Bangladesh’s LNG Procurement Partnership With Singapore – Analysis

In response to the increasing domestic gas demand, the government has opted to procure 24 shipments of liquefied natural gas (LNG) from Gunvor Singapore Pvt Ltd through a short-term agreement, marking the first time such a purchase has been made. Each shipment will consist of 33.60 lakh mmbtu (million British thermal units) of LNG, with pricing determined by the JKM (Japan Korea Marker) index. The Cabinet Committee on Economic Affairs gave preliminary approval to the procurement proposal submitted March 13by the Energy Division on March 27.

From September 2021 to January 2024, the government imported 54 shipments of liquefied natural gas (LNG) from the spot market. Petrobangla reports that the country's gas demand ranges from 3,800 to 4,000 million cubic feet per day (mmcfd). On March 28, Petrobangla data indicates that the country obtained 2,030 mmcfd from domestic gas fields and 620 mmcfd from imported LNG, totaling 2,650 mmcfd. Throughout March, gas supply fluctuated between 2,600 mmcfd and 2,720 mmcfd. To facilitate the regasification of imported LNG and its distribution to the national grid, two floating storage and regasification units (FSRUs) with a combined daily capacity of 1,000 mmcf have been established at Maheshkhali in Cox's Bazar. One FSRU is operated by Excelerate Energy Bangladesh Limited, while the other belongs to the Summit Group. The Summit Group's FSRU temporarily halted operations in mid-January for maintenance but is anticipated to resume gas supply in the first week of April. With both FSRUs operational, it is expected that the country's gas supply will receive a significant boost.

The LNG procurement landscape is evolving, with a shift towards shorter-term contracts driven by increased competition in mature ports and regions. This trend is particularly notable in locations like the Amsterdam-Rotterdam-Antwerp (ARA) ports area and the Baltic, where more flexible and short-term trades are emerging. While most LNG bunker volume is still contracted on long-term agreements, there's a growing interest in spot bunkers traded just weeks or days before delivery. LNG fuel prices within term contracts typically follow gas or oil indexing. Gas-indexed prices escalate based on gas prices from hubs like the Title Transfer Facility (TTF) or oil prices like Brent crude. Conversely, fixed prices are independent of future oil or gas price changes. These prices consist of a commodity component (LNG market value) and a logistic component (delivery cost). Gas-indexed pricing offers transparency, with indices based on benchmarks like TTF, Henry Hub (HH), or Japan Korea Marker (JKM).

Oil-indexed prices, often based on Brent crude, provide predictable returns on investment but may include added logistics costs. LNG prices are usually expressed by energy content, with units varying by market. Continental Europe and the UK typically use megawatt hours (MWh) or therms, while the US uses million British thermal units (MMBtu). Prices can be based on either gross calorific value (GCV) or net calorific value (NCV), with the GCV/NCV ratio for LNG commonly at 1.108. Overall, the LNG market is adapting to changing dynamics, with a move away from long-term contracts and a growing emphasis on green LNG. Challenges include delinking LNG prices from oil and addressing the emergence of renewable energy sources, all of which are shaping the future of LNG procurement and pricing mechanisms. Notably, the Platts JKM is the leading benchmark for spot LNG prices, utilized in transactions worldwide. It reflects the market value of LNG cargoes delivered to major destinations in Northeast Asia, including Japan, South Korea, China, and Taiwan.

Zanendra Nath Sarker, chairman of Bangladesh Oil, Gas and Mineral Corporation (Petrobangla), stated on March 28th that this is the first time Bangladesh is importing LNG cargoes under a short-term contract. The company would deliver one cargo monthly, with the flexibility to adjust based on demand. Pricing will adhere to the JKM formula, with additional terms favorable to Bangladesh. Energy Secretary Md Nurul Alam informed TBS that Gunvor Singapore's proposal was approved by the Cabinet Committee on Economic Affairs in the latest meeting. Once the pricing is determined, it will be submitted to the Cabinet Committee on Government Purchases for final endorsement. When asked about the price proposed by Gunvor, the energy secretary said Bangladesh had six long-term contracts with different companies for LNG purchase, providing a clear understanding of market prices. Besides, Gunvor Singapore will adhere to a formula [JKM], making the evaluation process straightforward.

On January 10, the Singapore-based company proposed to the Energy Division to deliver 12 cargoes this year and 12 cargoes in 2025. Prime Minister Sheikh Hasina, who also serves as the Minister of Power, Energy, and Mineral Resources, approved the procurement proposal process on March 4. Presently, the government procures spot LNG from 23 global companies, including Gunvor Singapore Ltd, through tendering, and through long-term contracts from Qatar and Oman. On January 23, the cabinet committee on government purchases authorized the procurement of an LNG cargo from Switzerland's Total Energies Gas & Power Ltd at a rate of $10.88 per mmbtu.

In addition to the spot cargo from Gunvor Singapore Ltd expected to arrive in April, the government is paying $9.37 per mmbtu. Apart from spot LNG, the Energy Division procures LNG from Oman and Qatar through long-term contracts. These contracts are processed and supplied to the national grid by the two LNG terminals established at Maheshkhali in Cox's Bazar. However, the purchase of 24 cargoes from Gunvor Singapore marks the country's first LNG procurement under a two-year contract. The Energy Division is now inclined towards procuring LNG through short-term contracts rather than long-term ones, citing the fluctuating nature of LNG prices in the international market, which complicates sourcing.

An examination of Petrobangla's recent LNG procurement records from the spot market revealed price fluctuations. In 2022, spot LNG was acquired at rates varying from $38.93 to $24.25 per mmbtu. In 2023, Petrobangla secured LNG at prices ranging from $19.74 to $10.97 per mmbtu. By January 2024, the highest recorded price for LNG purchases was $15.96, while the lowest stood at $9.77 per mmbtu. When queried about the decision to purchase LNG under short-term contracts, Energy Secretary Md Nurul Alam attributed it to the escalating gas demand from industrial and power generation sectors. Ensuring a sufficient supply is vital to prevent adverse impacts on economic activities. Moreover, LNG will be procured from the spot market as necessary. Nurul Alam mentioned that Bangladesh currently receives 56 LNG cargoes annually from Oman and Qatar under long-term contracts, although the existing capacity of the two LNG terminals allows for the processing of 58 more cargoes per year. However, recent years have seen limited spot market purchases due to pricing concerns. This year, a minimum of 48 LNG cargoes are slated for procurement outside long-term contracts, with at least 25 LNG cargoes required from long-term contracts by next June, Nurul Alam emphasized.

Bangladesh is steadfast in its pursuit of energy security, prioritizing the optimization of its LNG procurement strategy. The nation is strategically employing a blend of long-term contracts and flexible short-term agreements to navigate the dynamic energy landscape. This approach aims to counteract price uncertainties and uphold a consistent energy supply, essential for sustaining economic activities and fostering long-term development. By diversifying its procurement methods, Bangladesh aims to reduce vulnerability to market fluctuations and supply disruptions. Long-term contracts offer stability and predictability in pricing, providing a foundational framework for securing essential energy resources. Meanwhile, short-term agreements afford agility and responsiveness to changing market conditions, allowing Bangladesh to adapt swiftly to emerging opportunities or challenges.

This balanced strategy not only enhances energy security but also fosters economic resilience and sustainability. A reliable and uninterrupted energy supply is critical for powering industries, supporting livelihoods, and driving economic growth. By ensuring consistent access to LNG through optimized procurement practices, Bangladesh can bolster its industrial sector, attract investment, and create employment opportunities, thereby contributing to sustainable development goals. Moreover, a stable energy supply is integral to addressing environmental concerns and promoting sustainable practices. By securing reliable LNG sources through efficient procurement strategies, Bangladesh can reduce reliance on fossil fuels, mitigate environmental impact, and transition towards cleaner energy alternatives. This aligns with global efforts to combat climate change and promote sustainable development, positioning Bangladesh as a responsible steward of energy resources.

Bangladesh's commitment to optimizing its LNG procurement strategy reflects its dedication to securing energy sovereignty, fostering economic prosperity, and advancing sustainability goals. By embracing a diversified approach that combines long-term stability with short-term adaptability, Bangladesh aims to fortify its energy resilience and pave the way for a more sustainable and prosperous future.