Oil and gas in the capitals

World Oil last reported on Burma’s (Myanmar’s) energy sector in 2008. At that time, there were but a few companies exploring there. My, how times change. Since the U.S. lifted political and economic sanctions in 2012, Burma has become Asia’s new E&P hot spot. Potential hazards abound, however, and energy companies will have to maneuver carefully to reduce risks.

Burma had been isolated from the international community, due to its exceedingly harsh dictatorial policies. President Obama now believes that Burma’s 2008 constitution and 2012 elections demonstrate that the government is improving. While skeptical human rights advocates and guerrilla groups remain unconvinced, E&P investment is pouring in.

Burma had several bidding rounds in 2011 and 2012, for onshore and offshore blocks. Last June, Burma offered 30 offshore blocks, 19 in deep water and 11 in shallow water. Final proposals from the bidders are reportedly due in November. Successful candidates will be alerted, sometime between this December and April 2014.

The state oil and gas authority, MOGE (Myanmar Oil and Gas Enterprise), and the Energy Planning Department are reviewing the candidates’ proposals to ensure that they have the capabilities to explore, and contract particulars are firming up. PSC commercial terms solidified early, as did MOGE’s share of production. For deepwater blocks, MOGE will acquire between 55–80% of natural gas and 60–85% of oil. MOGE’s share of onshore projects will be 60–90% of gas and oil. These new projects are expected to benefit the domestic market. Foreign firms will pay a 12% royalty fee and 30% income tax, which might be cut to 25%. A tax holiday that was three years might be extended to five.

Major candidates, 61 in all, include ExxonMobil, ConocoPhillips, Shell, CNPC, and long-time Burma pro, Total. Scores of smaller, Asia-based companies also bid, such as ONGC and another longtime Burma pro, PTTEP. Others include Navitas Petroleum, PetroVietnam, Nippon Oil, Woodside, Eni and Petronas.

Amid all the euphoria, however, there are seven potential hazards. First, E&P investors must go through MOGE, which former U.S. Sen. Joseph Lieberman, and current Senator and Ranking Member of the Senate Armed Services Committee, John McCain, contend is corrupt. Critics also allege that its knowledge of technical E&P issues is low. In addition, MOGE is developing rules and regulations, as it presses forward. Some companies fear a lack of transparency might spur regulatory changes without warning.

Second, while foreign companies can operate alone in deep water, they have to partner locally in shallow water and onshore. This will create administrative and management complications for the latter investors because of inexperience and corruption. As a result, few major companies are bidding for onshore blocks.

Third, Burma is expensive for deepwater drillers. They have to foot the bill for all E&P costs. With rigs costing hundreds of thousands of dollars per day to lease, the expenses pile up quickly.

Fourth, currently offered blocks must have two wells drilled within a three-year time frame. So, companies must make Burma a top priority for business strategy and capacity. After getting approval, they have to move rigs to Burma and drill sooner, rather than later.

Fifth, the U.S. government’s human rights provisos—and human rights groups hunting for violators—make Burma a potential PR and legal minefield. Federal investment rules in the U.S. require American companies investing over $500,000 to file yearly “human rights and land acquisition” reports, which Washington will monitor and act on, if violations are detected. More, ex-military will be involved in most E&P dealings. So if energy companies have local security problems, and their Burma partners deal with them harshly, then bad PR and lawsuits are likely.

Sixth, there is a lack of sophisticated seismic data on Burma. Without knowing better where, and how, to drill, the risk of not striking oil or gas is increased.

Seventh, while several insurgent groups have signed peace treaties with the government, scores of others have not. Ethnic violence between Buddhists and Muslims is spreading. Damage to onshore E&P activities and service facilities cannot be ruled out.

This is not to say that Burma is not worth the risks. Production potential is high, but to avoid these hazards, energy companies need to apply excellence in three critical areas: risk intelligence, country strategy and project management. The potential downside demands it. 

REFERENCES

1. “Obama greenlights U.S. O&G investment in Burma,” Rigzone, July 16, 2012.
2. “Burma prepares ground to boost upstream oil, gas investments,” Rigzone, July 1, 2013.
3. “MOGE begins long process to pick Burma’s oil, gas investors,” The Irrawaddy, Aug. 1, 2013.
4. “Tender announcement due on offshore oil and gas blocks,” Burma Times, Aug. 4, 2013.
5. “Burma invites foreign energy firms to explore 23 offshore O&G blocks,” Jacob Gronholt-Pedersen, July 18, 2012.
6. “Burma to allow foreign ownership of firms,” Rigzone, June 20, 2012.
7. Statement by Sen. John McCain on Foreign Investment in Burma, June 14, 2012, http://www.mccain.senate.gov/public/index.cfm?FuseAction=PressOffice.PressReleases&ContentRecord_id=ecbed862-0e5f-24f8-469f-4822ab12a79f.
8. “IOCs line up for Burma offshore licenses,” Jacob Gronholt-Pedersen, Apr. 4, 2013.
9. “Burma to launch offshore oil, gas bidding round in April,” Jacob Gronholt-Pedersen, March 4, 2013.
10. Production sharing contract (PSC) in Burma’s upstream oil and gas sector,” Htin Aung, Director General, Energy Planning Department, March 28, 2012, http://www.slideshare.net/yph1969/production-sharing-contract-psc-u-htin-aung, slide 14.
11. “Obama greenlights U.S. O&G investment in Burma,” Rigzone, July 16, 2012.