Myanmar's upstream sector hobbled by pipeline controversy, poor E&D results

Legal problems affecting two major foreign companies are also a strain. Unocal Corp. and Premier Oil PLC are again facing legal and political pressure in their home countries and internationally for their involvement in development and pipeline projects involving Yadana and Yetagun, gas fields that they respectively operate in the Gulf of Martaban off Myanmar (Fig. 1).

The administration of US Pres. Bill Clinton last month renewed unilateral sanctions against Myanmar, first imposed in 1997 over allegations of slave labor and other human rights abuses in the country.

Unfulfilled promise

When Myanmar embarked on market-oriented economic policies back in 1988, oil and gas companies were excited by the prospect of searching for oil and gas in the underexplored nation. Non-US operators lined up to sign the first production-sharing contracts in 1989.

But over the past few years, Myanmar has grown increasingly isolated because of the US-led embargo and is regularly criticized for its slow bureaucracy, contrary decision-making, and a lack of clear laws and regulation and their arbitrary implementation, as well as increasing corruption. Many companies have already pulled their operations out of Myanmar, and others have threatened to do the same if the country's investment atmosphere does not improve soon.

Simply put, Myanmar has not been a simple place for foreign companies to do business. "It's been a nightmare," said one oil industry executive. "It can take weeks to get approval to do the simplest things, and then that decision can get overturned by another official in another department or ministry."

Despite considerable interest during the 1990s, Myanmar remains an obscure backwater as far as the oil and gas industry is concerned. Exploration and development onshore is proceeding with limited success, and after 18 months of delay, the country is only just now about to receive the first payments for offshore gas exports.

On the onshore front, the operator of the country's biggest oil field, Houston-based oil field service giant Baker Hughes Inc., announced in mid-January its intention to pull out of the Mann field, in central Myanmar. In addition, six other companies or groups have been mostly inactive over the past 2 years. All are small to medium-sized operators, and the results of both exploration and development have been sporadic at best.

Given Myanmar's earlier, much-vaunted potential, the delays offshore, coupled with the disappointment onshore, have left the country's industry in disarray. The further impact of the US economic embargo has made matters that much more difficult, discouraging investment from companies that have the resources necessary to plan beyond initial poor results.

"The fact is, it will be some time indeed before Myanmar truly lives up to its potential as far as hydrocarbons are concerned," said one executive with an oil operator based in Yangon (Rangoon). "The combination of the embargo, the economic crisis, and delayed development have really constrained [investment]."

Human rights controversy

Most of the storms of controversy have swirled over the first pipeline to be built to deliver Myanmar hydrocarbons to another country.

The $1 billion, 665-km Yadana pipeline extends from Yadana gas field to a power plant in Ratchaburi province. The Yadana consortium consists of operator TotalFinaElf SA (31.24%), Unocal (28.26%), PTT Exploration & Production (25.5%), and MOGE (15%).

The pipeline was originally scheduled for completion last April. However, in January, the Thai government suspended construction on a 10-km section of the pipeline that extends through the Sai Yok forest reserve near the Thailand-Myanmar border amid protests from environmental groups (Fig. 2). Work resumed thereafter, and the pipeline was completed during the first quarter.

But the real trouble came with allegations of slave labor used to build the pipeline.

Attorneys for a group of Myanmese refugees have claimed that they discovered "smoking-gun" documents that prove that Unocal was complicit in abuses of human rights by the Myanmese military. The abuses allegedly included slave labor, numerous deaths, and the seizure of property. Unocal has denied the charges.

A US federal judge in Los Angeles will hear the charges in July to determine whether the suits, the first ever to hold a US company liable for human rights abuses abroad, can proceed to trial.

Meanwhile, the British Foreign Office reiterated a request to Premier that it pull out of its Yetagun gas project as soon as legally possible. The request was made to Premier Chairman Charles Jamieson as part of British efforts to put further pressure on Myanmar to improve its human rights record.

An initial request was made 2 years ago. Premier is not expected to heed the latest appeal. Premier operates Yetagun field, 175 miles west of Thailand on Blocks M-12, M-13, and M-14 in the Gulf of Martaban.

But it is the suits against Unocal that have the gravest potential consequences. The class action suits, originally filed in 1996, seek more than $1 billion in damages. Attorneys for the refugees say that US Department of State cables obtained under the US Freedom of Information Act contradict Unocal's denials. They cite a 1995 cable of an interview with Unocal executive Joel Robinson, which stated: "On the general issue of the close working relationship between Total/Unocal and the Myanmese military, Robinson had no apologies to make. He stated forthrightly that the companies have hired the Myanmese to provide security and pay for this through the Myanma Oil & Gas Enterprise."

Robinson was quoted as saying that three truckloads of Myanmese soldiers typically accompanied the project officials during survey work and the soldiers were informed of the next day's activities so they could secure the area. Lawyers for the plaintiffs say the cables are evidence of a contractual relationship between Unocal and the Myanmese military.

For its part, Unocal claims that the cables were "not factually accurate" and that there is "no evidence that the Myanmese military was hired by Unocal or Total or anybody else." A Unocal lawyer insisted that its summary judgment motion "will dispose of the case in its entirety."

US District Judge Richard Paez has already dismissed TotalFinaElf, the operator of the Yadana consortium, and the Myanmese government as defendants in the cases.

In January 1999, the Myanmese military was reported to have sent troops and armored vehicles to suppress ethnic insurgents threatening to bomb the pipeline. A unit was assigned to protect a 60-km stretch of pipeline from the town of Kanbauk to the border city of Thong Pha Phum that had been threatened by Karen guerrillas. The unit consisted of an artillery battalion and five rapid-response battalions. Four Karen men arrested as spies a month before the deployment admitted to Myanmese intelligence that they were planning to bomb the pipeline.

Unocal insists that its past 10 years of engagement in Myanmar have meant "employment opportunity, technology training, education, and health care opportunities," Carol Scott, a Unocal spokeswoman based in Singapore, said recently. "Reaching out through this kind of engagement is the best way to achieve change, not hiding behind sanctions. There should be more American companies there, not fewer." She said people living close to the gas project Unocal was involved in Myanmar were "very happy" it was going on because of the opportunities it presented. "It will only serve to quicken the process towards democratization."

In late 1998, a renewed crackdown by the government on the country's pro-democracy movement and its international supporters added to the woes of business concerns already enduring criticism and local sanctions for their trade ties with Yangon. This has yet to subside. Clinton's decision in 1997 to bar new US investments in Myanmar has also been effective. The sanctions drive-as well as consumer boycotts directed at firms that deal with Yangon-have largely succeeded at pushing companies to end their work in Myanmar.

ARCO, which had invested in two gas projects that provided more than $55 million to the country, did not renew its remaining exploration lease in the Gulf of Martaban. In addition, Texaco pulled out of its onshore acreage, reportedly due to sanctions pressure.

Onshore E&D struggling

Onshore, activities have been difficult, although a sizeable amount of acreage has been leased in the country since the late 1980s (Fig. 3). Smaller players with limited cash continue to stay involved in the country, but efforts at success have been disappointing.

One of Myanmar's onshore gas fields, Aphyauk gas field in the Taikkyi area in the central part of the country, is operated by MOGE and has been supplying natural gas to Yangon, Pyay, and other areas in the southern part of the country for power generation and industrial use.

Meanwhile, a pipeline has also been laid to bring natural gas from another newly developed onshore oil field, Kyaukkhwet, to Kyuanchaung and Chauk areas in Myanmar's Magway Province.

The following foreign companies remain active onshore:

• Myanmar Petroleum Resources Ltd., Yangon, has taken complete control of Mann field following the departure of joint-venture partner Baker Hughes.
• Astra Petro Nusa of Indonesia operates Chauk and Yemangyaung fields in central Myanmar (Yemangyaung is the oldest in the country and has been producing since 1887). Astra Petro Nusa is in the midst of shooting 2D seismic and has talked about future exploration drilling but has no firm plans.
• Mercantile Southeast Asia Ltd. operates Myanaung field in southern Myanmar, 200 miles from Yangon and has plans to drill one shallow well.
• Focus Energy Ltd., formerly Asia Pacific Energy Ltd., operates Canni field in central Myanmar. The company has completed some remedial drilling but plans no new wells.
• A consortium led by the UK's Westburne Oil Ltd. operates in the Yenama region of central Myanmar. The consortium includes Westburne, the UK's A&T Exploration Co. Ltd., and Israel's Capital Investment Development Corp. This group is considering drilling a shallow well with a MOGE rig.
• PT Expan Sumatra Oil Co. of Indonesia operates blocks in the Ohndwe, Kyaukkyi-Mindon, and Padaukpin-Monnatkon areas. The company has plans to drill two wells, and was expected to spud the first one in the second quarter.

Exploration and development drilling in all but Mann field has been spotty, at best. The Myanmese have been trying to get the onshore E&D firms to spend money, but scant activity has been forthcoming. A large part of the difficulty has been dealing with MOGE, say foreign industry executives here. The state company has little experience and even less respect in senior government circles, they say. Simply put, MOGE does not possess the clout to honor the terms of contracts, particularly when results are less than anticipated, they contend.

"MOGE is sad to deal with," says one executive of an onshore operating firm. "They are simply not trusted by the government. There is no sign of any technology. They are a state company that cannot do anything on their own. None of their staff will speak up and say anything significant, no one has authority, everything has to go for approval to the Petroleum Ministry or the Finance Ministry."

Baker Hughes saga

The recent story of onshore development in Myanmar has been dominated by the misadventures of Baker Hughes with Mann field.

According to those involved, Baker Hughes had a distressing experience operating in the country, and results from its production compensation contract with MOGE have been disappointing. The company won an agreement in October 1996 to implement efforts to enhance production at the aging field, wherein it was to be paid for production that exceeded an agreed-upon level based on the field's projected decline profile. The initial consortium, which consisted of Baker Hughes, Irrawaddy Resources, Keppel Group, Nissho Iwai Corp., and Mynt Associates, broke up after it became obvious that initial output projections were far too optimistic and that MOGE payments were going to be seriously delayed.

Production exceeding the decline profile has been far less than anticipated. Original projections were 3,000-6,000 b/d above the originally projected output of 3,050-3,100 b/d and a limited amount of gas. Currently the field is producing only 740 b/d above the decline profile, confirmed Baker Hughes executives (OGJ, Mar. 20, 2000, p. 80).

This disappointment resulted in the failure of MOGE to pay for any of the oil produced until the week of Nov. 29, 1999. According to industry sources, MOGE has very limited power and is not permitted to pay out money without the express permission of the Finance Ministry.

Early this year, Baker Hughes teamed up with Myanmar Petroleum Resources and signed an additional contract on the same block. To date, three wells have been spudded: Nos. 645, 646, and 647, at a total cost of $53 million. Baker Hughes's recent decision to pull out of the development has nothing to do with the disappointment of Mann field's performance. According to company officials, the decision was made at the board level to withdraw from all activities that deviated from its core oil field services businesses.

"We started the Mann field project as a production enhancement exercise and went about deepening sidetracks to existing production wells," said a former Baker Hughes executive. "Unfortunately, it soon became obvious that we were never going to get the increase in output that we had initially projected. As of now, Mann field production is between 3,050 and 3,100 b/d, and incremental production is 740 b/d and will be sustained for a while. But this is a disappointment, and we had projected doubling output when we signed the first agreement.

"Partially as a result of this disappointment, we had a lot of difficulty getting money out of MOGE," he said. "The fact is, MOGE essentially has very little power, particularly when it comes to paying foreign companies. It is the Finance Minister who makes the ultimate decision, and we have had to negotiate directly with him as well as his team of advisers.

"When we had difficulty being paid and were going through the disappointment of the lower-than-anticipated enhancement output, we began reducing expenses dramatically. We had originally budgeted for $6 million/year in overhead and $15-20 million in revenue. Then we had cut expatriate staff to just two and increased local manpower significantly to save costs."

Offshore gas woes

While results offshore have been better in terms of development, the difficulties finding markets for the offshore gas and getting the terms honored when agreed to have been equally frustrating.

"Better late than never" is the emerging attitude in the Myanmese gas sector after the announcement that the Petroleum Authority of Thailand (PTT) resolved a long-running dispute with the Yadana consortium for payment of all gas not taken from the pipeline. In addition to the $50.47 million settlement for gas not taken last year, Myanmar now looks set to begin receiving regular revenue from gas sales for the first time in its history.

After 2 years of delay, Thailand's Ratchaburi power station soon may begin taking Yadana gas. A dispute this spring arose between PTT and Electricity Generating Authority of Thailand (EGAT), its chief customer for Yadana gas, over sharing of take-or-pay costs (OGJ Online, May 2, 2000). Because of repeated construction delays, the Ratchaburi plant is now prepared to take only about 150 MMcfd of Yadana gas, although PTT is committed to purchasing 525 MMcfd of Yadana gas to feed the plant. The dispute centered on whether or not EGAT would be willing to share part of the take-or-pay costs the power plant construction delays have incurred.

According to press reports from Bangkok, a June 15 agreement determined that five parties involved in the dispute-besides PTT and EGAT, there are also the Finance Ministry and the Independent Power Producers and Small Power Producers groups-would each shoulder part of the take-or-pay burden. Officials says the apportionment of those costs have not been decided yet, but a final decision is expected soon-perhaps this month.

The Yadana agreement also stipulates that PTT agrees to accept gas without enrichment until December 2006. The Yadana gas contains 712 btu of heating value, while the original contract called for 715 btu.

PTT did not reveal when and how much it will pay for Yadana gas: "All parties are confident that this agreement is the outcome of extremely good cooperation between the buyer and seller," PTT said in a statement. "It protects the interest of all the parties and strengthens their good relations for the coming 30 years [the duration of the sales agreement]."

While a far cry from the highly publicized expectations of 1998, when Myanmar was expected to join the ranks of Southeast Asian natural gas exporters such as Malaysia, Indonesia, and Brunei, the sales should still earn the country $2.9 billion over the life of the field. Output of 550 MMcfd will also nearly triple the country's currently modest output of 174 MMcfd, which it produces from various small fields.

A second gas development, Premier's Yetagun field, 270 km west of Thailand in the Gulf of Martaban, is scheduled to begin supplying 200 MMcfd to Thailand in 2000 under a 30-year arrangement between PTT and the Yetagun consortium. The Yetagun group consists of Premier, MOGE, PTTEP, Petronas Carigali, and Nippon Oil Corp. Earnings for Myanmar from Yetagun should average $823 million/year. However, like Yadana, the Yetagun project is almost certainly due to be significantly delayed.

PTT announced last December that it was seeking to postpone the delivery of natural gas from second phase of its contract with the Yetagun group. In the first phase, PTT will accept 200 MMcfd as of July 1, 2000, rising to 260 MMcfd by Aug. 1. In the second phase, delivery is set to increase to 400 MMcfd in 2003. PTT is seeking to delay taking the additional 140 MMcfd for at least 2 more years or until 2005. Discussions between PTT and Premier Oil are under way.

The gas revenues will dramatically increase Myanmar's foreign exchange earnings. The country's major foreign exchange revenue has traditionally been rice, beans, and teak. Its foreign exchange reserves are estimated at a paltry $150-300 million.

Constructing the Yadana line has been almost as problematic as getting the Ratchaburi power plant on stream and is a classic illustration of the difficulties that can occur in developing countries. For starters, the project was developed despite US sanctions. In the past several years, Coca Cola and Texaco Inc. have withdrawn from the country, and Unocal is the only remaining US company with significant investment.

Outlook

It would be a gross mistake to believe the new gas revenue represents the thin end of the wedge of Myanmar gas potential. Analysts caution that the two offshore projects have effectively cornered the regional market for Myanmar natural gas. Due to the recent economic slump in the region, additional discoveries and subsequent development would have difficulty finding markets.

Which is not to say that Myanmar does not remain highly prospective. The Gulf of Martaban is thought to be replete with commercial quantities of gas, and certain onshore areas also have good potential. But the only likely buyer of future Myanmese gas production is Thailand, and it has scant appetite to purchase any more than Yadana and Yetagun.

It is also unlikely that much further activity will take place off Myanmar in the medium term: "There is a lot of potential, but people are reluctant to explore the offshore areas, because they're gas-prone," one oil company executive said. "The two big players have the market sewn up."

Although exploration results have been disheartening since the Yadana and Yetagun strikes, Myanmar hopes to stimulate interest in some remaining unawarded offshore and onshore blocks. Many of these are located outside of traditional exploration areas. MOGE estimates that it will need $5 billion in foreign investment in its oil sector to fully develop its petroleum resources. Due to the sanctions and the country's poor administrative reputation, anything approaching this amount is unlikely to be forthcoming.

"They tend to forget that it is a competitive world out there," said one negotiator for a Western oil company operating in Myanmar in reference to the government. "It's like the old adage: 'Don't open the stable door after the horse is dead.' If there is not a lot of positive movement soon, more and more companies will pull out, and they will have to do some real convincing to bring them back again."