Myanmar faces energy crossroads
Huge potential in the country’s energy sector faces equally sizeable challenges
Myanmar's government has announced new oil and gas tender plans just as green shoots are being sighted in Southeast Asian upstream investment. But the country's private sector has said tough fiscal measures must be carefully revised to entice international energy investment.
The Ministry of Electricity and Energy plans to offer 18 onshore and 13 offshore blocks by the end of year, Daw Khin Htay, director of state-owned Myanmar Oil & Gas Enterprise (MOGE) told reporters on 13 July. She also revealed an added incentive that "it will no longer be mandatory to join with local firms", without giving further details.
The tender is yet to generate the same intense interest seen in 2014, when western majors rushed to snap up vast uncharted areas of the Bay of Bengal and in the Andaman Sea, as the country finally emerged from 50 years of international isolation. Proven natural gas reserves are about 23 trillion cubic feet in 2017, according to the Energy Information Administration, and crude oil reserves are estimated to top 50 million barrels as of 2015. But with so much acreage uncharted, the true potential is unknown.
This fueled confidence in the previous round, that saw several global firms including Royal Dutch Shell, US-based ConocoPhillips and France's Total take 20 offshore blocks, to the tune of $3bn. But the optimism has since waned amid a litany of domestic and international challenges.
As with offshore upstream projects elsewhere, the oil price crash had a damaging impact. But IOCs have also faced challenging exploration conditions, and the country's underdeveloped infrastructure and investment environment. The Myanmar armed forces' assaults on the Rohingya minority in Rakhine State pressurised companies facing activist investors .
As of late 2017, 10 of the offshore blocks agreed in 2014 had been relinquished, with the exits accelerating after a "drop or drill" warning from state-run Myanma Oil and Gas Enterprise. The departures included India's Reliance Industries, Australia's Tap Oil and Shell has since dropped some deep-water assets.
While well aware of all these factors, for the Myanmarese fighting for an industry revival, the biggest issue is the government's approach to the fiscal terms and taxation imposed on international energy firms.
"The present production sharing agreement's fiscal terms are just too economically tough for marginal fields and deep-water reservoirs", says Kyaw Kyaw Hlaing, chairman of the Myanmar Oil and Gas Enterprise. He also cites poor access to the government "data room" of exploration intelligence, and corruption and "ease of doing business" as the other major obstacles.
An analysis of the government revenue share provided by Wood Mackenzie, based on its fiscal benchmarking tool, found that Naypyidaw's stake for an example deep-water field of 1 trillion cf, under a low cost environment with a $8/mcf gas price, is 93.05%. For a shelf (500 bcf) field, under a low-cost environment with a $6/mcf gas price, the government take is 87.2%. Both Myanmar and foreign companies who are parties to PSCs are also subject to a 25% tax on profits under the Income Tax Law.
In contrast, Australia keeps around half the revenue generated at its fields.
Earlier this year officials confirmed that the government is planning to restructure the PSCs , which were initially drawn up under the military junta, and the private sector is hoping for big changes.
"The industry is keen to see what this restructuring will mean, specifically in terms of addressing taxes and royalties. Hopefully the government works to adjust the tax rates in a way that's more favourable to promoting production", says Jeremy Mullins, research director at Myanmar Energy Monitor. "It's important that PSC terms reflect the current environment. There are also other adjustments that can be made, such as splitting up some of the blocks or improving access to the data room that would help both the private sector and the government."
Adrian Pooh, senior analyst at Wood Mackenzie, says the government could look at a lesser profit split for government, or a higher cost recovery percentage. There is also the option of improved terms specifically for deep-water PSCs, as deep-water exploration and development is more costly than shelf fields.
Source: Petroleum Economist
Getting the restructuring right—and in a timely manner—could be critical as prices recover and potential supply pressures motivate large and smaller firms to re-evaluate the viability of offshore projects.
"There is a huge potential in Myanmar's oil and gas industry. It's still largely frontier and unexplored. Previous gas discoveries (that are now producing) are in multiple of trillion cfs," says Pooh.
He adds that Myanmar's location is strategic as it currently supplies two major export markets (southwest China and Thailand). Due to the country's explosive growth, Myanmar's current gas output will also not be able to meet its post-2020 domestic gas demand.
Industry analysts at Rystad Energy wrote in January that Southeast Asia will welcome a $28bn investment wave up until 2020, estimating that 50 oil and gas fields in the region, with a collective 4bn barrels of oil equivalent, will likely be approved.
"Policy decisions over the next year will be crucial to the development of Myanmar's upstream sector" as global upstream investment recovers from the 2014 oil price crash and resulting budget cuts, wrote GlobalData, a leading data and analytics company in March .
However, drafting clear and effective policy could be easier said than done amid the country's shaky democratic transition. Hopes raised by the landslide victory of Aung San Suu Kyi's National League for Democracy in the 2015 elections have faded amid the Rohingya crisis, and continued crackdowns on free speech and civil society.