23 January 2015edge review

A roadside refuelling station near Pyin Oo Lwin (SangOh Jung/Flickr).

Cheaper oil should benefit Myanmar’s consumers and manufacturers, but falling gas prices will hurt the country’s bottom line

Over the past three years, Myanmar’s crumbling streets and highways have begun to heave with late-model cars and trucks, among the most the most visible symbols of rapid economic reforms.

Myanmar’s new drivers haven’t felt much relief at the pump, though, despite a halving in global oil prices since last June. Prices for low-grade petrol have dropped less than 20 US cents per litre over the past six months, the Myanmar Times reports, a drop of less than 20% from prices in the middle of last year.

The country’s chaotic upstream production and distribution infrastructure – in disarray after five decades of self-rule and mismanagement – is part of the reason why.

Myanmar is reliant on imported oil, an excuse used to justify continuing only small drops in pump prices for consumers.

Although it has modest proven crude reserves – around 50 million barrels – it does not export oil and is home to just three refineries, operated by the state-owned Myanma Petrochemical Enterprise, that date to the 1950s and operate far below capacity.

“As an oil importer, cheaper oil will improve Burma’s trade and current account deficits directly, while also making Burmese exports more competitive by lowering their costs of production,” says Sean Turnell, an expert on Myanmar’s economy and a professor at Macquarie University in Sydney.

Myanmar, however, is a significant exporter of natural gas, resulting in a mixed blessing for its emerging economy. Natural gas royalties are believed to be the government’s single largest source of non-tax revenue, which will temper the benefits provided by plummeting crude prices as gas prices will also fall as a result.

“Under current arrangements, the price that Burma and other countries get for their gas export shipments is linked to the price of oil, with a lag,” Turnell said. “Thus, Burma’s gas export revenues are likely to fall across 2015. To the extent that these revenues fund socially productive government spending, this will have a negative impact on the economy.”

Large-scale natural gas exploitation began in the 1990s with the development of the offshore Yetagun and Yadana fields, with most production exported to Thailand. In 2013, twin pipelines across Myanmar to Yunnan Province in China came online, one of which transports gas from the newly-developed Shwe gas field off the coast of Rakhine state. The other will carry Middle Eastern and African crude, allowing oil shipments to China to bypass the notoriously pirate-plagued Straits of Malacca.

A bidding round that awarded 20 new offshore oil-and-gas concessions to some of the world’s biggest multinationals concluded last March, but their potential returns will remain unknown until comprehensive surveying is completed. The new offshore blocks are also not expected to be productive for another seven to ten years.

Tumbling prices have prompted at least one major investor to re-think its investment plans. In December, PTTEP, Thailand’s state-owned oil-and-gas giant, announced that unfavourable market conditions may prompt the company to “adjust” its US$24 billion global five-year investment plan, with further development on two projects in Myanmar – the Zawtika field and the M3 block – potentially facing a partial axe.

“If [oil] prices fall below our projection, we have a room to adjust the investment budget downward in order to maintain our good liquidity and strong performance,” PTTEP’s CEO, Tevin Vongvanich, said.

In the short-to-medium term, low oil prices will have a mixed impact on Myanmar’s balance of payments.

Longstanding trade deficits have been exacerbated by a massive influx of capital goods and foreign investment, laying bare the dangers posed by an over-reliance on royalties from the extractive industries to fund government spending, although cheaper oil will invariably make other exports – such as manufactured goods – more competitive.

“The silver lining here is that lower commodity prices may act as a catalyst for badly needed fiscal reform, although the government has quite a lot on its plate ahead of general elections later this year,” said Andrew Wood, the senior country risk analyst for Myanmar at consultancy Business Monitor International.

He estimates that non-tax income accounted for 74.3 per cent of the government’s total annual revenue between 2006 and 2013, with taxes accounting for a mere 22.8 per cent.

He thus expects lower commodity prices to deal a sharp blow to state revenue. Tax reforms and crackdowns on smuggling are moving ahead in earnest, but government coffers are unlikely to benefit in the short term.

Civil society groups allege that untold billions of dollars of natural gas revenue have been diverted away from public coffers since large-scale exploration and production activities got under way in the 1990s, a function of the endemic corruption that continues to blight Myanmar’s economy.

“Of course, the extent to which the gas revenues are not fully carried through into the government’s coffers, then the losers will be those hoarding them,” Turnell said. “No great social loss from this aspect!”

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