After a favorable UN settlement in June, Bangladesh stumbled upon a wealth of energy. Will investors buy in?
Imagine you are a major energy magnate, poring over maps to find the world’s next natural gas superpower. Where would you invest?
Even though Bangladesh just hit an energy mother lode in July – winning the rights to 20,000 square kilometers of natural gas-rich waters from India in a U.N. territorial arbitration, chances are you probably wouldn’t think of it. To most, the territory still looks like a high-risk investment, given the political tenisions, pervasive poverty, and highly subsidized economy which undermines growth and limits spending on energy infrastructure. Dhaka and Chittagong, swathed in slums, are a world away from the air-conditioned shopping malls of Riyadh, Doha, and Dubai.
Yet, looking the part isn’t everything: Nigeria, Chad, and Venezuela have fared well in oil markets despite endemic poverty and violence; but Bangladesh’s troubles could help explain why investors haven’t been biting. In fact, quite the opposite; Australia’s Santos pulled the plug on Bangladesh’s only offshore gas field last year, citing poor production. With the help of KrisEnergy, a Singaporean company, Santos plans to begin drilling in shallow waters later this year. PetroBangla, the national oil company, attracted just two bidders in a 2012 auction for offshore drilling rights: India’s Oil & Natural Gas Corporation and Houston-based ConocoPhillips.
Interest in “dispute-free” offshore oil blocks, which PetroBangla opened for auction last April, has proven sparse. Companies have complained about the lack of access to onshore blocks, and the terrible terms for drilling offered by PetroBangla. Earlier this year, Conoco and Russia’s StatOil paired up to bid on three of Bangladesh’s deepwater oil blocks, 30,000 feet below sea level. Conoco later attempted to win an agreement on two more deepwater blocks. Yet outside of these handful of companies, few are betting on Bangladesh.
It might be a smart time to place a wager. With its new territory, Bangladesh’s natural gas reserves are now estimated at 200 trillion cubic feet, the largest supply in the Asia-Pacific. PetroBangla will auction off 18 new oil and gas blocks by the end of the year. “Assuming Bangladesh could recover all of that, it would make it one of the largest natural gas producers in the world,” says Neil Bhatiya, a Policy Associate at the Century Foundation.
That’s a big if. Robin Mills, head of consulting at Manaar Energy, says there’s no way to be sure what’s there. “We just don’t know whether 100 to 200 trillion cubic feet, or indeed anything at all, will be discovered in the new area.” Bangladesh’s gas reserves are probable, not proven, so that estimate is a fifty-fifty proposition, based on existing geological and engineering data.
Bangladesh needs a comprehensive plan to survey and derive this energy, but the government lacks basic competencies to drill in deep water, from trained oceanographers to laws that safeguard against spills. Bangladesh’s Petroleum and Exploration Company has done experimental gas drilling, but it lacks the money and the energy infrastructure needed to explore the new territory.
Drilling also presents an environmental risk: cabinet secretaries have promised to deploy the government’s few tools to guard against environmental disasters, but they will need to import talent from energy majors to prevent methane leaks into the bay. Bhatiya says that problem can be mitigated using production agreements with Conoco and StatOil to extract the gas safely.
PetroBangla’s chief, Hossain Monsur, echoed that notion in a statement released just after the U.N.’s decision in July. But to achieve this, Bangladesh must first make nice with international oil majors, reconciling disputes that Petrobangla has enflamed over the price of gas, which Prime Minister Sheikh Hasina has fought to keep down. “Bangladesh may be willing to fast-track pricing reform if they think it’ll lead to the large-scale extraction of these resources,” Bhatiya says.
In the Bengal Delta, where poverty is pervasive, pricing reform may prove unpalatable. Families that depend on government subsidies to keep the lights on and put food on the table will not be able to stomach higher bills. If Dhaka pays the bumped-up tab itself, those expenses could wreak more havoc on the belabored economy: boosting inflation, hiking the trade deficit, and chewing up big bites of tax revenue. Energy subsidies alone cost Bangladesh $1.9 billion in 2013, and much of the food subsidy has been choked away by corruption in recent years. By going further into the red to subsidize its poor, Bangladesh would tack onto its budget deficit, a mess that the tax base couldn’t possibly clean up.
With foreign investors clamoring to get involved in the gas industry, and the presence of corruption lurking throughout Bangladesh’s ministries, rated some of the worst in the world by Transparency International, much of the energy, and revenue won from the U.N. settlement may not get back to the poorest citizens. That means the pain of energy shortages could persist, abetted by corruption in the state sector, and cause lasting damage. Political instability is also a grave threat: hundreds died in violence leading up to January’s election, the bloodiest campaign since Bangladesh declared independence in 1971. With Prime Minister Sheikh Hasina and the rival Bangladesh National Party still at loggerheads, that tumult could flare up again.
More money begets more problems. Still, Bangladesh’s new territory also puts it in an advantageous position to win concessions from China and India, its two primary benefactors, who are both increasingly hungry for new sources of energy. China has already invested a significant amount of money to build an airport at Cox’s Bazar, just south of Chittagong, a tab that continues to increase. Bangladesh remains a key part of Beijing’s strategy of encircling India with development money, and the infusion of natural gas should reaffirm that status.
Major energy finds in the Bay of Bengal could make a huge difference in pushing the economy forward, sending a rush of foreign investment into the country and helping growth rebound. “With natural gas consumption expected to grow worldwide, but particularly in the developing countries in South Asia, there is likely to be a strong market for the gas,” Bhatiya notes. Bangladesh’s oil riches are its best opportunity to rise from poverty, creating an equitable distribution of wealth to stabilize the government and the country. Dhaka must seize the moment.
Source: The Diplomat
