Technical Assistance Final Report Project Number: 44405 September 2013 Bangladesh: Tariff Reform and Inter-sectoral Allocation of Natural Gas This 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. TARIFF REFORMS AND INTERSECTORAL ALLOCATION OF NATURAL GAS: TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................................. ii CURRENCY EQUIVALENTS .......................................................................................... iii ABBREVIATIONS .......................................................................................................... iv List of Annexes ................................................................................................................ v List of Figures.................................................................................................................. v List of Tables ................................................................................................................... v CONVERSION FACTORS ............................................................................................. vii USEFUL CONVERSIONS .............................................................................................. vii Executive Summary ....................................................................................................... ix 1. BANGLADESH and GAS ......................................................................................... 1 A. Purpose of Report ............................................................................................. 1 B. Bangladesh ....................................................................................................... 1 2. GAS SECTOR OVERVIEW ..................................................................................... 3 A. Energy Sector Governance ............................................................................... 3 C. Energy Sector Overview .................................................................................... 3 D. Gas Institutions ................................................................................................. 5 E. Production Sharing Contracts ........................................................................... 6 A. PSCs and Taxes ............................................................................................... 8 F. Gas Market ....................................................................................................... 8 G. Gas Demand ................................................................................................... 11 H. Gas Supply ..................................................................................................... 12 I. Gas Reserves ................................................................................................. 13 J. Gas Supply Shortfall ....................................................................................... 15 K. Gas Exploration .............................................................................................. 16 L. Future Role of IOCs ........................................................................................ 17 M. Evaluation ....................................................................................................... 17 N. Recommendations .......................................................................................... 18 3. GAS TARIFFS ....................................................................................................... 19 A. Tariff Economics ............................................................................................. 19 B. Gas Pricing - Approaches ............................................................................... 19 C. IOCs and NOC Pricing .................................................................................... 21 D. IOC Gas Pricing .............................................................................................. 22 E. Gas pricing - other countries ........................................................................... 24 F. Retail Gas Pricing ........................................................................................... 24 G. Value of Gas ................................................................................................... 26 H. Gas Prices and Efficiency ............................................................................... 27 I. Evaluation ....................................................................................................... 28 J. Recommendations .......................................................................................... 29 4. GAS ALLOCATION ................................................................................................ 30 A. WTP ................................................................................................................ 30 B. Data Collection ................................................................................................ 31 C. WTP for CNG (for vehicles) ............................................................................. 38 D. Mean WTP for CNG ........................................................................................ 39 E. Productivity of gas in Production of electricity .................................................. 41 F. WTP for gas in Fertilizer production ................................................................ 43 G. Marginal benefit from using gas .......................................................................... H. Method of determining the value of natural gas ................................................... I. Marginal Benefits from different uses of Natural Gas .......................................... J. Allocation of Gas and benefits for its use ............................................................ K. Evaluation ....................................................................................................... 46 L. Recommendations .......................................................................................... 47 5. Efficient Use of Gas – Macroeconomic Impact ....................................................... 48 A. Economic Models ............................................................................................ 48 B. Aggregate Results ........................................................................................... 49 C. Impacts on Households ................................................................................... 51 D. Evaluation ....................................................................................................... 51 E. Recommendations .......................................................................................... 52 6. Opportunities for Best Use ..................................................................................... 53 A. Assessing Opportunity Cost ............................................................................ 53 B. Effects of Infrastructure Investment ................................................................. 99 C. Derivation of the SAM Multiplier .................................................................... 100 D. Simulation and Results ................................................................................. 102 F. Economy-Wide Effects of Investment: Results-Dynamic Cge Model ............... 53 G. Simulation and Results ................................................................................... 55 E. Results of Scenario 1 ...................................................................................... 55 F. Results of Scenario 2 .................................................................................... 104 G. Evaluation ....................................................................................................... 59 H. Recommendations .......................................................................................... 59 7. BANGLADESH TAXATION .................................................................................... 61 A. Taxation Base ................................................................................................. 61 B. Payments to National Budget .......................................................................... 62 C. Tax System ..................................................................................................... 62 D. Corporate tax in Bangladesh ........................................................................... 63 E. Bangladesh Oil and Gas Taxation ................................................................... 64 F. International Taxation of Oil and Gas .............................................................. 66 G. Ad Valorum Tax .............................................................................................. 68 H. Royalties ......................................................................................................... 68 I. Rent ................................................................................................................ 68 J. Other Options .................................................................................................. 69 K. Sovereign Wealth ............................................................................................ 71 L. Evaluation ......................................................................................................