Home to one of the world’s oldest oil and gas industries, the energy sector has long been a key pillar of Myanmar’s economy. While the sector continues to play an essential role in economic output, its true potential has not yet been realised, partly due to a counterproductive fiscal regime and unfavourable market conditions.
Despite a number of setbacks, successive governments have made important steps towards unlocking Myanmar’s energy potential. With natural gas reserves of an estimated 16.6trn standard cu feet (scf) and an estimated 139m barrels of crude oil reserves, substantial investments in exploration have led to billions of dollars in annual export revenue.
However, low oil prices and a less than attractive fiscal regime have lowered the initially high expectations that accompanied the auction of gas fields under the Union Solidarity and Development Party-led government between 2011 and 2015. Recently, some foreign investors have relinquished assets amid unfavourable market conditions, with India’s Reliance Industries and Australia’s Roc Oil among those that dropped deepwater assets. Shell also dropped some deepwater assets, while extending the study period for others.
Although a number of major operators have exited, a host of international players have expanded their operations. “Our government adopted a pragmatic approach on the back of weak oil market prices,” U Kyaw Kyaw Hlaing, chairman of the oil and gas services provider Smart Group, told OBG. “Companies were able to secure extensions without much difficulty when ‘drill or drop’ deadlines came up late last year.”
Over the course of its economic evolution, Myanmar has struggled to meet growing domestic demand for electricity. The exploitation of energy reserves therefore remains a central goal for the civilian-led government headed by the National League for Democracy (NLD). In an effort to rejuvenate exploration activity, U Win Khaing, minister of electricity and energy, has promised to address investors’ concerns about unfavourable production-sharing contracts. Their reform may encourage offers at upcoming oil and gas field tenders, which could expand domestic supply and boost electrification efforts in the long term.
Policy & Planning Project
In an effort to accelerate development, the previous government under U Thein Sein asked the Asian Development Bank (ADB) to assist in strengthening the capacity of the National Energy Management Committee (NEMC). Subsequently, technical assistance became effective in August 2013 under the ADB’s institutional strengthening of the NEMC in energy policy and planning project with initial funding of $1.5m from the Japan Fund for Poverty Reduction. During implementation of the project, assistance and funding were extended three times until its completion in mid-2017.
The ADB also helped prepare the long-term Myanmar Energy Master Plan (MEMP). A core component of the ADB’s project was to address the fragmented approach to policy-making. In 2012 when the government first secured the ADB’s assistance, energy sector matters were divided among several ministries and government entities. To improve coordination, a working level committee was established alongside the NEMC, the Ministry of Energy and the Ministry of Electric Power. However, the election of the NLD-led government in 2015 led to the abolishment of the NEMC and the two key ministries were amalgamated into the Ministry of Electricity and Energy (MoEE).
Although there are still areas for development, the energy sector’s policy and planning infrastructure has evolved in recent years. It has benefitted from strengthened institutional arrangements and enhanced civil staff capacity as a result of the ADB’s project and other international assistance. During the tenure of the project, the governance of energy-related matters became better coordinated. Moreover, the 20-year MEMP, launched by second vice-president at the time U Nyan Tun in January 2016, led to improved energy policy frameworks, greater energy efficiency and a strategy for the development of renewable energy. After the MEMP’s launch, the government approved a policy, strategy and roadmap to facilitate energy efficiency and conservation.
While the MEMP established broad objectives, the primary policy documents guiding electricity development are the National Electricity Master Plan (NEMP) and the National Electrification Plan (NEP), which were drawn up by the Japan International Cooperation Agency and the World Bank, respectively.
The MoEE is comprised of 12 departments that oversee all matters related to electrical power, as well as oil and gas development. Three of these are responsible for issuing tenders to foreign companies: Myanma Oil and Gas Enterprise (MOGE); Myanma Petrochemical Enterprise (MPE); and Myanma Petroleum Product Enterprise (MPPE). MOGE also acts as the national oil and gas operator, regulator and service provider, and as of the last quarter of 2018 it operated 11 onshore blocks. MPE, which operates under MOGE, is responsible for oil and gas exploration and production, as well as domestic gas transmission. MPPE, which also operates under MOGE, manages the retail and wholesale distribution of petroleum products.
Exploration & Production
Myanmar has identified 17 sedimentary basins to date. Three of these are onshore tertiary basins producing oil and gas in the Central, Pyay and Ayeyarwady Delta districts. Three offshore basins produce gas and condensate in the Moattama, Rakhine and Tanintharyi regions. An additional eight tertiary onshore basins have been identified as primary targets for further exploration, and three onshore pre-tertiary basins as secondary targets.
Myanmar’s production of offshore gas started in 1998 when Total E&P Myanmar began producing from the Yadana gas field. Under the operation of Malaysia’s state-owned energy firm, Petronas, Yetagun gas field in the Andaman Sea was the next block to start producing in 2000, having been discovered in 1992. Shwe gas field was the next major discovery and began production in 2013, followed by Zawtika gas field, which began producing natural gas in 2014.
According to MoEE statistics from 2017, Myanmar produces 12,000 barrels of oil per day, of which 7000 barrels is from onshore fields and 5000 barrels of condensate is from offshore fields. In terms of total gas output, Myanmar produces a total of 1.8bn scf per day (scfd), with 50m scfd from onshore fields and 1.75bn scfd from offshore blocks. Approximately 400m scfd is designated for domestic consumption, while the remainder is exported to Thailand and China. In terms of domestic gas consumption, 75% is used by gas turbines, 13.4% by industries, 5.6% for fertiliser, 4.2% by compressed natural gas, 1.2% by refineries and 0.6% by the liquefied petroleum gas (LPG) industry.
Located roughly 60 km offshore in the Andaman Sea, Yadana is the biggest gas production field in Myanmar, with a plateau production rate of 8bn cu metres per year, which accounts for 15% of domestic gas consumption. This is operated by Total E&P Myanmar, which holds a 31.2% share, while partner Chevron/Unocal holds 28.3%, Thai company PTT Exploration and Production (PTTEP) holds 25.5% and MOGE holds the remaining 15%.
The majority of gas produced is exported through two pipelines to the Thai border. Yadana is currently estimated to supply about 230m scf per day, but production from blocks M-5 and M-6 is expected to decline significantly by 2021. In an effort to maintain plateau production, Total E&P Myanmar has tapped into new reserves in the adjacent Badamyar gas field. Production started at the Badamyar site in May 2017 on schedule and 20% below budget. The project required the installation of a new compression platform and a new wellhead platform connected to Yadana’s production facilities, as well as four new horizontal wells to operate as a satellite of Yadana.
Yetagun gas field in the Gulf of Martaban straddles blocks M-12, M-13 and M-14. The combined area of the three blocks totals approximately 24, 130-sq-km. The field is estimated to contain around 3trn scf of gas and 80m barrels of condensate in reserves. Operator Petronas holds a 40.9% interest in the field, while MOGE has 20.5%, PTTEP has 19.3% and Nippon Oil Exploration holds 19.3%. Natural gas produced from the field is mainly exported to Thailand through the Tanintharyi pipeline, before the condensate is stored in the Yetagun Floating Storage and Offloading unit (FSO) and sold to both domestic and international customers. The FSO, which has a storage capacity of 606,000 barrels, is leased from Dutch company SBM Offshore. The Yetagun North Field is located 12 km north-east of the main field and is estimated to produce 70m scf of gas per day.
Located in blocks AD-1 and AD-3 of the Bay of Bengal, the Shwe gas field was developed by a consortium of six companies, headed and operated by a subsidiary of the South Korean steel-making company POSCO, Daewoo International. The Shwe natural gas project consists of the Shwe, Shwe Phyu and Mya offshore gas fields, with a combined natural gas reserve estimated at 4.53trn scf. The project’s infrastructure includes a 40,000-tonne offshore platform, submarine pipelines, onshore gas terminal and a supply base jetty facility at Kyauk Phyu in Rakhine State.
Operated by PTTEP, the Zawtika project is spread across blocks M-9 and M-11 in the Gulf of Martaban, which covers a total area of 11,746 sq km. PTTEP holds an 80% share in the $2bn project, with MOGE owning the remaining 20%. Exports of natural gas started in the third quarter of 2014, with an average of 240m scfd sent to Thailand.
Export revenue for natural gas increased in FY 2017/18 for the first time in three years, accounting for $3.1bn, which is approximately $361m more than in FY 2016/17. Despite having made a slight recovery, export earnings remain considerably lower than the $5.2bn registered in FY 2014/15. In FY 2018/19 Myanmar had earned $1.1bn from natural gas exports by August 2018, which is a decrease of $77m from August the previous year.
Foreign Direct Investment
According to official statistics from the Directorate of Investment and Company Administration, the oil and gas sector accounted for 39.4% of total foreign direct investment (FDI) between 2013 and 2017. Over this period, the oil and gas FDI total was $10.4bn, of which $10bn was equity investment, while the remaining $366.8m was debt-financed. Over the same period, power generation accounted for 6.5% of FDI, totalling $1.7bn. Of this, $1.5bn was from equity investments and the remaining $182.4m from debt instrument investments.
Despite a significant decline in foreign investment across oil and gas projects in recent years, it still accounts for the majority of total approved investments over recent decades: the oil and gas sector received $22.4bn approved investments from 1988 until August 2018, compared with $21bn in the power sector over the same period. Since the drop in oil prices in mid-2014, FDI has decreased substantially. Approved FDI in the oil and gas sector dropped from $4.8bn in FY 2015/16 to zero in FY 2016/17 and remained at zero in FY 2017/18. As a result, total approved FDI across all sectors dropped from $9.5bn in FY 2015/16 to $6.7bn in FY 2016/17 to $5.7bn in FY 2017/18.
Strategies & Opportunities
Despite oil price fluctuation and infrastructure challenges, a number of international operators have confirmed that they will push ahead with exploration and production (E&P) plans. PTTEP is a substantial stakeholder in three of the country’s four largest offshore natural gas fields, Yadana, Zawtika and Yetagun. PTTEP is the largest foreign investor in Myanmar’s energy sector and allocated almost 30% of its $1.8bn upstream global capital expenditure in 2018 to E&P operations in Myanmar. PTTEP plans to add 31 additional development wells and is also exploring the development of an offshore floating storage regasification unit (FSRU) in the Martaban Sea, which would bolster the country’s capacity for importing liquefied natural gas (LNG).
Petronas had been awarded the rights to explore and produce four onshore blocks. As of late November 2018, it had yet to start drilling new wells offshore at blocks M-12, M-13 and M-14 in the Tanintharyi Region, despite earlier indications that it would begin doing so in the last quarter of 2018. The company’s local subsidiary, Petronas Carigali Myanmar (Hong Kong), will drill the development across the three blocks. Petronas was also running eight exploration wells across Tanintharyi, Ayeyarwady and Magway Regions and Rakhine State as of the third quarter of 2018.
Major progress towards unlocking new gas reserves has been made after significant discoveries and appraisals at block AD-6. In September 2018 Total announced a successful appraisal of the Shwe Yee Htun-2 field, which adds to previous discoveries at block AD-6 by Total: the Shwe Yee Htun-1 discovery in 2016 and Pyi Thit-1 discovery in 2017. Initial estimates found that cumulated resources are in the range of 2trn-3trn scf. According to privately owned MPRL E&P, a number of development options are being considered for the AD-6 block. If substantial volumes of gas are discovered, there may be economic justification for an LNG development project linked to either the Yadana gas field or Shwe gas field. Under the joint venture agreement, Total holds a 40% stake in the AD-6 block and is set to take over as operator in the development phase. Australian company Woodside Energy also has a 40% share and is the technical joint operator for exploration and appraisal operations. Local partner MPRL E&P owns the remaining 20% of the venture.
In an effort to leverage their deepwater capabilities and secure international growth opportunities, Woodside has continued to invest in Myanmar’s oil and gas sector. The firm holds a total of nine permits in the Rakhine Basin. As of the third quarter of 2018, it had drilled seven deepwater wells and acquired more than 30,000 sq km of seismic data since 2015. Woodside has a stake in four blocks initially awarded in 2014, including two where Shell retains interests. Woodside seems to be proceeding with the other two – AD-6 and AD-7 – albeit slowly, as it evaluates the commercial viability.
A challenge for international oil and gas companies operating in Myanmar has been the lack of an offshore supply base (OSB). However, considerable progress was made in 2017, when the Myanmar Investment Commission approved six OSBs. As it stands, only one OSB near Yangon is owned by MOGE, while the majority of operators in Myanmar use supply bases in either Thailand or Singapore. This requires a four- or five-day boat trip, which heavily increases operating costs and lessens the potential revenue for Myanmar.
In July 2018 Canadian medical device company Verisante Technology announced that it had entered into an agreement with Myanmar-based land developer SIM in order to acquire their shares and a permit to construct an OSB. SIM has a minimum asset value of $50m from its 184 acres of land and government permit to develop and operate an OSB for 30 years in the Ayeyarwady Region. SIM and Verisante have agreed to raise $500,000 through debt financing with an annual simple interest of 12% paid quarterly. Upon completion of the acquisition, they will seek an additional $15m in equity financing to construct and develop this OSB.
Supply & Demand
Despite an abundance of hydropower resources, Myanmar’s electrification rate remains one of the lowest in South-east Asia. As of the last quarter of 2017 around 41% of the population were connected to the national grid, according to the MoEE. Guided by the NEMP and NEP, the government is accelerating efforts to develop new power plant projects. However, several key changes are needed for the country to meet its universal electrification target by 2030, including tariff structure reforms and upgrades to the national grid.
Since the appointment of U Win Khaing as minister of the MoEE, the government has reaffirmed its commitment to solving the power shortage. Soon after his appointment, the minister publicly announced that he favoured imports of LNG and smaller-scale hydropower projects to tackle this. Some analysts therefore suspect major hydropower projects to be put on hold indefinitely. One such project is the Chinese-backed $3.6bn Myitsone proposal, in the upper reaches of the Ayeyarwady River. A decision to delay or prevent this project would been welcomed by international development agencies – primarily for environmental reasons, but also as much of the power would have been exported to China’s Yunnan province. While large hydropower projects will likely still play a role in Myanmar’s power generation in the future, smaller projects will be prioritised for now. Speaking to the media in late 2017, Khaing said that large dams will not be included in Myanmar’s development plans until 2025.
To fill the energy gap, the government has decided to use LNG as a source of power generation. This will require major investment into LNG terminals, degasification plants and new pipelines. With a number of disconnected gas trunk lines, certain states in the north have a surplus of gas that could potentially be used domestically if infrastructure developments and export commitments allowed. “It is imperative to supply the southern part of the country with gas, if the economy is to grow in a sustainable way,” U Khin Maung Aye, chairman of the Lat War Group of Companies, told OBG.
\In September 2018 the Parliament approved a loan of $298.9m, which will be used to upgrade the national electricity grid in the four regions of Yangon, Ayeyarwady, Bago and Tanintharyi, and the three states of Mon, Karen and Rakhine. Work is scheduled to commence in 2019 and finish in 2025. This ADB loan, alongside government expenditure of $10m, is expected to help electricity distribution reach 84,850 households in Ayeyarwady Region; 151,667 households in Bago Region; 42,747 households in Mon State; 27,820 households in Karen State; and 27,820 households in Rakhine State.
In terms of financing, $143.1m will be allocated to transmission upgrades; $98.9m towards distribution efforts; $38.6m for contingencies; $10.5m for consultants; and $7.8m for interest payments. The state’s $10m expenditure will be used for project management and for compensation to farmers to account for expropriated land and lost crops. The 32-year ADB loan includes a 24-year repayment period and an eight-year grace period, with a 1.5% rate during the repayment phase and 1% during the grace period.
Independent Power Producers
The country’s existing network of 62 hydropower plants currently offers 3033 MW of installed capacity, accounting for 61% of the country’s energy mix, while just over one-third is generated by gas. Rural energy supply continues to be dominated by wood and charcoal products. Although coal accounts for a small percentage of power production, the NEMP aims to boost coal’s contribution to 30% of the country’s energy mix by 2030.
The NLD-led government has plans to more than double electric power capacity by 2022 by inviting independent power producers (IPPs) to develop four natural gas-fired power plants, raising generation capacity by 3100 MW. While concerns exist over the ability of policymakers to reach power purchase agreements with the IPPs involved, the strategy has credible potential to increase the security and diversity of Myanmar’s energy supply. However, there are opponents to the shift away from hydropower to natural gas. “Hydropower should be the main contributor to Myanmar’s energy mix,” U Win Kyaw, chairman of National Energy Group Company, told OBG. “LNG is a fine alternative, but that would mean relying on foreign supply, which puts us in a weak position.”
Under the government’s plan, the four plants would be constructed for a total cost of $5.2bn, with the government hoping at least two of these plants will be operational before the 2020 elections. The government used its new “notice to proceed” approval process to authorise the four projects in the first quarter of 2018. However, the long-term power purchase agreements between the government and the private investors first need to be agreed before the IPPs can begin raising the billions of dollars of financing required to bring the projects to fruition, casting doubt on the feasibility of the government’s timelines. “If power purchase agreements can be made, then developing LNG power plants is a viable option,” U Kyaw Kyaw Oo, director at Barons & Fujikura EPC, told OBG. “A number of proposed projects failed to get started in the past due to the inability to reach power purchase agreements.”
To meet rising demand, the MoEE aims to use renewable sources to power 8% of electricity requirements by 2021 and 12% by 2030. Moreover, if targets outlined in the NEP are achieved, approximately 500,000 households will benefit from subsidised solar home systems and mini-grids. To achieve these goals, major efforts are under way to expand Myanmar’s solar energy supply. The MoEE plans for six solar power projects to generate a total of 470 MW of energy, using plants in Magway, Myingyan, and Wundwin, in Mandalay. Minbu solar power plant in Magway Region is scheduled to be the first project to go live, in February 2019. The solar power plant is being developed by Green Earth Power under a build-operate-transfer arrangement with the government. The MoEE estimates that the renewable energy facility will initially generate 40 MW of power, which would provide sufficient electricity for 210,000 rural households. The eventual capacity of the solar plant is expected to be 170 MW.
“Given the barriers to large scale energy projects, there is a major push for renewable energy,” Kate Lazarus, senior operations officer at the International Finance Corporation’s Hydropower Developers’ Working Group, told OBG. “A renewable energy law is in the works to help govern the development of the sector,” she added. However, no firm details of its contents or release date were available as of late 2018. Myanmar’s solar power potential is estimated at 51,974 TWh per year. As such, solar power has been identified as a possible solution to offset declining hydropower production during Myanmar’s dry season – an important consideration for energy stakeholders.
Tariffs & Subsides
According to a government survey published in mid-2018, electricity consumption is expected to increase by 19% per year for the next 12 years. Yearly losses from the state-owned electricity company Myanmar Electric Power Enterprise increased by 44.8% from MMK420bn ($297.1m) in FY 2016/17 to MMK608bn ($430.1m) in FY 2017/18. As company losses are estimated to escalate to MMK620bn ($438.6m) for FY 2018/19, Myanmar urgently needs to rebalance its subsidised power tariffs. Despite reports forecasting that tariff hikes could be used as a solution to offset losses, the government had yet to action any price increases as of December 2018.
Market prices currently remain among the lowest in the ASEAN region. This has hindered investment in the sector, since the government has struggled to reach purchase power agreements for a number of proposed projects. According to the MoEE, households pay MMK35 ($0.02) for up to 100 units of electricity; MMK40 ($0.03) for 101 to 200 units; and MMK50 ($0.04) for anything above 201 units. Industries or commercial operations pay MMK75 ($0.05) for up to 500 units of electricity; MMK100($0.07) for 501 to 10,000 units; MMK125 ($0.09) for 10,001 to 50,000 units; and MMK150 ($0.11) for 50,001 to 200,000 units.
Of the total current 18 TWh of electricity produced and sold annually from all types of power stations across the country, 49% is purchased by households, 49% by businesses and the remaining 2% by the public sector. The poorest households in Myanmar pay the highest tariff for electricity supplied by a diesel generator at $0.30 to $0.35 per KWh.
On average, industries or commercial operations only receive reliable electricity for 75% of the time. For the other 25%, they are required to pay around $0.30 to $0.35 per KWh for electricity as supplied by their own diesel generators. Therefore, business customers are in fact already paying about $0.16 per KWh, which is why they are willing to pay $0.15 per KWh for reliable electricity 100% of the time.
For residential consumption, however, affordable electricity that is reliable 100% of the time can only be produced by hydropower, even after the tariff is raised from the current $0.04 per KWh to the ASEAN average of $0.08 per KWh.
On the back of rebounding oil prices, international oil and gas companies are eager to find new exploration opportunities. While there remains uncertainty around the future price of crude oil and natural gas, Myanmar’s upstream segment possesses potential. Changes to the existing fiscal regime could positively impact the government’s ability to secure upstream investment in the next round of bidding.
Myanmar’s midstream and downstream segments, meanwhile, are set to benefit from new projects such as pipeline construction and the upgrading of import infrastructure – as well as a host of OSB projects that should lower operating costs. In addition, the development of offshore FSRUs should bolster Myanmar’s total LNG import capacity after 2020.
With a production capacity of 442,000 barrels per day, the downstream segment is also set to benefit from the construction of a $2.5bn, 771-km crude oil pipeline to connect Made Island in western Myanmar to Yunnan province in northwest China. However, Myanmar is likely to remain dependent on refined fuel imports for its own domestic consumption in the near term, as a result of the cancellation of a major refinery project – planned for construction in the Dawei Special Economic Zone – and declining output at the three existing refineries.
In the short to medium term energy grid upgrades and tariff reforms will be critical to attracting investment. In the longer term, planned LNG power plants should boost energy supplies and support the government’s goal of universal electrification. LPG offers considerable growth potential in the near future; domestically, annual consumption of LPG is around 100,000 tonnes. Additionally, Thailand consumes approximately 4m tonnes of LPG per year, providing Myanmar a potential market for energy exports.
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