COVID-19: Lessons for Bangladesh Energy Sector

The outbreak of COVID-19 or coronavirus has virtually stalled most of the activities around the globe. Originated from Wuhan Province of China in December 2019, the deadly virus has spread across 197 countries till the last week March. Central Europe is the worst affected region. After China, Italy and Iran were suffering the most. Many countries have imposed travel ban. USA has closed its airports to any flights coming from the EU countries. Many countries and cities have imposed lockdown and shut down offices, business, schools, colleges and universities. Movements through air, water and international borders were also restricted. World Health Organization (WHO) has declared it a pandemic. Like all other sectors, it has already affected the world energy scenario. Energy Quest in its March 2020 quarterly report wrote: “Nobody knows how COVID-19 will pan out, whether it will be quickly contained or become a true pandemic but it is likely to hangover the energy sector for most of this year.” The spread is having impacts on trade, travel, energy and companies. Bangladesh is among the top fast growing developing countries of the world. The impressive economic growth and industrial development is greatly dependent on business and trade with the worst affected countries like China, Korea and some other regional as well as global countries. The major industries like clothing and textiles, pharmaceuticals rely heavily on raw materials from these countries. Semi-skilled and unskilled Bangladeshi workers from Middle East countries send huge remittance, which is also the life line of Bangladesh economy. The semi-lockdown situation in the EU and Western countries has already affected Bangladesh exports to these countries. Many workers would lose job if the pandemic prolongs. The UN Secretary General has already sent the words of caution for a major global economic recession.

Many mega projects of Bangladesh, especially in communication sector (Padma Multipurpose Bridge with Railway Communication, Karnaphuli River Tunnel, Metro Rail, Elevated Expressway, Railway Expansion to Cox’s Bazar etc.) and energy projects (Payra Power Plant, Rooppur Power Project, Rampal Power Plant, Matarbari Power Project etc.) are now at different stages of implementation. All these are being affected and may not be completed on schedule if COVID-19 pandemic prolongs. We hope the world community would find some way out and normalcy will gradually resume soon. But the dampening impacts on the economy, trade, business and on energy security would last for a long time. It will require many adjustments here and there with pragmatic policy reforms for the countries like Bangladesh to recover and take its economy back to normal. Bangladesh cannot even derive benefits from the current low oil price in the world market due to its very limited strategic reserve capacity. Most of its liquid fuel and LNG contracts are long-term and have very limited opportunities to renegotiate.

Economic Impacts of COVID-19

The economic impact is mounting as the world grapples with the COVID-19.   OECD has warned that the virus has triggered the greatest danger to global economy since 2008 financial meltdown. UN Trade Agency UNCTAD warned of below 2% slowdown of global growth in 2020, effectively wiping $1.0 trillion off the value of world economy.

COVID-19 Impact on Global Oil and LNG Market

The Energy Quest Report says, “COVID-19 has had an immediate impact on oil prices and spot LNG prices. Brent crude started January at US$ 67.05/bbl and rose to US$ 70.25/bbl on 6 January but then fell steadily to US$ 49.67/bbl on 2 March 2020”.

There has been dramatic fall in the Platts JKM spot price, dropping below US$ 3.00/MMBtu. Spot prices have fallen as high inventories, warm winter weather, increased supply and virus all take their toll. If we take the instance of Australia we find, Ichthys awarded a spot cargo loading 17-19 March at a price in the low US$2/MMBtu.

The fall in the oil price will affect prices realised under oil-linked LNG contracts. This will probably not become apparent until Quarter two (Q2) 2020 due to lags in contract prices but lower prices due to lower oil prices were already apparent in Q4 2019. There is potential for delays in LNG cargoes although our tracking data suggests that Australian exports to China have been largely unaffected, at least so far. No vessels appear to have been unduly delayed by being held at sea.”

Though LNG exports still appear to be holding up well, COVID-19 is having some effect in addition to the suffering from the ramp-up in global supply. Tanker charter rates (Tri-fuel Diesel Electric) quoted by shipping broker SSY have fallen from US$85,000/day at the start of January to US$37,500/day at the end of February. 

COVID -19 Impacts on LNG Market:

COVID -19 outbreak has dealt severe blow to the three top import markets of LNG –Japan, China and South Korea. These top LNG importing countries are also the hardest hit by COVID-19. The demand slowed down amid the outbreak came on top of milder winter in North Asia and high LNG inventories across Asia this season. These contributed to cause LNG price reduced to multi-year lows. China National Offshore Oil Corporation (CNOOC), the largest Chinese importer, have declared force majeure on deliveries of LNG cargoes and announced that it will not be honouring some of the deliveries because of COVID-19. Average LNG spot prices for April may be around $3 per million BTU (MMBtu).

China is the second largest importer of LNG. The slow down of Chinese economy has already severely impacted on global LNG demand. By end February, the loss of gas demand in China reached about 2 BCM and half of this loss was concentrated in the industrial sector. Many international airlines have suspended flights to and from China. Even if some of these resume flights in April and May, Energy Voice (a well read publication) estimated a reduction of Chinese gas demand between 6 bcm to 14 bcm in 2020 depending on the length of duration of COVID-19.LNG will bear the brunt of this reduction in domestic gas demand, although some disruption to domestic gas supply is also expected due to travel restrictions and reduced operations. According to an Energy Voice estimate, the downside impact to Chinese LNG demand is between 2.6 million tonnes (Mt) ‘best case’ with recovery by April and 6.3 Mt in a more ‘prolonged case’ with a slower return to normal.

How Low Global LNG Price Matters to Bangladesh?

Bangladesh is very new to LNG import market. It has started using LNG only from October 2018. Now two private sector companies operate two FSRUs in the Bay of Bengal and these have capacity of handling 1000 MMCFD. Bangladesh has long-term contracts for importing LNG from Qatar and Oman. It shortlisted few companies for spot supply. Unfortunately in such a small market, Bangladesh cannot benefit much from the very low LNG price in the world market. It has not the capacity to store LNG in reservoirs. Bangladesh must plan and implement projects on priority basis for setting up strategic reserve for crude oil and LNG storage (3-6 months) as a contingency measure. During this time, Bangladesh should talk with China, Japan, India and Korea for setting up a consortium of LNG importing countries with a provision of swapping LNG cargoes under long-term LNG purchase. Bangladesh will be extremely benefitted from superior bargaining capacity of the major buyers.

Top Five LNG Importing Countries

Source: Statista Published in February 2020

Incidentally all five countries are severely impacted and it has already taken a heavy toll on the major exporting companies and exporting countries for slowing down of demand. The market crash of oil and LNG will have its impacts on the world economy. There will be huge demand growth as soon as the situation gets normal again. Consequently, both LNG price and crude oil price may shoot up again.

Top Five LNG Exporting Countries

Source: https://www.tankfarmnigeria.com/world-top-ten-lng-exporting-countries

What Bangladesh Energy Sector Should Do to Offset Impacts of COVID-19?

Bangladesh must positively review its fuel option. There can be similar unforeseen regional and global crisis any time. This time situation triggered oil market collapse. In other cases, there may be supply chain disruptions, oil price burst. Bangladesh must be prepared for such contingent situations. Bangladesh energy and power must not become exclusively reliant on imported primary fuel. Japan, South Korea and Taiwan like countries do not have primary fuel resources like Bangladesh. India and China have fuel resources but these are not at all enough for meeting their huge demand. Bangladesh does not have open sea with deep draft seaports for setting up coal ports and LNG terminals. It has already experienced coal transport challenges for Payra plant. Other under construction coal port and land-based LNG terminal at Matarbari, and all other projects would eventually prove uneconomic. Bangladesh must review fuel mix and work for increasing contribution of own fuel.

While COVID-19 crisis gets over and things become normal again, Bangladesh cannot compete with these major importing countries for buying crude oil, LNG, LPG and coal from global market. The government must take immediate decision for exploiting its own coal resource. The green signal must be given for engaging contractor for open pit mining from Northern flank of Barapukuria coal mine. All preparatory works for commencing mining from other fields must also be completed as soon as possible.

Bangladesh will be requiring experienced senior managers for managing coal projects. For very novice handling of Barapukuria some coal sector officials have been suffering for a long time. It has been proved beyond doubt that nothing called coal pilferage had happened at all. There was administrative negligence in not documenting coal inventory properly. But for that so many senior officers must not be suffering for such a long time. Petrobangla must resolve the matter as soon as possible.

Country wide railway network specially from coal belt in greater Dinajpur and Rangpur to Payra in Patuakhali, Rampal in Bagerhat and Matarbari in Cox’s Bazar must be made ready for coal transportation in either direction for feeding coal fired power plants.

The PSC bidding round for offshore exploration may be delayed for few months as in the prevailing very low global crude oil pricing situation and over supplied LNG market scenario, the oil majors may not be interested for risk investment in Bangladesh offshore. But Petrobangla must keep on closely monitoring the global oil market scenario and announce PSC bidding as soon as oil market starts recovering again. In the meantime, the contract for multi-client survey(s) must be concluded and survey contractor must start work. In that situation before successful IOCs starting work, some useful data may be available. BAPEX must be given full support for continuing its exploration activities in their allotted blocks and ring-fenced areas. GAZPROM may act as strategic partner of BAPEX for further exploring identified structures in greater Chittagong region.

Energy and Power Projects

Situation in China is fast improving and very soon trades with China and return of all Chinese engineers and experts as well as Chinese goods and materials will start arriving. The 2X660 MW coal based Payra power plant’s full commissioning may have hampered a bit. But there should not be a major delay. We do not think that works of Rampal power plant, Rooppur Nuclear Power Plant, and all works of Matarbari mega project are much impacted.

COVID-19 is a Force Majeure

COVID -19 is a natural phenomenon, an act of god. No person has any control over it. But if countries had done extensive risk analysis and provided for contingency arrangements, some impacts could be avoided. However, from the present situation countries like Bangladesh must take lessons. Developing countries need support and assistance of other countries in major infrastructure development both in terms of technology, experts and finance. But there must be always plan B and some contingency planning. COVID -19 like catastrophe happens once in a millennium. Bangladesh could reap rich harvest if it could have developed strategic reserve of crude oil and LNG storage by this time. They could purchase crude oil and LNG from spot market at much cheaper price and store for future use. They could negotiate contracts for future purchase. In future even in joint venture projects, Bangladesh must keep provision for experts from different countries in each project instead of exclusive reliance on experts from one country.

Saleque Sufi;

Contributing Editor, EP