ECONOMIC ANALYSIS. A. Introduction

Transcription

1 Natural Gas Infrastructure and Efficiency Improvement Project (RRP BAN 45203) ECONOMIC ANALYSIS A. Introduction 1. In Bangladesh, indigenous natural gas accounts for almost 75.4% of commercial energy and about 58.0% of electricity generation. Growth in the country s gas production has not kept up with increasing demand from power generation and other gas-based industries. The project comprises the following components: (i) (ii) Production efficiency improvement at location A of Titas gas field. This component will install wellhead gas compressors with associated facilities at location A of Titas field for increasing and sustaining wellhead gas delivery pressure to maintain the current gas-production level to the gas transmission pipeline system. Bangladesh Gas Fields Company Limited will be the executing agency. Transmission pipeline capacity expansion. This component will allow the transmission of gas to major consumption centers and will construct a 181- kilometer, 36-inch gas transmission pipeline from Chittagong-Feni-Bakhrabad. Gas Transmission Company Limited will be the executing agency. 2. The project s economic analysis followed the Asian Development Bank s Guidelines for Economic Analysis of Projects, with non-incremental benefits and costs in economic prices estimated and compared over the project life. The analysis assessed the benefits and costs by comparing with-program and without-program scenarios in economic prices over the project life. B. Methodology and Assumptions 1. Least-Cost Analysis 3. The production efficiency improvement component will help maintain the desired operating pressure and is essential to ensure continued gas production. There is no other practical alternative to sustain supply from the existing gas field, and hence the component is considered a least-cost solution. The transmission component is included in the least-cost development plan for the gas transmission and distribution network. The recommended investment plan is based on multiple simulation runs to identify and remove bottlenecks with compressors or looping that develop as gas throughput increases Demand Supply Analysis 4. For this analysis, the demand forecasts by user category provided by Bangladesh Oil, Gas and Mineral Corporation (Petrobangla) have been applied. Gas consumption grew by 5.7% during FY2001 FY2014 and at the slightly lower rate of 4.6% during FY2009 FY2014, as supply was limited. Petrobangla estimates a total demand of 4,021 million cubic feet per day (MMCFD) by 2019 against an optimistic estimate of supply including liquefied natural gas (LNG) or pipeline gas imports and new gas discoveries totaling 3,351 MMCFD to give a shortfall of 670 MMCFD, or roughly 17% of demand. 1 Asian Development Bank Natural Gas Transmission and Distribution Development Investment Program (Appendix 6). Consultant s report. Manila (TA 8474-BAN). The pipeline size for the Chittagong-Feni-Bakhrabad loop is based on this simulation exercise.

2 2 5. Production from existing gas fields peaked at about 3,000 MMCFD in 2016 and will start falling by Even allowing for gas from new discoveries and LNG import in the withoutproject case, there will be a demand shortfall from 2016 that will widen (Table 1). The demand shortfall can be met in part by LNG imports expected to begin in 2018, new gas discoveries, alternative liquid fuels, or the supply freed by the proposed project. All of these sources will be required to meet the projected demand shortfall. Demand to be met by the project has been considered wholly non-incremental, as without the project energy would have to be provided by liquid-based fuels. Table 1: Demand Shortfall FY2020 FY2030 (MMCFD) FY / Category Domestic Demand 3,966 3,925 3,893 3,870 3,856 3,857 3,857 3,865 3,881 3,906 3,939 Domestic Supply 2,612 2,575 2,550 2,398 2,216 2,060 1,800 1,565 1,315 1,140 1,020 Domestic Shortfall 1,354 1,350 1,343 1,472 1,640 1,797 2,057 2,300 2,566 2,766 2,919 MMCFD = million cubic feet per day. Source: Bangladesh Oil, Gas and Mineral Corporation. C. Key Assumptions 6. The following assumptions have been used in the analysis: (i) (ii) (iii) (iv) (v) (vi) (vii) all costs and benefits are expressed in constant 2016 prices; an average exchange rate of $1.00 = Tk79.00 is employed when converting foreign exchange costs to local currency; economic prices of capital works and annual operation and maintenance are derived from the financial cost estimates, and adjusted to allow for transfer payments and correct for any market distortions; capital costs include physical contingencies but exclude taxes, price contingencies, and financial charges during construction. The residual value of the investment is taken as zero; the domestic price numeraire is used with a shadow exchange rate factor (SERF) of This SERF value has been used to appraise recent projects in Bangladesh; there are no significant distortions in the wage rates for skilled labor, so a conversion factor of 1.00 is applied. For unskilled labor, a shadow wage rate of 0.75 is applied; and a test discount rate of 12% is used. D. Project Benefits 7. Energy benefits are treated as non-incremental by assuming the new gas supply will replace alternative liquid fuels and firewood. 2 For the analysis, economic prices for alternative fuels were estimated as border parity prices for tradable fuels. For a non-tradable fuel domestic firewood the domestic selling price was accepted as a proxy for economic value. Border parity prices were derived from import prices in FY2015 FY Natural gas is a cost to the project and if domestic reserves are exhausted, the planned projects (or other users) will have to shift to imported gas. Hence, for the analysis, an estimate 2 Coal has not been considered because of its high emission levels and additional and costly infrastructure requirements, and because the extent of its future use is uncertain.

3 3 of the long-run import parity price for gas, based on imported LNG, was used. This was derived from a formula based on the assumed price of oil per barrel plus margins for regasification, transportation, and distribution. 9. Given the uncertainty in the global energy market, the sensitivity analysis tests for the impact of crude oil price changes on the prices of both natural gas and liquid fuel alternatives. As the impact of a rise in the crude price is greater on the latter, the economic returns to the project rise with the assumed crude oil price. A long-run real price of $50/barrel is used as the base case, but the impact of a lower-price scenario ($30/barrel) and a higher-price scenario ($70/barrel) is tested. The base-case price for natural gas of $8/million British thermal unit is about 30% lower than the estimated long-run cost of natural gas used in a recent gas project in Bangladesh, but is closer to the recent cost, insurance, and freight import cost of LNG to Japan. 10. The fuel substitution values for gas are calculated on the basis of the economic prices for the alternative fuels converted into gas equivalent values. To quantify the fuel substitution that the subproject would create, the expected mix of alternative fuels that would be used by each consumer category were estimated. These are combined with the demand forecasts by user sector to give a replacement impact for fuels in the with-project case. 11. The other direct economic benefit will be a reduction in greenhouse gas emissions from component 1 that would occur with the use of alternative fuels. The replacement of alternative fuels by natural gas results in the reduction of carbon dioxide (CO 2 ) emission by 703,522 tons per year during Savings in CO 2 emission can be valued at the global damage averted; for the analysis, a damage cost averted of $35/ton is used. The emission reduction benefit is a global gain, in contrast with the national gain from resource cost savings resulting from the replacement of alternative fuels with natural gas. 12. The analysis is conducted from both the national and global perspective. The national gain is the project s non-incremental benefits valued at the economic cost of the alternative fuels minus the project s economic cost, both capital and operating. The global gain is the value of the project-created reduction in carbon dioxide emission. Bangladesh will benefit from a proportion of these global benefits, but as this figure is uncertain no attempt has been made to reallocate them to the country. E. Economic Analysis Results 13. In the base case, the project has an economic internal rate of return (EIRR) of 19% from the national perspective and 25% when global gains in emission reduction are added to the national gains. There is a significant difference between the two components. Component 1 creates global environment benefits and consequently has a high EIRR of 35% in both national and global terms. Component 2 only creates national benefits and has a lower EIRR of 20%. 14. Table 2 summarizes the results for each component, and for the project as a whole. National gains alone and national and global gains in combination are also shown. In the base case the project as a whole has an EIRR of 19% from a national perspective and an EIRR of 25% when global gains in terms of emissions reduction are added to the national gains.

4 4 Table 2: Economic Internal Rate of Return and Economic Net Present Value (Base Case) EIRR (%) Base Case ENPV at 12% Subproject 1. Component 1 National gain National and global gain Component 2 National gain Overall project National gain National plus global gain EIRR = economic internal rate of return, ENPV = economic net present value. Source: Asian Development Bank estimates. F. Sensitivity Analysis 15. A sensitivity analysis was done for both components using the three different price scenarios as well as testing within the base case for the impact of a 20% capital cost overrun, a 20% fall in demand, and a SERF of The analysis results are in Table 3. In general, the results are robust; implausibly large increases in capital cost or falls in demand are required to make both components marginal. The higher value of foreign exchange raises the returns to the project. For the three price scenarios, project returns rise with the crude oil price. At the base case price of $50/barrel, both components have relatively high returns. At the low oil price of $30/barrel, component 1 has a low national return since in the analysis the cost of alternative fuels are assumed to fall by more than the LNG price. However, because of the emission reduction from component 1 in global terms, the component s return remains high even at this low oil price. Although the oil market remains relatively volatile, from the mid-2016 perspective a long-run crude value of as low as $30/barrel in 2016 prices appears unlikely. At a crude oil price of $70/barrel, both components have high returns in national and global terms. 3 3 A switching value for the oil price has not been calculated because of uncertainty regarding the strength of feedback between a change in the oil price and that of alternative fuels.

5 5 Table 3: Sensitivity Analysis: Base Case Variables National Gain Switching Value (%) National plus Global Gain Switching Value (%) EIRR (%) ENPV EIRR (%) ENPV Component % capital cost increase 20% decrease 13 2 (22) (58) in demand SERF 1.13 $70/barrel $30/barrel (31) Component % capital cost increase 20% decrease (45) in demand SERF 1.13 $70/barrel $30/barrel (19) ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value, SERF = shadow exchange rate factor. Source: Asian Development Bank estimates. G. Conclusion 16. The analysis has worked with three alternative price scenarios for crude oil and energy prices, allowing a feedback between these, rather than with single point prices. If the crude price rises above $50/barrel on a long-run basis, both components are unambiguously viable.