Energy dilemma

Myanmar needs oil and gas revenue to spur its economy and new discoveries to feed its growing energy appetite, but low oil prices could bring cutbacks in exploration.

Myanmar is bracing for a rougher ride after a few years of giddy economic expansion as foreign direct investment slows amid falling oil prices and global uncertainty.

The oil and gas industry, which accounts for more than a third of all foreign direct investment in Myanmar, is experiencing a slowdown worldwide as low prices make many new exploration ventures unviable. Oil prices that ranged between US$80 and $100 per barrel two years ago have fallen to just over $30 now, prompting companies to reconsider their investment plans.

The slowdown comes at a critical time for Myanmar. Not only does the country count on oil and gas revenue to fuel its economy, but also it needs new energy discoveries to feed the fast-rising demand of its own population. The issue is shaping up as one of the biggest challenges for the new government of Aung San Suu Kyi, but it has yet to offer many clues about its economic or energy policies.

The outgoing government has forecast 9.3% expansion in Myanmar’s gross domestic product (GDP) in the 2015-16 fiscal year that ends on March 31. But falling oil and gas revenue could put that target in jeopardy.

Oil and gas companies worldwide have responded to falling prices by scaling back or delaying hundreds of projects and cutting capital expenditure (capex) budgets by hundreds of billions of dollars over the past 12 months or so. The first candidates for cuts are capital-intensive projects such as deep-water exploration, which has been one of Myanmar’s strong suits.

Moody’s Investors Services earlier this year forecast that players in the upstream oil and gas business would cut their capital spending by a further 20-25% in 2016, following similar reductions last year. However, sharp cutbacks in new exploration could lead to problems meeting energy needs in the future, especially for rapidly developing economies such as Myanmar.

Wood Mackenzie, a research house specialising in the energy and resources sector, recently reported that global oil and gas companies had delayed $380 billion worth of investment in exploration and production (E&P) projects, more than half of which are deep-water projects, the hardest hit among the deferrals.

According to Wood Mackenzie, the break-even cost for deep-water blocks is in the range of $70 to $85 per barrel depending on where they are located. Consequently, it is crystal clear why it is unreasonable to pour money into deep-sea assets right now, the firm added.

This is bad news for companies with deep-water assets, a fact that was acknowledged earlier this year by Somporn Vongvuthipornchai, the president and CEO of Thailand-based PTT Exploration and Production Plc (PTTEP). He said his company would delay investments in some projects that were not justified given current global prices; Myanmar M3 and other deep-water projects were mentioned.

Last year PTTEP’s capex was around 30% lower than the original plan. It expects to reduce investment this year by more than 10% from the earlier announced total for the year of $3.44 billion. The amount includes $2.09 billion in capex and $1.35 billion in operating expenditure.

In addition to the deep-water projects it already operates, PTTEP has four new deep-water exploration ventures in Myanmar and Brazil. Those in Myanmar are the MD-7 and MD-8 blocks, while in Brazil it is exploring the Brazil BM-ES-23 and Barreirinhas AP1 fields.

The Thai company was one of the pioneers in Myanmar’s energy sector with investments starting two decades ago. It signed a contract with the Myanmar government to develop the MD-7 and MD-8 blocks in May 2013. As of the second quarter of 2015, the environmental, safety and health impact assessment (EHIA) study was in the process of being approved, while 3D seismic procurement was in progress.

Insiders say that the cost per barrel of oil equivalent produced in 2015 for PTTEP stood at around $38. Given current global prices, every barrel produced from these deep-sea projects would be a money-losing proposition.

U Than Tun, offshore director at Myanma Oil and Gas Enterprise, a state agency overseeing oil and gas investment in Myanmar, said last year that PTTEP asked for an extension to evaluate petroleum potential in blocks M-11, MD-7 and MD-8.

Although most of the E&P businesses contacted by Asia Focus have said that they were continuing with their plans, they have also hinted that some projects could be “reviewed”. The extent of the slowdown is confirmed by a logistics provider.

Chanin Yensudchai, director of MM Logistics Co Ltd (MML), said activity in Myanmar had slowed in line with the plunge in global oil prices. “Everyone has been pretty concerned about the cost,” he said.

Some projects have been delayed but he doesn’t think the delays will last too long. “Those projects have a commitment [with the government] for a certain budget to be invested over a certain period of time,” he told Asia Focus.

At the same time, the cost of doing business has gone down significantly as oil prices have fallen.

MML provides logistics services including manpower, machinery and food for companies in the oil and gas sector. Some of its clients include PTTEP, Petronas of Malaysia, Total of France and Daewoo of South Korea.

Dr Siri Jirapongphan, executive director of the Petroleum Institute of Thailand, said some E&P companies have already halted operations in the Gulf of Thailand. “Globally, operators of marginal fields, which require new investment every two years to maintain production, have already cut back their investment because it is not worth committing money right now,” he said.

Pannalin Mahawongtikul, executive vice-president for finance and accounting at PTTEP, said that so far its three operations in Myanmar were proceeding as planned and the SET-listed company had yet to postpone any activity there.

“The company will focus on optimising development design, bringing down costs and, in the process, improving project economics,” she said.

Ms Pannalin said that for the E&P business in general, cost per barrel varies by type of resources and location. For example, oil sands and deep-water exploration have a high cost, while some regions, most notably onshore fields in the Middle East, have very low costs.

“For PTTEP, our core operations in Thailand and Southeast Asia, which contribute 93% of the company’s total sales volume, are in relatively low-cost areas, resulting in an overall cash cost per unit of $15.75 and a unit cost of $38.88 [per barrel] for 2015,” she said.

POWER THE PRIORITY

For Myanmar, which has awarded a number of E&P concessions for both shallow-water and deep-water projects, making sure that these projects keep moving forward is a matter of some urgency.

The country’s economy has been growing quickly since many Western nations lifted sanctions in response to the start of democratic reforms in 2010. But inadequate electricity supply remains a huge constraint on economic development and a major deterrent where investors are concerned. Without new supplies to feed electricity plants, the prospects for improvement are poor.

Myanmar in 2013 and 2014 awarded concessions for 36 onshore, shallow-water and deep-water oil and gas blocks. UK-based BG and Shell, Statoil of Norway and Total of France are among the companies that won concessions for deep-water blocks, and they have cut their investment budgets as well as jobs in order to survive the price downturn.

For electricity generation, Myanmar relies mainly on natural gas from four offshore projects: Yadana, which produces 700 million standard cubic feet per day (MMSCFD); Yetagun (300 million), Shwe (360 million) and Zawtika (300 million).

However, most of the output from these fields is supplied to Thailand and China under long-term contracts. For example, Zawtika produces 300 MMSCFD of gas, of which 240 million is transported to Thailand, while the supply from Yadana to Thailand is 560 MMSCFD.

The problem for Myanmar is that the immediate outlook for new discoveries is not very promising.

In its management discussion and analysis of its 2015 operating results, PTTEP said that appraisal drilling at its M3 field in the Gulf of Moattama showed amounts of hydrocarbons that were not commercially viable in four out of five wells. As well, it said, drilling of four exploration wells at the PSC-G and EP-2 sites resulted in no commercially viable resources.

Australia-based Woodside Petroleum did report some success in its Block A-6 in the Rakhine basin and is planning 2D and 3D seismic surveys as a follow-up. Woodside together with BG Group of Britain have announced plans for $1 billion of investment in the Rakhine fields.

Royal Dutch Shell, which acquired rival BG Group in early February to become the world’s second largest non-state oil company after Exxon Mobil, has not yet announced any delays or cancellations in Myanmar, according to a company spokesperson. Since October it has been conducting seismic surveys at an offshore field in Myanmar.

In August last year, Shell also signed a joint development agreement (JDA) with Italian-Thai Development Plc (ITD) and LNG Plus International Co Ltd (LNGP) to cooperate on a proposed liquefied natural gas (LNG) receiving and regasification terminal in the Dawei Special Economic Zone.

But what if oil prices remain low for the long term? The US Energy Information Administration (EIA) estimates proved reserves of natural gas in Myanmar at 10 trillion cubic feet, ranking the country 37th in the world. The country is a net importer of liquid products but a net exporter of natural gas. Myanmar in 2014 produced 21,000 barrels per day of crude oil, while daily petroleum consumption is estimated at 29,000 barrels.

Based on the EIA forecast, Brent crude will average $38 per barrel this year and climb to $50 in 2017. Morgan Stanley sees oil at only $30 this year. Few industry forecasters see the price returning to $80 in the near term. Based on this forecast, deep-water exploration and some unconventional petroleum projects such as shale oil and gas or oil sands will face difficulty.

This means that Myanmar’s deep-sea projects could stall for a few years. As such, if Myanmar cannot speed up exploration activity for conventional onshore and shallow-water fields, or if new discoveries do not meet expectations, it could face more economic challenges.

 

Source: Bangkok Post

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