China re-evaluates its role in the Myanmar energy sector

China has long been a significant player in Myanmar’s energy sector. Before recent political reforms, Western sanctions made the country of particular interest to China, which was willing to finance and build projects that companies of the West and Japan could not. Chinese companies also saw Myanmar as an attractive investment, owing to its rich and diverse natural resources, geopolitical importance and potential as a source of electricity. As China boomed and the West isolated Myanmar, heavy participation the energy sector of its southern neighbour made sense for China.

The situation has changed considerably, and some of the conditions that attracted China earlier may no longer hold. With the sanctions lifted, the market is now far more competitive, leaving China in a less-favourable bargaining position. More importantly, the reforms have changed the way Myanmar does business. As transparency increases and the public becomes more engaged, China is not finding it as easy to pen new deals, or to complete those already signed. Its companies are being asked to justify their projects, especially on environmental and social grounds, and the government is under pressure to cancel deals that do not meet minimum standards. Last, as the Chinese economy slows, it simply does not need the energy and resources it did just a few years ago.

Deep History

Before the reforms of 2011, China was more heavily involved in Myanmar’s energy sector. According to EarthRights International, an environmental research group, as of September 2008 some 69 Chinese companies had investments in power and mining projects in the country. China today continues to be active, with a clutch of deals negotiated before 2011 still in the works, and some new deals being negotiated.

Still, it is unclear how many of these will reach completion, as many are being shelved, re-negotiated or cancelled. In 2010, Huaneng Lancang (part of China Huaneng, a state-owned utility) and the Htoo Group signed a memorandum of understanding (MoU) to build a 279-MW coal-fired plant in Htantabin Township, Yangon. However, that project lapsed as the MoU was not implemented within the 30-month deadline. Another project, the 600-MW Kelawa Power Station, is being constructed by China Guodian and a local partner. When finished, its output will supply the Monywa Copper project, which is also Chinese-led. The mine has been controversial, following clashes with local residents who claimed to have lost their land and been impacted by environmental degradation caused by the project.

Hydroelectricity

China has also been a major investor and builder of hydroelectricity projects in Myanmar. According to EarthRights International, Chinese companies were involved in 63 hydro projects as of 2008. In 2007, China Power Investment Corporation signed a deal with the Myanmar Ministry of Electric Power to build seven dams with a capacity of 17,259 MW. The investment would have been about $3.6bn. Several of these projects have been successfully completed, such as the 280-MW Lower Paunglaung dam, in 2005, and the 600-MW Shweli I dam in Shan State, in 2006. A group of Chinese companies supported by the Exim Bank of China subsequently wrapped up a 790-MW project south of Mandalay in 2010, while the Dapein 1 hydropower project started up in 2011 and the Upper Paunglaung dam did so in 2014.

Challenges

Despite the successes, some projects are in political limbo. The 7000-MW Mong Ton hydropower project, for example, which will be situated on the Salween River, has been in discussion for some time, and it is unclear where it stands. There has been considerable concern about the project, which would be the largest hydropower plant in all of South-east Asia and has been the target of civic action and protests. Its opponents say that the basin to be flooded – an area of 640 sq km according to some sources – would damage culturally and ecologically important areas, and that 90% of the power will be exported to Thailand and China. They are also worried about existing conflicts escalating as the Myanmar military presence increases with the building of the dam.

Another development mired in uncertainty is the Myitsone dam. The project was stopped following the reforms brought about after President U Thein Sein came to power in 2011. Like many other major hydroelectric projects in Myanmar, the dam would have exported most of its energy outside the country, mostly to China. In addition, threats to the environment and biodiversity, and potential resettlement of the local population, sparked civil unrest.

However, there are some indications that the project may be restarted. The Chinese company behind the project says the dam may not have been well understood back in 2011, as under the old regime investors could not engage the population: all communications were government to government. This time around, the Chinese are beginning to directly speak to those concerned and may yet make headway in convincing local residents that the dam’s benefits outweigh its costs.

Refineries

China is also active in the refinery subsector. At present Myanmar has only about 50,000 barrels a day of capacity, with a utilisation rate below 40%. However, China’s Guangdong Zhenrong Energy Company is planning to build a $3bn refinery in the Dawei Special Economic Zone, and applied for approvals in early 2015. The refinery is expected to have a capacity of 5m tonnes a year, but this project has also faced local resistance. In 2014, around 500 villagers from the area held a protest, saying the social and environmental damage would be considerable and that a large number of people would have to be relocated.

Momentum Play

Despite such problems, China continues to be a major player in Myanmar, partly from sheer momentum, with legacy deals and projects still in the works, and partly from the raw opportunities its neighbour continues to hold in terms of resources and building electricity infrastructure. China is also adjusting to economic and political realities. It is now more careful in how it conducts itself in Myanmar, engaging in more corporate social responsibility (CSR) work to give projects a better chance of surviving political and public scrutiny. In many ways, Chinese companies are adapting and beginning to conduct themselves similar to other multinationals in the country.

Observers of Myanmar note that Chinese efforts to engage the local population are not merely CSR-type initiatives. Chinese businesses are also becoming more sophisticated, they say, and are beginning to understand that convincing residents to accept their projects is not simply a matter of building a school or two; rather, it is a significant challenge, as China’s reputation in the country, especially in the energy sector, is particularly poor given its close ties to previous governments. All of this has spurred new efforts.

At the same time, Myanmar is starting to become more realistic in what it expects from China. It needs to increase its electricity generation capacity and to develop its energy sector. While many people in Myanmar have a negative image of China, and some projects may be environmentally troubling, the country has taken promising steps, and some of the envisioned projects can constructively add to its energy mix. It is therefore not hard to imagine that some deals currently on the table could eventually be built, albeit with modifications and after public concerns have been addressed.