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China bets on Myanmar status quo for gas deals

Fri Sep 28, 2007 10:54am BST

By Tom Miles

HONG KONG (Reuters) - China struck an energy coup with a pipeline deal in Myanmar earlier this year but its cosy relationship with the ruling generals could come back to haunt it if the investment environment opens up, analysts say.

The military government of the impoverished southeast Asian state gets most of its export earnings from selling gas to Thailand and it has stepped up a drive to attract more foreign investment in the last three years.

But a week of unrest, in which at least 9 people died when troops broke up the biggest anti-government demonstrations in nearly 20 years, has raised the question of what might happen if the military government loses its grip on power.

"If the junta is overthrown -- and that's a very big if -- clearly that might have an impact on China because it has invested a lot over the last 20 years," said Ian Storey, a fellow at the Institute of Southeast Asian Studies in Singapore.

"We're well into the grounds of speculation but if a more pro-Western government came into power they might seek to limit China's involvement. China is an important ally of Burma and it won't want to lose that."

Myanmar is wedged between China and India, making it a small but juicy prize in a furious battle for energy between the world's two most populous nations. Its proven gas reserves amount to only 0.3 percent of the world's total, but a lack of exploration means the true figure could be much higher.

Chinese oil giant PetroChina appears to have won the last round by snatching a gas pipeline agreement from under India's nose. It has sweetened the deal by talking to Myanmar about running an oil pipeline along the same route.

Such a pipeline would ease the passage of Saudi crude bound for China by cutting out the congested Malacca Straits, but would be dependent on the goodwill of the regime in Myanmar.

While China has been quietly trying to build ties with democratic and ethnic groups in Myanmar in recent years, Beijing has remained a steady friend to the ruling generals.

"If there was a change in government, there could be a rethink of the gas pipeline to China," said Sanjeev Prasad at Kotak Securities.


Observers are not predicting an imminent change of government in Myanmar, but many other countries have experienced unexpectedly rapid changes of leadership in the last 20 years.

"Ensconced in their new capital north of Yangon, the generals will be acutely aware that similar protests toppled Suharto in Indonesia in 1998," said CLSA analyst Nick Cashmore in a written comment.

For the moment, the country's biggest investors like Total and Thailand's PTT Exploration & Production as well as South Korea's Daewoo International Corp, operator of a multi-billion-dollar gas project under way, say it's business as usual.

"Politics is politics. Economics is economics," said Cho Sang-hyun, spokesman for Daewoo, which operates the A-1 and A-3 natural gas fields, holding nearly 8 trillion cubic feet (tcf) of reserves and expected to cost up to $3 billion to develop.

Total, which operates Myanmar's Yadana gas field, says it deplores human rights abuses but its exit would only make matters worse and another, possibly less responsible, firm would take over.

Chevron, which inherited a share in the project when it bought Unocal two years ago, said it was hoping for a swift and peaceful resolution to the current situation.

Analysts say that while Western oil majors fear the sting of public criticism, the main reason they have stayed out is a U.S. ban on new investment, imposed to hurt the ruling generals.

That has left easy pickings for their state-backed rivals, who are more phlegmatic about criticism. As well as Chinese and Indian firms, Malaysia's Petronas bought out UK-based Premier Oil in 2003 and Russian firms have also joined the hunt.

The company with the most existing exposure to Myanmar is Thailand's PTT E&P, a subsidiary of PTT, which takes nearly a fifth of the gas needed for its power plants from Myanmar.

"We see quite a short-term problem in Myanmar. We don't expect it to last too long," said PTT spokesman Sarutt Sonbutsiri. "It's possible that future prospects might be affected, it just depends how big the problem is."

Sonbutsiri played down the impact from the unrest, since most of the gas operations are offshore or in remote areas. Asked about the possibility of a change of government, he said current supply deals were locked in long-term contracts.

(Additional reporting by Angela Moon in Seoul)