Pipeline strengthens Sino-Burmese ties

Unlike Western governments, which have tightened sanctions against Myanmar (Burma), China has provided growing political and economic support to the military government in Rangoon, a decision to push ahead with gas and oil pipelines connecting Myanmar to China indicates a continued tightening of economic ties between the two countries.

Construction of the Myanmar section of the pipelines will start in September, according to China's official news agency, Xinhua, with China's largest oil company, China National Petroleum Company (CNPC), expected to carry out the work. The Chinese stretch of the pipelines will be built either by CNPC or its PetroChina subsidiary.

A 2,800 km, 1.2bn cubic feet a day (cf/d) pipeline will carry gas from Myanmar, or further afield, to Kunming, in Yunnan province, and on to Nanning, in Guanxi region. A 1,100 km, 400,000 barrels a day (b/d) crude pipeline will run from a port in Burma's Rakhine state to Guizhouo and Chongqing, through Kunmin, providing a new route for supplies from the Middle East and Africa.

The gas pipeline will tap supplies secured in December, when CNPC signed a 30-year agreement with a consortium led by South Korea's Daewoo International to take gas from the Shwe field in Myanmar's A-1 offshore block. The combined reserves of Shwe and the neighbouring Shwe-Phyu and Mya fields – being explored by the same consortium – have been estimated by Daewoo at 4.5-7.7 trillion cf. India's Oil and Natural Gas Corporation (ONGC), one of Daewoo's partners at Shwe, said in June that it expects flows to start in 2012. The country's total proved gas reserves stood at 17.5 trillion cf in 2008, according Cedigaz (see Figure 1).

At present, Myanmar's gas producers are heavily reliant on sales to neighbouring Thailand. Thailand's state-owned PTTEP is heavily involved in exploiting Myanmar's oil and gas resources and takes virtually all of the country's gas production.

However, China's long-term commitment to the gas industry offers Myanmar's regime a much bigger source of future revenue than Thailand – income that will be gratefully received by a government struggling to attract foreign investment in most areas of the economy because of Western sanctions. Both the EU and the US tightened sanctions after the 2007 crack-down on street protests. The country's precarious economic position has been exacerbated by the global economic downturn, which has caused a sharp fall in the price of the country's mining and energy exports.

According to government figures, new foreign direct investment (FDI) totalled $0.99bn in the first 11 months of the 2008-09 financial year, representing a sharp rise from $273m in the full year 2007-08. But around $0.86bn of that came from Chinese investment in mining. Beyond the mining sector, more than two thirds of FDI has been made in hydrocarbons projects over the last three years.

The Chinese deal also has implications for Myanmar beyond the oil and gas sector. "China has always enjoyed preferential status from Myanmarese governments in return for its investments, economic aid and political support in the international community," says one Asia-based regional energy analyst. "The decision to sell gas to China could further strengthen that relationship."
China's pipeline investment is not entirely risk free, as it could suffer if public protests resurfaced and prompted a change of government, but this seems unlikely. "The military government is in near complete control of the system and it seems determined to provide security protection to new gas-export pipelines, as it already does for gas-export pipelines to Thailand," the analyst says.

Despite the sanctions, a number of international companies, principally from Asia, remain active in Myanmar's energy industry. Besides Chinese and Thai firms, France's Total and the US' Chevron both retained long-standing offshore interests – Chevron's were acquired when it took over Unocal in 2005. In addition to Daewoo (51%), the Shwe consortium includes ONGC (17%), Myanmar Oil & Gas Enterprise (15%), Indian gas company Gail (8.5%) and Korea Gas (8.5%). Japan's Nippon Oil and Malaysia's Petronas are also active in the country.

Nonetheless, investments in Myanmar continue to attract strong protests from pressure groups inside and outside the country. Shwe has been subject to criticism over its environmental and social impact. In June, two non-governmental organisations said the South Korean government had rejected a complaint they filed with it last October. EarthRights International and the Shwe Gas Movement had alleged that forced relocations and other human-rights violations linked to the Shwe project had violated OECD guidelines. The NGOs have called on the OECD to launch an investigation.