Following our January newsletter, we have subsequently published English language only updates on: the telecoms market in Myanmar (24 April 2012) (also available in Japanese); the investment climate in Myanmar (26 April 2012) and lending and taking security in Myanmar (3 May 2012). In this update, we consider how Myanmar is positioning itself to attract greater levels of foreign investment in its natural resources (oil & gas) sector.
Myanmar's political reforms, which have accelerated since democracy leader Aung San Suu Kyi was elected to Parliament in April 2012, are gaining international recognition. Several key countries, including the U.S. and the EU block, have moved quickly to suspend economic sanctions in order to enable their companies to compete for projects in the resource-rich Southeast Asian country. Many of the larger US and European energy companies, which had previously been prevented from pursuing opportunities in the country, are now (in theory) able to commit to new investments.
Myanmar Oil and Gas Sector Indicators
Myanmar hydrocarbon reserves are estimated at 2.5 tcm of natural gas and 3.2 billion barrels of crude oil – numbers which are significant in the regional ASEAN context. Foreign investment in the oil and gas sector reached US$13.8 billion as of the end of November 2011, accounting for 34 percent and ranking second only behind the power sector. China is the largest investor in Myanmar's energy sector, with Chinese companies holding stakes in 16 oil and gas blocks.
Myanmar's natural gas exports jumped to US$3.56 billion in fiscal year 2011-12, compared to US$2.92 billion in 2009-10.
Natural gas accounts for 90% of hydrocarbon production, over 80% of which is exported to Thailand. Gas production in 2010 stood at 1240 mmcfd. This figure is expected to increase to 2000 mmcfd by 2016, following the start-up of the Shwe and Zawtika projects in 2013 and 2014 respectively, according to estimates by Wood Mackenzie.
The Yadana offshore gas project, operated by French major, Total, is the largest project in Myanmar, producing 750 mmcfd, the bulk of which is sold to PTT plc of Thailand.
2011 Onshore bidding round
Development of E&P has gathered pace recently following the international offering by the Ministry of Energy of 18 onshore blocks in late 2011. Seven local companies have been selected to partner with foreign investors in 9 of the 18 blocks. Foreign companies that have been awarded blocks in the 2011 onshore bidding round include PTTEP of Thailand, Petronas of Malaysia, CIS Nobel of Russia, Geopetrol International of Switzerland and Jubilant Energy of the Netherlands.
Offshore bidding round expected in 2012
In addition to the onshore blocks offered in 2011, the Myanmar Government has announced plans to offer up to 23 new offshore blocks for foreign investment before the end of 2012. Against a backdrop of continuing political reform and the positive response from western Governments, a greater number of international companies are expected to participate in the offering of the more significant offshore blocks.
Key maritime border dispute resolved
The development of offshore E&P is expected to increase with the resolution of the long-running maritime border dispute between Myanmar and Bangladesh. On 14 March 2012 the two countries announced that they had resolved their maritime boundary dispute that had been running since 1974. The dispute was resolved under the auspices of the United Nations International Tribunal for the Law of the Sea ("ITLOS"). At the heart of the dispute was an area covering 150,000 square kilometres in the hydrocarbon-rich Bay of Bengal. The agreement comes at a critical juncture for Myanmar, where delineation should promote exploration of the disputed blocks in that country. The exploration plans of China National Petroleum Company ("CNPC") and Daewoo are particularly impacted as they hold licences for some of the previously disputed blocks.
Oil & Gas Regulatory Regime
The key legislation for foreign investment in Myanmar is the Foreign Investment Law of 1988, which allows foreign investors to establish a local branch and obtain a trading permit. A new Foreign Investment Law is due to be enacted this year (as described below). The national oil company, Myanmar Oil & Gas Enterprise ("MOGE") has the exclusive right to explore, develop and produce petroleum both onshore and offshore. MOGE, which executes production sharing contracts ("PSC") on behalf of the Myanmar Government, falls under the auspices of the Ministry of Energy.
MOGE generally retains a carried interest in the exploration phase of upstream contracts, which it can convert into a working interest in the event of a commercial discovery.
To encourage deepwater exploration, the Myanmar Government is offering more favourable terms for the deepwater blocks. For instance, it is offering higher proportions of production available for cost recovery (up to 70% as opposed to 50%) and a longer technical study period before having to sign the full contract (2 years as opposed to 6-9 months).
New Foreign Investment Law
The Myanmar Parliament is reportedly in the final stages of a new Foreign Investment Law (which has been signed by the President and is expected to be published later this year), replacing the 1988 legislation. Details of the new law are expected to be presented by the Attorney General's office at a conference scheduled for July 2012 in Singapore.
If approved, the new law is likely to provide incentives to foreign investors in some (or all) of the following areas:
- Permission to establish wholly-owned entities in Myanmar.
- Permission to set up joint ventures with private or state-owned entities.
- Entitlement to improved tax exemptions and holidays.
- Permission to lease land for business.
- Legal protections in relation to nationalization of foreign businesses.
So far, Myanmar appears to have embarked on a course that will see political reforms lead to the economic, legal and regulatory reforms that are necessary to attract and retain foreign investors. There is little doubt that the natural resources sector in Myanmar is extremely significant, particularly in the context of the ASEAN region, and one that could propel Myanmar up the list of regional, natural resource-exporting economies. Recent experience suggests that whilst interest in the sector from international investors is high and the lifting of sanctions has opened up attractive, new opportunities, there remains a degree of caution as to how to navigate around the country risks that investors are likely to face.