Anniversary Article 1

Coal, Not Gas, Is The Panacea For Bangladesh’s Energy Security

Hafeezuddin Ahmad

There is growing concern about power availability and energy security facing the nation. This is acknowledged by Awami League government in its Five Priority Issues. The following is an analysis of the current Power Generation scenario (2009) with respect to the two primary fuels -- Gas and Coal.

What Is The Ground Reality?

·         Generation of power is nearly 90% dependant on gas resource.

·         Current gas supply is much short of demand. Several installed power plants are shut down; no new units will get gas; unless diverted from other users (fertilizer, industry, commercial, domestic).

·         Gas resource is fast depleting. Unless new discoveries are made, gas will run out within 10 years. New discoveries and production from these, if any, are at least 5-6 years away. It would appear that the mindset is still to bank on this primary fuel. Why ?

·         Extracting a bit of incremental gas from existing gas fields may increase current supply, but that would reduce the field’s life proportionately.

·         Coal reserves in north-western districts are significant,  to last for several decades. Except for Barapukuria, it is perceived that government is not pursuing with a sense of urgency. Why?

·         All new power plants should be coal fired. Our gas resource should be conserved for existing gas fired power plants. If significant discoveries are made in future, it could be used for more value added products i.e. fertilizer, petrochemicals and LNG.

What Should Be Done?

Coal mining must start immediately (in addition to Barapukuria), and construction of coal based power plants must start simultaneously, so that first coal would converge with first coal based power. The nation will have to cope with frequent load shedding, until in the interim, new power plants using oil or dual fuel (oil/gas) and strategically located, are set up urgently.   

Alternative Energy:

Clearly we, as a nation, must look at alternative energy sources. In the long term, renewable must be the answer, such as wind and solar. Whilst there are limitations (technical, safety and cost) in these areas, it is hoped that with future development and innovation in developed countries, which is going on with a sense of urgency, it would be possible to harness these for our future power need. There is also nuclear; government is in discussion for 1000 MW. We have already started on this path, and must persevere.

Power Generation 

Installed Power Plants

The current installed capacity is approximately 5551 MW, but the derated capacity is lower; estimated to be 5061 MW on 29-3-09 (due to plant ageing, wear and tear). Nearly 90% use gas as primary fuel. However, gas shortage,  plant maintenance and rehabilitation, have further reduced actual generation capacity. During March 09 average generation was around 3600 MW.  Demand is widely believed to range between 4400-4700 MW. So we are looking at 800-1100 MW shortfall.

To give an example, gas demand for power generation on 30-31 March 09 was 912 mmcfd, but only 745 mmcfd could be supplied, shortfall of 167 mmcfd (18%).  The maximum power demand (probable) on that day was 4600 MW. The maximum generation on 30-3-09 was 3803 MW,  so a shortfall of about 800 MW (17%). Consequently, load shedding was high. Interestingly, the highest ever generation was 4130MW on 17-9-07.  (source: BPDB-Petrobangla)

Pipeline Power Plants       

Over 1000 MW new capacity is supposed to be “under construction” during 2009/10, out of which 700 MW to be completed by June 09. However, all or most are gas based. How  will these be supplied with gas, when there is a net shortage already?  A net gas shortage does not mean there is shortage throughout the gas grid. If some of these units are located where there is already surplus gas or if additional gas can be produced from nearby existing fields, then well and good. However, if some units are in deficit locations, they would have to be converted, if feasible, into dual fuel (oil/gas) to be able to generate. This converted capacity would be added to the de-rated installed capacity as the “effective” capacity. If some units cannot be converted into oil, then they will have to remain idle until more gas is available. PDB can throw light on this.

Future Power Plants

New power plants (2000 MW plus “under process” and 1000 MW plus “new planned”) are envisaged to meet the projected demand under PSMP. It would be prudent to revisit such plans in the context of primary fuel availability.

What needs to be done ?

1. Unfortunately, the situation will not improve immediately so long there is a gap between demand and supply. Prudent load management can ameliorate the deficit situation.

2. Meanwhile there is urgent need to install new oil/gas dual fuel power plants to fill the gap between demand and supply (from existing plants and plants under construction plants which are converted into oil or dual fuel). (This exercise may already have been undertaken by BPDB-Power Division).

3. Maintenance and repair of all power plants must be given highest priority. This requires fast track emergency procurement of spares.

4. Conservation of available energy by mass scale use of energy saving bulbs; extreme prudence in the use of air-conditioners and national awareness against waste (switching off lights and fans whenever no one is around); maximizing day light timings in offices, shops and other public spaces.

5. Encouraging the use of captive generation in industrial and commercial entities by reducing price of generators and liquid fuels.

Gas Availability 

Gas Reserves, Demand and Supply

Bangladesh gas reserves are depleting. Production is unable to meet demand. Remaining reserves is estimated between 12-14 TCF (Proven 8.3 and Probable 5.5). This is likely to exhaust between 2015-2020. For example during 30-31 March 09, total gas produced was 1877 mmcfd, against normal demand of 2150-2200 mmcfd; so shortage was approximately 300 mmcfd (average 14-15%). Of this 745 mmcfd (39%) was to power plants, 206 mmcfd (11%) to fertilizer units, and 938 mmcfd (50%) to industrial, commercial and domestic consumers. (source Petrobangla). 

Gas based power generation

Currently, around 700mmcfd gas is supplied for power generation against demand of around 900 mmcfd, varying daily depending upon gas production, generation capacity of power plants, and diversion from other consumers. The fact is there is gas shortage daily. This inevitably results in reduced or no gas to some power plants, which were unable to generate to their operating capacity. The shortage would have been more; but for some power plants not operating due to maintenance and rehabilitation.

Increased effort for more gas discoveries

According to estimates from past surveys and studies (USGS and Norwegian Petroleum Directorate), there is 50% probability of Bangladesh having 32-42TCF undiscovered gas, and possibly more. Petrobangla is trying to increase production from its producing fields, and Cairns and Tullow are engaged in offshore exploration work (Blocks 16, 17, 18). All out exploration work is likely to yield positive result, given Bangladesh’s track record of successful drilling . (69 exploratory wells, 25 discoveries. 56 onshore exploratory wells, 22 discoveries, and 13 offshore exploratory wells, 2 discoveries). Despite the probability of some limited additional production from existing fields already, it would not be realistic to expect significant increase of gas production, what with Sangu depleting fast, and other unforeseen situations. The significant breakthrough would come only if new discoveries are made, unlikely before 2011, at the very earliest. Thereafter development and production would take another 3-4 years. So new gas, if any, is at least 5-6 years away.

What Needs To Be Done?    

·         Petrobangla should ramp up its efforts to produce additional gas from existing fields. An accurate re-evaluation should be made of how much more may be reasonably expected in the next 3-4 years. Very close co-ordination is needed between Petrobangla and Power Division (BPDB), so that gas allocation and utilization is maximized. There should be no surprises. Power Division and Petrobangla’s accurate, regular and updated rolling status of pipeline projects is critical for calculating the capacity of the emergency new dual fuel oil/gas fired plants.

·         Bidding for new blocks, and awards to successful bidders, should be expedited on an urgent basis.

·         Cairns and Tullow should be encouraged to expedite their exploration program.   

·         Bapex should become much more active, thus reducing dependency on IOCs for exploration and at the same time is more cost effective.

Coal Mining

Coal deposits

The north-western region of Bangladesh (Barapukuria, Khalashpir, Phulbari, Dighipara and Jamalganj) have an estimated coal resource of 3.3 billion tons, a third of which (in Jamalganj) is very difficult to mine due to being at depths exceeding 640 meters. The others are at shallower depths of 118-509 meters. Out of 3.3 bln tonnes of resource, about 962 mln tonnes are well studied coal deposits at shallower extractive depths. These are at Phulbari (572 mln tonnes at 150-240 meters), and Barapukuria (390 mln tonnes at 118-509 meters). The Khalaspir (143 mln tonnes at 257-483 meters), Dighipara (150 mln tonnes at 328-407 meters) and Jamalganj (1056 mln tonnes at 640-1150 meters) coal fields require further extensive studies for their commercial use. It may be noted that Barapukuria and Phulbari deposits have coal seam sections that are at very shallow depths, and therefore are the most feasible and viable for commercial mining. More coal field discoveries are expected with more exploration.

What Does This Coal Mean In Terms Of Gas?

In contrast to about 12-14 TCF proven gas reserve remaining, our coal deposit is equivalent to several times more TCF of gas, considering 1 TCF gas = 38 million tons coal (heating value).

To express this contextually,

·         3.3 billion tonnes north-western coal reserves (proven and probable) is equivalent to 87 TCF gas.

·         962 million tonnes coal (Phulbari and Barapukuria) is equivalent to 25 TCF gas.

·         Barapukuria coal deposit is equivalent to 10 TCF gas.

·         Phulbari coal deposit is equivalent to 15 TCF gas.

Bangladesh’s proven and probable coal reserve have huge potential. There are indications of more coal deposit discoveries in future.  There is also the extraction of co-products, such as rock, aggregate, clay, kaolin, and sand, all of which are economically useful.

Naturally, it is not possible to extract 100% of the coal deposit. This depends primarily upon the method of mining and techno-economic realities. In Bangladesh conditions of the discovered coal fields, open pit mining would allow 90% extraction, underground only 20%. Open pit mining, well tested and reliable technology, is prevalent in many countries.

The depth of the coal seam is important; the deeper it is, the more intense is the technology, cost, and safety. Coal at un-extractable depths may be used for producing coal-bed methane and coal gasification, although the technology of the latter is being pursued and improved in many countries…this is relevant for our deepest coal reserves. Overlying rock characteristics including location of the aquifers (underground water bearing rocks) are also important. Environmental concerns, hazards, land subsidence, and dewatering cost are important factors.

Mining is associated with social and physical issues, i.e. relocation of human population, loss of livelihood, relocation of infrastructure and other obstacles, land and traditional homestead loss. There are environmental issues i.e. effect on water bodies, forest, atmospheric emissions, ground subsidence, ground water, etc.

These concerns are not specific to Bangladesh…they are part of mining activity, encountered all over the world. With serious commitment, and partnership amongst the stakeholders i.e. government, affected population, and miners, they have been removed or mitigated. The economic benefit accruing to the nation is the over-riding factor.  

How Much Coal Is Needed For Power Generation And What It Means To The Nation?

This naturally depends upon plant design and capacity utilization. It is estimated that a 1000MW power plant will need between 3.0-3.5 million tons thermal coal annually. Clearly, several thousand megawatts can be generated from our coal resource. One way of looking at it is that only Phulbari deposit can feed five 1000MW power plants for 38 years, assuming mining capacity of 15 million tons yearly. So Bangladesh can comfortably shift to 100% coal based base load power generation, sustainable over several years. 

Globally, coal is the most abundant and least expensive energy source. It accounts for over 50% of US electrical energy, 20% of Canadian energy, over 65% of Indian energy and over 70% of Chinese energy.  Better technology, improved combustion, increased levels of scrubbing, filtering of flue gas etc have resulted in greatly mitigated environmental concerns.

First coal from new mining will take 4 years. It takes 5-6 years for the development of coal based power plants. So if the process of coal mining and coal based power plant construction is taken up immediately and concurrently,  it would not only be feasible to meet Awami League’s manifesto pledge by 2013 but also put Bangladesh to energy self sufficiency and security in the foreseeable future.    

Top Priority Focus to Shift Power Dependency from Gas to Coal

·         Immediately throwing open the coal mining program (at present restricted to Barapukuria deposit only of 1 million tonnes yearly target), such that first coal from the new projects can start flowing within 4/5 years  (2012/13), by when the new coal based power plants would be ready. Parallel and simultaneous program to be undertaken to set up coal fired power stations.

·         Private and private-public investments should be mutually synergesic and parallel in the development of such a program. Already concrete projects/proposals are with government from foreign investors (Asia Energy’s “Exploration & Mining” Contract with GoB , Tata, South Korean group).

·         The advent of coal sector in the North West region should provide the engine for accelerated socio-economic development of Western Bangladesh (Rajshahi and Khulna divisions). This would include  development of infrastructure (roads, railway, port, and electricity), greater industrial activity, and access to improved education and health services. For this, an integrated and comprehensive Western Bangladesh Development Program is necessary; to be funded from pre-allocated part of the coal revenue inflow.

·         Proper Collection and Use of Coal revenue: A transparent accounting system is necessary (source and application). There may be progressive and sound examples of such systems in developing countries, which are involved in mining.

·         Coal Policy: Should it not be a component of the Energy Policy? Is there need for a standalone policy for coal? There is no standalone policy for natural gas. The Mines and Mineral Rules, 1968 (amended up to 2004) is a workable basis for regulating the sector, under the Bureau of Mineral Development. It may be further strengthened through amendments and/or new enactment.

·         Private sector (national and FDI) policies and contracts need to be honored in the process. Overall nation’s interest, economic and socio-environmental aspects and adherence to global norms and practice should all be underlying principles and mutually complementary.  

Hafeezuddin Ahmad: formerly Resident Representative and Country Manager of IFC Bangladesh - the private sector arm of the World Group)

Anniversary 2

Cost & Benefits ofa Coal Project  in Bangladesh & the Issue of Royalty

Dr. S. M. Mahfuzur Rahman

Discovery of coal reserves in the north-western areas Bangladesh is seen as a blessing in a situation when the country is facing the threat of an inadequate supply of affordable commercial energy including electrical energy. It is estimated that even the modest target of a sustained 7% economic growth of the country is not achievable without regular supply of electricity. However, mining coal has significant costs that include mainly

1. The depletion of a resource which is exhaustible;
2. The costs of development and implementation of the mine project(s) including those of water and environment management;
3. Displacement of population and structures and their resettlement;
4. Loss of land (and crops) and the compensating arrangements for them; and
5. The costs of upgrading the transport and communication infrastructure in the coal zone(s).

The expected benefits of a coal project in Bangladesh are:

1. Use of coal as an alternative fuel for generation of electricity and improvement of the energy security and the economic infrastructure as the basis for growth and development of the economy of the country as a whole and the north-western region in particular; 
2. Saving natural gas by use of coal in electricity generation and the use of the saved gas in increased production of fertilizer and other beneficial purposes including in industry units and households and thereby arresting the depletion of forest resources;
3. Supply of coal as a cooking fuel in rural households now dependent on traditional biomass that are becoming expensive and have alternative uses;
4. Export of a part of coal produced in excess of the domestic demand and use of the foreign exchange earned in a planned way for economic development;
5. Working of the multiplier effect of the implementation of coal project(s) and especially, development of derivative industries and the working of export elasticity to economic growth;
6. Improvement in infrastructure (transport and access; services and facilities).
7. Revenues of the government over the lifetime of the project.

The costs and benefits of a coal mine project would significantly vary depending upon the method of mining. Open pit mine would require a displacement of the population and commercial and residential land and structures within the mine footprint area in phases over the 30 plus years of mine life. There would be temporary losses of agricultural land and the flora and fauna, a realignment of forest and wetlands and some environmental degradation because of pollution. Underground mining would involve costs of managing water inrushes inside the mine, inevitable risks associated with hazardous gas and the high temperature, the risk of land subsidence in the mining area, the cost of holding the roof atop the long walls and the like and more significantly, the loss of coal that would not be possible to extract in the underground mining method.

There is a debate around export of coal and the considerations here are (a) the economic size of a coal project (which says what should be the scale of investment in the project and how much should be the annual extraction of coal from the project to make it economically viable) and (b) how much of the coal the country is prepared to absorb within the economy (the capacity of the coal based power plants to be established, new plants for production of coal briquettes, use of coal in brickfields and in domestic cooking and the like). Also it is assumed that some grades of coal (for example, the high grade semi-soft coking coal) available in Bangladesh would possibly have no use within the country in the near future. The equation is: if a coal project extracts 15 million tonnes per year to be an economically viable one (at the given trends in the domestic and international market price of coal and co-products), the country can absorb tentatively 9 million tonnes per year (provided that the country establishes two coal-based power generation plants (of 1000Mwt each) and 2 medium sized coal briquette manufacturing units and extensively uses coal in brickfields). Most likely, it would be wise for the government to allow export of the ‘surplus’ coal instead of asking the project to stockpile it.

The issue of export of coal and accordingly, of the royalty becomes irrelevant only if the country can create additional coal use capacities to reduce the ‘surplus’ to zero.

This article assumes that by not undertaking a coal project, the country would face severe energy crisis within less than a decade and such a project is to be implemented by adopting the open cut method that would generate significantly higher net benefits. It may be noted that although underground mining might apparently look more acceptable in terms of lesser displacement of people and structures or losses of agricultural land and crops, the experience of the only existing Barapaukuria coal mine suggests that the underground mining is inefficient in terms of resource recovery and the cost-benefit analysis, it has been proven hazardous and even dangerous for health and life of the workers, and the underground mining causes subsistence leading to both forced displacement of people and loss of land and crops.

Three key of the communities residing in and around a possible coal mining area are: compensation and resettlement, water and environment and the project area economy. All these have social and economic costs and the costs of technology are also very high. On the other hand, any coal project has an impact on ongoing production in both agriculture and manufacturing and the provision of services. There is considerable room for significant increases in production from a more commercial agriculture using greater inputs, extension and contract buyers, introduction of new crops and cultivation methods as well as more agro-business to supply inputs and consequently, producing higher incomes. Growth of industry sector as a multiplier effect of such project is seen as a matter of time since with implementation of the project, many derivative industries would automatically start taking shape and a large service sector business is expected to flourish. The regular supply of electricity, which is seen as the most important use of the coal to be extracted by the project, will be a sound base for development of new industry units in the coal region.

Estimates on the costs and benefits of a coal project (with cost and benefit items as indicated above) stand at US$23 billion and US$70 billion respectively. The base data are developed through a long exercise on the various costs and benefit items and the present paper only presents the rough estimates on each of them in tables 1 and 2. The tables mention the specific items of costs and benefits of a coal project in Bangladesh. However, it should be mentioned that not all costs and benefits (displacement from roots and loss of existing livelihoods, pollution, technology transfer, access to potable water supply, reduction in vulnerability of the poor through new opportunities for business development and employment, comfort in living in a new township etc) can be can be accurately quantified but their inclusion in estimates is necessary although there is the risk of making such estimates subjective. However, the gains on some of these “un-quantifiable” counts may offset the losses and even if some figures may be arrived at, the discounted net present value of the variables may ultimately turn to be fairly insignificant and therefore, it may be assumed that the figures would not affect the IRR to any noticeable extent.  

The Internal rate of return of the project, based on these cost and benefit figures is around 26%. The rate, however, may actually be higher if the indirect benefits turn out to be more than what has been assumed in the estimates based on the export elasticity to growth of GDP applied to share of a sector in the country’s GDP and expected growth of that sector because of operation of the coal sector as a new one in the economy. The acceleration of economic growth may be triggered by the additional and steady supply of electricity to the different sectors of the country’s economy.

The estimates have direct relevance to the issue of royalty on coal exports from Bangladesh. These estimates are based on the assumptions of export of a part of the coal extracted annually and the provision of a 6% royalty on that. If the country can create the capacity to utilize coal domestically (which it should do for the sake of its energy security) question of royalty does not arise. But if export is allowed, at least till the country cannot absorb the ‘surplus’ over the minimum volume a coal project needs to extract for its viability and the capacity of the country to use the coal domestically, there is some scope of enhancing the royalty rate, from 6% to 8 – 9%, which would allow the project to have an IRR around 18 - 20% - a figure not very attractive but is still expected to be acceptable for investors in such big projects like the one under consideration. It may be noted that the royalty on coal exports is rarely a double digit figure in the coal exporting countries of the world.

There are however, some considerations beyond IRR in judging the rationale for a coal project. Bangladesh doesn’t have much alternative in ensuring energy security or even having electrical energy in the volumes needed to support rapid growth without the immediate development of coal. Delay in mining the coal would mean that for production of electricity the country will have to continue to use gas, the reserve for which, according to some estimates at the current rate of use, is sufficient to meet the demands of the country for not more than 15 years from now. In addition, there is a possibility of restricting exploitation of coal as part of the control of the world carbon regime and if delays prolong, prospective financing agencies may loose interest in the project and by the time all sides will be ready to see the coal traveling out of the mine caves, the international community may impose ban on extracting it. Only likely option the country would possibly be left with is to depend on import of the strategic commodity like energy. In that case we should be ready to conceive that any problem or uncertainty in energy imports will simply push the country to a collapse.

Table 1: Costs of the Project (Amount in’000 US $)

Table-2: Benefits of the Project (Amount in’000 US $)

·Dr. S. M. Mahfuzur Rahman: Professor, Department of International Business, University of Dhaka