China National Petroleum Corporation (CNPC) on June 4 announced the completion of its Sino-Myanmar gas pipeline project (Myanmar section), signaling that it is ready to enter trial production. The oil pipeline between the two countries is currently 94 percent complete.
As China’s fourth largest strategic energy import channel, the China-Myanmar Oil and Gas Pipeline Project, on which construction began in June, 2010, is expected to deliver 22 million tons of oil and 12 billion cubic meters of natural gas to China each year upon completion.
But Myanmar NGOs and local residents have been vehemently opposed to the project since construction work began. Protestors have demonstrated against the project in Kyaukpyu City and Made Island, the starting points of the pipelines.
Besides accusations of environmental damage caused by the project, Myanmar NGOs and local residents also registered their disquiet at being excluded from the benefits accruing from the China-funded energy project.
But behind these obstacles lies China’s misjudgment on Myanmar’s internal political changes. Chinese companies ignored grassroots opinion and failed to understand either the basic needs of the Myanmar people or social change in the country.
Chinese companies made massive investment in Myanmar between 2007 and 2008, at a time when the political situation in the country remained unstable. Chinese investors continued to increase their stake in Myanmar even after construction on the Myitsone Dam project was halted in September, 2011.
The pipeline has an investment budget of US$2.54 billion, in which US$1.5 billion is allocated to oil pipeline construction and the remainder to the gas pipeline. Scholars familiar with the project have, however put the estimated construction cost as high as US$5 billion, taking into account maintenance fees and the need to build supporting facilities in both Myanmar and China’s Yunnan Province.
The view of policy makers is that the pipeline will provide China with another major energy import channel, in addition to the current shipping route through the Strait of Malacca. The Sino-Myanmar pipeline is expected to ensure China’s future energy security while expanding its geopolitical influence, which was China’s original ambition for the project.
Despite this, doubts have been expressed about the potential profitability of the pipeline, especially regarding CNPC’s return on its investment and hopes that the project could boost the economies of southwestern China. In particular, there are concerns that the aim of lifting excessive reliance on Malacca will not be realized.
The prospects for this, however, do not look promising. Insufficient controllable resources will mean that the project cannot hit full operational status. Besides the huge investment, CNPC will also be faced with face high transit fees – US$13.6 million each year – to transport the fossil energy to China. Both issues pose serious challenges to the project’s profitability.
Political instability in Myanmar is yet another risk to add to the equation.
The protests of most local people in Myanmar protested against the China-sponsored project focused mainly on the fact that it impacted in their quality of life, especially during monsoon season.
Religious conflicts are another threat, with fighting between Buddhists and Muslims breaking out in June, 2012. Increasing tensions could result in construction supplies to Made Island being seriously affected.
Worse still, the pipeline has to go through the civil war-plagued Kachin State.
New situation in Myanmar
Myanmar has recently undertaken political and economic reforms, which portend uncertain times for Chinese projects in the country.
In November, 2011, Myanmar held multiparty elections in which the military government abdicated powers to a civilian administration. Former Burmese Prime Minister Thein Sein assumed the presidency and has continuously promoted democracy in the country, leading to the release Aung San Suu Kyi from house arrest and unrestricted accesses to Twitter, Facebook, YouTube and Voice of America, international websites which were originally banned in the country.
Thein Sein also ordered the cessation of the China-Myanmar Myitsone Dam project.
A Myanmar in transformation has made the country competitive in the new sphere of Asia-Pacific geopolitics. Both the United States and Japan are attempting in-depth interventions in Myanmar’s internal affairs.
On November 19, 2012, Barack Obama visited Myanmar, the first time in 50 years that a U.S. president had set foot in the country. Obama expressed the hope that Myanmar could consolidate its reform program while achieving compromise among the country’s different ethnic groups.
Japan followed the trend, with Prime Minister Shinzo Abe visiting Myanmar on May 24 of this year, shortly after he reassumed the country’s top government post. Abe noted that Myanmar’s cheap labor costs and expanding domestic demand could provide a new market for Japan’s recovering economy.
According to the People’s Daily newspaper, China wishes to see a stable Myanmar and supports stronger Western ties with Myanmar. The paper said that China does not fear being marginalized amid Myanmar’s improved external environment.
In the wake of halted construction on both the Myitsone Dam and Letpadaung Copper Mine, the China-Myanmar Oil and Gas Pipeline Project remained the only still-functioning China-sponsored project. However, the contract was inked when the Burmese military government was in power and was therefore likely to incur public objections.
The Malacca dilemma
Around four-fifths of China’s crude oil imports are shipped through the Strait of Malacca. The pipeline project was conceived in light of such problems as rampant piracy and the region’s complex geopolitical situation.
The Gulf of Aden, Strait of Hormuz and Strait of Malacca, channels through which tankers must pass to ship oil to China, are risky, said Wang Haiyun, a military and energy strategy expert. He said: “The U.S. navy guards all major ocean shipping routes. It can easily control China’s oil supply should the situation deteriorate.”
The China-Myanmar oil and gas pipeline could therefore serve more of China’s energy demands, reducing China’s dependence on the Strait of Malacca.
However there is even opposition to the project from within China. According to a researcher with the China University of Petroleum: “The Sino-Myanmar pipeline does little to relieve China’s dependence on Malacca, as the 22 million tons of oil imports are just a drop in the ocean compared with China’s large energy consumption.”
Meanwhile, an expert at China’s Energy Research Institute, National Development and Reform Commission, who wished to remain anonymous, warned that the pipeline may become a military target in the event of war.
CNPC’s China-Myanmar pipeline project is not yet delivering either adequate or controllable supplies of energy. Myanmar is to provide to China four billion cubic meters of natural gas each year, while two-thirds of the the designed 12 billion cubic meters’ capacity will have to rely on liquefied natural gas (LNG) imports.
If China plans to import LNG from the Middle East and sell it at the NDRC-supervised price, it is inevitable that CNPC will suffer huge losses.
In the worst case scenario, the lack of upstream supply will reduce the project to intermittent operation, or worse, to the status of a backup, emergency energy channel. “The pressure is too great for CNPC as an oil business,” said a researcher from China National Offshore Oil Corporation (CNOOC).
New trend, new ideas
The largest uncertainty with regard to the pipeline project’s profitability lies in Myanmar’s political changes. Although Myanmar’s authorities have not obstructed the project, concerns are mounting as a result of what happened to the Myitsone Dam and Letpadaung Copper Mine.
As well as misjudging grassroots sentiment in Myanmar, China’s failure to understand Myanmar’s political situation may also be rooted in its erroneous belief that it can venture wherever Western multinational companies cannot. “This is true in the short-term, but such confidence will not stand the test of time,” said a researcher surnamed Jiang from the Chinese Ministry of Commerce’s research center. “Myanmar is a case in point,” she said.
Chinese companies have not done enough in their overseas energy projects to safeguard the livelihood of local people and the West labels China’s activities in Africa neocolonial for this very reason.
As a result, it is important that Chinese companies adjust their mindset to counter these problems. Chinese enterprises investing in Myanmar must strive to achieve a new balance between political risk and economic profitability. They must also balance the various interests of the public, government and even opposition military forces.
“Since we have made the investment and the construction is incomplete, the Chinese companies in Myanmar have little room for maneuver. What they can do is only remedy in what we call crisis management,” Ms. Jiang said.