Table 29 sets out assumptions on inflation and exchange rates adopted in the analysis. International inflation is assumed at 0.8% per annum over the forecast period, while domestic inflation is assumed at 8.0% in FY 2009, 7.5% in FY 2010, 7.0% in FY 2011 to 2014 and 5.0% per annum thereafter over the forecast period. In respect of capital costs incurred in foreign exchange (incorporating physical, price contingencies, and financing charges) these are converted to domestic currency at the exchange ruling in the year of expenditure/draw down. For operating costs, where applicable these are adjusted by the domestic rate of inflation year on year.

35

The suitability of financing this subcomponent under the program loan, a separate engineering loan or TA will need to be assessed.

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72 Table 29: Inflation and Exchange Rates Assumed in the Financial Projections
Year ending 30 June 2008 2009 2010 2011 2012 2013 2014

Domestic inflation (%) Domestic Inflation Factor International inflation (%) International inflation Factor Exchange rate (Tk/$US)
Source: Asian Development Bank

9.0 1.000 6.8 1.000 70.0

8.0 1.085 0.8 1.038 75.4

7.5 1.169 0.8 1.046 80.8

7.0 1.254 0.8 1.055 86.2

7.0 1.342 0.8 1.063 91.9

7.0 1.436 0.8 1.072 98.0

7.0 1.536 0.8 1.080 104.4

237. The project costs assume that the ADB will provide a loan from its ordinary capital resources (OCR loan) to finance the foreign exchange costs of the project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADBs London interbank offered rate (LIBOR)-based lending facility with a margin of 0.2%, a commitment charge of 0.15% per annum, and a front end fee of 1% of the loan amount.36 For the purposes of calculation interest during construction (IDC) the fixed five year $ LIBOR rate has been adopted, which is equivalent to 3.66%37 per annum (inclusive of ADBs 0.2% margin). It is assumed that the ADB loan will be relent to the participating companies at a 5% interest rate for a period of 15 years plus a grace period of three to five years, depending on the duration of the subcomponents. The participating companies will bear the foreign exchange risk of the loan. IDC has been calculated at 5% on funds drawn down, with the foreign element including IDC payable to ADB at the LIBOR rate plus 0.2%, plus commitment fees at 0.15% of the loan balance outstanding. 238. The Government and the companies will provide the balance of funds to meet local currency costs in the form of equity from the ADP plus loans repayable by the companies at an interest rate on outstanding balance at 4.0% per annum repayable over 12 years. IDC has been calculated at 4% on domestic funds drawn down. There is no commitment or front end fees assumed on domestic borrowings. G. Detailed Project Costs

239. The costs of the different subcomponents are based on recent tender data, adjusted as necessary. The total cost of the Project is estimated at $561 million. This is made up of the Gas BGFCLs Seepage Control, and Appraisal and Development of Titas Gas Field at a cost of $155.9 million; the three GTCL subcomponents covering initial phase of Ashuganj-BakhrabadChittagong to Feni, Jamuna Bridge-Nalka, and Dhanua - Elenga transmission pipelines at an estimated cost of $316 million: and the SGCLs South Western gas distribution project (Phase I) estimated at $89.2 million. The Project cost includes physical and price contingencies, and interest and financing charges in accordance with ADB guidelines and procedures. These costs are set out in Table 30 by main cost items, and summarized by subcomponents in Table 31. Detailed costs for each component are set out in Appendix 20. 240. The costs for the Ashuganj-Bakhrabad-Chittagong pipeline to Feni (30 inch 90 km) also have an alternative evaluated, to Barabkunda that involves both 30 and 24 inch pipelines for a total of 92.5 km, plus in both cases Ashuganj to Bakhrabad 30 inch of 61 km would need to be added. The cost estimates include expenditures for environmental mitigation and resettlement.
36 37

At present the front end fee is waived on all loans As at 13 November 2008

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73 241. The two Jamuna Bridge Nalka and Dhanua Elenga pipelines are based on DPPs prepared in 2006 with costs updated in line with recent tenders. Likewise, the DPP for the Southwest Gas Distribution project of October 2008 includes estimates for environmental mitigation and resettlement. The Jamuna Bridge Nalka pipeline is included at the request of Petrobangla. The network analysis shows that this is not required at the present time, so it is not proposed for funding under the proposed project. Table 30: Detailed Project Costs
TkMillion Foreign A. Investment Costs 1.Preliminary Expenses 2i.Land Acquistion 2ii.Land Requisition 3.Land Development 4.Route Survey and Investigations 5.Environment Impact Assessment (EIA) and Surveys 6. Resettlement Compensation 7. Construction Works 8.Buildings 9i.Pipelines materials 9ii.Other Equipment 9 iv.Freight and Insurance 9v. Domestic Transport 10. Vehicles 11. Workover Operations 12. Engineering and Consulting 13.Training and Human Resource Development 14.Project Management and Overheads Total B. Contingencies Physical Contingency Price Contingency Contingencies C. Financing Charges Total Foreign Exchange Loss Total Costs % of total costs 2,414.9 4,927.1 35,814.8 71% 157.8 0.0 14,340.3 29% 2,572.7 4,927.1 50,155.0 100% 32.4 0.0 375.8 67% 10.9 0.0 184.7 33% 43.3 0.0 560.5 100% 2,533.9 600.5 3,134.34 1,081.4 2,347.0 3,428.38 3,615.3 2,947.4 6,562.72 29.0 6.8 35.8 13.3 28.5 41.8 42.2 35.3 77.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,032.1 0.0 16,242.8 1,719.9 842.2 0.0 13.1 3,606.1 1,782.6 99.7 0.0 25,338.5 6.0 858.8 520.2 51.4 15.6 9.5 520.5 2,523.9 133.5 4,977.4 295.5 0.0 190.3 67.2 194.6 144.9 3.5 241.3 10,754.0 6.0 858.8 520.2 51.4 15.6 9.5 520.5 3,555.9 133.5 21,220.2 2,015.5 842.2 190.3 80.2 3,800.7 1,927.5 103.2 241.3 36,092.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.2 0.0 199.0 21.1 10.2 0.0 0.2 41.6 22.2 1.2 0.0 307.6 0.1 10.9 6.7 0.7 0.2 0.1 6.6 30.3 1.7 61.0 3.6 0.0 2.3 0.8 2.3 1.8 0.0 3.0 132.0 0.1 10.9 6.7 0.7 0.2 0.1 6.6 42.5 1.7 260.0 24.7 10.2 2.3 1.0 43.8 24.0 1.2 3.0 439.6 Local Total Foreign $ Million Local Total

Notes: Tk70 - 1$; Taxes and duties of Tk3,099 million represent 8.5% of Base costs. Estimates of resettlement included until surveys are completed are Ashuganj-Bakhrabad, Tk100 million; BakhrabadFeni, Tk100 million; and South Western Distribution Project, Tk200 million Source: Consultant estimates.

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74 Table 31: Project Cost Summary by Component


TkMillion Costs by Project Component A. GTCL: Transmission Subcomponents 1. Dhanua Elenga 2. Jamuna Bridge West - Nalka 3. Ashuganj-Bakhrabad-Feni a) Phase 1 Ashuganj-Bakhrabad b) Phase 2 Bakhrabad Feni Subtotal (A) B. BGFCL: Gas Seepage Control, and Appraisal and Development of Titas Gas Field Subcomponent 4. Gas Seepage Control and Work-over 5. Gas Field Appraisal and Development Subtotal (B) C. SGCL: South Western Distribution Subcomponent 6. Phase 1 Distribution Network Subtotal (C) TOTAL 5,247 5,247 35,814.8 2,647 2,647 14,340.3 8,015 8,015 50,155.0 55.0 55.0 375.8 67.0% 34.3 34.3 184.7 33.0% 89.2 89.2 560.5 100.0% 3,153 9,491 12,644 373 1,258 1,631 3,598 11,004 14,602 33.2 99.7 132.9 5.2 17.8 23.0 38.4 117.5 155.9 4,622 8,076 17,924 3,007 4,328 10,122 7,701 12,601 28,438 48.4 84.7 187.9 38.3 54.0 128.2 86.8 138.7 316.0 4,124 1,101 2,204 583 6,425 1,710 43.2 11.5 28.3 7.5 71.5 19.0 Foreign Local Total Foreign $ Million Local Total

BGFCL - Bangladesh Gas Fields Company Limited; GTCL - Gas Transmission Company Limited; SGCL Sundarban Gas Company Limited Source: Consultant estimates. Note numbers may not add due to rounding.

1.

Tentative Financing Plan

242. A tentative financing plan for the Project is set out in Table 32. It is assumed that ADB would finance the entire foreign exchange costs, so that ADB would need to provide a loan $375.8 million, equivalent to 67% of project costs. 38 The Government and the companies will provide equity, and the Government will provide loans to cover the local currency costs, estimated at $184.7 million equivalent or 33 % of project costs. The domestic funding, debt and equity amounts set out in Table 31 follow the ratios in the DPPs. Table 32: Financing Plan
Funding Sources ADB Loan SGC Debt Government/SGC - Equity Total % of total costs
Source: Consultant estimates.

Foreign 103% 0% 0% 100%

Per cent Local 0% 11% 90% 100%

Total 69% 4% 30% 100%

FX 386.0 0.0 0.1 375.8 67%

$ million LC 0.0 20.7 165.7 184.7 33%

Total 386.1 20.7 165.7 560.5 100%

38

ADB has currently programmed $150 million for the Project, and is holding discussions with the Islamic Development Bank, Japan Bank for International Cooperation and the Korean Export Import Bank to mobilize the entire foreign exchange financing. The possibility of additional funding from ADB is also under consideration.

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75 2. Detailed Project Costs (Excluding Jamuna Bridge Nalka)

243. The Jamuna Bridge Nalka pipeline is excluded as the network analysis shows that this is not required at the present time, so it is not proposed for funding under the present ADB project. These costs are set out in Table 33 by main cost items, and summarized by subcomponents in Table 34. Table 33: Detailed Project Costs (excluding Nalka)
TkMillion A. Investment Costs 1.Preliminary Expenses 2i.Land Acquisition 2ii.Land Requisition 3.Land Development 4.Route Survey and Investigations 5.Environment (EIA) and Surveys 6. Resettlement Compensation 7. Construction Works 8.Buildings 9i.Pipelines materials 9ii.Other Equipment 9 iv.Freight and Insurance 9v. Domestic Transport 10. Vehicles 11. Workover Operations 12. Engineering and Consulting 13.Training and HRD 14.Project Management and Overheads Total B. Contingencies Physical Contingency Price Contingency Contingencies C. Financing Charges Total Foreign Exchange Loss Total Costs % of total costs 2,337.1 4,765.0 34,713.9 72% 151.8 0.0 13,757.2 28% 2,488.9 4,765.0 48,471.1 100% 31.4 0.0 364.2 67% 10.5 0.0 177.2 33% 41.9 0.0 541.5 100% 2,457.1 583.5 3,040.62 1,037.4 2,254.5 3,291.88 3,494.5 2,838.0 6,332.50 28.1 6.6 34.7 12.7 27.4 40.1 40.8 34.0 74.8 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,032.1 0.0 15,526.1 1,719.9 791.6 0.0 13.1 3,606.1 1,782.6 99.7 0.0 24,571.2 Local 6.0 848.8 512.9 49.1 15.6 9.5 480.5 2,432.4 133.5 4,703.5 295.5 0.0 184.9 67.2 194.6 144.9 3.5 231.3 10,313.5 Total 6.0 848.8 512.9 49.1 15.6 9.5 480.5 3,464.4 133.5 20,229.6 2,015.5 791.6 184.9 80.2 3,800.7 1,927.5 103.2 231.3 34,884.6 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.2 0.0 190.2 21.1 9.6 0.0 0.2 41.6 22.2 1.2 0.0 298.2 $ Million Local 0.1 10.8 6.6 0.6 0.2 0.1 6.1 29.2 1.7 57.6 3.6 0.0 2.3 0.8 2.3 1.8 0.0 2.8 126.6 Total 0.1 10.8 6.6 0.6 0.2 0.1 6.1 41.3 1.7 247.9 24.7 9.6 2.3 1.0 43.8 24.0 1.2 2.8 424.8

Source: Consultant estimates. Notes: Tk70 = 1$; Taxes and duties of Tk2,823 million represent 8.1% of Base costs. Estimates of resettlement included until surveys are completed are Ashuganj-Bakhrabad, Tk100 million; BakhrabadFeni, Tk100million; and South Western Distribution Project, Tk200 million

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76 Table 34: Project Cost Summary by Component (Excluding Nalka)


TkMillion Costs by Project Component A. GTCL: Transmission Subcomponents 1. Dhanua Elenga 2. Ashuganj-Bakhrabad-Feni a) Phase 1 Ashuganj-Bakhrabad b) Phase 2 Bakhrabad Feni Subtotal (A) B. BGFCL: Gas Seepage Control, and Appraisal and Development of Titas Gas Field Subcomponent 3. Gas Seepage Control and Work-over 4. Gas Field Appraisal and Development Subtotal (B) C. SGCL: South Western Distribution Subcomponent 5. Phase 1 Distribution Network Subtotal (C) TOTAL 5,247 5,247 34,714 2,647 2,647 13,817 8,015 8,015 49,345 55.0 55.0 364.2 67.3% 34.3 34.3 177.2 32.7% 89.2 89.2 541.5 100.0% 3,153 9,491 12,644 373 1,258 1,631 3,598 11,004 14,602 33.2 99.7 132.9 5.2 17.8 23.0 38.4 117.5 155.9 4,622 8,076 16,823 3,007 4,328 9,539 7,701 12,601 26,728 48.4 84.7 176.3 38.3 54.0 120.7 86.8 138.7 297.0 4,124 2,204 6,425 43.2 28.3 71.5 Foreign Local Total Foreign $ Million Local Total

BGFCL - Bangladesh Gas Fields Company Limited; GTCL - Gas Transmission Company Limited; SGCL - Sundarban Gas Company Limited Source: Consultant estimates. Numbers may not add due to rounding.

3.

Tentative Financing Plan a. ADB Funding Meets Project Foreign Exchange Costs

244. A tentative financing plan for the Project (excluding Nalka) is set out in Table 35. It is assumed that ADB would finance the entire foreign exchange costs, so that ADB would need to provide a loan $375.8 million, equivalent to 67% of project costs. The Government and the companies will provide equity. In addition, the Government will provide loans from ADP sources to cover the local currency costs, estimated at $184.7 million equivalent or 33% of project costs. The domestic funding, debt and equity amounts follow the ratios in the DPPs. Table 35: Financing Plan (excluding Nalka)
Funding Sources ADB Loan SGC - Debt Government/SGC - Equity Total % of total costs Source: Consultant estimates. FX 100% 0% 0% 100% Per cent LC 0% 11% 90% 100% $ million LC 0.0 19.9 158.8 177.2 33%

Total 69% 4% 29% 100%

FX 364.2 0.0 0.0 364.2 67%

Total 374.2 19.9 158.8 541.5 100%

b.

ADB Funding Meets $250 million (excluding Nalka)

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77 245. An alternative financing plan for the Project (excluding Nalka) is set out in Table 36. This assumes that ADB would provide financing of $250 million, which would finance 69% of foreign exchange costs, and the equivalent of 46% of project costs. The Government and the companies will need to provide equity and the Government provide loans (from ADP sources39) to cover the balance of foreign currency costs of $114 million or 31% of foreign costs, and 100% of local currency costs of $177 million. That is a total of $421.8 million or 54 % of project costs. Table 36: Financing Plan
Funding Sources ADB Loan SGC Debt Government/SGC Equity Total % of total costs
Source: Consultant estimates.

FX 69% 0% 31% 100%

Per cent LC 0% 11% 90% 100%

Total 46% 4% 50% 100%

FX 250.0 0.0 114.2 364.2 67%

$ million LC 0.0 19.9 158.8 177.2 33%

Total 250.0 19.9 273.0 541.5 100%

c.

Physical Contingencies Reduced from 10% to 5%

246. Where physical contingencies are reduced to 5% rather than 10%, the overall project cost would be $518 million as shown in Tables 37-38. This is a reduction of $23.8 million as a result of a reduction in physical contingencies and a corresponding reduction in price contingencies and financing charges. Funding to meet foreign costs is reduced to $348.6 million compared with $364.2 million, while local currency costs decline to $169.1 million compared with $177.2 million. Table 37: Project Costs with Contingencies at 5% (excluding Nalka)
TkMillion Local
10,313.5 518.7 2,149.4 2,668.10 144.9 0.0 13,126.5 28%

Foreign A. Investment Costs Total Physical Contingency Price Contingency Contingencies C. Financing Charges Total Foreign Exchange Loss Total Costs % of total costs
Source: Consultant estimates.
24,571.2 1,228.6 557.0 1,785.50 2,250.0 4,542.5 33,149.1 72%

Total
34,884.6 1,747.2 2,706.4 4,453.60 2,394.9 4,542.5 46,275.6 100%

$ Million Foreign Local


298.2 14.0 6.3 20.4 30.1 0.0 348.6 67% 126.6 6.4 26.1 32.5 10.1 0.0 169.1 33%

Total
424.8 20.4 32.4 52.8 40.1 0.0 517.7 100%

39

Another possibility is private sector participation, but in GTCL this may be more likely through the flotation of shares on the stock exchange as in the case of TGTDCL. There is no plan for this yet.

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78 Table 38: Financing Plan with Contingencies at 5% (excluding Nalka)


Funding ADB Loan SGC Debt Government/SGC Equity Total % of total costs
Source: Consultant estimates.

Per cent FX 100% 0% 0% 100% LC 0% 12% 88% 100% Total 67% 4% 29% 100% FX 348.6 0.0 0.0 348.6 67%

$ million LC 0.0 19.9 149.2 169.1 33%

Total 348.6 19.9 149.2 517.7 100%

247. Project costs by Component are summarized in Table 39 Table 39: Project Cost Summary by Component (excluding Nalka)
TkMillion Costs by Project Component A. GTCL: Transmission Subcomponents 1. Dhanua Elenga 2. Ashuganj-Bakhrabad-Feni a) Phase 1 Ashuganj-Bakhrabad b) Phase 2 Bakhrabad Feni Subtotal (A) B. BGFCL: Gas Seepage Control, and Appraisal and Development of Titas Gas Field Subcomponent 3. Gas Seepage Control and Work-over 4. Gas Field Appraisal and Development Subtotal (B) C. SGCL: South Western Distribution Subcomponent 5. Phase 1 Distribution Network Subtotal (C) TOTAL 5,247 5,247 33,149 2,647 2,647 13,186 8,015 8,015 47,114 55.0 55.0 348.6 67.3% 34.3 34.3 169.1 32.7% 89.2 89.2 517.7 100.0% 3,010 9,062 12,072 356 1,201 1,557 3,435 10,507 13,941 31.8 95.4 127.2 4.9 17.0 21.9 36.7 112.4 149.2 4,412 7,714 16,065 2,870 4,130 9,104 7,350 12,033 25,519 46.4 81.0 168.8 36.6 51.6 115.2 82.9 132.6 284.0 3,939 2,104 6,135 41.4 27.0 68.4 Foreign Local Total Foreign $ Million Local Total

BGFCL - Bangladesh Gas Fields Company Limited; GTCL - Gas Transmission Company Limited; SGCL - Sundarban Gas Company Limited Source: Consultant estimates. Numbers may not add due to rounding.

4.

Ashuganj to Feni versus Ashuganj to Barabkunda Pipeline Configuration and Costs

248. Depletion of the Sangu gas field has meant that more gas needs to be transmitted to Chittagong from Ashuganj, which has resulted in a new transmission constraint on the existing Ashuganj Chittagong pipeline. GTCL originally proposed constructing a 230 km 30 inch pipeline to loop to the existing pipeline.. However, network analysis revealed that, under a realistic range of gas demand and supply scenarios, only the first section of the pipeline (110 km from Ashuganj to Bakhrabad and on to Laksam) needs to be 30 inch, with a new 99 km 24 inch pipeline to be looped to existing 24 inch pipeline from Laksam to Barabkunda. The analysis revealed that the existing 24 inch 26 km pipeline from Barabkunda to Chittagong city gate

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79 station does not require augmentation. The alternative pipeline configurations are summarized in Table 41. Table 41: Ashuganj to Chittagong Alternative Pipeline Configurations
GTCL Option Km 61.00 50.00 42.50 92.50 153.50 Diameter Inches 30.00 30.00 30.00 Alternative Km 61.00 50.00 42.50 56.50 149.00 210.00 Diameter Inches 30.00 30.00 24.00 24.00

Ashuganj-Bakhrabad Bakhrabad-Laksam Laksam-Feni Feni-Barabkunda Total Overall Total

249. Given possible constraints on available ADB loan financing, GTCL proposed the option of looping a 30-inch pipeline only as far as Feni. This option is cheaper than extending the looped pipeline to Barabkunda ($225.5 million versus $246.7 million), but does not provide the same potential benefit (Table 41). At present, it is not possible to identify the least cost option between these two, and both options have been analyzed further in the financial and economic analyses. Table 41: Ashuganj to Chittagong Alternative Pipeline Costs
Pipeline Options Ashuganj to Bakhrabad Bakhrabad to Feni Total Cost Ashuganj to Bakhrabad Bakhrabad to Barabkunda Total Cost Foreign 4,622 8,076 12,699 4,622 8,997 13,619 TkMillion Local 3,007 4,328 7,335 3,007 5,291 8,298 $ Million Local 38.3 54.0 92.4 38.3 65.6 104.0

Total 7,701 12,601 20,303 7,701 14,508 22,209

Foreign 48.4 84.7 133.1 48.4 94.3 142.8

Total 86.8 138.7 225.5 86.8 159.9 246.7

Note: Assuming 10% Physical contingency

H.

Implementation Arrangements 1. Project Management

250.

The EA for the investment component will be as follows: Part A: GTCL will be the EA for all gas transmission subprojects Part B: BGFCL will be the EA for the field rehabilitation, appraisal and development of the Titas Gas Field Part C: SGCL will be the EA of the gas distribution subproject

251. Two of the EAs (GTCL and BGFCL) form part of the Petrobangla group of companies, incorporated under the Companies Act of 1994. Their activities encompass gas production and transmission. GTCL was incorporated in 1993 and is responsible for the construction, operation and maintenance of the high pressure gas transmission networks in the country. BGFCL is a gas producing SGC established in 1975 to take over the gas fields previously owned by the

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80 Pakistan Shell Oil Company that was nationalized in 1972. SGCL is in the process of incorporation to undertake gas distribution in the south western region of the country. 252. The organization structure of the SGCs involved in the Project is similar. Each EA is managed by a separate board of directors, representing the Government, Petrobangla, and external institutions and individuals. Each is headed by a managing director reporting to the board, and assisted by a number of senior managers for operation, planning and finance, as well as construction and other technical matters. Pursuant to a loan covenant under the DCFP, three top executives in each SGC responsible for management, operation and finance, particularly of GTCL, are appointed through competitive selection. Most of the higher level operational and management staff have university degrees and most technicians have attended technical schools. Although the SGCs have the operational autonomy in managing their affairs under the direction of the respective boards, the Government exerts direct and indirect influence through its policy directives and board appointments. Further, the external, contractual appointments to only a few key positions, with the rest subjected to Government rules and regulations affect the progress of the company activities. Under the Project, selected personnel of the SGCs will undergo human resource development and international training in financial management, operation and maintenance of new facilities, and efficient use of new technologies. 253. GTCL and BGFCL are both involved in the current GTDP loan and are familiar with ADB procurement, project accounting and monitoring procedures. Nevertheless, the Project will involve several gas companies and will require strong coordination among the agencies. As is the case with the GTDP, the existing steering committee in the EMRD, headed by the Secretary, which monitors and supervises the activities of all projects in the energy sector, will also monitor the progress of the Project. In addition, it would be advisable to establish a Project Management Office at Petrobangla to assist in monitoring implementation. The PMOs responsibilities will include (i) overall coordination, macro level project management and monitoring; (ii) annual budget preparation and monitoring utilization of loan proceeds; (iii) progress reporting, including reports on cost management and project impact; and (iv) ensuring compliance with loan covenants. 254. Similarly, each gas company will also be required to establish a project implementation office headed by a senior official and staffed by adequate personnel to supervise day-to-day implementation of the subprojects. The PIOs will be responsible for administration, and financial and technical supervision of the subprojects, including engagement of consultants and engineering contractors, and monitoring subproject operation performance. 255. The Petrobangla companies have computerized accounting and billing systems which are continually being updated and improved. The companies involved in the project namely BGFCL and GTCL have completed a financial management assessment questionnaire and Appendix 21 sets out financial management assessment. In the case of GTCL supervisory control and data assessment is being incorporated to improve operational and management performance, while Petrobangla is initiating a Human Resource Management System throughout its group of companies. 256. Both GTCL and BGFCL confirmed that they would establish suitable accounting mechanisms to account for the current ADB-assisted project expenditure, which would enable generation of suitable financial reports including total project expenditure incurred, amount eligible for ADB financing, amount already claimed from ADB, amount reimbursed by ADB and that disallowed/pending for reimbursement.

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81 257. The financial management systems and procedures of GTCL and BGFCL (plus those of the new company SGCL that are based on accounting and billing systems of existing distribution companies) are adequate to carry out the fiduciary duties of the proposed project. In terms of financial strength, for the counter party funds, the present companies remain profitable and able to provide a share of counterpart funds by way of equity or support additional borrowings. Also the Government of Bangladesh will provide a share of equity investment through the ADP. The introduction of tariff reviews through the regulatory authority BERC should see a maintenance of both transmission and distribution margins to meet financial targets. 2. Implementation Period

258. The subcomponents will be completed in 3-5 years. It is envisaged that implementation will commence in early-2010, and the last subproject will be completed in mid-2015. The implementation schedule is attached in Appendix 23. This schedule appears optimistic, considering the state of the subcomponent preparedness, the institutional limitations, and the experience with the implementation of the GTDP. The implementation schedule will be reviewed with the respective agencies, and an appropriate and workable schedule will be developed. Its implications on the costs and financing plans will be assessed. Procurement packages will also be prepared and the possibility of advance action will be examined during the next stage. The agencies will submit to ADB quarterly progress reports on their respective responsibilities. ADB will review the implementation of the Project and its operation based on these reports, and will meet the EAs and the Government regularly to discuss project progress. ADB will also monitor the overall performance of the EAs. During processing, the implementation schedule will be reviewed and agreed with the EAs. 3. Procurement

259. Goods and related services, and civil works financed by ADB will be procured in accordance with ADBs Guidelines for Procurement on the basis of either international competitive bidding or international shopping, depending on the contract size. Procurement will be carried out separately for each part of the Project by the concerned EA. For the gas transmission component (Part A), a construction contractor and design firm will be engaged for the engineering design, construction and overall supervision of the work. All machinery and materials will be procured through tendering. All the other civil and mechanical works will be undertaken by the EAs and/or contractors appointed by the EAs in accordance with procurement procedures acceptable to ADB. For the Gas Seepage Control and appraisal and development of Titas gas field, a drilling contractor and a number of third party contractors will be engaged. Consistent with the envisaged autonomy for the gas companies, each EA will carry out procurement, including the evaluation of bids and making the recommendations for the award of contracts. To encourage local manufacturers, suppliers and contractors to participate in international competitive bidding, ADBs domestic preference scheme may be utilized. A list of tentative procurement packages is in Appendix 24. The status of preparedness of the different subprojects under the investment component is in Appendix 25. 260. Generally, for equipment costing more than $500,000 and civil works more than $5 million, international competitive bidding is used. For equipment costing $500,000 and below, limited international bidding is applied, and for civil works below $5 million and below, local competitive bidding, LCB is applied. Ancillary facilities including buildings and service areas under domestic financing will follow Government procedures.

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82 4. Consulting Services

261. A major concern is the capability of the EAs to manage large projects. GTCL is associated with several ADB and World Bank projects at the same time that has stretched its capabilities. However, adequate capacity building has not taken place. Similar is the case with BGFCL. SGCL is new. It will, therefore, be necessary to provide considerable advisory support for the implementation of the proposed subcomponents. This may be further assessed and examined during loan processing. 262. The EAs will mostly be responsible for undertaking most implementation activities. However, consultants may be required to assist the EAs in various design, engineering, procurement and construction activities, and to assist in the institutional strengthening of the SGCs. If required, the Project will provide international and national consultant services for supporting implementation, especially for the Gas Seepage Control, and appraisal and development of wells. All consultants will be engaged in accordance with ADBs Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for engaging domestic consultants. The quality and cost-based selection method will be used. 5. Disbursement Arrangements

263. Disbursement of loan funds under the Programs investment component will be mainly for supply of goods and consulting services. Disbursement procedures will be in accordance with ADB Disbursement handbook.40 Since the disbursements under project loan will be mainly for procuring goods and services, ADBs commitment letter and direct payment procedures will be utilized. 6. Accounting, Auditing, and Reporting

264. The EAs will maintain separate account for the Project, and submit audited financial statements within at least nine months after the end of the fiscal year. The annual project accounts and annual financial statements will be audited by independent auditors acceptable to ADB, with the auditors observations with respect to use of loan proceeds and compliance with loan covenants. They will prepare separate progress reports for their respective components and submit them to ADB quarterly within one month of the end of each quarter. The report will contain narrative description of progress made during each period, changes of the implementation schedule if any, problems or difficulties encountered and remedial actions taken, the performance of the institutional development consultants, and the work to be carried out in the upcoming period. Progress reports will also reflect quarterly and cumulative contract awards and disbursements. A project completion report will be submitted to ADB within three months of completion of the Project. 7. Project Performance Monitoring and Evaluation

265. Project performance monitoring system will be established to assess progress and implementation of the Project and to measure impacts and outcomes. A set of indicators for evaluating project performance in relation to its goals, purposes, outputs and conditions will be developed. The indicators will include (i) economic development and poverty indicators in the project areas, (ii) energy indicators for the region and the project areas, (iii) energy prices and gas tariffs, (iv) financial sustainability of the SGCs, (v) access to social services in the project
40

ADB. 2007. Loan Disbursement Handbook. Manila

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83 area, (vi) jobs created in construction and maintenance of the Project, and (vii) environmental and social indicators. At the beginning of project implementation, the SGCs will establish baseline and target values for the indicators. The indicators will be measured at Project completion and three years later, and compared with the baseline. A report summarizing the key findings of monitoring at inception, completion and three years later will be submitted. 8. Project Review

266. The Project will be supervised by ADB through two review missions each year. ADB will monitor implementation of all components of the Project through quarterly progress reports. The Project will also be supervised through regular ADB missions. In addition to the normal periodic reviews, ADB and the Government will undertake a mid-term review two years after Project implementation begins. The mid-term review will include a detailed evaluation of the Project scope, implementation arrangements, resettlement, consultation with affected persons, and achievement of scheduled targets, progress on policy reforms and capacity building measures. I. Financial Review of Gas Sector Operations 1. Petrobangla Group of Companies (Gas Sector)

267. The nine companies in the gas sector operate independently under the 1994 Companies Act and report separately as does Petrobangla itself. The results are consolidated for information purposes only, with each company treated separately for tax purposes. Petrobangla companies operating in the gas sector include: BAPEX, BGFCL, BGSL, GTCL, JGTDSL, PGCL, RPGCL, SGFL and TGTDCL. Of these BAPEX, BGFCL and SGFL are engaged in exploration and production; GTCL undertakes gas transmission; and TGTDCL, BGSL, JGTDSL, RPGCL and PGCL provide the distribution facilities and services. 2. Current Sector Financial Objectives and /or Covenants

268. A number of multilateral and bilateral agencies provide loans to the gas sector. However, the main lenders and projects that set out sector financial objectives are the IDA Gas Infrastructure Project of 1995, the ADB TNGDP of 1993, and GTDP, 2005. The specific financial covenants summarized below are set out in detail in the review of past financial performance in Appendix 22. a. IDA Credit Number 2720 BD, May 24 1995

BGFCL, SGFL, TGTDC, BGSL and JGTDSL to self-finance a minimum of 20-30% of their respective investment programs SGFL to : (i) achieve a minimum of 15% annual rate of return on its average net fixed assets in operation : (ii) maintain its accounts receivable from the sales of gas and condensates at a level not exceeding the equivalent of three months' billings; and (iii) maintain a debt/equity ratio of not greater than 70/30. GTCL to: (i) achieve a minimum annual rate of return of 10% from FY2000; (ii) maintain accounts receivable at a level not exceeding the equivalent of three months' billings; and (iii) maintain a debt/equity ratio of not greater than 60/40.

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84 b. ADB Third Natural Gas Project, 1993

Annual rate of return on average net fixed assets : For BGFCL, BGSL, and JGTDSL of not less than 12%, For TGTDC of not less than 15%, Debt service ratio of not less than 1.2 Debt: equity ratio of not more than 70:30, Accounts receivable of not more than three months of total sales, and For TGTDC to reduce system losses to 2% by end of FY 1996. c. Dhaka Clean Fuel Project, 2002

Debt service ratio of not less than 1.2. Debt: equity ratio of not more than 70:30. d. Gas Transmission and Development Project, 2005

To ensure sound financial operations (BGFCL, SGFL, and GTCL), the following financial results to be achieved : a. Debt service ratio of not less than 1.2, b. Self financing ratio of 30%41, and c. Accounts receivable of not more than three months of total sales.

3.

Summary of Recent Financial Performance of SGCs

269. A brief description of each companys operations, financial results, income statements, balance sheet data, and financial ratios are set out in Appendix 25 for the period FY2004 to FY2008. This section presents a summary of the main issues, and results of financial ratios. The rate of return for each company is compared with financial covenants. The rate of return is calculated as return on average net fixed assets in service. In the case of BAPEX, and BGFL and SGFL, net fixed assets includes the cost of reserves (gross costs less depletion premium). Fixed assets are on a historic cost basis. 42 Revenues are calculated as net income from operations (excluding interest earned on cash balances) plus adding back the after tax cost of interest charges. a. Bangladesh Petroleum Exploration Company Limited 270. BAPEX derives the bulk of its revenues from the gas tariff exploration levy. Table 42 shows that, in FY 2002, 89% of revenues were derived from this source. Since then as BAPEX
41 42

Three year moving average of both denominator and numerator. The IDA covenant requires periodic revaluation of assets. However, foreign loans are revalued at year end based on year end exchange rate, with the increase booked to both loans and to fixed assets. Accordingly a partial revaluation takes place each year based on the change in the value of foreign loans.

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85 revenues from gas sales have increased the importance of the exploration levy has declined and in FY 2007 represented 49% of sales, but with the decline in gas production in 2008, the importance of the levy has risen to 57%. 271. It is recommended that BAPEX be funded directly by the Government through the annual development program (ADP), and not as part of the gas tariff. This would be more transparent and consistent with international practice for financing high risk ventures. This raises the issue on whether the Government could actually afford to be in the exploration business, and whether it should be left to the IOCs who have the available risk capital. Table 42: BAPEX Sources of Income (Tkmillion)
Year Ending 30 June Gas sales (MMCM) Revenues from Gas / Condensate Gas Exploration Surcharge Other Income Total % Exploration Surcharge
MMCM - million cubic meter Source: Petrobangla and BAPEX Annual Reports

2004 Audit 184.0 57 349 33 439 80%

2005 Audit 497.2 140 354 35 529 67%

2006 Audit 610.9 170 361 146 677 53%

2007 Audit 542.4 156 385 242 783 49%

2008 Draft 322.1 104 372 181 657 57%

272. The return on net fixed assets in FY 2008 is 5.7% (Table 43). However, this has little relevance as the company is fully funded by the ADP, with no need for BAPEX to seek outside funding. In the past, BAPEX was not able to meet its DSCR on foreign loans.43 However, these have now all been repaid or converted to equity as they related to past development where fields were handed over to BGFCL or SGFL for operation, but BAPEX retained the liabilities. BAPEX debt equity ratio in FY 2008 is very low at 10:90, which is consistent with the financing structure of an exploration company. Table 43: BAPEX Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%)
Source: Petrobangla and Company Annual Reports

2004 4.2% 0.4 0% 8%

2005 4.0% 0.6 0% 10%

2006 3.7% 4.4 88% 10%

2007 5.6% 5.5 451% 10%

2008 5.7% 4.8 0% 10%

b.

Bangladesh Gas Fields Company Limited

273. Revenues in terms of gas production (at the prescribed production margin) have steadily increased, with net profit reaching Tk1,055 million in FY 2005 and remained around this level over the rest of the period before declining in 2008 to Tk817 million as a result of higher
43

In the case of BAPEX, its exploration activities should be funded from the ADP by way of grants/equity. Loans that had accumulated from Government financing were converted to equity in FY 2006 when the fields associated with the loans and development were transferred to BGFCL and SGFCL. Given that BAPEX is an exploration company this is an appropriate action as the revenue sources (production) to repay the loans were transferred to the operating companies..

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86 maintenance costs. Return on net fixed assets reached 27.7% in FY 2005 but had declined to 17.2% by FY 2008. The DSR is well in excess of 1.2 times debt obligations, and the SFR exceeds the covenanted 30% (reflecting a delay in most capital expenditure) of annual capital expenditure (Table 44). BGFCLs capital structure is consistent with that expected for a production company with debt at or below 30% of the companys financing in all years of the review period. Table 44: BGFCL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%) 2004
26.1%

2005
27.7%

2006
24.1%

2007
24.2%

2008
17.2%

6.4 441% 25%

5.9 264% 25%

6.2 137% 15%

3.8 125% 24%

3.5 107% 11%

Source: Petrobangla and BGFCL Annual Reports

c.

Sylhet Gas Fields Company Limited

274. Revenue In terms of gas production (at the prescribed production margin) have increased, with net revenues growing by approximately 2% per annum, and net profit reaching Tk714 million in FY 2004 before declining and then recovering and finally increasing to Tk1,705 million in FY 2008. Return on net fixed assets reached 14.6% in FY 2004, before declining and then increasing to 24.7% in FY2007 and to 34% in FY2008 (Table 45). The DSR is well in excess of 1.2 times debt obligations, and the SFR exceeds 30% of annual capital expenditure. SGFLs capital structure is consistent with that expected for a production company with debt at or below 30% of the companys financing in all years of the review period. Table 45: SGFL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%)
Source: Petrobangla and SGFL reports

2004 14.6% 9.8% 2.0 1484% 21%

2005 10.1% 6.7% 12.9 242% 18%

2006 11.7% 6.9% 4.8 179% 15%

2007 24.7% 12.2% 4.3 183% 11%

2008 34.0% 15.0% 6.2 343% 9%

275. Thus the debt-service ratio (DSR) in both BGFCL and SGFL is well in excess of 1.2 times debt obligations, and the SFR exceeds 30% of annual capital expenditure. Each companys capital structure is consistent with that expected for a production company with debt at or below 30% of the companys financing in all years of the review period. 276. The attractive performance of both companies reflects the very low cost of gas from SGC fields of $0.118/ MCF, when compared with an average IOC cost of $1.61/MCF. This means that in the future as further fields are developed, SGC gas costs will rise substantially. In addition the returns on net fixed assets reflect assets at very low historic costs resulting in overstated returns when compared with present day costs of production. 44 Thus, when
44

The accounting policies of both BGFCL and SGFL state that gas reserves are calculated at price levels ruling at the balance sheet date and are depleted field by field on a unit of production basis. However, it appears that no revaluation has taken place.

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87 considering the future performance of BGFCL and SGFL these matters need to be taken into account and performance adjusted accordingly. d. Gas Transmission Company Limited

277. Revenues from gas transmission activities have increased as a result of gas transmission volumes increasing as shown above, with a net profit of Tk227 million in FY 2003 increasing to Tk2,031 million in FY 2007 and to Tk2,618 million in FY 2008. Return on net fixed assets increased steadily over the period to reach 16.9% in FY 2008 to be in line with WACC as well as the covenanted rate of return of 10.0% from FY 2006. The DSR exceeded 1.2 times debt obligations (Table 46). The SFR achieved the 30% covenanted level, but GTCL is nevertheless very dependent on the governments ADP for any major capital expenditure program. GTCLs capital structure is consistent with that expected for a transmission utility company with the debt financing in its capital structure now in the order of 32%. 278. Return on net fixed assets was only 4.6% in FY 2003, but increased to 10.2% in FY 2006 and 12.8% in FY2007. Thus GTCLs return over last two years met the covenanted rate of return of 10.0%. The DSR has exceeded the covenanted 1.2 for all years. The SFR exceeds 30% but this reflects low capital investment as a result in project delays. Debt financing in its capital structure is now in the order of 37%, which is low for a transmission company. Accounts receivable have exceeded three months of sales since FY 2001. However, they do not translate into bad debts with GTCL being paid by PETROBANGLA once payment is received by distribution companies. Table 46: GTCL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%) Accounts Receivable (months of sales)
Source: Petrobangla and GTCL Annual reports

2004 5.0% 4.8% 1.7 47% 50% 5.79

2005 8.3% 7.4% 2.6 64% 47% 5.39

2006 10.2% 8.2% 1.9 64% 43% 6.07

2007 12.8% 10.1% 1.9 33% 37% 5.93

2008 16.9% 11.3% 1.8 285% 32% 5.09

e.

Titas Gas Transmission and Distribution Company Limited

279. TGTDCL is the oldest and largest gas marketing company of the country. At the end of the August 2008, TGTDCL had a customer base of about 1367,861 among the bulk customers of TGTDCL are 14 power and 4 fertilizer plants. In 2004 financial year TGTDCL sold 8,480 MMCM gas to 979,195 customers. Sales for FY 2008 at 12,239 mmcm increased 44.3% since 2004. 280. Return on net fixed assets reached 33.7% in FY 2008, which exceeds the WACC of 13.1% and the covenanted rate of return of 15.0%, over the last four years. The DSR exceeded 1.2 times debt obligations (Table 47). The SFR exceeds 30% suggesting that the company is able to make a significant contribution to its own capital expenditure program out of revenues if required. TGTDCLs capital structure is conservative for a distribution utility company with the debt financing in its capital structure now in the order of 10% compared with an expected 50% to 70%.

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88 Table 47: TGTDCL Financial Ratios


Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%) 2004 13.8% 8.7% 2.4 59% 32% 2005 16.7% 9.4% 3.6 153% 27% 2006 20.5% 10.7% 4.2 176% 24% 2007 22.1% 11.3% 5.2 450% 19% 2008 33.7% 13.6% 5.0 909% 9%

Source: Petrobangla and TGTDCL Annual Reports

281. TGTDCL offered 20% of its shares to the public on 2 July 2008 at an estimated value of Tk2,141.1 million equivalent to a share price of Tk750 per share. After no sales at this level on the first day shares were eventually sold, with the shares trading in the range of Tk396 to 430 per share. However only about 10% of shares expected to be sold or 2% of those on offer were actually sold during this period. At the end of November 2008 a total of 1,080 million shares were sold, representing 50.5% of those on offer. 282. Accounts receivable have continued in recent years to exceed three months of sales and result from slow payment from bulk users such as power and fertilizer government agencies who eventually pay. TGTDCL is required to reduce its losses to less than 2% of total sales. This is proving difficult, but losses have declined from 7.6% in FY2005 to 5.4% in FY 2004. TGTDCL is implementing a pilot project in Dhaka of 1000 prepaid card meters in an effort to reduce gas losses and at the same time avoid the cost and corrupt practices associated with meter reading. However, the bulk of domestic meters are not metered with customers paying a fixed amount based on estimated use which is often exceeded so that actual losses from theft, leakage etc maybe much less than the figures recorded. f. Bakhrabad Gas Systems Limited

283. Net profit reached Tk2,162 million in FY 2007 compared with Tk887 million in FY 2004. However, there was a significant increase in revenues in FY 2008 that led to a considerable increase in net profits resulting in a Net Profit of Tk3,684 million, an increase in FY2008 over the previous year of 70.4%. However, Chittagong now faces critical gas shortages following the decline in reserves in the Sangu field. Return on net fixed assets has exceeded 17.1% each year since FY 2004. Thus BGSLs return is higher than the WACC of 12.4% and the covenanted rate of return of 12.0% (Table 48). The DSR exceeded 1.2 times debt obligations in all years. The SFR exceeds 30% since FY 2002 suggesting that the company is able to make a significant contribution to its own capital expenditure program out of revenues if required. BGSLs capital structure is conservative for a distribution utility company with the debt financing in its capital structure now in the order of 2% compared with a typical level of 50% to 70% for a distribution company. Table 48: BGSL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%)
Source: Petrobangla and BGSL Annual reports

2004 22.5% 11.9% 1.2 37% 7%

2005 39.9% 14.0% 2.1 134% 6%

2006 63.1% 18.7% 3.8 132% 4%

2007 69.8% 22.4% 5.0 135% 3%

2008 133.9% 33.4% 9.6 224% 2%

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89 g. Jalalabad Gas Transmission and Distribution Systems Limited

284. Revenues from gas sales activities FY 2004 to FY 2007 increased as a result modest growth in sales ( after fall from FY 2002) and price increases resulting in an overall increase in sales revenues, and net profit reaching Tk220 million in FY 2007, compared with Tk104 million in FY2004. Despite the large sales increase in FY 2008, net profit increased a modest 5.5% over FY 2007 to Tk232 million. 285. Return on net fixed assets reached 17.3% in FY 2008 above the WACC of 12.4% and the covenanted rate of return of 12.0% (Table 49). In years before FY 2006 the return failed to achieve 12.0%. The DSR exceeded 1.2 times debt obligations over FY 2004 to FY 2008. JGTDSLs capital structure is conservative for a distribution utility company with the debt financing in its capital structure now in the order of 9% compared with a more typical level of 50% to 70% for a distribution utility. Table 49: JGTDSL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%)
Source: Petrobangla and JGTDSL Annual reports

2004 6.5% 4.9% 1.3 41% 20%

2005 8.0% 5.4% 1.6 88% 18%

2006 7.7% 5.3% 1.8 83% 16%

2007 12.8% 7.5% 1.9 80% 13%

2008 17.3% 6.9% 2.2 129% 9%

h.

Paschimanchal Gas Company Limited

286. Revenues from gas sales activities have increased as a result of gas sales increasing as noted above up to FY 2005, with net profit reaching Tk59 million in the same year, but declining to Tk30 million in FY 2007 with declining gas sales and high costs associated with new networks. There was some recovery in FY 2008 with net profit of Tk59 million on a level of sales (MMCM) similar to FY 2005. 287. Return on net fixed assets was 16.7% in FY 2002, but since then has been lower in all the following years and in FY 2008 was 7.2% (Table 50). The DSR exceeded 1.2 times debt obligations in all years while the SFR has varied from greater 30% to less than 30% with all development in fact financed by government loans and equity on a 60:40 basis through the ADP prior to the ADB project for gas distribution in Rajshahi. PGCLs capital structure is consistent with that expected for a distribution utility company with the debt financing in its capital structure now in the order of 50%. Table 50: PGCL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Service Ratio (times) Self Financing Ratio (%) Debt Financing (%) 2004 11.3% 7.5% 1.5 N.A 57% 2005 10.1% 6.9% 1.4 N.A 58% 2006 6.6% 4.5% 1.8 N.A 55% 2007 5.1% 3.2% 1.7 30% 51% 2008 7.2% 4.8% 1.2 53% 47%

Source: Petrobangla and Company Annual Reports

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90 i. Rupantarita Prakritik Gas Company Limited

288. While revenues from CNG activities have only increased from Tk555 million in FY 2004 to Tk568 million in FY 2007 net profit over the same period from Tk8 million in FY 2003 to Tk49 million in FY 2007 (after declining from Tk69 million in FY 2006. Return on net fixed assets reached 25.9% in FY 2006, but in previous years has been lower, or negative, with FY 2007 forecast at 10.4% (Table 51). Thus RPGCLs return was higher than the WACC of 12.4% in FY 2004 through to FY 2006, but lower in all other years. Table 51: RPGCL Financial Ratios
Year ended 30 June Return on Net Fixed Assets (%) Return on Capital Employed (%) Debt Financing (%)
Source: Petrobangla and Company Annual Reports

2003 6.5% 4.0% 57%

2004 14.1% 6.2% 55%

2005 18.9% 6.9% 44%

2006 25.9% 4.9% 49%

2007 10.4% 6.9% 44%

4.

Bangladesh Oil, Gas and Mineral Corporation (Petrobangla) a. Financial Performance

289. Petrobangla operates as a public sector statutory body under the Ordinance of 1985. Petrobangla obtains the bulk of its revenues from a management service charge levied on the SGCs. Its largest expense is personnel costs, followed by depreciation and transport costs. It also earns interest income which is used to offset its operating deficits. Up to FY 2003 it has shown a net surplus on its activities, however in FY 2004 it recorded an overall deficit of Tk7.5 million and also in FY 2006 of Tk9.0 million, before achieving an overall profit of Tk5.1 million in FY 2007.Howvere, in FY 2008 it suffered a loss of Tk64.8 million 290. The purchase of gas and payment to IOCs and purchase of gas from SGCs is undertaken by Petrobangla. The IOC transactions are recorded in the PSC Operations Accounts - Income Statement, and with the addition of PDF collected as a margin in the tariff, the net cash position (IOC payments less PDF) is reflected in the PSC Balance Sheet. b. Production Sharing Contracts

291. The present Bangladesh end user tariffs include the gas costs as a blend of IOC and SGC gas and an equalizing factor, the PDF. Because of the nature of the PSC gas formula, with up to 80% of the gas going for cost recovery at the start of production, quantities of high cost gas will be added periodically to the gas supply mix. Petrobangla is also liable for the income taxes payable by the IOCs in the future. 292. Petrobangla also buys directly from the three SGCs (BAPEX, BGFCL and SGFL). Purchases of gas from IOCs and SGCs are summarized in Table 52 for FY 2000 to FY 2008. In FY 1998 IOC purchases represented 4.1% of total gas purchases, 9.1% in FY 1999 and around 21% for next four years, FY 1999 to 2003, before rising to 24% in FY 2004 and then steadily rising to 36.2% in FY 2007 and to an estimated 48.0% in FY 2008.

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91 293. Petrobanglas accounts include a PSC income statement and balance sheet. The income statement records sales of IOC gas (at current market prices), i.e. sales of cost recovery gas, and profit share gas and the costs of gas at the contractual price to IOCs. Table 52: Summary of IOC and SGC Gas Purchases (MMCF)
FY/Source Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 IOC MMCF 71,002 78,035 79,053 87,465 109,689 130,557 169,665 203,729 273,074 SGC MMCF 261,387 295,335 312,477 333,693 343,086 356,202 357,265 358,402 327,796 Total MMCF 332,389 373,370 391,530 421,158 452,775 486,758 526,929 562,131 600,870 IOC/Total % 21.4% 20.9% 20.2% 20.8% 24.2% 26.8% 32.2% 36.2% 45.4%

IOC - international oil companies; MMCF - million cubic feet; SGC - state gas companies Source: Petrobangla

294. Table 53 shows the annual cost and cumulative cost of IOC gas (IOC payments less sales at market prices) with the cumulative loss reaching Tk16,770 million (or $280 million at current exchange rates). These losses were to be offset by the PDF margin in the gas tariff; however PDF payments were insufficient up to FY 2003, resulting in an overall deficit of Tk4,835 ($69 million). Since FY 2004 PDF collections have exceeded losses on IOC gas payments so that at the end of FY 2007 the overall deficit was reduced to Tk479 million ($7 million). Table 53: Summary of PSC Operations and PDF
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 IOC Losses on Purchasea Annual Cumulative Tkm Tkm (377) (377) (2,710) (3,087) (4,000) (7,087) (5,445) (12,532) (4,238) (16,770) (447) (17,217) (2,836) (20,762) (4,549) (25,310) (3,710) (29,020) (9,714) (38,734) PDF margin to cover Losses Annual Cumulative Tkm Tkm 833 833 1,437 2,270 2,673 4,943 3,290 8,233 3,702 11,935 3,830 15,764 4,445 19,909 4,204 24,112 4,429 28,541 7,095 35,636 Net Cumulative Tkm 455 (817) (2,144) (4,300) (4,835) (1,453) (853) (1,198) (479) (3,097)

IOC - international oil company; PDF - price deficit fund a Includes payment to IOCs and sale of Petrobanglas share of profit gas, plus IOC tax payments and interest charges on late payments. Source: Petrobangla

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92 295. However, in FY2008, because of high level of cost recovery gas in the purchases from IOC from Chevrons Bibiyana field (and a correspondingly lower level of profit gas) there was a large increase in the IOC losses. However, this was in part compensated for by payments into the PDF account of the amount paid by KAFCO where gas price was linked to world petroleum prices. While the loss on IOC gas will reduce in FY 2009 as a result of no more cost recovery gas from Bibiyana and a corresponding increase in profit gas, the windfall contribution to the PDF from KAFCO is not likely to be repeated as world petroleum prices have fallen. Nevertheless, it is expected that the cumulative deficit will decline in FY2009. 5. Overall Gas Sector Consolidated Operations

296. Aggregating the overall operation of the nine companies in the gas sector with Petrobangla, together with the PSC operations and payment to IOCs and the PDF, suggest that overall the sector had an annual operational deficit at the end of FY 2003 (Table 54), but that since then the sector has had an improvement in performance. However, return on historic net fixed assets of 5.9% at the end of FY 2007 is inadequate to allow the sector (BAPEX) to carry out exploration activities without external ADP support. This inadequate return has also meant that production companies have little incentive at current well head prices to invest their cash on hand in new gas production while low margins for transmission and distribution makes these companies dependent on ADP funding for any major investment requirements.

Table 54: Overall Consolidated Operations of SGCs


Y/E 30 June 2002 Audit Tkm (3,098) (3.7)% 36% 2003 Audit Tkm (187) 0.7% 34% 2004 Audit Tkm 4,073 10.5% 29% 2005 Audit Tkm 3,001 6.9% 27% 2006 Audit Tkm 2,975 6.1% 23% 2007 Audit Tkm 3,724 5.9% 22%

Net Profit After Tax Return on Net Fixed Assets (%) Debt Financing (%)
Source: Petrobangla annual reports

J.

Financial Projections of Executing Agencies

297. This section sets out financial projections for the Executing Agencies for GTCL, BGFCL, and the new Sundarban Gas Company (SWGCL) of the Project. Appendix 26 sets out financial projections and forecast financial statements for each entity. 1. Inflation and Exchange Rate Assumptions

298. International inflation is assumed at 0.8% per annum over the forecast period, while domestic inflation is assumed at 8.0% in FY 2009, 7.5% in FY 2010, 7.0% in FY 2011 to 2014 and 5.0% per annum thereafter over the forecast period. In respect of capital costs incurred in foreign exchange (incorporating physical, price contingencies, and financing charges) these are converted to domestic currency at the exchange ruling in the year of expenditure/draw down. For operating costs, where applicable these are adjusted by the domestic rate of inflation year on year.

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93 2. Gas Transmission Company Limited a. Future Gas Volumes

299. Table 55 sets out assumptions on the forecast gas volumes, MMCFD (and condensate, liters) handled by GTCL over the period 2009 to 2020. The forecasts are based on PETROBANGLA and GTCL forecasts. In Petrobanglas demand/supply projections gas production currently consumed in the Chittagong area is not carried by GTCL, while some gas from Titas and Jalalabad gas fields is transported by non-GTCL pipelines. Petrobanglas demand forecast for the south-west zone has been excluded from GTCLs financial projections because the investment in transmission lines for that area has not yet been completed. However, they are under construction and are therefore included in the GTCL projections, as are those proposed for the south east region. 300. The forecast GTCL gas volumes were compared with the actual in FY2008 and found to be only 89% of the actual. Accordingly to be conservative and to avoid overstating the gas volumes handled by GTCL the gas volumes projected were also adjusted by 89%. Condensate volumes are assumed to increase in line with gas volumes transmitted over the forecast period. However, GTCL advised that there is a proposal to build condensate processing plants at gas fields which would see this removed. Accordingly no condensate volumes and revenues are assumed after FY 2010. Table 55: Estimate of Gas Transported by GTCL, 2009 to 2020 (MMCFD)
Year ending June 30 Petrobangla Forecast Gas Production Less Own Use (Field) and Losses Less : i) Titas Own transmission ii) Jalalabad (Sylhet) iii) Bhakrabad (Semutang) iv) Bakhrabad (Sangu) GTCL Gas Wheeled Adjusted (for 2008 Actuals) Source: GTCL, Consultant estimates. 2008 1,787 18 363 7 0 60 1,339 1,193 2009 2,040 20 363 7 0 50 1,600 1,425 2010 2,024 20 363 6 20 0 1,615 1,438 2011 2,169 22 363 25 20 0 1,740 1,549 2012 2,311 23 363 25 20 0 1,880 1,675 2013 2,485 25 363 50 20 0 2,028 1,806 2014 2,542 25 363 50 20 0 2,084 1,856 2015 2,599 26 363 50 20 0 2,140 1,906 2020 2,468 25 363 70 20 0 1,991 1,773

b.

Capital Expenditures

301. GTCL capital expenditure expected to be undertaken 2009 2020 is summarized in Table 56, which shows total project costs in nominal prices. In addition to project expenditures over the forecast period, there is an allowance of Tk150 million per annum for routine capital expenditure for replacement and minor rehabilitation. This amount is inflated at the level of domestic inflation over the forecast period. It is assumed that this is met out of GTCLs cash flow. Total costs amount to Tk69,178 million, or $ 988.3 million.

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94 Table 56: Summary of Capital Expenditure 2009 to 2020 (Tkand $m)


Tkm World Bank Bakhrabad-Siddirganj Existing ADB Manohardi-Jamuna (east) Ashuganj-Muchai Compressors Jamuna (West)-Bheramara Bheramara-Khulna Bonpara-Rajshahi Total Proposed ADB Dhanua-Elenga Ashuganj- Bakhrabad Bhakrabad - Feni Total GTCL Financed Titas - AB line Jamuna Bridge - Nalka Routine/Other (FY 2009 to 2020) Total Overall Total
Source: GTCL

$ 98.2 154.8 51.9 112.0 127.1 15.5 461.2 83.2 105.3 167.4 355.9 10.0 24.3 38.6 72.9 988.3

6,877.0 10,833.4 3,632.5 7,837.4 8,898.8 1,083.2 32,285.3 5,821.1 7,373.7 11,720.2 24,915.0 700.0 1,699.2 2,701.7 5,100.9 69,178.2

c.

Project Financing

302. The funding of GTCLs capital expenditure program is set out in Table 56. The foreign aided projects are financed approximately 60% by debt, mainly foreign loans, with the balance Government (31%). There is limited funding contribution to large projects by GTCL. However, the projections assume that GTCL funds the Titas - AB line and the Jamuna Bridge - Nalka pipeline projects itself. Although GTCL/PETROBANGLA will try and find external financing for the Jamuna Bridge-Nalka pipeline if possible. However, this is not seen as a priority project at the present time. GTCL is assumed to fund all the routine capital expenditure from its own revenues. Table 56: Summary Funding of Capital Expenditure, 2009 to 2020 (Tk, $ million)
Tkm $m 577.2 12.8 590.0 306.4 91.8 988.3 % 58.4% 1.3% 59.7% 31.0% 9.3% 100.0%

Loans
Foreign Domestic Total 40,405 896 41,302 21,448 6,428 69,178

Equity
Government Internal Funds Total
Source: GTCL

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95 303. GTCL has a number of multilateral and domestic loans. Annual interest and principal repayments are summarized in Table 58, with detailed schedules set out in the Financial Projections. With respect to foreign loans GTCL is required to repay the $/foreign equivalent. In addition, at year end foreign loans are revalued at the yearend exchange rate, with loans and fixed assets revalued accordingly. This exchange rate fluctuation (ERF), forms part of the loan principal and is paid back over the remaining life of the particular loan with interest charged on the outstanding amount at 5% per annum. At 30 June 2008 the ERF amounted to Tk1195 million on existing loans of Tk3,780 million. For the projections it is assumed that this is repaid in equal installments over the forecast period to 2020 with interest paid at 5% per annum on the outstanding balance. In line with existing conventions, no foreign exchange rate devaluations/increase in loans are assumed for the over the remainder of the forecast period. Table 58: GTCL Existing Project Debt Servicing (Tkmillion)
FY Foreign Principal ERF Total Interest ERF Total Domestic Principal Interest Summary Interest Principal 2009 Taka million 629.5 99.7 729.2 153.0 57.3 210.3 277.9 178.9 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

287.6 99.7 387.2 168.2 52.3 220.6 464.5 172.3

287.6 99.7 387.2 318.1 47.3 365.4 464.5 213.0

274.3 99.7 374.0 1,047.2 42.4 1,089.5 464.5 342.1

337.9 99.7 437.6 1,031.9 37.4 1,069.2 481.7 323.2

624.6 99.7 724.2 1,007.8 32.4 1,040.2 605.1 301.5

1,704.6 99.7 1,804.3 949.6 27.4 977.0 851.0 272.3

1,704.4 99.7 1,804.1 864.4 22.4 886.8 745.8 240.4

1,704.4 99.7 1,804.1 864.4 17.4 881.8 748.3 210.5

1,704.4 99.7 1,804.1 693.9 12.5 706.4 645.0 182.6

1,704.4 99.7 1,804.1 608.7 7.5 616.2 635.6 157.0

1,704.4 99.7 1,804.1 523.5 2.5 526.0 622.8 131.9

389.3 1,007.1

392.9 851.7

578.4 851.7

1,431.6 838.5

1,392.4 919.3

1,341.7 1,329.4

1,249.3 2,655.3

1,127.2 2,549.9

1,092.3 2,552.3

889.0 2,449.1

773.2 2,439.7

657.8 2,426.9

d. 304.

Operating Costs

The operating costs were estimated on the following basis: (i) Direct salaries and wages of pipeline operations are assumed to increase in line with pipeline project commissioning compared with current level of gross fixed assets and also in line with projected annual inflation. Personnel costs include basic salaries allowances and overtime. GTCL overhead costs, are assumed to increase at 50% of the increase in gross fixed assets from the new pipeline projects and also in line with projected annual inflation. Compressor operating costs other than fuel, to cover fixed overhauls, inspection and variable costs are estimated at 2.5% of compressor capital costs (gross fixed assets). Operating costs are assumed to increase in line with inflation. In the case of fuel, based on manufacturers estimates, 1.5% of the gas passing through the compressor is assumed to be consumed when going through two compressor stations and half that amount for one compressor station. A gas cost of Tk1.17/ cm is assumed, with increases linked to changes in gas costs.

(ii)

(iii)

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96
(iv)

The amount of gas going through Muchai and Ashuganj compressors, after eliminating sales to Chittagong and Titas direct sales by TGTCL (carried in its own transmission lines) and from Jalalabad fields to distribution centers is estimated at 1.17 of all gas, while sales to the West would go through the Elenga compressor so that around 1.35 times all gas would go through a compressor. Petrobangla management charges are assumed to increase from FY 2005 levels at the rate of domestic inflation. The workers share of profits is assumed at 1/21 of net operating profit before tax. Future depreciation has been based on an average depreciation charge of GTCL of 3.33% per annum. This is similar to that for the project pipeline assets and compressors. Thus a depreciation charge of 3.33% per year has been assumed for general additions over the forecast period. Interest charges for new projects are based on 5% per annum for foreign loans (repayable over 15 years) and 4% for domestic ADP loans (repayable over 12 years), along with existing interest charges. Income tax on net profits is assumed at 37.5%. The financial projections assume that 40% of the after tax income is paid out to Government annually as Dividend. The balance is available to meet debt service and capital expenditure. It is assumed that dividends would only be paid out where cash flow permits. Assumptions for working capital items are summarized as follows. Debtors are assumed at 5 months of sales.45 Creditors are set at three month of the years expenditure on fuel, chemicals, repairs and materials. Inventories are set at 3 months expenditure on fuel and other materials, plus a percentage of fixed asset additions of 0.25%. Prepayments where applicable are assumed to increase from their present level in line with inflation. Revenues a. Existing and Proposed GTCL Tariffs

(v) (vi) (vii)

(viii)

(ix)

(x) (xi) (xii) (xiii) (xiv)

3.

305. The transmission and distribution companies receive margins from PETROBANGLA for the volume of gas transmitted and sold to consumers. GTCL, the transmission company, receives a margin for the volume of gas transmitted through its system. The wheeling margin for FY 2004 was Tk0.25 / cum. This was increased from July 2004 to Tk0.32 / cum, with a further increase expected to Tk0.36 / cum in January 2005 as part of the Interim Pricing Agreement. However, this and subsequent increases to Tk0.48 / cum by FY 2008 never eventuated. The current GTCL wheeling charge is Tk0.32 / cum, i.e. the 2004 level. Condensate transmission charges are currently Tk1.0 / liter.
45

While 3 months is covenanted, five months reflects the actual situation in the absence of contracts between GTCL and the Distribution companies. GTCL is paid by Petrobangla, who in turn awaits payment from the distribution companies who transfer funds to Petrobangla. However, they have to wait for payment, especially from the power plants and fertilizer companies, both of which are government agencies and slow payers.

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97 b. GTCL Other Income

306. The projections assume that other Income for GTCL of Tk20 million in FY2008 increases in line with level of expenses and annual inflation, while interest receipts of Tk332 million are based on average cash and investments held in the previous year at an interest rate of 5%. This reflects a historic source of revenues for state gas companies and is included in the projections, but is excluded from rate of return calculation as it is not earnings from present gas transmission activities. c. Financial Covenants and Return on Net Fixed Assets

307. For GTCL the loan agreements require the following financial objectives to be met: (i) achieve a minimum annual rate of return of 10%; (ii) debt service ratio of not less than 1.2 (iii) achieve a self financing ratio of 30%, (iv) maintain accounts receivable at a level not exceeding the equivalent of three months' billings; and (v) maintain a debt/equity ratio of not greater than 60/40. 4. GTCL Financial Projections a. GTCL Projections at the Present Wheeling Charge of Tk0.32 / cum

308. The tariff adopted in the Project evaluation was the present tariff of Tk0.32 / cum. As this was insufficient to achieve an FIRR greater than the WACC further analyses were undertaken to identify that level of tariffs necessary to achieve an adequate FIRR on the proposed investments. In the first instance, the financial performance of GTCL has been examined where there is no change in the level of wheeling charge from present levels of July 2004. Over the period FY 2005 to 2008 GTCL has performed creditably because of the very high through put of gas, which was much higher than that projected in FY 2005 for the GTDP. 309. In the absence of any tariff increases GTCLs financial position deteriorates sharply (Table 59). In particular it cannot meet the SFR covenant from 2009 with essentially all funding being provided by Government by way of loans and equity funding. That is, cash flow from operations is insufficient to finance more than 13% of capital expenditure FY 2009 to FY 2012. In addition with the commissioning of new assets in FY 2012 the Rate of Return falls from 12.2% in 2010 to 4.4% in 2012, and declines over the remainder of the forecast period. The DSR also falls below the covenanted 1.2 to 1.1 in 2015 (but recovers to 1.2 in 2016 and remains above 1.2 for remainder of the period to 2020. The D: D+E remains at less than the covenanted 60:40 over the forecast period. During this time while GTCL continues to be able to operate it becomes progressively more dependent on the Government for all its capital expenditure.

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98 Table 59: Summary Results with Wheeling Charge of Tk0.32/cum


FY Gas wheeling charge ( Tk/ cm) Condensate charge ( Tk/ cm) Gas wheeled MMCFD Condensate M liters/year Summary ratios Return on Average NFAs (%) Debt-service Ratio (DSR, times) Self Financing Ratio (%), 3yr.ave. Debt/Debt Equity Ratio (%) Source: Consultant estimates. 2008 0.32 1.00 1193 2331 15.1% 2.3 31% 29% 2009 0.32 1.00 1425 2260 12.6% 2.4 11% 33% 2010 0.32 1.00 1438 2281 12.2% 2.8 13% 41% 2011 0.32 1549 0 9.8% 2.6 12% 44% 2012 0.32 1675 0 4.4% 1.9 -3% 45% 2013 0.32 1806 0 3.7% 2.0 30% 48% 2014 0.32 1856 0 3.5% 1.7 29% 48% 2015 0.32 1906 0 3.0% 1.1 3% 46% 2018 0.32 1924 0 1.9% 1.3 314% 40% 2020 0.32 1773 0 1.4% 1.4 418% 35%

b.

GTCL Tariffs to Achieve 10% Rate of Return by 2012

310. To improve the financial position and financial performance of GTCL, wheeling charges need to be increased so that GTCL complies with the present covenant that it should maintain a 10% rate of return (Table 60). In the absence of any wheeling charge increase in 2012, on the commissioning of several pipeline projects, GTCLs return on net fixed assets falls to 4.4%, compared with 9.8% in 2011, and then continues to fall further over the forecast period to 1.4% by 2020. To avoid this situation the wheeling charge needs to double to Tk0.64 / cum by the beginning of FY 2012, i.e. 1 July 2011 to achieve at least 10% rate of return for the next three years, FY 2012, 2013 and 2014. (However, the SFR would not be met over the period FY 2009 to 2013, but this is largely recognized by the Government provided all the funding for projects over this period in the form of debt and equity contributions.) By FY 2015 a further increase is necessary of 5% and then 13% the following year (FY 2016), i.e. 18% over two years followed by 5% per annum each year thereafter. This would allow a return of 10% or more to be achieved over the remainder of the forecast period. Table 60: Summary Results with Gas Charges to achieve 10% Return on Assets by 2012
FY Gas Wheeling ( increase % p.a) Cumulative Inc. from July 2008 (%) Real Inc. above inflation (%) Gas wheeling charge ( Tk/ cm) Gas wheeled MMCFD Condensate Million liters/year Summary Ratios Return on Average NFAs (%) Debt-service Ratio (DSR, times) Self Financing Ratio (%), 3yr.ave. Debt/Debt Equity Ratio (%) 15.1% 2.3 31% 29% 9.8% 2.6 12% 44% 12.8% 3.4 5% 44% 10.4% 3.5 79% 46% 10.3% 3.0 101% 45% 10.1% 2.1 161% 42% 10.0% 2.6 551% 39% 10.2% 2.7 1542% 35% 10.9% 3.1 1816% 32% 11.0% 3.2 1836% 29% 11.7% 3.5 2770% 26% 2008 0% 0% 0% 0.32 1193 2331 2011 0% 0% -20% 0.32 1549 0 2012 100% 100% 49% 0.64 1675 0 2013 0% 100% 39% 0.64 1806 0 2014 0% 100% 30% 0.64 1856 0 2015 5% 110% 29% 0.67 1906 0 2016 13% 136% 38% 0.76 1911 0 2017 5% 148% 38% 0.79 1938 0 2018 5% 160% 38% 0.83 1924 0 2019 5% 173% 38% 0.88 1817 0 2020 5% 187% 38% 0.92 1773 0

Source: Consultant estimates.

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99 311. Now that increases in end user prices and margins are subject to review by BERC, it is not possible for the Government to agree to increase the end user prices and margins. However, BERC should take into account the agreed financial covenants and adjust tariffs so that these can be met. No further covenants are envisaged. Rather it is necessary to ensure that the existing covenants are observed and taken into account by BERC. 5. Bangladesh Gas Fields Company Limited a. Gas Production

312. This section sets out assumptions on the forecasted gas volumes, MMCFD (and condensate, liters) produced by BGFCL. BGFCL is the largest gas production company of the country and operates Titas, Habiganj, Bakhrabad, Meghna and Narsingdi gas fields. Condensate production is assumed to increase in line with gas sales (Table 61). Table 61: BGFCL: Projected Gas Production/Sales, 2009 to 2020 (mmcm)
Gas Produced at Fields (MMCFD) Titas Bakhrabad Habiganj Narsingdi Begumganj Meghna Total Total Annual (MMCM) Condensate Total (liters million)
Source: Petrobangla August 2008

2008 390 33 243 34 0 700 7,230 33

2009 425 54 246 35 15 775 8,009 37

2010 450 65 246 35 15 811 8,381 38

2011 475 65 270 4 32 10 856 8,846 41

2012 520 65 300 3 26 10 924 9,549 44

2013 565 65 350 3 20 10 1,013 10,469 48

2014 565 65 350 2 14 10 1,006 10,397 48

2015 565 80 350 2 11 10 1,018 10,521 48

2020 565 80 350

10 1,005 10,386 48

b.

Capital Expenditure

313. As part of its development activities, BGFCL is drilling a new well the Meghna field, workover wells and new wells in the Titas field, and redevelopment of Bakhrabad field (phase 1) with its own resources. A major 3D appraisal seismic program over Titas field is also planned as part of the GTDP, which would be followed by additional production wells and gas plants to be financed under GSDP. The programs are reflected in the forecast capital expenditure program in the Table 62.

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100 Table 62: BGFCL: Projected Capital Expenditure FY 2009 to 2020


Tkmillion BGFCL / ADP Domestic Financed Meghna No. 1 Well Workover Wells Titas Redevelopment Bakhrabad Field (Phase 1) New Wells Titas New Well Habiganj Routine/Other expenditure Government ADP Foreign / BGFCL Seismic Survey 3-D (ADB) Gas seepage repair Titas New Wells Titas and plants Redevelopment Bakhrabad Field (Phase 2) Workover Habiganj & Narsingdi Total Source: BGFCL and Consultant estimates. 127.1 420.5 865.0 900.0 470.0 887.4 435.2 3,257.2 9,756.4 3,500.0 1,500.0 22,118.8 $ million 1.8 6.0 12.4 12.9 6.7 12.7 6.2 46.5 139.4 50.0 21.4 316.0

c.

Funding of Capital Expenditure

314. In addition to the cash flow generated from the well-head gas margin and the sale of condensate, the Petrobangla production companies have to rely on multilateral and bilateral loans, ADP loans and grants/equity to finance their capital expenditure (Table 63). The financial projections assume that the 3-D project, gas seepage project and new wells and gas plants for Titas will be financed by ADB loans. Similarly the Bakhrabad Redevelopment (Phase 2) and Habiganj and Narsingdi workovers would be financed by future multilateral loans relent to BGFCL at an interest rate of 5% repayable over 15 years following a grace period of five years. BGFCL will finance the Titas workover, Bakhrabad field redevelopment (Phase 1) and new wells for Titas over FY 2009 and FY 2010 from internal cash sources and investments.

Table 63: Summary of BGFCL Funding 2009 to 2020


Item Debt Government/ADP - Foreign Debt Equity Government contribution BGFCL Internal Funds Total Total
Source: BGFCL

% 66.0 2.8 31.2 34.0 100.0

Tkmillion 14,605.3 7,513.5 610.5 6,903.0 7,513.5 22,118.8

$ million 208.6 107.3 8.7 98.6 107.3 316.0

315. Debt service on existing loans are set out in the financial model worksheets for the period up to 2020, and includes repayment of present exchange rate fluctuation (ERF) loan amounts over remainder of loan lives/balances.

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101 d. Current Sector Financial Objectives and /or Covenants

316. The main financial covenants impacting the gas production companies of BGFCL include: (i) annual rates of return on average net fixed assets of not less than 12% (ii) debt service ratio of not less than 1.2, (iii) debt: equity ratio of not more than 70:30, (iv) Accounts receivable of not more than three months of total sales, and (v) self financing ratio of 30% (Table 63). e. Operating Costs

317. Operating costs and assumptions generally follow those set out for GTCL and past BGFCL operations, with depreciation and amortization of gas field assets (depletion) averaging 4.4% per annum. f. Revenues

318. BGFCL derives its revenue from production of gas for which it receives the Petrobangla well-head margin and sale of gas condensate. Condensate volumes are assumed to follow the historical pattern with gas sales volumes and are based on level of future gas sales. Condensate prices are assumed to follow the petroleum prices with $70/barrel assumed over the forecast period plus adjustment for domestic inflation. g. Summary of Financial Projections i. Well Head Margins at current levels of Tk0.25 / cum

319. Well head margins are assumed to remain at present levels until these are adjusted by Petrobangla. A DSR of 1.2 is met in all years, with the SFR exceeding 30% of funding requirements except in FY 2009, and the RofR (historic) is in excess of 12% in all years (Table 64). However, the rate of return does not reflect the cost of capital and is artificially high because gas reserves have not been revalued in recent years. If gas reserves reflected replacement costs based on current field production costs, rather than development costs in the early 1970s then the rate of return would fall dramatically. For this reason the covenant is not considered to have any real relevance to BGFCL. While BGFCL performance appears adequate, because of the low well-head margin, its ability to finance gas production and field workovers has declined and it is now dependent on the ADP for much of its funding. Table 64: BGFCL - Well-Head Margin at present levels (Tkmillion) Financial Year Summary Ratios 2008 2009
0.25 0 25.3 4.6 -80 11

2010
0.25 0 32.0 4.9 91 10

2011
0.25 0 28.7 4.8 66 15

2012
0.25 0 28.7 5.1 54 22

2013
0.25 0 37.6 5.5 44 29

2014
0.25 0 29.8 6.2 56 36

2015
0.25 0 26.9 3.5 43 36

2020
0.25 0 31.5 3.5 260 32

Well - Head Margin (Tk/ cum) 0.25 Percentage change per annum 0 Return on Average NFAs (%) 17.2 Debt-service Ratio (DSR, times) 3.4 Self financing Ratio (%), 3yr.ave. 83 Debt/Debt+Equity Ratio (%) 13 Source: BGFCL and Consultant estimates.

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102 ii. Well Head Margin Increases to IOC Levels

320. One of the sector reforms is to move well head margins for SGCs into line with IOC contract prices over five years. This would result in improved field management as the gas would have far higher value to the production companies. This would mean that the SGCs could meet a greater share/if not all of their capital expenditure out of cash flows, without any further borrowings. It should be noted that while substantial cash surpluses would eventuate, the Government would be able to recover much of the surplus generated after tax through increasing dividend payments. 6. Sundarban Gas Company Limited a. Forecast Gas Sales

321. SGCL gas sales projections for 2012 to 2020 (Phase 1) are based on PETROBANGLA forecasts and in particular the supply of gas to power plants in Khulna (100 MW) and in the future Bheramara (450 MW). Over the forecast period sales to power plants exceed (or equal in 2020) 90% of total sales (Table 65). Table 65: SGCL - Projected Gas Sales, 2009 to 2020 (mmcm)
FY / Category Domestic Commercial Industry BPDB Power CNG Total 2012 58.6 1.2 10.0 912.0 25.5 1007.3 2013 85.2 1.5 15.1 1510.0 36.0 1647.8 2014 110.4 1.8 22.9 2284.0 49.5 2,468.6 2015 125.6 2.1 31.0 2284.0 60.0 2,502.7 2016 130.8 2.6 39.2 2284.0 70.5 2,527.2 2017 138.1 2.8 39.4 2284.0 81.0 2,545.4 2018 138.5 2.8 39.6 2284.0 81.0 2,545.9 2019 138.8 2.9 39.8 2284.0 82.5 2,547.9 2020 139.3 2.9 40.1 2284.0 82.5 2,548.7

Source: Petrobangla and SGCL

b.

Capital Expenditure and Funding

322. SGCLs capital expenditure is related to expansion of gas distribution in the Khulna area as Phase 1 to cover Khulna, Bagerhat, Jessore, Jhenaidah, and Kushtia. Due to lack of gas Phase 2 is not considered at this stage46. The distribution expenditures, are financed by the ADB loan (61.6%) relent at 5% repayable over 15 Years following a 5 year grace period, with the balance provide by Government as local loan (4.5%) at an interest rate of 4% repayable over 12 years, and Government (33.9%). Capital expenditure and funding is summarized in Table 66.

46

Phase 2 would extend distribution to Bagerhat, Satkhira, Magura, Narail, Chuadanga, and Meherpur.

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103 Table 66: SGCL: Projected Capital Expenditure FY 2005 to 2015 (in 2005 prices)
Government/ADP - Foreign Debt Government/ADP - Domestic Debt Government Internal funds Total
Source: SGCL and Consultant estimates.

% 61.6% 4.5% 33.9% 0% 100.0%

Tkm 4474.8 326.9 2462.0 0.0 7263.7

$m 63.9 4.7 35.2 0.0 103.8

c.

Operating Costs

323. Operating costs and assumptions for this component of the Project generally follow those set out for GTCL, with depreciation assumed at 5% per annum reflecting the shorter 20 year life of distribution assets. Specific operating costs for the distribution company are based on the DPP (October 2008) and the operating costs of the PGCL that operates in the south west of the country. d. Revenues

324. Gas distribution margins adopted are those that remain unchanged from 2005, and are assumed still in force in FY 2012, and for SWGCL whose sales are very skewed towards supplying power stations averages Tk0.276 / cum. If the margin was held constant at the 2005 levels then the DSR for SWGCL would be less than 1.2 over FY 2013 and FY 2014. Therefore a conservative assumption is adopted that distribution margins from FY 2013 will be maintained in real terms by adjusting for the assumed level of inflation. These are presented in Table 67. Table 67: SGCL Forecast Margins and Revenues by Customer (Tkmillion)
2012 Distribution Margin Tk/cum Domestic 0.740 Commercial 1.750 Industry 0.970 BPDB Power 0.240 CNG 0.170 Total 0.276 Change per annum (%) 0.0% 2012 Tkm 43.3 2.2 9.7 218.9 4.3 278.5 2013 0.792 1.873 1.038 0.257 0.182 0.287 7.0% 2013 Tkm 67.5 2.8 15.7 387.8 6.5 473.7 2014 0.847 2.004 1.111 0.275 0.195 0.304 7.0% 2014 Tkm 93.5 3.6 25.5 627.6 9.6 750.1 2015 0.907 2.144 1.188 0.294 0.208 0.330 7.0% 2015 Tkm 113.8 4.6 36.9 671.5 12.5 826.8 2016 0.952 2.251 1.248 0.309 0.219 0.350 5.0% 2016 Tkm 124.5 5.8 49.0 705.1 15.4 884.4 2017 0.999 2.364 1.310 0.324 0.230 0.368 5.0% 2017 Tkm 138.1 6.6 51.6 740.4 18.6 936.7 2018 1.049 2.482 1.376 0.340 0.241 0.387 5.0% 2018 Tkm 145.3 7.0 54.5 777.4 19.5 984.2 2019 1.102 2.606 1.444 0.357 0.253 0.406 5.0% 2019 Tkm 152.9 7.4 57.5 816.2 20.9 1,034.1 2020 1.157 2.736 1.517 0.375 0.266 0.426 5.0% 2020 Tkm 161.1 7.8 60.8 857.0 21.9 1,086.8

Net Revenues Domestic Commercial Industry BPDB Power CNG Total

Source: Consultant estimates.

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104 e. Financial Covenants

325. As a new company the SGCL has no financial covenants. According it is suggested that those for other gas distribution companies be adopted. Namely, to ensure sound financial operations, the following financial results to be achieved: (i) Annual rates of return on average net fixed assets of not less than 12%, (ii) Debt service ratio of not less than 1.2, (iii) debt : equity ratio of not more than 70:30, and (iv) Accounts receivable of not more than three months of total sales. 7. Summary of Financial Projections i. Existing 2005 Margin in 2012 Increased by Inflation through 2013 to 2020

326. Table 68 shows that PGCL exceeds DSR of 1.2 in all years and an SFR of 20% in all years after 2014 (but this is in the absence of any investment plan or Phase 2). The Rate of return covenant of 12% required by distribution companies is not achieved. Table 68: SGCL Key Financial Ratios for Forecast Period 2012 to 2020
2012 -0.2% 0.0 11% 66% 2013 1.0% 12.2 44% 66% 2014 4.7% 1.2 -16% 64% 2015 5.6% 1.3 >30% 61% 2016 6.3% 1.4 >30% 58% 2017 7.1% 1.5 >30% 55% 2018 8.0% 1.6 >30% 52% 2019 9.1% 1.7 >30% 48% 2020 10.0% 1.8 >30% 43%

Return on Average NFAs (%) Debt-service Ratio (DSR) Self Financing Ratio, 3yr.ave. Debt/Debt+Equity Ratio (%)
Source: Consultant estimates.

ii.

Distribution Margins Increased to Achieve 12% RofR

327. Where the distribution margin was increased by twice the forecasted rate of inflation, then a 12% rate of return on historic fixed assets would be achieved by 2018 (Tables 69 and 70). Table 69: SGCL- Forecast Margins and Revenues by Customer (Tkm.)
2012 Ave. margin (Tk/cum) Change per annum (%) Total Revenues (Tkm)
Source: Consultant estimates.

2013 0.306 14.0% 504.7

2014 0.345 14.0% 851.5

2015 0.400 14.0% 999.9

2016 0.443 10.0% 1,120.5

2017 0.488 10.0% 1,243.3

2018 0.538 10.0% 1,368.5

2019 0.591 10.0% 1,506.3

2020 0.651 10.0% 1,658.5

0.276 0.0% 278.5

Table 70: SGCL Key Financial Ratios for Forecast Period 2012 to 2020
Summary Ratios Return on Average NFAs (%) Debt-service Ratio (DSR, times) Self Financing Ratio (%), 3yr.ave. Debt/Debt+Equity Ratio (%)
Source: Consultant estimates.

2012 -0.2% N.A 11% 66%

2013 1.3% 12.8 46% 66%

2014 5.7% 1.3 45% 63%

2015 7.3% 1.5 >30% 60%

2016 8.8% 1.7 >30% 57%

2017 10.6% 1.9 >30% 53%

2018 12.7% 2.1 >30% 48%

2019 15.3% 2.3 >30% 43%

2020 18.0% 2.6 >30% 38%

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105 K. Social Assessment and Resettlement 1. Social Dimensions

328. The social, poverty and development impacts of the Project have been reviewed based on available documents. The activities in this area involved collection of relevant existing data (which were largely confined to statistical and census publications, and previous ADB and government studies, including the PRS) and the draft resettlement action plans. This review confirmed the Projects thematic classification for sustainable economic growth. 329. The field survey has revealed that the reinforcement and expansion of the gas transmission network to the consumption centers in the eastern region and to the western zone will bring significant benefits to the people of the regions in a multi-dimensional way. In broad sense, the Projects impact can be classified into production, income, employment, habitat, health and safety, quality of life, society and organization, poverty gender, environment and pricing. 330. Pursuant to a work plan for the preparation of social impact assessment in accordance with ADBs Handbook for Incorporation of Social Dimensions of Projects, socio-economic surveys were conducted. The social impact assessment addressed the following issues: identification of clientele groups, assessment of their needs for natural gas consumption for various purposes including domestic and commercial demand at anticipated prices, assessments of gender issues and adverse impacts. In this regard, several techniques were used to collect information, such as participatory rural appraisal, interview ad questionnairebased sample surveys. At the time of the surveys, a careful attempt was made to delineate population and groups that might be adversely affected through relocation, loss of asset such as farmland, loss of business or services of income. Further, for possible adverse impacts, dialogues with the community was undertaken to consider alternative options for mitigation compensation or how to avoid such an outcome. A summary of the social impact assessment is in Appendix 27. 331. The Project will have a poverty reduction impact in the project areas. The positive effects are expected to be multidimensional. Poverty analysis was carried out during the project preparatory phase. The levels of income are likely to increase due to new opportunities that are expected to open up, and the increased employment due to economic diversification. The channels through which the income of the poor would increase are (i) expansion of nonfarm economic activities; (ii) growth in agricultural income; (iii) changes in markets and land tenure system; (iv) expansion of markets and institutions due to availability of gas and electricity; (v) time saved that could be devoted to other pursuits, particularly for women, who would be involved in extra income activities; and (vi) low cost of natural gas compared with other sources of energy. No income poverty can be reduced by (i) controlling depletion of forest resources and reducing health risk and diseases; (ii) empowering women through new income opportunities; (iii) establishing social infrastructure that would provide better services (e.g., health centers, educational institutions); and (iv) building social relations and status, etc. Moreover, the Project will create about 3,000 person-months of job opportunities for the unskilled category. 332. GTCL, BGFCL and SGCL have engaged qualified firms to undertake preparation of resettlement plans of the respective components. These plans are scheduled for completion in the first quarter of 2009. A review of land acquisition and relocation plans of project subcomponents that involve resettlement is in Appendix 28 to assess their conformity with ADBs Guidelines for Involuntary Resettlement. Time bound arrangements for public consultation, relocation, compensations for affected persons and costs related to relocation

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106 compensation for land acquisition will be reviewed. An outline of the land acquisition and resettlement framework is in Appendix 29. 333. Field studies were carried out to assess the exact situation of persons likely to be affected by the Project. Part A will involve mostly strip acquisition, and impacts are expected to be both temporary and permanent, though not extensive (alignment corridor will require 8 meters of permanent and 15 meters of temporary land acquisition). The corridor will mainly pass through cultivated land. Land acquisition and resettlement impacts would be minimized by aligning the pipelines away from areas with high population density. 2. Poverty Reduction a. Introduction

334. Economic growth and poverty reduction are at the pinnacle of policy objectives in Bangladesh. Available empirical evidences appear to suggest that, in an investment-friendly regime, natural gas could grease the wheels of economic growth to impact upon poverty levels. Natural gas helps agricultural growth in two ways: as an input to fertilizer factory (and hence to chemical fertilizer input) and, second, as input to electricity generation that helps irrigation of crops. Since most of the poor live in rural areas and on agriculture, obviously the poor are likely to benefit most from gas networks. Besides this, gas-based industries big or small tend to generate employment, reduce poverty and enhance productivity. It is thus no surprising that the proposed gas network to the Southern and Western parts of Bangladesh regions with pervasive poverty and less industrialization would result in an improvement in socio-economic status of people. Such an objective could lead to industrial and commercial expansion to make the regions important contributors of economic growth for the country as a whole. b. Purpose 335. The objectives of this section of the report are to assess the probable contributions of extended gas network in the project areas. It is mostly prepared through primary data collected from households in rural and urban areas of the project areas. A total of 303 households have been selected for interview based on proportionate random sampling technique. The households belong to the villages supposed to be affected by an access to gas in future. Both quantitative and qualitative instruments were used to derive conclusions. The causal relation between gas and per capita income or between access to gas and the probability of being poor were established through multivariate and logit regression exercises, respectively. c. Major Findings i. Poverty status

336. The social and poverty impact assessment of the survey of the project areas is in Appendix 30, and the summary poverty reduction and social strategy is Appendix 31. It is observed that in the sample areas as a whole, 35% of the households are found to be poor households having a monthly income of less than Tk.7000. The share is 40% in control areas compared to 23% in areas with gas and electricity (target areas). On the other hand, the highest share of non-poor households at 77% is in areas where the households have access to both gas and electricity. The lowest share of poor households belongs to areas with access to both electricity and gas. Households having both electricity and gas tend to have more income than others: about 44% more than control households and 13% more than electrified ones. ii. Wage levels and exchange entitlements 337. Between 2007 and 2008 a year of acute economic crisis - agricultural and nonagricultural wages appear to have increased in areas where both gas and electricity is available. For example, agricultural wage increased by 40%, on average in target areas compared to 34%

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107 in control areas. Again, non-agricultural wages increased by 35% and 25%, respectively during the same period of time. This seems to be theoretically sound as it might be due to a tight labor market following better infrastructure causing farm and non-farm income to grow robust. On the other hand, the price of coarse rice rose at relatively lower rate (by 25%) in target areas compared to control areas (by 35%). Hence, households exchange entitlements in terms of coarse rice are found to be highest in areas where both gas and electricity is available. iii. Cost of Cooking 338. The cooking cost in control areas, dependent on traditional fuels, averages Tk.700-800 compared to Tk.400/month in target areas. The most important non-monetary adverse effects of using traditional fuels are: forgone children education, less scope for womens extra work, health hazards, deforestation etc. Users of traditional fuels reported that during fuel crisis they cook once, instead of twice, or apply less heat in cooking food. Those with access to gas reported the following advantages of gas: cost savings, cleanliness, more education for children, extra work for women, and growth of gas based industries etc. iv. Demographic variables 339. The control areas have relatively higher household size and more dependency ratio. It could be that use of traditional fuels lead to more infant mortality and demand for child labor. v. Expenditure Pattern 340. For the poor, expenses on rice claims roughly 38% of total expenditure in control areas compared to about 27% in target areas. In areas with access to gas, poor households tend to spend roughly 8% on education of children compared to 7% in electrified areas and only 4% in control areas. Health cost is the highest in control areas. Fuel cost for the households with access to only electricity is roughly 120% higher compared to costs for the households with access to gas. If the households do not have access to gas or electricity, the fuel costs seem to be higher by 88% as against the costs incurred by the households with access to gas. In the control areas as well as in areas where the households have access to electricity only, the minimum as well as maximum willingness to pay for gas appears to be higher for non-poor households as compared to the poor households. vi. Impacts on income and poverty 341. The survey findings seem to indicate that there is close correlation between access to gas and electricity and socio-economic benefits to households, both poor and non-poor. The most important observation that follows from the regression exercise is that, besides other factors, access to electricity and gas significantly affects the per capita income of poor households. That means, for poverty reduction, provisions of public utility services, e.g., electricity and gas, could be an important policy parameter. Besides this, based on the bivariate analysis, it is also found that households having access to only electricity increases the probability of being non-poor by almost four times compared to households who do not have access to either electricity or gas. When households have access to gas and electricity, the probability of being non-poor is eight times as against households without any access to public utility services. vii. Willingness to pay 342. More than four-fifths of sample households in control areas expressed their eagerness to have access to gas. The maximum willingness to pay for gas bill is estimated to be Tk.650/month. Majority of the intended beneficiaries asked for access to credit to meet fixed costs of installation.

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108 viii. Policy Conclusions

343. The household level information as well as discussions with different stakeholders reveals that the supply of natural gas to the Southern and Western parts of Bangladesh could lead to socio-economic gains. When natural gas would be supplied to those parts of Bangladesh, arguably, the dominant users of gas will be power plants, shrimp processing plants and fertilizer factories. A smaller portion is likely to be consumed by commercial enterprises and households. The majority of the poor expressed their willingness to have access to gas and they perceived growth of industries, commercial enterprises and more importantly, a substantial reduction in costs of production. L. Environmental Aspects

344. The major scope of the Project consists of gas transmission and distribution, besides appraisal and development of gas fields. As per the Environmental Conservation Act (1995) of the Government all components of the Project falls under the red category need Initial Environmental Examination (IEE) and Environmental Impact Assessment (EIA). 345. GTCL, BGFCL and SGCL have engaged qualified firms to undertake or update IEEs and EIAs of the subcomponents. The process may be completed by April 2009. A preliminary assessment of the environmental impacts and mitigation measures is in Appendix 32 while a summary of the IEEs is in Appendix 33. The IEEs will identify potential impacts, their severity, and duration, and will provide mitigating measures for the impacts and a monitoring plan. It is likely that, as in the case of GTDP, the IEEs will show that the proposed Project will be passing through farmlands, rural areas, peri-urban areas, and secondary cities. It will not pass through any socially, archeologically, or ecologically sensitive areas. In addition, potential impacts will mostly be temporary and will not have lasting impacts if mitigating measures to be outlined in the environmental management plans are followed. Taking into account these considerations, the Project may be in environment category B. 1. Description of the Environment

346. In general, the physical, ecological and socio-economic environment conditions for all the subprojects covered in the IEEs are similar. Topographically, the subproject areas are almost flood plains. The region has a tropical climate. The project area is mostly agricultural land with scattered settlement. In selecting the pipeline routes, several factors were taken into consideration, including access to the pipeline from the main road and avoidance of river crossing, railway crossing and major road crossing as much as possible. Features of particular sensitivity have been identified and the right of way (ROW) has been diverted from them including most of the village homesteads. The pipeline routes would not pass through any historical and archeological sites. 2. Potential Impacts and Mitigation

347. The potential environmental impacts and mitigation measures will be by phases of development activity, such as pre-construction, construction, and operation and maintenance phases. Land acquisition and clearing of access roads will be the main pre-construction activities, when socio-economic impacts relating to land, crop and vegetation will be mitigated by compensation payments. During construction, the major impacts will arise from dust generated from soil excavation, pipe laying and vehicle movement. However, these impacts will be minor and of short duration at different locations along the route. During the operation and maintenance phase, pollution of land and surface water arising from discharge of wastes and spillages from scraper trap and valve stations would be mitigated by appropriate treatment.

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109

3.

Environmental Management Plan

348. Generic environmental management and monitoring plan be prepared that would be undertaken during implementation as part of the mitigation of adverse impacts. The environmental management plan (EMP) would be prepared in outline only, as many important elements have yet to be fully defined. GTCL, which will be responsible for executing the environmental management and monitoring program, will expand the plan during the detailed design stage. 4. Benefits

349. The IEEs of the proposed gas transmission pipeline subprojects would be carried out at generic level in terms of both project design and environmental definition. The Project can be environmentally sound and sustainable when the recommended mitigation measure and environmental management processes are adopted. Environmentally sensitive areas will not be disrupted. Therefore, a full environmental impact assessment to assess further impacts of the gas transmission and distribution pipelines would not be required. 5. Greenhouse Gas Reduction

350. Economic growth normally requires increases in energy consumption. Increases in efficiency of energy use are seldom, if ever, sufficient to decrease GHG emissions from the increased energy consumption coincident with economic growth. The major benefit of the Project will be to reduce GHG emissions below those that would occur with use of alternative fuels. 351. A preliminary calculation of the reduced GHG emissions was made on the basis that the increase in the amount of gas consumed after 2009 would all result from the various subcomponents since the Bangladesh gas production, transmission and distribution system is essentially operating at capacity. Alternate fuels which would have to be used by the subprojects were estimated on the basis of knowledge of the market. 352. The power sector comprised 56% of 2008 gas consumption and is expected to increase to about 58% in 2020. The alternate fuels for electricity consumption would be coal and fuel oil, probably in equal proportions. The alternate fuel for fertilizer production might be naphtha but the resulting fertilizer production would not be competitive with international fertilizer prices. Consequently, a reduction in GHG emissions from the use of an alternate fuel to gas is not expected in fertilizer production. 353. Estimates have been made by the United States Energy Information Agency regarding million tons of carbon emitted per quadrillion BTUs. Other sources were used to calculate corresponding numbers for wood. Preliminary calculations indicate that the reduction in GHG emissions would be reduced by about 100,000 tons of carbon over 20 years (Table 71). This is probably conservative since no adjustment has been made for the much higher GHG emissions which would result from transporting the alternate fuels to market than for transporting the gas to markets.

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110

Table 71: Estimation of Greenhouse Gas Reduction

Daily WITHOUT PROJECT Gas Consumption 2008 Gas Consumption - 2008 - 2028 (20 Years) WITH PROJECT Gas Consumption - 2008 - 2028 Increased gas consumption Less: Fertilizer increased gas - no alternate fuel Substitutable increased gas consumption Substitutable increased gas consumption MMBTU ALTERNATE FUELS CONSUMPTION WITHOUT PROJECT AND CARBON DIOXIDE EMISSION REDUCTION BY USE OF GAS SUBSTITUTED BY GAS FUEL Coal HSFO Kerosene Diesel Wood Gasoline LPG Total GAS Percent 30.00 30.00 10.00 10.00 5.00 5.00 10.00 100.00 0.01447 TONS CARBON PER MMBTU 0.02576 0.02149 0.01972 0.01995 0.03545 0.01936 0.01699 MMBTU 1,009,590 1,009,590 336,530 336,530 168,265 168,265 336,530 3,365,300 3,365,300 120 1,249 MMCFD 668

Yearly BCF 243,820 4,876,400 9,117,700 4,241,300 876,000 3,365,300 3,365,300

TONS CARBON 26,007 21,696 6,636 6,714 5,965 3,258 5,718 75,994 48,696 27,298 100,182

DECREASED CARBON EMISSIONS WITH GAS DECREASED CO2 EMISSIONS WITH GAS Assume 1 MCF=1MMBTU Source: Consultant estimates.

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111 IV. A. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS AND RISKS

Expected Benefits 1. Program Loan

354. Weak governance and sector efficiency has long been recognized as a serious development issue in Bangladesh and that issue has particularly affected the evolution of the natural gas sector. The Program will help improve sustainability of the energy sector by implementing national action plans for gas sector reforms, strengthening the policy, legal and regulatory framework; improving sector governance, efficiency and performance; marketoriented pricing; and promoting private sector participation. Together, they will contribute to lay the foundation for further moves to an efficient gas sector in the medium-term. Other tangible benefits lower technical and commercial losses; and better service delivery that would address current supply constraints. Strengthened governance will in part be underpinned by better and more integrated implementation of the GSRR, which is seen as a direct benefit of the enhanced engagement that ADB will have if the Program goes forward. The gas sector is expected to contribute positively to Bangladeshs economic development through enhanced capacity and quality of gas supply. As the program loan component is mainly related to financial and organizational restructuring of gas sector entities, it has not been considered in the economic or financial analysis. 355. The Project aims to further develop the main natural energy resource in Bangladesh to meet the increasing demand for primary commercial energy. The Project is designed to address all aspects of the problem faced by the gas sector, namely, appraisal, production, transmission and distribution. The Project will augment and expand access to gas to the less developed western and southwestern areas of the country to help balanced regional development, and augment transmission capacity to the countrys southern industrial areas. This will not only save foreign exchange currently spent on fuel imports, but also will have a positive impact on the environment and health, particularly of the women and the poor, who are most vulnerable to the harmful effects of biomass and fuel wood traditionally used for cooking. The Project will reduce commercial risks from the ongoing PSCs by expanding the domestic gas market. 356. Network analysis demonstrates the constraints in the existing gas supply system. Infrastructural deficiencies continue to act as a major impediment to Bangladeshs developmental efforts. Reliable access to energy is essential for economic development and poverty reduction in Bangladesh. However, the relatively low utilization of the countrys natural gas resources has constrained the commercial, industrial and rural development of the country. The countrys gas infrastructure is in a poor condition due to lack of commercial orientation and inadequate funding for maintenance and expansion. Weak financial management of the public gas sector entities and other governance constraints have an impact on the development of the gas sector. The Governments poverty reduction strategy emphasizes implementation of policies directed towards expanding national natural gas grid to cover western, north-western and south-western regions of the country to promote extensive industrialization and accelerate balanced regional development that would help reduce widespread poverty. The Project aims to further develop the main natural energy resource in Bangladesh to meet the increasing demand for primary commercial energy. The Project is designed to address all aspects of the problem faced by the gas sector, namely, appraisal, production, transmission and distribution. 357. The scope and configuration of transmission subprojects has been determined on the

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112 basis of least cost expansion plan for the gas network. The distribution subproject aims to create new gas distribution infrastructure in the countrys southwest, the only region that does not currently have any gas distribution network. The intention of field appraisal and development subprojects is to increase proven reserves and production from the Titas gas field. The accompanying policy reforms and institutional restructuring will improve sector governance and efficiency, and encourage private sector involvement in the gas sector. B. Economic Analysis

358. Economic analysis of the for the investment component of the Project was undertaken in accordance with ADBs Guidelines for Economic Analysis of Projects (1997) and Handbook for Integrating risk Analysis into the Economic Analysis of Project (2002). This detailed economic analysis uses the respective SGCs DPPs and related documents as starting points to: i. ii. iii. iv. 1. Verify electricity demand and supply projections Ensure the subprojects are least cost Undertake economic cost benefit analysis of subprojects of the aggregate physical investment program, including sensitivities to key variables Identify distribution of project costs and benefits amongst key stakeholders. Assumptions a. 359. Standard Exchange Rate Factor

The official exchange rate as at November, 2008 has been taken as Tk70.0 = $1.

360. The standard exchange rate factor (SERF) was calculated as the inverse of the standard conversion factor (SCF) using the following commonly accepted formula: SCF = (e X + n M)/[e X (1 t x) + n M (1 + tm)] Where: X M e n tx tm = f.o.b. value of exports = c.i.f. value of imports = elasticity of export supply = elasticity of import demand = average tax on exports (negative for subsidy) = average tax on imports.

361. Calculations show that SERF has trended towards 1.03 in recent years, and this value has been adopted for the purposes of analysis. b. Wage Rates

362. It is assumed that there are no significant distortions in the wage rates for skilled labor. In the case of unskilled labor, underemployment exists in the economy, resulting in the opportunity cost of unskilled labor being less than the promulgated minimum wage rates. A shadow wage rate (SWR) of 0.75 was adopted, based on parameters used by the Bangladesh Planning Commission and the Consultants assessment of underemployment in the unskilled sector, average wage rates, and expected wage rates paid by the project to unskilled labor.

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113 c. Project Costs

363. All costs and benefits have been expressed at a constant 2008 price level. The world price numeraire was used. Traded inputs were valued at their border price equivalent values and non-traded inputs were valued at domestic prices and were then adjusted to the world price numeraire by multiplying by the estimated SCF of 0.97. Capital costs included physical contingencies, but excluded taxes, price contingencies and financial charges during construction. d. Operating Costs

364. Operating and maintenance costs are based on the specific operating characteristics of the individual subprojects and the existing system based on the operating costs of Petrobangla companies operating in the sector. 365. Based on international experience, the operating costs for the extension subprojects (transmission pipelines) are estimated at 1% of capital costs. For the distribution component, the greater of 1.5% of capital costs and the operating cost forecast prepared by BGSL was used. e. Transmission Grid Renewals

366. A cost allocation was made to subprojects for the capital and operating cost of future replacements and renewals on the main gas transmission system. The allocation was pro-rated on the basis of the incremental demand for gas served by each subproject to total demand on GTCLs transmission system. f. 367. Discount Rate

A 12% economic discount rate was used. g. Evaluation Period

368. A period of 20 years has been used for economic evaluation. Investment is assumed to take place in the period 2009-2013, and benefits are assumed to be realized from year 2013 in the case of transmission subprojects and progressively from 2011 in the case of the distribution subproject. No residual values are assumed in year 20. h. Alternative Fuels

369. Imported fuel substitution is the main economic benefit quantified in the analysis, and is the imported petroleum fuels and indigenous fuels such as biomass or firewood substituted by gas when it becomes available. The fuel substitution values for gas were made on the basis that the ex-wholesale depot prices are at the same level as the gas delivered by GTCL to the bulk consumers or gas distributors. 370. Table 72 shows the values of fuels adopted as resource cost savings and expressed in gas equivalents of $/MCF, including in-country transport costs. The decrease in the value of petroleum fuels reflects the World Bank projection of a decline in crude oil prices from current levels. Derivation of these costs is detailed in Appendix 34.

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114 Table 72: Economic Fuel Costs used as Resource Cost Savings ($/MCF)
Fuel 2009 Gasoline Kerosene Gas Oil HFO LPG Coal Wood Economic Fuel Cost 2014 2019 2024

23.1 22.0 18.8 11.2 24.4 5.1 3.0

16.7 16.0 13.6 8.1 18.3 2.9 3.0

15.4 14.8 12.6 7.5 17.2 2.7 3.0

15.4 14.8 12.6 7.5 17.1 2.7 3.0

MCF = Thousand cubic feet; HFO = heavy fuel oil; LPG = liquefied petroleum gas Source: World Bank commodity price projections and Consultant estimates.

371. To quantify the fuel substitution that the subprojects would facilitate, the expected mix of alternative fuels that would be used by each consumer sector were estimated based on Petrobanglas consumer mix in its demand forecasts as in Table 73. Table 73: Fuel Mix Displaced by Gas
Displaced Fuel Gasoline Kerosene Gas Oil HFO LPG Coal Wood Power 0% 0% 50% 50% 0% 0% 0% Domestic 0% 40% 10% 0% 10% 0% 40% Consumer Sector Industrial Commercial 0% 0% 10% 20% 40% 20% 50% 0% 0% 30% 0% 0% 0% 30% CNG 100% 0% 0% 0% 0% 0% 0%

HFO = heavy fuel oil; LPG = liquefied petroleum gas Source: Consultant estimates.

i.

Depletion Premium

372. ADBs 1997 Guidelines for the Economic Analysis of Projects sets out a methodology for calculating a depletion premium. For the purposes of estimating a depletion premium for it was assumed that Banlgadeshs gas resources would be fully depleted at the end of the analysis period (i.e. 20 years). The price of the substitute fuel was based on the World Bank crude oil projections and the crude-to-product relationships and transport prices identified above. A value of $10.3 per MCF was used for the distribution subproject, and $11.1 per MCF was used for the transmission subprojects. The approximated long-run marginal cost (LRMC) of wellhead gas of $1.16 per MCF was used as the extraction costs. j. Long-Run Marginal Cost of Gas Supply

373. Investments will be required in the upstream gas exploration and production to meet forecast sales. The estimated life-cycle gas cost (on an average incremental cost basis) of $1.16 per MCF was taken as a measure of the LRMC of gas production for calculating depletion premium. This represents upstream investments in exploration and production, estimated

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115 operating expenses for gas production and transmission, variations in royalty "free of cost" gas quantities, and IOC return on investment. Calculation details are contained in Appendix 30. k. Gas Supply

374. To allow for the possibility that the required investment is not made for re-estimation of reserves and for exploration, a run-down in the supply of gas has been modeled in the base case; it has been assumed that gas will begin to run down at 20% per annum (on a declining balance basis) from year 2025. l. Gas Transmission and Distribution Losses

375. Losses are incurred in transmission and distribution networks in delivering gas to consumers. These are recognized as a cost of sales in the economic analysis and are assumed at 1% of gas transported for transmission and 2% for distribution. In addition, compressors are assumed to consumer 1.5% of gas throughput, with an estimated 140% of gas consumed passing through a compressor (i.e. some gas passes through more than one compressor). 2. Gas Transmission Subcomponent a. Subprojects

376. The economic analysis has been carried out for the following transmission network reinforcement subprojects: Dhanua-Elenga 30 inch pipeline (augmenting existing pipeline capacity) Ashuganj Chittagong 30 inch pipeline and 24 inch pipeline (augmenting existing pipeline capacity)

377. Augmentation of the Jamuna Bridge (west) to Nalka pipeline was also proposed by Petrobangla and by GTCL. However, technical analysis revealed that the existing pipeline capacity will be sufficient for some time, and would not need to be upgraded until the Elenga compressor is upgraded or a second compressor is added. By itself, the upgraded pipeline would have not economic value. In this context, economic analysis of the pipeline upgrade would require the estimation of compressor and pipeline costs well into the future, undermining the value of the analysis. Moreover, development of the Shahbajpur field or other field discoveries downstream (west) of the Jamuna Bridge might render the proposed pipeline and compressor upgrades unnecessary. For these reasons, this subproject has not been considered any further. b. Demand Analysis

378. Petrobanglas base case demand forecast was adopted to quantify the benefits of proposed transmission subprojects. This forecast assumes that only 80% of actual demand will be supplied due to restrictions on production. On the basis of aggregate downstream demand, expected flow through the subject pipeline before and after augmentation was determined. Demand was modeled as flat beyond 2020 on the basis that other upstream upgrades and augmentation would generally be required to accommodate further growth in demand. Petrobanglas demand forecast is discussed further in the main body of this report.

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116 c. Least Cost Analysis

379. The transmission subprojects are primarily designed to relieve downstream supply constraints on radial parts of the network to the west and to the south. In this context, alternatives to the proposed subprojects are limited to consideration of different pipelines sizes and lengths. 380. In the case of the Dhanua Elenga pipelines, GTCL originally proposed augmenting pipeline capacity from Dhanua all the way to Nalka (excluding the Jamuna Bridge which is already 30 inch) - some 66 km at an economic capital cost of $74 million. Technical analysis revealed that the existing pipeline capacity will be sufficient for some time, and would not need to be upgraded until the Elenga compressor is upgraded or a second compressor is added. 381. Depletion of the Sangu gas field has meant that more gas needs to be transmitted to Chittagong from Ashuganj, which has resulted in a new transmission constraint on the existing Ashuganj Chittagong pipeline. GTCL originally proposed constructing a 230 km 30 inch pipeline to loop to the existing pipeline, at a capital cost of approximately $280 million in economic terms. However, network analysis revealed that, under a realistic range of gas demand and supply scenarios, only the first section of the pipeline (108.5 km from Ashuganj to Bakhrabad and on to Laksam) needs to be 30 inch, with a new 99km 24 inch pipeline to be looped to existing 24 inch pipeline from Laksam to Barabkunda. The analysis revealed that the existing 24 inch 26 km pipeline from Barabkunda to Chittagong city gate station does not require augmentation. Total estimated (economic) capital cost of this subproject is $200 million. Operating costs for both options would be largely fixed and related to initial capital cost and therefore the cheaper option would also be expected to have the lower operating costs. 382. Given possible constraints on available ADB loan financing, GTCL proposed the option of looping a 30-inch pipeline only as far as Feni. This option is cheaper than extending the looped pipeline to Barabkunda ($186 million versus $200 million in economic terms), but does not provide the same potential benefit. Therefore it is not possible to identify the least cost option between these two, and both options have been analyzed further. For clarity, Ashuganj Chittagong Option 1 refers to the Ashuganj-Barabkunda alternative, and Ashuganj Chittagong Option 2 refers to the 30-inch Ashuganj-Feni alternative. d. With and Without Project Scenarios

383. The forecast downstream demand for each of the transmission subprojects is summarized in Table 74. The table also shows the supply constraint for each subproject, with project and without project.

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117 Table 74: Constraints Relieved by Transmission Subprojects (MMCFD)


Subproject Downstream Supply Constraint Without With Project Project 372 500 Downstream Demand (80%) 2010 2015 2020 502 555 555 in the BGSL

Dhanua Elenga 30 inch 82 391 pipeline 296 553 346 464 Ashuganj Chittagong a/ Option 1 Ashuganj Chittagong 296 500 346 464 Option 2 a / For Ashuganj Chittagong options, the constraint refers to the demand that can be served franchise area Source: Consultant estimates.

e.

Calculation of Economic Benefits

384. The economic viability of the subprojects depends on what would happen in without project cases. If the transmission constraints are not relieved, then some demand for gas would remain unserved, and alternative fuels would be used instead. it has been assumed that consumers would substitute fuels rather than reduce energy consumption in the without project case. In other words, it was assumed that benefits are non-incremental in nature. 385. The AshuganjChittagong subproject (Option 1) will increase the gas that can be supplied to existing and new consumers in the BGSL franchise area by approximately 257 MMCFD, and the Option 2 subproject would increase the gas that can be supplied to existing and new consumers south of Ashuganj by approximately 204 MMCFD. In the case of Option 1, the limit of flow to the BGSL franchise area is actually the Ashuganj compressor. The additional flow that could be achieved with a second compressor (or a higher rated compressor) has not been considered, as it would not be required until after 2020. The limit on flow under Option 2 is the ability to deliver gas to Chittagong at an acceptable pressure, as pressure drop in the Feni Barabkunda pipeline, which is not looped under Option 2, is severe under heavy demand at Chittagong. This is discussed in the network analysis section of this report. The Dhanua Elenga subproject will increase the gas that can be supplied to existing and new consumers in the PGCL franchise area and to new consumers in the SGCL franchise area by approximately 130 MMCFD. The fuels and indigenous energy sources replaced by gas are assumed to be heavy fuel oil, diesel, kerosene, gasoline and wood, as shown in Table 75. The savings in resource costs comprise the difference in the economic costs of imported fuels displaced and the economic cost of gas production, transmission and distribution that would replace those fuels. a. Economic Cost Benefit Analysis 386. Detailed cost benefit calculations show that the transmission subprojects are expected to deliver significant economic benefits due to the high economic cost of alternative fuels. The Dhanua Elenga subproject delivers an estimated economic internal rate of return (EIRR) of 72%. Ashuganj Chittagong Option 1 delivers an estimated EIRR of 92% and Ashuganj Chittagong Option 2 delivers an estimated EIRR of 94%. Detailed calculations are given in Appendix 30. 387. The risks that the subprojects do not achieve such high levels of economic returns were identified from both cost and benefit side. For each of the risks identified, the sensitivity of the

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118 EIRR was tested and switching values (SVs) were calculated.47 A combination of cost increases, benefit reduction and delays in project commissioning were also tested. The subprojects are most sensitive to commissioning delays that result in a delay in benefit accrual. For both transmission subprojects, the EIRR exceeds 12% in all cases. Details of sensitivity analyses are and the risk to subproject returns posed by international oil prices is examined further in the risk analysis in Appendix 34. Table 75: Alternative Fuels Displaced by Transmission Subprojects (MMCFD)

388. The EIRR of the Ashuganj Chittagong Option 2 subproject is slightly higher than Option 1, reflecting the lower capital cost of Option 2. However, Option 1 provides a higher level of flexibility to cope with increased demand in the BGSL franchise area than does Option 2, particularly for demand downstream of the Chittagong gate station. For example, if Petrobanglas full demand forecast rather than the 80% base case is used to value benefits, then the EIRR of Option 1 increases to 114% versus 105% for Option 2. Furthermore, Option 2 produces marginal pressure (400 psig) at Chittagong under heavy load conditions at Chittagong, but it is not possible to value the additional pressure that Option 1 provides, even though higher pressure is unequivocally a benefit for consumers. Therefore, whilst both options are valid and
47

A switching value measures the percentage change in the variable required to reduce the EIRR to the assumed hurdle rate.

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119 are economically viable, in the absence of capital constraints it is recommended that Option 1 be selected over Option 2. If capital is constrained and Option 2 is chosen, it should be recognized that faster than expected demand growth in the BGSL franchise area and particularly downstream of Chittagong will necessitate pipeline looping beyond Feni. 3. Titas Gas Field Appraisal and Development Subcomponent

389. This Project component involves appraisal and field development and repair and servicing of the problematic wells in Titas gas field, and appraisal and development of four producing wells in Titas gas field to upgrade the estimated gas in place. It will involve drilling of development wells and installation of processing plants at the gas field to increase gas production by an estimated 120 MMCFD. Three-dimensional surveys of the existing gas fields at Titas gas field are included in the scope of the GTDP that is currently being implemented by Petrobangla. However, given the critical shortage of gas, Petrobangla has requested ADB assistance to drill appraisal wells in the fields adjacent to existing reserves before the survey is completed so as to increase proven gas reserves. The second subcomponent will identify the causes of gas seepages and undertake remedial works in existing problematic wells at Titas. 390. For the purposes of economic analysis, this component has been considered as one subproject and economic returns have been estimate on the basis of the value of increased production that should result from the work. However, the outcomes of the work are highly uncertain. Given the uncertainty of the outcomes, only the project costs have been used in the overall economic analysis, as the investment is seen as part of the sector investment necessary to ensure adequate gas supplies in the future to meet projected market demand. a. Economic Benefits

391. Whilst it is impossible to estimate the value of the gas lost through seepage, identification of the source of the seepages and possible remedies is critical to the ongoing operation of the Titas gas field. Ultimately the seepage problem, if left unchecked, could lead to suspension of production from Titas. In the shorter term it represents a safety issue. A side benefit of seepage investigation is investigation of shallow reserve prospects (at a depth of less than 2,500 meters). However, none of these benefits are quantifiable and seepage investigation is only applied as a cost to the overall Titas gas field subproject for economic analysis purposes. 392. There is an urgent need to restore the balance between gas demand and gas supply in Bangladesh; the current gas deficit increases the consumption of expensive imported energy. Increasing production from the Titas gas field through new production has the potential to add around 120 MMCFD of gas, representing approximately 8% of Titas GIIP (P1 + P2), against an estimated 2008 national gas deficit of around 186 MMCFD. Given an expectation of sustained gas deficits, the additional gas has been valued using the per-unit resource cost saving estimated for the transmission component of the Project. A gas production cost equal to the estimated long run cost of wellhead gas from IOCs ($1.16 per MCF) was used to cost production of this gas. This is a conservative assumption: the long run cost of IOC includes return of and return on the capital investment made by IOCs. b. Economic Analysis

393. Based on the above assumptions regarding additional production assumptions, wellhead cost based on the estimated long run cost of IOC gas, and the inclusion of a depletion premium, the Titas gas field subproject yields an EIRR of 103%. More importantly it provides an

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120 opportunity to identify and recover further reserves of gas at a time when Bangladesh gas reserves are declining. Appendix 34 contains details of the EIRR calculation and sensitivity analysis. 4. Gas Distribution Subcomponent

394. The economic analysis has been carried out for the development of a gas distribution network in Bangladeshs southwest, along a backbone from Bheramara in the north to Khulna in the south. It will supply existing power stations in Khulna, Bheramara and Kushtia, proposed power stations in Khulna and Bheramara, and industrial, commercial, domestic and CNG consumers in Khulna, Mongla, Jessore, Jhenaidah, Kushtia and Bheramara. A second phase of the distribution network is planned to supply gas to consumers in Bagerhat, Satkhira, Magura, Narail, Chuadanga and Meherpur districts. The second phase is not considered in this analysis. a. Demand Analysis

395. The demand forecast prepared by Petrobangla was adopted to quantify the benefits of proposed distribution subproject. Prior to its proposed augmentation (analyzed separately as a transmission subproject in the preceding section), the upstream supply constraint imposed by the Dhanua Elenga pipeline means that total demand that can be supplied downstream of Elenga is limited to 372 MMCFD. Therefore, demand growth beyond 2013 was not considered in determining the economic viability of the distribution subproject (instead it was ascribed as a benefit of the Dhanua Elenga transmission subproject). b. Customer Connection Costs

396. Gas consumers pay for their own connection to the gas network either indirectly through a connection charge or directly. This represents an economic cost to the subproject. Based on information provided by Petrobangla and by PGCL, connection and related costs were estimated and added to subproject costs. c. Least Cost Analysis

397. Given the low delivered energy cost of gas, there is no practical alternative to gas distribution in Bangladeshs southwest region. Transmission expansion to the south and southwest was included as part of the least cost expansion plan in the 2005 Gas System Master Plan, with possible looping from Khulna back to Dhaka if the gas fields in the southwest are developed in the future. Petrobanglas Development Project Proposal for southwest distribution uses network topography and pipeline sizes that are standard across Bangladesh, and they are considered by the Consultant to be reasonable and reflective of international practice. Therefore, alternatives to Petrobanglas distribution network design have not been developed and the subproject is considered to reflect least cost. d. With and Without Project Scenario

398. The forecast downstream demand for the southwest distribution project is summarized in Table 76. The table also shows the with project and without project supply constraint.

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121 Table 76: Constraint Relieved by Distribution Subproject (MMCFD)


Subproject Supply Constraint Without Project 0 With Project 186 1/ Downstream Demand (80%) 2010 0 2015 196 2020 197

Southwest distribution

1/ Based on half of the constrained supply of 372 MMCFD being available to BGSL for supply to its franchise area the southwest Source: Petrobangla and Consultant estimates.

e.

Calculation of Economic Benefits

399. The economic viability of the distribution subprojects depends on what would happen in without project case. If the distribution network is not extended to the southwest, then alternative and traditional fuels will continue to be used for cooking, industrial process, electricity generation and transport. It was been assumed that consumers would substitute fuels but would not increase their energy consumption in the with project case. In other words, it was assumed that benefits are non-incremental in nature. This is discussed further in Appendix 30. The estimated fuel substitution enabled by the distribution subproject is summarized in Table 77. Table 77: Alternative Fuels Displaced by Distribution Subprojects (MMCFD)

f.

Economic Cost Benefit Analysis

400. Detailed cost benefit calculations show that the distribution subproject is expected to deliver significant economic benefits due to the high economic cost of alternative fuels. Overall, the subproject delivers an estimated EIRR of 175%. Detailed calculations are in Appendix 34. 401. The risks that the subproject does not achieve this level of economic return were identified from both cost and benefit side. For each of the risks identified, the sensitivity of the EIRR was tested and switching values (SVs) were calculated. A combination of cost increases, benefit reduction and delays in project commissioning were also tested. The subprojects are most sensitive to commissioning delays that result in a delay in benefit accrual. However, the distribution subproject EIRR exceeds 12% by a large margin in all cases. Details of sensitivity analyses and the risk to subproject returns posed by international oil prices are examined further in the risk analysis in Appendix 34.

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122

5.

Overall Project

402. For the reasons described in the transmission component economic analysis, Ashuganj Chittagong Option 1 is preferred over Option 2. Therefore, only Option 1 is considered in the overall Project analysis. However, overall economic outcome would be very similar if Option 2 was included rather than Option 1, and overall capital cost would be slightly lower. Detailed calculations are in Appendix 34. 403. The overall Project EIRR, including costs and benefits of distribution and transmission subprojects and the costs of the Titas subproject, is estimated at 83.3%. The overall Project is most sensitive to commissioning delays that result in delays in benefit accrual. However, the overall Project EIRR exceeds 12% in all cases. 6. Risk Analysis

404. Further to sensitivity testing, analysis was performed to assess the risk inherent in the economic performance of the overall Project. Of particular interest in this analysis was the extent to which oil price fluctuations impinge upon Project returns. The World Banks current (as at December 2008) oil price forecast appears high in light of the rapid decline in oil prices in the second half of 2008 precipitated by global recession. A 20% reduction was made to the oil price forecast in the calculation of base case economic returns to partially account for this, but this reduction does not account for the possibility of sustained low oil prices. Figure 4 shows four probability functions for oil prices (in 2008 dollars): 1970-2008 (1970+); 1980-2008 (1980+), 1990-2008 (1990+) and 2000-2008 (2000+). Distribution means and standard deviations are shown in Table 78. In developing the probability density functions, oil prices were considered in $5 bands for example, the figure below shows that from 1990 to 2008, there was a 25% probability of oil price being between $40 and $45. In all cases the functions appear to fit a lognormal distribution. For the purposes of risk analysis, the 1990+ distribution (i.e. the probability distribution of oil prices since 1980) was adopted as it appears to capture one full cycle of very high prices (2007 and 2008) and very low prices (1998 and 1999). For the simulations, a side constraint (in the form of a correlation function) was adopted to limit the price change in any one year to 30% of the previous year.

Table 78: Historical World Oil Prices Key Statistics


1970-2008 Maximum Minimum Mean Standard deviation Period 1980-2008 1990-2008 2000-2008

133.9 14.8
44.2 22.2

133.9 14.8
45.9 23.4

133.9 14.8
40.6 22.1

133.9 23.4
54.3 25.1

Source: Economic Research, Federal Reserve Bank of St Louis (website) and Consultant estimates.

405. In additional to oil price, probability functions were applied to capital cost and operating cost. Normal distributions were adopted, with distribution means equal to the base case and distribution standard deviations equal to 15% of the mean. The result of the simulation is shown in Appendix 28 in the form of a probability of exceedance (POE) curve. Results support the economic viability of the overall project, with expected EIRR (i.e. 50% probability of exceedance (POE)) of 64.4%.

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123 Figure 4: Historical World Oil Prices Probability Density Functions

Prices are West Texas intermediate spot price in 2008 dollars per barrel The monthly price series was converted to average annual prices to estimate density functions Source: Economic Research, Federal Reserve Bank of St Louis (website) and Consultant estimates.

7.

Analysis of Beneficiaries and Distribution of Benefits

406. The distribution of costs and benefits amongst stakeholders was assessed by comparing financial costs and benefits to economic costs and benefits. Analysis was undertaken on a prefinancing basis and as such lenders were not included as stakeholders. Income tax was excluded from the analysis. Consumers and Bangladeshs economy benefit from a resource cost saving as output from the subprojects displaces more expensive energy sources. The economic valuation of tradable goods and services exceeds its financial value due to the overvaluation of the exchange rate, and represents a loss to the economy as a whole. The financial cost of unskilled labor exceeds its opportunity cost, with the difference reflecting a net gain to unskilled labor participating in the project. Taxes paid in Bangladesh represent a gain for the public goals for which the Government elects to commit its resources. 407. Overall, the economic net present value exceeds the financial net present value by Tk267.9 billion. Consumers are the greatest beneficiaries, with net benefits of about Tk209.0 billion. Unskilled labor benefits by approximately Tk0.3 billion, and Bangladeshs economy benefits by approximately Tk59.9 billion. Gas sector companies are the net losers in this analysis (Tk7.7 billion), as their weighted average cost of capital and therefore its expected financial internal rate of internal on the investment are well below the 12% discount rate used in the analysis.

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124 C. Financial Evaluation Of The Project 1. Introduction

408. The financial evaluation of the Project has been carried out in accordance with The Guidelines for the Financial Governance and Management of Investment Project Financed by the Asian Development Bank. GTCL will be the EA for the gas transmission pipeline subprojects, and will be required to repay subproject loans. BGFCL will be the EA and be required to repay subproject loans to meet the foreign costs for the Titas wells and gas seepage components. No FIRR is calculated as there is no revenue stream associated with this component of the Project. The investment provides a clearer delineation and an increase in reserves that have a future economic benefit. The local costs are provided by BGFCL as equity from its own cash flow. The SGCL will be the EA of the distribution component Phase I for Khulna and other adjacent towns. 2. General Assumptions 409. The Project financial evaluation is carried out in 2008 prices with financial cost flows inclusive of taxes, duties, subsidies and physical contingencies, but exclusive of any price contingencies and interest during construction. The following general assumptions have been adopted: The project is evaluated over a 22-year period with Project benefit and cost streams held constant from 2020 to 2031. The financial evaluation considered only the incremental revenues and costs directly associated with each subproject. Therefore, the revenues and costs of existing systems are not considered, All costs and revenues are expressed in 2008 prices. Capital costs include physical contingencies but exclude price contingencies and interest during construction for the project over the period 2005 to 2009. Residual values for project assets are assumed in the year 2031 of 33% for pipeline related assets with an expected economic life of 30 years. An average exchange rate of Tk70.0 per $1.00 has been used to convert foreign exchange costs to their local currency equivalent in December 2008. Repairs and maintenance costs of project assets are based on estimates adopted in the economic evaluation. 3. Gas Transmission Subcomponent a. Options Evaluated

410. The gas transmission pipeline component reinforce the gas network by providing looping of pipelines to improve gas flow in the system. The evaluation and computation of the FIRR, including sensitivity analysis, have been carried out for the following cases. 411. In the case of the Dhanua Elenga pipelines, GTCL originally proposed augmenting pipeline capacity from Dhanua all the way to Nalka (excluding the Jamuna Bridge which is already 30 inch). However, technical analysis revealed that the existing pipeline capacity will be sufficient for some time, and would not need to be upgraded until the Elenga compressor is upgraded or a second compressor is added. Therefore, no further analysis was done for the Jamuna Bridge to Nalka section.

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125 412. Depletion of the Sangu gas field has meant that more gas needs to be transmitted to Chittagong from Ashuganj, which has resulted in a new transmission constraint on the existing Ashuganj Chittagong pipeline. GTCL originally proposed constructing a 230 km 30 inch pipeline to loop to the existing pipeline.. However, network analysis revealed that, under a realistic range of gas demand and supply scenarios, only the first section of the pipeline (108.5 km from Ashuganj to Bakhrabad and on to Laksam) needs to be 30 inch, with a new 99km 24 inch pipeline to be looped to existing 24 inch pipeline from Laksam to Barabkunda. The analysis revealed that the existing 24 inch 26 km pipeline from Barabkunda to Chittagong city gate station does not require augmentation. 413. Given possible constraints on available ADB loan financing, GTCL proposed the option of looping a 30-inch pipeline only as far as Feni. This option is cheaper than extending the looped pipeline to Barabkunda ($186 million versus $200 million in economic terms), but does not provide the same potential benefit. Therefore it is not possible to identify the least cost option between these two, and both options have been analyzed further in the fianacial analysis (as well as the economic). 414. are: In summary, the options analyzed all represent existing system reinforcement. These Dhanua Elenga loop line 30 inch Examination of various options to improve gas flow to Chittagong, namely b. Ashuganj to Bakhrabad to Feni with 30 inch pipeline or Ashugnaj to Bakhrabad to Barabkunda with 30 and 24 inch pipeline

Combination of projects proposed. Project Revenues

415. The GTCL derives its revenue from wheeling charges on gas volumes and condensate volumes transported. The current rate is Tk0.32/ cm.48 However this rate remains unchanged since 2005 and was found to be too low to support the projects. Accordingly the analysis examines what the GTCL margin would need to be to achieve FIRRs above the WACC of 2.7%, including sensitivity analyses. The gas volumes transported by the GTCL assumed in each option are those discussed and set out in the economic evaluation. As in the past condensate revenues were assumed at 7% of gas revenues. c. Project Capital Costs

416. Project capital expenditures include taxes and physical contingencies and are the base costs (before adjustment) set out in the economic evaluation. Residual values for pipeline assets equivalent to 33% are assumed at the end of the evaluation period.49

48

In 2005 under the Interim Pricing Agreement, there was provision for six monthly increases of 5% or 10 % per annum in the overall tariff. Therefore, a rate of Tk0.48 / cm was assumed by July 2008. However, these increases did not eventuate. 49 To date pipeline assets in excess of 40 years are operating without any loss of performance.

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126 d. Project Operating Costs

417. The operating costs for the extension of transmission pipelines and for reinforcement of the existing system through compressors and looping are based on 1.0% for new pipelines. Compressor operating costs other than fuel to cover fixed overhauls, inspection and variable costs are estimated at 2.5% of capital costs. In the case of fuel, based on manufacturers estimates, 1.5% of the gas passing through the compressor is assumed to be consumed when going through two compressor stations and half that amount for one compressor station. As compressor costs are sunk costs for this project, only the additional fuel cost for the incremental gas volumes under this project were included with the costs. 418. GTCL currently does not operate any compressors, so there is no history of the prices that GTCL would pay to Petrobangla for gas consumed in the compressors. In the economic analysis the opportunity gas of gas in terms of petroleum products and other fuels substituted by has been adopted. It is assumed that the minimum GTCL would pay would be the amount paid by Petrobangla to the SGC development companies for gas of Tk0.25/cm. To this could be added taxes levied by the Government on distribution sales. However, the gas is not sold so these taxes may not apply. On the other hand Petrobangla may levy the margins for the PDF and the BAPEX. Again this gas is not sold, so these levies should not apply.50 419. Therefore, a realistic charge would be the average well-head gas cost/margin for IOCs and SGCs of Tk1.17/cm while an upper limit would be the average cost of IOC gas Tk3.680 / cm (Table 79). While this may not be applicable at the present time, if other pricing reforms in the sector take place with all gas charged at the IOC costs, then this may apply in the future.

50

The Government taxes and Petrobangla levies are not charged on system or distribution losses but only on distribution sales.

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127 Table 79: Range of Possible Fuel Costs for Compressors (2005 Tariffs/Charges)
Serial No. (1) SGC well-head margin Government taxes Value-added tax Supplementary duty Total SGC plus Government taxes Petrobangla charges Add price deficit fund (PDF) surcharge Add BAPEX levy Total SGC,GOB,Petrobangla Average Production Costs SGC plus IOC's costs but no Government taxes or Petrobangla fees. IOC Production cost Tk/cm 0.250 1.270 0.360 1.630 1.880 0.410 0.076 0.486 2.366 1.170 1.12 0.55 0.89 $/MCF 0.12

(2) (3) , (1+2)

(4) (5) , (3+4) (6)

(7) (8) , (4+6)

3.680

1.74

Average Production Costs 1.656 0.78 Plus Petrobangla charges BAPEX - Bangladesh Petroleum Exploration Company Limited; IOC - international oil companies; SGC state-owned gas companies Source: Consultant estimates

e.

Amount of Gas passing through Compressors

420. Table 80 summarizes the estimate of the amount of gas going through Muchai and Ashuganj compressors, after eliminating sales to Chittagong and Titas direct sales by TGTCL (carried in its own transmission lines) and from Jalalabad fields to distribution centers. Accordingly 1.17 of all gas would go through these compressors, while sales to the west would go through the Elenga compressor so that around 1.35 times all gas would go through a compressor. Table 80: Estimate of Gas through Compressors (MMCFD)

Financial Year Gas through Muchai/Ashuganj compressor % of Total gas Gas through Elenga Compressor % of Total gas Gas through compressors % of Total gas
Source: Consultant estimates and Petrobangla

2011-12 2,687 1.16 300.8 0.13 2,988.2 1.29

2014-15 3,072 1.18 433.0 0.17 3,505.4 1.35

2019-20 2,892 1.17 516.6 0.21 3,408.9 1.38

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128 f. Calculation Weighted Average Cost of Capital (WACC)

421. The cost benefit or financial evaluation is undertaken for the individual gas supply subprojects that represent the least cost options identified in the economic evaluation. Revenues are those incremental revenues derived from GTCL wheeling charges on the additional gas volumes transported plus an allowance for condensate. Capital and operating costs are those related to the project extensions plus a share of the existing network as additional gas sales through the extensions also are conveyed through the existing network. The objective of the financial evaluation is to ensure that each subproject is financially viable, meaning that in each case they generate revenues from wheeling charges that is sufficient to cover capital and operating costs and generate rates of return that meet or exceed the WACC used to finance each subproject. The subproject is considered to be financially viable if the FIRR is equal to, or greater than, the actual cost of project funding which is the WACC. 422. The computation of WACC is in Table 81 and is estimated at 2.7% and is made up of government equity estimated at 11.72%51 nominal and re-lending of foreign funded components at 5.0%52 and domestic funds at 4.0% interest rates. Table 81: Calculation of WACC for Transmission Line Components
Dhanua-Elenga Amount $ m Weighting Nominal Cost Tax Rate Tax Adjusted Nominal Cost Inflation Rate Real Cost Weighted WACC ($ in million) ADB Loan 43 60.4% 5.0% 37.5% 3.1% 0.8% 2.3% 1.4% Dom. Loan 3 4.0% 4.0% 37.5% 2.5% 7.0% -4.2% -0.2% Government Equity 25 35.6% 11.7% 0.0% 11.7% 7.0% 4.4% 1.6% Total 72 100.0%

2.7%

g.

Summary of Results

423. Project financial analysis was carried out for each subproject comparing the financial internal rate of return (FIRR). The results by pipeline subproject and the overall project are set out Table 82 and Appendix 35. As noted above it was proposed to undertake the analysis at various wheeling charges to determine the value that would be necessary for the calculation of revenues so that the FIRR and sensitivities would exceed the WACC. In the case of Dhanua Elenga looping pipeline a wheeling charge of Tk0.48/cm (in real terms, before inflation) would yield an FIRR of 4.1% compared with a WACC of 2.7%. While at the current wheeling charge of Tk0.32/cm the FIRR would be 1.8% which is less than the WACC. For the AB-BF and the ABBB projects the wheeling charge would need to be Tk0.64 to 0.72/cm or 100/125% above present levels to achieve an FIRR above the WACC.

51 52

10 year Treasury Bond Rate The Government determines the on lending rate of foreign loans, irrespective of the LIBOR, with foreign loans attracting 5% interest rate. However, the loans are in foreign currency and attract foreign exchange losses or gains on an annual basis. For this reason the interest rate is shown as 5% while the international inflation rate is adopted, to reflect that the loan is essentially denominated in foreign currency with GTCL taking the foreign exchange risk.

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129 Table 82: Summary of Transmission Line Sub Components and Overall FIRR
Existing Margin Wheeling Charge Tk/cum GTCL Options D-E AB-BF AB-BB D-E+AB-BF D-E+AB-BB WACC 0.32 1.8% -0.3% 0.0% 0.2% 0.4% 2.7% +50% 0.48 4.1% 1.3% 1.7% 2.1% 2.3% 2.7% +75% 0.56 5.1% 2.1% 2.5% 2.9% 3.2% 2.7% +100% 0.64 6.1% 2.9% 3.3% 3.8% 4.0% 2.7% +125% 0.72 7.0% 3.6% 4.1% 4.5% 4.8% 2.7% +150% 0.80 7.8% 4.3% 4.8% 5.3% 5.6% 2.7%

Note : wheeling charges required are in real terms before adjustment for inflation, required from 2012 and then remain constant in real terms over 20 year forecast period. D-E DHANUA-ELENGA TRANSMISSION AB-BF ASHUGUNJ-BAKHRABAD-FENI (30 inch)TRANSMISSION AB-BB ASHUGUNJ-BAKHRABAD-BARABKUNDA (30 inch and 24 inch)TRANSMISSION Source: Consultant estimates.

h.

Sensitivity Analysis

424. No sensitivity analysis was carried out, because at the existing GTCL wheeling charge of Tk0.32/cm all FIRRs are well below the WACC of 2.7%. 4. Gas Distribution Subcomponent

425. The gas distribution component will provide gas distribution to Khulna, Bagerhat, Jessore, Jhenaidah, and Kushtia. This will provide gas for the first time to domestic customers, commercial and small industries as well as power plants in Khulna. Connection costs are met directly by customers. The assumptions follow the general assumptions discussed above together with forecast capital costs, operating costs and revenues set out below. a. Capital Costs

426. The capital costs for the initial phase of distribution are estimated at $76.8 million, including taxes and duties and physical contingencies. The distribution pipe lines are assumed to have a life of 20 years, so that there will be no residual value at the end of the evaluation period. b. Gas Distribution Operating Costs

427. Gas distribution operating costs are the operating costs assumed for the new South West Gas Company The Sundarban Gas Company Limited, excluding depreciation and interest. These costs are based on the DPP, plus those of the PGCL, who also operate west of the Jamuna Bridge.

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130 c. Project Revenues

428. Revenues are derived, based on the distribution margin set out in the gas tariff for various classes of customers. The gas sales are those set out in the Petrobangla forecast. The table below sets out the gas volumes by customer categories and shows that sales to power stations dominate and represent over 90% in all years. The distribution margin used in the analysis remains unchanged from 2005 (Table 83). Table 83: Estimated Gas Distribution Margin (Tk/cum) and Sales (MMCM)
Customer Category Domestic Commercial Industry BPDB Power CNG Average/ Total
Source: Consultant estimates.

Distribution Margin (Tk/cum) 0.740 1.750 0.970 0.240 0.170 0.276

2012 58.6 1.2 10.0 912.0 25.5 1007.3

Gas Sales (MMCM) 2013 2014 2015 85.2 110.4 125.6 1.5 1.8 2.1 15.1 22.9 31.0 1510.0 2284.0 2284.0 36.0 49.5 60.0 1647.8 2468.6 2502.7

2020 139.3 2.9 40.1 2284.0 82.5 2548.7

d.

Other Income

429. Other Income is derived from late payment penalties, installation of gas appliances etc. Based on current levels in PGCL this is projected at 2% of gas sales. e. Losses

430. Bad debts, illegal connections in the distribution companies are high by international standards and have reached 7.2% of sales in the case of TGTDCL. However, this includes illegal connections. Given that PGCL will be a new system, there should be no illegal connections and therefore low non-technical losses. Accordingly losses are assumed at 1.0%. f. WACC for Distribution Subcomponent 431. The computation of WACC is in Table 84 and is estimated at 2.7% and is made up of Government estimated at pre-tax 11.72% nominal and re-lending of foreign funded components at 5.0% and domestic funds at 4.0% interest rates. Table 84: Calculation of WACC for Distribution Subcomponents (Part C)
($ in million) ADB Loan 57 61.6% 5.0% 37.5% 3.1% 0.8% 2.3% 1.4% Dom. Loan 4 4.5% 4.0% 37.5% 2.5% 7.0% -4.2% -0.2% Government Equity 31 33.9% 11.7% 0.0% 11.7% 7.0% 4.4% 1.5% Total 92 100.0%

Amount $ m Weighting Nominal Cost Tax Rate Tax Adjusted Nominal Cost Inflation Rate Real Cost Weighted WACC
Source: Consultant estimates.

2.7%

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131 g. Calculation of FIRR and Sensitivity Analysis

432. The results of the distribution component are set out in Table 85, with the base case FIRR of 5.8% exceeding the WACC of 2.7%. Table 85: FIRR and Sensitivity Analysis
Sensitivity Analyses Base Case Capital +10% Operating +10% Benefits -10% All the above Two year delay with 20% increase in Capex WACC SI 5.8% 4.7% 5.6% 4.4% 3.1% 4.4% 2.7% 18.6% 4.3% 25.1% SV 28.6% 125.1% -21.2%

h.

Sensitivity Analyses

433. An evaluation was undertaken to test the sensitivity of the estimated FIRR of the gas distribution component to adverse changes in key variables. The variables tested are increases (+10%) in capital and operating and maintenance costs, and a reduction in project benefits (10%). A combination of the above increases in costs and decreases in benefits was also tested, together with delays in project accompanied by increases in project costs. The sensitivity indicator and switching value were calculated. 434. The project is robust to the above sensitivities with the FIRR remaining above the WACC. In the case of the two year delay in commissioning associated with a 20% increase in project costs, the distribution subcomponent would be sensitive to such results, with the FIRR falling to 4.4%, but still above the WACC. Where cost overruns occur, they are assumed to be financed by increased ADP borrowings. The project implementation procedures have been designed to avoid delays in project planning, design and construction. D. Risks and Safeguards

435. Political Commitment. The Programs success depends on the Governments commitment to gas sector reforms in general and, more specifically, to successfully implementing the revised GSRR to create an enabling environment for improved sector governance and efficiency. This would be the major risk in the successful implementation of the Program considering the limited progress on the reform program supported by GTDP primarily because of lack of ownership by the Government. There is a risk that these actions may be affected by future political developments. However, this risk is considered low and may be mitigated by continued policy dialogue, as the Government at ministerial level has shown consistent commitment to gas sector reforms during TA implementation 436. Reform Agenda. The main potential policy risk relates to the failure or delay in introducing the required reform and restructuring measures. There is a substantial risk that the Government would not implement the reform agenda in the intended spirit in a in a timely manner. A past example would be the passage of the BERC Act in 2003 and the failure to operationalize the agency for five years. Also, the Government is taking a long time (about four years) in updating the NEP to guide energy sector development in the country. This risk has been mitigated by designing the Program to promote the acceleration of reforms, the quality of

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132 the reform content, and the sustainability of implementation. It addresses risk by approaching difficult issues in an incremental fashion; and supports reform actions that are both important and distinguishable by a high, observable level of government ownership. ADB will maintain policy dialogue with the Government on these issues. 437. Gas Supply Risks. Another major concern is the availability of the required gas supply during the Projects economic life. Current demand-supply projections indicate that the available gas reserves can only meet demand up to FY 2017. Thereafter production will decline if no new reserves have been found. This risk has become increasingly high in recent years. Bangladeshs natural gas supply situation has deteriorated for the worse. Supply shortfalls have been especially pronounced in the Southeast, where the offshore Sangu field went into fasterthan-expected decline; production there has fallen two-thirds, to under 50 MMCFD, and leaving the Chittagong area short of at least 100 MMCFD. 438. Elsewhere in the country, demand exceeds supply by about 100 MMCFD. This risk would be addressed by requiring the Government to encourage and accelerate exploration activities both in the public and the private sectors to ensure timely gas availability. The sector as a whole is negatively affected by poor pricing policies, which limit the incentives for IOC investment, and severely constrain the cash available to Petrobangla companies for exploration, appraisal, and development drilling. Poor management of natural gas demand and the lack of an allocation strategy pose risks of going forward with downstream investments. The Program addresses these concerns by appropriate policy reforms to promote upstream investment. 439. Implementation Risks. Generally, the Project as a whole is subject to risks common to projects of such size and complexity. However, the Project has been designed to mitigate policy and institutional risks. The subprojects are not subject to any unusual technical and commercial risks. They involve SGCs with a reasonably sound financial status, and technically and commercially proven technologies. Cost overruns and delays in implementation constitute major potential risks. The economic impacts of the subprojects are relatively insensitive to cost overruns. The subprojects are more sensitive to delays in implementation, but the basic economic returns remain sound. The potential risks in Project implementation include front-end delays, and inadequate project management capabilities of the SGCs, which may affect the financial viability of the Project. Measures have been incorporated in the Project design to reduce these risks. In particular, the institutional development will address this issue. Market risks exist since distribution components for most subprojects are yet to be planned and executed. This risk could be addressed through long-term off take agreements with bulk consumers such as power generation plants and industrial enterprises, including fertilizer and other chemical factories. 440. Funding Risks. One area of potential concern relates to the availability of local currency financing. This concern will be addressed by obtaining confirmation of counterpart funding arrangements.

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133

APPENDIXES (In Separate Volume)


Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Title Terms of Reference of Consulting Services Greenhouse Gas Emissions Assessment of Natural Gas Resources and Prospects System Loss of Different Distribution Companies Institutional Framework for the Energy Sector Production and Utilization of Natural Gas Proposed Power Generation Plants in Bangladesh Projected Daily Gas Demand Projected Production of Gas Projected Gas Supply Current Natural Gas Pricing Framework Gas Sector Investment Plan Implementation Status of Gas Sector Reform Roadmap Revised Gas Sector Reform Roadmap Problem Tree Design and Monitoring Framework Tentative Policy Matrix Negative List Network Analysis Estimate of Project Costs Financial Management Assessment of Executing Agencies Past Financial Performance of State Gas Companies Implementation Schedule Procurement Packages Project Preparedness Financial Projections Social Impact Assessment Assessment of Resettlement Issues Land Acquisition and Resettlement Framework Environmental Impact Assessment Summary Initial Environmental Examination Poverty Reduction Impact Assessment Summary Poverty Reduction and Social Strategy Economic Analysis of the Project Financial Evaluation of the Project Page

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