London Calling on a recent City shuffle

Published by MAC on 2006-06-09

9th June 2006

Eager to quit Bangladesh - but still stuck in Peru

London Calling has been following the recent career of Chris Eager, former NM Rothschild's manager of mine finance investment. We've never met him - and don't expect to. However community members, opposed to two projects his companies are promoting, have certainly brushed against some of his employees. By which (to be more legally precise), we mean people hired by corporate enterprises whose behaviour must be laid at the door of Mr Eager and his fellow directors.

Well that's until a few weeks back. On May 9th, Mr Eager suddenly resigned as non-executive chairman of Asia Energy, a company he'd been instrumental in bringing to London's Alternative Investment Market (AIM) specifically to grab the huge Phulbari coal fields in northwest Bangladesh. The flak which Eager and his company has received, both within the country and from abroad, was almost certainly not anticipated when this ill-conceived project was launched with the backing of the UK Department for International Development (DfID). Now it's at the centre of a raging debate within the country as the government's new mining policy gets aired and resoundingly attacked (see below). This is due to the policy's promise to dish out Bangladeshi minerals to foreign companies mainly for export and at a derisory royalty. India's biggest private enterprise, Tata, is also fmirly in the running (see article below). Indeed it's way ahead of Asia Energy at this stage of the game, but a tie-up between the two is by no means off the cards.

We don't know whether Eager was levered out of Asia Energy because of his poor defence of the company. (In fact, it's hardly been a defence at all, considering that the Phulbari mine would necessitate the removal of 40,000 people, thus destroying much local business and uprooting Indigenous villages).

In any event, Eager remains the Chief Executive Officer (CEO) and a director of Monterrico Metals, whose Rio Blanco operations in north western Peru only this week incurred the wrath of local people. This wasn't by any means the first time - as readers of this website will
be well aware. Last November two protestors against the project were killed during a demonstration and, in March this year, the company was accused by a community representative of orchestrating violence against opponents of the project.

Beholden to Gerald

Eager has been replaced at Asia Energy by Gerald Holden, who (we're told) had "a distinguished career with Barclays Capital.[working] for the Barclays Group for over 20 years and in his recent role as Managing Director and Global Head of Mining and Metals has been instrumental in building Barclays Capital into a leading position in the Mining and Metals community around the world."

In other words, Asia Energy has gone up market. Barclays Capital is no minnow in the distinctly murky sea of global mine finance. On the contrary - and even compared with big fish like Citigroup, HSBC, and Deutsche Bank - it's a shark. Among Barclay's recent dinners, served up by Mr Holden, has been a hefty steak in Vedanta Resources plc and more than a soufflé of Tiomin's mineral sands mine in Kenya. Holden has been granted options in Asia Energy which, if exercised, could earn him nearly £900,000. Under Holden's stewardship, in August 2004, Barclays Capital itself secured 2.1 million options to subscribe for Asia Energy shares. This was after the bank became the financial adviser to the Phulbari project with the aim of "advancing" the mine towards secure project finance. So, Mr Holden is now putting his mouth where both Barclay's and his own money lie.

Asia Energy obviously needs their new chairperson at this point in time. The company claims that he has "especial" knowledge of the Phulbari Coal project". If so, he'll be well aware that, shifting thousands of resisting people from their land in pursuit of the interests of a UK company, will exercise all the persuasion of which he's capable.

But this isn't the half of it. Holden is also joint chairman of Lonrho Africa Ltd and of Brinkley Mining, which listed on AIM at the beginning of this month. Through its South African subsidiary, Western Uranium, Brinkley has already acquired significant slices of the country's uranium and molybdenum resources in the Karoo region, two hundred or so miles north of Cape Town. Sections of these deposits allegedly contain up to 9,000 parts per million (ppm) of uranium and more than 500 ppm of moly. No mean reserves, however you measure them.

If Britain's prime minister follows these intra-company affairs (which he probably does, given his ire at the demotion by the Kyrgyzstan last year of another AIM mining company, Oxus) he must be rubbing his hands with satisfaction at Holden's ascendancy. Tony Bliar is now converted to nuclear power (and thus uranium), while his "development" department badly requires a front person for Asia Energy who can bring some credibility to the company in the City.

Meanwhile Eager can be permitted to hold onto Monterrico. After all, it's only a copper mine, impacting communities in an isolated valley, opposed by peasants who can't even speak English, while its progenitor far enjoys a complete absence of negative reportage in the British media.

And, for heaven's sake - Peru's not even in the World Cup!

Coal policy to be sent to cabinet next week
Geologists and economists oppose the policy

New Age, Dhaka, Bangladesh

2nd June 2006

The Energy and Mineral Resources Division will send the draft of the proposed coal policy to the Cabinet Division next week for approval although geologists and economists have opposed it.

'The law ministry has already vetted the policy and we have completed all procedures to send the policy to the Cabinet Division next week,' said an official on Thursday.

The Cabinet Division will place the policy that will allow export of 50-60 per cent coal with an increased royalty, before the cabinet meeting, headed by the prime minister, he said.

Geologists and economists, however, said the country's energy security will be under threat if the policy is approved as it will allow more than half of the country's coal to be exported.

If the policy is approved, any company will be allowed to export double the volume of coal that would be consumed in the country. This provision will remain for the first 10 years after the coal policy comes into effect, said energy officials.

The company will be allowed to export the same amount of coal that would be consumed in the country annually 10 years after the policy comes into effect.

It means the ratio of domestic consumption and export will be 1:2 in the first 10 years and 1:1 after 10 years.

The policy also provides an option for the method of coal extraction - shaft or open pit. Apparently this would be decided taking into account the environment, geographical structure, health and social and economic impacts and maximum extraction of coal.

The policy has also introduced a variable royalty rate for coal exports instead of a fixed rate.

The royalty for coal export from open pits will be around six per cent if the price of one tonne of coal in the international market is $25 per tonne or below, and for an increase of every $3 the rate will increase by about one per cent.

As per the current price of $50 per tonne in the international market, the royalty will be around 16pc.
For companies using the shaft method, royalty will be about five per cent if the coal price is $25 or below, and will increase by one per cent for an increase of every $3.

The proposed policy has stressed on foreign investment and made it mandatory for companies to set up power plants at the coalmines.
'The proposed coal policy has encouraged aggressive extraction of coal to facilitate foreign companies to export coal from Bangladesh. The policy is export oriented,' said former power development board chairman Nuruddin Mahmod Kamal, who is also a geologist.

Economist Anu Mohammad of Jahangirnagar University said, 'How would the energy security of the country be ensured if the government allows 60 per cent coal to be exported?'

He said the policy pointed that there was little domestic demand of coal. 'If there is indeed little demand, why should huge amounts of coal be extracted displacing thousands of people and destroying the environment?'

Investment proposal from the House of Tata

New Age, Dhaka, Bangladesh

4th June 2006

Export of a commodity takes place only when it is in surplus or not needed by the country itself. Since gas and coal are not yet in exportable surplus in Bangladesh, there cannot be any argument made now for allowing these to be exported, either directly or indirectly…. It is very important that we see the benefits from Tata's investment by excluding the associated gas or coal price. Because both gas and coal are depletable resources – selling of these energy commodities is equivalent to selling family jewellery or ancestral property. If it can be assured that Bangladesh will derive benefit much more than the value of gas, only then such investment could be considered, write Justice Golam Rabbani, Nuruddin Mahmud Kamal, Engr SM Shaheedullah, Prof Shamsul Alam, Prof Anu Mohammad, Prof M M Akash and Prof Hossain Mansoor

In October 2004 an expression of interest of a 2-billion-dollar investment proposal in Bangladesh was signed between the Indian industrial conglomerate Tata and the Board of Investment (BOI) Bangladesh. Much enthusiasm was shown in the media, more so by the BOI boss, Mahmudur Rahman. There was no urgency to begin negotiations. Yet, discussions began on the investment package and these were kept secret from the people. From time to time, some bits and pieces of the proposal were leaked through the media. The people got alarmed; there were many omissions in the proposal.

We soon heard more about the Tata proposal than we wanted to know. We found ourselves awash in a tidal wave of conflicting opinions. The initial discussions/negotiations broke off over the issue of natural gas pricing. At least the BOI spokesman claimed so. Tata, on the other hand, said it was a tactical retreat.

Tata offered only US$ 1 for one Mcf of gas, but demanded assured gas supply for 20 25 years as well as all the privileges offered to export-oriented projects. This created suspicions on the Tata investment package that would need 3 trillion cubic feet (TCF) of gas over the life of the three proposed projects. It was also unclear whether they were export-oriented projects. Was the proposal an investment package or a prospectus (like Ashulia or bashundhara Housing Project)?

Tata proposal

The initial Tata proposal comprised of three gas-based projects that envisaged a 2.4-million-ton capacity steel plant (Sponge iron) at Ishurdi, a 1-million-ton per annum capacity fertiliser plant at Chittagong (near Sangu), and a 1000-MW power plant. Later, a 6- million-ton coal project (through open cast mining method) was included. According to the latest amendment by Tata on 30th April 2006, the proposed projects will now require 2.14 TCF of gas and 6 million ton of coal with a guaranteed supply for 20 years (revised downwards to 10 years now!).

Time of submission of the proposal

It is intriguing that Tata made the proposal at a time when the law and order situation in the country was deteriorating fast. The government has so far been hesitant to bargain hard with on many issues, particularly on gas pricing and guarantee, fiscal incentives, tax holiday and Barapukuria coal mine lease etc. Many development partners, including the World Bank and ADB, are strongly supporting Tata's proposal.
The likely negative impact of subsidy on gas price has not been raised by BOI. Gas price below the international market price cannot be acceptable for Bangladesh. The international market price for one unit of gas (one thousand cubic feet of gas or 1 Mcf) ranges between US$ 5 to US$ 8

Tata's gas price offer

Tata group now proposes three new prices for natural gas, one for steel plant (US$2.60 per Mcf), another for its fertiliser project (US$ 3.10 per Mcf). It appears that Tata assumes that the gas price shall vary from IJS$ 2 to US$ 4 per Mcf. According to their revised proposal in April 2006, the floor price (third price) will be US$1.5 per Mcf at the initial period (first 5 to 6 years): US$ 2.6 per Mcf for steel and US$ 3.1 per Mcf for fertiliser production respectively. What a preposterous proposal? Terming the revised proposal 'the deal of a century', Tata group has asked Bangladesh government to approve the said proposal by the end of June 2006. How can a company show such arrogance.

An economist's views

Tata's earlier investment proposal, including gas price and spin-off benefits, has been examined by an economist, Professor Wahiduddin Mahmud. He expressed doubts about the Tata- sponsored Economic Intelligence Unit's (EIU's) study on the benefits to be accrued as a result of the proposed investment by Tata. Dr. Mahmud could not find many of the benefits as claimed by Tata in economic terms.

Gas price

KAFCO, for instance, has tied the gas price with the international export price of fertiliser (at US$ 0.75 in 2001), but effectively pays US$ 2.55 in 2006. Petrobangla buys gas from Chevron (Unocal) or Cairn Energy at approximately US$ 2.70 per unit (Mcf) and it pays corporate tax on behalf of the IOCs. When corporate tax plus transportation cost is added, per unit price of gas become US$ 3.50 per Mcf. The international market price (bench mark price with escalation clause) for gas ranges between US$ 5 to US$ 8 per Mcf (highest in USA). Assuming even a US$ 5 per Mcf, the value of 2.14 Tcf gas (to be dedicated to Tata) would be US$ 10.7 billion. It would be stupid to dedicate for a 3-billion-dollar investment US$10.7-billion worth of natural gas at the prevailing international market price.

The pricing of gas may be based on overall benefit the nation may derive out of Tata's investment, based on total transparency. If KAFCO is a base line example, one cannot ignore that it is 43 per cent owned by the Government of Bangladesh and KAFCO is obliged to provide attractive dividends to the government for its investments. What is perhaps more important is the guarantee Tata sought for uninterrupted supply of gas for at least 20 years since the country's ability to produce and supply of gas is quite doubtful and the manufacturing units in Bangladesh are already suffering due to the short supply of gas. How can Petrobangla ensure supply of the desired volume of gas (between 180 to 200 million cubic feet per day) for 20 years up to say 2030 (assuming the proposed plants will come into operation by 2010)?

Reserves of gas and coal

Since 2001, a number of gas reserves studies and long-term forecasts of gas use have been made in Bangladesh. Petrobangla forecast for a 50-year demand in 2001 is around 62.9 Tcf compared to the proven and probable reserve of 11 Tcf (even a 20-year forecast shows a demand of 13.8 Tcf.). In 2002, the government-sponsored National Gas Reserve Study and Utilisation Plan indicates that by 2015 the existing reserve of about 15 Tcf will exhaust. Consequently, by 2016 import of gas will become necessary unless new gas fields are discovered. The latest study by Messers Wood and Macanzie, the Gas Sector Master Plan 2005, is based on a proven and probable reserve of approximately 13 Tcf. From their assessment, the existing reserve of gas will start to decline fast from 2012 and perhaps by 2018 it will deplete completely, if new fields are not discovered.

The present gas reserve is entirely dedicated to home consumption, mostly for power generation. If an arrangement is made now to set aside about 2.2 Tcf of gas for Tata's use, the decision will be suicidal for the nation. The country can ill afford such a plan to be executed by Tata. If the Government still insists on providing gas to Tata, the amount of subsidy will be approximately Taka 27,000 crore at the present price in the country.
Long term guarantee on gas supply should depend on reserve estimation of gas. The official recoverable reserve of gas is expected to be exhausted within 2015 even without Tata plants. Consequently, there is a strong argument that the country does not have abundant gas to spare for a large consumer like Tata.

Another question is: why should the government allow 90 per cent ownership of an asset like Barapukuria coal mine to Tata after 2011 for a petty 6 per cent royalty? Besides, the residents of the prospective coal mining area are against open cast mining method.

What is the driving force?

Tata is showing interest to make investment in Bangladesh mainly because of the availability of natural gas at a cheap price. Tata will not be able to set up a gas-based sponge iron plant in India nor can it ship huge volume of heavy iron ore to another nearby country it can get access to a large reserve of cheaper gas. Tata is also interested in securing alternative fuel like the availability of coal for the energy security of their proposed steel plant. Bangladesh with its gas and coal is offering an ideal place of investment, having low demand of steel.

And with investor-friendly fiscal regime Tata feels that it is assured of unhindered export of steel. If the investment proposal is examined closely, it will be seen that all income and expenditures are related to steel and fertiliser exports. The proposed infrastructure developments in rail, road, port and other areas will be exclusively dedicated for Tata's export facilities. Bangladesh's share of the benefit will need to be seen with a magnifying glass or under a microscope.

What will be the benefit to Bangladesh?

The billion dollar question for the three-billion-dollar investment proposal is: what will be the benefit of Bangladesh from such investments by Tata? It is being said that billions of dollars will be received by Bangladesh as a result of Tata investment. If so, on what account will it come? Is it the sale proceeds of the steel or fertiliser or duties on export or gas price? The last point is very dangerous. Are we entering into a trap of gas export in a disguised form?

It is very important that we see the benefits from Tata's investment by excluding the associated gas or coal price. Because both gas and coal are depletable resources -- selling of these energy commodities is equivalent to selling family jewellery or ancestral property. If it can be assured that Bangladesh will derive benefit much more than the value of gas, only then such investment could be considered.

Tax holiday, financial incentives, etc

Tata's investment also involves a long tax holiday request, financial incentives, participation of Tata in the capital market, purchase of huge land (about 3000 acres including 20-kilometre-long corridor (!) and infrastructure.

Nothing has been stated in the proposal about the price per unit of electricity or the price of steel or fertiliser to be supplied by Tata to Bangladesh. Many local steel /re rolling industrialists feel threatened due to the likely arrival of Tata in this field. They apprehend that the local steel industry will be adversely affected although Tata indicated that they will manufacture only flat steel as opposed to long products manufactured by the re rolling mills in the country.

Employment and energy security

Tata claims that due to its investments in Bangladesh some 24,000 direct employment and 100,000 indirect employment opportunities will be created. However, these are mere statements and needs to be supported with evidence and facts.

In the face of rising oil prices, energy security is a crucial issue. Even though Bangladesh's import of crude oil and petroleum products are about one-fourth of the total commercial energy use, it is still significant because almost the entire transport sector is dependent on imported oil, in addition to generation of power and operation of a substantial number of agricultural pumps. Bangladesh is already severely handicapped by a huge gap between its import and exports. The current fiscal year would spend about US$ 1.4 billion for import of 3.7 million tons of oil. While a large import saving is taking place due to the large gas use in the domestic sector. Some 11.5 million tons of energy substitution is taking place by gas use in FY 2005 06 and thereby a foreign exchange saving of US$ 4.5 billion would commence. Therefore, there is ample justification for domestic gas use by our own companies and not by Tata.

Export of gas and coal

The latest proposal from Tata

The 30th April 2006's proposal from Tata includes, among other things, a three-tier pricing for gas and 10 per cent equity share for the government.
If one considers Tata's equity in the investment proposal as US$ 3 billion, Bangladesh's equity share is many times over, say, US$ 12 to US$ 15 billion as raw material (2.14 Tcf gas and 6 million ton coal), land and associated infrastructure, not to speak of other tangible and intangible assets. Consequently, the government's equity may be considered as over 60 per cent and accordingly one formula could be joint venture for the proposed investment. Tata's investment may then be considered profit-sharing on an equitable basis.

The value addition to gas or coal resources are very important factors in the value chain under the proposed projects and must be considered a sine qua non while evaluating any project involving gas- or coal-based exportable commodity.

Officials and politicians who are associated with the evaluation of Tata's proposal must appreciate that the price of crude oil may increase from US$75 to US$100 a barrel. And committing Bangladesh gas for the future at the prevailing bench mark of crude oil price may be considered as an action against the interest of the people of Bangladesh and the country itself and those who are responsible for such criminal acts shall be exposed to heavy penalty in due course.

A threat to energy security

Energy experts, engineers, geologists and economists, in a round table dialogue held at the Press Club on 28 May, 2006, called upon the government not to accept Tata's investment proposal. They held that it would severely diminish the country's energy security. They criticised the government for its non transparency about Tata's investment proposal. They pointed out that local industries are now facing serious gas and power shortages and asked: how can the government sell gas to the Indian company at a subsidised price? Similar opinions were also expressed in a conference held at the Department of Geology, University of Dhaka on 29 May, 2006. The attending engineers, geologists, economists and students reiterated that Tata's proposal should be discarded forthwith.

What the government must do

The above discussion has originated from Tata's investment proposal. We have, in fact, no need or scope for discussing this or any other similar proposal. Our course is inexorably dictated by the fact of extremely limited size of our gas and coal reserve.
We must put our limited gas and coal reserve to our own use as much as is possible. We must not let these precious energy sources to be exported directly or indirectly in the form of products. We must not let ourselves be stripped of our scarce resources by the charm of fictitious prospects held out by big profiteers.

The article has been abridged and slightly edited. The authors: Justice Golam Rabbani, Retired justice of the Supreme Court,; Nuruddin Mahmood Kamal, Ex-Chairman, PDB; Engr. S.M Shaheedullah, Convener, National Committee for safeguarding oil-gas and mineral resources, protection of electrical power and ports; Dr. M. Shamsul Alam, Professor, Chittagong University of Engineering and Technology; Prof. Anu Muhammad, Professor, Jahangirnagar University, Prof. M.M Akash, Professor, Dhaka University; and Dr. Hussain Monsur, Ex-Chairman, Petrobangla and Professor, Dhaka University

Sources: sack for Eager: Asia Energy announcement, May 9 2006; Eager at Monterrico: www.monterrico.co.uk; Barclay's Capital in Phulbari project: Mining Journal, September 1 2004; last weeks demonstration against Monterrico in Peru - see story on this weeks' MAC Latin America update; previous demonstrations against Monterrico in Peru - see: http://www.minesandcommunities.org/Action/press988.htm; Holden's holdings in South Africa: Mineweb, June 8 2006; Bliar and Oxus: http://www.minesandcommunities.org/Action/press987.htm

[London Calling is published by Nostromo Research, London. Views expressed in this column do not necessarily reflect those of any other organisation, including the editors of the MAC website. Reproduction is welcomed, so long as acknolwedgment is given to Nostromo Research].

MAC: Mines and Communities

Themes

London Calling on a recent City shuffle