At the end of 2007 Bangladesh faces two serious, but different, problems in the energy sector: first, a shortfall in the electricity generating capacity; second, a shortage of domestically produced fuels for firing the power plants.

The failure to provide the electricity generating plants is a consequence of the poor governance and greed of the four-party alliance government. The caretaker government is moving systematically to insure that there is sufficient generating capacity. This column examines the second problem, why the energy sector has failed to develop the fuel resources needed by the economy?

Bangladesh has significant coal and natural gas resources. Prospects for significantly larger discoveries of natural gas are very good but take time for exploration and development. Major coal reserves have been found. Tragically for the economy, neither of these resources has been developed to a level sufficient to satisfy the growing energy demands of the economy: the poorer western region of Bangladesh faces an acute shortage of energy; most of rural Bangladesh does not have access to electricity; most large industrial establishments prefer to generate their own electricity rather than rely on the PDB.

Within Bangladesh there have been significant discoveries of natural gas that have been exploited to fire electricity generating plants, as a feedstock for the production of urea, to provide a source of heat for industry and households, and to fuel vehicles using CNG.

A large part of energy consumption comes from natural gas. Geologists consistently report that there are promising prospects for discovering more gas fields. Yet the reality of today is that there is a shortage of gas and the future looks very bleak, with very limited ability to increase gas supply in the next decade.

How did this situation arise wherein a country rich in natural gas faces an acute shortage for the next several years? The answer is simple -- the refusal to export natural gas discourages exploration by the energy companies that have signed production sharing contracts. Why is this?

Suppose that there are two companies exploring for gas and by their exploration activities each identifies 4 TCF of gas. To carry out such exploration including exploratory drilling the company may incur costs of $100 million. If it fails to find gas, then it loses the money; if it finds gas then it wants to develop the gas and sell it. With both companies discovering gas, the government is unable to buy all of this gas. One of the companies may find itself delayed in developing the field. Both companies can figure this out and conclude that with the "no gas export" policy, it is not worthwhile to pursue exploration in an aggressive manner.

Is this a realistic description of what happens? Yes! The Bibiyana field was discovered but many years went by before it could be developed. Unocal's effort to export part of the field was denied; after that exploration efforts fell sharply. It is one thing to take the risk of failing to find the gas and it is another thing to not be allowed to sell gas that has been discovered.

It is easy then to understand the origin of the present gas shortage. The prohibition on exporting gas meant that there is a shortfall in new discoveries. The oil companies have minimum interest in Bangladesh, and Bapex does not have the financial resources to go forward.

However, it is important to determine the price paid to the holders of PSCs. The current price levels are too low; wholesale prices of natural gas in various world markets are in the range of $3.50-5.00 per thousand cubic feet and rising. In contrast, average prices under the PSC arrangements are $1.25-1.50. Petrobangla will have to allow these average prices to rise significantly, say to $2.50 (his means that the price is about $5.00).

The same policy dilemmas arise in establishing coal policy. There is much discussion of a ban on exports or a limit of exports to what is used domestically. There are several points related to these issues:

* If exports are not allowed then the rate of extraction of coal would be much lower; for an open pit mine the overburden that has to be removed is more or less independent of the rate of extraction. This means that a heavy initial investment is made regardless of the production level; developing the mine at 3 million metric tons per year rather than the 15 million would make the cost of coal about $20 higher for each metric ton. It would be cheaper for Bangladesh to import coal than pay so much.

* There is a large amount of coal in the Phulbari deposit that is suitable for coking and it would be silly to use this coal for power plants as its export price is much higher than for thermal coal.

* It takes time to develop the domestic uses, but with aggressive development during the next decade of coal fired power plants most of the coal can be used domestically. At first most of the coal would be exported, but gradually domestic demands would increase.

* The price of coal would be linked to the world price -- unlike natural gas there is an international market for coal providing reference prices. If there are low prices enforced on the domestic coal industry, the private sector will have difficulties in developing the resource. If the development is left to the government one should expect little to be achieved over the next few years. At current world prices, coal is cheaper for Bangladesh to use as a fuel than natural gas.

To manage the energy fuels achieving the necessary exploration, development, financing to supply the nation needed energy, two policies must be followed: exports allowed if the domestic energy companies do not want to purchase; and prices should follow international markets. Otherwise, the nation will face continuing energy shortages with consequent slower economic growth. Fear of exporting gas and coal is contributing to the slow growth of the economy.