Bangladesh aspires to become a high-income country by 2041. The development of energy and power infrastructure, therefore, pursues not only the quantity but also the quality to realize the long-term economic development.
As Bangladesh is slowly depleting its resources, the government has been taking measures to conserve gas lately. One of the initiatives includes encouraging the use of Liquefied Petroleum Gas (LPG) and LNG as an alternative to natural gas for household and commercial use. It is done by discontinuing the provision of new gas connections to households and other commercial enterprises and reducing the number of hours of supply to connected consumers. The government’s natural gas conservation policy is therefore based on rationing gas supply rather than by proper pricing to encourage its efficient use.
Owing to the absence of new significant discoveries and a very liberal use, the growing shortage of natural gas is a burning issue for Bangladesh now. If Bangladesh’s gas demand continues to grow at the current pace of 7% per annum, the current reserve will completely deplete by FY2023 (Table 1), unless gas supply capacity substantially increases through new gas field exploration/development and gas imports.
Table 1: Reserve to Production (Supply) Projection from 2014
On the demand side, the rapid use of gas in power production has been the main source of the growth in gas consumption. Due to the most recent gas supply constraint, the power sector is increasingly relying on fuel oil. Thus, the rapid increase in the share of oil-based power supply– from only 8% in FY2010 to 28% in FY2015– is a reflection of a major primary fuel constraint in Bangladesh. Along with reliance on rental power, substitution of high-cost fuel oil with low-cost domestic gas has contributed to the rapid increase in the average cost of electricity generation. A severe rationing of gas now exists in the economy. Even though priority has been given to power sector, which has come at the expense of fertilizer production, the rising demand for gas in power production far outstripped gas supply. With competing demands for natural gas and its constrained supply, the share of gas-based electricity supply dropped down to 66%.
The Power System Master Plan (PSMP) 2016 aims to assist Bangladesh in formulating an extensive energy and power development plan up to the year 2041, covering energy balance, power balance, and tariff strategies. Bangladesh aspires to become a high-income country by 2041. The development of energy and power infrastructure, therefore, pursues not only the quantity but also the quality to realize the long-term economic development.
In addition to the demand from the power sector, the demand from industries (mainly cement), commercial sector and household sector have also contributed much to the rapid expansion of gas consumption. One major policy that has contributed to this expansion is that the domestic gas has been underpriced and rather inefficiently allocated across competing uses. Proper pricing of gas and allocation based on economic efficiency will be a major policy challenge while moving forward.
In the area of household consumption, the policy of encouraging the use of LPG is a sound one. However, to implement it properly the government first needs to price domestic use of gas accurately by setting proper gas prices and linking total gas bill for household-based to actual consumption rather than charging a flat rate irrespective of usage. Secondly, the government needs to facilitate a competitive LPG market.
Presently, there are seven LPG operators in the private sector of Bangladesh. Their operations can be broken down as buying bulks of LPG from foreign refineries or traders, shipping the bulk to their terminals in Bangladesh via seagoing gas carriers, storing the bulk LPG into spheres or bullets via jetty pipeline, and filling the gases into pressurized cylinders for onward distribution to the final consumers. Bangladesh has much potential regarding LPG consumption as only 6% of the entire population has access to natural gas, that too mostly in urban areas. The government has granted more than thirty new licenses to private operators who are willing to set up downstream LPG operations. As Bangladesh’s market for LPG is about to expand, competition will concurrently increase with new license holders entering the market. Going forward 5 to 10 years, when customers will find a variety of LPG brands to choose from, competitors will have to resort to their operational efficiencies to offer the best value for money.
Bangladesh consumes more than 100,000 tons of LPG a year, 80% of which is imported from Saudi Aramco, the state-owned oil company of Saudi Arabia. State-run Bangladesh Petroleum Corporation (BPC) produces the rest using oil-refining process. Internationally, the price of LPG is benchmarked to the Saudi Aramco Contract Price and is stable for that month. Freight charges are reduced with the increasing size of the Bulk LPG Cargo. For example, the freight per ton charge of a 5,000 MT Capacity LPG carrier is much lower than the freight per ton charge of a 1,500 MT Capacity LPG gas carrier (based on similar length of travel). It is very important that LPG operators understand this scale economy of trading and finds a way to take advantage of this and pass on the benefits to the households.
Creating Cost Efficient Options
The shortage of gas increases the cost of power by raising the dependence on imported liquid fuel and lowering the efficiency and capacity of power plants designed to run on gas. There is no doubt that Demand Side Management (DSM) is by far the cheapest option that increases virtual generation by reducing demand. The DSM measures are therefore more cost-effective than creating new capacity, and hence opportunities need to be fully exploited. For the liquid fuel based plants, fuel cost far exceeds the capacity cost. The efficiency of these plants is, therefore, an important parameter. Moreover, the capacity cost of existing plants is a sunk cost, and their incremental cost is fuel and variable operation and management (O&M). On the other hand, new plants involve capacity cost as well as fuel and variable actual cash operation, maintenance, and administrative expenses (O&M) costs. In the above context, the Independent Power Producers (IPPs) are operating for about a decade with fixed capital cost, which has already sunk. Since the IPPs are available for the generation at marginal cost (fuel and variable O&M costs), their capacity needs to be utilized.
In conclusion, Bangladesh is quickly running out of natural gas, and the status quo promotes a faster depletion of the resource. The market is still working on encouraging people to switch and strengthen the energy security of the nation. As a share of the overall expenditures, spending on natural gas remains small and relative compared to other energy items. Therefore, even with a jump in consumption, the rise in natural gas prices is less likely to take a crippling bite out of the more discretionary household spending. While many consumers will not even realize the bump in prices, the numbers will come through in personal consumption data via an increase in utility spending. Consumers will also use gas more wisely instead of wasting it. Nevertheless, if the government designs and implements its policies to promote the use of LPG properly and if the LPG and LNG operators can grasp the right opportunities to combine their operations, the country will have a bright future which may proliferate the opportunities to grow.
THE WRITER is an analyst working in the Energy sector can be reached at email@example.com.