Myanmar’s unexplored but rich natural resources have transformed it into one of the fastest-growing countries in the region. The government set an agenda for economic reforms in 2011, alongside an uptick in growth, the removal of international sanctions and an influx of foreign investors, particularly in the energy sector. The country’s strategic location within the region and population of more than 50m will help it achieve growth, with international analysts predicting Myanmar’s economy to be worth up to $200bn by 2030.
Exporting Oil
Oil was first exported in 1854, and the Burmah Oil Company (BOC) discovered the onshore Yenangyaung oil field in 1887. BOC founded a sister company in Persia that would later evolve into British Petroleum. BOC controlled the oil industry between 1886 and 1963 by extracting oil in the Yenangyaung field and the Chauk field. Both are still in production today. 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, development and gas transit; the Myanma Petrochemical Enterprise, which controlled processing through its three small refineries, three fertiliser plants and other processing plants; and Myanma Petroleum Products Enterprise, tasked with distribution and sales of oil products. Collectively, these companies are now departments of the Ministry of Energy (MoE).
As of December 2014, revenue from foreign investments in the oil and gas sector came to more than $15.1bn, second only to the power sector, which stood at $19.3bn. This represents around 30% of the country’s total foreign investments, according to Myanmar’s Directorate of Investment and Company Administration (DICA). The Myanmar Investment Commission (MIC) announced in September 2014 that the country had seen almost $4.09bn in foreign investment over the first nine months of 2014, of which almost $700m came from the offshore blocks that the MoE had granted to foreign companies. According to MoE estimates in 2014, Myanmar has the potential of extracting 4.6bn barrels of oil both onshore and offshore. Of this, 135m barrels are certain, 355m barrels are probable and 4.1bn barrels are possible. As for natural gas, Myanmar’s potential stands at 15.48trn cu feet from both onshore and offshore sources. Of this, 10.21trn cu feet are proven, 544bn cu feet are probable and 4.72trn cu feet are possible. For example, the US Energy Agency estimates that Myanmar has reserves of 3.2bn barrels of oil and 9.99trn cu feet of natural gas. It currently produces around 180,000 barrels of oil equivalent per day, of which 90% is gas, and total yearly production of gross natural gas is estimated at 700bn cu feet.
Meeting Demand
However, only 33% of crude oil demand and 41% of gas demand is met through domestic supplies, with the remainder mostly exported to Thailand and China. For the 2013-14 period, Myanmar earned $3.3bn from the export of gas, a drop from the $3.67bn it had gained in 2012-13, but a more than fivefold increase over the $580m seen in 2003-04. With further exploration, Myanmar aims to serve its domestic market first before exporting, using the proceeds for domestic development programmes.
In October 2014 MOGE announced it would launch a new round of oil and gas auctions in 2015, though this could be delayed. Nine blocks – four shallow and five deepwater – would be on offer. According to MOGE, around 65% of the shallow blocks have proven hydrocarbons, while the deepwater blocks are unproven. The state agency revealed that it had conducted some exploration but did not yet own the appropriate technology to assess the amount of oil in these blocks.
In 2013 the MoE conducted tenders for 16 onshore blocks and 30 offshore blocks for oil and gas exploration. This resulted in 27 companies being awarded exploration and production rights. In early 2014, 20 of the offshore oil and gas blocks were awarded to firms comprising Royal Dutch Shell, Total and Statoil. According to MOGE, exploration on these blocks is expected to begin in early 2015. Throughout 2014 the ministry and the MIC were engaged in follow-up agreements and product-sharing contracts (PSCs) that brought in signature bonuses for the government.
Local Participants
A major concern among local business entities is that not many companies in Myanmar are enjoying the benefits that have resulted from increased foreign investment. At present, only about 5% of local participants are involved in operating in the sector, including those providing services for the industry. “It is important that foreign companies train locals on all levels to ensure the development of technical skills and the overall improvement of our oil and gas operations,” Ken Tun, CEO of Parami Energy, told OBG. At the same time, according to DICA, foreign investment has created jobs and transferred technological expertise that has aided in the development of domestic industries, which has strengthened Myanmar’s export performance. More jobs are likely to be created when exploration activities begin in the 20 offshore blocks and 16 onshore blocks in 2015.
The government hopes that foreign companies will maintain high workplace safety standards and contribute to the transfer of technology to Myanma firms. More importantly the government is confident that these foreign companies can transfer their knowledge of how to operate advanced drilling technology and aviation maintenance to locals. “Our technology is around two decades out of date, but major oil and gas companies coming into Myanmar can share their experiences of operation management. However, we still have a very limited talent pool,” added Ken Tun.
In October 2014 MOGE shortlisted nine international consultants in a first-round selection to help with its corporatisation process. The selected consultant will help to establish joint ventures for activities that MOGE aims to corporatise, including drilling, pipe-laying and seismic services. According to a MoE statement, 10 international companies had applied for a pre-qualification letter of expression of interest but the ministry will only evaluate the proposals of nine companies from the US, UK, France, Germany and Singapore. These companies – VDB-Loi Myanmar, Jones Day (US), Berwin Leighton Paisner (UK), Schlumberger Business Consulting (France), Rajah & Tann (Singapore), Fichtner (Germany), EP Legal (Vietnam), Elegen Energy Oil and Gas Services (Australia), and Roland Berger Strategy Consultants (Germany) – will be invited for talks first before the ministry makes a final decision.
Bureaucratic Obstacles
Despite significant progress on implementing reforms, several laws and regulations continue to await official approval. Media reports have highlighted the example of the 1934 Petroleum Act, which contains nothing on decommissioning or abandonment. However, the Yadana, Shwe, Yetagun and Zawtika PSCs all contain some abandonment clauses. It has also been noted that there is currently no procedure for obtaining foreign work visas. Additionally, there are no laws or regulations governing the response to oil spills or other environmental disasters. The proposed laws include a new foreign investment law, and new banking and labour laws.
Homegrown Talent
The legacy of five decades of military rule has contributed to a series of shortcomings in the educational system in Myanmar. Some universities were shut down following anti-government protest in 1988, contributing to a void in skilled talent, especially for the oil and gas sector, which needed an educated workforce for higher extraction. According to the International Society of Petroleum Engineers, the scarcity of local engineering talent was the most pressing challenge facing the oil and gas industry.
However, educational reforms promised by the government in 2011 led to new investment in education. For example, Yangon Technological University now offers petroleum engineering education, supported by oil and gas companies and service companies who have provided buildings, infrastructure and guest lecturers with international exposure. Private enterprises such as Uniteam Training provide health, safety and environment, and technical training solutions for the oil and gas industry. However, local universities remain unable to produce the necessary talent, largely due to a continued lack of funding. Required skills, such as modern exploration, drilling and development techniques, and skills to obtain and read seismic data, and use sensors to analyse underwater images, have not been catered to in current syllabi. “Educational capacity remains low. Reforms are being made within the sector but it will take time to reap the rewards,” U Kyaw Kyaw Hlaing, chairman of Smart Group of Companies, told OBG.
To rectify this, many local graduates are sent by oil and gas firms to companies like Uniteam Training to be re-trained and upskilled. “There is huge potential within the vocational training space,” Paul Van Empel, the managing director of Uniteam Training, told OBG. “New international companies will need to embark on large-scale training programmes for their local staff in order to bridge the skills gap and meet nationalisation quotas set by the government.”
Boosting Supply
With under a third of people in Myanmar having access to electricity, the Asian Development Bank and the Ministry of Electric Power Energy (MOEP) are currently working on implementing a long-term energy master plan, including measures to attract investments and modernise the ageing power sector. More than 40,000 villages are still to be electrified but demand for electricity is growing, especially among the growing middle classes, as well as among the enterprises that have grown in response to increasing investment into the country.
Power Consumption
Ministry statistics show that households are the main consumers of power, taking in some 42% of the total power consumption. Industries consume about 36% and some 21% is absorbed by services and commercial activities. Myanmar’s power generation is currently provided by 19 hydropower plants, which generate 2660 MW of installed capacity, and 11 gas and steam plants that provide 834 MW of installed capacity. In total, Myanmar is able to produce 3490 MW of installed capacity through its 30 plants. In terms of transmission facilities, they are 9710 km in length, carrying a combination of 66-KV, 132-KV and 230-KV voltages. There are a total of 163 sub-stations and distribution lines covering 22,570 km. Demand for electricity is forecast to increase 15% yearly until 2016. In 2013 the demand was at 2060 MW and in 2014 it was 2370 MW. The demand is expected to reach 2725 MW in 2015 and 3130 MW in 2016. Since close to 75% of power is generated by hydropower plants, the supply of electricity dips during the dry season between February and May. In 2013 there was a shortfall of 509 MW and this continued in 2014 with a dip of 35 MW. With the construction of new power plants under way, power supply is expected to meet growing demand in 2015 and 2016. Under new investments, additional power supply will be provided by 17 power plant projects, which are to be completed before the end of 2016, including the extension of the Kyunchaung and Shwedaung gas turbine plants, providing a total of 2311 MW of installed capacity.
Of the 17 power plants, 10 were completed in 2013 and 2014. Over the long term, Myanmar is looking to complete about 87 power plants that can supply 54,608 MW of installed capacity. Of these, the ministry will be embarking on 10 hydropower plant projects, including 56 projects undertaken by foreign investors. Electricity remains highly subsidised in Myanmar, with the government selling power for less than the actual cost of production. “People are willing to pay so there is no need to subsidise them. Small businesses should be subsidised instead,” U Kyaw Kyaw Hlaing, the chairman of Smart Group of Companies, told OBG.
Given the country’s heavy reliance on hydropower, supplying electricity is a challenging prospect. Indeed, during the dry seasons, almost 75% of Myanmar’s power is either substantially reduced or entirely offline, with some homes only getting supply for around an hour per day. Moreover, many distribution facilities are outdated and require upgrades. Other challenges include persistent underfunding, and a fragmented institutional and regulatory sector framework. Even so, the government has worked to reform the sector by opening up investment opportunities, as well as laying down a proper legal framework (see analysis).
Renewable Generation
With about 70% of the country still not connected to the electrical national grid, the off-grid electrification process is making significant strides via renewable energy generation, especially in rural areas. Over the past five years, Myanmar has looked into a wide array of renewable energy sources, particularly solar, wind, small hydropower mini-grids, geothermal and biomass. In the past two years, solar power has in particular become a major source of renewable energy. Myanmar enjoys abundant sunshine and the country’s potential available solar energy is estimated at 51,970 TW per year, according to a report by the UN Development Programme.
While wind and solar hybrid home systems have the advantage of 24-hour electricity generation, the technology contains various drawbacks such as a high initial investment cost, as well as Customs duties on imported parts of the solar home system. Another major concern was the cheap quality of batteries made in China and solar panels that were available in the local market (see analysis). Government data revealed that the potential in wind energy is around 365 TWh per year, while MOEP is working with the foreign firms Gunkul Engineering, based in Thailand, and China Three Gorges Company to study the potential development of 4032 MW of wind energy. The government has identified 93 geothermal locations throughout Myanmar.
Biomass Project
Various small-scale biomass energy projects are under way, commonly using rice husks – a milling by-product – to produce electricity for milling and other food processing in villages that are off the public grid. Most of the renewable energy projects are spearheaded by NGOs and private firms. The abundance of natural resources and a large customer base wanting regular power supply ensure that off-grid renewable energy can be just as effective as an alternate source of energy to the national grid.
Rural consumers have embraced renewable energy sources as the target area of supply is self-contained, usually only covering a village or small township, while supply is regular and comes at an affordable price. Despite this, some rural consumers have complained of being forced to pay high rates to local private operators using diesel generators. The Ministry of Science and Technology has declared a goal of supplying 15-20% of the country’s energy through renewables by 2020. The government’s liberal foreign investment laws allow full foreign ownership of Myanmar-based enterprises. The major disadvantage of renewable energy in Myanmar is that this alternate source, in whatever form, is supplied to a local population or to certain villages by small private enterprises, NGOs or the government.
There is currently not a single project that looks into supplying renewable energy on a large scale – with the exception of hydropower as a renewable energy resource, which is being undertaken on a commercial level. In June 2014, the government said that it was planning to build nuclear reactors for research purposes but gave no timeline for the project. Myanmar established a nuclear energy department in 1997 and passed a nuclear energy law the next year to acquire and use nuclear technology in various sectors.
Outlook
As the country continues to welcome new investments and developments in the sector, various challenges in implementing key reforms remain. Many proposed laws remain pending, while the demand for fuel and energy continues to increase. Even as the government has taken moves to implement best practices to increase transparency in the sector, concerns remain over the possibility of revenue loss that might result from corruption and an absence of sufficient legal and public scrutiny. Moreover, increased political uncertainty – a general election is expected to be held in November 2015 – is likely to slow the pace of reform further, at least in the short term. Even so, in the long term, a fully developed electrification system, alongside offshore gas exploration, look set to accelerate Myanmar’s growth in all aspects of the energy sector. To achieve this growth, the government must maintain the pace of its reform programme, in turn speeding up the country’s integration into the world economy.
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