Govt pays for unnecessary power and LNG import, force majeure not applied

Power demand in Bangladesh is now less than half the production capacity, while the demand for natural gas has dropped by one sixth of the previous amount

Although the Covid-19 pandemic has significantly slashed the country's energy consumption, the government is still following contractual obligations to pay for huge and unnecessary imports of power and liquid gas.

Furthermore, it is paying penalty fees to private power companies for keeping their plants idle.

But the government, according to legal experts, can avert this financial pressure by invoking a "force majeure" clause in the contracts to temporarily suspend such obligatory purchases.

China and India, among some other countries, are already invoking this legal clause to stay free from liability.

Force majeure is a common clause in contracts that essentially frees both parties from contractual obligations in case of extraordinary events beyond the control of both. The current pandemic situation could be a cause for invoking force majeure.

According to the China Council for the Promotion of International Trade, China has issued thousands of force majeure certificates worth $53 billion dollars, reports Xinhua. Similarly, the Indian media reports big companies, including Indian Oil Corporation and Adani, have invoked this clause to halve payments to suppliers.

However, with no immediate plans to invoke the force majeure clause, the Bangladesh government is turning towards liquidating Tk6,624 crore in fixed deposit receipts (FDRs) from various state-owned gas companies to pay arrears.

According to State Minister for Power, Energy and Mineral Resources Nasrul Hamid, invoking force majeure is still not in consideration for private power or Liquefied Natural Gas (LNG) imports from Qatar.

"We have been importing LNG in volumes less than our capacity," he said, adding, "this time, we are trying to import the minimum quantity of LNG and we have already informed them[Qatar] of our decision." 

Nasrul Hamid added that as their sovereign guarantor, the government cannot invoke the force majeure clause on private power companies or LNG regasification units. 

"What we can do is negotiate with the parties on delayed payments, and we are doing so," he added.

Spending on unused energy

The power demand in Bangladesh is now less than half the production capacity – even on a sultry day when a larger number of people are using more electricity than usual to cool off. Moreover, the demand for natural gas, which is at the heart of power and industrial production, has dropped by one sixth of the previous amount.

This means that the country could have partially or fully stopped the import of around 1,000 megawatts of power from India for around Tk3,700 crore a year.

Bangladesh now has the capacity to produce over 19,000MW of power, and is only utilising less than half during peak times.

The never-ending crisis that had plagued the gas sector for decades ended with LNG import from Qatar less than two years ago. The import is costly, but it is being effectively mixed with cheaper local gas to generate industrial production or power.

The Qatar contract allows import of maximum 2.5 million tonnes of LNG per year and minimum 1.5 million tonnes. This translates into an import of around 1,000 million cubic feet per day (mmcfd) maximum. But the government has been importing around 600 to 700 mmcfd.

During good times, Bangladesh consumes up to 3,400 mmcfd gas along with the LNG.

But today, the highest gas demand is less than 3,000 mmcfd. However, instead of cutting LNG imports, the government has reduced local gas production.

The government spends around $150 million per month for LNG import.

Meanwhile, the power sector is bleeding red ink with saturated electricity generation and reduced sales.

Due to low power demand, the power board keeps on paying Tk750-800 crore a month as "capacity charge" to many of the 69 private power plants and 19 rental plants for keeping their plants idle. This is becoming worse due to the novel coronavirus.

Accordingly, the Power Division now is seeking a Tk35,000 crore bailout to pay independent power producers (IPPs) and handle other financial crises.

Force majeure or not?

Energy and legal experts say that the government can invoke the force majeure clause to ease the financial pressure on the country. The LNG contract does have a force majeure clause. But lawyers argue that even if this were not included, the government could apply it given the nature of the pandemic.

Veteran lawyer Dr Kamal Hossain said that any part of a contract has the option of invoking the force majeure clause. However, mutual discussion is far better than the one-sided force majeure claim.

"If the other party does not agree with the claim, then it will depend on the court. But in such a situation, the claimer would not have much logic to present before the court. Therefore, mutual discussion is the best option," said Dr Kamal Hossain.

Professor Mohammad Tamim, an energy expert and pro-vice chancellor of Brac University, also says that Bangladesh should invoke the force majeure clause in this situation.

"If force majeure is an act of god, this virus itself is also an act of god. But there is a legal issue here regarding whether this can be considered as a force majeure. However, I believe it should be, because the impact is no less than an earthquake," said Mohammad Tamim.

Barrister Moin Ghani, a lawyer for the Power and Energy Division, told The Business Standard that Bangladesh has this option even if it was not stated in the LNG contract because it is covered by other laws as well.

Energy adviser to the Consumer Association of Bangladesh (CAB) Professor Dr Shamsul Alam said "Under that unbinding clause, we can cancel or review the contracts as our energy and electricity demand have reportedly dropped."

Double trouble with LNG

Not only does the government continue to buy LNG in the same volume as before, it is also paying more than four times the current international value, official sources said.

The price per thousand cubic feet of LNG in the global market is now around $1.71 to $1.87, while Bangladesh is paying $8.

And this is happening due to contractual limitations.

"We are not getting the current global market price as our contract is different. This has happened to us because as a new LNG importer, we could not go to the depths of the contract," said Anisur Rahman, senior secretary at the Energy and Mineral Resources Division. 

However, he said that the division has decided to import the product from the open market by reducing the amount from Qatar and Oman. 

In addition, the government has to bear the cost of the two floating storage regasification units (FSRUs) at Moheshkhali of Cox's Bazar, with a capacity to re-gasify 1,000 million cubic feet (mmcf) per day. 

One is owned by a US firm Excelerate Energy, named Moheshkhali Liquefied Natural Gas (MLNG) and the other is owned by a local company Summit LNG. 

As per the deals, Petrobangla has to pay the terminal owners around $4,50,000 per day for re-gasification of up to around 1,000 mmcfd of LNG. 

A source at Petrobangla said that it has been paying the amount since the FSRUs were commissioned, one on August 18, 2018, and the other on April 29, 2019. But the country never needed to re-gasify more than 600mmcf LNG per day. 

"The deals were made in the framework of Independent Power Producers' (IPPs) agreement. As per the condition of the deals, terminal owners will be given full capacity charge if their facilities are capable to re-gasify," said the source. 

Therefore, it will have to pay the same amount to Excelerate Energy and Summit Group, whether the FSRUs re-gasify the agreed quantity or less. 

Under huge financial pressure, Petrobangla recently turned to State Minister Nasrul Hamid for his direction. 

Having no option to collect funds, Nasrul Hamid asked the state-owned gas distribution companies to deposit dues from their FDRs.

This decision became a burden for the gas distribution companies too, as most of them do not have much in FDRs or their own money. 

"It is an injustice to us. We are not getting the bill from the customers as the government issued a notice on relaxing the bill payment from March to May," said a top official of a gas distribution company, wishing anonymity. 

Besides putting pressure on gas distribution companies, Petrobangla also sought the Finance Division to disburse Tk5,175 crore as budgetary support. 

Earlier, the oil & gas corporation wanted Tk1,500 crore on the same ground to pay the LNG bill.

In the latest gas tariff order, the Bangladesh Energy Regulatory Commission (Berc) stated that Petrobangla will need budgetary support of Tk7,690 crore to meet the deficit for importing LNG.