Document of The World Bank ~~~ y FOR OFFICIAL USE ONLY Report No. 2956-BD STAFF APPRAISAL REPORT BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT October 31, 1980 Energy Department Petroleum Projects Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be diselosed without World Bank authorization. CURRENCY EQUIVALENTS Currency unit = Taka (Tk.) US$1.00 = 15.5 Tk. Tk 1.00 = US$0.065 WEIGHTS AND MEASURES 1 Barrel (Bbl) = 0.159 cibic meters (m ) 1 cubic foot (CF) = 0.028 m 1 British Thermal Unit (Btu) = 0.252 kilocalories (Kc) 1 Kilowatt hour (Kwh) = 2.978 Kc 1 metric ton (mT) of oil 0.85 sp.gr. = 7.4 Bbl 1 kilometer (km) = 0.621 miles CFD = cubic feet per day MCFD = thousand cubic feet per day MMCFD - million cubic feet per day TCF - trillion (1,000 billion) cubic feet Toe = tons of oil equivalent in heating value MW - Megawatt (1,000 kilowatts) GW = Gigawatt (1,000,000 kilowatts) ABBREVIATIONS AND ACRONYMS GOB Government of Bangladesh BGSL Bakhrabad Gas Systems Limited BMOGC Bangladesh Minerals, Oil and Gas Development Corporation BOGC Bangladesh Oil and Gas Corporation (Petrobangla) OGDC Oil and Gas Development Corporation BPC Bangladesh Petroleum Corporation BPDB Bangladesh Power Development Board BGFCL Bangladesh Gas Fields Company Limited BPL Bangladesh Petroleum Limited ADB Asian Development Bank UNDP United Nations Development Program ERL Eastern Refinery Limited KPM Karnafuli Paper Mills CNG Compressed Natural Gas LNG Liquified Natural Gas FISCAL YEAR July 1 to June 30 This report was prepared by Messrs. V. Nayyar, H. Schober, and M. Wormser, Ms. S. Shum of the Energy Department. FOR OFFICIAL USE ONLY BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. ENERGY SECTOR .........................1.................... Introduction ..... . ................................ 1 Energy Balance ...... ................. l Resource Endowment ........ . . . . . . . ........... ....... . . 2 Pattern of Energy Use .... . ......... . ... .............. . 5 II. OIL AND GAS SECTOR *................. o..* ....*...*........** 5 Background ................... .. .................... 5 Exploration ...... .....*...... *........* ......................... 6 Natural Gas ........................................ 6 Gas Distribution ................. . . ................ . 7 Gas Consumption Pattern ............................ 8 Pricing of Natural Gas ............. * .. ............. 8 Production and C,onsumption of Petroleum Products ... 10 Investment in the Oil and Gas Sector .. ............. 13 Sector Issues and Role of the Bank Group .......... . 13 III. BENEFICIARY .. ............... 16 Background ........................................... 16 Sector Corporation ....... .......................... 17 The Beneficiary ............................ ........ 17 Project Implementation Considerations . 18 Accounts and Audits . .20 Insurance ... 20 IV. THE PROJECT ...... 21 Project Objectives ....21 Project Preparation. . .. . 21 Gas Supply and Market... 21 Design Criteria .... 23 Project Description . ........ . .24 Project Implementati.on . . .25 Project Cost ...26 Financing Plan . .................................. 27 Procurement and Disbursement .. ..................... 28 Training ........................................... 29 Ecology and Safety .... .................. . .......... 29 Land and Right-of-Way . ............................. 29 Project Risks .................. ......... 30 This document has a festricted distribution and may be used ;4y recipients . i in the performance of their official duties. Its contents may not otherwise be disc!csed without World Bank authorization. Table of Contents (Continued) Page No. V. FINANCIAL ASPECTS ....................................... 30 Market ............................ ............ 30 BGSL Revenues ...................................... 31 BGSL's Financing Plan .............................. 31 Future Finances .................................... 32 VI. ECONOMIC ASPECTS ........................................ 34 VII. RECOMMENDATIONS ......................................... 35 ANNEXES 1.01 Estimates of Energy Supplied by Traditional Fuels 2.01 Important Gas Fields in Bangladesh 2.02 Production and Consumption of Natural Gas in Bangladesh 2.03 Refinery Yield and Consumption of Petroleum Products 2.04 Physical Program of Investment in Oil and Gas Sector 2.05 Natural Gas Powered Vehicles 3.01 Organization Chart of the Petroleum Industry of Bangladesh 3.02 Proposed Organogram for BGSL 4.01 Proposed Distribution System 4.02 Project Schedule 4.03 Estimated Cost pf Transmission Line 4.04 Estimated Cost of Distribution Lines 4.05 Breakdown of Foreign Expenditures 4.06 Estimated Annual Consumption 4.07 Estimated Schedule of Disbursement 5.01 Income Statement 5.02 Notes and Assumptions on Financial Statement 5.03 Balance Sheet 5.04 Sources and Application of Funds 6.01 Economic Analysis MAP IBRD 14869 I. ENERGY SECTOR Introduction 1.01 Energy consumption in Bangladesh is characterized by heavy reliance on traditional fuels such as animal and vegetable wastes which, according to a recent estimate, account for 60% of its overall requirement. Consumption of commercial energy is extremely low, compared to other countries in the subcontinent and the average for the less-developed world in general. Measured in oil equivalent per capita, it is estimated at 34 kg per annum. In terms of resource endowment, Bangladesh has an abundant potential supply of natural gas; its reserves are currently estimated at 9 trillion cubic feet, equivalent to 220 million tons of oil. Relative to availability, gas consumption is low and currently is equivalent to one million tons of oil per atinum. Bangladesh is otherwise poorly endowed in primary energy. The potential for hydropower is extremely limited and has largely been harnessed. Coal deposits exist, but are presently not considered economic to mine. Sporadic exploratory efforts for oil stretching over the last seventy years have, so far, yielded no results. Consequently, Bangladesh has to import all its requirements of oil and petroleum products. Even at the existing low level of consumption (1.5 million tons), in 1980 Bangladesh would need to dedicate 60% of its projected export earnings for oil imports. 1.02 An apparent paradox characterizes the energy sector in Bangladesh. While it is expending a major portion of its foreign exchange earnings on import of liquid hydrocarbons, it may have what could be a relative surfeit of primary energy in the form of natural gas. To reduce Bangladesh's reliance on imported oil, energy policy for Bangladesh must assiduously aim at increasing the economy's absorptive capacity for gas. There are, however, tclihnological and economic limits to the substitution of liquid hydrocarbons by natural gas. Thus, Bangladesh twould simultaneously need to intensify its search for oil, specially in prospects which are believed to hold high hydrocarbon potential. This would require reinterpretation of the existing seismic data, undertaking additional seismic surveys, and increasing the pace of exploratory drilling. Energy Balance 1.03 The commercial sources of energy in Bangladesh are hydropower, natural gas, oil, and coal, the latter two being imported. The table below estimates Bangladesh's. energy balance, in terms of oil equivalent. 2- ENERGY BALANCE 1979 (Thousand tons oil equivalent) Production Consumption (a) Hydro Electricity 1/ 168 (a) Hydro Electricity 168 (b) Natural Gas 2/ 1,072 (b) Petroleum Products 1,417 (c) Non Commercial Energy 3/ 4,810 (c) Refinery Losses 75 Total 6,050 (d) Natural Gas 1,072 (e) Coal 156 (f) Non Commercial Energy 4,810 Imports (a) Crude Oil & Products 1,492 (b) Coal 156 Total 1,648 Total Availability 7,698 Total Consumption 7,698 Resource Endowment 1.04 Hydropower and natural gas are the only two sources of primary commercial energy currently available within Bangladesh. The specifics of Bangladesh's energy resources are as follows: (a) Natural Gas 1.05 In 1979 hydrocarbons accounted for 89% of the commercial energy used in Bangladesh. While exploration for oil commenced as early as 1908, it has so far yielded no positive results. Bangladesh has to import all its oil requirements. Extensive gas deposits have, however, been identified and of the nine gas fields discovered, eight can be exploited commercially. Gas reserves are estimated at 9 trillion cubic feet. On account of the limited 1/ Conversion factor 1000 kwh = 0.286 tons of oil (assuming 30% efficiency). 2/ Average calorific value assumed at 1030 BTU/Standard Cubic foot (SCF). 3/ Estimate made by the UNDP energy study. domestic market. only four gas fields have so far been partially developed. Availability of natural gas has permitted Bangladesh to contain the growth in the use of liquid hydrocarbons, which have to be imported, and presently natural gas accounts for 44% of total hydrocarbon use. (b) Power 1.06 Bangladesh's generating systems and the power grid, like the country, are split into two by the river Jamuna. These two power systems exist as separate entities, having no inter link with one another. In the East Zone, besides hydropotential, gas in abundant quantities is available for gener- ating power. The West Zone, however, has to rely on imported fuel oil and diesel oi` for power generation. (i) Hydropower: 1.07 Bangladesh, except for the northern hills of Chittagong, is a flat deltaic area. The prospects of economic hydropotential development are there- fore limited. Hydropotential of the Karnafuli River, flowing in the hills of Chittagong, has largely been harnessed at Kaptai which has an installed capacity of 80 MW (2 x 40 MW). The Bangladesh Power Development Board (BPDB) is currently engaged in installing a third unit of 50 MW which will be com- missioned in 1982. Potential exists for adding two more units of 50 MW each, but these would provide only peaking power. The hydropotential of the river Sangu, also flowing from the hills of Chittagong, has been evaluated at 97 MW. To tap this potential, a dam at Tarasa Chara would need to be constructed. Presently there is no proposal for tapping this source. The northern portion of the river Bramahputra (Jamuna) has a potential for a dam site with an estimated capacity of 400 MW, but the size and large cost make it only a remote possibility. (ii) Thermal Power: 1.08 Both in terms of transmission and generating capabilities, the East Zone is relatively better endowed than the West Zone. In 1978 BPDB installed capacity, including isolated units, amounted to 752 MW, 1/ of which 526 MW was in the East Zone and 226 MW in the West Zone. However, a large number of these units are in a state of disrepair with the result that tot.il available capacity in the East Zone is 450 MW, and in the West Zone, 122 MW. Power in the West Zone is generated from fuel oil and diesel oil which have to be imported. The East-West Power connector, which is currently afiler construction across the river Jamuna, would link the two power grids and permit power generated in the East Zone to be transferred to the West. This would enable Bangladesh to substitute imported liquid hydrocarbons by indigenous natural gas. The interconnector is expected to be completed in June 1982. It would initially have a capacity of 200 MW which could subsequently be increased to 500 MW. 1/ There are in addition captive power stations, owned by various industrial units, which cumtulatively have a generating capacity of 120 MW. - 4 - 1.09 In 1978 the overall power system included about 1600 KM of 132 kv transmission lines, about 5000 KM of 66 kv and 33 kv subtransmission lines, and 13,200 KM of 11 kv lines. Total energy generated in 1979 was estimated at 2140 GWh, of which about 1600 GWh was in the East Zone and 540 GWh in the West Zone. The present quality of service is poor, characterized by frequent breakdowns. This is attributable to outdated generating stations and inadequate and overloaded transmission facilities. On the other hand, consumption has been growing rapidly at an average annual rate of 13%, over the last three years. Over the period 1979-85 power consumption is expected to increase at 14.6% annually. (c) Coal and Peat: 1.10 Bangladesh uses limited amounts of coal for railways, in industry and as domestic fuel. This demand is met exclusively from imports; over the last five years the annual imports of coal have been about 250,000 tons. In 1979-80 Bangladesh expects to import 350,000 tons of coal involving a foreign exchange expenditure of US$20 million. Coal deposits exist in Bangladesh near Jaipurhat and the reserves are estimated at a thousand million tons. However, coal seams lie at a depth of 3,000 feet and the overlying formation is unconsolidated, or poorly consolidated, alluviums, sand-stone, shale, and water-bearing lime stone. Various feasibility studies carried out indicate that the cost of extraction will be high. It is not yet certain whether coal extraction in Bangladesh is economic, and in view of the large gas reserves, even necessary. In addition, peat deposits exist in Faridpur and Khulna districts. However, both on account of the high cost of extraction and low calorific value, at present, it does not appear economic to expLoit this resource. (d) Non-Commercial Energy: 1.11 Non-commercial sources are the predominant form of energy in Bangladesh. While no systematic data base exists for quantifying the rela- tive share of non-commercial energy, a number of estimates have been made, including the recent energy study undertaken by UNDP. The major source of non-commercial energy is crop residue and animal wastes. Annual production of rice straw is estimated at about 30 million tons. While most of this straw is used as cattle feed, it is estimated that at least 3-5 million tons is used as an energy source. Rice hull production is estimated at 5 million tons. While a small proportion is used as cattle feed, a major portion is used for parboiling of rice and as a fuel in small rice mills. Jute sticks and bagasse together provide about 2.5 million tons of household fuel, while firewood provides 1.75 million tons annually. With cattle popula- tion reckoned at 10 million, animal waste becomes another important source of energy. Use of dry dung as domestic fuel is estimated at 6 million tons annually. On the basis of these estimates the UNDP study assessed that the total energy provided from non-commercial sources amounted to 200 trillion BTU, equivalent to 5 million tons of oil (Annex 1.01). As in other developing economies, the level of utilization of this form of energy is high, although the end use efficiency is low - typically of the order of 10% to 15%. While in the future, the relative share of traditional fuels will be declining, Bangladesh does not have the resources to sustain a major shift to commercial energy. Concerted efforts are therefore required to augment the use of non-commercial energy and upgrade its end use efficiency through improved appliances, etc. Pattern of Energy Use: 1.12 Estimates of the current end use of petroleum products, natural gas and electric power, and the pattern that is likely to emerge in 1985, are given in the following table. On account of the limited hydropotential and in the absence of any oil find, Bangladesh will have to rely largely on natural gas for meeting its commercial energy needs. Natural gas, which presently constitutes 44% of Bangladesh hydrocarbon consumption, is esti- mated to increase to 62% by 1985. Major end users would continue to be power generation and the fertilizer sectors. Pattern of Energy Consumption Petroleum Products Natural Gas Electricity 1979 % 1985 % 1979 % 1985 % 1979 % 1985 % …---------- Thousand Tons of Oil Equivalent---------------- Fertilizer - - - - 441 41 869 31 - - - - Power 207 15 50 3 379 35 905 33 - - - - Industries 275 19 340 20 197 19 892 32 230 80 450 73 Transport 470 33 635 38 - - - - - - - - Agriculture 75 5 180 11 - - - - 12 4 86 14 Domestic 390 28 470 28 55 5 124 4 45 16 78 13 Total 1417 100 1675 100 1072 100 2790 100 287 100 614 100 II. OIL AND GAS SECTOR Background 2.01 The quest for oil in Bangladesh dates back to the turn of the twentieth century, but has so far yielded no positive result. In 1908, the Burmah Oil Company carried out geological mapping over a few of the structures in the Chittagong area. In 1914 this company drilled the first exploratory well in the Sitakund structure and was followed by the Indian Prospecting Petroleum company, which drilled three wells in the same structure. No hydrocarbons were discovered. Again between 1922 and 1927, Burmah Oil Company and the Whitehall Petroleum Company carried out geological mapping and drilling in the Patharia structure of Sylhet district and in some parts of Chittagong - but without success. Drilling was resumed by the Pakistan Petroleum Company Ltd. (Burmah Oil Group) in the Haripur and Chhatak region in 1955 and by the Pakistan Shell Oil Company, in 1957, in Titas, Habiganj, Kailashtilla, and Bakhrabad. It was in search for oil in these areas that considerable reserves of natural gas were discovered. Exploration Onshore Exploration: 2.02 The Exploration Department of Petrobangla is responsible for all geophysical/seismic surveys and onshore drilling. Petrobangla has six geo- logical and seismic parties for carrying out investigations in relation to stratigraphy, structures and sedimentation of Bangladesh and is currently concentrating on the southeast region. Over the Second Five-Year Plan (1979-80 - 1984-85) it proposes to undertake geological surveys over 2000 sq. km., gravity surveys over 17,500 sq. km. and seismic surveys over 6,000 sq. km. In addition, it has recently commissioned an aeromagnetic survey which would be undertaken over 120,000 sq. km. During this period it proposes to drill 20 exploratory wells of which Petrobangla would drill 13 wells and the balance would be undertaken by foreign contractors. The Federal Republic of Germany will provide technical and financial assistance to Petrobangla for undertaking seismic surveys and exploratory drilling. Offshore Exploration: 2.03 For offshore exploration, GOB in 1974 entered into production sharing contracts with six foreign oil companies. These oil companies cumulatively drilled seven wells, of which only Union Oil Company struck gas at Kutubdia, 55 nautical miles offshore from the Kutubdia island in the Chittagong district at depth of 11,500 feet. As success attending these efforts was limited, all foreign oil companies, including Union Oil, have since relinquished their concessions and no offshore exploration is currently being undertaken. In an attempt to attract back foreign oil companies, GOB recently announced its willingness to depart from the provision of the earlier negotiated production sharing contract so as to provide additional incentives for poorer geological prospects and adverse tax laws in the country of origin of the oil company. The Government has also announced its willingness to accept foreign participation in onshore areas including those reserved for Petrobangla. Although these concessions have so far failed to secure any firm foreign participation, discussions have been in progress with British Petroleum, for an onshore production sharing agreement, in northeast Bangladesh. Natural Gas: 2.04 Bangladesh is well endowed with natural gas and so far eight gas fields onshore, and one gas field offshore, have been discovered. All these discoveries are confined to the East Zone. There have been few gas shows in the West Zone, but data secured so far are inconclusive. Specifics of the more important gas fields are provided in Annex 2.01. Whereas nine gas fields have been discovered so far, no systematic attempt has been made to quantify the reservoirs or even delineate the fields. The number of wells drilled in relation to discoveries have been limited. However, on the basis of available data, estimates of proven, possible, and probable reserves have been made by Petrobangla. To arrive at an estimate of total reserves, probabilities of 1.0 were used for proven reserves, 0.5 for probable reserves and 0.25 for possible reserves. On this basis gas in place is estimated at about 9 trillion cubic feet, of which 75% should be recoverable through normal production methods. The current gas reserves and other specifics of the gas field are indicated below: NATURAL GAS RESERVES AND PRODUCTION Gas Fields Year of No. of wells Reserve Cumulative Condensate Calorific discovery drilled estimate production recovery value -by 1979 Trillion Trillion Bbl/MMCF. BTU/CF CF CF Sylhet 1955 6 0.29-0.43 0.078 3.7 1050 Chhatak 1959 1 0.04 0.017 Trace 1007 Titas 1962 4 2.25 0.167 1.70 1036 Habiganj 1962 2 1.28 0.038 0.05 1020 Bakhrabad 1968 1 2.78-3.70 Not pro- 2.00 1022 ducing Rashidpur 1960 1 1.06 Not pro- 0.30 1014 ducing Kailas Tila 1962 1 0.6 Not pro- Trace 1050 ducing Semutang 1969 1 0.03 Not pro- Trace - ducing Kutubdia 1977 1 1.00 Not pro- Trace 1043 ducing Total estimated gas reserves in place 9.33-10.39 Total recoverable gas reserves 7-7.8 Gas Distribution: 2.05 At present only the Titas field is being exploited in any significant measure. A 14" pipeline, 55 miles long, transports gas to Dacca via Ashuganj and Ghorasal. There are three other lines, each of which connects a main consumer to a particular field. The Chhatak Cement Factory is supplied from the Chhatak field, the Fenchuganj Fertilizer plant from the Sylhet field, and Shahjibazar power station from Habiganj field. As production facilities in Titas are presently limited, Petrobangla proposes to supply the new Ashuganj Factory with gas from the Habiganj gas field and for this purpose a 12" pipe- line is currently under construction. The proposed project will link Chittagong with the Bakhrabad gas field through a 24" high pressure pipeline. In addition to these transmission pipelines, there are gas distribution networks in Dacca and eight other towns of Bangladesh. These networks extend-over 1250 KM and presently service 90,000 customers. The salient features of the existing pipelines are given in the followirg table: GAS PIPELINES Pipeline Diameter Length Line flow Existing working inches miles capacity pressure I__MCFD_ psig - 1. Titas-Dacca 14 60 175 1000 2. Sylhet-Fenchuganj 8 33 25 650 3. Chhatak-Cement Factory 4 12 9 650 4. Habiganj-Shahjibazar power station 8 1.5 36 5. Habiganj-Ashuganj Fertilizer Factory (Under construction) 12 35 120 Gas Consumption Pattern: 2.06 Initially the use of natural gas was confined to the Fenchuganj Fertilizer unit and the Chhatak Cement Factory. However, subsequent to the discovery of the Titas gas field in 1962, gas production was stepped up and its use diversified to include generation of power, production of fertilizer, and other industrial, commercial, and domestic uses. Gas consumption in different sectors of the economy, for the last 10 years, is indicated in Annex 2.02. In 1979, the consumption of natural gas was 43,540 MMCF, equivalent to about 1.1 million tons of oil. Pricing of Natural Gas: 2.07 The producing companies (BGFCL and BPL) presently receive a well- head price of Tk. 1.48/MCF ($0.1/MCF). GOB levies an excise duty on natural gas, which as of 1980, has been increased from Tk. 3/MCF to Tk. 4.5/MCF for the power and fertilizer units and Tk. 5.0/MCF for other users. The price at which the distribution companies further affect sales depends on the consumers and the end use of the product. In June 1979, GOB increased the gas rates by an average of 42% and by a further 12% in June 1980. In spite of the recent two increases, in terms of fuel oil equivalent, the tariff for gas is well below the international price (Tk. 63/MCF). In pricing gas at this level, the government apparently hopes to provide incentives to new and existing domestic industries in Bangladesh. However, this has resulted in prices being not only out of alignment with the international prices, but also in relation to domestic prices of liquid hydrocarbons. The comparative cost to consumers in Bangladesh between natural gas on the one hand, and substitute liquid hydrocarbons on the other, is as shown below: -9- Natural Gas Domestic Price Taka/MMBtu $/MMBtu Petroleum Liquid Hydrocarbon Product Taka/MMBtu $/MMBtu Commercial 19 1.25 Kerosene 85 5.6 consumer Fuel Oil 47 3.1 Industrial 18 1.18 Fuel Oil 47 3.1 consumer Fertilizer 7.75 0.51 Fuel Oil 47 3.1 & Power Domestic 18 1.18 Kerosene 85 5.6 LPG 102 6.7 2.08 The levels at which gas should be priced requires careful consider- ation. On account of its relatively abundant availability, Bangladesh has so far been pricing the gas well below the cost of alternate fuel supplies. This has resulted in adventitous gains accruing to industrial units and sectors which are in a position to utilize gas by virtue of their geographical location. Provision of gas in Chittagong would reduce the fuel cost to industries by a factor of three to four. Domestic households, privileged to be connected with gas, would reduce their fuel bill fivefold. Besides generating these distor- tions, such a pricing policy is depriving the government of a unique oppor- tunity to mobilize resources for the economy. Accordingly, gas tariffs should be structured in a manner which would: (a) ensure that revenue from the sale of gas is higher than the economic cost of gas; (b) ensure that the operating entity (BGSL) is a financially viable organization; which would imply that its revenues after the initial operating period cover operating expenses, ensure debt service while achieving an adequate rate of return on revalued gross fixed assets and generate sufficient cash to contribute to its future investments; and (c) mobilize resources for the economy. 2.09 The average economic cost of natural gas from Bakhrabad is estimated to be Tk. 13/MCF; this includes a depletion premium of approximately Tk. 3/MCF. In order to achieve the objective of financial viability, the Government agreed to set the net revenue to BGSL in such a way as to reach a 5% return on revalued gross fixed assets to BGSL in 1985 and 10% afterwards. According to the projections, this would require a net revenue of Tk. 17 in 1985 (see para. 5.03). The Government furthermore agreed to increase by no later than June 30, 1981, the national average price of gas to consumers by at least 20% over the existing price. GOB also agreed to periodically increase - 10 - gas prices to fully reflect domestic inflation taking into account movements in international prices of fuel oil, and in addition to provide a margin for domestic resource mobilization. GOB agreed to carry out a study, with the assistance of consultants acceptable to the Association, in order to ascertain the appropriate levels of gas prices and net revenues to gas distributors necessary to achieve, inter alia, the financial viability of gas distributors and the efficient mobilization of resources for the borrower's economy. GOB agreed to review each year with the Association its proposals for increases in gas prices. Production and Consumption of Petroleum Products: Import and Refining 2.10 The entire domestic demand for oil and petroleum products is met through imports. In 1979, Bangladesh imported 1.58 million tons of crude oil from Iran, Saudi Arabia, Iraq and U.A.E. As there is an imbalance between the domestic consumption pattern and product yield, Bangladesh has had to export a few products (naphtha and fuel oil), and import kerosene, aviation fuel and diesel oil. Overall, however, it remains a net importer of petroleum products. Import of oil has imposed a considerable foreign exchange burden on the economy. The recent price increase has further exacerbated this situation; in 1980 the import bill for oil and petroleum products is expected to be of the order of $420 million, or about 60% of the Bangladesh's export earnings target. 2.11 Imported crude oil is refined in Bangladesh's only refinery in Chittagong which has a capacity of 1.5 million tons, with a throughput in 1979 of the order of 1.38 million tons. This refinery was established by the Burmah Oil Company in 1963. It employs an atmospheric distillation process and has a catalytic reforming unit and a hydrodesulfurization unit. There are, however, no secondary processing facilities. In order to recover butane and propane, which were earlier used as refinery fuel, it established an LPG recovery and bottling plant with an initial capacity of 6,000 tons. Separately an asphaltic bitumen and drum making plant is under construction, which would be commissioned by 1982. This unit will not only meet the domestic requirements of bitumen but would also increase the availability of middle distillates. Current refining capacity is inadequate to meet the needs of Bangladesh, and therefore part of the crude (200,000 tons) is being refined in Singapore. The Government of Bangladesh is now considering the establishment of a second refinery at Khulna with a capacity of two million tons. Marketing: 2.12 Before independence, marketing of petroleum products was being undertaken by Pakistani and foreign companies. These companies were taken over or acquired by the Government after the formation of Bangladesh. In January 1977 the Bangladesh Petroleum Corporation (BPC) was established as a holding company and charged with the responsibility of importing, exporting, - 11 - refining, and marketing of crude oil and petroleum products. BPC, however, does not distribute or market these products directly, but discharges these functions through its various subsidiaries. The distribution and marketing of petroleum products is currently being undertaken by three marketing companies. The major share of the market (40%) is held by Burmah Eastern, a successor to the Burmah Oil Company, which still retains 49% of the equity capital. The management is however with BPC which owns a majority of the remaining capital. The other major marketing unit is Jamuna Oil Company, the successor to the Pakistani National Oil Company which is now fully owned by BPC and presently markets 32% of the petroleum products. Meghna Petroleum Company (successor to ESSO) controls 27% of the market share. In addition BPC owns two other subsidiaries, the Eastern Lubricating Plant Limited and the Standard Asiatic Company, which are currently engaged in blending and marketing lubricants and special products. Consumption Pattern: 2.13 Consumption of petroleum products over the last 10 years has been almost stagnant and in some cases (motor spirit and kerosene) consumption has decreased in absolute terms. The only product which has shown a significant growth rate is diesel oil. Like all developing countries the consumption pattern in Bangladesh is skewed in favor of the middle distillates (Annex 2.03). Diesel oil, which is used in transport, power generation and agriculture, is the most extensively used petroleum product (29%) followed by kerosene (28%), which is used largely for illumination, and marginally as a domestic fuel. However, over the last 10 years the consumption of natural gas has risen sharply and in 1979 was equivalent to 1.1 million tons of oil. Thus while the consumption of liquid petroleum products has fluctuated between 1.1 and 1.9 million tons over a ten year period, commercial energy derived from hydrocarbons has doubled. The future consumption pattern will depend upon the extent to which GOB succeeds in increasing the economy-s absorptive capacity for gas. Some investment decisions have already been taken in this direction. With the commissioning of Khulna power station (1981) it should be possible to back down the diesel oil consuming power turbine station in the West Zone. The East-West connector, when completed (1983), should enable the transfer of gas generated power from the East zone to the West zone, thereby reducing the consumption of fuel oil. Commissioning the Bakhrabad-Chittagong gas system will enable the replacement of fuel oil by natural gas in the steel mill, rerolling mills, power station, paper mill and other industries located in, and around Chittagong. The rural electrification program will also help in limiting the growth in the demand for kerosene. Working on the assumption that these investments will go on stream as scheduled, the consumption pattern of petroleum products, over the next five years, is likely to be as under: - 12 - Consumption of Petroleum Products (1000 tons) Product -------Actual ----Projected---- 1970 1975 1979 1980 1983 1985 L.P.G. - - 2 3 5 6 Naphtha 43 9 4 - - - Motor Gasoline -72 54 66 72 83 90 Aviation Fuel 41 24 35 37 46 55 Kerosene 421 346 393 420 460 470 Diesel oil 156 283 413 450 460 540 Jute Batching oil 44 28 32 32 39 41 Fuel oil 495 401 452 490 650 450 Others 29 13 20 21 24 25 Total: 1,301 1,158 1,417 1,525 1,767 1,677 2.14 It is anticipated that the demand for fuel oil would increase to 650,000 tons in 1983, but with the commissioning of the East West connector, reduce to 450,000 tons in 1985. Further reduction may not be possible as fuel oil will continue to be used in the West Zone for industrial uses and for inland river and coastal transport. While diesel oil consumption for power generation would gradually become nominal, growth in the road transport would more than offset this saving. Estimates of diesel oil and motor gasoline consumption are based on the expected growth in vehicle population and on the assumption that diesel would cease to be used, except nominally, as a fuel for power generation. Further, if there is delay in the implementation of projects relating to the gas fired power stations, the East-West connector, or the proposed pipeline project, then the demand for liquid hydrocarbons could increase to 2 million tons by 1985. In the projected pattern of consumption, the proportion of middle distillates will continue to be high (66% in 1985). This would result in increased imbalance between the refinery product yield and the consumption pattern, warranting additional investment in secondary processing rather than investment on a new refinery as is presently being considered by GOB (para. 2.11). This investment proposal will be reviewed as a part of the proposed natural gas study. Prices 2.15 As GOB passes on all price increases to the consumer, the last ten years have seen a sharp escalation in the domestic prices for petroleum pro- ducts. The consumer has not only had to absorb international price increases, but also successive increases in domestic prices arising from the erosion in the value of the Taka in relation to the US dollar. Over the last seven years the prices of petroleum products in Taka, on the average, have increased seven- fold. The price of motor gasoline, which was 3.74 Taka per imperial gallon in 1972, now stands at 45 Taka. Similarly, over the same period, the price of high-speed diesel oil has increased from 3.5 to 15 Taka per gallon and kerosene from 2.2 to 13.5 Taka per gallon and fuel oil from 0.3 to 8.2 Taka per gallon. Consumer resistance to rapidly rising prices in part explains the almost zero rate of growth in the consumption of liquid hydrocarbons. - 13 - Investment in Oil & Gas Sector: 2.16 Bangladesh proposes to make substantial investment in the oil and gas sector during its second five year plan. The physical program targeted for the plan is indicated in Annex 2.04 and the sector investment tentatively being considered for this purpose is indicated below: Tentative Investment Plan for Petroleum Sector 1979-84 (In million Takas) Total Foreign Exchange Cost Component 1. Geological Survey 250 120 2. Hydrocarbon Exploration 2000 1250 3. Gas Field Development 1150 800 4. Gas Transmission & Distribution 3400 2182 5. Petroleum production & Disribution 900 610 6. Development of Nonconventional energy 200 100 7. Research & Training 100 60 Total 8000(US$516 5122(US$330 Milion) Million) Sector Issues and the Role of the Bank Group (a) Gas Use 2.17 Bangladesh urgently needs to reduce its dependence on imported oil. The success of such an effort depends critically upon the speed with which it can increase the economy's absorptive capacity for natural gas. Natural gas can replace diesel oil and fuel oil currently being used for power generation in the West Zone and in the captive power stations all over Bangladesh. Similar replacement could, to a large degree, be effected in the industrial sector. Certain investment decisions in this direction are already being taken. The East-West interconnector, when completed, will allow gas generated power to be utilized in the West. The proposed IDA financed Bakhrabad- Chittagong pipeline would permit the replacement of fuel oil and diesel oil by gas for power generation and other industrial uses in Chittagong and in adjoining areas. Gas will also be used as a feedstock for the manufacture of urea permitting the substitution of imported fertilizer with a domestic product. It must, however, be recognized that there are major constraints to the substitution of gas for oil. Firstly, there are technical limits beyond which gas cannot replace liquid hydrocarbons. Secondly, there are limits to the feasible rate of capacity expansion in both the gas distribution sector and the electricity sector. Thirdly, the capital cost of converting large parts of the economy to natural gas, would create a large draft on the economy's resources. The issue which therefore needs to be addressed is the extent to which limited and otherwise fungible resources need to be dedicated for restructuring the economy so that it can absorb larger quantities of gas. - 14 - (b) Gas Export 2.18 Even on the basis of very preliminary investigations undertaken so far, the supply of gas would appear to be in excess of Bangladesh's internal needs. Understandably, the policy makers in Bangladesh look upon it as a means of shoring up the country's limited foreign exchange resources. Bangladesh could: (a) export the gas through a pipeline to a neighboring country; (b) export the gas after liquefaction; and/or (c) attract export-oriented industries which are energy intensive and/or use natural gas as a feed stock. Unlike crude oil, export of gas is beset with a large number of technological and financial problems. Bangladesh could conceivably market the gas in India, but this would require an East-West connector for gas. In any case such a decision would be predicated upon a large number of political considerations and it is not at all clear, whether at the moment, this represents a viable possibility. Gas could be exported after liquefaction, but a LNG plant capable of liquefying 500 MMCFD of gas, including tankers, is likely to cost more than two billion dollars. In addition, considerable investment would be required to create a deep-sea terminal or make alternate arrangements as Chittagong harbour is incapable of accepting LNG tankers. In any event, substantial new gas reserves will have to be found before an LNG plant can be given serious consideration. 2.19 For purposes of determining the proportion of resources which would need to be deployed for increasing the economy's absorptive capacity for gas and also for evaluating the various options available to GOB in terms of gas export including liquefaction, a detailed study would be required. As part of this credit GOB has agreed to carry out such a study with help of consultants and on the basis of terms of reference agreed upon between IDA and GOB. This study will also evaluate the impact of increased domestic use of gas on refinery requirements. (c) Study/Pilot Project for Natural Gas Powered Vehicles 2.20 It is in the context of diversifying the use of natural gas that the feasibility of using it to replace motor gasoline, and subsequently diesel oil as an automotive fuel, needs to be examined. The use of compressed natural gas (CNG) to power automobiles is well established in Italy where it has been extensively used for the past 30 years. New Zealand is undertaking a large scale program to convert automobiles to CNG. The conversion is rela- tively simple requiring no internal changes to the engine, and the converted vehicle can switch fuels with a selector mounted on the dash board. Diesel engines can also be fueled with CNG but the necessary technology related to automotive engines has not yet been developed to the same level as is the case with gasoline engines. For further details on the present state of the art of natural gas powered vehicles see Annex 2.05. - 15 - 2.21 CNG, even if it could partially replace motor gasoline and diesel, will result in significant foreign exchange savings for Bangladesh. The proposed credit contains a provision ($1.3 million) for undertaking a study, establishing compression facilities, and converting a limited number of diesel and gasoline vehicles to CNG. Petrobangla, with the assistance of qualified consultants, will carry out the study/pilot project. The consuitants would, inter alia, be required to evaluate the cost relating to conversion of vehicles and compression of natural gas in Bangladesh and recommend necessary modifica- tion in technology. The study would propose a price differential between natural gas and gasoline so as to provide an adequate incentive for conversion, identify target groups and assess the extent to which CNG penetration is feasi- ble in Bangladesh. In addition,the consultants would be required to study the technical feasibility of converting diesel powered vehicles to natural gas, especially in the context of the limitation in range, which such a conversion imposes on the vehicle. In this context consultants would also study the logistics and the economic feasibility of setting up "satellite stations" which would secure bottled CNG from compression stations located on the high pressure transmission pipeline. Simultaneously, Petrobangla will undertake a pilot project for converting a limited number of gasoline and diesel vehicles and establish the necessary compression facilities. The results of this project would constitute an important input in drawing up a future plan of action. (d) Demand Management and Exploration 2.22 There are, as indicated above, economic and technological limits beyond which it may not be feasible to substitute natural gas for liquid hydrocarbons. Current projections indicate that as a consequence of a more extensive use of natural gas, the demand for fuel oil will begin to decline from 1983. However, the demand for diesel oil and, if per capita income grows as projected, the demand for kerosene will continue to increase. As a result of these offsetting trends, the import requirement of petroleum products by 1985 would be at least 1.7 million tons per annum. Even at this level, petroleum imports would impose an onerous burden on the balance of payments of the country. 2.23 Bangladesh would therefore need to intensify its search for oil. Exploratory efforts so far have been unsystematic and sporadic. Foreign oil companies which took out offshore concessions in 1974/75 have, after a few exploratory wells, ceased operations. Petrobangla now needs to: (a) initiate an extensive seismic program; (b) collate and reinterpret the existing seismic and drilling data; and (c) step-up exploratory drilling. Clearly, Petrobangla does not have the resources or the capacity to implement an adequate exploration program. It is already receiving assistance from the Federal Republic of Germany in this area, but this will need significant - 16 - supplementation. As a first step toward identifying prospective areas for further exploration activities, the proposed project includes US$2.7 million for Petrobangla to undertake with the assistance of consultants seismic surveys, and processing and interpretation of seismic data. (e) Appraisal Drilling 2.24 No systematic attempt has so far been made to quantify or even delineate gas fields, making the present reserve estimates somewhat specula- tive. Investment in a fuller appraisal of Bangladesh-s gas reserves appears advisable. Its justification goes beyond securing theoretical satisfaction in having made an inventory of an important natural resource. Accurate data in regard to reserves is necessary for determining the opportunity cost of gas and hence its price, pace of exploitation and the export options. Association financed consultants, on the basis of existing data, have firmed up reserves estimates relating to Bakhrabad, Titas, and Habiganj gas fields. However, additional appraisal drilling would need to be done on these and other gas fields before any firm estimates can be made of the gas potential in Bangladesh. (f) Traditional Fuels 2.25 A growing tightening in the traditional fuel market can be expected over the foreseeable future. Bangladesh clearly does not have the resources to contemplate a major shift to commercial energy for rural domestic uses. Measures designed to alleviate the constraints of supply in the rural areas will therefore have to focus on the traditional market itself. Improvement in the energy efficiency of cooking appliances, given the importance of cooking requirements in the fuel demand, could potentially have an enormous impact on the fuel situation in rural areas. Improved stoves have been developed which could reduce cooking fuel requirements by as much as 50%. Prototypes would need to be developed and their extensive adoption promoted. Separately, social forestry would need to be encouraged, which could augment the limited supplies of firewood. A research and development program for traditional fuels could prove rewarding. 2.26 These and other crucial sector issues can be dealt with only in the context of national energy planning framework which evaluates the country's present and prospective energy balance and identifies the gaps in information, institutions and feasibility studies. Bangladesh clearly needs assistance in developing a natural energy planning capability and the role of the Bank Group in this area will be discussed with the Government in the coming months. III. BENEFICIARY Background 3.01 Natural gas was first discovered in Bangladesh in 1955 at Sylhet by the Pakistan Petroleum Company. Gas use, however, became extensive only after Shell discovered (1962) and developed the Titas gas field. In addition to - 17 - production and distribution of gas, these private companies, along with the Government-owned Oil and Gas Development Corporation (OGDC), undertook explora- tion for oil and gas on a limited scale. Immediately after independence GOB assumed all Pakistani companies and subsequently took over Shell's interest in Bangladesh. In March 1972, through a Presidential Decree, Bangladesh Minerals, Oii and Gas Development Corporation (BMOGC) was created. Through an amendment of 1974, BMOGC was split into two sector corporations, and the oil and gas development functions were vested into the Bangladesh Oil and Gas Corporation (in short, Petrobangla). Sector Corporation 3.02 Petrobangla was entrusted with all tasks relating to the exploration and production of oil and gas, import of oil, refining and marketing of petroleum products, exploration production, transmission and distribution of natural gas. As of January 1, 1977 the functions relating to the import of crude oil, refining and marketing of petroleum products were taken away from Petrobangla and entrusted to a newly-created corporation, namely, Bangladesh Petroleum Corporation (BPC). As with other sector corporations in Bangladesh, Petrobangla acts as a holding company, with direct managerial and operational tasks being performed by individual companies which function under its super- vision and control. Natural gas is being produced by two companies under this corporation, namely the Bangladesh Gas Fields Company Limited (BGFCL) and Bangladesh Petroleum Limited (BPL). BPL was formed after GOB assumed the assets of the Pakistan Petroleum Company and it presently owns and operates the Sylhet and Chhatak gas fields. BGFCL was established in 1975 when GOB took over Shell, and now operates the Titas and Habiganj gas fields. For transmission, distribution, and marketing of gas, there are two separate entities, namely Titas Gas Transmission and Distribution Company and the Jalalabad Gas Transmission and Distribution Systems. These companies purchase gas from BGFCL and BPL and market it in the area of their respective franchise. Sector organization is at Annex 3.01. Petrobangla is managed by a Board of Directors presently consisting of four members including a Chairman; and functions under the overall supervision of the Ministry of. Petroleum and Mineral Resources. GOB nominates the Board of Directors. Its authorized capital is ten million Takas of which ten per cent has been subscribed and paid in by the Government. Petrobangla finances its expenses by splitting them among the individual companies which function under its control. The Beneficiary 3.03 For purposes of implementing the project and subsequently operating the gas fields and the gas system, GOB has decided to set up the Bakhrabad Gas Systems Limited (BGSL) - a new, fully government-owned entity, established under the Companies Act of 1913. BGSL, like other companies in the sector, will function under the overall supervision of Petrobangla. Articles of Association for BGSL have been drafted and the chief executive (designate), along with a few key staff members, appointed. The proposed organization of BGSL is shown in Annex 3.02. - 18 - Functions 3.04 BGSL's functions, as envisaged in the draft Articles of Association, are as follows: - Develop and produce gas from the Bakhrabad, Comilla, or such other gas fields as may be decided by the Government from time to time; - Process and transport gas from the gas fields to the area of its marketing franchise (Comilla, Feni, Chittagong, etc.); - Provide natural gas to industrial plants, power stations, and residential areas; - Establish a marketing system to carry out the above activities. Capital Structure 3.05 The authorized capital of the company is Tk.1000 million, (US$64.5 million) comprising ten million shares of Tk. 100 each. The entire capital, as and when required, will be subscribed by the Government. Normally, Government channels all the funds to its companies through the respective sector corporation as loans, under the annual development plan. GOB in this case has agreed to transfer direct to BGSL local currency expenditure in the form of equity. Organization and Management Capabilities 3.06 BGSL, under its Articles of Association, is to be run by a Board of Directors consisting of five members including the Chief Executive. Petrobangla appoints the Board of Directors and can remove them from office at its discretion. BGSL is a new entity established specifically for purposes of implementing the project and subsequently operating the gas utility. To man its senior levels, it has drawn upon competent and experienced personnel from the oil industry, especially the Titas Gas Company; a company which has operated successfully as a gas utility in Bangladesh for over fifteen years. The existing managers of BGSL have experience in operating gas distribution utilities and therefore can be expected to manage the distribution system after it has been established. However, they have limited experience in gas field development and laying of high pressure transmission pipelines. Project Implementation Considerations 3.07 Project implementation as currently planned takes note of these limitations. However, BGSL has so far made good progress in the initial implementation of the project. It has appointed a reservoir consultant to assist it in carrying out the Bakhrabad gas field development and drilling program and an engineering firm for executing the pipeline and distribution portion of the project. - 19 - Furthermore, the construction contract for the high pressure transmission pipeline from Bakhrabad to Chittagong and distribution pipeline to the fertilizer unit and the power station, would be the sole responsibility of a prequalified contractor on the basis of international competitive bidding (paras. 4.13 to 4.18). 3.08 Nonetheless, BGSL management and administrative capabilities are critical to the successful implementation and completion of the project. It would need to establish an organization capable of managing the contract, ensuring extensive and effective supervision and operating and maintaining a safe and dependable supply of gas. During the pre-construction stage it will need to provide specific facilities for contractor, develop a manpower recruit- ment and training schedule and create a corporate structure capable of managing the project and supervising the contract. On account of the extremely tight implementation schedule, it would be required to take prompt decisions related to engineering and construction activities, avoid undue delays in processing procurement documents, evaluating bids and awarding contracts and purchase orders. It will have to exercise its prime project management responsibili- ties; process bills, invoices, etc. and see to the acquisition and retention of essential project documents and records. Finally, by the time the project is completed it should have established an operational organization capable of operating the gas utility and servicing the customers. 3.09 BGSL, for achieving these objectives, would require close coopera- tion and assistance from various government agencies. This would, inter alia, involve assistance in securing the right of way, timely release of foreign exchange and local financing to BGSL, government approval to the award of con- tracts, adequate delegation of financial powers, port and customs clearances etc. 3.10 In view of the above, assurances have been obtained during negotia- tions from the government, Petrobangla and BGSL that: a) by March 31, 1981, a master plan by the critical path method would be prepared, which would include the time required by and allocated for the relevant government and Petrobangla activities; b) the government and Petrobangla would take all action, as is necessary, to enable BGSL to maintain the project schedule; c) a condition of effectiveness of the credit would be appoint- ment of key BGSL staff responsible for project implementation; d) within six months after the approval of the credit, BGSL, with the help of its consultants, would prepare and submit its recruitment and training program for review by the Association. - 20 Accounts and Audits 3.11 BGSL and Petrobangla are required by law to prepare full accounts of their financial position and results of their operations. The accounting information system of the existing Petrobangla group is satisfactory. How- ever, in view of the fact that BGSL is to be formed as a new and separate entity, during negotiations, BGSL agreed to provide the Association by September 30, 1981, with a satisfactory plan regarding the design of an accounting information system as well as the staffing and organization of its accounting and finance departments. For internal control purposes, BGSL is expected to have its own internal audit staff which is in line with the practice of Petrobangla's existing affiliates. 3.12 In addition to internal audit, BGSL and Petrobangla would, under law, be subject to two types of audit: a) External Audit by a firm of chartered accountants appointed at the general meeting of the stockholders. The entity's balance sheet and profit and loss accounts are to be presented to the general meeting within eighteen months after the incorporation of the entity and subsequently at least once during each calendar year. Accounts are required to be ready for external audit within nine months after the end of the financial year and are reviewed within three months after submission. b) Besides the external audit, each entity is subject to Government s commercial audit. Its report is submitted to the concerned Ministry of the Government within three months after the end of each fiscal year. During negotiations, BGSL and Petrobangla agreed to supply the Association with copies of the financial statements, duly audited by the Controller and Auditor General, and of the independent corporate auditor's opinion, no later than six months after the end of each fiscal year. Insurance 3.13 National statutes require that all insurance within Bangladesh as well as on all imports be obtained from the state insurance corporation, Sadharan Bima Corporation. Insurances involving high value risk which, in the event of loss, are required to be replaced by imports involving foreign exchange are reinsured abroad. The terms of reference of the project imple- mentation consultants include provisions for assisting and advising BGSL on adequate builders all risk coverage during the construction phase of the proposed project. After construction completion and acceptance of the project facilities, BGSL will take out a comprehensive insurance, which will include third party liability and personnel and property damages. - 21 - IV. THE PROJECT Project Objectives 4.01 Currently, 55% of Bangladesh's commercial energy requirements are met through imports. Although marginal quantities of coal are included, the energy imports essentially comprise crude oil and petroleum products; domestic petroleum production is limited to natural gas which provides about 35% of commercial energy requirements. Sharply rising oil prices have imposed an increasingly heavy burden on the country's limited foreign exchange resources. In 1980 the import of liquid hydrocarbons should account for about 60% of projected export earnings. The proposed project aims at substituting indig- enous natural gas for imported fuel oil and diesel oil currently used by various industries in the Chittagong area. The project would also enable kerosene to be replaced by natural gas as a domestic fuel and provide a source of energy and feed stock for new industries, particularly fertilizers, planned for Chittagong. Project Preparation 4.02 Williams Brothers Engineering Co. (USA) have completed a feasibility study of the Bakhrabad-Chittagong pipeline and its distribution system. The study was carried out in conjunction with the overall Chittagong Fertilizer Project study financed by the Asian Development Bank (ADB). It includes a preliminary route survey and optimization of pipeline sizes for the gas trans- mission and distribution pipelines, and it will form the basis for detailed engineering. 4.03 The ADB financed study also included an evaluation of the recover- able gas reserves in the Bakhrabad field and a recommended drilling plan to produce the required quantities of gas. This work was assigned to DeGolyer and MacNaughton (D & M) who have completed their assignment. D & M have recommended that four slanted wells be drilled from an earth filled pad. Work on filling the drilling area and an access road is scheduled to be completed in May before the onset of the 1980 monsoon season. 4.04 BGSL has employed an expatriate engineering firm and drilling and reservoir consultants with qualifications and conditions of employment satis- factory to the Association to assist it in carrying out the pipeline project and the Bakhrabad gas development program. Gas Supply and Market 4.05 The Bakhrabad field consists of four potential petroleum bearing structures (culminations) identified by seismic interpretation. In 1968 a well drilled into one of the structures, designated the B-1 culimination, by Shell Oil Company struck gas in commercial quantities. Its plans for develop- ing and marketing the gas were interrupted by the war of independence and the subsequent nationalization of its assets. There has been no further drilling in the field. Reservoir consultants engaged by the Association (James E. Lewis - 22 - Engineering Co., Canada) have estimated that proven gas-in-place in B-l culmination at 1.6 TCF of which 1.3 TCF will be recoverable. In addition, probable reserves at this culmination are estimated at 1.0 TCF. An earlier estimate by D & M, who participated in the ADB fertilizer study, estimated proven recoverable reserves to be 1.1 TCF. The extent to which additional reserves can be classified as proven will depend on future drilling results. 4.06 The Association's consultants also evaluated the neighboring Titas and Habiganj gas field reserves which, if necessary, could supplement Bakhrabad production. Estimated recoverable reserves in these fields were reported to be 1.3 TCF proven and 1.5 TCF probable for Titas and 1.0 TCF proven and 0.3 TCF probable for Habiganj. Titas gas is now essentially committed to the Dacca area market but the bulk of the Habiganj reserves are uncommitted. If necessary, the Habiganj gas can be almost exclusively dedicated for the Chittagong market. Presently Habiganj gas field is being linked to Titas. Subsequent linking of Titas to Bakhrabad, which would require an investment of about US$30 million, would provide necessary flexibility to the proposed gas system to supplement shortfalls in Bakhrabad from either Titas or Habiganj. 4.07 Over the next 20 years, the projected Chittagong demand would require a cumulative production of about 0.8 TCF of gas. However, a consider- ably higher level of reserves (minimum gas-in-place reserves of 2.6 TCF) is required to supply sufficient gas to maintain the projected growth in demand. In the event that these reserves are not proved and developed by future drilling in the Bakhrabad field, it will be necessary to make up the shortfall from the Titas/Habiganj fields to meet the peak demand forecasts for 1993 and beyond. To ensure an adequate gas supply for the Chittagong market, assurance has been obtained from GOB during negotiations that: (a) funds would be allocated, when required to meet market demand, for developing additional gas production from the Bakhrabad field or, alternatively, from Titas/Habiganj along with all gathering facilities and interconnecting pipelines; (b) 1.0 TCF of proven in-place reserves from the Titas/Habiganj fields would be committed to the Chittagong market until such time as the necessary gas reserves and deliverability are established at Bakhrabad or another gas field; and (c) the reserves committed under (b) above would take precedence over all other reserves commitments except for any future reallocations agreed to by GOB and the Association. 4.08 The Chittagong gas market has been surveyed by a number of organi- zations. Shell Oil undertook a detailed survey of the existing market and future growth potential in 1969, after the Bakhrabad discovery. In 1978, Hydrocarbon Consultants Ltd. (Bangladesh) completed a market survey and projec- tion of future demand sponsored by ADB as part of the Chittagong fertilizer study, led by the prime consultant, Unico (Japan). Also in late 1978, Chem Systems (UK/USA) undertook a similar study under the auspices of GOB and the Association. The different demand forecasts were reconciled during a meeting - 23 - of representatives from GOB, the Association and ADB in May 1979. Projected demand forecast by different categories of consumers is shown in Annex 4.06 and forms the basis for sizing the proposed facilities. Peak and average demand is projected to grow to approximately 320 and 203 MMCFD respectively by the year 2000 AD. 4.09 By 1985, it is anticipated that the Chittagong demand from the power plant, steel mill, paper mill, industries, etc. will average about 35 MMCFD. The fertilizer plant would significantly increase the demand to about 80 MMCFD. ADB has preappraised the project, and according to its present estimates, the foreign exchange requirements would be about US$285 million. So far, US$177 million financing has been committed in principle by 5 agencies. An addi- tional US$105 million is under consideration by various financing agencies. While slippage in the implementation of the fertilizer plant would adversely affect the cash flow of BGSL, the project would still be economically and financially viable, even without the proposed urea plant. In the event that financing of the ADB sponsored fertilizer plant at Chittagong cannot be consummated, a condition of the proposed credit is that apart from the urea plant already proposed at Chorasal the next urea plant would be located at Chittagong. Design Criteria 4.10 The proposed project facilities comprise a gas well drilling program, gathering and conditioning facilities, a transmission pipeline, and a distribu- tion system. Based on an analysis of the various parameters affecting the optimum sizing of pipelines, the feasibility study recommends a 24" transmis- sion line operating at 960 psi maximum pressure without compressors. A 22" line with an intermediate compressor station in 1996 is marginally less expen- sive on a discounted cost basis. However, simplicity of operation and lack of maintenance problems with complex machinery outweighs the slight cost advant- age. In the event additional reserves are not developed at Bakhrabad, it will be necessary to extend the pipeline to Habiganj during 1993 to meet peak demand forecasts for that year and beyond. This would mean an additional expenditure of approximately US$30 million (1980 prices). The impact on the project's economic rate of return, however, would be marginal since, as can be seen in Section VI, the rate of return would still be acceptable. The transmission and distribution pipelines were sized on the basis of the market forecasts rather than presently established gas reserves because: (a) the possibility of confirming additional reserves at Bakhrabad is high, with probable reserves being estimated at an additional 1 TCF. Additional gas discoveries in the area also cannot be ruled out; (b) even if no additional reserves are proven in Bakhrabad, the demand in the Titas/Chittagong market could still be met by connecting the Titas/Habiganj gas fields with Chittagong, in the early 1990s; and (c) although it is recognized that there is a possibility of slippage of some of the potential consumers, a gas system with a technical life exceeding 30 years, needs to be designed to handle anticipated peak flow requirement. - 24 - 4.11 The proposed distribution system will have an initial capacity of approximately 160 MMCFD which will satisfy the projected demand until about the year 1990 when the system will have to be expanded. Annex 4.01 shows the dis- tribution system prepared by the consultants. The Phase 2 portion completing the distribution ring would increase the system capacity to 350 MMCFD to match the maximum pipeline capacity. The pipeline route and gas fields are shown in Map IBRD 14869. Project Description 4.12 The proposed project includes the following: (a) Development of the Bakhrabad gas field comprising four deviated wells in the B-1 culmination to a depth of 9,000 to 15,000 ft from an earthen pad approximately 300 ft by 400 ft in area and 12 ft high and recompletion of the existing well, BK-1. (b) Flow lines (6" in diameter) from each well-head to a central area containing metering, pressure regulating, separation and dehydration and odorizing facilities. A small quantity of liquid hydrocarbons will be recovered at this point, and provisions will be included for storing and transferring it to tank trucks. (c) A 24" buried gas transmission pipeline, approximately 110 miles long, from the Bakhrabad facilities (under (b) above) to a city gate station outside Chittagong and all necessary ancillaries. (d) A gas distribution system along with operating and main- tenance facilities, including pressure regulating and metering facilities and service piping to consumers, comprising approximately 11.7 miles of 20" piping from the city gate station south to the Eastern Refinery and steel mill area, 13.5 miles of 16" piping from this point to the proposed Chittagong fertilizer plant and to the WAPDA power station including 0.6 miles of twin 12" river crossings at Karnafuli River and-29 miles of 10" piping from a point on the 20" line approximately 4.5 miles south of the city gate station to the Karnafuli Paper Mill and serving the Nasirabad and Kalurghat industrial estates in Chittagong. (e) consultants for drilling, project engineering, management and construction supervision services. (f) Staff training (para. 4.25). (g) Technical assistance comprising seismic surveys and pro- cessing and interpretation of seismic data with a view to identifying prospective areas for possible exploratory drilling (para. 2.23). (h) Studies on gas utilization and pricing and a compressed natural gas pilot project (paras. 2.09, 2.19 and 2.21). - 25 - Project Implementation 4.13 Implementation of the proposed project will be the responsibility of Petrobangla and BGSL. A qualified expatriate engineering consulting firm satisfactory to the Association has been appointed to assist in providing complete project management, engineering and training services for implement- ing the transmission pipeline, the distribution system, and the gas field facilities portion of the project. The services to be provided by the consultant comprise engineering and design, general project management functions, procurement, contract administration, construction supervision, start-up, and commissioning assistance and training. The BGSL staff will include about 12 members trained abroad and with previous gas distribution experience who will participate in project implementation. Appointment of key staff with appropriate qualifications and experience would be a condition of effectiveness of the proposed credit. The project implementation schedule is given in Annex 4.02. 4.14 Construction of the transmission pipeline and the distribution lines will be tendered to prequalified foreign contractors. For the construction of a 10" distribution line, domestic contractors will also be prequalified. There are several such contractors who have the experience and capability to install high pressure pipelines in the smaller diameters. 4.15 Pipeline construction will have to be limited to the dry season, roughly from about October to May. It is essential to complete the construc- tion during one season to avoid the expense of mobilizing and demobilizing the contractor twice or paying standby charges during the period no work can be undertaken. To achieve a one season construction schedule, all equipment and materials must be on the job site on or before the scheduled construction start-up date. BGSL has set the construction target for the 1981-1982 dry season, and there is a reasonable chance that it can be achieved as the consultant have been mobilized, and the detailed engineering for the project has been initiated. However, to be conservative the appraisal of the project is based on a 1982-1983 construction period. 4.16 BGSL has appointed a qualified consultant satisfactory to the Association for managing the Bakhrabad gas field development and well drilling program. The key personnel provided by the consultant for this assignment include a drilling adviser, a reservoir engineer, two geologists and two tool pushers (drilling supervisors) for continuous well site duty and an overall coordinator and manager of the program. Their chief responsibilities on behalf of BGSL will be procurement of well materials and services, preparation of the work program for each well, monitoring and analyzing drilling, logging and testing results, supervision of the drilling contractor and reservoir evaluation studies. 4.17 BGSL, with the assistance of its drilling consultant, has completed negotiations of a drilling contract for the Bakhrabad wells with the Japanese Exploration Company (Japex). A letter of intent was signed on September 17, 1980, which requires that Japex deliver the drilling rig to Chittagong by - 26 - January 1, 1981 and spud the first well by February 10, 1981. A condition of the proposed credit is that no materials procurement or pipeline construction contract will be awarded until this first well has been completed and the well data has been analyzed to confirm the results obtained from the discovery well. 4.18 The above implementation arrangements are satisfactory. Tenders can be issued for the pipe and pipe laying contract while the first well is being drilled. If no drilling problems arise and the results are satisfactory, BGSL should be in a good position to achieve the 1982 completion goal. Project Costs 4.19 Including contingencies, the project is estimated to cost US$164 million of which the foreign exchange component is US$132 million or 80%. The proposed credit of US$85 million represents 64% of the estimated foreign expenditures and 52% of the total estimated project cost. Sector studies and technical assistance to be financed by the proposed credit but not directly related to the project are estimated to cost US$4.5 million. Import duties, which have averaged about 10% for imported goods and equipment on past pipeline projects, contribute US$4.1 million to the project cost. Interest during construction amounting to approximately US$13 million is not included in the above costs. 4.20 Letters of intent have been signed (September 1980) for the project engineering and implementation services and management of the gas field development and drilling program. The engineering contract amounts to US$3.8 million, including local and foreign costs based on 670 man-months (370 expatriate and 300 local personnel). The drilling contract amounts to US$1.3 million in local and foreign costs based on 85 man-months (64 expatriate and 21 local personnel). These costs are slightly less than the amounts in the project estimate not including contingencies. US$400,000 have been allocated from Credit 622-BD (Subproject 24) to cover initial payments for these services prior to effectiveness of the proposed credit. A physical contin- gency of 10% was applied to all costs except for construction to which 15% was applied, since no detailed survey has been made of the pipeline route. The price contingency was calculated on the basis that local costs would escalate at an annual rate of 10% and foreign costs at 10.5% during 1980, 9% during 1981, 8% during 1982, and 7% during the remaining project implementation period. - 27 - 4.21 The following table summarizes the project costs. Gas transmission and distribution costs are detailed in Annexes 4.03 and 4.04. Local F.E. Total Local F.E. Total (In Taka Millions) (In US$ Millions) Bakhrabad Development 1. 5 Gas Wells 11 209 220 0.7 13.5 14.2 2. Gas Field Facilities 11 79 90 0.7 5.1 5.8 Basic Cost Estimate 22 288 310 1.4 18.6 20.0 Physical Contingency 2 29 31 0.1 1.9 2.0 Price Contingency 7 85 92 0.5 5.5 6.0 Sub-Total 31 402 433 2.0 26.0 28.0 Gas Transmission and Distribution 3. 24" Transmission Line 212 704 916 13.7 45.4 59.1 4. 20"/16" Distribution Line 56 202 258 3.6 13.0 16.6 5. 10" Spur Line 36 109 145 2.3 7.0 9.3 6. Engineering, Management and Supervision 11 77 88 0.7 5.0 5.7 7. Training 2 16 18 0.1 1.0 1.1 8. Technical Assistance - 31 31 - 2.0 2.0 9. Studies & CNG Pilot Project 8 23 31 0.5 1.5 2.0 Basic Cost Estimate 325 1162 1487 20.9 74.9 95.8 Physical Contingency 39 144 183 2.5 9.3 11.8 Price Contingency 105 338 443 6.6 21.8 28.4 Sub-Total 469 1644 2113 30.0 106.0 136.0 Total Estimated Project Cost 500 2046 2546 32.0 132.0 164.0 Project Financing Plan 4.22 The financing plan is based on the GOB providing equity from the national budget to cover the US$32.0 million equivalent (including contin- gencies) local expenditure costs of the proposed project. Of the US$132 million foreign exchange cost US$85 million is proposed to be financed from the IDA Credit, and the balance from the Overseas Economic Cooperation Fund (OECF) of Japan (US$26.0) and from the OPEC Fund for International Development (US$21.0 million). The proposed allocation is indicated below. A detailed breakdown of the foreign exchange expenditures is given in Annex 4.05. To ensure prompt provision of budgetary funds and timing of project staff, approval of the Project Proforma 1/ by GOB would be a condition of credit effectiveness. 1/ An internal GOB document, the approval of which is a prerequisite for the release of funds and the hiring of staff. - 28 - IDA OPEC Japan Total 1. Wells and Gas Field - - 26.0 26.0 2. Goods and Equipment 40.3 3.1 - 43.4 3. Construction 24" Line 31.9 - - 31.9 4. Construction 20"/16 Line - 11.9 - 11.9 5. Construction 10" Line - 6.o - 6.0 6. Engineering Consultants 7.0 - - 7.0 7. Training 1.3 - - 1.3 8. Technical Assistance 2.7 - - 2.7 9. Studies and compressed natural gas pilot project 1.8 - - 1.8 TOTAL 85.0 21.0 26.0 132.0 % 64 16 20 100 4.23 The proposed IDA credit would be to GOB. GOB, in turn, will relend US$80.5 million to BGSL for 15 years, including a grace period of five years, at an interest rate of 12 percent per annum. GOB would bear the foreign exchange risk. US$4.0 million will be relent to Petrobangla on IDA terms for financing items 8 and 9 above except for one study (about US$0.5 million equivalent) which would be carried out by GOB. A condition of effectiveness would be that the Subsidiary Loan Agreements between GOB and BGSL and Petrobangla has been executed. GOB would further be required to fulfill all conditions of effectiveness of the OPEC and OECF Loan Agreements before the IDA credit is made effective. Procurement and Disbursement 4.24 All procurement for the proposed project, including the OPEC Fund financed portion but excluding the well drilling and gas field facilities funded by the OECF Loan, will be by international competitive bidding in accordance with procedures set forth in the Association's procurement guide- lines. Items costing less than $100,000 of a specialized nature available from a limited number of suppliers or not of sufficient value to attract wide international competition, may be procured through limited international tendering up to an aggregate amount of US$4 million. All bidding packages US$500,000 or above (about 16 of the total 40 estimated) would be subject to prior review. Any goods or equipment which might be available from local suppliers would be granted the usual 15% preference or customs duty if less. Qualified domestic construction contractors would be granted a 7.5% preference. 4.25 Disbursement for goods and equipment up to a maximum of US$40.3 million would be made against 100% of the foreign exchange cost of items directly imported or the ex-factory cost if manufactured locally and 70% of total expenditues for items procured locally off-the-shelf. For the (i) 24" pipeline construction contract; (ii) consultants; (iii) training and (iv) technical assistance disbursement would be against 100% of the foreign exchange cost. Annex 4.07 gives the estimated disbursement schedule. The credit would be fully disbursed by June 1984, and the closing date would be December 31, 1984. - 29 - Training 4.26 BGSL will have a nucleus of trained and experienced personnel recruited from other Petrobangla organizations, but the bulk of its staff will need training for the various administrative, operating, and maintenance functions of the company. Depending on job classification, the training needs will comprise technical courses and assignments with pipeline companies abroad and on-the-job training during engineering, construction and commissioning of thc project facilities. The terms of reference of the project implementation consultant include provisions for assisting BGSL with the preparation and implementation of a training program for its personnel (see also para. 3.10(d)). Submission of a satisfactory training program would be a condition of disburse- ment for the training component. Ecology and Safety 4.27 Neither the pipelines nor the gas field facilities are expected to pose a significant ecological hazard. Preparation of an environmental impact statement is included in the terms of reference of the implementation consultants. The pipelines will be buried and all drainage and other surface features will be restored. Some crop damage along the right of way will be unavoidable and compensation will be paid to the respective owners. Trenching at river crossings will temporarily increase the turbidity of the water, and its effects should be addressed in the environmental study. A small quantity of brackish water will be separated from the gas at Bakhrabad. However, based on test results from BK-1 (the discovery well), the quantities and salinity involved are not significant enough to warrant any special disposal measures other than the natural drainage system of the area. 4.28 Although pipelines have a good safety record compared to other modes of transportation, fire from leaks in gas pipelines is a real danger. It can only be minimized by strict adherence to safety codes and proper design, construction, operation, and maintenance. In this regard, the proposed project pipelines will be designed in accordance with the appropriate international standards and codes including the provision of adequate cathodic protection against corrosion. BGSL's training program will include, and emphasize, safety and preventive maintenance. In addition, the gas will be odorized at Bakhrabad, thus making leaks more easily detected. Land and Right-of-Way 4.29 Petrobangla and BGSL will have to acquire rights-of-way and easements along the pipeline route and land for the well facilities, pipeline terminal, and other above ground installations. No major problems are foreseen in this respect since the government can exercise its power of eminent domain on behalf of BGSL. However, to ensure that no costly delays will occur a condi- tion of the proposed credit is that no contract for civil works or goods for the pipeline shall be awarded until the right-of-way for the pipeline route has been acquired. - 30 - Project Risks 4.30 Gas field and pipeline projects carry geological and operational risks which are common to the petroleum industry. They can be minimized, but not entirely eliminated. In addition, the proposed project carries the risk of the market not growing at the projected rate. These risks are discussed below; none is considered a significant deterrent to the project. 4.31 The gas production potential of the Bakhrabad field is considered to be highly promising by various experts who have examined existing geo- logical and well data. However, only one well has been drilled into the structure. Additional drilling and geophysical study are necessary to delineate the production zone and ascertain with a high degree of certainty the magnitude of the gas in place, and the rate at which it can be delivered. The project is to a large extent protected from this risk in that back-up reserves from the Titas and Habiganj fields can, if necessary, supplement the Bakhrabad production. Furthermore, as shown below, even if gas deliveries amount to only 80 MMCFD, the economic rate of return from the project will still be quite attractive. 4.32 Finally, the possibility exists that the market will not grow, as predicted, to an average rate of 203 MMCFD by the year 2000 AD. Including the fertilizer plant, the initial market which can be foreseen with reasonable certainty amounts to an average consumption of 80 MMCFD or 0.5 TCF cumulatively. Sensitivity analysis shows that this consumption level is sufficient to make the project economically sound with a rate of return of about 50%. Therefore, future market growth is not a significant factor in the economic viability of the project. Nevertheless, failure of the market to grow to the projected levels would have the consequence of having invested in an oversized pipeline system from which maximum benefits cannot be derived. However, the incremental investment for such oversizing would be relatively small assuming demand does not deviate radically from the forecast. VI. FINANCIAL ASPECTS 5.01 Bakhrabad Gas Systems Limited (BGSL) will be incorporated as a separate entity within the Petrobangla group. BGSL will be responsible for field development as well as marketing of the gas of the Bakhrabad field. Its revenues will be derived exclusively from the sale of the gas to the Chittagong area consumers. BGSL will account for and depreciate its own assets, incur operating expenses, and generate revenues in order to meet its debt service requirements. It will ensure that most of its future expansion in terms of distribution network and production facilities will be met from within its own resources after the initial implementation period. Market 5.02 The market for gas is expected to develop as follows: - 31 - Gas Consumption: MMCF per year 1985 1990 1995 2000 Industrial 10,163 18,084 38,545 44,358 Fertilizer 8,100 17,325 17,325 17,325 Power 2,683 2,683 7,246 12,356 Commercial/Domestic 11 77 158 173 TOTAL 20,957 38,169 63,274 74,212 These figures were based on the consultants- market study as revised by IDA and agreed upon with GOB. BGSL Revenues 5.03 GOB has agreed that gas tariffs should be set at such levels as will meet the objectives mentioned in para. 2.08. Regarding the financial aspect, BGSL should be a financially sound organization with revenues suffi- cient to cover, after the initial operating period, operating expenses and debt service, while achieving adequate rates of return on revalued assets and generate a reasonable proportion of BGSL-s future development requirements (see para. 5.07). It is estimated that the revenue to BGSL (net of excise duty) which will meet this financial objective should be Taka 17 per MCF in 1985, Tk. 18 in 1987 and Tk 31 in 1989, as described in paras. 5.06 and 5.07. BGSL's Financing Plan 5.04 The table sets out below a summary of BGSL's estimated capital requirements for the four-year (FY 1981 - 1984) construction period of the project and the sources from which they would be met. Further details are given in Annex 5.04. - 32 - Taka US$ % (millions) Requirements Fixed Investments 2,468 159.2 92 Interest during Construction 203 13.1 7 Working Capital 17 1.1 1 Total Requirements 2,688 173.4 100 Sources Internal Cash Generation 155 10.0 6 Less: Debt Service (230) (14.8) (9) Net Internal Cash Generation (75) (4.8) (3) Government Contribution 785 50.7 29 IDA Credit 1,248 80.5 47 Japanese Loan 404 26.0 15 OPEC Loan 326 21.0 12 Total Sources 2,688 173.4 100 5.05 The Japanese loan will be made to GOB at the rate of 1.25% with a repayment period of 20 years including 10 years of grace period and onlent to BGSL at an interest rate of 12% per annum. The OPEC loan will be relent to BGSL at 12% rate of interest per annum, for a period of 15 years including 5 years of grace. On the basis of a subsidiary Loan Agreement, satisfactory to the Association, the proposed credit would be onlent to BGSL at a rate of interest of 12% for a period of 15 years, including a grace period of five years. GOB will bear the foreign exchange risk of these borrowings. GOB will furthermore contribute the balance of the funds needed by the company presently estimated at about US$51 million. During negotiations, an assurance was obtained from GOB and Petrobangla that they will make available to BGSL on a timely basis any local and foreign currency funds including cost overruns that may be needed to complete the project. Future Finances 5.06 Projected income statements, balance sheets and statements of sources and applications of funds are shown as Annexes 5.01, 5.03 and 5.04, with related assumptions in Annex 5.02. Salient financial indicators for the first six years of BGSL's operation are presented below: - 33 - Fiscal Year 1984 1985 1986 1987 1988 1989 Sales (MMCF) 11,942 20,957 32,634 33,784 34,445 34,988 Net Revenue to BGSL(Tk./MCF) 15.0 16.6 16.9 17.9 26.3 30.6 Net Income before Interest (Tk. million) 6 157 344 377 586 453 Net Income after Interest (Tk. million) (224) (80) 119 175 408 299 Return on Revalued Gross Fixed Assets (%) 0.2 5.0 10.0 10.0 14.2 1/ 10.0 Debt/Equity Ratio 69/31 65/35 55/45 46/54 35/65 27/73 Debt Service Coverage (times) 0.7 1.4 1.2 1.4 2.1 2.0 5.07 In order to meet the criteria set out in para. 2.08, the Government and BGSL have agreed during negotiations to set BGSL-s tariffs (net of excise duties) at such levels as to achieve a rate of return on revalued gross fixed assets of 5% in 1985 and 10% thereafter. The financial projections indicate that: (i) the rates of return in 1984 and 1985 are expected to be low. These are, however, acceptable in view of the lag involved in the demand build up, particularly as the proposed fertilizer plant, the major consumer in early years of operation, is not expected to be fully operational until 1986. The method of revaluation to be used in the computation of the rate of return on revalued assets was discussed and agreed upon during negotiations. Since most of BGSL's fixed assets are expected to be imported, the UN index for the prices of machinery and equipment exported to developing countries will be used for purposes of revaluation; (ii) BGSL would start to pay income taxes in 1988 2/; (iii) the current position is expected to remain satisfactory through- out the project period. During negotiations, BGSL undertook that accounts receivable should at all times be lower than three months sale of gas. (iv) debt/equity ratio is expected to reach 83/17 in 1982 and to improve afterwards to 69/31 in 1984 and 55/45 in 1986. The latter would still leave a margin for further borrowings. However, during negotiations, assurances were obtained from BGSL that no long term debt will be incurred without prior agreement by the Association, unless the maximum future debt service is covered 1.5 times by net income before charging depreciation; debt service coverage is projected to be 1.4 in 1985, 1.2 in 1986, and to remain above 1.4 afterwards, which is satisfactory. The low coverage of 1984 is acceptable in view of the projected demand for this year. Present forecasts indicate that the Company may have 1/ Result of loss carry forward tax laws. 2/ In accord'rice with the Companies Act of 1913, BGSL will incur income taxes at the rate of 55% of net profit, while losses can be carried forward up to five years for tax purposes. - 34 - surplus cash and may be able to distribute dividends after 1985. However, in order to protect BGSL's financial viability, Petrobangla and BGSL agreed during negotiations that surplus funds from operations would only be applied to purposes other than gas operations after ensuring that sufficient in- ternally generated funds are available for meeting debt service requirements, operating expenses, and a reasonable proportion of investmeilt requirements to ensure adequate gas supplies for the Chittagong market. The DCF rate of return has been computed at 11% in real terms, which is satisfactory. VI. ECONOMIC ANALYSIS 6.01 In addition to producing significant direct economic benefits through import savings, this project represents an important contribution to the Government-s effort to enhance domestic resource mobilization and stimulate industrial development. Most of the gas produced by the project will be used in the industrial and power sectors to replace imported fuel oil. In addition, some of the gas will be used as feedstock, enabling the expansion of the country's domestic fertilizer industry, and thereby reducing the need for fertilizer imports. 6.02 In estimating the project's benefit streams, it has been assumed that the natural gas used by existing industry and power has a value of $164/ton, based on the thermal equivalence of gas and fuel oil and the September 1979 cif price of fuel oil imported from Singapore. This value is assumed to increase by 3% in real terms each year. All the incremental gas demand from industry and power subsequent to the completion of the project has been conservatively assumed to be induced and the value of the induced demand has been estimated at Tk. 25/MCF, representing 50% of the difference between the economic cost of gas and the cost of imported fuel oil. The value of the gas used as a feedstock to the fertilizer plant is calculated as the value added by gas in fertilizer production which would leave the economy indifferent between domestic production and import. This is the difference between the cif Chittagong price of imported urea and the cost of production (excluding gas) in the proposed Chittagong fertilizer plant. 1/ This difference is estimated at Tk. 48 per MCF. 6.03 The project's cost streams used a foreign exchange shadow price of Taka 20 per U.S. dollar, which is based on the free rate allowed for worker-s remittances from abroad. The local labour component was shadow-valued at 75 percent of current wages owing to the surplus labour situation in the country. Because gas is a depletable resource, its supply cost must include an allowance for the lost opportunity of future use. Therefore, a depletion premium for the gas has been computed on the assumption of gas availability 1/ Based on urea price Bank projection and on the Report on Chittagong Urea Fertilizer Project in Bangladesh, November 1974, Unico, as updated by the Bank for cost data in September 1979. A rate of return of 12% to the fertilizer plant has been assumed in the computation. - 35 - in Bangladesh for 40 years and an increase in real terms of 3% a year from an initial cif Bakhrabad-Chittagong price of $164 per ton for fuel oil. The social discount rate is assumed to be 12% per year. 6.o4 The economic rate of return under these assumptions would be 57% (Annex 6.01). If, on account of financing problems, the Chittagong fertilizer plant is delayed by two years, the economic rate of return would be 51%. Similarly, if recoverable gas reserves in Bakhrabad, Titas and Habiganj limit the availability of gas in the Chittagong market to 80 MMCFD, the economic rate of return would be 50%. In the event Titas is to be linked with Bakhrabad at an additional project cost of US$30 million, the economic rate of return would be 47%. Under the worst scenario, where the fertilizer plant is delayed by two years, gas availability restricted to 80 MMCFD and the project cost increased by US$30 million, the economic rate of return would still be 35%. 6.05 Because Bangladesh is blessed with such large supplies of gas relative to its domestic demand and because the possibilities for gas export appears remote, there is a large "economic rent" to be captured between the cost of the gas to the economy (basically its production cost plus a depletion premium) and its value to those consumers who would otherwise use imported fuel oil. Setting the price of gas above its cost to the economy (about Tk. 13/MCF) but below the fuel oil domestic equivalent price (Tk. 47/MCF), encourages gas-based industries and at the same time mobilizes resources for other sectors of the economy. This will become increasingly important in Bangladesh as the role of food aid as a source of budgetary support declines with continued movement toward food self-sufficiency. The tax base must be diversified to encompass production and domestic income, in addition to import-related levies. Bangladesh has few areas of its economy where a surplus can be mobilized since agriculture incomes are difficult to tax for political and administrative reasons. Its natural gas resources present a unique and immediate opportunity to generate resources for the benefit of the economy, with minimal economic disincentives and relatively light administrative requirements. 6.06 Bangladesh is also likely to benefit from the small amounts of natural gas liquids (NGL) present in the gas. In addition, there will be environmental benefits in terms of reduced atmospheric pollution in the Chittagong area as natural gas replaces fuel oil. VII. RECOMMENDATIONS 7.01 During negotiations the following issues were raised with GOB and satisfactory assurances were obtained that: (a) GOB would undertake a gas utilization and pricing study (paras. 2.09 and 2.19); - 36 - (b) GOB would increase national average gas prices by at least 20% by June 30, 1981 and periodically thereafter to fully reflect inflation taking into account movements in inter- national fuel oil prices and in addition to provide a margin for domestic resource mobilization (para. 2.09); (c) GOB would annually review with the Association its proposals to meet the objectives of the above pricing policy (para. 2.09); (d) GOB would give all necessary assistance to BGSL for maintaining the project schedule (para. 3.10 (b)); (e) GOB would provide BGSL with all local funds for the project in the form of equity and with the foreign currency funds to complete the project (paras. 3.05 and 5.05); (f) GOB would provide BGSL with the necessary funds for developing the additional gas production needed for the future Chittagong market (para. 4.07 (a)); (g) the next urea plant, apart from the one proposed at Chorasal would be located in Chittagong (para. 4.09); (h) an additional 1.0 TCF of proven gas-in-place reserves would be dedicated to the Chittagong market from the Titas/Habiganj fields until such additional reserves are established at Bakhrabad or an alternarive field (para. 4.07 (b)); (i) the reserves committed under (h) above would take precedence over all other commitments (para. 4.07 (c)); and (j) GOB would give all necessary approvals to increases in gas prices by BGSL to ensure sufficient revenues for BGSL to achieve a rate of return on its revalued gross fixed assets of 5% in 1985 and 10% thereafter (para. 5.03). 7.02 Assurances were obtained that: (a) BGSL would prepare a master plan for executing the project by March 31, 1981 (para. 3.10 (a)); (b) BGSL would submit to the Association its recruiting and training program within 6 months after approval of the IDA credit (para. 3.10 (d)); (c) BGSL would provide the Association with a satisfactory plan for an accounting information system and the staffing and organiza- tion of its accounting and finance department by September 30, 1981 (para. 3.11); - 37 - (d) BGSL and Petrobangla would forward independently audited financial statements to the Association within 6 months after the end of each fiscal year (para. 3.12); (e) no civil works or materials contract for laying of the pipeline would be awarded until an additional well has been drilled and its results analyzed and found satisfactory to the Association and until the pipeline right-of-way has been acquired (paras. 4.17 and 4.29); (f) BGSL would maintain gas tariffs to meet its required rates of return on gross revalued assets (para 5.07); (g) accounts receivable would at all times be lower than three months of gas sales (para. 5.07); (h) no long-term debt would be incurred without prior agreement of the Association unless debt service is covered 1.5 times by net income before charging depreciation (para. 5.07); and (i) surplus funds from operations would not be distributed and/or applied to purposes other than gas operations unless the operating expenses, debt service requirements and investment needs of BGSL are met from internally generated funds (para. 5.07). 7.03 Conditions of effectiveness of the proposed credit would be: (a) the execution of the Subsidiary Loan Agreements between the Borrower and BGSL and Petrobangla (para. 4.23); (b) the completion of all conditions of effectiveness of the OPEC and OECF Loan Agreement by the Borrower (para. 4.23); (c) the appointment by the Borrower of key BGSL staff for implementation of the project (para. 3.10(c)); and (d) the approval of the Project Proforma by the Borrower (para. 4.22). 7.04 A condition of disbursement for the training component would be the submission of a satisfactory training program for BGSL staff. 7.05 With satisfactory resolution of the items outlined above, the project constitutes a suitable basis for an IDA Credit of US$85 million. BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT Estimates of Consumption of Energy Supplied by Traditional Fuels Percent of Total Production Total BTU Fuel Used as Contet Fuel x 10 Cow Dung 35 50 Jute Stick 50 12 X Rice Straw 10 36 Rice Hulls 80 48 Bagasse 75 11 Firewood .. 7 Twigs, Leaves .. 18 Other Wastes .. 18 Total .. 200 Source: Bangladesh Energy Study, 1976 BTU - British Thermal Unit. - 39 - Annex 2.01 Page 1 of 2 BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT IMPORTANT GAS FIELDS IN BANGLADESH 1. Sylhet This was the first gas field to be discovered in Bangladesh by the Pakistan Petroleum Limited in 1955 and is located 11 miles East of Sylhet. Sylhet structure is asymmetrical anticline trending from North East to South West. Its Eastern flank is steeper in comparison to the Western flank which is faulted at depth. There are two main gas producing zones at depth of 3,973-4,202 feet and 4,290-5,430 feet. So far, six wells have been drilled, of which two were abandoned, two are producing and the remaining two could be put into production if required. The field was commercially commissioned in 1961 and supplies gas to the Fenchuganj Fertilizer Factory. In addition it meets the commercial and domestic requirements of the Syhlet town and various tea gardens located in the district. Gas in place is estimated between 290 to 430 billion cubic feet (bcf) of which 78 bcf have so far been produced. 2. Titas This field, presently the most important in Bangladesh, is located in the Comilla district. It was discovered by the Shell Oil in 1962. It has a dome like subsurface structure with a peripheral closure of some nine by twelve miles, at a depth of 3,150 feet. It is asymmetric with a steeper Eastern flank. Four gas bearing zones have been identified, which are at a hydrostatic prrssure ranging from 4,200 psi to 4,500 psi. Total pay zone has a thickness of 426 feet and the gas saturation has been determined at 55% to 77%. Four producing wells have been drilled at a depth ranging from 9,350 feet to 12,325 feet. Gas from this field is being used by the power stations at Ashuganj, Ghorasal and Shiddhirganj and by the fertilizer unit at Ghorasal. In addition, it also provides for the industrial, commercial and domestic requirements of Dacca. Total reserves are estimated at around 2,250 bcf, of which 167 bcf have so far been produced. 3. Chhatak This gas field was discovered in 1959 by Pakistan Petroleum Ltd; its structure is an east west trending faulted anticline and is located in the Sylhet district. This gas is used in the Chhatak cement factory, in the Sylhet paper mills and for domestic use in the town of Sylhet. So far 17 bcf of gas has been used against estimated reserves of 40 bcf. 4. Habiganj This gas field was discovered by he Shell Oil Company in 1963. It is located in the Sylhet district, about 20 miles north east from the Titas gas field. The Habiganj structure is a continuation of the Baramura anticline of Tipura State in India. Including Habiganj the length of the anticline is about 80 miles. So far two wells have been drilled. Both the wells have two - 40 - Annex 2.01 Page 2 of 2 gas bearing zones at depths of 4,590 to 5,500 feet and 9,889 to 9,970 feet. Gas is being utilized for power generation at Shajibazar and in the adjoining tea gardens. It is also proposed to utilize gas from this field for the Ashuganj Fertilizer Factory and a 12" pipeline for this purpose is currently under construction. So far, 38 bcf of gas has been produced from this gas field against gas reserve estimates 1280 bcf. 5. Bakhrabad This gas field is one of the most promising discoveries to date. It is located west of the Tripura uplift, about 25 miles southwest of Titas and northwest of the town of Comilla. It consists of a seismic elongated anti- cline having four culminations. Presence of gas in this field was estab- lished by Shell, when the first and only well (BK-1) was drilled and completed in 1969. The well was tested for gas in two separate zones, though several additional zones were encountered and found through electrical interpretation to contain gas. According to the analysis made by Shell, the gas reserves were estimated in the range of 2.8 to 3.7 tcf. No well has subsequently been drilled though, on the basis of data collected by Shell, consultants have estimated the proven reserves of B-1 culmination at 1.5 tcf, of which 1.1 tcf are considered recoverable. Further additional drilling at the B-1 site might indicate a potential of around 1.4 tcf. However, to fully delineate the field, additional drilling in other culminations (A-1, A-2 and B-2) would need to be undertaken. BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT Production and Consumption of Natural Gas (MMCF) Crude Oil Consumption Year Production Million Power Fertilizer Commercial Domestic Other- Total in Cafpt Barrels 1968-69 9,434 1.73 2,843 5,554 009 000 698 9,104 .09 1969-70 14,932 2.73 6,017 7,644 026 004 813 14,504 .06 1970-71 11,467 2.10 7,160 8,148 041 022 1,042 16,413 .31 1971-72 16,727 3.06 5,480 3,979 034 036 611 10,140 .50 1972-73 23,577 4.31 7,910 14,075 065 087 1,284 23,421 1.17 1973-74 27,124 4.96 10,146 15,773 114 267 2,013 28,313 3.49 1974-75 17,976 3.29 8,446 7,109 181 277 3,741 19,754 3.55 1975-76 27,357 5.01 8,705 15,901 266 488 3,510 28,870 6.11 1976-77 32,360 5.92 11,408 15,285 360 771 4,215 32,039 9.43 1977-78 34,294 6.28 12,235 13,837 546 1,217 5,529 33,364 14.54 1978-79 39,511 7.23 14,627 14,802 957 1,809 6,143 38,338 21.13 1/ Other - Industries included are Iron and Steel Works, Telegraph Works, Ceramic, etc. Source: Petrobangla x4 BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT Refinery Yield and Consumption of Petroleum Products (Tons) Production Consumption Production Consumption Production Consumption Production Consumption Products 75/76 75/76 76/77 76/77 77/78 77/78 78/79 78/79 LPG - - - 162 162 605 605 Naptha 61,993 5,620 91,974 15,210 82,341 50,650 64,545 27,410 Motor Spirit 54,925 51,160 51,380 50,450 53,141 57,340 55,750 55,190 High Octane Blending Component 3,385 2,300 1,545 3,260 2,161 3,790 3,385 4,730 Jute Batching Oil 28,796 27,740 28,475 27,950 35,195 33,820 32,938 31,060 Jet Petrol 16,772 23,850 12,776 24,100 6,908 26,730 12,705 27,770 Superior Kerosene Oil 203,393 341,310 247,302 359,750 263,963 353,490 306,358 369,550 High Speed I Diesel 106,828 243,610 147,314 235,300 120,759 300,500 87,588 303,300 Light Diesel Oil 30,705 29,160 24,220 29,010 31,389 24,190 29,292 28,250 Furnace Oil, (Heavy Stock & 310,994 345,740 427,207 315,990 385,580 380,050 386,736 379,450 Refinery Fuel) Furnace Oil (Low Sulphur) 29,572 30,100 33,542 31,150 39,102 27,270 37,274 32,310 Other (Special Boiling Point Solvent & Mineral Turpentine) 970 1,950 1,235 3,150 2,398 3,080 1,863 2,350 TOTAL 848,333 1,102,540 1,066,970 1,095,320 1,023,099 1,261,072 1,019,039 1,261,975 0 Source:_Petroba ngla, , > Source: Petrobangla & BPC o - 43 - Annex 2.04 Page 1 of 2 BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT PROPOSED PHYSICAL PROGRAM FOR SECOND FIVE YEAR PLAN OIL AND GAS SECTOR (A) Survey (i) Geological: Length - 1250 km Area - 2000 sq. km (ii) Gravity: Length - 6000 km Area - 17500 sq. km of Semi-detailed or 7500 sq. km of detailed. (iii) Seismic (Multifold): Length of Profile - 1250 km. Regional (Reflection) - 2750 km. Detailed Area (Detailed) - 6000 sq. km. Length of Profile (Refraction) - 4375 km. (iv) Vertical Seismic Profiles - 23 wells. (B) Exploratory Wells - 20 wells. (C) Production & Development of Gas Field: (i) Development Wells: Field No. of Wells Titas 3 Habiganj 2 Chhatak 1 Kailashtilla 1 Bakhrabad 5 (1st phase) Titas/Bakhrabad 3 (2nd phase) Total 15 (ii) Natural Gas Liquids Processing Plant: 64000 MT. capacity (D) Transmission Line: (a) Bakhrabad - Chittagong (24") - 110 miles. (b) Parallel line from Titas to Ghorasal or a new line from Bakhrabad to Demra (14" & 16") - 30/40 miles. (c) Ashuganj to East Bank of Jamuna via Kishorgonj, Mymensingh and Jamalpur (12") - 40 miles. - 44 - Annex 2.04 Page 2 of 2 (d) Sylhet Tea Estate: Habiganj-Shamshernagar (6") - 30 miles. Shamshernagar-Juri (4") - 30 miles. (E) Distribution Line: (a) Chittangong, Comilla, Baksham and Feni Area - 600 miles. (b) Titas Franchise area (Phase II) - 300 miles. tc) Mymensingh, Jamalpur and Kishorgonj - 100 miles. (d) Chhatak & Sumamgonj - 20 miles. (e) Sylhet Tea Estates: Phase I - 115 miles Phese II - 65 miles. (F) Petroleum Sector: Additional/new capacity creation (i) L.P.G. Recovery 14000 tons (ii) Lubricating Oil 40,000 MT/year (iii) Refinery capacity* 20 lakh tons (iv) Tankers**: Coastal 90,000 tons (9 tanker) Shallows 1000 tons (2 tankers) (v) Waste Oil recycling 4,500 tons of base lubricating oil (in the private sector) (G) Traditional and Non-Conventional Energy (i) Field trial of Solar pump for irrigation a Pilot Plant basis. (ii) Field trial of phototype wind mill which suits the technological base of Bangladesh. (iii) R & D on alternative energy sources and promotion of their uses. (iv) Integrated study, monitoring and coordination of traditional and non-conventional sources of energy by the Planning Commission. - 45 - ANNEX 2.05 Page l oi 5 BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT Natural Gas Powered Motor Vehicles Historical Development 1. The early development of the internal combustion engine was based largely on gaseous fuels. Beginning around 1800 coal gas, originally produced for lighting, began to be used in engines. During the first three-quarters of the 19th century, a series of major advances in gas engine design were made, culminating in Nicolaus Otto's invention of the four cycle Deutz "A" engine of 1877. Liquid fuels, developed at about the same time, however, proved to be easier to distribute and store and to have a higher energy content. Wide- spread acceptance of gasoline and diesel fueled engines for the infant auto- mobile industry soon followed. 2. From the turn of the century to 1950, gas fueled engine technology found application primarily in the stationary engine market. The popularity of gas for water pumping, power generation, and other industrial uses was due to its low cost, clean burning characteristics, and increased engine life. Only in recent years, spurred initially by air quality concerns and shortly thereafter by energy supply concerns, have gas fueled vehicles appeared on a commercial basis. An estimated 400,000 automobiles were operating on various gas fuels worldwide in 1978, and the numbers have been growing ever since. This fact has remained obscure to the general public, as the utilization to date, except for Italy and France, has largely been limited to private coMaY. cial fleets, and more recently a few municipal fleets. Status of Technology 3. CNG and Gasoline Engines. Virtually all of the gaseous fuel used to power transportation is in gasoline engines which have been retrofitted with dual-fuel apparatus allowing them to burn either gasoline or gas. Compressed Natural Gas (CNG) has been used extensively as an automotive fuel in Italy since the late 1930s. Currently nearly 250,000 vehicles, mainly private, are running on CNG in the central and nothern part of the country. A small number of other countries are using CNG as an automotive fuel, although on a far more limited scale. In Franice there are about 20,000 vehicles operating on CNG and in U.S.A. more than 200 million miles have been logged by CNG powered vehicles (owned largely by fleet operators) over the last ten years. Conversion to natural gas occurred where (a) natural gas was abundant and relatively cheap in relation to other fuels; (b) an extensive distribution network existed; and (c) prices of gasoline on account of taxes etc. were high enough to justify expenditures on conversion. However, in the U.S.A. conversion was motivated either by a concern over the pollution levels or because captive gas was available to some companies. In either case, conversion to CNG took place in - 46 - ANNEX 2.05 Page 2 of 5 a sporadic fashion and was a result of individual initiative. However, with sharply rising prices of gasoline and consequent higher import burden, CNG becomes an attractive alternative for countries which are well endowed in natural gas. New Zealand which has a large natural gas resource, but has to import liquid hydrocarbons, is sponsoring conversion of about 200,000 motor vehicles over the next few years. 4. Adapting a gasoline powered motor vehicle to a dual-fuel powered vehicle using natural gas as the alternate fuel is relatively simple. No internal changes to the engine, its cooling, lubrication or iginition system are necessary. The conversion kit consists of a two-stage pressure reducing assembly, an air-gas carburation unit, solenoid valves for the CNG and gasol- ine supply lines, and high pressure tubing and fittings. The CNG is stored in cylinders, normally two or three, located usually in the trunk of the automobile or in the case of vans and trucks on the bed of the vehicle. A safety requirement is that the passenger space of the vehicle must be her- metically sealed off from the cylinders if they are located in an enclosed portion of the vehicle such as the trunk. Furthermore, the cylinder space must be vented to the atmosphere. The pressure regulating assembly is nor- mally jacketed to allow the circulation of hot water from the radiator in order to prevent freeze-up. A selector switch, generally mounted on the dashboard, allows the driver to select the desired fuel by actuating the solenoid valves in the supply lines to the appropriate off-on position. There are five known manufacturers of CNG conversion systems in Italy supplying not only the Italian but a substantial export market. In the U.S.A. there is one manufacturer engaged in this work on a fairly active scale. Italy is also the leading supplier of CNG cylinders. There are five manufacturers, each using its own process, to fabricate seamless cylinders from mild alloy steel (chrome-moly or nickel-chrome-moly) billets or tubing. The cylinders are designed for an operating pressure of 200 atmospheres and are hydrostatically tested at 300 atmospheres. Cost of conversion kit varies between $125 to $150 and a pair of cylinders costs about $300. Including labour, the cost of conversion per vehicle would be of the order of $550. 5. CNG and Diesel Engine. A considerable amount of development work has been carried out by several groups in Italy on the conversion of diesel engines to CNG. The basic approach has been to retain the diesel cycle, inject diesel fuel by the usual direct injection pump in limited quantities and aspirate CNG in the induction manifold. No sparking device is added to the engine, and diesel oil acts as a pilot fuel and sparks the CNG. In such conversions, the proportion of CNG can vary from 0 to 75% without affecting the performance of the vehicle. The impetus for this work came from the desire to reduce pollution, but the price differential between diesel fuel and CNG was too small to make conversion attractive. Some research and development has also been carried out in the U.S.A. A bus has been converted, and suc- cessfully operated over a long period, to run on 100% CNG by altering the engine to spark ignition. Work has also been done on converting diesel engines to dual-fuel systems with up to 90% CNG and 10% diesel. From the development works carried out so far, it would appear that conversion of - 47 - ANNEX 2.05 Page 3 of 5 diesel vehicles to dual-fuel (diesel and CNG) is technically feasible. However, range would be an inhibiting factor limiting its use essentially to urban transport. 6. Fueling Stations. Refueling is one area in which gas burning cars differ markedly from gasoline fueled vehicles. For compressing gas to 200 atmosphere pressure special equipment is required to recharge the vehicle. A typical compression station comprises electric or gas engine driven com- pressors, storage cylinder to provide surge capacity, and flow and pressure measuring and recording facilities. For vehicle refueling there are normally at least five bays, each equipped with a hose which is coupled to the vehicles filling connection. Two options are available on refueling stations; locating the stations so that natural gas be compressed directly from a pipeline or supplying a station with mobile tanks or cylinders which are refilled at a mother compression station on a pipeline. Usually it is a combination of the two; with a mother compression station operating off a high pressure transmis- sion pipeline and feeding 5 to 20 satellite stations therefrom. One of the most critical factors in selecting the site of a compression station is the pressure in the natural gas supply pipeline. The capital cost of compression can vary by a factor of six between operating at an inlet pressure of 20 atmospheres compared to one atmosphere. Operating costs, especially compres- sion energy, are also significantly affected. The mother - satellite combin- ation permits the use of high pressure, if available, in the transmission pipeline. On account of these considerations, cost of compression can vary widely. On the basis of preliminary computation, cost of compression in Bangladesh would be of the order of US$0.05/litre. 7. Economy and Performance. Improvements in engine efficiency of 5 to 40 percent have been observed in vehicles operating on CNG, with a figure of 14 percent for an average. In a gasoline engine a portion of the total amount of fuel consumed by the vehicle is required to operate a device known as an accelerator pump; a gas powered vehicle does not use such a pump, resulting in an immediate saving in fuel. In addition, gaseous fuels mix readily and completely with air and do not later separate or condense out; methane in particular can burn over a wide range of air-fuel ratios. The result is more complete combustion with increased energy efficiency and reduced pollu- tion. The degree of improvement in efficiency depends on the type of usage: (a) improvements on the order of 10 percent have been obtained under highway conditions, while (b) improvements of up to 40 percent have been obtained under city stop-and-go driving conditions. Vehicle age and size do not appear to affect relative engine efficiency. 8. It is this very efficiency in energy usage which is, in part, res- ponsible for the engine power loss suffered by CNG fueled vehicles relative to gasoline fueled ones. The extent of the power loss varies with the vehicle and driving situation, and is generally noticeable only when accelerating, climbing a hill, or carrying a heavy load. Averaged power losses experienced with CNG operation have been on the order of 10-20 percent, although the drop-off can be substantial for vehicles in low throttle settings and higher RPM ranges and for heavily laden vehicles. Advancing spark timing within - 48 - ANNEX 2.05 Page 4 of 5 rather strict limits may reduce the power loss. At the same time, by virtue of the gaseous state, natural gas offers easy starting, reliable idling, and stumble free acceleration. 9. Natural gas has an octane rating of 130, and therefore, does not need the addition of lead--a substance harmful to both people and engines. Moreover, although day-to-day maintenance costs may be higher initially until experience is gained, use of natural gas can result in considerable savings on routine preventative maintenance. Actual use has shown for example, that a CNG powered car can be driven up to 36,000 miles between oil changes and 40,000 miles between spark plug replacements. Engine life is also enhanced substantially. These advantages have to be measured against a loss in cargo space (30%) to CNG cylinders and limitations of range imposed on the auto- mobile. Two cylinders of gas, would on average carry CNG equivalent to 20 litres of gasoline, giving an average vehicle a range between 150 and 200 kilometers; after which it would either need to be refueled or switch over to gasoline. Again, not only will refueling be required twice as often but it will also be more time consuming. Refueling natural gas would take about ten minutes against three to five minutes for gasoline. Despite these dis- advantages there are reasons to believe that consumers would be willing to convert provided adequate fiscal incentives are provided. However, the major benefactor of the conversion would be the economy and in the case of Bangladesh, a modest conversion program (6,000 vehicles), would secure a rate of return in excess of 70%. 10. Safety and Environment. CNG is as safe, if not a safer motor fuel, than gasoline. It is ligher than air, and unlike gasoline, quickly dissipates when released to the atmosphere. Moreover, because of its high pressure it must be contained in very strong cylinders which have an extremely 10o prob- ability of bursting from excessive heat or mechanical damage. Durit)j 30 years of operation in Italy, which has the most extensive experience with CNC and where it is compulsory to report all accident damage involving gas cylinders, there is no recorded accident resulting from a faulty CNG system. Although CNG vehicles have been involved in their fair share of accidents, none were attributable to CNG components. Component failure has rarely resulted from an accident, and there have been no injuries or deaths attributable to CNG in an accident. In U.S.A. in over 175 million miles logged by CNG vehicles, there was no death and only one injury attributable to CNG in about 1360 collisions, of which more than 800 were rear end collisions. This excellent safety record of course does not mean that strict regulations and their enforcement, regard- ing the manufacture, installation and inspection are unnecessary. To ensure a high level of safety, iianufacturing quality and performance must be monitored and installations checked and approved annually. Cylinders must be checked and recertified at 5-year intervals. Particular attention must be paid in the routing and secure fastening of all high pressure piping and in reducing the number of connections and joints to a minimum. Cylinders involved in accidents must be recertified and those found mechanically defective or thermally over- stressed must be destroyed. A natural gas supply free of moisture and sulphur impurities is an essential safety requirement. - 49 - ANNEX 2.05 Page 5 of 5 11. Natural gas is non-toxic and non-reactive in the atmosphere; that is, it does not form smog. Moreover, it burns cleanly in a world in which exhaust emissions from motor vehicles are a major source of air pollution, particularly in urban areas. A vehicle powered by natural gas releases air emissions totaling only 10-20 percent as much as discharged by a gasoline powered vehicle. Composite emission comparisons in a series of tests in Southern California showed an 83 percent reduction in carbon monoxide, a 72 percent reduction in hydrocarbons, and a 97 percent reduction in oxides of nitrogen when operating on CNG compared to stock gasoline. On a total energy cycle basis (i.e., from extraction to end-use), fueling a vehicle with natural gas would result in total air emissions of only 10-40 percent of the total which would result from using present-day gasoline. 12. Potential for Use. Given the present price differential between gasoline/diesel and indigenously available natural gas, conversion of vehicles to CNG offers substantial economic advantage. At the same time, natural gas is more economical in terms of engine efficiency and maintenance, and more environmentally sound in terms of both safety and pollution. Nevertheless, the increased use of natural gas faces several constraints--capital costs of conversion, development of refueling stations and gas distribution, reduced vehicle range, and loss of engine power. Several of these constraints suggest the urban environment with the existing infrastructure (pipelines, etc.) and, initially, commercial and governmental fleets as the principal market for natural gas powered vehicles. In addition to clear identification of the potential savings to the consumers in using natural gas rather than gasoline, conveniently located refuelling stations, adequate conversion facilities, financial assistance for undertaking conversion, introduction of investment tax credits, accelerated depreciation schedules, road tax credits, and other financial incentives may be necessary to encourage greater conversion of vehicles. Important policies pertaining to standards, jurisdiction and fiscal incentives defined and established. Finally, caution must be exercised in attempting to introduce CNG powered motor vehicles in other countries, as technical feasibility, financial and economic viability, and social accept- ability will differ from country to country. Conversion to CNG on an exten- sive scale should therefore be considered only after its economic feasibility has been studied in depth and its acceptability verified through a pilot project. BANGLADESH BAKHRABAD GAS DEVELOPMENT PROJECT ORGANIZATION CHART OF THE PETROLEUM INDUSTRY IN BANGLADESH Minister of Petroleum & Mineral Resources Secretary Chairman Chairman Petrobangla Bangladesh Petroleum Corp. Board of Directors Director ~~~~~~~~~~~~~~~~~~~~~~~Me hna Standard DrcoDierect or etr spotl & Directcr Bum auoPetrlu Latr atr Aiatc Adinitrtion F ac lenn rdcin e atr ed i opn Company ReleyLurcn ii0 E: 0. 1h 0 BARIIRABAD GAS SYSTEMS LIMITED SOURCE AND APPLICATION OF FUNDS IN MILLIONS OF TAKAS AFTER REVALUATION OF ASSETS 1992 1993 1994 1995 1996 1997 1998 1099 2000 SOUlRCES NET INCOME BEFORE INTEREST 604.04 720.55 840.10 919.63 1,006.85 1,102.18 1,206.77 1,321.05 1,445.92 DEPRECIATION 319.50 400.96 439.01 480.65 526.21 576.06 630.61 690.31 755.62 _ -- - ------ _- - --_--_------ - --_-- -- - -- _- _-- ---- -_-- -- - -- _- - ---- - -_-- -- - --_ - -- -- --- INTERNAL CASII GENERATION 923.54 1,121.51 1,279.11 1,400.28 1,533.06 1,678.24 1,837.38 2,011.36 2,201.54 INCREASE IN ACCOUNTS PAYABLE 13.18 71.73 (82.95) 0.78 0.85 0.94 1.02 1.13 1.23 ONLENT IDA CREDIT DRAWDOWN - - - - - - - - - OTHER LONG TERM DRAINDOWN - - - - - - - - - INCREASE IN CAPITAL - - - - - - - - - TOTAL SOURCES 936.72 1,193.24 1,196.16 1,401.06 1,533.91 1,679.18 1,P38.40 2,012.49 2,202.77 USES OF FUNDS FIXED ASSETS 186.52 1,054.10 39.21 42.48 46.05 4).93 54.13 58.71 03.67 IWORKERS PARTICIPATION FUNDS 31.06 39.31 61.59 6q.51 77.41 85.32 94.00 103.48 113.85 INCREASE IN ACCOUNTS RECEIVABLE 36.40 63.20 107.44 49.58 51.50 53.72 58.89 64.40 70.41 INCREASE IN CAS11 401.93 (220.44) 754.58 1,029.89 1,358.95 1,400.21 1,631.38 1,785.90 1,954.84 INTEREST ON LONCTERM BORROWINGS 83.06 59.32 35.59 11.87 - - - REIMBURSEMENT, IDA CREDIT ONLENT 124.78 124.78 124.78 124.78 - - - - _ REIMBURSEMENT, OTHER LONGTERM 72.97 72.97 72.97 72.95 - - - - - TOTAL DEBT SERVICE 280.81 257.07 233.34 209.60 - - - TOTAL, APPLICATIONS 936.72 1,193.24 1,196.16 1,401.06 1,533.91 1,679.18 1,838.40 2,012.49 2,202.77 ===== ============ ======== ====--=== =====~== ====== …======-=== DEBT SERVICE COVERAGF 3.29 4.36 5.48 6.68 - - - - - NET CASHFLOW 713.13 70.50 1,056.60 1,309,30 1,440.21 1,575.35 1,725.17 1,889.16 2,068.44 BAKHRABAD GAS SYSTEMS LIMITED ECONOMIC ANALYSIS IN MILLIONS OF TAKAS 1081 1982 1983 1984 1985 1986 1987 1988 COST OF PROJECT _______________ TOTAIL ACQUISITIONS 32.78 026.73 1,250.23 172.70 14.76 14.76 14.76 14.76 LESS ITMPORT DUTIES - (31.00) (20.20) - - - - - TOTAL, FIXEI) ASSETS ACQUJISITTON, NET OF IMPORT DUTIES 32.78 895.73 1,239.03 172.70 14.76 14.76 14.76 14.76 OPERATING EXPENSES - - - IR.24 18.24 18.24 18.24 18.24 DEPLETION PREMIUMl - 34.04 59.73 93.01 96.?9 98.17 TOTAL ECONOMIC COSTS 32.78 895.73 1,239.03 224.98 92.73 126.01 129.29 131.17 PROJECT BENEFITS ________________ GAS IUSED IN UREA PLANT - - 388.80 831.60 831.60 831.60 GAS USED IN CARBON BLACK,SPONGE IRON, - - - - 12.97 98.28 131.48 148.65 STEEL & POllER FU1TURE, & OTlIER INDUSTRIES FUEL OITL REPLACED - - - 1,060.92 1,148.19 1,227.60 1,308.5() 1,383.35 VALUE OF ENERGY REPLACED - - - 1,060.92 1,549.96 2,157.48 2,271.98 2,363.60 PROJECT SAVINGS (32.78) (895.73) (1,239.03) 835.94 1,457.23 2,03l.47 2,142.29 2,232.43 PRES VALUJE UNIT COST OF GAS - - - 232.99 93.47 52.33 37.88 30. 61 RETURN ON INVESTMENT = 57.148% H 0 . Ftl O BAKHRABAD GAS SYSTEMS LIMITEn ECONOMIC ANALYSIS IN HILLIONS OF TAKAS 1989 1990 1991 1992 1993 1994 1995 COST OF PROJECT TOTAL ACQUISITIONS 14.76 14.76 14.76 85.79 452.13 14.76 14.76 LESS IttPORT DUTIES - - - - (31.10) - - TOTAL FIXED ASSETS ACOUISITION, NET OF IMPORT DUTIES 14.76 14.76 14.76 85.79 421.03 14.76 14.76 OPERATING EXPENSES 18.24 18.24 18.24 18.24 18.24 18.24 18.24 DEPLETION PREMIUM 99.72 108.79 117.30 132.80 153.09 160.77 180.34 TOTAL ECONOMIC COSTS 132.72 141.79 150.30 236.83 592.36 193.77 213.34 PROJECT BENEFITS GAS USED IN UREA PLANT 831.60 831.60 831.60 831.60 831.60 831.60 831.60 GAS USED IN CARBON BLACK,SPONCE IRON, 177.70 295.13 426.70 685.89 1,039.97 1,194.09 1,597.47 STEEL & POWER FIUTURE, & OTHER INDITSTRIES FUEL OIL RFPLACED 1,424.85 1,553.52 1,649.62 1,753.80 1,874.11 1,965.07 2,024.02 VALUE OF ENERGY REPLACED 2,434.15 2,680.25 2,907.92 3,271.29 3,745.68 3,990.76 4,453.09 PROJECT SAVINGS 2,301.43 2,538.46 2,757.62 3,034.46 3,153.32 3,796.99 4,239.75 ======== ======== ====U=== ======== ======== ======== 16=== PRES VAL.UE UNIT COST OF CAS 26.26 23.19 20.92 19.26 18.46 17.20 16.13 Ia' 0t. W jO BAKHRABAD GAS SYSTEMS LIMITED ECONOMIC ANALYSIS IN MILLIONS OF TAKAS 1996 1997 1998 1999 2000 COST OF PROJECT TOTAL ACQUISITIONS 14.76 14.76 14.76 14.76 14.76 LESS IMPORT DUTIES - - - - - TOTAL FIXED ASSETS ACQUISITION, NET OF IMIPORT DUTIES 14.76 14.76 14.76 14.76 14.76 OPERATING EXPENSES 18.24 18.24 18.24 18.24 18.24 DEPLETION PREMIUM 184.83 190.53 196.24 203.29 211.51 TOTAL ECONOMIC COSTS 217.83 223.53 229.24 236.29 244.51 PROJECT BENFFITS GAS USED IN UREA PLANT 831.60 831.60 831.60 831.60 831.60 GAS USED IN CARBON BLACK,SPONGE IRON, 1,727.27 1,887.13 2,054.75 2,258.21 2,496.83 STEEL & POWER FUTURE, & OTHER INDUSTRIES FUEL OIL REPLACED 2,084.74 2,147.29 2,211.70 2,278.05 2,346.40 VALUE OF ENERGY REPLACED 4,643.61 4,866.02 5,098.05 5,367.86 5,674.83 PROJECT SAVINGS 4,425.78 4,642.49 4,868.81 5,131.57 5,430.32 *-------3 ........ ........ =------- ------- PRES VALUE tUNIT COST OF CAS 15.28 14.60 14.03 13.56 13.15 0 . 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