By Sherry Su
Of Dow Jones Newswires
SINGAPORE (Dow Jones)-Energy-thirsty China is taking a hard look at one of its neighbors, a country with major gas reserves and the possibility of finding a lot more, Myanmar.
The governor of South China's Yunnan province, Xu Rongkai, visited Myanmar last week to discuss energy relations, and, it's widely believed, the possible construction of an oil pipeline between the two.
China, which is trying hard to diversify its imported energy sources and improve energy security, isn't the only one eyeing reserves of hydrocarbons in what some regard as a pariah state.
But prospecting for and producing oil and gas in Myanmar is a delicate matter given its troubled history of human rights abuses and military rule, and consequent economic and political sanctions imposed by some countries.
Even so, foreigners have a well-established presence - companies from more than 10 countries are active there, including big players such as France's Total (TOT), U.S. firm Unocal Corp.(UCL), South Korea's Daewoo International Corp. (047050.SE) and Japan's Nippon Oil (5001.TO).
India, one of China's main rivals in the search for foreign oil and gas assets, and also a neighbor, is among those wooing Myanmar.
India and Myanmar signed a deal in January to build a US$1.0-billion, 290-kilometer gas pipeline between them, via Bangladesh, to help narrow India's huge energy deficit.
That pipeline, to be completed by 2010, should be able to transport up to 40 million cubic meters a day of gas, India's Petroleum Secretary Sushil Tripathi said recently.
Myanmar has 46 onshore oil and gas blocks, and 25 offshore blocks. But so far, output is modest and the size of its reserves is unclear, in part due to the country's uncertain investment climate.
BP's Statistical Review of World Energy puts Myanmar's end-2003 proven gas reserves at 364 billion cubic meters, accounting for just 0.21% of total world gas reserves.
"A good gas potential has been proven in the offshore area. But for the onshore area, there hasn't been a lot of exploration because of political problems," said Mario Traviati, the head of Asia-Pacific Energy Research of Merrill Lynch.
Offshore exploration is concentrated in the Yetagun and Yadana natural gas fields. Gas worth some $1 billion a year from there is sent to Thailand via a pipeline, satisfying 15%-20% of Thailand's needs.
The International Energy Agency has put Myanmar's gas output in 2002 at 5.44 million metric tons of oil equivalent, and crude oil output 507,000 tons.
Oil Pipeline Talks
Over the last few years, India, which relies on imports to satisfy its 70% energy needs, has moved gradually to improve relations with Myanmar - the two have a history of animosity going back centuries.
India's major oil companies, like Oil and Natural Gas Corp. (500312.BY), and GAIL India Ltd. (532155.BY), now hold stakes in gas projects in Myanmar.
India's growing energy links with Yangon may well have been a factor prompting China to speed up its talks with Myanmar on its oil pipeline project.
Chinese planners envisage this being built from Myanmar's western port of Sittwe to Kunming, the capital of Yunnan province.
While there isn't enough domestic oil output in Myanmar, for now, to justify such a project, there is a geo-political imperative for such a project.
"The bulk of China's oil imports are coming through the Malacca Strait. Building a China-Myanmar oil pipeline will help reduce the risks caused by over dependence on the Malacca Strait," said Professor Li Chenyang, the head of Institute of Southeast Asian Studies of Faculty of International Relations, Yunnan University.
A pipeline would cut the distance needed to get Middle East oil to China by some 1,200 km.
China is studying several ways of bypassing the Malacca choke point, including backing an oft-talked-about plan to build a Suez-like canal and pipeline across southern Thailand, although recently it hasn't shown much enthusiasm for that particular project.
Despite Myanmar's potential, foreign companies feel some constraints, and some are reluctant or unable to go prospecting there.
"Certainly, the political risk had been a deterrent in the past for exploration...(Even at present) it's still perceived to be a risky area," Merrill Lynch's Traviati said.
Total and Unocal, two of the major investors in Myanmar, have been severely criticized for their involvement there.
Total argues that it's gone to great lengths to adhere to national and international laws, and to contribute to local social and economic development.
Working with other co-investors, Total has so far allocated $10 million to build or renovate hospitals, health centers, schools, roads and water supply systems, said Jean du Rusquec, Total's ranking official for Myanmar.
The cost of projects like these are a price that foreign entrants into the Myanmar energy scene will need to pay.
Added to costs like those are U.S. sanctions against Myanmar, which bar foreign oil and gas firms from U.S. technology in that country.
Even so, there's no shortage of companies, and countries, ready to dive into the Myanmar energy scene.
Five months ago, a unit of China National Offshore Oil Co. and two partners signed three onshore and offshore oil and gas production-sharing contracts with State-owned Myanmar Oil & Gas Enterprise covering 52,600 square kilometers.
That contract followed on the heels of a smaller contract last December they'd signed for onshore exploration.