Bangladesh makes its PSC terms winsome to lure more IOCs

Bangladesh makes its PSC terms winsome to lure more IOCs

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M Azizur Rahman
Bangladesh will raise the wellhead gas price for contractors in its deepwater blocks by at least 2% per year to entice IOCs to explore for hydrocarbons in the Bay of Bengal, Petrobangla Chairman Hussain Monsur has told Interfax.The provision is the first of its kind for Bangladesh and is part of the new model PSC for deepwater blocks proposed by Petrobangla and approved by the government, Monsur said. The new PSC will sweeten the terms and reopen the suspended bidding round for the three deepwater exploration blocks, possibly as soon as within a month.
Bangladesh offered three deepwater blocks – DS-12, DS-16 and DS-21 – along with nine shallow-water blocks in a December 2012 tender. However, during a pre-bid meeting in February 2013, IOCs – Chevron, ConocoPhillips, Shell, China National Offshore Oil Corp. and Australia’s Santos and Carnarvon Petroleum – asked for higher prices and greater incentives to enter the deeper areas, prompting Petrobangla to suspend bidding on the three blocks and review its PSC terms.
The demand for better terms was compounded by poor results for a previous 2012 tender, in which Petrobangla only received bids for three of the nine shallow-water blocks on offer. That bidding round closed on 2 April, after the initial submission deadline was extended. Petrobangla reoffered six shallow-water blocks under the original PSC terms in May and received one bid after extending the submission deadline to the end of July (see Bangladesh seeks more IOC partners as Gazprom explores, 20 August 2013).
A new model
In a move to entice IOCs into its deepwater blocks, Bangladesh has decided to exempt the winning bidders from paying gas transmission firms a wheeling charge to transport gas to end-users, Muhammad Imaduddin, Petrobangla’s director for PSCs, told Interfax. IOCs are currently charged a wheeling fee of 4% of the gas price.
Wellhead gas prices in Bangladesh are pegged to high sulphur fuel oil (HSFO) prices in the international market, while oil prices are determined on a fair market value basis as agreed by the contractors and Petrobangla.
Under the new PSC model for deepwater blocks, the ceiling HSFO price has been increased to $220/t for deepwater blocks, from $200/t at present. The floor price for HSFO remains unchanged at $100/mt. This equates to a gas price of $6.50/MMBtu when the HSFO price is $220/t, Imaduddin said. Petrobangla will also cover the local taxes for bidders that are awarded deepwater blocks – a break from the 37.5% local corporate tax companies pay under the existing PSC model. Companies will also receive a tax holiday for the entire contract duration.
In addition, the cost recovery limit for international companies has been raised to a maximum 70% per year, from 55%, to ensure a quicker return on their investment, Imaduddin said.
Finally, the country will allow contractors to sell 50% of their production directly to domestic third parties, bypassing Petrobangla. Petrobangla will have first right of refusal on selling the remaining 50%.
Reactions
International companies operating in Bangladesh did not comment on the new terms.
However, Chevron Bangladesh President Geoffrey Strong called on the government in May to improve the fiscal terms of PSCs to attract the huge investment required to find and develop more gas resources, and to allow contractors to sell their share of the gas produced to third parties at market prices.
The gas price should be increased to reflect the present cost of doing business, and the PSC contractors should be allowed to sell their share of the gas to third parties at market prices, Strong said at the time. “The price in the model PSC is not economically viable. Even with higher prices, domestically produced gas prices will continue to provide the lowest cost of energy for Bangladesh,” he said.
More could be done to increase investment in the gas producing sector and raise production, as the demand for energy keeps growing in Bangladesh, he added.
Strong also urged the government to release more exploration acreage – onshore as well as offshore. The country has not offered any onshore blocks since 1997, according to a senior Petrobangla official.
Chevron, the largest international gas producer in Bangladesh, produces around 1.4 billion cubic feet per day (39.6 million cubic metres per day: MMcm/d) from three onshore fields, according to Petrobangla data.
Breakthrough on prices
In a major breakthrough on pricing, Santos last year convinced the government to allow it to sell gas from the Sangu 11 well in the Bay of Bengal to domestic buyers at market-based prices – the first such agreement between the government and a foreign company. Sangu 11 was the country’s only offshore gas well, but Santos shut it down on 1 October because reserves were running out and its supply dropped below the level at which it was economically viable.
Santos sold Sangu 11 gas at $4.50/MMBtu to state-owned Bangladesh Power Development Board until the well was shut down. The price was 55% higher than the government’s fixed rate of $2.90/MMBtu under the PSC, allowing the company to launch a $128 million exploration programme in the Bay of Bengal, a Santos official said.
With the well’s closure, however, Bangladesh is entirely dependent on onshore gas production to meet its mounting demand.
The country’s total gas output was 65.1 MMcm/d as of last week, Petrobangla data show. The country’s recoverable gas reserves stood at 463.3 billion cubic metres as of January, but those resources are likely to be exhausted within a decade, making exploration for new sources crucial.
The country’s economy has been growing at an average rate of 6% per year since 2003-2004, the highest since independence in 1971, and stronger industrial demand has created a daily shortage of around 14,200 cubic metres of gas per day. – Interfax via Google

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