Report and Recommendation of the President to the Board of Directors Project Number: 38164 February 2010 Proposed Loans People’s Republic of Bangladesh: Natural Gas Access Improvement Project CURRENCY EQUIVALENTS (as of 15 January 2010) Currency Unit – Taka (Tk) Tk1.00 = $0.0145 $1.00 = Tk68.03 In this report, a rate of $1 = Tk70.00 is used. ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund BERC – Bangladesh Energy Regulatory Commission BGFCL – Bangladesh Gas Fields Company Limited BGSL – Bakhrabad Gas Systems Limited CNG – compressed natural gas DPP – development project pro forma DSR – debt service ratio EIRR – economic internal rate of return EMRD – Energy and Mineral Resources Division FIRR – financial internal rate of return FNPV – financial net present value GSRR – gas sector reform road map GTCL – Gas Transmission Company Limited GTDP – Gas Transmission and Development Project ICB – international competitive bidding IEE – initial environmental examination IMRS – interface metering and regulating station IOC – international oil company JICA – Japan International Cooperation Agency LIBOR – London interbank offered rate OCR – ordinary capital resources Petrobangla – Bangladesh Oil, Gas, and Mineral Corporation QCBS – quality- and cost-based selection ROR – rate of return SCADA – supervisory control and data acquisition SGC – state-owned gas company SGCL – Sundarban Gas Company Limited TA – technical assistance TGTDCL – Titas Gas Transmission and Distribution Company Limited USAID – United States Agency for International Development WACC – weighted average cost of capital WEIGHTS AND MEASURES BCF – billion cubic feet ha – hectare km – kilometer m3 – cubic meter MMCFD – million cubic feet per day MW – megawatt TCF – trillion cubic feet NOTES (i) The fiscal year (FY) of the government and the Bangladesh Oil, Gas, and Mineral Corporation group of companies ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 30 June 2008. (ii) In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General S. H. Rahman South Asia Department (SARD) Director T. Kandiah, Energy Division, SARD Team leader P. Wijayatunga, Energy Specialist, SARD Team members I. Caetani, Social Development Specialist, SARD L. George, Energy Specialist, SARD H. Gunatilake, Principal Energy Economist, SARD R. Murshed, Project Implementation Officer (Energy), SARD S. Sasaki, Energy Specialist, SARD J. Srinivasan, Senior Control Officer, SARD K. Takebayashi, Energy Specialist, SARD J. Versantvoort, Counsel, Office of the General Counsel In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS LOAN AND PROJECT SUMMARY i I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 1 III. THE PROPOSED PROJECT 5 A. Impact and Outcome 5 B. Outputs 6 C. Special Features 6 D. Project Investment Plan 7 E. Financing Plan 8 F. Implementation Arrangements 8 IV. BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 12 A. Project Financial and Economic Justification 12 B. Social Assessment and Resettlement 14 C. Environmental Analysis 16 D. Expected Benefits 16 E. Risks and Safeguards 17 V. ASSURANCES 18 A. Specific Assurances 18 B. Conditions 20 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework 21 2. Gas Sector Assessment and Reform Road Map 23 3. Development Coordination 30 4. Detailed Cost Estimates 32 5. Project Implementation Schedule 35 6. Procurement Plan 36 7. Financial Analysis 41 8. Economic Analysis 45 9. Summary Poverty Reduction and Social Strategy 49 10. Summary Resettlement Plan 52 SUPPLEMENTARY APPENDIXES (available on request) A. Organization Chart of Executing Agencies B. Past and Projected Financial Performance C. Financial Management Review D. Economic Analysis E. Summary Initial Environmental Examination F. Procurement Capacity Assessment G. Project Readiness Schedule H. Short Resettlement Plan for Component C I. Full Resettlement Plans for Components A and B J. Terms of Reference for Consultants K. Project Implementation Arrangements L. Models for Private Sector Participation in Gas Distribution LOAN AND PROJECT SUMMARY Borrower People’s Republic of Bangladesh Classification Targeting classification: General intervention Sector (subsectors): Energy (pipelines, energy efficiency and conservation) Themes (subthemes): Economic growth (promoting economic efficiency and enabling business environment); environmental sustainability (natural resources conservation, urban environmental improvement) Location impact: National (high) Partnerships: Export–Import Bank of Korea (Korea Eximbank) Environment The project is classified category B. Initial environmental examinations for Assessment the project have been completed and will be updated in line with the summary initial environmental examination in Supplementary Appendix E. Project The project has four components: (i) the construction of 61 kilometers Description (km) of gas transmission pipeline for transporting 400 million cubic feet per day (MMCFD), including interface metering and regulating stations at selected locations and the installation of compressors at Ashuganj and Elenga; (ii) safety and supply efficiency improvement in Titas gas field to increase gas production by 120 MMCFD; (iii) the construction of a 845 km gas distribution network in the southwest to improve energy access; and (iv) support for supply and demand management. Rationale Natural gas contributes 70% of primary energy supply in Bangladesh. It has dominated the power sector, fueling 85% of power generation. As the country is highly dependent on natural gas for its economic development, the sustainability of gas supplies is critical. Government policy in the gas sector since 1993 has been to attract private investments to upstream gas field development while improving the network coverage and operational efficiency of companies that produce and distribute natural gas. Bangladesh managed to attract significant investments from the private sector for gas exploration and increased gas production by over 100% since 1998. The share of gas production by international oil companies (IOCs) grew to almost 50% of the total supply in 2008. Exponentially increasing demand for gas has introduced a supply deficit. To address the demand–supply gap, national oil companies and IOCs have been investing in existing fields and new discoveries to increase production. By 2017, these interventions and the recently concluded 3rd round of bidding will increase the gas supply by 74% compared to supply in 2008. The government is currently examining several options to further improve supply: (i) additional investment in existing fields, (ii) initiating another round of bidding for exploration; and (iii) importing liquefied natural gas as a medium- to long-term measure. The transmission and distribution network is inadequate to meet the needs of industry, commerce, and households. The capacity of the state ii gas companies is insufficiently developed to access international financing. Therefore gas transmission and distribution continue to need public financing. Operational performance in the gas sector has been affected by inadequate investment in all subsectors, compounded by uneconomic tariffs, inadequate investment resources, inefficient use of gas, and inadequate capacity in the state-owned gas companies and the government. The government's gas sector reform road map (GSRR) is designed to address many of these issues. The GSRR and Asian Development Bank (ADB) policy dialogue with the government includes time-bound actions to improve the policy and regulatory environment, sector planning, and corporate governance, as well as to implement structural and pricing reforms. Some of the key actions, such as approving the GSRR, operationalizing the Bangladesh Energy Regulatory Commission (BERC), licensing gas companies, and cabinet approval for the proposed gas act, are already accomplished. The government is committed to continuing the implementation of other measures identified in the GSRR. The proposed physical investments are the most urgent components of the gas sector’s priority investment program. The gas sector master plan provides the basis for investment planning by the Bangladesh Oil, Gas, and Mineral Corporation (Petrobangla) and its affiliates. The need to provide gas to Chittagong from fields in the northeast and the constraints on the national supply of gas have focused investment priorities on these areas. Removing bottlenecks in the transmission system has become critical to ensuring the efficient delivery of higher gas volumes. Safety and supply efficiency improvement at the Titas gas field is necessary to avoid a major accident and sustain the current level of production from the field in the long term. With the extension of the natural gas transmission pipeline to the Khulna Division under the Gas Transmission and Development Project (GTDP), improving the distribution network in the southwest is essential to making gas available to consumers in that region. Impact and The impact of the project will be increased and more reliable access to Outcome natural gas for sustained economic