CHAPTER 1: INTRODUCTION

1.1 Origin of the Report

This report on The Prospects of Natural Gas as a Source of Energy in the Process of Industrialization in Bangladesh is expected to be prepared for Mr. Sheikh Morshed Jahan as a partial requirement for the course, Macroeconomics.

1.2 Objective of the Report

Primary Objective (make broader objectives..) To measure the competence of gas resource as a power source in attracting foreign and local investment.

Secondary Objective To give a brief overview of the current scenario regarding the exploration and production of gas and the roles played by the different concerned groups to project the demand of gas in the coming years To give a brief overview of the availability of gas according to different estimates conducted by different groups To project the demand of gas in the coming years To identify the alternative ways of utilizing the existing gas reserve after meeting the internal demand To identify the effects of implementing the alternative ways of utilizing gas on the industrial process of the country To measure the role of gas in attracting investment in three major industries, i.e. the urea fertilizer industry, the cement industry and the steel industry To discuss the overall gas management scenario and identify the policies undertaken by the government

1.3 Scope
This report excludes the scenarios of exporting gas or keeping gas reserve for next 50 years or so as suggested by many groups. Besides, this report is best applicable in the situation where the industries are the primary consumers of gas rather than the household.

1.4 Limitation
This report is primarily based on secondary data. So, the probable unavailability of relevant articles, publications, news and reports can be a limiting factor. Besides, for the better understanding on this topic we may need to interview experts in this field. In this case, the probable inaccessibility of such persons can be a barrier in expecting the best outcome.

1.5 Methodology
Primary data: interview with experts in this particular field Secondary data: relevant articles, publications, news and reports

CHAPTER 2: OVERVIEW OF THE GAS SECTOR IN BANGLADESH

2.1 The History of Gas and Petroleum Exploration in Bangladesh
The exploration for oil and gas in the areas what constitute now Bangladesh was initiated by finding oil in 1908 and the first exploratory well was drilled at Sitakundu. This was followed by three more exploratory wells by 1914. After the emergence of Bangladesh the exploration by IOCs under production sharing contract was initiated. The country was divided into 23 blocks for PSC. Six IOCs were awarded 7 blocks under PSC in the early seventies. During the period of 1974-77, seven offshore exploratory wells were drilled with only one gas field discovery. In 1988, under a new PSC, 4 blocks were awarded to two IOCs who drilled 4 exploratory wells leading to the discovery of one gas field. In the early nineties, the model PSC of 1988 was revised and 8 blocks have been awarded to four IOCs. Two of these IOCs have so far drilled 14 exploratory wells since 1994 resulting in the discovery of 3 gas fields including one offshore field; and there was one gas well blowout. (Reference 1) During the period 1972-2000, Petrobangla drilled 16 exploratory wells and discovered 9 gas fields and one oil field. In terms of gas reserves, IOCs under a wide range of PSCs have made major gas discoveries in Bangladesh. These IOCs including those operating during pre-1972 era have discovered total recoverable gas reserves of 14.19 TCF from 12 fields while Petrobangla has discovered a total recoverable gas reserve of 1.47 TCF from 10 fields. Since the emergence of Bangladesh, the IOCs exploration has contributed 4.46 TCF to recoverable gas reserves and Petrobanglas discoveries have contributed 1.24 TCF to recoverable gas reserves. (Reference 1)

2.2 Production of Natural Gas 2

There are now 53 production wells capable of producing more than 1300 MMCFD of gas from 12 gas fields. The following five companies are producing gas: Bangladesh Gas Fields Company Ltd. (BGFCL) Sylhet Gas Fields Ltd. (SGFL) Bangladesh Petroleum Exploration and Production Company (BAPEX) Shell Bangladesh Exploration and Development B.V. (SHELL) UNOCAL Bangladesh Ltd. (UNOCAL)

BGFCL, SGFL and BAPEX are subsidiary companies of Petrobangla. Shell and UNOCAL are IOCs operating under separate Production Sharing Contracts (PSCs). BGFCL owns eight gas fields. Sylhet Gas Field Limited (SGFL) owns five gas fields.BAPEX has been given the responsibility of operating of the Saldanadi, Fenchugonj and Shahbazpur gas fields. Shell Bangladesh Exploration and Development B.V. produces from one field, namely- Sangu and this is an offshore field. It also owns two other fields, namely- Semutang and Kutubdia. UNOCAL owns three gas fields, namely- Jalalabad, Maulavibazar and Bibiyana. It produces gas from the Jalalabad field. (Reference 1)

2.3 Gas Reserves Estimates by Different Studies (make shorter)

Reserve estimation is very important for the proper planning and implementation of strategies most likely to benefit the population for the energy sector of any country. However, it must be recognized that the reserve estimation is a dynamic process and the reserve of a field/country needs to be updated with the exploration, production and development activities. When it comes to reserve, one needs to have clear understanding of some technical terms to avoid confusion. While talking about the reserve, people often get confused by the interchanging use of the terms reserve and the gas initially in place (GIIP). GIIP is the total amount of gas found initially in a reservoir when the reservoir is discovered. However, GIIP needs to be updated with additional information as a result of production and development activities. Reserve is that portion of the GIIP that can be produced from the reservoir under the present technical and economic conditions. Another term that is quite frequently used now days is reserve growth. Reserve growth is the additional reserve over that of the previous estimate of the discovered fields as a result of additional appraisal cum development activities and/or application of new technology. Finally, resource potential of a country means probability of finding new reserve in addition to that already discovered. Resource potential is a probabilistic estimate, and information like geological data, exploration history of the region, exploration history of similar but mature basins of other region, etc., is used in this kind of study. Over the years many studies have been conducted to estimate the gas reserve of Bangladesh. The names of the important studies are mentioned below. These studies are summarized in table format in the appendix.

IKM Study (Table 1) Petrobangla Study (Table 2) BUET Study (Table 3) Study by Shell UNOCAL Study USGS- Petrobangla Joint Study on Natural Gas Resources of Bangladesh (Table 4) Hydrocarbon Unit and Norwegian Petroleum Directorate Joint Study

A comparative study of all these estimates have been provided in the appendix (Table 5). Among all these estimates, this report recommends the Hydrocarbon Unit and Norwegian Petroleum Directorate Joint Study as the most comprehensive one. This study has been summarized below. The reasons for choosing this study as the best one have also been highlighted in the following sector. Hydrocarbon Unit and Norwegian Petroleum Directorate Joint Study A joint team of Hydrocarbon Unit (HCU) of Energy and Mineral Resources Division and Norwegian Petroleum Directorate (NPD) conducted the latest study to estimate the reserve of the discovered fields and undiscovered resource potential of the country. Experts of NPD on Norwegian side and those of Petrobangla, BAPEX, BGFCL, SGFL, and GSB conducted this joint study on HCU side. This study re-estimated the reserve of four major gas fields, namely- Titas, Habiganj, Rashidpur and Kailashtilla, by material balance and volumetric methods utilizing latest available data and reviewed the gas reserves of other discovered fields. For estimation of the resource potential, this study divided the country into two petroleum provinces comprising of six petroleum systems. This study identified the prospects, leads, plays, and selected reservoir parameters utilizing latest information and available geological, exploration, reservoir and production data. This study estimated the proven and probable gas initially in place (GIIP) of the discovered fields as 28.79 TCF and recoverable reserve as 20.44 TCF. Based on recent information, this study showed an increase in GIIP in Titas and Habiganj fields and a decrease in GIIP in Kailashtilla and Rashidpur fields. The study contended that using modern technologies and good reservoir management practices, it is possible to achieve a recovery factor of 70-75% in different gas fields compared to 52-70% used by Petrobangla. The study estimated the undiscovered resource potential of the country between 18.5 TCF (90% probability) and 63.7 TCF (10%) with a mean of 41.6 TCF. (Reference 2) The reasons for choosing the HCU/NPD study Among all these estimations, this report recommends that the Hydrocarbon Unit and Norwegian Petroleum Directorate Joint Study is the most comprehensive one. This study is

the most recent of them all and thus has used the most recent data and technology. This study has been chosen as the most reliable one due to its following characteristics: This study re-estimated the gas reserves for the four major gas fields and reviewed the estimates of the other discovered fields. This study estimated the reserves by both the material balance and volumetric methods utilizing latest available data. This study identified the prospects, leads, plays, and selected reservoir parameters utilizing latest information and available geological, exploration, reservoir and production data.

Other than these characteristics of the aforementioned study, some of the limitations of the other studies have also enhanced its reliability. Some of the limitations of the other studies are hereby shown: The IKM study accounts for only 8 out of the 24 gas fields. Apart from that this study was based upon cumulative production up to December 31, 1991. Most of the reserve figures of Petrobangla are based on studies conducted in 1991 or earlier. Petrobangla figures need to be updated based on recent development/appraisal activities and studies. The BUET study was only based upon the producing gas fields of Petrobangla. So they accounted for only 15 out of the existing 24 gas fields. The method used by the PMRE of BUET in conducting their study was the flowing well material balance method. It is customary to use static reservoir pressure data to calculate the estimates in this method. But instead, they used the flowing well pressure data because of the unavailability of sufficient information, which might have led to some faulty estimates. In the study by Shell, the undiscovered reserves were estimated upon a combination of the historical success rate and geological evaluation of the individual prospect. A probabilistic volume range was provided as the estimation and so it was not possible to get an exact figure of the estimates and thus can be cited as a limiting factor for policy determination.

The USGS assessment only included the undiscovered reserves and it doesnt specify the prospects and leads on which the risk factors were considered.

2.4 Use of Natural Gas

The use of natural gas in Bangladesh can be broadly divided into the following five categories: Power Fertilizer (urea, ammonia and ammonium sulphate) Industrial Commercial and Domestic. There are some seasonal users like the brickfields. The consumption pattern during the past decade shows that power sector consumes approximately 45%, fertilizer 35%, and the other sectors (industrial, commercial, domestic and seasonal) 20% of the gas. (Reference 1)

2.5 Consumption of Natural Gas in Different Sectors and Their Growth

The use of natural gas began in 1960; since then the consumption and its growth have been on the rise. There has been a steep jump in gas consumption and its growth every time with the commissioning of a fertilizer complex or a gas fuelled power plant. Figure 1(See Appendix) shows the sector wise cumulative consumption of natural gas since 1960. Urea Fertilizer Sector Seven grass-roots urea complexes now in operation have a combined connected demand of 289 MMCFD. Table 7 (See Appendix) and Figure 2 (See Appendix) show the growth of the sector. During 1988-1997 the share of this sector accounted for 32% to 37% of the total gas consumed. The average daily demand of gas by the sector for the years 1986, 1989 and 1996 were 103, 154 and 213 MMCFD respectively against the contracted loads of 121, 171 and 289 MMCFD respectively. During the next few years up to 2005, the most optimistic annual consumption of gas would be 90 BCF per year by this sector. These plants currently operate at around 85% of their connected load. (Reference 1) Power Sector Today there are nine major installations, where electric power is generated using natural gas as fuel under PDB. Some independent power producers (IPP) are also engaged in electric power generation. The gas fuelled electricity generation capacity in June 2001 was 2970 MW with the largest installation at Ghorasal with the installed capacity of 950 MW. IPPs gas based generation capacity is 390 MW (Table 8) and during 1986-90, 1101 MW generation capacity was added; 510 MW was added during 1991-95 and 790 MW has been added since

1996. The average demands of gas for power generation for 1985, 1986, 1989, 1996 and 1999 were 109, 142, 203, 303, and 375 MMCFD respectively. (Reference 1) Industry Sector The industry sector during the current decade has been consuming 8% to 12% of the total gas consumption. Major application areas include: steam generation, captive power and process (heating media and heat source/fuel). When Bangladesh Gas Systems Limited (BGSL) had made its gas available in Chittagong area, industries using furnace oil, diesel or other liquid fuels immediately switched over to gas. The sector has shown a growth of 3.75% during the decade. Table 9 in the appendix lists the consumption of gas and its growth in this sector during 1991-2000 according to the three gas transmission and distribution companies. (Reference 1) Domestic Sector The domestic consumers use gas as a fuel for cooking mainly. In recent years some affluent customers have been using gas for stand-by generators and raising hot water. This sector during the current decade has been using 8% to 10% of the total gas consumption. The number of domestic consumers now stands approximately at 900,000. This sector has shown a growth of about 11.7% during 1986-95. (Reference 1)

2.6 Projections of Gas Demand in Bangladesh

Since the emergence of Bangladesh, there have been several projections of natural gas demand. These are reported in the planning documents of various plans (five 5-year plans and one 2-year plan), ADB study, Task Force Report, National Energy Policy Report and Petrobanglas own report/study. These documents while making projections have envisaged considerable annual growth of the power and fertilizer sectors continuously. Some of the important underlying assumptions include: 3% to 5% increase in gas demand for fertilizer yearly 10-13% growth of natural gas fuelled power generation yearly Industrial growth in excess of 7% requiring 7% rise in gas demand yearly Growth of gas demand to exceed the growth in GDP

Articles and reports related to gas demand and future needs, speak of 10% annual growth of gas demand in Bangladesh. Figures 3 and 4 in the appendix show some of these projections of gas demand since 1973 by the five 5-year plans and different studies as average and peak respectively along with the actual consumption of gas. The projected demands in the context of gas reserves have predicted that the reserves would be exhausted by the end of a particular year. For example, the latest projection supported by Petrobangla predicts that the gas

reserves of 10.46 (excluding Bibiyana and Moulavibazar) would be exhausted by 2015 if the demand grows as projected. While the projection supported by HCU/NPD predicts that the gas reserves of 20.44 would be exhausted by 2025 as per the demand projection. (Reference 3) We have so far dealt with the cumulative demands for gas. But it would be easier to understand if the demand projections are based on a sectoral analysis. We already know about the current consumption scenario of the different sectors. In Table 6 (see Appendix) gas demand projection is made for each sector individually i.e. power, fertilizer, industries, commercial and domestic for ten year intervals from 2001 to 2050. Use of gas in the industrial sector has grown at an average rate of 10-12% during 1991-2000. It is expected that this trend will continue. So it can safely be assumed that the gas reserve is contributing towards the rapid growth rate of the industrial sector. (Reference 4)

CHAPTER 3: NATIONAL ENERGY POLICY (NEP), PSCS AND THE GOVERNMENT POLICIES AND BLOW-OUTS (reduce chap 3make a generalized section on govt policies)
3.1 National Energy Policy (NEP) The government of bangladesh, considering the importance of supporting sustainable economic development, approved the National Energy Policy (NEP) in 1995 to ensure long term energy security for the country. The objectives of NEP are as follows: (summerise objectives) 1. To provide energy for sustainable economic growth so that the economic development activities of different sectors are not constrained due to shortage of energy. 2. To meet the energy needs of different zones of the country and soci0economic groups. 3. To ensure sustainable operation of the energy utilities. 4. To ensure rational use of total energy sources. 5. To ensure environmentally sound sustainable energy development programs casing minimum damage to environment. 6. To encourage public and private sector participation in the development and management of the energy sector. 7. To ensure optimum development of tall the indigenous energy sources (e.g. commercial fuels, bio-fuels and other renewable energy sources).

3.2 PSCs and the Government Policies PSC is accepted internationally for gas sector development. Many countries of the world are enjoying the benefits of PSC. However, some countries are facing negative impacts of PSC. Thus, impacts of PSC depend on terms and conditions formulated during signing of PSC and judicial decision of respective government. 92% of our initial gas in place was discovered by IOCs. IOCs are working in Bangladesh since 1974. our expertise of gas sector was developed with the help of foreign experts. Before 1987, IOCs were working in our offshore areas from time to time and our national company was exploring in onshore areas. Our national organization was also engaged in developing gas fields and managing production, transmission and distribution of gas. Sometimes, they were taking help form outside of the country. Everything was fine and we were enjoying the benefits of foreign help. Suddenly, the government changed their policies of gas sector development without thinking o the future impacts. During the period 1995-2001 almost all our onshore prospective zones were handed over to IOCs. Even discovered Jalalbad gas field was handed over to UNOCAL. During that period we had gas reserve for 20 years. We could develop our gas sector slowly using the revenue of Petrobangla and encouraging the investment of our private sector in energy sector slowly using the revenue of Petrobangla and encouraging investment of our private sector in energy sector development. It should be noted here that foreign consultants and equipment for exploration and drilling could be hired for carrying out activities of gas sector. There was no need for IOCs involvement for onshore activities. Thats why India, Pakistan and Malaysia are signing PSC with IOCs mainly for offshore exploration activities and they are developing the expertise of national companies working in onshore areas with the help of foreign consultants. Most of the Asian countries are adopting this principle in developing their gas sector. Before 1987, we were also following the same principle. Now let us look into negative impact of deviation form the previous principle: 1. IOCs have got the right to control power over gas reserve of about 4.46 TCF investing only 850 million US dollars. At the rate of 2.5 dollar/Mcf, the value of 4.46 TCF gas is about 11.16 Billion US dollars. 2. Petrobangla is facing trade loss due to purchase of gas from IOCs at the rate fo US $ 2.5/Mcf and sell that amount of gas to customers at average US $ 1.4. 3. Increase of gas price in the internal market due to high price of gas of IOCs fields. 4. We are facing international pressure for gas export. This issue may have immense impact on our economic and political development in future.

5. Our future economy will be dependent on IOCs gas supply because of the fact that at present most of our prospective gas resource are under the control of IOCs due to the signing of these PSCs. 6. The cash outflow from the country upto 2020 will be about 3.8 Billion US dollars due to purchase of gas from IOCs. Based on the findings, the National Committee formed on Gas Utilization has concluded that the experiment with the PSCs had drawn only negative results. The only positive impact of PSC is that 3.65 TCF gas has been discovered at the cost of 3.8 Billion USD. Petrobangla may be able to discover more than 3.65 TCF gas investing US $ 3.8 Billion in gas exploration during 2002-2020. we may be able to develop the expertise of Petrobangla to avoid the above-mentioned negative impacts. In spite of the energy crisis of Bangladesh, our government is facing tremendous external pressure for gas export due to signing of PSCs without being aware of the negative impact of this contract. For the mport of about 11% of total primary energy consumed in our country, we are paying abut taka 4000 crore in terms of foreign currency. We have to pay more than taka 12000 crore in terms of foreign currency when we do not have gas. From the above discussion it is quite evident that, although with the help of PSCs many countries could develop their gas sector, we rather plunged ourselves into a deep crisis leading to a situation as grave as facing emphatic external pressure to export gas. Unlike India, Pakistan and Malaysia where both the local organizations and IOCs are enjoying equal opportunities in investing in the mineral exploration sector, we inadvertently handed over our control to the IOCs. Now, the situation is so dismal that we have to buy our own gas at a higher cost and sell it to the customers at a lower cost causing the driving out of huge amount of foreign currency from our country. We have not only handed the control of gas to the foreign parties, but also incapacitated the state owned exploration company BAPEX. Today, this selfesteemed organization, proud of gifting the nation with several gas and oil fields, is sitting idle. Now the question is- Why did our governments take such actions that actually went against the best interest of the nation and the very National Energy Policy, which the government itself formulated? During the process of signing the PSCs with the IOCs (1995-2001) two democratically elected governments were in power and were directly involved in the process. The most notable point is: while these PSCs were being signed the citizens of the country were not informed adequately. We actually came to know about the PSCs long after they were signed. Controversies began to take heat just after the export proposal from UNOCAL came. It was then when the citizens of

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the country could know the ins and outs of the suicidal conditions of the PSCs. Under this situation, the fingers are obviously pointed to the politicians of the country.

3.3 Blow-Outs A blow out is simple the blowing up and destruction of the drilling rig and associated installations due to sudden, violent and uncontrolled flow of fluids, i.e. water, gas or oil, from underneath the surface. Such accident is accompanied, in most cases, by fire and lead to damage to properties and often loss of lives. Oil or gas zone or overpressured water bearing rock layer in the surface, it penetrated by drilling pipe, may cause forceful flow of fluid into the drilling pipe. This fluid may come up to the surface and kick the rig floor violently causing a blow out. It is therefore customary to maintain a proper mud circulation through the drill pipe during drilling in order to curter any fluid flow from the formation into the drill hole. This is done by increasing the mud weight whenever such force is expected of encountered in the subsurface. Any delay of failure to maintain such a circulation may cause fatal blow out in a gas or oil well. In Bangladesh there have been some cases of gas well blow out. Among these, the Moulovibazar-1 (Magurchhara) gas well blow out and Chattak-2 (Tengratila) gas well blow out are well known.

Moulovibazar-1 (Magurchhara) gas well blow The Magurchhara gas well blow out in the year 1997 during the Awami League government. This was an exploratory well drilled by Occidental/Unocal oil company. The accident resulted in total destruction of drilling rig and associated installations, damage to the environment and loss of natural gas and human properties. Large amount of gas was lost into the air not only through the well but also through the fractures formed in the ground surrounding the well. After the blow out, as the gas was gushing out it was lit by fire that burned down all in and around the wellhead including properties and forest. A large crater was created into which the rig and associated machineries sank as it was filled with water. In addition to the drill hole, gas was bubbling up through several points in the ground outside and surrounding the well through newly created fractures and fissures. No loss of lives was reported however. Following an investigation by a government appointed committee of experts, it was concluded that the blow out was caused by negligence on part of the drillers and the 11

committee held the drilling company responsible. The committee has reported that an estimated 245 Bcf gas was damaged and lost in the blow out incidence. The government accordingly claimed a compensation of $685 million to Occidental company. This was not realized till date. The company has since left Bangladesh after handing over the gas block to Unocal Corporation. Chattak-2 (Tengratila) gas well blow out and NIKO A severe blowout of well occurred in Chattak gas field on 8 January 2005, while Niko Resources Company was drilling a development well Chattak-2 at Tengratila in Sunamganj district. In a similar event to that of Magurchara well blowout of 1997, the accident happened because of uncontrolled flow of gas and fire causing complete destruction of drilling rig and associated installations. Most surprisingly, the same gas well blew out again in June 2005. An incident like this is simply unprecedented not only in the history of mineral exploration in the country but also in the whole world. In the incident of the first blow out large amount of gas escaped and lost into the air, not only through the well but also through the fractures in the ground surrounding the well. The primary reasons, as figured out by the investigation committee, are: (i) keeping the loose sand unprotected by not setting a casing and (ii) pulling out from the gas zone while the sand above remained uncased and unprotected. Surprisingly, these are the same factors responsible for the blowout in Magurchara well. This has provoked many to allege Niko that they did not into account the well history of the ill fated Magurchara well while designing and planning the well.

Niko- a Canadian oil company, registered in Bermuda showing a capital of only USD 12,000 was rejected both on technical and financial terms in 1997 during the process of signing PSCs with the IOCs. being under Canadian ownership, this company is registered in Bermuda in order to evade tax. However, despite being rejected by the government in 1997, it devised a way to enter the country's gas sector bypassing any evaluation or competition. It designed a joint venture proposal with Bapex, the country's lone oil and gas exploration entity. Niko wanted access to three "marginal" or previously used and abandoned gas fields through the joint venture. However, it actually named three marginal fields and one unexplored gas field -- Chhatak east, where Tengratila is located. The proposal, the first of its kind in Bangladesh, was grossly flawed with all gains going to Niko. Amidst continuos resistance from experts of Petrobangla, newspaper reports and also some senior bureaucrats, the then Awami League government ultimately did not okay the Niko deal. However, in the year 2003, Niko managed to sign a Joint Venture Agreement (JVA) with BAPEX. Furthermore, Niko managed to strike a secret deal with US giants Chevron-Texaco for the purchase of block 9 shares for a symbolic nominal price in 2003. Now, with block 9, three marginal ( Chattak west, Feni & Kamta) and one unexplored gas fields in hand, once

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disqualified Niko holds more energy resources potentials than British company Cairn which pioneered oil and gas exploration in Bangladesh in the recent decades through a PSC. In October 2004 Niko developed the Feni marginal gas field. Although this field is small with a reserve of 150 billion cubic feet of gas, it is worth about 250 million to 300 million US dollars. Today, it produces 27 MMCFD gas from this field. The government claimed 8.9 billion cubic feet (bcf) gas and a Tk 250 crore bank guarantee from Canadian company Niko as part of a three-stage compensation for the Tengratila gas field blowouts. Based on the findings of several probes into the blowouts, the energy ministry in a letter to Niko said 3bcf gas was lost from the surface level and another 5.9bcf from the sub-surface level in the field, also known as Chhatak marginal gas field. The probe committees entirely faulted Niko's poor planning and operations for the two rounds of blowouts, one in January and the other in June. Besides the energy ministry, the environment ministry too has made a Tk 84 crore compensation claim from Niko for environmental damages wrought by the blowouts. However, due to legal and policy related complications it is still uncertain whether the government can exact the compensation that it claimed from Niko.

CHAPTER 4: THE ALTERNATIVE WAYS OF UTILIZING GAS AND ITS EFFECT ON THE COUNTRYS INDUSTRIALIZATION PROCESS
Till the year 2003, a total of 5 TCF gas has been exhausted and 15 TCF of gas is still in the reserve. This 15 TCF gas is expected to be exhausted by the year 2025 if the demand of gas continues to grow in the projected rate. If we assume that, the quantity of gas to be produced in excess of the current production is 500 MMCFD for the purpose of fostering industrialization only, then it will increase the annual consumption of gas by 182.5 BCF. Let us now examine the possible options and their impact on the countrys industrial process that can be implemented using this 500 MMCFD of gas. In this case we have not considered the other options of utilizing gas such as producing Lequefied Natural Gas (LNG), Gas To Liquid (GTL) or gas export by pipeline as these options will not directly contribute to the industrialization process of the country. Fertilizer (Urea) To utilise 500 MMCFD gas to produce urea, we require 16 ammonia-urea complexes of the size of CUFL/JFCL. This will require an investment of about US$ 5 b. The total urea to be produced is about 9 million ton per year. (Reference 1)

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Power To utilize 500 MMCFD gas for power generation we need to build power plants to generate 3500-4000 MW electricity and transmission systems. This will require an Investment of about US$ 2.5 b in addition to the cost for transmission system. (Reference 1)

CHAPTER 5: THE ROLE OF GAS IN ATTRACTING FOREIGN AND LOCAL INVESTMENT IN BANGLADESH
The proposed investment options would generate a foreign investment worth 5 billion USD in fertilizer sector or 2.5 billion in power sector using only 1.825 TCF gas in every 10 years. This is least likely to pose any serious threat to the current reserve of gas. Any apprehension regarding the quick exhaustion of gas is also not much justifiable. Instead, the proposed volume of gas can be increased. It is quite evident that, the local market cannot absorb the fertilizer or the power produced through the investment of the aforementioned volume. Thats why; the investment portfolio should be a combination of the two. The local investors and entrepreneurs are not likely to make such huge investments. Furthermore, the local investors lack the required knowledge and technological backup needed in this sector. Yet, if proper subsidy and facilities are provided then the local investors may also contribute in the countrys industrial growth using natural gas. As a source of energy, gas is abundant in Bangladesh and can sustain the demand of an investment as huge as 2.5 billion USD. But problem remains with the overall management of the exploration, production and distribution of gas throughout the country. A major portion of the gas today is supplied by the international oil companies and as a result, the production sharing contracts i.e. the process through which the deals are fixed and the pricing of the gas are some of the key issues that need to be kept transparent and mutually beneficial. Any foreign or local investor, investing in a gas based industry in the country would definitely expect the authority to provide uninterrupted supply of gas. For this reason, no matter how abundant our natural gas reserve is, once it is above the ground, proper management and transparency in the entire process are of utmost necessity. Control of corruption, good governance, setting up of infrastructure, legal and policy framework are the prerequisites to attract both local and foreign investments in not only the countrys gas sector but in all other relevant sectors alike.

To illustrate the role of gas in attracting investment, brief analysis on four relevant industries have been conducted. To provide further clarification, we have provided the examples of the three largest investments in three of these sectors. Particularly the role of gas in attracting investment in these sectors has been highlighted. The four industries analyzed are: The Steel Industry

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The Power Sector The Cement Industry The Urea Fertilizer Industry

Make each industry part shorter 5.1 Steel Industry

For the industrialization of any country, steel is always considered as a major infrastructural requirement. No industry can be set up without steel. According to a common notion, a countrys industrial strength can be measured by its consumption of steel. Being a third world country with acute technological backwardness, it is quite expected that a sector like steel would not be much developed in Bangladesh. Steel is categorized as a heavy industry that requires both high technological and financial backup, which in Bangladesh, did not develop so far. The steel industries operating in Bangladesh are mainly steel re-rolling mills, cold rolled and hot rolled iron manufacturing plants, and some corrugated tin manufacturing plants. all these plants usually produce finished steel products but not any basic steel and procure their raw materials from the ship breakers operating in Sitakunda. The corrugated tin manufacturers procure their raw material- cold rolled coils usually from outside sources. The major sectors of steel consumption are MS Rod used in the construction sector, corrugated tin, and plane steel sheets used in ship building yards. The only basic steel producing factory in Bangladesh is Chittagong Still Mills, which was shut down in 1994. In fact, this plant also used raw material procured from the ship breakers. So it is quite clear that, the ship breaking industry of the country actually supplies the majority of the raw material used in all these steel industries The ship breaking industry in Bangladesh has started in the late 1980s. Today, it provides employment for more than 100,000 blue and white collar workers. Today, every year, the government of Bangladesh collects some 500 million taka as tax from this single sector. Above of all, this industry now supplies the majority of raw material for the steel industries. However, this industry is not at all an unmixed blessing. The process of ship disposal and breaking is enormously harmful to the environment. Thats why, there is no ship breaking industry in any developed country because of the high cost needed for maintaining the environment during the process of ship breaking. The working condition of the workers is also inexplicably hazardous. So far, 400 deaths are reported to have taken place over the last 20 years. (Reference 14) The Investment of TATA in the Countrys Steel Sector TATAs 2 Billion US Dollar investment proposal includes a plan of investing 700 million US Dollars in basic steel. They have proposed to set up this plant in the countrys north western part. This steel plant will use coal as its primary raw material and fuel source, obtained from the Barapukuria coal mine. Furthermore, this plant has a nameplate capacity of producing 2.4 million ton basic steel every year which can comfortably meet the nations demand of steel entirely. as a condition of their investment, TATA has demanded considerable amount of

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subsidy in purchasing the coal from the government of Bangladesh. This plant, however, for the time being does not intend to produce any finished steel goods such as cold rolled coils or MS rod. (Reference 15) The countrys various steel plants that now procure their raw materials from the countrys ship breakers can obtain the raw materials from TATA once their steel plant becomes operational. As a result, the countrys entire ship breaking industry will be under major threat of extinction. The fate of the 100,000 workers now working in this industry will become uncertain. Although, the ship breaking industry is severely harming the environment and the overall fairness of this trade is extremely poor, the fate of these workers definitely requires attention from the concerned authorities. Apart from the ship breaking industry, the proposed steel plant of TATA apparently would not pose any serious threat of competition to other steel industries. Rather it is expected to foster the local steel industries by providing basic steel which they will use as their raw material. But, as the TATA steel plant alone can supply the 100% of the total demand for steel in the country, a state of monopoly can easily arise. as a result, the steel industry can become entirely dependent on TATA. The steel industries use electricity as their primary source of power. As a result gas does not play any role directly in the development of this sector.

5.2 Power Sector

Power sector is the single largest consumer of natural gas in our country. It consumes nearly 50% of the total gas produced everyday. The gas fuelled electricity generation capacity in June 2001 was 2970 MW while IPPs gas based generation capacity is 390 MW. However, the total demand for electricity is 5700 MW while the total installed capacity is only 3400 MW creating a gap of as much as 2300 MW every day. (Reference 1) Hypothetically, according to the experts in this field, if a gas driven electricity plant is set up using 500 MMCFD gas then the plant will have a capacity to produce 3500-4000 MW electricity. This hypothetical proposal will require investment worth 2.5 billion USD. However, considering the current demand and supply situation of the power sector, this investment proposition may not be feasible. Nevertheless, there is huge potential for investment in this sector using the nations gas resource. The investment proposal of TATA also includes a plan to invest in a gas driven power plant that will have capacity to produce 1000MW electricity everyday. This venture will require an investment of 700 million USD. (Reference 1) So far, despite repeated suggestions from the international donors and monetary agencies, there has not been any initiative taken by the government of Bangladesh to liberalize the countrys power sector. Recently, the government enacted a law to allow private investors to produce electricity upto 50 MW. However, this is not enough to foster local private investment in this sector. Besides, the local private sector lacks the technological and financial strength that are needed to invest at a moderate volume in a sector like power.

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5.3 The Cement Industry

Cement Industry, a relatively fast growing industry, is developing in pace with increasing building and construction activities. Historically, Bangladesh did not depend much on cement. It also does not have enough natural resources for manufacturing it. The base materials traditionally used in house building and other construction required little use of cement. Gradual substitution of traditional building structures or patterns by modern high-rise ones has pushed up the use of cement. But as the economy continues to remain agro-based, construction sectors have not been able to gain momentum and as the infrastructure development is selective, cement still remains a product of low demand today. The key raw material of cement is clinker. Clinker is derived through burning limestone. The production of clinker does not take place in Bangladesh. This is because the country lacks the raw materials namely limestone and shale, for the production of clinker. Therefore, it is imported from countries like India and China. The cement manufacturing stage that takes place in Bangladesh is the grinding of clinker and gypsum together to obtain pure cement. Most of the grinding mills that are currently in production do this stage of the production, and then sell it in the market. (Reference 5) Cement factories those burn limestone to clinker and then crush the clinker to cement are called composite cement mills. The only composite cement mill in Bangladesh is Chatak cement mill, which was established in 1947. Currently this is a government owned mill under BCIC (Bangladesh Chemical Industries Corporation) having exclusive access to limestone from India. The first cement factory in the hands of the private sector was the Aynepur Cement Factory, which was established in 1992, had a capacity of 30,000 TPA. This was also an integrated cement plant, but it did not play any significant role in the cement industry because of irregular production and untrained management staff. Other than these two factories, there were no other integrated plants in the country. But this situation is going to change soon as Lafarge Surma Cement Ltd. starts their operation of the first fully integrated cement plant by a MNC in February-March 2006. (Reference 6)

There was not enough development of the cement industry, as compared to other countries, until 1990 because of government price control on cement and unfavorable import duty on clinker to promote the development of the industry in the country. But after these rules were withdrawn, many multinational companies and local investors started setting up their plants in the country. The cement industry was primarily an import market up till 1997, but as a result of the expansion afterwards, now the time has come for the Bangladesh based cement plants to export their product to the eastern part of India. Due to the investments after 1997, the Bangladeshi market seems to be saturated. The consumption is not even close to the current production capacity of the existing companies. . The low capacity utilization is causing huge loss to the industry and leading to demise of the minnows. To improve the situation, the only feasible option is to export our cement. Entrance of the Top Multinational Companies

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Till the first half of 90s, Bangladesh cement market was typically an import market. Hyundai, now known as Holcim, was the first multinational company to start up a local factory primarily to fulfill the demand of Jamuna Bridge. In the later half of 90s, a number of companies sprang up, allured by the prospect of a large demand-supply gap. This included world leaders like Lafarge, Holcim, Heidelberg and Cemex each now having their own plants. However, today there are more companies than what the country needed. The trend to setup local cement factories sharply increased from 1997. At that time, all the potential local as well as foreign investors started to explore the possibilities of setting up grinding mills. Favorable government policies also encouraged the entrepreneurs to come to Bangladesh. (Reference 8) A few years ago, multinational cement companies targeted the cement industry in Bangladesh. Many of the multinationals that are here in Bangladesh came because of the favorable import duty, potential demand for cement manufactured by international companies, and cheap labor. The companies had ways of making better quality cement for the same price as the local cement companies. Therefore, this would attract the consumers which in turn would spell profit for them. Investment of Lafarge Surma Cement Lafarge Surma Cement is the first MNC, which is installing a fully integrated cement plant in Bangladesh. It is also the first to enter Bangladesh arriving in 1997. The French company holds the leading position in cement production in the world. It has finished the construction of its US$ 255 million, 1.2 million tons per annum factory at Sunamgonj. Lafarge will be producing its own clinker, and along with that it will also be selling its surplus clinker to local companies. This means that the local companies won't have to pay high import duty for importing the clinker, thereby reducing the overall cost of production. (Reference 7) The Bangladeshi government will be benefiting a lot from the project. The government is going to get a lot of money in terms of import duty when the heavy duty plant and technical machinery will be imported. The project is a cross border project. That means that the entire plan will be between two countriesthe Indian and the Bangladeshi governments. This helps the two countries to improve their relationship. As both the countries have approved the project, it shows the cooperation among the two governments. This project is probably the biggest benefit the Bangladeshi government is getting from the project. The two countries will be linked with a 17 km long conveyor belt for sourcing the raw materials from Meghalaya, India. Apart from that, Lafarge will provide local industries with high quality clinker. Therefore, the supply from the local companies will be consistent, as the local companies dont have to wait for the imported clinker to arrive in time. This project of Lafarge is also the biggest foreign private investment in Bangladesh apart from the energy sector. (Reference 8) When the plant comes into production in March, it will provide employment to around 500 people, and will also provide them with adequate training. The total number of people

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employed indirectly will be well over 5000 through linkage industries. In other words, many Bangladeshi people will be employed as new jobs will open up in the transportation sector, retailers and dealers. There is a deficit of cement in the North East and North West regions of Bangladesh. But when the Lafarge plant goes into full swing, the deficit in the North East region will change into surplus. The rate of deficit will also go down in the North West region. (Reference 8) Role of Gas in Attracting Investors to the Cement Industry As we have already seen, the main reasons for the expansion of the cement industry are favorable import duty, potential demand for cement manufactured by international companies, and cheap labor. We have also seen that the cement industry in Bangladesh is saturated. At present, some 40 operational companies have an installed production capacity of 1.5 crore tonnes a year while the local consumption is only 70 lakh tonnes. So the demand for cement is much less than the supply. But still world reputed companies like Lafarge are willing to invest in this industry and thus saturating it even further. So why are these multinational companies being attracted to a saturated industry? The answer to this question lies in our reserve of natural gas. Gas may not be a direct material in the production of cement, but it is the most important indirect material as it is used as a fuel in the production process. Bangladesh has very little limestone. So apparently it seems that Bangladesh is not the ideal place to set up a cement factory. India seems to be a far better place for investors to go to. Especially for Lafarge, as we can see that they are importing the raw materials from India. So it seems that India would have been a more beneficial choice for Lafarge to set up their factory. Their set up cost would have been much lower, as their would have been no need for them to build the 17 km long conveyer belt; they would not need to pay any import duty on their raw materials; the eastern part of India is starving of cement supply, so that would have been a very easy market for them to break into. In spite of all these reasons, Lafarge chose Bangladesh over India for one reason---the natural gas reserve of Bangladesh. If they had invested in India, they would have had to import gas. It would have been tough for them to ensure consistent gas supply for various reasons. The gas reserve played a big role in attracting the other cement companies to Bangladesh too. This also attracted the local investors to invest in this industry. But most of the local companies were set up before 2000. Back then there was a lack in supply of cement. But now as the market seems to be saturated, it seems unlikely that any new local investor would be attracted by the gas reserve to enter this market. Although the probability of exporting cement to India and Sri Lanka might attract foreign as well as local investors to invest even more in this apparently saturated industry. Lafarge Surma Cement Ltd. already has an agreement with Jalalabad Gas Transmission and Distribution Company Ltd. (JGTCL) for purchase of 16 million cubic feet per day (mmcfd) gas. The company is set to start production in February-March. But still, it was reported in the papers that Niko is independently negotiating with Lafarge for sale of Tengratila gas in future.

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It has proposed to Lafarge a gas sale price of $3 per thousand cubic feet (mcf). Such gas price negotiation is the first of its kind in Bangladesh as no other oil companies, operating from the mid-nineties, are allowed to independently negotiate with a third party as gas buyers unless Petrobangla declines to buy the gas. The faulty Joint Venture Agreement (JVA) between Bapex and Niko however allows such anomaly. But Lafarge later on pointed out that there was a mistake in the aforementioned report. The report stated that, Lafarge and Niko were negotiating a deal. But Lafarge were not negotiating with Niko. Actually Niko had just proposed a deal, but no such negotiation took place and as Lafarge had an agreement with JGTCL, they had no intention of dealing with Niko. (Reference 9) In order for Lafarges investment to work as an advantage to Bangladesh, the government must ensure that no hazy dealings are undertaken involving this situation.

5.4 The Fertilizer Industry

While the technique of increasing soil fertility by application of organic fertilizer was known and was in use in the Indian sub-continent over many centuries, the introduction of chemical fertilizers in Bangladesh is known to date back to early sixties. With the first ammonia-urea complex coming on stream in 1961, Bangladesh joined the chemical fertilizer producers and users club with a consumption of 40,000 MT of urea and 25,000 MT of ammonium sulphate in 1962-63. The ammonium sulphate mainly used in the tea gardens is produced in the same complex by producing in-house sulphuric acid. Since then the consumption of urea in Bangladesh has grown steadily registering growth at an average rate of 7.8% per annum over the past 20 years. On the other hand, the use of other fertilizers did not grow at the same rate and failed to follow any predictable pattern; rather, it was dictated by availability, price and lack of knowledge concerning balanced N: P: K application.

Why Bangladesh? Bangladesh is a country with one of the highest population concentration in the world. Its population density is about 775 persons per square km with a population growth rate of 2.17% per annum. With all these facts in mind and bringing into account the fact that the countrys economy is predominantly based on agriculture accounting for one third of our national GDP and still growing at 5% per year and the fact that only one third of approx. 111,300 sq. km. is provided with proper irrigation facilities, the only feasible way to grow more food in Bangladesh is to improve soil fertility by application of fertilizer and use of improved variety of seeds. (Reference 10) Another and to some extent the main factor contributing to the rapid growth of this industry in Bangladesh is the availability of natural gas, a basic necessity (raw material rather) for the production of fertilizer. (Reference 10) Bangladesh is known to have a large reserve of natural gas. The estimates of natural gas reserve in Bangladesh vary widely, depending on the source. According to the official source the proven reserves in the 21 gas fields consisting of 20 onshore and 1 offshore discovered to date is over 13 trillion cubic feet while the proven plus probable reserve is estimated to be as

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high as 23 trillion cubic feet. The details of these estimates are discussed more elaborately in the later part of this report. (Reference 10) The production of urea is one of the best ways of utilizing natural gas, not only because the production technology is standard and mature, but also due to Bangladeshs extensive experience in operating urea fertilizer plants. Currently, around 30 percent of the countrys natural gas is being used for fertilizer production. The following factors conspire against any potential benefits with regard to the export of fertilizer by Bangladesh: The low world market price of urea ($120-$130 per million ton) and ammonia The existence of more than 1,400 Tcf of stranded gas, the price of which varies between US$ 0.50 to US$ 1.00 per MMCF. Limited demand for urea and ammonia in the world market (total market around twenty million tons) because of significant increase in domestic production around the world. The Committee Reports analysis of fertilizer plants shows that even in the best case (urea price US$ 170, interest rate 10%), the netback to the wellhead is approximately one dollar less than the ceiling purchase of natural gas from the IOCs.

The Demand-Supply Scenario of Fertilizer Although urea was first introduced in Bangladesh in the early sixties, its consumption rose to any significant level only in the early seventies. The impetus of fertilizer use coupled with availability of natural gas as raw material for urea production resulted in the construction of 6 fertilizer plants over the past three decades with a combined annual nameplate capacity of about 1.40 million tons of ammonia to be converted to 2.32 million tons of urea dedicated for the domestic market. The only 100% export orientated plant in Bangladesh, Kafco, has a nameplate capacity of 0.5 million tons of ammonia and 0.575 million tons of urea apart from urea, kafco also produces 100,000 MT of TSP and 120,000 MT of SSP. (Reference 11) The need to boost food production and availability of indigenous raw material has made urea by far the most widely used fertilizer in Bangladesh. This is followed by TSP/SSP and MOP. Availability of cheap locally produced urea resulted in a sustained high growth rate for urea over the past two decades. On the other hand, the use of other fertilizers did not grow at the same rate. It also did not follow any predictable pattern; rather it was dictated by the availability and the farm level price. (Reference 11) An evaluation of the present Bangladesh fertilizer scenario and its growth potential is presented below. The following table depicts the use of different kinds of fertilizers from 1980-81 to 1998-99. (Reference 11)

Year Urea Production

1980/81 595

1985/86 794

1990/91 1323

1995/96 2045

1996/97 2120

1997/98 1872

1998/99 1902

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Urea fertilizer consumption and year (Figures in 000 MT) Investment of KAFCO In March 1991, the ECGD gave investment insurance worth 20 million to Citibank UK for its involvement in the Karnaphuli Fertilizer Company (KAFCO) Fertilizer Complex in Chittagong, Bangladesh. KAFCO is the largest private foreign investment project in Bangladesh and the single largest industrial project in the country. The Complex produces high-grade ammonia and granular urea out of Bangladeshs natural gas for export to the international market. The $500 million contract for KAFCO was signed in 1990 between the Karnaphuli Fertilizer Company and Japanese companies Chiyoda and Marubeni, together with the Italian Petro-Chemical Manufacturers Association. (Reference 12) The government of Bangladesh holds the largest share in KAFCO, at 43.4%, through the state-owned Bangladesh Chemical Industries Corporation. The government is also a guarantor for the whole project. The largest foreign investors in KAFCO are the Japanese companies, Chiyoda (an engineering company) and Marubeni (a trading company specializing in textiles, metals, chemicals and fertilizer). Together with the Japanese governments Overseas Economic Cooperation Fund which prior to 1999 disbursed Japans Overseas Development Assistance (ODA) these two companies set up the KAFCO Japan Investment Co Ltd, which holds a 31.3% share in the Complex. Other shareholders include: the Danish company, Haldor Topsoe (14.95%); Denmarks Industrialization Fund for the Underdeveloped (4.35%); the UK governments Commonwealth Development Corporation (4.35% share) and Stamicarbon BV of Holland (1.56%). Chiyoda, Marubeni and the Italian Petro-Chemical Manufacturers Association (IPMA) acted as contractors on the project. Marubeni and the US trading company, Transammonia AG, secured off-take agreements allowing them a virtually risk-free monopoly to sell all the ammonia and urea produced by KAFCO and to charge KAFCO a 2-5% commission on each sale without requiring the companies themselves to get any minimum price for the products. (Reference 12) The contracts between KAFCO and the foreign contractors were all signed between April and October 1990 amidst great political instability. The controversial Gas Supply and Gas Price and Payment Agreements between KAFCO and the Bangladesh government were signed on 1 December 1990. These agreements entailed the government of Bangladesh supplying KAFCO with cut-price gas. There was no competitive tender for the contracts despite stringent requirements in Bangladesh for competitive tender in public procurement. (Reference 12) The terms of the various KAFCO deals were so unfavorable to Bangladesh that when a new government came to power in 1991, a cabinet committee investigated the project and concluded that it was not in Bangladeshs interests and that the whole arrangement should be revised. But strong pressure from Japan, whose export credit agency, the Export Import Bank of Japan, had underwritten the deal, ensured that only a few revisions were made. This pressure also led the government of Bangladesh itself to issue guarantees on the project in

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1992 against $250 million (157 million) of loans and guarantees to KAFCO from various export credit agencies. (Reference 12) Even though the Bangladeshi government was the projects major shareholder, it did not benefit in any significant way from its investment in KAFCO. The fact that almost all KAFCOs foreign shareholders also acted as suppliers, contractors or lenders to the project gave rise to conflict of interests among shareholders who may have deterred them from taking optimal decisions favoring the interest of KAFCO. (Reference 12) From the beginning, the government of Bangladesh granted KAFCO extraordinary concessions that were far more in the interests of the foreign investors than of the country. KAFCO was to receive gas on a preferential basis and at a cheaper rate than any other consumer in the country at half the price of gas supplied to other fertilizer companies in the public sector. This annual subsidy to KAFCO of cheap gas provided by the Government of Bangladesh has been estimated at $18.5 million a year. Bangladeshs total subsidy to KAFCO up to January 2003 is estimated to be in the region of $120 million. KAFCO was given an income tax holiday for the first nine years of its production, followed by an annual rebate of 50% on income tax. KAFCOs foreign equity holders and lenders did not have to pay any taxes, import or export duties, charges or fees. (Reference 12) The government of Bangladesh is not only one of the major suppliers to KAFCO but also its major shareholder. It is one of KAFCOs major purchasers as well but it has to buy fertilizer from KAFCO in foreign exchange and at international prices. KAFCO itself is required to pay 2% commission to US Company Transammonia and Japanese company Marubeni for these sales to the government of Bangladesh, even though the sales require no work on the companies part and even though it was understood at the outset that the Bangladeshi government would be a major purchaser of the plants products. (Reference 12) The KAFCO fertilizer plant has proved a costly drain on the government of Bangladeshs resources, and not just because of its gas subsidy. The plant, according to the contract, was considerably over-priced. It cost between $130-150 million more to build than a similar plant in Bangladesh at Jamuna. Cost overruns of more than 26% meant that the project finally cost $632.7 million instead of the original contract price of $500 million. Equipment bought from Romania and Italy was so substandard that the plant did not function properly when it finally opened in December 1994, five years after the signing of the contract. Within four months of opening, the plant had suffered numerous shutdowns. It failed a performance test carried out in May 1995, and the plant did not achieve Plant Acceptance until October 2000, after one contractor (and investor), Japanese company Chiyoda, had paid out $30 million in compensation. (Reference 12) Production losses caused by shutdowns due to substandard equipment have been estimated at $78 million but according to internal projections by KAFCOs management, the total losses to KAFCO are likely to be in excess of $110 million. It is only in the last two financial years, 2000-2001 and 2001-2002, that KAFCO has shown an operating profit of roughly $5 million a year. But if the gas subsidies provided by the government of Bangladesh were removed, KAFCO would still be operating at a loss. The white paper on KAFCO prepared for

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Bangladeshs Ministry of Industries in November 2001 was deeply critical of the projects viability. It found that the plants mid-term financial viability was in doubt and that the companys net assets had declined by 38.5% over six years. It also noted that it is unlikely that the government of Bangladesh will receive any dividend income [from KAFCO] for the foreseeable future. (Reference 12) Estimates of the net drain on Bangladeshs resources of the KAFCO project are in the region of $350 million. The ECGD has played a significant role as a guarantor for Citibank UKs substantial loans to KAFCO. Neither the ECGD, nor its fellow UK government department, the Commonwealth Development Corporation, which is a KAFCO shareholder and lender, seem to have undertaken any serious analysis of the projects cost before giving financial support. The ECGDs involvement shows considerable disregard for the interests of Bangladesh and for the impact that corruption can have on the design and implementation of a project. The ECGD is still insuring the KAFCO Fertilizer Complex. (Reference 12) Summary of the Woes Karnaphuli Fertilizer Company (KAFCO), the country's largest joint venture fertilizer manufacturer and exporter, is in chronic financial problem. It defaulted two consecutive loan installments to the Japanese Exim Bank. The company has been at loss for most of the years of operation since 1994 and incurring huge drainage of government fund, because government has provided guarantee to the foreign creditors against loan repayment default of KAFCO. The trouble is attributed to frequent closures due to interruption in gas supply, mechanical faults and drop in urea prices in the international market to $80 per ton from $200 during the last three years. The company is reportedly in need of fresh equity of $50 million for financial restructuring. (Reference 13)

CHAPTER 6: CONCLUSION
In a third world country like ours, we do not have too many things to be happy about. Our natural gas is one of the very few things that make us proud. In terms of reserve and the quality of gas, it is capable enough to bring about a visible change in the countrys overall economic condition. While our neighboring countries are already suffering from energy crisis, we have a gas reserve that can sustain the internal demand till 2025. Already there have been massive foreign investments in the gas sector creating employment to thousands of locals. The question is how authentically and profoundly are we being benefited through the involvement of these foreign investors? With the signing of the PSCs we have literally incapacitated the state owned exploration company BAPEX and created a situation of buying our own gas at a higher price and selling it at a lower rate. We have ceded our control of the gas sector to the foreigners and due to our own faults we could not collect the compensations from the parties responsible for gas well blow outs.

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Our agricultural sector is immensely dependent on urea fertilizer and our industries need viable and favorable power source in order to maintain an optimum growth of the GDP. In both cases gas plays an instrumental role as it is a raw material in the production of fertilizer and power generation. In the fertilizer sector Japanese investment has been initiated through the establishment of KAFCO in Chittagong. Surprisingly, due to suicidal policies, the government of Bangladesh has to pay this company a subsidy worth USD 18.5 million every year. In the countrys power and cement sectors, both foreign and local investment can be attracted. Although the local investors do not have technical strength to carry out a feasible venture in the power sector, many believe that they can succeed, as they did in the pharmaceutical sector, if proper subsidies and government cooperation are provided. The pharmaceutical sector of this country proves that, our local entrepreneurs can overcome the technological backwardness. This same assumption can be applied in case of the power and fertilizer sectors as well. Yet again, serious apprehension and question remain whether the government can formulate proper policies and ensure the highest benefit for the nation. Lack of political commitment, failure to maintain utmost transparency in fixing the dealings have already resulted colossal loss to the nation. We have quality gas in enough quantity. But it is the fallacious policy alone that has barred us from extracting the maximum benefit from this valuable resource. The prospect of gas is enormous in fostering the industrialization in the country. Now it is our responsibility to use it through implementing viable alternatives. In order to do so, the importance of maintaining utmost transparency and ensuring highest political commitment in the process of fixing any deal can hardly be overemphasized. For all these reasons, any process of government decision making should be accompanied by proper parliamentary representation, proper parliamentary process, and participation from the civil society, intelligentsia and the common people.

CHAPTER 7: FINDINGS (do we need dis????)

There are plenty of studies on the gas reserve estimates i.e. IKM Study, Petrobangla Study, BUET Study, Study by Shell, UNOCAL Study, USGS-Petrobangla Joint Study, HCU/NPD Joint Study etc. This report recommends the HCU/NPD Joint study as the most comprehensive one as it has used the most recent data and technology. The projections for the gas demands see a constant rise in almost all of the sectors, namely the power and the industrial sectors. These sectors are expected to experience an annual increase in demand of approximately 12%. The government of Bangladesh formulated the National Energy Policy (NEP) in order to ensure energy security and optimum utilization of the nations gas resources. Through the signing of PSCs a total of 3.65 TCF gas has been discovered. But, due to faulty negotiations and suicidal policies we are now buying our own gas at a higher

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price and selling it to the customers at a lower rate. Besides, through the signing of PSCs the BAPEX have been left idle. Over the last few years two major incidents of blow outs took place in the country. One took place in Magurchara gas field in 1997 and another in Tengratila gas field in 2005. The government demanded $685 million for the Magurchara blow out and another Tk 334 crore for the Tengratila blow out. Neither of these two compensations has yet been collected from the responsible parties. Besides, there has been allegation that the dealings made between the government of Bangladesh and the parties involved in these blow out incidents were not fair and transparent. The most viable options for utilizing gas in order to foster the industrial process of the country are investing in fertilizer and power sector. In order to use 500 MMCFD gas in fertilizer would require an investment of 5 billion USD. To use the same quantity of gas in power would require investment of 2 billion USD. This amount of gas would increase the consumption by only 0.1825 TCF every year. Regarding the steel industry, natural gas, as a source of energy, does not play any direct role. in this case the source of power is electricity. Hypothetically, in the power sector, there can be direct investment of 2.5 billion dollars using the countrys natural gas. The local investors do not have the required level of technological and financial soundness to invest at a moderate volume in the power sector. The main reasons behind the expansion of the cement industry are favorable import duty, potential demand for cement manufactured by international companies and cheap labor. Because of all the investments, now the cement industry seems to be saturated. But still world reputed companies like Lafarge are being attracted towards investing here. Although gas is not a direct material in the production of cement, one of the prime reasons for the investments in this sector is the existence of natural gas. That is why; even though there is very little availability of raw materials here, foreign as well as local investors are being attracted towards investing in this industry. Although urea fertilizer was first introduced in Bangladesh in the early sixties, its consumption rose to any significant level only in the early seventies. The impetus of fertilizer use coupled with availability of natural gas as raw material for urea production resulted in the construction of 6 fertilizer plants over the past three decades. The market leader in this regard, KAFCO has a nameplate capacity of 0.5 million tons of ammonia and 0.575 million tons of urea with the total production of the industry being 2.32 million tons of urea. However it stands as an example of total disregard for national economy in the name of foreign investment. The government of Bangladesh now has to provide KAFCO with an annual subsidy $18.5 million.

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APPENDIX

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