The energy sector is the great, untapped potential on which much of Myanmar’s hopes are pinned. One of the world’s first oil producers, Myanmar is emerging in the 21st century as a key producer of natural gas. With the lifting of international sanctions and the resolution of a maritime border dispute with Bangladesh, the government has moved to speed up investment by tendering out vast regions of the country and its offshore shelf to foreign investors. Drawn by the river delta geography and the productive history, despite limited exploration, more than 60 global oil and gas companies, including several supermajors, are participating.
Credentials
Myanmar’s vast rivers are also well suited to hydroelectric dams. Already the main source of the country’s electric power production, hydropower output has the potential to be boosted 40 times. The former military regime planned to allow Chinese, Thai and Indian companies to develop dozens of dams geared mainly towards exports, but those plans were delayed or shelved due to popular opposition, difficulties obtaining financing and resistance from armed groups in some areas. Currently only several smaller dams are being built, but there is continued interest, in particular from Chinese and Thai companies.
The greatest challenge will be to apply energy potential to promote general economic growth. Most recent major investments have been geared towards export, due to overly low electric power tariffs and an inefficient centrally planned gas distribution system.
While there is momentum behind market reforms generally, at the time of publication the government had yet to announce any concrete plans to address those key issues and challenges. The resulting energy deficit makes power supplies unreliable, stifles the development of industry and complicates expansion of the public energy grid to the three-quarters of the country that is not yet connected.
Ancient Oil Producer
Myanmar’s oldest oil fields, on the central Irrawaddy River around Chauk and Yenangyaung, brought oil and bitumen naturally to the surface. By the 18th century the region was home to a substantial indigenous oil industry of hundreds of hand-dug wells. In the early 20th century, as global demand for oil surged, the Burmah Oil Company developed into one of the largest oil companies of that era and founded a sister company in Persia that would evolve into British Petroleum.
After a military regime came to power in 1962, the oil and gas industry was nationalised and reorganised under three state-owned companies: the Myanma Oil and Gas Enterprise (MOGE), responsible for exploration and development and gas transit; the Myanma Petrochemical Enterprise (MPE), controlling processing; and Myanma Petroleum Products Enterprise (MPPE), tasked with distribution and sales of oil products. Collectively, these companies are now departments of the Ministry of Energy (MoE).
With no major oil discoveries in recent decades, crude oil production has fallen to 7000-7500 barrels per day (bpd), as per MoE figures. Most oil fields are operated by MOGE, with the exception of two privately operated projects. The Chauk and Yenangyaung fields were turned over to Goldpetrol, a foreign joint-venture (JV), in 1996 under an improved petroleum recovery contract. Interra Resources, a Singapore-based independent, owns 60% of Goldpetrol, and ZhenHua Oil, a unit of Chinese industrial giant Norinco, has held the other 40% stake since 2010. The nearby Mann field was turned over in 1996 to a JV between US services firm Baker Hughes and Myanmar’s MPRL E&P, which took over as operator in 1999 when Baker Hughes withdrew. MPRL’s 15-year performance compensation project, due to expire in 2013, was then extended for 11 years.
Modern Gas Producer
Small onshore gas fields were explored and developed in the colonial era, while offshore gas exploration got under way in the 1960s. The first offshore find came in 1982 with the discovery of the Yadana gas field, about 64 km offshore of the Irrawaddy Delta. Development began after a reorganised military regime introduced market reforms after 1988. A licensing round in 1989-90 offered 16 blocks for production-sharing contracts (PSCs) to foreign investors, with major groups Total, Unocal, Texaco, Shell and Amoco among the tender winners.
The Yadana field was awarded in 1992 to Total, which remains the operator with a 31.2% stake. Of this total, stakes were farmed out to Unocal, which was later acquired by Chevron, with 28.3%, and the Petroleum Authority of Thailand (PTT), with 25.5%. MOGE holds the remaining 15%. As the project was already well advanced prior to international sanctions, which prohibited US and European companies from investing in Myanmar, Yadana and its investors were given a “grandfather clause” exception. After $1.2bn of investment, commercial production began in 2000 under a 30-year PSC. Output averaged about 730m cu feet per day (cfpd) in 2012, according to the MoE. About three-quarters of the gas is exported to Thailand through a pipeline that runs east under the Andaman Sea and overland to the Thai border, where PTT takes delivery. A quarter of Yadana’s output is consumed domestically through two MOGE pipelines: one running under the sea to Yangon, launched in 2010, and an overland pipeline that runs north from south-east Myanmar towards Yangon.
Rich Offerings
A second major gas field, called Yetagun, was discovered in 1992 in blocks that Premier Oil, an independent UK group, was awarded in 1990. The project is located in shallow water north-west of the Mergui Archipelago. Premier sold off stakes to Texaco, initially the operator, and JX Nippon Oil & Energy. However, sanctions led to, first, Texaco and, later, Premier backing out. Petronas, the Malaysian state oil and gas group, took over as operator, and PTT, the main customer, joined as partner. The current stakes in the project are Petronas with 40.9%, PTT and JX Nippon Oil & Energy with 19.3% each, and MOGE with 20.5%.
Production started in 2000 and has risen in stages with the addition of satellite fields. Investment has reached $840m, and includes a subsea pipeline and an overland pipeline parallel with the Yadana project’s overland line. The field produces about 500m cfpd of gas, with 90% exported to Thailand and 10% delivered domestically via the overland pipeline running north from south-east of Myanmar. According to the MoE, the field also yields 11,500 bpd of condensate, which is offloaded by boat and refined domestically.
Later the military government awarded PSCs individually through direct negotiations with foreign investors. The next major discovery, the Shwe gas field, came in 2004 offshore of north-west Myanmar in blocks awarded to South Korea’s Daewoo International in 2000. Daewoo International then obtained an additional PSC for a neighbouring block and discovered satellite fields. Daewoo International is the current operator with a 51% stake. The other partners are India’s ONGC Videsh with 17%, India’s GAIL and Korea Gas with 8.5% each, and MOGE with 15%. Daewoo International was acquired by the Korean steel giant Posco in 2010.
Enter The Dragon
The Shwe project was originally aimed at supplying gas to India, but backers were unable to secure a pipeline access across Bangladesh. Then China stepped in, agreeing to build a pair of oil and gas pipelines leading 870 km from Myanmar’s Bay of Bengal coast to the Chinese border. The gas pipeline will carry Shwe’s output, while the oil pipeline will carry oil arriving by tanker from the Middle East, and as a result will shorten shipping time. The pipelines are known informally as the Sino-Myanmar pipelines.
Myanmar’s then-energy minister, U Than Htay, told Reuters in July 2013 that the China National Petroleum Company (CNPC) had spent $2bn on the gas pipeline, which was completed that month, and would spend some $2.3bn on the oil pipeline, which was due to be completed later in 2013.
The Daewoo International-led consortium planned to invest $3.2bn and expected to produce 500m cfpd of gas, according to the trade publication OE Digital. About 80% of output will be exported. The gas pipeline was built with a larger capacity of 1.1bn cfpd, allowing it to accommodate future offshore discoveries or a potential addition of a liquid natural gas terminal. The oil pipeline has a capacity of 22m tonnes a year, equal to about 8% of China’s total oil imports in 2012.
The most recent major development, the Zawtika field was discovered by PTT in 2007 in a block south-east of Yadana. PTT holds an 80% stake, while MOGE has 20%, in line with a 2003 PSC. The $2bn project is expected to produce 300m cfpd, of which 80% will be exported to Thailand via another eastward subsea pipeline and overland link to the Thai border. A further 20% will be delivered domestically through a MOGE off-take pipeline. The project is slated to begin producing in the first quarter of 2014, according to a recent press release.
There were also two smaller but significant onshore gas discoveries in the 1990s: Shell unearthed the Ahpyauk gas field in 1991, roughly 80 km north of Yangon, and which was taken over by MOGE when Shell pulled out in 1993. MOGE also discovered the Nyaungdon gas field in 1999, which also lies north of Yangon. Owing to these discoveries Myanmar’s annual gas production rose significantly from approximately 60bn cu feet in the late 1990s to 421bn cu feet in 2011, according to US Energy Information Administration (EIA) data.
Annual output is expected to reach about 790bn cu feet by 2015 as the Shwe and Zawtika fields ramp up production. By comparison, China produced 3.8trn cu feet of gas in 2011; Indonesia, 2.7trn; Malaysia, 2.2trn; India, 1.4trn; Thailand, 1.3trn; and Bangladesh, 710m, according to the most recent EIA data.
Accelerating Exploration
As political reforms have led to the lifting of international sanctions, the government has moved to speed up oil and gas exploration. Since 2011 the MoE has announced three successive rounds of tenders, offering PSCs for a total of 61 onshore and offshore blocks (see analysis). Eight onshore blocks were awarded in 2012, and a second licensing round offering another 18 onshore bids attracted 53 bids from 31 companies, according to a 2013 press release from the ministry.
In April 2013 the ministry announced a third licensing round of 30 offshore blocks, representing almost the entire Myanma offshore shelf that was not already under contract. The announcement came soon after Myanmar and Bangladesh settled a long-running dispute over their international maritime border. A total of 61 companies prequalified for the bidding in the offshore licensing round, according to a July 2013 ministry announcement, including major groups such as Chevron, ExxonMobil, Shell and Total, and other large firms such as ConocoPhillips, CNPC, British Gas, Repsol, Statoil, Eni, Anadarko, Petronas, PTT and Daewoo International, which all prequalified. The ministry is set to sign PSCs in the second and third licensing rounds during the course of 2014, and it also awarded two offshore blocks to PTT in 2013, which had been under negotiation since 2010.
The increased licensing activity is expected to boost exploration over the next few years, especially in Myanmar’s deepwater shelf, which remains mostly unexplored with little or no geological data available. Of the 30 offshore blocks offered, 19 are deepwater and are being offered under better terms than the shallow offshore blocks. This is to compensate for the greater technical demands and higher costs of deepwater projects. At present, deepwater blocks can be bid for without any domestic partner. “Deepwater blocks require a quantum leap in investment and expertise, which local companies do not yet have. Foreign firms are allowed to develop the blocks by themselves,” Paul Van Empel, director and chief instructor at Uniteam Offshore Training Centre, told OBG.
New Finds
Meanwhile, exploration is continuing in offshore blocks already awarded. PTT announced in August 2013 that it had discovered the Aung Sinkha field, north-east of the Yadana field. The company said gas flowed from three test drills and that it would continue test drilling, with a preliminary aim to begin development in 2016. The group signed a PSC for the block in 2004 and is operating with an 80% stake, while Japan’s Mitsui holds a 20% stake. Additionally, in late 2013, PTT drilled Myanmar’s first deepwater well in the M-11 deepwater block it had acquired in 2005, which lies adjacent to the Zawtika field. PTT is the block operator, with a 45% stake, following a deal in 2012 that gave stakes of 40% to Total and 15% to JX Nippon Oil & Energy.
PetroVietnam, Vietnam’s national oil and gas company, announced in June 2013 that it would continue drilling after finding gas in its first test drill in a block north-west of Yadana, which it signed a PSC for in 2008. The find came after PetroVietnam outsourced a 40% stake in the block to France’s Maurel & Prom. PetroVietnam is operating with a 45% stake and Myanmar’s Eden Group holds a 15% stake.
MPRL E&P, the operator of the onshore Mann oil field, carried out 3D seismic work in 2013 in a block off the southern part of Myanmar’s Bay of Bengal coast. After announcing in March 2012 that an initial test drill had struck gas, MPRL sold a 50% stake in the block to Australia’s Woodside Petroleum.
In June 2013, India’s Essar was reported to be in talks with state-owned Indian Oil and Oil India on a farm-out deal that would revive exploration a block adjacent to the Shwe field on the east. Essar signed a PSC for the block in 2005, but suspended drilling in 2009 as prospects for a pipeline to India faded. The difficulty of securing transit to India remains an obstacle to Indian investment in Myanmar’s hydrocarbons.
To date, the focus of deepwater exploration has been off Myanmar’s north-west coast near the Shwe field. Daewoo International conducted seismic work in 2013 in a deepwater block to the west of Shwe. The Korean group had signed a PSC for the block in 2005, but its initial attempt to test drill in 2008 was blocked by the border dispute with Bangladesh. Daewoo International is the operator of the block with a 60% stake after farming out a 40% stake to Woodside in 2012.
In addition, CNPC was reported to be preparing to test drill in late 2013 to 2014 in three deepwater blocks to the south, south-west and north of the Shwe field. CNPC signed PSCs for the blocks in 2007. Gagan Singhal, former general manager at Schlumberger Myanmar, told OBG, “Myanmar’s deepwater shelf is one of the only unexplored frontiers left in the world. It is a feeding frenzy in terms of international oil companies.”
Demand For Services
More exploration means more demand for oilfield services, and both international and local firms are gearing up. Schlumberger started operations in Myanmar in 1933 and was the only international oilfield services company that was able to continue operations throughout the sanctions era as it was not affected by the restrictions. Other major oilfield services firms such as Halliburton, Saipem, Weatherford and Transocean are also now promoting themselves actively. Additionally, regional services firms such as China Oilfield Services and Malaysia’s SapuraKencana and Scomi Group are also present.
There are also many niche openings in the services segment for local companies, which typically work as subcontractors. The MoE is promoting the development of local oil and gas firms by requiring bidders in the 2013 licensing rounds, except bidders for deep-water blocks, to bid jointly with a domestic JV partner.
The domestic partners must be chosen from the ministry’s pre-approved list of qualified companies. As of September 2012 there were 154 companies on the list, ranging from established oil services and construction firms to younger firms looking to break into the field.
Downstream Oil Privatisation
Myanmar’s current limited oil-refining capacity answers to its modest oil production. MPE operates three refineries: the Chauk and Mann Thanpayarkan refineries, located in the central oil producing region, which process the country’s crude oil output, and the Thanlyin refinery, on the south-eastern outskirts of Yangon, which processes condensate mainly from the Yetagun gas field. In 2012 the MoE announced it would privatise the refineries, and in July 2013 the ministry said it was negotiating a JV to renovate the Thanlyin refinery.
Meanwhile, the ministry is planning to build a new 56,000-bpd refinery near Minhla, about 160 km north of Yangon, along the route of the Sino-Myanmar pipelines. The MoE appears to be planning to take a portion of the oil transiting to China as payment for transit fees. PTT and China’s Guangdong Zhenrong Energy have announced plans to build large refineries in Myanmar, though at the time of writing no specifics had been announced.
The retail filling station segment has been growing rapidly in recent years, particularly since privatisation in 2010 and liberalisation of automobile imports in 2011. MPPE, the state oil and gas distributor, sold off its network of 260 stations in June 2010, parcelling them out to domestic business groups. Since then the number of stations has more than doubled. In May 2013, PTT announced plans to enter the market with two filling stations in Yangon. The great majority of Myanmar’s oil products are imported.
Downstream Gas
Natural gas supply remains centrally planned and largely inefficient, impeding the development of private gas consumers Myanmar needs to secure more domestic supplies. U Aung Htoo, deputy energy minister, told the national parliament in an August 2013 report that the MoE lost $320m between June 2012 and June 2013 by supplying gas to state enterprises at less than production and delivery costs. Only 500,000 cfpd, or 0.2%, of domestic gas supply went to private industry in the 2012 fiscal year, according to MOGE data. At present there is no residential gas distribution. The lack of private gas consumers explains why investors in gas production prefer exports, and supply only as much gas to the domestic market as their PSCs require. As per figures from the Ministry of Electric Power (MoEP), about 265m cfpd of gas, less than a quarter of Myanmar’s output, was supplied to the domestic market in the 2012 fiscal year.
The state-run power sector took 160m cfpd, or 60.4% of domestic gas supply, and other state enterprises and organisations took 104.5m cfpd, or 39.1% of domestic gas supply. This includes 21m cfpd that went to three fertiliser plants operated by MPE. Another 19m cfpd went to a MOGE programme that produces compressed natural gas for uses in buses, taxis and private automobiles lured to convert by low prices. Various state-owned factories also have access to gas, including the Myainggalay cement factory, owned by the military-run Myanmar Economic Corporation.
U Kyaw Kyaw Hlaing, chairman of Smart Group, an oilfield services company, told OBG that the price of domestic gas is $5 per million British thermal units (mbtu), compared to the $12 per mbtu that producers receive for export. If gas and electricity were sold at market prices, Myanmar’s offshore gas would be used almost exclusively for electric power generation, while industrial users such as fertiliser and cement plants would be very hard-pressed to compete with producers located near cheaper supplies of onshore gas. “The point is, gas producers can supply gas domestically, but can consumers afford it?”, U Kyaw Kyaw Hlaing said.
Electric Power
Meanwhile, Myanmar’s state-dominated electric power sector is facing a growing challenge to keep up with increasing demand. Only one quarter of the population is currently supplied by the public power grid and consumption per capita is among the lowest in Asia at little more than 100 kilowatt-hours per capita, which is less than 5% of the level in Thailand, according to the MoEP. From such a low base, demand is growing rapidly, with peak load demands leaping from around 1500 megawatts (MW) in 2011 to 1790 MW in 2012. The MoEP expects demand to rise 15% annually from 2013 to 2016. However, generation capacity remains limited, and most of the grid is outdated and run down, resulting in high grid losses, daily blackouts during the dry season and unreliable supplies throughout the year.
“We have many industrial zones in Myanmar and many plans for more, but we cannot yet supply them with electricity,” U Chan Mya, chief geophysicist at Parami Energy, a local hydrocarbons group, told OBG.
Notwithstanding, the MoEP has ambitious plans to expand and renovate the grid. This includes targeting 7825 km of transmission lines, 8254 km of distribution lines and 10,303 megavolt-amperes of substations during the fiscal period 2012-15. In terms of generation, the MoEP is increasingly relying on private investment by awarding build-operate-transfer (BOT) contracts, but low regulated tariffs mean that investors prefer export-oriented project. The ministry has negotiated small private investments in hydro and thermal power projects that are aimed exclusively at domestic supplies, but such projects are likely to be loss-makers for the ministry until retail tariffs are increased. Since 2012 tariffs have stood at MMK75 ($0.08)/KWh for businesses and MMK35 ($0.04)/KWh for residential users. That compares to about $0.12/KWh in Thailand.
Much of the accelerating demand in recent years has come from growth in use of domestic electrical appliances among the urban middle class.
Hydro Potential
Meanwhile, hydropower accounts for three-quarters of power supply in the country, rising to as high as 90% during the monsoon season, which generally lasts from mid-May to mid-October. Total rated capacity as of 2013 was 2660 MW, of which 2044 MW was directed to domestic supply. Peak domestic hydropower supply was about 1900 MW in the wet season and 1200 MW in the dry season, according to MoEP figures. Total hydropower production in 2011 was 6721 gigawatt-hours (GWh), of which 5233 GWh was supplied domestically. Those figures imply average output of 767 MW and average domestic supply of 597 MW. Output has risen sharply since 2007, when it was 3522 GWh and domestically supplied.
Of three major dams completed in recent years, two were Chinese investments under export-oriented BOT contracts. The 600-MW Shweli 1 Dam, completed in 2009, was financed by the Yunnan Joint Power Development Company, a consortium of power and engineering companies from China’s Yunnan province. Shweli 1 exports half of its output. The 240-MW Dapein 1 Dam, completed in 2011, exports 90% of its output, and was financed by China Datang Corporation, a major state-owned power generator.
A third major project completed in 2010, the 790-MW Yeywa Dam, is operated by the MoEP but was largely financed by Chinese firms and the Export-Import Bank of China. All three dams were built mainly by Sinohydro, a Chinese state-owned hydropower engineering and construction company. The MoEP completed another five smaller dams between 2008 and 2012 – Kabaung, Kengtawng, Shegyin, Kun and Kyee Ohn Kyee Wa – with a total capacity of 293 MW.
Another four dams with a overall total capacity of 316 MW were under construction in 2013: Upper Palaung and Phyu, being built by the MoEP; and Thaukyegat 2 and Baluchaung 3, being built under BOT contracts by domestic construction firms Asia World and Shwe Taung, respectively. U Ohn Khaing, deputy chief engineer at Shwe Taung’s unit High Tech Concrete Technology, told OBG the tariff at which the Baluchaung 3 Dam would sell power to the MoEP was subject to upcoming negotiations. At the time of writing, however, no developments had taken place.
New Horizons
In retrospect, the former military regime had ambitious plans. Agreements and contracts were signed with foreign governments and companies to build more than 40 dams around the country, with more than 40,000 MW of total capacity, most of which would have been exported to China, Thailand or India. A 1995 World Bank study of Myanmar’s hydropower potential identified 266 possible dam sites that could produce an estimated 108,000 MW. The largest project was the Upstream Ayeyawady Confluence Basin Hydropower project, led by China Power Investment Corporation, a major state-owned power generator. It included eight dams with a combined capacity of almost 20,000 MW, starting with the 6000-MW Myitsone Dam that was planned for completion by 2017. However, the project proved unpopular due to its flooding of the upper Irrawaddy River basin and that 90% of the project’s output was earmarked for export to China. A wave of attacks orchestrated by armed groups targeted dam sites in 2010-11, including Myitsone, Dapein and Thaukyegat 2 (see analysis). President U Thein Sein responded to the situation in September 2011 by announcing that work on the Myitsone Dam would be suspended for the remainder of his term. While he said the decision applied only to that dam in particular, no construction has gone ahead at any Chinese-backed dam project in Myanmar since then.
Large Thai- and India-backed hydro projects also stalled for similar reasons. However, Myanmar’s major electric power deficit and the huge hydropower potential of its rivers make it very likely that a number of major hydro power projects will eventually be revived over the coming years (see analysis).
Thermal Capacity
Myanmar has 10 gas-fired power plants with a total capacity of 715 MW and one coal-fired power plant with a capacity of 120 MW. Most plants are inefficient and operate well below capacity. Peak thermal power output in 2013 was 350 MW, according to the MoEP, whereas total thermal generation was 2292 GWh in 2010, according to EIA data, which implies an average output of 262 MW.
Another 1010 MW of thermal capacity is scheduled to come on-line by 2015 through upgrades at Yangon’s four gas-fired plants. At the Thaketa plant, Korea Western Power, a division of Korea’s national power firm is planning to add 500 MW of combined-cycle engines by 2015 in a JV with Myanmar’s Hexa Group.
At a preliminary signing ceremony in September 2013 both firms said that they were working towards a final agreement with the MoEP. The project, which will be partly financed by the Japan International Cooperation Agency, is aimed mainly at supplying the planned Thilawa Special Economic Zone.
At the Ahlone plant, Toyo-Thai, a Thai engineering group, is investing $170m to add three 40-MW combined cycle engines by 2014 under a 30-year BOT contract signed in 2012. At the Ywama plant meanwhile, the MoEP is installing a second-hand 240-MW engine donated by the Thai government.
A 50-MW plant was also installed at Thaketa, which began operating in July 2013. Many proposals for new gas-fired plants have been floated, some by the MoEP and some by private investors.
Myanmar has substantial untapped, albeit low-grade, coal reserves and there has been talk of ramping up output and building more coal-fired plants. Mining is undertaken privately under licences issued by the Ministry of Mines. Output was 1.56m tonnes in 2011, according to the EIA’s most recent figures, with the majority of recent growth going toward exports.
Alternative Sources
Thailand’s Green Earth Power announced plans in May 2013 to invest $275m in a 210-MW solar power plant, to be located in the central city of Minbu. The company said it was working on financing and negotiating a 30-year BOT contract with Myanmar’s government, which has held discussions with several firms on solar plants.
Two export-oriented wind farms are in the feasibility study stage: a 1000-MW project backed by Thailand’s Gunkul Engineering and a 1100-MW project backed by China Three Gorges Corporation.
There are many small-scale biomass energy projects, commonly using rice husks, a milling byproduct, to produce electricity for milling and other food processing in villages that are off the public grid. Operators often sell limited amounts to local residential customers. Wood is the main source of energy for residential cooking and heating. Myanmar currently gets around 75% of its total primary energy from biomass, mostly firewood, according to the Asian Development Bank.
Outlook
Myanmar will continue to face energy challenges over the next few years, with an underpowered and overloaded energy grid. The pace of new supply additions is unlikely to keep in tune with rapidly growing demand, both domestically and, in particular, from neighbouring China. Unreliable public energy supplies remain a disadvantage limiting industrial investment, though obtaining commitment from the government to market reforms, albeit a gradual process, is likely to bring gas and electricity prices in line with the market. Moreover, increasing shares of new energy investments are likely to be directed to the domestic market.
Over the longer run, offshore gas exploration is set to bear substantial fruits and large hydropower projects are expected to be revived, which will ultimately accelerate the country’s industrial development.
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