Legislative reforms have made the sector more accessible

The oil and gas sector has formed one of the most important objects of the government’s ambitious programme of economic reforms over the past few years. A rise in licensing activity will contribute to increased exploration, responding to a surge in demand for oilfield services. Foreign investment from some of the world’s largest oil and gas companies has played a pivotal role in developing the sector. In October 2014 Myanmar announced it would launch a new round of oil and gas auctions in 2015, with four shallow and five deepwater blocks on offer – though this could be delayed. Myanma Oil and Gas Enterprise (MOGE) said it was confident of making big discoveries in the future in these blocks. In March 2014, Myanmar awarded 20 offshore oil and gas blocks to firms comprising Royal Dutch Shell, Total and Statoil. According to MOGE, exploration on these blocks is expected to begin in early 2015.

Technical Demands

The increased licensing activity is expected to boost exploration over the next few years, especially in Myanmar’s deepwater shelf. Almost half of the offshore blocks under offer are deepwater and are being offered under better terms than the shallow offshore blocks. This is intended to compensate for the greater technical demands and higher costs of deepwater projects. Despite the pace of economic reform, the oil and gas industry largely remains a restricted sector, with foreign investors only able to operate through joint ventures with the Ministry of Energy (MoE). Under the Foreign Investment Law, the ministry must hold a stake in every aspect of oil drilling – from the construction of containers, ports and pipelines to the warehousing and distributing of oil and gas.

Oil exploration is also governed by the law, allowing the ministry to hold stakes in oilrigs and chemical factories. The Myanmar Investment Commission (MIC) issued a directive in August 2014 to expand sectors that could be held at 100% by foreign investors, including in small and medium-sized hydropower and coal-fired power projects, but fell short of extending it to the oil and gas sector.

Legislative Shift

Between 1962 and 1988, oil exploration and production were mainly performed by MOGE, as government policy kept away foreign players. At the same time, there was also an absence of an appropriate legal framework in the country. Later, in 1988, Myanmar passed foreign investment legislation and started relying on foreign technology and capital to revive its oil and gas industry.

The oil and gas industry in Myanmar is governed by a complex mixture of regulations from the colonial era, parliamentary laws passed immediately after independence, revolutionary council laws from 1962 to 1988, decrees passed by the military regime from 1988 to 2011, and finally laws introduced by the newly elected government in 2011.

Since 2011, the government has promised to promulgate reform-minded legislation to make Myanmar a more attractive destination for prospective investors. These have included amendments to the Oilfields Act 1918 and Petroleum Act 1934, while there are also plans to upgrade existing laws that pertain to the oil and gas sector, including the Oilfields Act (1918); the Oilfield Rules (1936); the Petroleum Act (1934); the Petroleum Rules (1937); the Essential Supplies and Services Act (1947); the Oilfields (Labour and Welfare) Act (1951); the Petroleum Resources (Development Regulation) Act (1957); the Law Amending the Petroleum Resources (Development Regulation) Act (1969); the Myanmar Petroleum Concession Rules (1962); and the Environmental Conservation Law (2012). So far, Thailand's total investment in Myanmar has reached a total of almost $10bn while Chinese investment is already worth more than $14bn. However, while Thailand, China and India were early players in Myanmar's oil and gas sector, the promised reforms and moves to improve transparency have also seen other significant international players enter the field.

Cutting Red Tape

In order to facilitate the easy entry of more foreign investors, the government has also worked to streamlined its bureaucratic and administrative procedures. The government body responsible for foreign investment is the Ministry of National Planning and Economic Development (MNPED). The MIC, which carries out a regulatory function, was made an independent organisation in June 2014 to further encourage investment. The government has also reformed laws relating to foreign investment, namely the Myanmar Foreign Investment Law (2012); the Ministry of National Planning and Economic Development No. 11/2013, the Foreign Investment Rules; the Myanmar Investment Commission Notification No. 1/2013; and the State Law and Order Restoration Council Law No. 9/89.

Under these reformed investment laws, foreigners can invest in the oil and gas sector through a joint venture with a Myanmar party, which can either be an individual or a corporation, in an 80:20 shareholding ratio. In practice, however, the MIC has been flexible on this stipulation largely due to a continued lack of local expertise in highly technical areas of the oil and gas industry, particularly with regards to deep-water offshore activities. Foreign investors will be allowed to function provided that there is some degree of local participation. So that foreign parties are able to invest in Myanmar's oil and gas sector, they must first apply for a recommendation from MoE to obtain a permit from MIC. The MoE must give its recommendation within seven days. Meanwhile, the MIC must issue its permit within 90 days after receiving the recommendation from the MoE. Effective as of April 2014, the government has also introduced tax reforms whereby capital gains tax for oil and gas assets will be based on the kyat and not in US dollars, as was done previously. This has led to some degree of uncertainty for investors due to the volatility in the value of the kyat.

Cutting Taxes

According to MOGE, deepwater offshore production-sharing contracts will offer an exploration period of three years, followed by one-year extensions up to two additional years. They also include a 20-year development period, royalties of 12.5% and cost recovery limits of between 40% and 50%. The royalty payable for onshore production is also 12.5%. The government's share of deepwater oil will range from 70% if output is 50,000 barrels per day (bpd) to 90% above 150,000 bpd, with the state's share of gas output ranging from 70% at 300m cu feet per day to 90% over 900m cu feet per day. Signature fees can also be negotiated.

For shallow waters, the production split ranges from 60% to 90%, depending on production rates and well depths. Cost recovery limits are 50% in water depths of 600 feet or less, and 60% over that. MOGE will also be entitled to take a 15-25% share in any producing offshore or onshore block. With the signing of the PSCs, exploration and production work can begin on the blocks as soon as the oil companies have conducted environmental and social impact assessments in their respective blocks within a time period of six months. The assessments must also be approved by the MIC. The government hopes that exploration from Myanmar’s deepwater shelf – still largely untouched and lacking in geological data – will increase its oil and gas revenue. To attract larger international players, the government has offered favourable terms to deflect higher costs and compensate for the need for new seismologic and drilling technology. “One good thing about being a relative latecomer is that we will be able to benefit from the latest technology,” U Thet San, managing director of Alpha Power Engineering, told OBG, “The government should change from the old distributor system to a multiple distributor which will reduce power loss and ensure better output.” To boost foreign presence in Myanmar, the MIC, which oversees foreign investment, has also allowed for deepwater blocks to be wholly owned by foreign investors As a result of this new openness to investment, the total approved foreign investment in Myanmar's oil and gas sector had hit $14bn as of June 2014. “Opening up the oil sector to international operators will bring many benefits and opportunities for local servicing companies. Myanmar’s oil and gas future looks very bright,” U Aung Kyaw Kyaw, the managing director of Alliance Logistics, told OBG. Myanmar’s government has also offered to exempt duties on imports of equipment, and on oil and gas exports. Oil companies are offered a rate of 30% income tax with a three-year holiday.

Concerns Raised

Despite the liberalisation of the oil and gas sector to foreign partners, concerns have been raised over the exact identity of these foreign partners, with fears of substantial revenue loss that might result from corruption and lack of legal and public scrutiny. The government has promised to implement best practices and ensure transparency across the oil and gas industry, as part of a shift away from the stigma of corruption linked with the former military regime. “The government needs to fast-track its reforms, and so it must move out incompetent officials who are slowing progress. There is no time to teach them the ways of the new, reformed economy,” U Kyaw Kyaw Hlaing, chairman of Smart Group of Companies, told OBG.

EITI Scheme

MOGE has started to disclose the standard terms and conditions of all its production-sharing agreements. Moreover, it has applied to join the Extractive Industries Transparency Initiative (EITI), a global anti-corruption scheme to which Myanmar was accepted as a candidate state in 2014. This means Myanmar must now comply with international standards of transparency for all its oil, gas and mining earnings, thereby demonstrating the commitment of the government to the economic reform process. The scheme has recommended the disclosure of information relating to company ownership, contract terms, state-owned extractive industries and revenue allocation.

The extractive industries watchdog Global Witness claimed in June 2014 that when asked for the disclosure of details of the 47 companies awarded 36 oil and gas blocks both onshore and offshore in October 2013 and March 2014, the response from the companies was very poor, with only 11 responses to its queries. Global Witness feared that secrecy over company ownership could result in profits kept away from public scrutiny and law enforcement. Another series of requests from Global Witness after Myanmar was accepted as a candidate for the EITI scheme, however, fared better, with 25 oil and gas companies that were investing in 17 oil and gas blocks revealing their ownership details. This information can be used to allow citizens to monitor the individuals behind oil companies, and raise concerns over any conflicts of interest or risks for corruption. As an EITI candidate, Myanmar is required to submit its first report on the implementation of the EITI requirements within 18 months, and then to become fully compliant by January 2, 2017.