Unlocking a ‘Sleeping Petroleum Giant’

By Simon Lewis 14 November 2013

YANGON — Potential investors at a hotel conference room in Yangon in September were invited to salivate over Myanmar’s geology. By all accounts, the maps and cross-section graphics on display indicate that the country is sitting on vast energy wealth.

Although the exact quantities of hydrocarbons are unknown, “it can be envisaged as a sleeping petroleum giant in the Southeast Asia region,” said one slide presented by China’s North Petro-Chem Corporation (Myanmar) Ltd.

Investors were shown historic images of oil being pulled out of the ground by hand, hinting at just how easy the business could be here. The government hopes foreign investors will help unlock energy to fuel Myanmar’s development and provide big state revenues.

Many of those watching were from—or hope to link up with—the 61 local and international firms named as prequalified to bid for 11 shallow-water blocks and 19 deep-water blocks—more than 2,000 feet deep—off the coast. The offshore bidders must submit their proposals by Nov. 15.

Some 20 trillion cubic feet of natural gas reserves have already been proven offshore, and another 80 trillion cubic feet of “probable and possible” reserves had been identified before proper exploration of the deep-water areas has even begun, according to the North Petro-Chem Corp. presentation.

“[The] deep-water area has a better chance than shallow water to discover world-class commercial oil and gas reserves,” the presentation said.

As an indication of how valuable these reserves could be, the Shwe gas field—which began producing gas this year and justified the building of a US$3.7 billion gas pipeline from the Bay of Bengal, across Myanmar, to China—has reserves of up to 9.1 trillion cubic feet.

U Aung Kyaw Htoo, deputy director of the Ministry of Energy’s production planning section, told investors he was confident the unknown reserves were “giant.”

“The offshore blocks are good incentive for the investors,” he said. “Especially the deep-water blocks—they are untapped, they have never been touched before.”

The offshore blocks are set to be awarded early next year, shortly after 18 onshore blocks, which are expected to go to the highest bidders before the end of 2013.

The tenders run alongside the rapid development of the Shwe gas field and accompanying pipeline, a separate oil pipeline connecting Kyaukphyu in Rakhine State with China, and onshore oil and gas developments, meaning a veritable boom in the extraction and transportation of fossil fuels could be about to break.

While deep-water drilling has opened up vast reserves of oil and gas worldwide that could not be reached before, there are dangers. In 2010, the Deepwater Horizon oil rig in the Gulf of Mexico, which was operating at a depth of more than 4,000 feet, blew out, causing the deaths of 11 crewmen, and initiating the largest oil spill in US history.

U Aung Kyaw Htoo said ministry officials had spoken with the US State Department for “advice” on how to make sure such an incident didn’t happen in Myanmar’s waters.

Paul Donowitz, campaign director at conservation group Earth Rights International, said he was concerned about the government’s readiness to deal with multiple offshore drilling projects, as well as “significant quantities” of crude oil on vessels docking in Kyaukphyu to send oil to China.

“The ability to respond to an incident is completely untested,” he said.

The government has made public no information about emergency management and how it intends to ensure companies have in place comprehensive plans for incidents, he said. Even a small spill could do huge damage to Myanmar’s mangrove-lined coastal habitats, Mr. Donowitz added.

“The question is whether the government has the capacity to regulate the industry,” Mr. Donowitz said. “I just don’t think it is clear and the government has yet to demonstrate the capacity to oversee the industry. This industry is likely going to be effectively self-regulating.”

One way of balancing that risk is to bring in large companies who have experience drilling in deep seas and can make the necessary investments.

Among the firms allowed to bid for the offshore blocks are major international firms like Total of France, Chevron and ExxonMobil of the United States and Norway’s Statoil. The China National Petroleum Corporation, which is the developer of the Shwe gas pipeline, is also on the list alongside state-owned Korean and Japanese companies.

The Ministry of Energy has told companies, contrary to initial indications, that it will negotiate on the amount of profits from oil and gas projects they will share with companies. The move appeared to be a sweetener for entering a joint venture with the state, which on Myanmar’s preferred terms give the government more than 80 percent of the takings of an oil or gas project.

Economist and long-time Myanmar-watcher Sean Turnell said that while there will certainly be interest in the bidding from the major companies from the West, they may not be able to outbid regional firms, many of which have state backing.

“I think we will find the blocks are picked up by Chinese, Thai, Korean and other firms familiar from the past few years,” Mr. Turnell said in an e-mail.

Mr. Turnell also said the large revenues the government could be in for pose their own risks, since “such revenues kept the old regime afloat, and allowed its unhelpful policies.”

Myanmar is trying to join the Extractive Industries Transparency Initiative, which Mr. Turnell said was a necessary step, but would not have an impact on the way government spends oil and gas revenues.

“In short, good policymaking remains the issue, and resource rents pose dangers to this to the extent they allow poor decisions to be made,” he said.

This story was first published in the November 2013 print issue of The Irrawaddy magazine.