BANGLADESH OPENS BIDS ON OFFSHORE EXPLORATION FOR

UNCLAS SECTION 01 OF 02 DHAKA 000517

SENSITIVE
SIPDIS

DEPT FOR SCA/PB AND EEB/ESC

E.O. 12958: N/A
TAGS: ENRG EINV EMIN PGOV BG
SUBJECT: BANGLADESH OPENS BIDS ON OFFSHORE EXPLORATION FOR
OIL AND GAS

SUMMARY
--------------


1. (SBU) The Government of Bangladesh May 7 opened bids from
international energy companies interested in exploring for
oil and natural gas in the Bay of Bengal, as Bangladesh seeks
to secure future energy resources. Following discoveries of
natural gas reserves off the Indian and Burmese shores in
recent years, there is widespread optimism similar
discoveries will appear off of Bangladesh's coast. Only seven
companies submitted bids, a number far lower than had been
anticipated. Prior to the opening local media had reported a
large number of potential bidders had expressed interest.
However, energy company officials privately had expressed
concerns about the conditions of the production sharing
contract (PSC) and questions over jurisdiction in the waters
adjacent to international borders.

OFFSHORE BIDS INVITED
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2. (SBU) The so-called Third Round of International Bidding,
following two bids for onshore exploration in 1993 and 1997,
offered 28 blocks of offshore territory in the Bay of Bengal
to bidders for 25 years of exploration and production.
Petrobangla, the state-owned energy giant, floated the tender
in February, hosted a road show for interested companies in
March and accepted bids until May 7. Petrobangla officials
told Econoff that 28 companies had purchased bid documents
indicating their interest in bidding, including Chevron and
ConocoPhillips (U.S.),Total (France),British Petroleum,
Cairn and Tullow (U.K.),CNOOC (China),Santos (Australia)
and Indian Oil (India). Only seven companies eventually
submitted bids, including Santos, ConocoPhillips, Longwoods
(US-China),CNOOC, Comtrack (Cyprus),Tullow and Korea
National Oil Corporation (South Korea). Officials from
Chevron, the largest foreign gas producer in Bangladesh, had
informed Post immediately before the opening that Chevron
would not submit a bid.


3. (U) The tender documents included a model production
sharing contract (PSC),which set a minimum share of 'profit
production' for Petrobangla at 55%. It would allow exports
of natural gas only after domestic demand has been met.
Contracting companies could fully repatriate profits,
equipment for operations could be imported duty free, and
there would be no royalty payments.

REACTIONS FROM ENERGY COMPANIES
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4. (SBU) Meetings with Petrobangla and U.S. energy companies
had revealed a diversity of perspectives on the prospects for
the tender. Petrobangla was upbeat, citing the large number
of companies that expressed interest and touting the
advantages of the model PSC, particularly the clauses on
profit repatriation and duty-free import of operating
equipment. However, executives from the two major U.S.
companies privately shared their concerns about the proposed
fiscal terms of the PSC and the limitations on selling for
export, warning that these conditions would discourage
potential bidders.


5. (SBU) Another serious issue concerned national
jurisdiction. Some company executives expressed surprise the
GOB saw no apparent urgency in resolving territorial disputes
with Burma in some of the offshore areas included in the
tender. The media reported that Burmese authorities were
lobbying some potential bidders not to participate in the
tender. When Econoff had raised with Petrobangla officials
concerns about the territorial dispute, they implied they saw
no major obstacle, citing the example of the world's largest
offshore natural gas field that lies in disputed territory
between Qatar and Iran. Both countries have been producing
gas from that field for years without a defined boundary, the
officials said.


6. (SBU) One U.S. oil executive told Econoff the Special
Assistant for Energy, M. Tamim (the approximate equivalent of
Energy Minister in the Caretaker Government) recognized the
weaknesses of the model PSC. Tamim decided, however, not to
send it back to the drawing board, which would have resulted
in further delays of the tender process. The oil executive

DHAKA 00000517 002 OF 002


had said he believed many of the Western bidders would submit
non-conforming bids.

COMMENT
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7. (SBU) Non-conforming bids from U.S. and other companies
would signal interest in exploration but highlight problems
with the PSC. Some U.S. oil experts speculated other
companies might submit conforming bids now and the winning
firm would renegotiate the contract once awarded. It is a
good sign the GOB is interested in foreign investment in
energy; previous and ongoing foreign energy projects have
often been the targets of public criticism in Bangladesh.
Some critics claim foreign energy investors divert resources
and profits away from the country. They also strongly
criticize the potential environmental impacts. There is no
question, however, that Bangladesh is in desperate need of
fuel for its power sector, which requires far more capacity
than currently exists.
Moriarty