NAYPYITAW, Myanmar (Reuters) - In a few months, impoverished Myanmar plans to start pumping roughly $45 million worth of oil and gas a day from the Bay of Bengal to China by pipeline. The vital fuel for China's growing economy will bypass the Malacca Straits and U.S. ally Singapore.
It will mostly also bypass Myanmar.
Though rich in natural resources, Myanmar has little capacity to use them for its own development. For decades, its leaders valued gas for the hard currency it could earn rather than the economic development it could fuel. Today, only one in four of Myanmar's citizens have electricity.
Now, two years after sweeping aside six decades of self-imposed isolation in favor of democratic reforms, Myanmar's leaders face pressure to deliver tangible results, to appease voters ahead of 2015 elections and to quell sectarian unrest.
"We're now entering the third year of the reforms," said opposition leader and Nobel price laureate Aung San Suu Kyi, who used her appearance at the World Economic Forum's East Asia summit in Myanmar last week to underline her ambition to run for president. "What we really want to see now are results in the form of a real change in the lives of our people."
That, experts say, means giving Myanmar energy.
"Electricity is definitely number-one," said Hans Vriens, a Singapore-based consultant who advises companies on investing in Myanmar. "No electricity. No factories."
Making the switch from seller to consumer, however, could change Myanmar's attitude toward its resources in a way that may smack of "resource nationalism".
Multinationals vying to drill for gas and oil off Myanmar will have to negotiate with the nation as a customer instead of as a partner. And Myanmar's own customers, China and Thailand, already find themselves re-drawing old purchase agreements.
"We're renegotiating already," said Pailin Chuchottaworn, CEO of Thai oil company PTT PTT.BK, which imports $2 billion of gas a year from Myanmar. Last year, Myanmar approached PTT with a proposal to retain a fifth of the gas its sells Thailand.
"The problem is not the gas, it's the overall capacity."
Myanmar produces gas equivalent to 10.2 million tons of oil a year, according to a report prepared for the forum by Accenture and the Asian Development Bank (ADB). All but about 15 percent of it is sold to Thailand.
"Myanmar has a supply deficit," said Stephen P. Groff, ADB Vice-President for East Asia, Southeast Asia and the Pacific. "You've already set aside a fairly substantial amount of your resources for export."
Graphics on Myanmar's oil & gas industry
Output vs consumption: link.reuters.com/pym78t
Blocks and infrastructure: link.reuters.com/ben78t
Electricity grid: link.reuters.com/xum78t
IN THE DARK
As a result, Myanmar only counts on gas for about 12 percent of the power it generates. Most power comes instead from hydroelectric plants whose water supply varies so widely between the monsoon and dry season that they run at roughly 60 percent of generating capacity. Even in the commercial capital, Yangon, residents can only count on power for roughly a third of any given day, according to the report prepared for the forum.
A new offshore gas field near Myanmar's maritime border with Bangladesh will boost output by 75 percent. The gas is bound for China, earning state-owned Myanmar Oil and Gas Enterprise (MOGE) another $1.8 billion annually, the report estimates. Though at least a portion of the gas has been reserved for domestic use, Myanmar lacks the onshore infrastructure to make much use of it.
Where MOGE has been putting its money is a mystery, experts say. Myanmar's government budget accounting remains murky, the result of antiquated record-keeping and widespread corruption.
As part of its plan to streamline national energy policy, Myanmar in January put MOGE along with the Ministry of Energy and the 10 other government institutions involved in energy development under a single National Energy Management Committee.
Myanmar has also vowed to join the Extractive Industries Transparency Initiative (EITI), set up in 2002 by then UK Prime Minister Tony Blair to help reduce the potential for payments to developing nations to feed graft and conflict.
Following President Thein Sein's visit to the United States last month, Washington is working with the government to help it meet EITI's membership criteria. Myanmar and the United States are drafting a letter of intent to publish at the June 15 launch of the Group of Eight's new transparency initiative, according to Julia Nesheiwat, Deputy Assistant Secretary at the U.S. State Department's Office of the Bureau of Energy Resources.
"They could be in the EITI by December," Nesheiwat said.
That would coincide with the deadline for companies submitting bids to Myanmar's government to explore for oil and gas in 30 offshore blocks. Bids are due on June 14, with contracts due to be awarded by year-end.
Whatever they find and whenever they find it, they will end up negotiating with a government more determined to lavish most of these new resources on its citizenry, which already pays less for the electricity they do receive than it costs to produce.
Energy companies say returns will need to be commensurate with growing risks, particularly as violence between Buddhists and Muslims grows in western Rakhine state.
Rakhine stretches along roughly one-third of Myanmar's coastline, and China's pipelines already traverse the state. Foreign industry and government officials worry that adding more oil and gas to this landscape could increase the likelihood that it becomes a new battle ground for religious extremism.
Drilling for oil and gas produces few local jobs. So keeping Myanmar from becoming a new Nigeria, Sudan or Iraq will require making sure that local populations benefit from the investment.
"It's critical that the government makes investments in health, in education and in agricultural productivity," said Groff at the ADB.
But the new gas is still years away. For Myanmar to deliver power quickly to its rural masses, industry executives say, it must look to Laos and Cambodia where small generators produce power by burning farm byproducts such as rice husks or pig manure.
An even simpler step would be to fix Myanmar's existing infrastructure. Aging turbines and transmission losses have cut the nation's power output to just 44 percent of capacity.
"There are a lot of GE gas turbines running at half their efficiency," said Stuart Dean, head of General Electric Co.'s (GE.N) Southeast Asian operations. "By refurbishing them you could double capacity overnight." (Editing by Mark Bendeich)