Overview

Following the suspension of sanctions in respect of Myanmar by various jurisdictions, including the European Union and the United States, and the installation of a civilian government, international companies may now be able to participate in the development of largely untouched hydrocarbon reserves. Myanmar, an energy rich country, benefits from large, apparently proven, reserves of oil and natural gas – the U.S. Energy Information Administration estimates its proven oil and gas reserves as 50 million barrels of oil and 10 trillion cubic feet of gas.

In January 2013, Myanmar conducted an auction for 18 onshore blocks (with reportedly 59 shortlisted bidders), in addition to the 10 onshore blocks auctioned at the end of 2011. However, the announcement of the offshore licensing round for 30 offshore oil and gas blocks, by the Ministry of Energy in Myanmar (MOE), has supposedly sparked major interest from the large international oil and gas entities. According to reports, production companies from Australia, India, Canada, Indonesia, the UK, China, Malaysia and Pakistan are interested in participating in the bidding round.

Currently, almost the entire level of foreign investment in Myanmar comes from Asian-headquartered companies, with Total and Chevron being the only exceptions (Total operates the Yadana gas field, having obtained its interest prior to the imposition of sanctions; Chevron is a non-operating participant in this field pursuant to a “grandfathering” agreement). In Myanmar, title to all hydrocarbons vests in the state, and the Myanma Oil and Gas Enterprise (MOGE), a division of the MOE, has the exclusive right to explore, extract and sell petroleum and natural gas. Successful contractors will be required to enter into production sharing contracts with MOGE.

What’s on Offer?

  • There are 30 offshore oil and gas blocks up for auction: 11 in shallow water and 19 in deep water blocks.
  • The deadline for providing expressions of interest is 14 June 2013. Further details on the licensing round may be found on the MOE website.
  • Foreign companies will be able to operate alone on the deep water blocks. However, bidders will be required to partner with at least one local operator (registered with a department of the MOE) of their own choosing in relation to shallow water blocks.
  • Companies must demonstrate technical competency, financial capability, experience, expertise and technical “know-how” for conducting petroleum exploration, development and works. Bidders must also provide various corporate documentation to the MOE.
  • Potential bidders will be pre-qualified and presented with a general overview of each block consisting of representative data and information, by a geological/geophysical team of MOGE.
  • Interested companies are entitled to submit three bids for different blocks (deep water, shallow water, or both). A bidder’s proposed terms and conditions (based on terms and conditions provided by the MOE) should be provided on a block-by-block basis.
  • Potential bidders’ proposed terms and conditions, together with other relevant information, will be evaluated and the best will be selected.
  • Apparently, there will be no negotiation in respect of proposed terms and conditions.
  • Operations will be conducted on a production sharing basis with MOGE.

Legislation, Contractual and Fiscal terms

General

  • For this licensing round, the MOE has published standard terms and conditions of a production sharing contract for offshore blocks, governed by the laws of the Republic of the Union of Myanmar.
  • The exploration period is three years (with seismic and drilling programme). This can be extended once, by a period of two years.
  • Upon a discovery, the production period is 20 years for each commercial discovery, or in accordance with the petroleum sales agreement, whichever is longer.
  • The Myanmar Government may, through MOGE, exercise an option to acquire an undivided participating interest of up to 20 per cent (or 25 per cent if the reserves available are greater than five trillion cubic feet)

Bonuses and royalties

  • A data fee (as yet unknown) will be due and payable within 30 days after signing the contract.
  • A signature bonus (as yet unknown) will be payable within 30 days after entering the exploration period.
  • Income tax will be charged at 25 per cent on the contractor’s net profit. A three-year tax holiday will be provided, starting from the date of production.
  • Royalties will be taxed at 12.5 per cent of available petroleum.
  • A production bonus will be payable at the following rates:

Upon approval of a development plan                           US$1.00 million

25,000 BOPD (for 90 consecutive days’ production)     US$2.00 million

50,000 BOPD (for 90 consecutive days’ production)     US$3.00 million

100,000 BOPD (for 90 consecutive days’ production)   US$4.00 million

150,000 BOPD (for 90 consecutive days’ production    US$5.00 million

200,000 BOPD (for 90 consecutive days’ production)   US$10.00 million

Cost/profit petroleum

  • The contractor will be entitled to recover 50 per cent of all available petroleum for water depth of 600 feet or less, and 60 per cent for water depth of more than 600 feet.
  • The production split on profit petroleum will be:

Click here to see table.

Other issues for investors to note

  • There is a domestic supply provision that 20 per cent of crude oil and 35 per cent of natural gas of the contractor’s share is available at 90 per cent of fair market value.
  • The contractor will be required to contribute annually to a training fund, amounting to US$50,000 during the exploration period and US$100,000 during the production period.
  • Contractors will also be required to pay 0.5 per cent of their profit petroleum into a research and development fund.
  • The production sharing contract will be subject to UNCITRAL Arbitration Rules.
  • In relation to the sharing of profits on the sale or transfer of a participating interest, the contractor will be liable to pay the Myanmar Government the following amounts out of net profit made on the sale or transfer:
    • if the amount is up to US$100 million – 40 per cent
    • if the amount is between US$100 million and US$150 million – 45 per cent
    • if the amount is over US$150 million – 50 per cent

Comment

In common with many other regimes, Myanmar is competing for international oil and gas development funding. As a result, it is keen to attract foreign investment in the oil and gas sector. With its continuing democratisation, the suspension of sanctions, the resolution of the maritime border dispute with Bangladesh, and the large reserves available, there is significant interest among the major international oil companies over the lucrative and enticing offshore licensing blocks on offer.

Although uncertainty remains, in particular as to whether Myanmar will continue on its path to democracy, and following criticism of its current oil and gas industry (Aung San Suu Kyi reportedly urged foreign governments not to let their companies partner with MOGE due to close ties with the military junta in Myanmar and a lack of transparency in the industry), Myanmar is apparently endeavouring to build a more transparent industry to promote investment. It has begun work to sign up to the Norway-based Extractive Industries Transparency Initiative, which includes rules on financial disclosure, governance and environmental criteria. Indeed, to bring the industry in Myanmar in line with international standards, it may also be required to revisit and renegotiate existing oil and gas contracts.

Whilst Myanmar’s intention to try to limit production sharing contract negotiation rounds and to extract a fee when assets are sold is bold, it remains to be seen whether the size and quality of reserves are sufficient to justify such a seemingly uncompetitive stance.