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Bangla economy runs out of gas

PRATIM RANJAN BOSE | Updated on November 14, 2017 Published on March 26, 2012

To increase gas output, the Sheikh Hasina Government has struck an exploration deal with a US-based company.

Bangladesh's industry is driven by unnaturally cheap gas. But gas output has not increased, with exploration proving unattractive at current prices.

Najmul is unhappy. The lanky 24-year-old driver of a Toyota Corolla taxi in the Bangladeshi capital, Dhaka, is finding it increasingly difficult to make ends meet in the face of unrelenting price rise.

Najmul is not so troubled by the food inflation, which has lately shown signs of subsiding, thanks to a bumper busy season crop. His greatest worry is the rising price of CNG (compressed natural gas), the most popular auto-fuel of the city, used rather indiscriminately by private as well as commercial vehicles.

Gas (and water) has been the epicentre of nationalist politics in Bangladesh, particularly when global energy prices zoomed. Bangladesh thought it could build an export economy, like China, riding on cheap domestic gas, which now meets over two-thirds of its primary energy needs.

So, when Bangladesh effects a hike in gas prices, it is bound to create more ripples than higher diesel or domestic LPG prices in India. Between May and November 2011, the Awami League government raised CNG prices in two tranches — from as low as Tk (Taka) 16 a cubic metre (scm) to a little over Tk 30 an scm.

To compare it with prices in Rupee terms, even after such a steep escalation, the price of CNG in Dhaka is at least 30 per cent cheaper than CNG available for commercial vehicles in Delhi. The price differential will be as high as 44 per cent if measured against cities such as Ahmedabad.

Last hike in 2008

Therefore, Bangladesh has been used to CNG as cheap as Rs 4 a kg (Tk 8.5 a scm) till May 2008, when a military-backed “caretaker government” (that stuck to power for nearly two years between 2006 and 2008) dared to hike prices.

A flip side of this policy is evident on the streets of Dhaka, where an ever-increasing fleet of swanky, imported fuel guzzlers — retrofitted to be run on cheap CNG — chokes city traffic for a better part of the working day.

Bangladesh is paying in dollars to import those pricey automobiles, many of which are not so common on Indian streets, sacrifices tax revenue on fuel and wastes nearly one-tenth of its 28 million standard cubic metre daily production in fuelling cars owned by the rich.

Rising subsidy bill

This is, however, just a part of the damage caused by nationalist policies to keep gas cheap. In its effort to fuel its textiles-sector-dependent economic growth with cheap gas, Bangladesh has lost out heavily in attracting investment in its exploration and production sector.

The perceived rich offshore resources notwithstanding, no major field has come into production since Sangu (1998). As investors shied away due to non-remunerative returns vis-à-vis the risk of exploring oil and gas, Bangladesh's gas production declined.

As wary governments tried to supplement the rising demand for gas by subsidising costly fuel oil, the subsidy bill went up.

Some media reports suggest that even after the rise in CNG prices, Bangladesh would require to chip in approximately Rs 12,000 crore equivalent of subsidies to fuel the economy this year.

In comparison with India

Considering that Bangladesh also sacrifices tax revenues (so as to keep the final prices low), the subsidy is abnormally high when compared with India, where oil and gas is one of the single largest contributors to revenues of Union and State governments.

Take, for example, the case of IndianOil, the largest Indian oil retailer. In 2010-11 it paid nearly Rs 78,000 crore of taxes as against a total subsidy receipt of approximately Rs 45,000 crore. Clearly, India earned a few times more than the total subsidy payment of Rs 90,000 crore towards the oil marketing companies, during the last fiscal.

Moreover, India is powered by coal, meeting 55 per cent of energy needs, and, the governments (Central and State) earn huge revenue from the sector without any subsidy element.

Time to change

To cut a long story short, Bangladesh's decade-long growth story (5-6 per cent growth since 1996) is now faced with serious fundamental weaknesses, arising out of its lopsided, if not unviable, energy policies, which need immediate correction. The symptoms are evident in regular protests over supply disruptions to the textiles sector — consuming over two-third of domestic gas supplies.

The threat to the economy apparently forced the Sheikh Hasina Government in Bangladesh to risk her popularity and take drastic measures such as raising auto-fuel prices and even strike a production-sharing contract with a US-based company for exploring gas in the deep sea.

Preparations are on to auction 15-odd offshore gas blocks with lucrative production-sharing clauses so as to attract foreign investment in exploration and production. Matching proposals are in place to hike the gas price for both retail and industrial supplies.

But that is just the beginning. Bangladesh needs to go miles in restoring the balance in its economy. The task ahead is clear and simple: Bring sanity in energy pricing to ensure investment in the upstream sector and, diversify the energy source portfolio.

Politically difficult

Unfortunately for Bangladesh politics, neither choice may prove easy. The violent protests demanding the cancellation of exploration deal with ConocoPhillips in mid-2011 is a grim reminder of the political challenges in the proposed auctioning of gas blocks.

Resentment is palpable against the auto-fuel price hike, especially with the economy facing double-digit inflation for nearly a year. It is anybody's guess how the Opposition will respond to any further proposals on gas price hike. A greater challenge lies ahead in convincing the Bangladeshi industry — essentially the textiles sector — to live without the existing energy cost advantage vis-à-vis competitors.

Bangladesh has already invited Indian power producers to invest in coal and gas-based facilities in the country. However, as the base cost of fuel is set to move up, the cost of the proposed electricity should be higher (than the existing 7,000 MW-odd capacity) — a proposition that may not find ready takers in an economy that practically grew on free (energy-packed) lunches.

Regional rivalry

In fact, there is opposition to the country's recent 250 MW (daily) power import deal with India on the ground that it would lead to forex outgo. For a politics that survived for too long on nationalist agenda, the logical solution of regional cooperation seems difficult to implement. Take, for example, the immense possibility that lies between the two nations in generating hydro-power jointly from innumerable perennial rivers entering Bangladesh from eastern and north-eastern India.

Theoretically it is a win-win situation for both nations. While Bangladesh can successfully diversify its energy source portfolio without any major risk of price volatility; any such improvement may have a far-reaching positive impact on the economically weaker Eastern and North-Eastern states of India.

Published on March 26, 2012
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