US sanctions on Myanmar pose hurdles for gas exports to Thailand, China

The latest US sanctions on Myanmar's national oil and gas company Myanma Oil and Gas Enterprise (MOGE) could cripple the ability of its Thai and Chinese customers to make payments through conventional banking systems and curtail upstream gas investments in the Southeast Asian country, according to legal experts and industry executives.

The sanctions are the first time Washington has directly targeted Myanmar's oil and gas exports for funding the military government and risk jeopardizing the energy security of both Thailand and China at a time when global gas supply is tight.

In the longer term, it could prompt a gas strategy that relies more on LNG imports in Thailand, and a shift to alternative fuel sources in southern China to replace pipeline gas when production in Myanmar peaks and starts to decline. Myanmar exports most of the natural gas produced from its main offshore fields Yadana, Yetagun and Zawtika, roughly two-thirds to Thailand and a third to southern Chinese provinces.

The US Department of the Treasury's Office of Foreign Assets Control imposed(opens in a new tab) Oct. 31 new sanctions prohibiting certain financial services for MOGE, including loans, transfers, accounts, insurance, investments, securities, guarantees, foreign exchange, letters or credit and commodity options.

OFAC's directive is aimed at US persons and prohibits the provision, exportation or reexportation, directly or indirectly, of financial services to or for the benefit of MOGE by a US person on or after Dec. 15, 2023.

"The directive does not directly prohibit non-US persons from doing business with MOGE. The directive will, however, have indirect consequences on non-US entities (including Thai and Chinese companies) doing business with MOGE," said Karnan Thirupathy, partner at Singapore-based Kennedys Legal Solutions.

"Payments in USD on transactions with MOGE will not be practically possible insofar as the payments through banking channels will involve US banks (which are US persons subject to the prohibitions)," Thirupathy said.

Non-US entities will need to be careful not to enter any transaction involving attempts to evade or cause the violation of the prohibitions, for example, by being connected to a transaction where an entity mis-declares information in payment instructions that results in a US bank making a payment to MOGE in violation of the prohibition, he said.

"There has long been discussions on the use of alternative currencies in international sales, and alternative currencies (to the USD) are already being used in international trade -- so it would not be surprising for counterparties involved in transactions with MOGE to switch to currencies other than USD -- if they haven't already done so," Thirupathy said.

Thailand's state-owned oil and gas company PTT did not respond to queries.

JVs, investments

In 2021, when a coup by Myanmar's military overthrew the Aung San Suu Kyi-led government, Thailand had imported around 32.2% of its natural gas consumption, comprising 15% of pipeline imports from Myanmar and 18% from seaborne LNG, official data showed.

By 2022, Thailand's dependence on LNG had risen to 22% and on Myanmar gas to 16% as domestic production declined. For China, Myanmar accounts for around 1% of total gas consumption and 6% of total pipeline gas imports. Myanmar also supplies crude to China through its pipeline.

Countries like Japan, the US, Australia and Singapore had ramped up energy and infrastructure investments in Myanmar before the coup.

The upstream projects were designed to help Myanmar, one of Asia's poorest countries, boost gas production and export revenues, but most investors have now fled. The latest sanction shuts out any future investments in oil and gas projects, industry executives have said.

"JVs and subsidiaries more than 50% directly or indirectly owned by MOGE are also caught by the new prohibitions. So, companies doing business in Myanmar will need to investigate whether the companies they are dealing with are caught by the new prohibitions," Thirupathy said.

Foreign companies involved in JVs with MOGE would need to consider if the JV vehicle will become subject to the new sanctions, he said.

"It is therefore possible for companies involved in JVs with MOGE (or holding shares in MOGE subsidiaries) to be more seriously affected by the new prohibitions," he said.

Other risks

"With regards to Chinese companies specifically, there is a possibility that the Chinese "Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures" may come into play," Thirupathy said.

Under the rules, Chinese companies are required in certain circumstances to report to the government when they are restricted or prevented by foreign sanctions from engaging in normal activities with third countries, he said.

Thirupathy said the Chinese government can issue "blocking regulations" to "prohibit" the application of the foreign sanctions.

"It remains to be seen if the Chinese regulations will be triggered."

It is unlikely that Myanmar will cut off gas exports immediately if payments cannot be made, and both Thailand and China are capable of eventually finding a workaround, oil and gas executives also said.

Longer term risks would be around maintaining production when reserves start depleting or if the sanctions tighten further. Most of the conditions that led to Myanmar setting up one of the fastest LNG-to-power plants in Asia, including a dedicated small-scale LNG shipping supply chain using reload terminals, may not materialize in the near future, industry sources added.