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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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How The Coup In Myanmar Will Impact Energy Markets

Myanmar’s military coup has become Asia’s most significant political development in 2021 so far. In many ways, the coup brought back memories of times long gone – Aung San Suu Kyi, who has marked another landslide victory in the November 2020 general election, was swiftly detained by the military allegedly for the possession of illegally imported walkie-talkies. The Aung San-allied President Win Myint was ousted under the pretext of him breaching the country’s coronavirus laws during the pre-election campaign meetings. Briefly put, Myanmar’s brief self-democratizing drive was defeated after a little more than 5 years of non-military rule. Although one would rarely see Myanmar on the list of major oil and gas producers, the Southeast Asian plays an instrumental role for China’s energy security.

The energy community’s automatic reaction to the happenings of the past week was to assess how dangerous the military’s return would turn out to be. Considering the Tatmadaw’s (Myanmar’s military) rhetoric of holding a “fair” election once the state of emergence is over indicates a strong willingness on the army’s side not to repeat its mistakes of the 2010s and disallow any coexistence with civil leaders. The United Kingdom, formerly the colonial ruler of then-Burma, has tried to have the UN Security Council condemn Myanmar’s backsliding into a military state but was quickly rebuffed by China and Russia. China’s peevishness reveals a profound interest in keeping Myanmar within its circle of allies, especially in terms of its importance for China’s crude and gas supply.

China operates an oil (capacity of 240kbpd) and gas pipeline (12 BCm per year), running in parallel all the way through Myanmar and reaching their final destination in Kunming, capital of the landlocked Yunnan province. Both pipelines are operated by CNPC, sharing the same purpose of existence – to create an alternative hydrocarbon conduit that would avoid the Malacca Strait. Having agreed on their construction in 2008, the $1.5 billion pipelines were commissioned in 2013 and 2014, respectively. To boost its economic claim to the area of the Bay of Bengal, China has pledged to invest $7.3 billion into the construction of a deepwater seaport and $2.7 billion into an industrial hub in the area adjoining the port of Kyaukpyu. Add to this a Myanmar-China railway line running from the same town of Kyaukpyu and one gets a fairly comprehensive picture on how serious China is about consolidating its interests in Myanmar. Related: Shell’s Profits Plunge 87% In 2020

Many Western majors were already pressurized by domestic audiences in the 2015-2020 period to quit Myanmar on the back of its treatment of the Rohingya minority. For instance, when Statoil (now Equinor) substantiated its decision to leave Myanmar’s offshore in late 2017, the Rohingya crisis was brought up within the same sentence with unfavorable geology. The above said notwithstanding, there remain many international majors present in Myanmar, more often than not having licenses from the 2014 offshore licensing round. Royal Dutch Shell holds a non-operating stake in the A-7 offshore block and its recently-purchased subsidiary BG Group participates in another four blocks (2 as operators). Total has been active in Myanmar from 1992, i.e. well back in the years of the military junta, and amongst others operates the country’s largest gas field, Yadana.

The thing is that most Western majors by now have a comprehensive Human Rights Code that defines and specifies its policies vis-à-vis various rights infringements. These are almost universally steeped in UN Guiding Principles on Business and Human Rights, therefore cannot be altered that easily if one is to turn a blind eye to a specific set of encroachments. Availing themselves of the Suu Kyi-led political thaw, firms like Total and ENI organized human rights training sessions with the participation of Burmese authorities. With the military junta back in power, majors that remained in Myanmar will have an extremely hard time reconciling their internal regulations on ethics and human rights with the actual reality, creating a painful reputational liability upon which they might be pressurized both domestically and internationally.

Myanmar will inevitably need increasing amounts of gas to meet its surging energy demand. Naypyidaw has ranked among the steepest increases in total energy supply over the 2010s, between 2015 and 2020 electricity demand in Myanmar rose an average 15% per year, roughly double the rate of the nation’s GDP growth. Although its abundant hydropower resources were able to satiate most of the demand increase (covering some 60% of total electricity generation), Myanmar is nearing the point of saturation beyond which imports will become inevitable to keep the economy going. Partially this is due to the tangible pushback on further hydro dam construction plans (as illustrated by the Myitsone Dam’s suspension) as the Burmese public remains leery of their environmental impact. Related: How High Will Oil Prices Go This Year?

ASEAN’s Economic Research Institute estimates that Myanmar’s current energy import dependency rate of 16% will climb to 49% by 2040. Taking into account the relatively weak international stature of the national NOC, Myanma Oil and Gas Enterprise (MOGE), supplying energy to Myanmar will become an ever-appetizing business endeavor. Coal is assumed to rise in significance – Myanmar today operates only one coal-fired plant, however its 2015 Energy Master Plan stipulated a tenfold increase in coal’s total energy mix share (to 20%) by 2030. China is a close political ally that happens to be the world’s number one coal producer so the synergies there are almost guaranteed. The populace at large remains staunchly anti-coal, however the return of overt military rule would most probably result in another clamping down on dissent.

What next, you might ask? First, there is an increased risk in international majors leaving Myanmar as the prospect of having a military junta running the country again might trigger reputational damage. China, along with Thailand, can be considered the most active participant in Myanmar’s offshore acreage and with the potential departure of some majors its share might only increase. Second, the stronger political ties will blaze a path for energy cooperation beyond oil and gas, coal in particular might be of interest. Third, on the downstream front Myanmar currently operates only one (outdated, built in 1954) refinery in Magway and suffers from chronic fuel dependence – it would be quite easy to imagine Chinese firms taking the act of good will to build a new refinery to complement its already hefty asset portfolio there.

By Viktor Katona for Oilprice.com

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