The hidden subsidy in gas pricing

There are two momentous dates in the energy history of our country. The first is 1962, when Titas gas field was discovered. It was then believed that gas was a free bounty and all households and power generation plants should be provided with this gift of nature.
The next date is 2009, when the nation switched to imported heavy fuel oil (HFO) to generate power in the face of declining reserves of natural gas. The decision was momentous as, for the first time, fuel imported at world market prices would be used in power generation. As HFO was an imported fuel it received a heavy dose of price subsidy to bring its price down to the arbitrary and artificial price level of natural gas in the country.
Then, what is the correct price of gas? In the global market natural gas is a valuable commodity and its price is determined by supply, demand, costs and perceived risks. The chart, printed in a recent issue of the Wall Street Journal, sheds some light on the current market prices of natural gas in major gas consuming and producing regions. These are prices in long-term contracts, typically 12 years, for LNG supplies. Spot prices are much higher. Qatar Petroleum recently offered LNG at $ 18/mmBtu to India and Pakistan. Spot prices for natural gas are pegged to Brent crude oil prices.
What is of interest in the chart is the US price of gas. Till 2009, gas futures in the US were priced around $ 13.50/mmBtu. The miraculous collapse in the US price of gas was not the result of an executive decree by President Obama or any legislation on Capitol Hill.
In a major technological breakthrough, largely unnoticed by the mainstream media, US oil companies discovered and managed to extract gas in sedimentary rock layer, known as shale, over 4 miles deep underground by hydraulic fracturing and horizontal drilling. The schematic diagram illustrates the process. High pressure water fractures the shale rock and the gas trapped in the shale is released. The unexpected and sudden glut in production led to the U.S. price collapse. No wonder, President Obama declared his country "The Saudi Arabia of Gas." The shale gas revolution has re-drawn the energy map of the world. As of April 2012 the Energy Information Agency, a U.S. government agency, estimated U.S. proved reserves at 2214 trillion cft. Poland, till now, completely dependent on gas imports from Russia, have discovered massive deposits of gas 5 miles below the ground. India has added another 572 tcf of shale gas to its proved reserves. In a post Fukushima world, Japan has chosen natural gas as the mainstay fuel for power and transport.
Unfortunately the possibility of shale gas has not even registered on the radar of our energy planners. With proven reserves of only 13.2 trillion cubic feet, we will run out of gas, in less than 20 years, assuming current consumption levels do not rise.
Now, how does our gas prices compare with world prices? Our gas price for power generation is currently priced at Tk. 2.82 per cubic meter which is Tk.79.93 per 1000 cft or mmBtu or U.S. $ 0.97! Imported LNG will cost U.S. $ 18 for mm/Btu which is 19 times the current price of our domestic gas. This is the hidden subsidy which our government unwittingly provides to the most affluent sections of our society and for operating some of the most inefficient power plants in the world.
As most of our major shallow reserves of gas have been either exhausted or are in proved reserves we must search deeper and technologically challenging shale rock bearing gas reservoirs. This is immensely costly and the technology is the sole domain of international oil companies (IOC). No IOC will set foot in Bangladesh for costly and risky shale drilling as long as our gas prices are kept arbitrarily low on domestic political considerations alone, with no relevance to market forces.
A reliable energy infrastructure is an essential backward linkage in industrialisation and employment generation. Today gas shortage has emerged as the greatest road block to industrialisation and GDP growth as even existing industries have to run below capacity for both gas and electricity shortages. Load shedding is the direct result of inadequate gas supply.
Most of our export based industries are labour intensive not energy intensive; higher gas price will not affect their competitiveness. What all industries require is uninterrupted and reliable gas and electricity as outages are more damaging than higher prices.
The only long term solution to this crisis is pricing and linking domestic gas price to global market prices. This will encourage private investors to set up LNG terminals and import gas as there is huge demand for the fuel. It will also attract investment, by IOC's for exploring gas in the country. Aggressive exploration to raise the country's proved reserves to higher levels should be a strategic goal in our economic planning. Higher proved reserves of gas makes the country a more attractive destination for overseas investment as it is a sure sign of long term energy security.
Even if we do not find gas, below our feet, a deregulated market for energy, where gas is available at global market price still makes the country an attractive investment destination.
The biggest gainer, from a deregulated and market based gas price, will be the Govt. of Bangladesh (GOB) as the increased revenue from higher gas prices will more than offset the subsidies on furnace oil for rental power plants. The National Board of Revenue (NBR) can set up well head meters in the gas fields and realise a sovereign royalty on all gas pumped in to the grid.
Our honourable Finance Minister has spelled out plans for linking the price of all imported petroleum products to global prices. Our domestic gas prices should be linked to global prices as well. This will be a strong signal to investors both at home and abroad that energy shortages, very soon will be a thing of the past in Bangladesh.

The writer is an energy and steel industry analyst. E-mail: [email protected]