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“All Citizens are Equal before Law and are Entitled to Equal Protection of Law”-Article 27 of the Constitution of the People’s Republic of Bangladesh

Issue No: 141
October 24, 2009

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Using production sharing contract for petroleum exploration

Dr. Abdullah Al Faruque

CAMPAIGN against proposed exploration of hydrocarbon by international oil companies is mainly based on fear of export of our precious natural resources and consequently losing control over them due to some provisions of the production sharing contract (PSC), which gives some incentives to them. While this kind of politics of natural resources is not new phenomenon, question arises how far current agitation is justified or pragmatic in the context of real scenario? This should be explained in the light of context of country's energy needs and proper understanding of how production sharing contract works.

Currently Bangladesh's recoverable proven reserve of natural gas is around 14TCF. It requires about 26TCF additional gas by 2025 to attain a 7% gross domestic product (GDP) growth. Many areas, both onshore and offshore, of Bangladesh remain unexplored. Therefore, extensive exploration and drilling should be undertaken on urgent basis to increase reservoir of petroleum resources for ensuring our energy security. It should be noted that our offshore areas have enormous potential as Myanmar and India have already discovered large gas reserves in the Bay near the maritime areas that belong to Bangladesh. Deepwater exploration is very much different than onshore and shallow water drilling. It involves more risks, substantial investment and requires high technical capability which we can not afford.

Therefore, attraction of foreign investment in highly risky offshore exploration often requires necessary incentives and promotional package from the host state. Campaign against proposed contractual arrangement will only delay the exploration in off shore areas and will not serve our national interest. Rather our national interest may be best served by exploring our off shore hydrocarbon potentials which is currently being exploited by India and Myanmar through participation of international oil companies.

Raison deter of recent public agitation is largely influenced by limited understanding of international instruments and oil companies. However, the reality is that we have to depend on them for capital and technology for exploration of petroleum in deep sea for foreseeable future unless and until our state-owned enterprise, Petrobangla, develops capacity and invest resources to carry out such exploration. But this is unfortunate that we have failed to develop Petrobangla's technical capacity to explore in deep offshore area in last three decades.

At this point, it might be relevant to state how PSC operate. According to PSC, overall management of petroleum operations vests to the state. The host governments can exercise the authority over the management and ownership of the petroleum operations. The operating company gets cost recovery for the all exploration, development and production from a portion of production, then remaining production is split as profit oil between the state and the oil company. Under the PSC, the oil company bears all exploration risk and is reimbursed only in the event of a commercial discovery. The rate of both cost recovery and profit petroleum may vary, depending on various factors like geological and economic conditions. The PSC is popular for both the host states and companies mainly for its flexibility in its negotiation process and its proven effectiveness and adaptability in very different settings. It should be mentioned that provision for export of some portion is nothing new. It can be found in PSCs of many developing countries. Moreover, according to article 15.5.1 of our PSC, contractor shall have the right to export natural Gas in the form of Liquefied Natural Gas, which is usually highly expensive enterprise and involves years to implement. Therefore, there is no blanket scope of exporting of natural gas if discovered.

However, the crux of the matter lies in article 15.5.4 which provides that where Petrobangla has installed necessary facilities to transport and use gas to meet domestic requirements, Petrobangla shall be entitled at its option to retain in kind any natural gas produced up to Petrobangla's share of profit natural gas, but in no event more than twenty percent of the total marketable natural gas. According to the Oil, Gas Protection Committee, this provision creates scope for export of eighty percent of produced natural gas. But this should be read with article 15.6 which states that such right to export is conditioned by Petrobangla's right of first refusal, which means that only in case of inability of Petrobangla to buy gas, oil companies can export. Moreover, according to the contract, operating companies will be free to find a market outlet within Bangladesh in case of refusal by Petrobangla and there is an obligation on the part of operating company to sell their share of gas in the domestic market to a third party.

Another point of PSC contended by the committee that the government would not be able to set up pipelines from deep sea to the mainland to buy the gas and the foreign companies would not be bound to pay for construction of pipeline to transport gas to mainland. According to article 16 of the Model PSC, right of construction of pipeline is vested with the operating company for transporting petroleum from contract area to measurement points in Bangladesh. But development plan of construction of such pipelines will be reviewed by Petrobangla which may suggest such changes in it as may be essential in the national interest. Development and operating costs of the Pipeline upstream of the measurement point shall be subject to cost recovery under this contract. These provisions on pipeline are consistent with prevailing practices and international standard of petroleum industry and as such, fear of exporting our gas to third states by such pipeline is unfounded.

Any contractual arrangement for exploration of natural resources is not inviolable and is amenable to change and renegotiation. Therefore, any ambiguity or any provision in production sharing contract which goes against our national interest can be removed by mutual discussion by the parties and renegotiation. The scope of such discussion has been provided in the model PSC. Article 35.2 provides that without prejudice to the Government's prerogative of sovereign powers to act in the public interest, this contract can be amended or modified by mutual agreement in writing.

It must be remembered that in view of the massive exploration activities conducted by India and Myanmar in close proximity to Bangladesh coastal zones including many disputed amongst them, it has become imperative for us to have our own exploration works conducted with or without foreign companies. This will better our claims over these zones and strengthen our negotiating position to resolve the disputes with India and Myanmar. Pragmatism and national interests should prevail upon any campaign against proposed exploration.

The writer is Associate Professor, Department of Law, University of Chittagong.


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