Will Bangladesh’s new terms attract investment?

Will Bangladesh's new terms attract investment?

By Emilio Intrieri, David Ooi

On March 10, 2024, the government of Bangladesh via Petrobangla officially launched the Bangladesh Offshore Bidding Round 2024 inviting international oil companies (IOCs) to bid, either individually or as joint ventures, for 24 exploration blocks. In this piece, we look at some of the changes that have been introduced under the Model Production Sharing Contract (PSC) 2023 and whether these changes are sufficient to attract IOCs.

Bangladesh launches 2024 offshore bidding round

The acreage offer includes nine blocks primarily in shallow water and 15 blocks in deep water, as summarized in the table below. The total acreage on offer amounts to approximately 93,000 sq km, including 42,000 sq km in shallow-water blocks and 51,000 sq km in deepwater blocks. Water depth in the latter blocks can reach up to approximately 2,500 m. All the blocks are located in the Bengal Basin.

Bangladesh Model PSC 2023

In a bid to improve its attractiveness as an investment destination, Bangladesh introduced the Model PSC 2023 which was approved at the 16th meeting of the Cabinet Committee on Economic Affairs in July 2023.

Key changes include:

• An uplift in cost recovery from 55% (onshore, shallow-water blocks) and 70% (deepwater blocks) to 75% across all blocks.
• Profit share has been modified to be profitability-based using an R-factor instead of production-based.

Based on the development of a hypothetical shallow-water gas discovery and a gas price of $5/Mcf, these changes have the cumulative impact of lowering the minimum economic field size (MEFS) from around 2 Tcf to ~1.2 Tcf of gas resources when compared to the previous terms.

Gas pricing terms

Alongside improvements in the fiscal terms, there have been changes introduced for gas pricing with the effective lifting of any gas price caps. Previous gas price terms were linked to high sulfur fuel oil (HSFO), with a price floor and ceiling. While deepwater blocks enjoyed a 130% multiple on the benchmark price with an escalation of 1.5% annually from the start of commercial production under the Model PSC 2019 terms, this would still have placed an effective cap of ~$7.3/MMBtu in real terms.

Under the Model PSC 2023, gas is priced at 10% to dated Brent on a three-month rolling average basis. Based on the current Brent price assumption, gas price is anticipated to be in the range of ~$8/MMBtu. This would bring gas prices more in line with the costs of supplying gas from liquefied natural gas (LNG) imports which Bangladesh is projected to increasingly rely on, should the country fail to turnaround its domestic gas production.

Proof will be in the pudding

We view the combined effects of these changes to be positive in terms of improving the attractiveness of Bangladesh as an investment destination. Early signs point to a renewed interest in the upstream exploration and production sector. Prior to the bidding round launch, Petrobangla had received unsolicited proposals by some IOCs to collaborate in exploration of immature or frontier areas in the country. One such proposal, involving both onshore and offshore blocks, was made by ExxonMobil in early 2023, calling for investment between $10 billion and $30 billion for exploration activities focused on deepwater blocks. Similarly, Chevron has also reportedly expressed interest in Bangladesh deepwater exploration. While these discussions are believed to have stalled, both ExxonMobil and Chevron are expected to participate in the formal bidding round.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.