Concern over fuel oil, gas and electricity price hike

Originally posted in The Financial Express on 21 March 2022

Anxiety prevails in Bangladesh over smooth supply of fuel oil and natural gas at an affordable price at the consumer level. Bangladesh Petroleum Corporation (BPC), the government owned sole importer and distributor (through its subsidiary companies) of fuel oil has been reportedly incurring daily loses of Taka 80 crore (800 million) due to the price differences of imported fuel oil from international market and its domestic sales. Bangladesh government officials have been indicating that they are observing the situation and the rising losses (due to price differences from import and domestic sales prices of petroleum products) may ‘alter decision on fuel subsidies’. As per published reports, the Ministry of Finance has allocated Tk 488.25 billion subsidy for different sectors (mainly power, energy and agriculture sectors) for the current fiscal year. For last eight months, power sector received Tk 86.0 billion as subsidy from the government. Also, the allocated subsidy for LNG for the current fiscal year was approximately Tk 60.0 billion. Petrobangla sources suggest that approximately Tk 30.0 billion has been spent as subsidy for LNG price adjustment. Due to the increase of import costs from the international market, the power sector has requested additional Tk 320.0 billion and Petrobangla requested Tk 93.31 billion for LNG. At the same time, natural gas distribution companies of Petrobangla have requested Bangladesh Energy Regulatory Commission (BERC) for increasing gas prices for local consumers. BERC has started public hearing on the issue from March 21, 2022 to recommend for gas price adjustment at the consumer levels. The increased petroleum prices have been pressing hard both BPC and Petrobangla and Bangladesh Power Development Board (BPDB) and they have options either to adjust gas and electricity price in line with the international price (as import cost reflects) or ask more subsidies from the government to absorb the losses. The increase of prices for power and energy commodities will hit hard the local consumers and may adversely affect on their living conditions and livelihood. On the other hand, increase of subsidies for the power and energy commodities will have impact on the national budget discipline as well as on the government’s capacity to finance various development projects and services.

The trends of price decline for petroleum products have been observed in the international market for last couple of days, although experts do not exclude the reverse trend for rapid price increase of fuel oil, LNG and coal. Russian oil and gas supply to the global market continues despite US attempt to impose total ban on Russian export of oil and gas. The information, to some extent, helped ease the anxiety regarding supply disruption. Crude petroleum oil price has fallen to nearly US$ 100 a barrel (for both American West Texas Intermediate crude and the international benchmark Brent crude) on March 15, 2022 from US$ 139 last week.

Analysts believe that the positive news of negotiations to end the war in Ukraine, increased concern that China’s economy will slow due to the new wave of coronavirus outbreak that has prompted lockdowns are some important reasons behind the reversal of petroleum prices. Earlier, petroleum price escalation started with gradual normalisation of business from the Covid-19 pandemic worldwide due to the demand surge. The global crisis of supply uncertainty of petroleum products escalated with the Ukraine crisis. Uncertainty over Russian oil and gas access to global market badly affected the market (Brent crude oil soared by US$139 per barrel in early March 2022). BBC reports that the USA and 30 other countries of the International Energy Agency agreed to release their oil stock to help stabilise international energy market.

Russia is the third largest oil producer and a major supplier of petroleum products in Europe and Asia. Fortunately, attempts to block the supply of Russian oil and gas, so far, did not work and the supply continues to Asia and Europe (Europe imports approximately 541 billion cubic meter (bcm) of gas from Russia. China, the largest natural gas consumer in the world byes about 43 per cent of its gas demand from the external market. For last couple of years, Russia became its reliable and long term partner for supply oil and gas and coal. As reported, China and Russia have agreed to a contract to supply additional 10 billion cubic meters of natural gas ( from Russia to China via a new pipeline). Russia has been sending gas to China since 2019 through the Power of Siberia pipeline. As per published reports, Russia aims to supply 38 bcm gas through pipelines by 2025. In addition, Russia and China have agreed to a contract for selling 100 million tonnes of Russian coal to Chana. India has been actively trying to import Russian petroleum at a competitive price from Russia (out of 80 per cent of India’s oil imports, only 2- 3 per cent accounts for import from Russia, so far). More reports suggest that Indian government has been considering import of crude oil and other commodities at discount prices from Russia with payment via a rupee-ruble transaction amid tough western sanctions on Russia.

Thus maintaining supply chain by major importers of oil and gas will help ease the demand surge and price.

Bangladesh has been fully import dependent country on fuel oil and partly dependent on natural gas (LNG) import for enabling its economic activities. In December 2021, demand for fuel oil in Bangladesh was approximately 63 million tonne. BPC has a total storage capacity of 1.3 million tonne of various types of fuel oil (which may meet 35 days demand) and 1.5 million tonne (installed) capacity to refine imported crude annually at its Eastern Refinery plant. Last November (2021) BPC increased prices (Taka 15 per liter) of diesel and kerosene in the backdrop of price increase in the international market for petroleum at US$85 per barrel (158.99 liters).

BPC Chairman Mr A B M Azad informed that the global market situation had put BPC in a difficult condition. BPC earlier received government subsidy to face the losses in operation. BPC Chairman considers that the diesel, Kerosene and Petrol (Octane) sales in the local market at the existing price will invite huge loss for the organisation. BPC has only 1.5 million tonne capacity to refine imported crude petroleum in the Eastern Refinery at Chattogram. And the major part of petroleum products are imported as finished products for local consumption. BPC’s current storage capacity for various kinds of fuel oil is insignificant (the ongoing construction of storage capacity at Parbatipur, Dinajpur, Maheshkhali, Godnile Naraynaganj once completed will help increase storage capacity of 350,000 tonne petroleum products in the country). BPC hopes to complete Chattogram (Patenga) to Naraynaganj oil pipeline and the Single point mooring (SPM) projects within this year to enhance safety, operational management efficiency of petroleum product unloading and transportation and reduce system losses.

BPC has little infrastructure and management capacity to reduce system losses in handling and distribution of petroleum products. Therefore, the consumers in Bangladesh may face major price adjustments for petroleum products (and subsequently for electric energy and other commodities) unless government decides to increase additional subsidy for oil, gas and electric energy.