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Analysis of Fiscal Terms of Bangladesh PSC
Nurul A Chowdhury, BEng (Civil)
Project submitted in partial fulfilment of the requirements for the degree of MSc (Energy and Resources), UCL School of Energy and Resources, Australia.
Best Poster, UCL Australia Graduate Research Conference 2012.
Natural gas is the main, and one of the few, indigenous sources of energy in Bangladesh. However, with the production of gas not catching up with the rapidly increasing demand, an energy crisis is looming fast in the country. One of the reasons for the lack of growth in gas production is that Bangladesh has not been able to attract much investment in the offshore exploration and production business.
My research project focussed on the fiscal terms of the production sharing contract (PSC) of Bangladesh to understand the reasons for the lack of interest from the international oil companies in investing in the country’s offshore areas.
A financial model was used for my research in which three reserve scenarios of 100 bcf, 500 bcf and 1 tcf were developed using data from previous Santos exploration programs in the area. The results showed that at the current fiscal terms, both 100 bcf and 500 bcf scenarios were uneconomic with negative NPV. The 100 bcf scenario did not even break even, while 500 bcf scenario, although, broke even, had a very low return of 6%. Only the 1 tcf scenario had a healthy return of 19% on the investment and an NPV of $106 million. Using the model it was found that the minimum economic pool size was approximately 820 bcf. However, a recent study by Santos showed that the mean reservoir size in this area is only 51 bcf. As a result, Bangladesh needs to offer more relaxed terms to attract investment in the area.
Sensitivity analysis of the fiscal terms showed that an increase in gas price was favourable to the profitability of both the contractor and the government. A higher gas price would also give more ‘profit gas’ to the government which could be used to continue the gas supply to the subsidised sectors. Tax and profit gas split also contributed significantly to the profitability, while the cost recovery limit was less influential.
My research recommends Bangladesh offers a better combination of fiscal terms to attract new investments and also to incentivise re-investments by existing investors.