World Bank guarantee or an energy trap?

The World Bank has provided a $700 million guarantee to help Bangladesh pay for liquefied natural gas (LNG) imports. At first glance, this appears to be a major relief for the country’s energy sector. The guarantee will make it easier to open letters of credit (LCs) with international banks and increase funding for LNG supplies. However, new concerns are emerging beneath this apparent relief. Energy experts are questioning the terms of the guarantee, the debt burden, the pressure of rising gas prices and the long-term risks of dependence on imports. They fear that Bangladesh may become trapped in a financial and energy structure that will be even harder to escape as it tries to manage a temporary crisis.

AKM Mizanur Rahman, director (finance) of Petrobangla, told Agamir Somoy that the World Bank’s guarantee is neither a grant nor direct cash assistance. Under the arrangement, international commercial banks will guarantee payments to LNG suppliers on behalf of Petrobangla. If Petrobangla fails to make payments on time, the banks will pay the suppliers. Petrobangla must then reimburse the banks. If it fails to repay that amount, the World Bank’s guarantee will take effect. Bangladesh will then be liable to repay the amount, along with the stipulated penalties.

In other words, the guarantee that is making imports easier today could become a source of additional financial liabilities tomorrow. However, AKM Mizanur Rahman said Petrobangla had never failed to make payments on time since Bangladesh began importing LNG in 2018. He said there was, therefore, no reason for concern.

Energy Division officials said Petrobangla had long struggled to secure standby letters of credit to guarantee payments to LNG suppliers. The World Bank’s guarantee is helping address that problem. However, energy experts are questioning where the long-term solution lies to the energy crisis that has driven such massive imports, even as financial guarantees become available.

Maqbul-E-Elahi Chowdhury, a former member (gas) of the Bangladesh Energy Regulatory Commission, said such financial guarantees could provide temporary relief during a crisis, but the conditions attached to them could ultimately increase import costs. “When you are in trouble, lenders like these are always waiting to take advantage. They have imposed several conditions to serve their own interests, and meeting those conditions will increase the cost of LNG imports,” he said.

Under the World Bank’s Energy Sector Security Enhancement Project, the bank provided a $350 million guarantee in January. It later approved an additional $350 million, which will take effect in January next year. The guarantee carries a one-time initiation fee of 0.15 percent, with a minimum charge of $100,000. In addition, the fees include a processing charge of up to 0.50 percent, an initial fee of 0.25 percent, an annual fee of 0.30 percent on the guarantee used and an annual standby fee of 0.25 percent on the unused amount after four years. The arrangement also involves legal and consultancy costs.

Against the guarantee, international commercial banks will provide Petrobangla with a $200 million standby letter of credit, a $50 million 90-day letter of credit for spot cargo imports and $100 million in short-term loans. Under the first tranche of the guarantee, Bangladesh plans to import 37 to 41 LNG cargoes a year, with an estimated value of $1.22 billion to $1.35 billion. Overall, the arrangement is expected to facilitate LNG imports worth about $6 billion. The addition of the second tranche of the guarantee next year will double this facility.

This is where experts see cause for concern. As it becomes easier to arrange financing for imports, dependence on foreign energy is also increasing. Yet they believe Bangladesh could achieve major savings with comparatively low investment by tapping its domestic gas reserves, repairing old wells and curbing gas theft.

Maqbul-E-Elahi Chowdhury said Bangladesh could save 200 million to 250 million cubic feet of gas a day by stopping gas theft. By drilling and rehabilitating old gas wells, the country could increase production by 300 million to 400 million cubic feet within six months. This would require only $120 million in phased investment, he said. At the same time, prioritizing new gas exploration as part of a long-term plan could create significant opportunities to address the country’s energy crisis.

Maqbul-E-Elahi Chowdhury asked, “Why is there such a strong focus on imports when so many easy and sustainable alternatives are available?” In his view, imported LNG can never ensure genuine energy security for the country. Instead, growing dependence on imports could deepen the crisis.

However, World Bank estimates show that supplying imported LNG to power plants could reduce annual fuel costs by $800 million to $900 million. This would require spending $140 million to $200 million on gas, leaving a potential net saving of $670 million to $720 million. If old and expensive liquid-fuel-based power plants are shut down quickly, Bangladesh could save an additional $320 million. Importing LNG under long-term contracts could also generate annual savings of about $320 million.

The World Bank, however, has issued a warning alongside these savings estimates. Its documents say Bangladesh may not be able to realize the full potential savings because of transmission infrastructure constraints, pressure in gas pipelines, insufficient storage capacity and existing unfavorable power purchase agreements. In other words, questions remain over how much of the financial benefit touted as a reason for facilitating imports will actually materialize.

Meanwhile, Petrobangla has had to provide nearly Tk 140 billion in subsidies after buying LNG at high prices and supplying it at lower prices. Under the World Bank’s conditions, Bangladesh may need to raise gas prices for consumers to reduce these subsidies. The impact would extend across almost every sector of the economy, including industry, power and transport. Higher production costs could eventually push up the prices of goods and increase the cost of living for ordinary people. Bangladesh has also raised gas and electricity prices repeatedly in the past to meet conditions attached to international loans.

Hassan Mehedi, member secretary of the Bangladesh Working Group on Ecology and Development, believes the financial guarantee for LNG imports has further exposed fundamental weaknesses in Bangladesh’s energy planning. In his view, investing the money being used to meet energy demand for only a few days in renewable energy could deliver long-term benefits.

Hassan Mehedi said, “LNG import prices initially stood at $7-$8, then rose to $13. At one point, they reached $30. A single LNG cargo costs about $100 million, which could be used to build a 100-megawatt solar power plant. That plant could provide electricity for 25 to 30 years. In contrast, a single LNG cargo is consumed within a maximum of three days.”

He said the long-term plan should have focused on reducing fossil fuel use and increasing investment in solar and other renewable energy sources. In practice, however, international financing institutions are placing greater emphasis on LNG imports and infrastructure expansion.

Hassan Mehedi cited the example of the LNG terminal operated by Excelerate Energy in Maheshkhali. In 2016, the International Finance Corporation (IFC), an international financing institution, provided nearly $110 million in financing for the terminal. Now, the World Bank is providing a guarantee for payments for LNG imported through that infrastructure. “If the World Bank had provided this money, or if the IFC had invested its funds, in solar or wind power, Bangladesh could have had an opportunity to ensure energy security for 25 to 30 years,” he said.

Analysts are also questioning policy coordination between the World Bank and the International Monetary Fund (IMF). They said the IMF and World Bank are jointly pursuing similar agendas, including reducing subsidies, raising prices and privatization. They said this guarantee project could serve as an additional tool in that effort. Earlier, the IFC was directly involved in financing the construction of the first LNG terminal in Cox’s Bazar’s Maheshkhali. Now, the World Bank guarantee is being used to help pay for LNG brought through that infrastructure.

Analysts say the financial guarantee for LNG imports is not merely a commercial facility but is also being viewed as part of a broader economic framework in Bangladesh’s energy sector.

According to Manowar Mostofa, networking adviser at the Coastal Livelihood and Environmental Action Network (CLEAN), the World Bank’s guarantee for LNG imports contradicts its stated policy of reducing fossil fuel use. At the same time, it is not consistent with efforts to expand renewable energy. He alleged that such financial support is tying Bangladesh more closely to a high-cost, import-dependent system instead of helping the country move away from it.

Although the guarantee may appear to be a “benefit” at first glance, Manowar Mostofa believes it will create long-term risks by increasing fossil fuel use and dependence on imports. “If the World Bank genuinely wanted what was best for Bangladesh, it would provide financing or guarantees for renewable energy or domestic gas exploration. Its objective is to ensure that we cannot move away from dependence on high-cost imported LNG,” he said.

The need to increase new gas exploration to address the long-term gas shortage also appears in World Bank documents. Yet the guarantee provided to secure imports has no direct role in exploration, increasing domestic production or expanding renewable energy. As a result, the root causes of the crisis that this financial arrangement aims to address remain unresolved.