Myanmar’s draft oil and gas bill jeopardises next bidding round

NAY PYI TAW, Oct 15, 2019, The Myanmar Times. Uncertainty and confusion over Myanmar’s proposed oil and gas law risk alienating existing investors and could undermine the next crucial bidding round, according to companies and experts in the sector, reported The Myanmar Times.

Time is running out for the Ministry of Electricity and Energy to launch the round by the end of the year, having initially planned to start the process in the first half of 2019.

The government published the revised text of the draft oil and gas law for public consultation in August with the aim of reforming the legal framework and replacing the 1957 petroleum resources act. But the association representing oil and gas investors has highlighted its objections to parliament in a letter, of which The Myanmar Times has seen extracts.

Gas produced offshore in Myanmar is delivered to the domestic market and exported to Thailand and China, forming a major source of government revenues. In 2017-18, natural gas exports accounted for US$3.1 billion, or around 50 percent of total export revenues.

But 2019 is a far cry from the heydays of 2013-2014, when in the space of 12 months the country enjoyed a rapid increase in foreign direct investment with the award of 16 onshore and 20 offshore blocks. There has been no international bidding under Daw Aung San Suu Kyi’s administration.

State-owned Myanma Oil and Gas Enterprise (MOGE), the de facto regulator, has pledged to go ahead with the release of 15 offshore and 18 onshore blocks to international bidders this year, leaving open the possibility of a bidding round without a new law. At present, there are 38 offshore and 27 onshore joint ventures in Myanmar, which are structured as production sharing contracts (PSCs).

The Myanmar Times understands that the ministry wants to have the new law in place for the new bid round but, given the need to revise the bill, such a timeline does not appear feasible.

“Myanmar’s current PSC model with high taxing nature was created when oil prices were high. Now – in a low oil price environment – these fiscal terms are no longer favourable for investors,” said Ma Thel Sandy Tun, a Yangon-based oil and gas analyst.

At the time of the last bidding round, prices were US$90-100 and now they are around $60, so Myanmar is unlikely to attract many bidders unless the commercial terms are significantly changed in favour of companies.

Global oil prices remain volatile with forecasts for weaker demand and continued oversupply despite disruptions in the Gulf.

Regarding the new bidding round, Ma Thel Sandy Tun said more incentives were needed “in light of the wider current industry context” to attract investors to commit to offshore oil and gas exploration, especially in more costly and riskier deep and ultra-deep waters.

The gas sector attracted significant foreign direct investment under U Thein Sein’s government, accounting for about 40pc of the total US$8 billion in 2014-15 in FDI commitments.

The legislation was meant to give the ministry regulatory authority over MOGE, said an industry expert involved in the consultation. “It was supposed to take a broad-brush approach in bringing the approval of contracts and regulatory powers under the purview of the ministry, which in theory makes sense from a governance and regulatory perspective.” The problem is that the ministry “does not appear to truly understand the commercial requirements of the oil and gas industry in Myanmar.”

Given that the 2013-14 bidding round was successful without a law, observers argue that the proposed legislation is not a prerequisite for another bidding round.

The draft text – as seen by The Myanmar Times – contains the possibility of changes to existing PSCs and the risk of companies losing title between exploration outcome and agreement on production plans.

The bill also preserves the conflicting roles of the MOGE, which acts as both a regulator and commercial partner. The state firm is given a co-secretary role on the committee and empowered to “issue any necessary orders and directives,” which puts it clearly in the role of regulator, against the government’s Myanmar Sustainable Development Plan.

The relationship between the Petroleum Activities Supervision Central Committee, the ministry and MOGE and their respective authorities are not clearly defined under the law. Governance experts have long called on Myanmar to clarify the roles of different government bodies and the state-owned enterprise.

There is also no clarity over how the bill will interact with the 2012 Environmental Conservation Law and other existing regulations.

“If the draft law is promulgated in its current form it is likely to significantly dampen investor interest in the future oil and gas blocks tender. The uncertainty caused by such a new law will outweigh any potential benefit it may have. This is not to say that no investors will enter, but I would expect less excitement around the tender,” said the industry expert.

“Hundreds of millions of dollars are involved in these PSCs. Each well costs several million dollars to drill and you have to drill several wells during the exploration phase. This involves massive capital expenditure and extremely high risk. It is extremely worrying that you can spend all the money and the government can just say ‘thanks for all your hard work, but we’re not granting you a permit for production’,” he went on.

In addition to the confusion, the draft law is a missed opportunity to reform the industry and improve its governance and transparency. Daw Aung San Suu Kyi in 2012 urged foreign governments not to allow their companies to form joint ventures with the MOGE – which she criticised as “lacks both transparency and accountability” – until the state firm improved its business practices.

The board of the Extractive Industries Transparency Initiative (EITI) – a global governance initiative which Myanmar joined in 2014 – decided to make contract disclosure a mandatory requirement for all implementing countries from 2021 onwards. The law does not include provisions addressing the issue of transparency.

It also fails to tackle the sensitive issue of sharing benefits from oil and gas exploitation with the states and regions. Extractive industries in Myanmar are closely intertwined with ethnic conflicts. Demands by ethnic minority groups for more control over and benefits from natural resources located in their areas have been a key driver of conflict.

Loss of title during a negotiation is expected to be unacceptable to investors and their shareholders. – The Myanmar Oil and Gas Producers and Operators Club

The Myanmar Oil and Gas Producers and Operators Club has expressed serious concerns over the bill to the Parliament Joint Bills Committee, according to another source involved in the discussions, who declined to be identified due to the sensitivity of the matter.

The industry body, which represents companies in the sector, asked for the law to exempt existing contracts, for more clarification on the role of different regulatory bodies and clarity over terms and timeframes, according to a document seen by The Myanmar Times.

“Loss of title during a negotiation is expected to be unacceptable to investors and their shareholders,” the group said. It recommended that “only a single permit is required which will give the permit holder the right to enter into a negotiated production sharing contract with MOGE.”

The Norwegian government has offered support to Myanmar to conduct a strategic environmental assessment for offshore gas, which will remain the most important segment in Myanmar’s petroleum sector.

Such an assessment would set a framework around which blocks are tendered and the environmental regulations under which they should operate. This could reduce costs and delays for Myanmar companies in conducting individual Initial Environmental Evaluations or Environmental Impact Assessments for seismic exploration.

The ministry has not responded to requests for comment. It is currently under investigation by the Anti-Corruption Commission, which has yet to officially conclude. Two senior officials in the ministry’s Hydropower Implementation Department were arrested last month.

Tags: Myanmar