Will govt make money from the record gas price hike?

    Originally posted in The Business Standard on 19 January 2023

    The government raised gas prices by 78.62% on average on Wednesday, effective in February. The price hike for power plants and the industrial sector was the highest at 178% on the grounds of adjusting the subsidies provided to import liquefied natural gas (LNG).

    Although the massive hike left industry leaders and energy experts stunned, as they are already hit by the poor supply of gas and soaring inflation, it would benefit the government with higher cash flow.

    Analysing the LNG import trend, price and total gas consumption of the country, energy experts viewed that the latest gas price hike will not only cover the deficit but also pave the way for profits.

    The new tariff has been fixed without considering the current global oil and LNG price trend, they said.

    If the same amount of gas is supplied as it was in the fiscal 2021-22 when spot LNG was also included in the total supply, the government will collect around Tk20,800 crore in additional money, excluding the expected subsidy, said experts and Petrobangla sources.

    Professor Mohammad Tamim, an energy expert who teaches petroleum and mineral resources engineering at Buet, said the new tariff will generate more revenue than the government would require to spend on the service.

    “If we consider the production costs of state-owned company’s gas and international oil company’s (IOC) imports over the long term and spot LNG’s import cost, the new tariff is much higher. It will not only mitigate the deficit, but rather bring additional revenue,” he said.

    Dr Ijaz Hossain, a former dean of the Faculty of Engineering at Buet, who has specialisation in energy, said that this price will help the government if the downtrend in the global price keeps going.

    Currently, the price per barrel of Brent crude oil is $78.90 whereas the Platts projection for the Japan-Korea LNG market, the benchmark that determines the spot price of LNG for Asia, is $20.170mmBtu for March.

    In June 2022, when the Bangladesh Energy Regulatory Commission (Berc) announced the last gas tariff, hiking the weighted average price by 22.78% to Tk11.91 cubic metre, it considered the Brent crude oil rate of $76.53 per barrel and the average import cost per mmBtu of spot market LNG of $24.19.

    “We proposed to increase the price of captive gas from the existing Tk16 to Tk25,” Md Jashim Uddin, president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the country’s apex trade body, said.

    “This would have been a 57% increase, which would have been acceptable,” he added.

    The price comparisons show that the current global energy price trend is lower than the rate considered last June to hike the gas price.

    Petrobangla gas production and sales data shows that a total of 28,667.92 million cubic metre of gas was sold in the fiscal 2021-22 when the government imported LNG from both long-term contracts and the spot market.

    At an average rate of Tk11.91 cubic metre, gas distribution companies’ revenue last year stood at Tk34,143 crore. Including the projected subsidy of Tk6,000 crore, the total cost in the given year would be Tk40,144 crore.

    As the new average weighted price stands at Tk21.27 cubic metre after the record hike, the total revenue will go to Tk60,990 crore if the same amount of last year’s gas is supplied to consumers, according to experts’ estimation.

    Professor M Shamsul Alam, energy advisor at the Consumers Association of Bangladesh (CAB), said that this price is not justified.

    “The government has taken the authority of price increases into its own hands. Now it is doing as per its wish. The process through which the new tariff has been hiked is a punishable offence,” he added.

    Govt to resume spot LNG import in Feb

    In the fiscal 2021-2022, Petrobangla used to inject around 100 million cubic feet (mmcf) of gas per day in the gas supply system after importing LNG cargoes from the spot market.

    However, it ceased importing this share of gas in June of last year due to price volatility in the source market as a result of a surge in demand from European countries following the Russian pipeline gas supply cut to the region.

    In order to meet the gas demand of industry and power sectors in the next summer and Ramadan, however, the government has initiated resuming spot market LNG again.

    Sources at Petrobangla said that it is going to import a minimum of ten cargoes from the February to December period from the spot market.

    When asked, Zanendra Nath Sarker, chairman at the Bangladesh oil, gas, and mineral corporation (Petrobangla), said that the Energy and Mineral Resources Division knew the issue better as it had announced the new price.

    Sarker, however, said, “We are calculating how much gas can be imported from the spot market. Hopefully, we will finalise our calculation within three to four days.”

    In September 2020, Petrobangla imported a total of 29 LNG cargoes from the sports market.

    57% hike would have been tolerable: FBCCI

    FBCCI President Md Jashim Uddin said a 57% hike in gas prices would have been tolerable but it was increased by 87% or even 180% in some cases.

    He said they wanted the 57% hike for captive gas and the same rate for gas used in the industry.

    “And the rest should be subsidised or adjusted with taxes. There are import taxes and VAT of around 40% [on gas],” he added.

    Jashim said the matter was being discussed and hinted there would be talks with the government.

    Speaking to reporters after a meeting on the occasion of the Bangladesh Business Summit at a hotel in the capital’s Banani on Thursday, he said the price of gas used in the industry, besides captive power, had been increased from Tk11 to Tk30.

    Yarn-fabric imports will increase, local industry will suffer: BCI president

    Speaking to The Business Standard on the same day, Bangladesh Chamber of Industries (BCI) President Anwar-Ul-Alam Chowdhury Parvez said due to the increase in gas prices, the cost of yarn in local mills would increase (per kg) from $0.35 to $0.40. And the price of yarn will increase by about $0.30.

    “I am afraid, as a result, we will not be able to sustain the industry. As a result, the import of yarn and fabric from India and China will increase. This will put pressure on the dollar on the one hand and the local backward linkage industry will suffer, alongside exports.”

    He said the 8% system loss in the gas distribution process should be reduced as a solution.

    He also suggested reducing the value-added tax, which is currently around 40%.

    “If the rest is passed on to the consumer, it is affordable. Then the industry will survive,” he added.