Friday, September 25, 2015

Negotiation impasse for China oil pipeline

Myanmar TImes   |   Friday, 25 September 2015
Bulldozers and excavators at the Myanmar-China pipeline project near Nawnghkio, Shan State, in 2012. Photo: EPA
Myanmar and China need to return to the negotiating table to finalise the terms of the controversial cross-Myanmar oil pipeline, according to senior officials.

While the South East Asia Crude Oil Pipeline (SEAOP) has been essentially completed since the start of 2015, and its sister natural gas pipeline is already operating, there remain unresolved arguments on investment and tax terms, officials told The Myanmar Times.
The pipeline provides a shortcut for Middle Eastern crude oil to reach China. Rather than being shipped south around Singapore, it can be offloaded on Made Island in Rakhine State and sent via a 700-kilometre pipeline across Myanmar to its terminus in China’s Yunnan province.

A trial operation was launched in January, but agreements with Myanma Port Authority to offload crude at Made Island and a transportation agreement with China National United Oil Corporation (Chinaoil) require further government-to-government discussions.

“It is now beyond our capability to decide on a deal for the project,” said an official from Myanma Oil and Gas Enterprise, which holds a 49.1 percent stake in the project. He declined to be indentified as he is not allowed to speak to the media.

The agreement to build the pipeline was inked in 2008, with construction essentially completed earlier this year.

“Discussions with the Myanma Port Authority to use Made Island Port ended without any result,” the official said. “It is beyond our level to negotiate.”

Similarly, discussions with China National Petroleum Corporation (CNPC), another shareholder and the main operator of pipeline, could not be completed due to concerns on taxation and other charges relating to the pipeline project, which were originally completed during the time of the previous government.

The Myanma Oil and Gas Enterprise official said that some of the agreement terms are no longer relevant in a changing Myanmar, while there is still disagreement over various fees and taxes.

The pipeline had cost US$2.45 billion to construct, with CNPC holding 50.9pc and the rest held by Myanmar. The pipeline is designed to transport 22 million tonnes of crude annually. Myanmar’s first international oil unloading terminal on Made Island is at one end of the pipeline, and includes 12 oil storage tanks, a dockyard and a sea port with a 480-metre terminal.

Speaking at a soft opening ceremony in January for the Made Crude Oil Unloading Terminal and Pipeline, U Nyan Tun, vice president and chair of the National Energy Management Committee, said the project will promote the country’s economy and develop pipeline crossing areas.

China became the world’s largest energy consumer in 2011 and is the world’s second-largest crude oil consumer after the United States. It imported an average of nearly 6.2 million barrels per day of crude in 2014, a 10pc increase on 5.6 million barrels in 2013, according to a report from the US Energy Information Administration.

The Myanmar-China crude pipeline was intended as one of China’s main oil import links. China National Petroleum Corporation plans to send crude from the pipeline to service a Yunnan refinery which is slated to open in 2016, as well as a Chongqing refinery which is to begin operations in 2017, according to a May 2015 report.

Yet the Yunnan refinery is still under construction, according to a Myanma Oil and Gas Enterprise official.

“The refinery is still being constructed,” he said. “This is one of the factors delaying the project, while another is the fall in crude oil prices.”

Still, the project has attracted a large share of controversy. It is one the most well-known China-backed projects in Myanmar, and has been the target of opposition from the public and from non-government organisations.

In 2011, one of the first acts of President U Thein Sein was to suspend another large Chinese project, the Myitsone hydrodam in Kachin State. That project had come under attack from concerns over its environmental and social impact. Similar, the government renegotiated terms at the Letpadaung copper mine in 2013.

The 771km crude pipeline was tipped as a revenue generator for Myanmar. The country was to direct obtain a road-right fee of $13.81 million from both the gas and oil pipelines each year, as well as a transit fee of $1 per tonne of crude oil transmitted to China under a 30-year concession agreement.

However, authorities have never fully disclosed the exact income and profit sharing from the project, with detailed information behind the agreement not publically released by either side.

Industry observers have questioned the pipeline.
“Some previously approved projects have some social and environmental concerns,” said U Pyi Wa Tun, chief executive officer of Parami Energy. “In addition, for some projects we are not clear about the economic benefit for Myanmar.” He added a possible change of government can be quite risky for investors and developers.

Risks can be minimised with the inclusion of multilateral associations such as the World Bank, International Finance Corporation and Asian Development Bank. “They can bring best practices from around the world to address community participation, environmental issues and economic benefit for the people of Myanmar,” he said.

The pipeline project has providence $13.26 million for corporate social responsibility programs to date. It will improve the wellbeing of local people as well as create employment and assist the country’s economy, according to previous information from SEAOP.

The Myanmar Times requested the SEAOP consortium provide an update the pipeline’s status last month. In a partial reply on September 22, the company said the process is still being discussed.

“The preparation for full operation is completed. The pipeline is ready to pump crude oil, but no date has been selected for operations of transferring and pumping,” a representative said. No further information was provided.