Technical Assistance Consultant’s Report Project Number: 38164 April 2009 People's Republic of Bangladesh: Preparing the Gas Sector Development Program (Financed by the Japan Special Fund) Prepared by: Technoconsult International Limited Dhaka, Bangaldesh For Petrobangla This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design. Final Report Volume 2: Main Report People’s Republic of Bangladesh: Preparing the Clean Fuel Sector Development Program TA 4952-BAN Technoconsult International Limited Sena Kalyan Bhaban (7th Floor), 195 Motijheel C/A, Dhaka -1000 Tel: 9565122-25, Fax: +880-2-9565127, Email: [email protected], Web: www.tcil-bd.com Project Number: 38164 March 2009 CURRENCY EQUIVALENTS (as of 1 March 2009) Currency Unit – Taka (Tk) Tk1.00 = $0.0145 $1.00 = Tk68.95 In this report, a rate of $1 = Tk70.00 has been used ABBREVIATIONS ADB – Asian Development Bank ADP – annual development program BAPEX – Bangladesh Petroleum Exploration Company Limited BCF – billion cubic feet BERC – Bangladesh Energy Regulatory Commission BGFCL – Bangladesh Gas Fields Company Limited BGSL – Bakhrabad Gas Systems Limited cm – cubic meter DCFP – Dhaka Clean Fuel Project DEGTP – Dhanua-Elenga Gas Transmission Pipeline DM – distribution margin DPP – development project proforma EA – executing agency EIA – environmental impact assessment EIRR – Economic internal rate of return EMRD – Energy and Mineral Resources Division EPZ – export processing zone FIRR – financial internal rate of return FY – financial year GDP – gross domestic product GHG – greenhouse gas GSMP – Gas Sector Master Plan GSRR – Gas Sector Reform Roadmap GTCL – Gas Transmission Company Limited GTDP – Gas Transmission and Development Project GWh – gigawatt-hour HCU – Hydrocarbon Unit HSFO – high sulphur fuel oil IEE – initial environmental examination IOC – international oil company IPO – initial public offering IPP – independent power producer JGTDSL – Jalalabad Gas Transmission and Distribution Systems Limited JNGTP – Jamuna Bridge (West)-Nalka Gas Transmission Pipeline kgoe – kilogram of oil equivalent kiloton – thousand ton (metric) km – Kilometer kWh – kilowatt-hour LRMC – long run marginal cost MCF – millennium (thousand) cubic feet MCM – millennium (thousand) cubic meters ABBREVIATIONS (Continued) MDG – millennium development goals MMCF – million cubic feet MMCFD – million cubic feet per day MMCM – million cubic meter MW – Megawatt NEP – National Energy Policy NPV – net present value O&M – operation and maintenance BPDB – Bangladesh Power Development Board PDF – price deficit fund Petrobangla – Bangladesh Oil, Gas and Minerals Corporation PGCL – Paschimanchal Gas Company Limited PRS – poverty reduction strategy PSC – production sharing contract psig – pounds per square inch gauge PSMP – Power System Master Plan BREB – Bangladesh Rural Electrification Board ROR – rate of return SCF – standard conversion factor SD – supplementary duty SGCL – Sundarban Gas Company Limited SER – shadow exchange rate SFR – self-financing ratio SGC – state-owned gas companies SGFL – Sylhet Gas Fields Limited SWR – shadow wage rate SWRGDN – South West Region Gas Distribution Network T – ton (metric) TA – technical assistance TABGTP – Titas-Ashuganj-Bakhrabad Gas Transmission Pipeline TCF – trillion cubic feet TGTDCL – Titas Gas Transmission and Distribution Company Limited TM – transmission margin TNGDP – Third Natural Gas Development Project toe – ton of oil equivalent TOR – terms of reference UNDP – United Nations Development Programme VAT – value-added tax WACC – weighted average cost of capital NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 30 June. (ii) In this report, "$" refers to US dollars. CONTENTS Maps 1 Natural Gas Fields and Pipelines i 2 Gas Fields and Transmission Network ii 3 Gas Transmission Flow Diagram iii 4 Natural Gas Based Power Plants and Fertilizer Factories iv 5 Rehabilitation and Development of Titas Gas Field v 6 South Western Region Gas Distribution vi I. PURPOSE AND SCOPE 1 A. Introduction 1 B. Project Objectives and Output 1 C. Work Accomplished 2 D. Organization of the Report 2 II. THE SECTOR: PERFORMANCE, PROBLEMS AND OPPORTUNITIES 3 A. Performance Indicators and Analysis 3 B. Analysis of Key Problems and Opportunities 6 C. Gas Demand Assessment 15 D. Gas Supply 24 E. Gas Pricing 28 F. Government Policies and Plans 36 G. Policy Framework 39 H. Gas Sector Reform Roadmap 46 III. CLEAN FUEL SECTOR DEVELOPMENT PROGRAM 51 A. Issues 51 B. Impact and Outcome 51 C. Important Features 51 D. The Program 52 E. The Project 59 F. Project Cost Estimates and Financing Plan 71 G. Detailed Project Costs 72 H. Implementation Arrangements 79 I. Financial Review of Gas Sector Operations 83 J. Financial Projections of Executing Agencies 92 K. Social Assessment and Resettlement 105 L. Environmental Aspects 108 IV. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS AND RISKS 111 A. Expected Benefits 111 B. Economic Analysis 112 C. Financial Evaluation Of The Project 124 D. Risks and Safeguards 131 APPENDIXES 133 1 I. PURPOSE AND SCOPE A. Introduction 1. In the face of impending gas shortages as well as continued growth of Bangladesh’s energy and natural gas requirements in recent years, the Government has requested ADB financing for several priority projects in the gas sector that would help implement its Poverty Reduction Strategy (PRS).1 In January 2008, ADB engaged Technoconsult International Limited (TCIL, Consultant) to undertake the TA study. This Final Report presents the findings and analysis undertaken since February 2008 under the project preparatory technical assistance (TA) for the Clean Fuel Sector Development Program (the Program).2 B. Project Objectives and Output 2. The sector goal is to facilitate economic growth, poverty reduction and environmental improvement through natural gas sector development. The purpose of the TA is to help the Government prepare a new gas sector development program to build on the progress from the ongoing Gas Transmission and Development Project (GTDP).3 The Program will include (i) a policy agenda for improving the governance of the natural gas sector, and to improve sector institutions, and (ii) priority investments to support implementation of the Gas Sector Master Plan (GSMP) 4 , and (iii) creating facilities for distribution of gas in new areas for which transmission system is being constructed under GTDP. 3. The TA is assisting the Government prepare the Program. Key activities include the following: (i) Adopting measures to ensure adequate gas supply in the eastern parts of the country. (ii) Analyzing the potential for economic growth and social development in less developed areas, particularly with reference to expanding natural gas supply and distribution in the western and southwestern regions of the country with the construction of the pipeline to Khulna under GTDP. (iii) Developing an investment package that identifies gas sector infrastructure development components. (iv) Reviewing the Program’s investment components including cost estimates, financing plan, and procurement packages. (v) Performing detailed financial, economic, environmental, social, poverty reduction, and institutional analyses of the identified project components. (vi) Estimating the levels that greenhouse gas emissions will be reduced by the subcomponents. 1 Government of Bangladesh. 2004. Unlocking the Potential: National Strategy for Accelerated Poverty Reduction. Dhaka. The PRSP is being updated for the period 2009-2011. 2 ADB. 2007. Technical Assistance to the People’s Republic of Bangladesh for Preparing the Gas Sector Development Program. Manila. The title of the project has been changed by ADB to the Clean Fuel Sector Development Program in the Country Operations Business Plan. 3 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of Bangladesh for the Gas Transmission and Development Project. Manila 4 The GSMP was prepared by Wood Mckenzie in 2006 with financial assistance from the World Bank, and approved by the Government in 2007. Clean Fuel Sector Development Program Final Report March 2009 2 4. The terms of reference of the TA are in Appendix 1. The outputs of the TA comprise the following: (i) A sector development plan containing an analysis of opportunities for the sector’s growth and development. (ii) A policy reform agenda for the development of the gas sector including promotion of public and private investments. (iii) Identification of priority investment projects with technical, social, economic and financial justification in accordance with relevant ADB guidelines. (iv) Assessment of institutional development and restructuring requirements to implement proposed policies and investment components. 5. Bangladesh Oil, Gas and Minerals Corporation (Petrobangla) was the Executing Agency (EA) of the TA and responsible for coordinating with its companies and for providing necessary support to the Consultant including access to information and project sites and facilities. The Energy and Mineral Resources Division (EMRD) of the Ministry of Power, Energy and Mineral Resources coordinated with other ministries and agencies on policy related aspects. C. Work Accomplished 6. The study commenced on 15 February 2008 and was