Myanmar turns attention to LNG projects

Myanmar’s downstream oil and gas sector is slated for expansion in the coming years, as declining production at its big four offshore gas fields, limited domestic refining capacity, and rising fuel imports and electricity consumption create new investment opportunities for the private sector. One of the largest recent downstream developments saw a crude oil pipeline running to south-western China begin operations in early 2017, as part of China’s Belt and Road Initiative, a geopolitical mandate to revive trade ties and supply lines along historic routes to the Middle East, Africa and Europe.

Downstream investment will also be critical as the country seeks to meet a widening capacity gap in the power sector. The Ministry of Electricity and Energy (MoEE) is prioritising plants powered by liquefied natural gas (LNG) over large-scale hydropower projects, a strategy which will likely necessitate construction of LNG import terminals and a regasification plant within the next several years. In the longer term, new refineries will be required, following the recent cancellation of a major refinery in the southern city of Dawei. This should provide new opportunities for downstream investors, despite doubts about the economic feasibility of multibillion-dollar refinery projects at this stage in the country’s economic development.

New Pipeline

In April 2017 a 771-km crude oil pipeline connecting Myanmar’s Made Island to a refinery in China’s Yunnan Province officially began operations. International media reported that Suezmax-sized tankers capable of holding 1m barrels – or 140,000 tonnes of crude oil – have been offloading shipments at Made Island, which offers China the strategic geographic advantage of being able to avoid the Straits of Malacca when importing fuel from the Middle East. Crude oil imports to China rose by 14% in 2016, the fastest pace since 2010, and peaked at a record 8.6m barrels per day (bpd) in December of that year, according to international media. China also receives natural gas imports through a parallel pipeline with a design capacity of 12bn cu metres annually. Imports from this pipeline commenced in 2013 and hit 2.86m tonnes in 2016, or 5% of China’s total gas imports.

National Benefits

Although the Made Island pipeline project was completed in 2014, with trial operations beginning in 2015, it had been delayed due to transit fee negotiations. PetroChina, China’s national oil company, reported that the government of Myanmar eventually agreed to lower its fees. According to international media, out of an anticipated 22m tonnes of crude oil forecast to be shipped through the pipeline each year, Myanmar will offtake just 2m tonnes.

Research consultancy Wood Mackenzie told international media that the initial benefits for Myanmar will be limited to its offtake from the pipeline, as well as revenue from oil storage and other fees. The longterm benefits are significant, however, with experience gained from pipeline construction helping the country to meet its own downstream needs, which include new refineries, pipelines and energy import infrastructure.

Domestic Shortfall

Myanmar’s domestic refining capacity is limited at present. The Energy Research Institute Network (ERIA) reports that Myanmar’s three operational refineries – Thanlyin, Chauk and Thanbayakan – hold a combined capacity of 51,000 bpd. All three refineries are owned by Myanma Petroleum Enterprise (MPE), operating under the Ministry of Electricity and Energy’s Myanma Oil and Gas Enterprise (MOGE).

Thanbayakan is the largest refinery in operation, with a design capacity of 25,000 bpd, followed by Thanlyin, at 20,000 bpd, and Chauk, with 6000 bpd. However, the ERIA reports these refineries are in need of upgrade, with the Chauk refinery in Magway operating at just 33% of its total design capacity as of 2012 – the most recent year for which statistics are available – followed by the Thanbayakan Refinery, at 34%, and Yangon’s Thanlyin refinery, at 57%.

Import Activity

As a result, refined fuel products have become the country’s top import; the Observatory of Economic Complexity reported that refined petroleum was the largest single import to Myanmar in 2016, accounting for $1.64bn, or 10.5% of total imports.

This poses a problem given current trends in domestic fuel consumption. According to the Ministry of Planning and Finance, the total number of registered vehicles in Myanmar rose from 960,934 in January 2005 to 6.5m in May 2017, while the MPE reports that current liquefied petroleum gas (LPG) production of 10,000 tonnes annually, augmented by 50,000 tonnes of annual imports, still covers just 5% of domestic demand. Compounding the problem, the MoEE forecasts electricity consumption will, at a minimum, triple over the next 12 years, with peak demand set to rise from 3192 MW in May 2017 to between 9100 MW and 14,542 MW in 2030, with the country’s National Electrification Plan calling for an additional 24,000 MW of installed capacity to be added to the grid over the same period.

To curb the use of electricity for household cooking and replace it with LPG in an effort to conserve power, local Parami Energy won a government concession to import, store and distribute LPG from the Thanlyin refinery in August 2017. This represents the first public-private partnership for LPG activity in the country.

In addition, large-scale hydro projects, including the deeply unpopular Chinese-backed Myitsone dam, have faced rising local opposition in recent years. This has led the MoEE to announce it would pivot its energy strategy towards small-scale hydro projects and, significantly, plants based on LNG power generation (see analysis).

Refinery Plans 

In an effort to bolster domestic capacity and reduce refined fuel imports, the government has increasingly sought to build up its domestic refining capacity, most significantly through a major refinery project planned at the Dawei Special Economic Zone. In April 2016 Chinese commodity trader Guandong Zhenrong Energy announced it had obtained the government of Myanmar’s approval to build a $3bn refinery in the southern city of Dawei, roughly 350 km west of Bangkok. One of the largest single foreign investments in Myanmar to date, the project would include construction of a 100,000-bpd refinery, as well as an oil terminal, storage and distribution facilities. Guandong announced it would hold a 70% stake in the project, with the remaining 30% held by three local firms: Myanmar Economic Holdings (MEH), Myanmar Petrochemical Corporation and Yangon Engineering Group. The announcement was made just several days before Daw Aung San Suu Kyi’s National League for Democracy was sworn into power, after being proposed in 2011 and later approved by China in 2014.

Cancellation

In December 2017, however, authorities announced that the project had been cancelled as a result of financial constraints, with the MEH reportedly submitting a proposal to pull out, citing limited progress in the years since it had received approval. Part of the problem could lie in the economic feasibility of such a large project. In April 2016 local media reports said that many analysts in the country had raised questions about its viability, noting that at just 100,000 bpd of production, the refinery’s output would not be large enough to compete with other refineries in Asia, which generally have capacity for 600,000 bpd or more, and operate on slim margins. Low global oil and LNG prices, as well as refining surpluses in neighbouring India and China, could further weigh on profitability, while Myanmar’s burdensome permit and approval process poses a number of potential risks for investors.

Demand

Against this backdrop, opportunities in the mid-stream segment offer a more attractive near-term prospect, and several private companies are investing in storage terminals, aviation distribution networks and fuel stations. Indian refiners and fuel supply companies have also flocked to the market, signing import and distribution deals with private firms operating in Myanmar, with more investment expected in light of rising fuel demand (see overview). In January 2017, for example, international media noted that 20 small tankers, all from Singapore, were shipping refined products to Myanmar, twice as many as the previous year. It was also reported that Myanma Petroleum Products Enterprise, the government entity responsible for fuel procurement and distribution, typically purchases gasoil from Singapore traders at a premium of $3 per barrel over average Singapore prices.

Global consultancy BMI Research has forecast refined fuel consumption will record a compound annual growth rate of 6% between 2017 and 2027, with international media reporting that diesel demand rose to 110,000 bpd between September and October 2016, up from 80,000-90,000 bpd in September and October 2015. Gasoil imports, meanwhile, are forecast to average between 37,250 bpd and 50,000 bpd in 2017, against 17,400 bpd to 19,900 bpd in recent years.

Rising demand for electricity has similarly brightened the outlook for LNG infrastructure investors, with the government issuing a request for expressions of interest in a $2bn LNG project in September 2016, which would include a floating LNG import terminal with annual capacity for 3m to 4m tonnes, as well as a 1-GW, gas-fired power plant. In July 2017 France’s Total announced it was in talks with Myanmar to supply Yangon with LNG, as well as build a new power plant, as the company moves to expand its global downstream activities into LNG infrastructure, including regasification terminals, pipelines and power plants.

Qatar’s plans to boost its LNG production to 100m tonnes by 2024, from 77m tonnes in 2017, has created serious concerns about global LNG oversupply. Asia LNG spot prices had already tumbled by 70% between 2014 and July 2017, making LNG an economically viable fuel source for emerging markets like Myanmar, if the supporting infrastructure can be successfully developed.

Evidence of LNG’s rising attractiveness is also reflected in recent government policy. The MoEE announced in November 2017 that it was shifting its long-term energy strategy away from large-scale hydropower projects to focus instead on gas-fired and small-scale hydro projects. On making the announcement, the ministry reported it was negotiating with major LNG producers to sign a supply deal, although it did not unveil a planned timeline for its conclusion.