Characteristics of Natural Gas Market in Bangladesh

The nature of the natural gas market is like to other competitive product markets: prices reflect the ability of supply to meet up demand at any one time. The economics of producing gas are moderately straight forward. Like any other goods, the price of natural gas is mostly a function of demand and the supply of the product.

When demand for gas is rising, and prices rise accordingly, producers will respond by increasing their exploration and production capabilities. As a consequence, production will over time tend to increase to match the stronger demand. However, unlike many products, where production can be increased and sustained in a matter of hours or days, increases in natural gas production involve much longer lead times. It takes time to acquire leases, secure required government permits, do exploratory seismic work, drill wells and connect wells to pipelines; this can take as little as 6 months, and in some cases up to ten years. There is also uncertainty about the geologic productivity of existing wells and planned new wells. Existing wells will naturally decline at some point of their productive life and the production profile over time is not known with certainty. Thus, it takes time to adjust supplies in the face of increasing demand and rising prices.

In an environment of falling gas prices, the converse will be true. Producers will respond to lower natural gas prices over time by reducing their expenditures for new exploration and production. Production decline in existing wells will decrease productive capacity. At the same time, the lower prices will increase the demand for natural gas. This, in turn, will ultimately result in upward pressure on gas prices. This relationship between changes in the price of natural gas and variations in the supply of and demand for natural gas is sometimes referred to as the "natural gas market cycle."  In the short term, and in relation to existing producing wells, the supply of natural gas is relatively inelastic in response to changes in the price of natural gas. Contrary to some views, producers do not routinely shut in wells when natural gas prices are low. 

There are many Characteristics of Natural Gas Market. This are-

First, if production is halted from a natural gas well it may not be possible to restore the well's production due to reservoir and well bore characteristics.

Second, the net present value of recapturing production in the future may be negative relative to producing the gas today -- i.e., it may be better to produce gas today than to wait until the future to produce the gas. If a producer likes not to operate a well, the lost production cannot be recovered the next month but is instead is deferred potentially years in the future. There are no guarantees that the prices for gas in the future are going to be higher than prices today. 

Third, some gas is produced in association with oil, and in order to stop the flow of natural gas, the oil production must be stopped as well, which may not be economic.

Fourth and finally, a producer may be financially or contractually bound to produce specific volumes of natural gas. Producers and consumers react rationally to changes in prices. While the price of the natural gas commodity fluctuates, it is this inherent volatility that provides the signals (and incentives) to both suppliers and consumers to ensure a constant movement towards supply and demand quality.

Because the natural gas market is so heavily dependent on the interaction of supply and demand, it is important to have knowledge of the factors that affect these two components.

Natural gas in Bangladesh remains under priced in relation to the long-run marginal cost. This has led to significant resource shift by some sectors and consumer groups. The average tariff or all users was 78% of total sales in 1999/2000, implying an average subsidy of 22%. The under pricing of household gas use leads to a high opportunity cost in terms of foregone resources that could have been mobilized to support investment within and outside the sector, especially given the country’s massive development financing needs.