The economics of the economic pricing of gas

Both the parties supply gas to the domestic market in Bangladesh with state owned companies claiming, reportedly, about three-fourths of the total gas production. Needless to mention, perhaps, that the gas market is extremely tight with low supply elasticity. On the other hand, the transmission and distribution sector is completely state-owned, with a number of Petrobangla subsidiaries. They are supposed to be regulated by the recently formed Bangladesh Energy Regulatory Commission (BERC). Unfortunately, BERC is being short-changed in the absence of logistics support and commitment from the policy makers.

When gas is not goose
It would be a mistake to assume that the current availability of gas is a gift to grease our economic wheels for ever. It is not the proverbial goose, either, that will lay golden eggs for long. It is non-renewable, and like any other commodity, is likely to finish if sufficient moves are not materialized to get more gas from the fields. That means, to match growing demand of gas, supply must come from new drilling and explorations. And to meet the growing demand for more investments to this effect, gas needs to generate its own resources through rational pricing. The other alternative is to give citizens an access to gas free of cost and postpone poverty reducing and health-helping developmental works. But that is also for a limited period before we end up losing both the mango and the sack!

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Of course, we take the argument that there could be some subsidy on gas for some sectors and, of course, for some limited time. But kindly put it, preferably, at the end user level. For example, at the moment, fertilizer factories are subsidized for the use of gas, i.e. the plants consume gas at lower than the actual market price taking into account exploration, transmission and distribution costs. Although it goes in the name of helping farmers, actually it is not. If this cheap fertilizer crosses the border through illegal routes, to fetch better price, the subsidy also goes to the neighbouring country consumers. Why Bangladesh government should subsidize, say, Myanmar farmers? It would, perhaps, be more productive to subsidize Bangladeshi farmers on the basis of the use of fertilizer, if there is at all any political will to do that.

Fearful future
Our economy has been growing, appreciably, at 5.5 per cent plus per annum over the last couple of years. As income and gas-driven activities would go up, the demand for gas would also increase. Taking 20 years as a time horizon, the total gas demand would then reach 4 bcfd by 2024-25 as shown by an estimate. This implies a growth rate of gas demand of 6 per cent per annum. But suppose, for the sake of brevity, we assume an economic growth rate of roughly 8 per cent per year. Then gas demand will reach 7.4 bcfd by 2024-25, indicating a growth rate of 9 per cent per year. Please do not denounce the projection of growth rate as a dream. If current corruption and other conundrums could fuel 5.5 per cent growth rate, we hope that substantial improvements on the heels of good political will on these counts could lead to a growth rate of about 8 per cent per year. In fact, that is exactly what is needed to meet the MDG and the targets of poverty reduction in the PRSP.

And here comes the problem. Under the scenario of proved gas reserves, as released by research findings, the gas demand will be fully met by 2011. If probable gas reserves are added, it will go up to 2015 and conversion of possible reserves will lead us to live up to 2019. It appears that Bangladesh would face a gruesome gas set-back by 2011 --only five years from now if nothing is done to explore and develop new gas reserves. If probable gas reserves are firmed up and converted to proved reserves, Bangladesh can go up to 2015 -- ten years from now! Clearly, the consolation from the current level of potential reserves cannot be relied upon to meet the forecast demand by 2025 and hence additional reserves need to be proved up. That is, according to some estimates, an additional 20-25 tcf needs to be proved up between now and 2010. Conservatively speaking, this goes to imply an investment of $5-10 billion to avert any gas-driven disaster. The question is: where to get the money from?

Groaning gas system
What is the reality on the ground? The state-owned companies are faced with the fragile fundamental called financial weakness. Upstream companies like Bapex are not in a financial position to invest more in exploration and production and thus bring additional gas to the market. Some of the IOCs -- in their lust for more profits within a short period of time -- are allegedly contributing to the crisis in the gas sector. There are also allegations of massive corruption between IOCs and domestic dollar-hunters. The transmission company GTCL is also unable to transmit gas across the country due to the lack of an adequate investment in the transmission system. Thus, for example, in the absence of compressor facilities with due investments, the country faces acute problems with gas pressure. A free-flow system as it is now, allows no capability to manipulate line pack in preparation for planned outages or in reaction to unplanned outages. Besides, the concentration of supply in the north and east part of the country puts strains on the existing transmission network. There are little attempts, in evidence, for sourcing gas from the south and thus ease the tension of transmissions.

On the distribution side, a high system loss (also called unaccounted for gas) accounts for roughly 20 per cent of the gas generation. In monetary terms, it amounts to $39 million per annum at the current weighted average price of gas and $207 million per annum if estimated at rational pricing. Only 6 per cent of the households in Bangladesh have access to gas and only 3 per cent have metered gas. This means, in the absence of meters to measure the actual usage, substantial wastage steps in. The fertilizer factories, recipients of subsidized gas, have old machines and poor management system (like other state enterprises) exhibiting high specific consumption levels. Thus, according to the views expressed by concerned quarters, a new plant with modern production facility and better management would cost 15-20 per cent less gas to produce the same amount of fertilizer that would come from an old plant.

Pricing problems
The weighted average price to consumers currently works out at $1/mmbtu. Of this, Bangladesh government retains 57 per cent as VAT and Supplementary Duty. The rest 43 per cent is retained by Petrobangla and allocated to state companies responsible for exploration, production, transmission and distribution. One may question the use of the rent received by the government. How much of that is spent on reinvigorating the capacity of the state owned companies in exploring gas, in generating efficiency in transmission and distribution? The meager share of the companies of Petrobangla is too small to allow any productive investment. If Bangladesh aims to develop strong gas transmission and distribution networks, the companies must be made financially strong, autonomous in administration, and above political influences.

To drive home the point that gas is under-priced in Bangladesh, let us take one or two examples. The total end-user price of gas to the power sector is $1.1/mmbtu, for fertilizer it is $1.0/mmbtu, and for industry, $2.3/mmbtu. Suppose, gas is gone and to keep the wheels moving, the sectors must look for alternative arrangements which is the fuel oil. The opportunity cost of gas is the price of fuel forgone. In economic terms, gas should be priced close to the opportunity costs. Is that happening? It is not, because the substitute fuel price for each of three sectors is $5.3/mmbtu. Thus considered, the discount gas price to liquid fuel is 200-300 per cent less! Not so? Think of the cost of a gas-driven car compared to a diesel driven one. The former is Tk.1 per km while the latter is Tk.5 per km. Thus, even if the gas price is raised 2-3 times, it is still more economic for car owners who are mostly the richer segment of society. This is in addition to the fact that liquid fuel prices in Bangladesh are, on average, 60 per cent of the prices prevailing in the region e.g. India, Pakistan and Sri Lanka. For example, when Bangladesh price is $5.3/mmbtu, it is about $9 in other places.

Searching sustainable system
Given the above facts and figures, reform in the domestic pricing of gas are urgent. It calls for rise in the existing tariff levels. It argues for a price of gas that would ensure a sustainable system of gas availability for furthering economic growth, poverty reduction, and overall socio-economic development. The reform agenda, no doubt, should take into due note the existing socio-economic conditions but, with equal force, it should take stock of the future demand and supply.

One option could be direct and transparent subsidy from budget rather than using the sector as a vehicle to promote socio-economic objectives. To help the future generation reap home gas at reasonable prices, we should abandon the populist policy of keeping gas prices much below the opportunity costs. The history of subsidy in this country, and also elsewhere, is a history of subsidizing the rich and subjugating the poor. The long-run development of the gas sector crucially hinges on devising economic pricing in a gradual manner to match international prices in future. Otherwise, current trend if allowed unabated, might kill the goose that could lay golden eggs. The sooner we realize this, the better it would be.

Abdul Bayes is a Professor of Economics at Jahangirnagar University.