New investment in Myanmar’s oil and gas sector has been prohibited by US- and EU-imposed sanctions since 1997. Sanctions were eased in early 2012, and the country is now being courted by major players eager to gain access to its potentially lucrative offshore acreage.

Myanmar has historically been a relatively minor oil and gas province, producing oil from small onshore fields. However, following a series of large offshore gas discoveries, production jumped to 1.2 MMcf/d in the early 2000s and will increase beyond 2 Bcf/d by 2015 as new export projects are commissioned.

Much interest in a new licensing round

Myanmar’s first offshore licensing round in more than 20 years is expected in the second half of 2013, having been delayed from late 2012. It could incorporate as many as 30 offshore blocks, with many extending into deep water. Wood Mackenzie analysts expect the licensing round to be keenly contested, with many major oil companies having already indicated serious interest in gaining access to one of the region’s last relatively unexplored provinces.

Given this, it will be interesting to see what criteria the government uses to pick its winners. A diversified corporate landscape is certainly one of its aims. It is therefore likely that companies will be limited to bidding on or being awarded a certain number of blocks similar to the maximum limit of three bids imposed in recent onshore bidding rounds.

New fiscal terms for the offshore round include an increase in royalties on gross revenues from 10% to 12.5%. State participation will be up to 20% in the event of a commercial discovery and up to 25% if the discovered gas volumes are greater than 5 Tcf. But the industry regulator needs to be mindful that developments in deep and ultra-deep water are considerably more expensive than the shallow-water areas that have been developed to date. Fiscal terms will need to reflect this.

Myanmar’s corporate landscape over the previous decade has been largely dominated by Asian national or state-linked oil companies that were unaffected by the sanctions hampering Western investment. This will now change quickly, and some firms already have made their opening moves.

First out of the blocks were Total and Nippon Oil, which already have operations in-country. In September 2012 they picked up 40% and 15% interests, respectively, in the PTTEP-operated deepwater Block M11 in the Martaban basin. This was followed by new entrant Woodside, which acquired a 40% stake in the Daewoo-operated AD7 in the Rakhine basin. The block covers shallow and deep waters adjacent to the Myanmar-Bangladesh maritime border. Woodside then acquired a 50% nonoperated stake in Myanmar Petroleum Resources’ (MPRL) AD6 Block.

Onshore Myanmar acreage has attracted less interest from major international companies due to its smaller prospect sizes and more complex geology. Drilling also has indicated reservoirs to be of poor quality or tight. This, combined with modest reserves expectations and a lack of infrastructure, makes field development challenging and economically marginal.

That said, the Myanmar economy and its gas demand are now expected to grow rapidly. There may well be niche opportunities for nimble onshore operators to create value from small gas discoveries that are close to new industrial developments or growing urban areas.

Export opportunities

One of the key reasons that the Myanmar upstream appears attractive is the opportunity to export gas through existing infrastructure to its neighbors Thailand and China.

There are currently two large offshore gas fields onstream: Yadana and Yetagun. In addition, two further fields – Zawtika and Shwe – are under development, with first gas expected in the late 2013/early 2014 timeframe.

The Yadana field transports gas to the Thai border via a 409-km (247-mile) trunk line. Current capacity is 700 MMcf/d with the potential to raise this to 1 Bcf/d if additional compression is installed. Another 270-km (164-mile), 620-MMcf/d pipeline meets the Yadana pipeline at the Thai border from the Yetagun field. Thai-state company PTT then pipes the Yetagun and Yadana border gas to Ratchaburi southwest of Bangkok via a 1.25 Bcf/d pipeline (which could be increased to 1.9 Bcf/d).

Wood Mackenzie estimates an average Thai border price around US $12/Mcf for gas exported in 2013, including tariffs.

With infrastructure in place, partners in any new discovery in the south would likely aim to send gas into Thai-land. The gas would compete with LNG imports and other yet-to-find (YTF) volumes in Thailand and/or the Thai-land-Cambodia Overlapping Claims Area.

A potentially larger market is China. First gas from the offshore Block A1 and Block A3 fields (also known as the Shwe complex) is expected in mid-2013 as part of a pioneering development, with gas transported from Myanmar’s coast via an 803-km (489-mile), CNPC-operated onshore pipeline to Yunnan and Guizhou provinces in southwestern China. The onshore pipeline will have a capacity of around 1.1 Bcf/d, and with the Shwe project contracted to supply 400 MMcf/d, there is ample spare capacity. This offers future discoveries a potentially ready route to market. Wood Mackenzie estimates a 2013 average China border price of approximately $10.50/Mcf, including tariffs.

Domestic market obligations require 20% of total production volumes to be placed into the local market and sold at 90% of prevailing export prices. One potential issue is how fast domestic gas requirements will grow. Rapid development is expected throughout the country, but infrastructure and facilities often are in a state of disrepair, requiring considerable time and investment before they can accommodate additional volumes. Wood Mackenzie estimates that around 250 MMcf/d is currently supplied into the domestic market and that local demand is unlikely to exceed 400 MMcf/d in the short term. That said, government figures forecast an increasing domestic supply shortfall that could need to be satisfied before any further exports can be considered.

Substantial investment in onshore infrastructure is required, particularly gas pipeline networks and power transmission lines, if the country’s forecast economic growth is to be realized. Gas now accounts for more than 90% of Myanmar’s hydrocarbon production and is expected to exceed 2.1 Bcf/d by 2015.

The balancing act

Myanmar’s unlicensed deepwater acreage is expected to hold significant gas potential. Gas reserves could significantly exceed growth in domestic demand, and access o neighboring export markets could provide attractive commercialization options. The prices for gas sold at the Chinese or Thai borders certainly compare favorably with regional markets.

The government needs to balance domestic demand with revenues generated from increased exports. Creating a robust, transparent regulatory environment is critical to encourage investment from international companies. Establishing a fiscal structure that promotes exploration and development is critical for progress. A rigorous but flexible approval process is needed to promote projects efficiently through to production. Local content provisions will be an important part of this, but targets need to be achievable to avoid constraining the pace of growth.

Myanmar faces the dawn of a new era of economic and social renewal. The oil and gas industry will provide much of the revenue to shape the future.