Business

The Irrawaddy Business Roundup (May 2, 2015)

By Simon Lewis 2 May 2015

‘Go Big or Go Home’ Lawyers Advise Oil and Gas Bidders

Issuing advice to firms considering entering the race to extract oil and gas in Burma, a leading consultancy says that the best approach when dealing with the current government was to “go big.”

Burma’s Ministry of Energy has in recent months been concluding negotiations on production sharing contracts with the international oil and gas companies who won a 2013 tender to explore 20 offshore blocks in both shallow and deep waters. The companies include majors Shell, Chevron, Eni, Total and Statoil.

While some contract negotiations are yet to conclude, regional legal consultancy VDB Loi—which said it has been involved in some of the negotiations—has helpfully published a detailed report giving advice to companies.

The Oil & Gas Myanmar Update, published in April, outlines some of the sticking points that have led to drawn out negotiations in some cases, putting them down in part to the government’s inexperience in dealing with large international oil companies. “Put another way,” it says, “in the wake of the repeal of international sanctions against Myanmar, the Ministry of Energy (MOE) is facing a new kind of company at the other side of the negotiating table.”

VDB Loi has suggestions on how oil and gas companies should approach negotiations with Burma, summing up the advice as: “Go big or go home.”

“Judging from our experience with the Government’s tenders in the past 18 months, such as the airport tender, the tender for 2 telecom licenses and the privatization of SOEs [state-owned enterprises], the winners are those with a forward leaning proposal,” it said.

In the case of oil and gas production sharing contracts, it said, the government is reluctant to deviate much from its standard model contract. That leaves companies looking for leverage largely relying on the one-off signature bonus to stand out among competitors.

The sizes of signature bonuses agreed so far have not been made public, and Shell declined to confirm an Eleven Media report saying that its bonus was worth US$61 million.

“We can’t go into too much detail, but it suffices to say that signature bonuses have been on a steep rise in Myanmar. I would guess, based on incomplete information, that signature bonuses have nearly tripled between 2006 and 2013,” the VDB Loi report says, adding that, while other factors would be taken into consideration, the government was most likely to pick the firm offering the largest amount.

“All else being equal, including the work program, we think the highest bidder has a very good chance of getting the nod.”

Singapore Firm to Build Power Plant as Burma Looks to Use More of its Gas

Singapore’s Sembcorp Industries has announced that it has been granted permission to build a 225-megawatt gas-fired power plant in Mandalay Division. The project is one of a number underway that will use more of Burma’s endowment of natural gas as the country looks to meet rising demand for power.

The Singapore-listed Sembcorp said in a statement that Myanma Electric Power Enterprise had awarded its subsidiary Sembcorp Utilities the deal after a competitive tender overseen by the World Bank’s International Finance Corporation. Sembcorp will build the plant in Myingyan Township at an estimated cost of $300 million.

The company will take an 80 percent stake in project, which is expected to come online in 2017 and will sell its power to the national grid for 22 years, the statement said.

The statement added, “This marks Sembcorp’s entry into Myanmar’s fast-growing power market, where electricity demand is expected to increase at a compounded annual growth rate of 13% over the next 15 years, according to government estimates.”

According to a report from Russian news service Interfax’s Global Energy site, the Myingyan plant will be connected to the Shwe gas pipeline that carries natural gas from beneath the Bay of Bengal, through Burma, to China.

Burma is entitled to 20 percent of the gas produced in the offshore Shwe field, the rest of which goes to China. But Interfax said that last year Burma only used 8 percent of the 3.30 billion cubic meters of gas extracted from the Shwe project.

Deals are also in place with Thailand, which takes the majority of the gas extracted from the southern Zawtika and Yadana gas fields. According to Interfax, Burma has been increasing the amount of gas it takes from both projects, and will likely need more to feed 12 new gas power plants that have been approved, with a total potential capacity of 1.26 gigawatts.

New Budget Boosts Spending on Power, Education

Burma’s budget for the new fiscal year included large increases in the electricity and education sectors as the government looks to address longstanding spending shortfalls, according to UK-based analysts Oxford Business Group.

The education system has been chronically underfunded for decades, and power outages have been common even for the minority of Burmese people who have access to the electricity grid.

Oxford Business Group in an economic update this week said decisions made for the 2014-15 government budget appeared to be addressing those areas. The group described “major funding boosts” for both power and education, as part of the last budget of President Thein Sein’s administration.

Citing local media reports, Oxford Business Group said that the $18.5 billion budget included $2.3 billion for the Ministry of Electrical Power “to improve electricity supply and distribution, making it the fourth-largest spender behind the finance, energy and defence portfolios.” It said the figure included foreign loans, and the World Bank has previously pledged a large injection of cash into Burma’s power sector.

The budget also included $1.3 billion for education, up from $1 billion in the previous fiscal year, the group said.

“In a separate move, the country’s free schooling system will be extended to include higher education this year, in a bid to boost the number of graduates entering the workplace,” the update said.

“The budget also approved resources for university stipends and scholarships as well as financial support for students attending technical institutions, as part of a push to boost take-up of vocational courses.”

Swiss, German Firms Team Up to Bring Beauty Products

Two European firms have announced that they will expand their existing partnership in Burma to bring Schwarzkopf hair color products and Fa deodorants to the Burmese market.

DKSH, a global company headquartered in Zurich that describes its business as “market expansion services” announced this week that the products “will be available in modern and traditional trade channels nationwide.”

The brands are produced by German company Henkel. The two firms have collaborated since 2013 to sell laundry detergent in Burma, the statement said.

“DKSH and Henkel cooperate in eight Asian markets in total: Cambodia, China, Hong Kong, Malaysia, Myanmar, Singapore, Thailand and Vietnam,” it added.

Burmese Tea, Thanakha Could Get ‘Geographical Indication’ Status

In France, a product labeled Champagne must come from Champagne; Cognac must be from Cognac. But in Burma, so far, specialty products from the regions are offered no protection.

That might change soon as the government is preparing to propose a new law on “geographic indication,” (GI) status, according to a UN agency.

Countries around the world are increasingly looking to classify certain products as unique to their region as a way to protect local farmers and to market specialty products. Following a regional meeting on GI last year in Cambodia—which has successfully applied the classification to its famous Kampot pepper and other agricultural products—the United Nations Conference on Trade and Development (UNCTAD) in March held a forum on the issue in Rangoon.

“Given that Myanmar’s economy is mainly based on agriculture and is rich with biodiversity and handicrafts, GIs represent an excellent opportunity for Myanmar,” the UNCTAD said in a press release.

“They could help promote such products as Thanakha, a unique scented cosmetic cream made from tree bark that is becoming popular in Thailand, and special lotus-fiber robes made by the people of the Inle Lake region.

“Myanmar teak, types of tea and even certain stone items are also considered potential targets for GI classification.”

The release said the Ministry of Science and Technology made a presentation at the meeting, saying that a law on the issue would be presented to Parliament shortly.

“Representatives of the ministry said it attaches great priority to the implementation of GIs in Myanmar are looking forward to more assistance from UNCTAD and other development partners on this matter.”

The release quoted Deputy Minister of Science and Technology Ba Shwe saying that embracing GI would “promote the development of agriculture, to increase producers’ income and foster dynamic rural development.”

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