• Wednesday, October 22, 2014

Deep-sea Exploration

Higher gas prices key to woo IOCs

Sharier Khan

Bangladesh may not be able to attract international oil companies enough to explore its deep sea waters even after resolving maritime disputes with Myanmar and India unless it revises its model production sharing contract (PSC) by offering higher gas prices.
“Policymakers must realise that deep sea exploration and development of a gas prospect is completely different from onshore or even shallow water operation. Deep sea operation is very costly, highly risky and technologically very challenging,” said a top PSC expert.
“All of the commercial deep sea gas discoveries in the last five years had between 6 trillion cubic feet (tcf) and 16 tcf reserve. Any reserve less than that is not commercially viable for development. Developing one gas field can cost between $3 billion and $5b or beyond,” he said.
These discoveries were made, among other places, in Mozambique, Tanjania, Ghana and the Caribbean seas.
For Bangladesh, exploring the deep sea especially for gas is the last resort to increase its gas reserve, as there is very little chance of finding a major reserve onshore. Considering huge gas discoveries in the Bay of Bengal by India and Myanmar in the last decade, the prospect of finding gas in Bangladesh waters is alluring.
According to Petrobangla, the country's gas consumption has enormously increased over the years. Whereas in 2000 the country consumed 370 billion cubic feet (bcf) gas, it is set to consume 900 bcf gas this year.
With 6 percent economic growth rate, the consumption rate is not going down soon. But unaddressed energy shortage would ultimately hurt the growth rate.

An example of deep-sea gas-field operation in the North Sea near Norway. In case of Bangladesh, when gas is discovered, a similar operation may be in place at a depth of 1,500 metres.
An example of deep-sea gas-field operation in the North Sea near Norway. In case of Bangladesh, when gas is discovered, a similar operation may be in place at a depth of 1,500 metres.

Currently only one American company -- ConocoPhillips -- is working in  deep sea blocks 10 and 11, where it found a 5 to 7 tcf gas prospect on the basis of seismic survey. But the company is asking the government to revise its PSC and make a separate deal for gas pipeline so that it could get around $9 per million cubic feet of gas a day (mmcfd) instead of just $4.5 outlined in its 2008 PSC.
Old PSCs with Chevron puts the highest gas price at $3 per mmcfd.
The prospect is 350 km away from Chittagong's shore and all drillings would have to take place using remote control at a water depth of 1,500 metres. The company will need to invest between $3 billion to $5 billion.
The 350 km pipeline needs to endure high water pressure, climb up the continental shelf before reaching Chittagong. This pipeline alone demands 30 percent of the total investment to confirm and develop the gas prospect.

“Shall we benefit from buying our deep sea gas at, say $9 per mmcfd? Let us take the example of Japan, Korea or China which are buying primary energy at any price and making strides in development. China is buying Myanmar gas for $10,” the expert said.  
Bangladesh floated two rounds of offshore block bidding with 28 blocks --eight of which fall in shallow waters. The first bid floated in 2008 resulted in just one PSC with CononoPhillips for deep sea blocks 10 and 11 while the second bid resulted in two PSCs signed with Indian ONGC and Oil India (shallow water blocks 4 and 9) and Australian Santos and Kris Energy for shallow block 11. Both these companies intend to conduct seismic survey in next January.
During the 2012 block bids, 16 oil companies expressed initial interest. But they did not submit bids saying that the financial incentives offered were way lower than those offered in Myanmar. Petrobangla argued that it was exempting corporate tax -- which Myanmar was not offering, while oil companies said Myanmar was offering flexible gas price -- which was way above Bangladesh's tariff, plus freedom for exporting gas.
“Myanmar has a very little gas market. It has a demand of 450 mmcfd whereas Bangladesh supplies close to 2,300 mmcfd against a demand of around 2,800 mmcfd,” said an expert of an international oil company having operation in Myanmar.
“We have a local market and there is no need for exports. But we still need to consider the high level of investment and risk in deep sea operation and design our gas price for deep seas accordingly,” said a Petrobangla official.
To address Bangladesh's gas deficit, the government opted for importing Liquefied Natural Gas (LNG) from the Middle East -- each mmcfd costing between $14 and $18. Upon mixing this costly LNG with local gas, the average cost of per mmcfd gas will go up to $4 from the present rate of $1.30.
“If we buy our deep sea gas landed in Chittagong for $9, we can assume that the oil companies would enjoy a longer time for cost recovery. But at the same time, the PSC would guarantee 25 percent of that gas as free share. This will put down the net price of that gas to $7. This is at least half of the price of the LNG,” he said.
“If we can bring 500 mmcfd gas from offshore, it will give us huge savings compared to imported LNG. Plus this gas is free from any political or international price fluctuations because it is all ours,” the official said.
“The deep sea operations involve 1,000 metres and beyond underwater installations, which are very expensive and which demand high safety measures. All possible discoveries are 300 to 350 km from shore. All pipelines will have to deal with a depth of around 1,500 metres and it is a major additional cost which we don't need for onshore gas fields,” he noted.
No company would tap or develop a small gas field in the deep sea. “This is why the government needs to take a decision coming out of all reservations and cultural resistance against anything big. We have to compete with our neighbours by separating gas sales and pipeline transmission of gas from the PSC,” he pointed out.
According to him, even the package for shallow blocks in the western part needs redesigning because of the distance of the shore from these blocks.

 

Published: 12:01 am Friday, August 01, 2014

Last modified: 9:22 pm Friday, August 01, 2014

TAGS: Bangladesh production sharing contract (PSC) attract international oil companies gas prospect

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