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IOCs Line Up for Myanmar Offshore Licenses

International oil companies are lining up for the right to prospect in untested waters off the coast of Myanmar.

International oil companies are lining up for the right to prospect in untested waters off the coast of Myanmar.


But uncertainty over how the once-isolated country will handle the projects and whether it will keep its commitments threaten to damp enthusiasm and delay much-needed revenue for one of Asia's poorest economies.


Myanmar plans this month or next to accept bids from international investors for control of all its remaining offshore oil and natural-gas blocks – 18 in deep water and seven in shallow water – covering much of the eastern half of the Bay of Bengal.

The tender comes as President Thein Sein concludes months of lobbying abroad for foreign investment in a country that until two years ago was under international sanctions against its military junta.


Myanmar already has foreign investment in some blocks, dating from before sanctions were imposed. Malaysia's Petroliam Nasional Bhd. has been producing natural gas from a shallow-water development since 2000. Another is operated by France's Total SA and U.S.-based Chevron Corp. And South Korea's Daewoo International Corp. and Thailand's PTT Exploration & Production PLC this year are expected to start production at offshore wells that the government says will lift Myanmar's daily gas output to 2.2 billion cubic feet by 2015 from 1.4 billion today.


But industry executives and consultants say hazards in the new blocks are high, citing scarce geological data, Myanmar's inexperienced officials, the possibility that contract terms will change and uncertain corporate governance standards at the country's state oil company.


Foreign investors will bear all the exploration and development costs in the deep-water blocks. The government's exploration and production arm, Myanma Oil & Gas Enterprise, will have the right to purchase between 15% and 25% in projects that prove commercial, says Aung Kyaw Htoo, an assistant director in Myanmar's Energy Ministry. If initial studies of a block are encouraging, the companies must drill two wells within three years.


With the cost of hiring a deep-water rig approaching $500,000 a day, only companies with deep pockets can get involved.

"That's $300 million or more you have to spend in the first five years. It's a substantial investment and may not be worth the risk," says an executive at a European oil company. "I don't have much confidence that the terms they offer won't change several times," he says.


"For the deep water, it's very risky and highly capital intensive," says Deputy Energy Minister Htin Aung, "so our people may not have the financial or technical capabilities."


Foreign companies developing onshore and shallow-water blocks must team up with a Myanmar partner, which has spurred more than 100 domestic companies to register with the Energy Ministry.

Allowing foreign companies to hold controlling stakes is unusual in many resource-rich countries. Yet the exact terms for Myanmar's new offshore developments remain in flux.


"The fiscal terms, based on some of the analysis that we have done and others have shown us – they will need some working," says Mariano Vela, who runs Chevron's operations in Thailand and Myanmar. "For deep water, we are talking a different kind of . . . cost structure than the country has been accustomed to in the shallow water," he says. A deep-water exploration well will cost around $150 million to drill, he says.


Possible changes in Myanmar's legal and regulatory system, which some people say is outdated, also pose hazards.

"Contracting under a legal framework that is changing by the day is a risk," says Nomita Nair of U.K.-based law firm Berwin Leighton Paisner LLP.

"Too often we see that the decision process becomes a bottleneck, and Myanmar really has to avoid that," says Craig McMahon, a research chief at energy consulting firm Wood Mackenzie Ltd.


State-run Myanma Oil & Gas Enterprise has been criticized for its business practices and close ties with the military. Opposition leader Aung San Suu Kyi has warned foreign governments against allowing their companies to work with MOGE. And Sen. John McCain (R., Ariz.) and former Sen. Joe Lieberman of Connecticut have criticized it for a lack of transparency.


Myanmar officials say they are working to address the concerns. "Our department is hugely understaffed. . . . We are constantly working on overtime, but are still struggling to meet our timelines," says Zaw Aung, MOGE's director of planning.

Energy companies likely will recall what happened to mining firms in mineral-rich Mongolia, where the government has been trying to renegotiate contracts to gain more favorable returns.


"My guess is that Myanmar is getting coaching from other regional governments that have been in similar situations in recent years, and are probably advised not to give up too much control," says Jason Waldie, an associate director at energy consulting firm Douglas-Westwood.

And to some degree, investors will be flying blind. "The availability of seismic data is very, very limited," says Mr. McMahon, of Wood Mackenzie. "Companies will be invited to bid in the [coming] licensing round without really having sufficient data."

The auction, nonetheless, appears sure to get lots of interest.


"We think the resource potential offshore looks very attractive," Malcolm Brown, the vice president for exploration at U.K.-based producer BG Group PLC, said at a March industry conference in Yangon, Myanmar.

Source : Neftegaz.RU