Summary and implications

Overview – the oil and gas market in Myanmar

Despite Myanmar being one of the world's oldest oil and gas producers, its upstream oil and gas sector is considered to be relatively underdeveloped. After the oil and gas industry was nationalized by the Myanmar government in 1962, there are currently several offshore and onshore blocks that are at different stages of development – i.e. exploration/production, improved petroleum recovery and reactivation of suspended fields.

The outcome of the last bidding (in 2013) for the exploration of the bulk of Myanmar's offshore oil and gas reserves (deep and shallow water blocks) was one of the most eagerly awaited events in the industry. However, the actual capacity and economic potential of the new blocks, however, is a subject of intense speculation. Because of the long-running international economic sanctions against the country, introduced in the mid-1990s and only substantially relaxed approximately two years ago, little work has been done so far to determine the capacity of the country's oil and gas fields, so estimates vary widely.

Though the proven energy reserves are still relatively modest, the unofficial estimates seem extremely promising and have attracted the interest of several major players. Indeed, some experts have stated a view that the potential of Myanmar's fields could be on a par with Britain's North Sea before it was exploited, or Brazil's reserves now. This has supported the Myanmar government's drive towards attracting foreign investments and technical assistance in this sector.

As a result of this spike in government attention, the oil and gas and investment regulatory framework and government practice in Myanmar is undergoing rapid change. Potential investors would hence need to come to terms with newly issued legislation and also monitor important reforms that are currently in the process of being issued. These include the new Foreign Investment Law passed in 2012 (together with its constituent rules, the FIL), the rules issued under the new Environmental Conservation Law, as well as a number of new policies regarding transparency and good governance.

Foreign investment law and rules

The FIL (which replaces the previous Myanmar Foreign Investment Law of 1988) represents a key element of the regulatory framework for foreign investments in the oil and gas sector in Myanmar. Of particular importance is the fact that "oil and gas" is one of the industries listed in the State Owned Enterprise Law of 1989 (the SOE Law) as being a monopoly activity of the state. The FIL allows for an approval to be issued in favour of a foreign investor which will allow for an exemption from this restriction under the SOE Law.

The FIL rules provide for any foreign investment to be made through a locally incorporated company. However, although this is not expressly regulated by the FIL rules, as a matter of practice it appears that the Myanmar Investment Commission may still allow the setting-up of branch offices in the oil and gas sector, as branches have always been the preferred corporate vehicle for foreign investments in oil and gas projects in Myanmar.

An Environmental Impact Assessment is now additionally required for all petroleum and natural gas exploration, drilling and production in Myanmar.

Oil and gas transactions are generally implemented through a production sharing contract entered into between the Myanmar Oil and Gas Enterprise (MOGE) as owner and (usually) a branch of the relevant foreign investor. Pursuant to the FIL rules, the foreign investor will now additionally be required to enter into a Joint Operating Agreement with a local company approved by MOGE.

In terms of new provisions directly affecting the oil and gas industry, pursuant to FIL rule 60, all production sharing contracts will need to contain a "construction period" (i.e. the period for drilling of wells). We infer that this will likely correspond to the "exploration period" contemplated in current models of the production sharing contracts.

Additionally, FIL rule 61 provides that, if the construction activities are not completed within the permitted construction period or extended period, the permit can be revoked with no compensation to the foreign investor.

New rules: bidding process and local partner requirements

The latest bidding round for onshore and offshore blocks that was carried out by the Myanmar government in 2013 provides a good practical example of the impact of the new FIL rules on oil and gas projects in Myanmar.

In relation to the requirement to cooperate with a "local partner" (historically a key issue for foreign investors), the FIL has introduced varying requirements depending on the nature of the blocks that the foreign investor is bidding for.

For onshore blocks, foreign investors are required to cooperate with one of the approved, registered domestic entities listed on the website of the Ministry of Energy.

As far as offshore blocks are concerned, a distinction is made between shallow water blocks and deep water blocks. Foreign investors bidding for shallow water blocks must co-operate with a minimum of one Myanmar national owned company registered with the Energy Planning Department of the Ministry of Energy. There are no "local partner" requirements in relation to deep water blocks.

The FIL does not stipulate any minimum or maximum thresholds of participation in the projects. The level of interest held between the foreign and local entities is therefore left to the commercial negotiation of the parties. It would seem that the Energy Planning Department's key interest in the local companies' participation in the projects is for these companies to increase their levels of experience and know-how by working with their foreign counterparts.

It is however not recommended that a purely nominal participation structure (e.g. one ordinary share held by the local company) be used as this could be considered unacceptable by the Ministry of Energy as being in circumvention of the law. Perhaps some guidance can be derived (and applied in this case) from the prescribed minimum shareholding ratios applied by the Myanmar Investment Commission in other restricted sectors (i.e. 80:20 ratio).

In terms of bidding process, and based on the last bidding round in 2013, it appears that pre-qualified potential bidders will be allowed to submit up to a maximum of three proposals for three onshore and/or offshore blocks. Submissions, so far, have been on a block-by-block basis, and the selection per block was based on the best offered terms and conditions for the production sharing contract, which will be used by the Energy Planning Department to prepare the Model Production Sharing Contract to be provided to the awarded potential bidders.

Once the winning bidder is selected, a production sharing contract will be negotiated and signed only between MOGE and the foreign investor, which will be a contractor and operator. The foreign investor and the local company will, as a requirement of the bid and part of the bidding process, sign a memorandum of understanding and then subsequently a joint operating agreement. The memorandum of understanding and the joint operating agreement will set forth, among other things, the participating interest of the local company.

The FIL does not specify the mechanics or form of contribution by the local partners (i.e. whether they will be required to actually contribute capital or just get a carried interest). This will depend on the agreement of the parties.

Conclusion

In sum, there continues to be good reasons for investors to look seriously at onshore and offshore oil and gas opportunities in Myanmar. The regulatory framework is new and to a large extent untested, however, it is clear that investors will need to carefully consider the requirement to co-operate and share with local partners. Additionally navigating the FIL, specifically where it impacts upon exploration activities, will also be important.

With the announcement from MOGE in October 2014 that Myanmar will auction nine offshore oil and gas blocks for exploration next year another surge of investment is expected in the near term.

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