U Kyaw Kyaw Hlaing, Chairman, SMART Group of Companies: Interview

Interview: U Kyaw Kyaw Hlaing

To what extent have service companies been affected by the decline in oil prices?

U KYAW KYAW HLAING: Service companies have had to make significant cutbacks in different ways, including staffing. While the oil and gas sector is well versed in dealing with cyclical swings in oil prices, individual companies – even those with international portfolios – are struggling. In Myanmar, for example, there are many blocks due for seismic tests or drilling that have not yet commenced due to the downturn. If we begin to see a trend of a lack of movement from the study period to the exploration phase, it will eventually trickle down into the service industry.

What are the prospects for developing new discoveries, and how can they best be monetised?

KYAW KYAW HLAING: Our country is a gas producer. Oil and gas prices are related but not directly priced one-to-one. We are also selling our gas through long-term agreements with neighbouring countries. These are important factors to consider. For example, Woodside has discovered two gas fields offshore, AD-7 and A-6. The first is a huge discovery at a depth of 800 metres, and the second is a smaller reserve.

First, the operators have to drill the wells and then appraise them. Then, based on the appraisal, they have to make a decision. They are not able to sell gas at the spot price unless they convert it to liquefied natural gas (LNG). If this decision is taken, the bankers want to know how much gas is there, so third-party certification is required.

However, gas fields take around eight to 10 years to develop, starting from the day of discovery to the selling of the first batch of gas, and take even longer for deepwater deposits. It is difficult to predict what is going to happen by 2024. Woodside still has aggressive plans to drill follow-up wells, and once there is a clearer picture of the size of the deposits, then a decision can be made regarding better utilising the gas. During the administration of President U Thein Sein, 20 blocks were awarded to local and foreign players – 10 deepwater and 10 shallow water. Of this, some are already due for drilling. The good thing is that in shallow water they have one year after the study period before starting exploration, and two years in the case of deepwater. In the exploration phase a commitment of three years is required. The government allows firms free rein during the study period, so some drill the well during the this time. If they make a discovery, they go into the exploration period, and if they do not, they cease operations. Some big firms will want to take advantage of this now, because they can benefit from the low cost of services for drilling due to the current market conditions. So, despite the low oil price, there will still be exploration activity in 2017. How this is best monetised will depend on market conditions at the time of production.

Which infrastructure projects should the government incentivise to help the oil and gas industry?

KYAW KYAW HLAING: That’s a difficult question. One area that needs to be addressed is an offshore supply base. According to Myanmar Oil and Gas Enterprise, if you want to invest in this area you must do so in partnership with them. At the same time, however, the country is open, and the government wants to corporatise bodies to improve efficiency, which should help to encourage participation.

Another area of concern is the limited availability of gas. Woodside has made discoveries, but they will not be available until 2024. By 2018 Total will have been producing from their field for 20 years, so we may see production coming down. As such, the availability of gas for local power production between 2017 and 2024 is a concern. The government has some difficult decisions to make about how to manage this shortage. There are plans for LNG projects, but there is nothing concrete in place yet to close the gap.