Beset by Delays, Burma-China Oil Pipeline Nears Start-up

By Reuters 21 March 2017

RANGOON & BEIJING, China — Nearly a decade in the making, a project to pump oil 770 kilometers (480 miles) across Burma to southwest China is set for imminent start-up, with a supertanker nearing the port of Kyaukphyu, Arakan State, marking the opening of a new oil trading route.

Dogged by sensitive relations between Naypyidaw and Beijing, the US$1.5 billion oil pipeline has been sitting empty for two years, but the two sides are now close to a deal, said Burma-based government and industry sources, despite some last-minute tensions.

An agreement between China’s PetroChina and Burma’s government will allow the state energy giant to import overseas oil via the Bay of Bengal and pump it through the pipeline to supply a new 260,000-barrels-per-day (bpd) refinery in landlocked Yunnan province.

The new oil gateway fits with China’s “One Belt, One Road” ambitions, linking it with central Asia and Europe, and will provide a more direct alternative route to sending Middle Eastern oil via the crowded Malacca Straits and Singapore.

It would also be a rare win for China in Burma after a diplomatic offensive aimed at forging better ties with its resource-rich neighbor, which has often been wary of Beijing’s economic clout.

Aung Myat Soe, deputy director of planning under the state-owned Burma Oil and Gas Enterprise (MOGE), said the project was awaiting a final sign-off by the Minister of Electricity and Energy.

Major issues including transport tariffs and Burma’s tax take on the oil have been settled, but port fees have yet to be finalized, said a Burma-based industry source familiar with the matter.

“The two sides are working to finalize the terms and sign the contract,” the person said, declining to be named as the information is not public.

“I can’t say for sure when the deal would be sealed—it could be in a couple of days or early April.”

The pipeline will have an eventual capacity of 400,000 bpd, about 5 percent of China’s daily import demand, but the start-up of the Yunnan refinery has been held up as PetroChina and Burma negotiated final terms for delivering the oil.

PetroChina plans to start test production at the refinery in June, aiming to expand its foothold in China’s fuel-short southwest which has so far relied largely on rival Sinopec for supplies, said two Beijing-based oil officials familiar with the Yunnan refinery.

Before then, PetroChina is expected to purchase another 7 million barrels of crude for the pipeline, to stock up fuel for about one month’s production at its new refinery, said one of the officials.

Squabbling Neighbors

While the deal is still to be finalized, oil is already on its way to supply the pipeline, straining relations with Burma.

Shipping data in Thomson Reuters Eikon shows the oil tanker United Dynamic, carrying one million barrels of Azeri crude, is currently off the coast of southern India and expected to unload its cargo at Kyaukphyu this week.

A Burma government official said there had been “a big argument with the Chinese” over the move to ship in crude before the contract was finalized, while a second official said the entry of the tanker was pending approval from Burma’s navy.

PetroChina did not respond to requests for comment.

Any delay would be costly for the oil shipper, which is carrying crude worth over US$50 million and which has a daily tanker charter cost of nearly $20,000, excluding fuel and crew costs.

The deal is also controversial in China as it has been tainted by a graft probe into PetroChina’s ex-chairman Jiang Jiemin, a supporter of the project.

Critics have raised concerns about the economic viability of the project, which also includes a natural gas pipeline, which was touted as providing “strategic new channels” for China’s energy needs.

At the same time, the prolonged squabbling over key features of the deal, first discussed back in 2004, has soured Chinese enthusiasm for the project.

“There are open questions about the economics and future cooperation with Burma, given the repeated delays and under-utilization,” noted a senior PetroChina official who requested anonymity as he’s not authorized to speak to press.