Global Insight Perspective | |
Significance | China is keen on the project as it will decrease the chances of oil imports being disrupted by congestion or attacks on tankers in the narrow Strait of Malacca and will allow the country to gain access to Myanmar's 21.29 tcf of gas reserves and other mineral resources. |
Implications | Construction of the oil pipeline is likely to reduce crude oil transportation costs and journey times for China. However, whether it is likely to significantly reduce the threat of disruptions from piracy is uncertain given that the oil pipeline will still have to be supplied by tankers from the Middle East, some of which will have to pass through piracy prone areas off the coast of Yemen. |
Outlook | If pipeline construction is going to start next year, feasibility studies and pipeline routes are already likely to have been completed. However the gas pipeline is unlikely to become operational pending the start of gas production at the A1 and A3 blocks in Myanmar, previously pinpointed as a potential supply sources. |
China Announces Myanmar Pipeline Projects
China has announced that it will start building a US$1.04-billion gas pipeline and a US$1.5-billion oil pipeline from Myanmar. The oil pipeline will run from Myanmar's port of Sittwe on the Bay of Bengal to the city of Kunming, the provincial capital of China's Yunnan province. Work on the pipelines is expected to commence in Yunnan province in 2009, as part of China's plan to spend 72 billion yuan (US$10.55 billion) on energy projects next year according to Mi Dongsheng, head of Yunnan's Provincial Development and Reform Commission cited by Chinese state media. As part of the project, oil and gas storage tanks would also be built near Myanmar's port of Kyaukpyu. China National Petroleum Corp. (CNPC) will manage the project and hold a 50.9% stake in it while Myanmar Oil and Gas Enterprise would own the remaining stake. Proposals for building the pipelines had already been discussed five years ago although they appeared to have been put on a back burner. However if construction is going to start next year, feasibility studies and the pipeline route are already likely to have been completed.
China is interested in constructing the oil pipeline in order to diversify imports away from the Strait of Malacca, through which a reported 80% of its oil imports travel. Indeed China worries that congestion, collisions, pirate attacks, terrorist attacks, or a naval blockade by a hostile foreign power could significantly disrupt its crude oil imports which China relies upon to meet around 50% of its total crude oil demand. Indeed the country may have been reminded of its vulnerability regarding crude oil imports following the hijacking of a very long crude carrier (VLCC)—carrying 2 million barrels of Saudi oil—by pirates off the Kenyan coast on Monday (see World – Somalia: Gulf States: 18 November 2008: Hijacking of Saudi Supertanker Likely to Affect Gulf Crude Transport Economics).The revived pipeline proposal may be indicative of China's attempts to avoid the risk of shipping crude through Indonesian waters (which have also traditionally been a pirate hotspot) although the annual decline in attacks in these waters suggests that the threat of piracy is more perceived than real these days. However, crude oil imports to the pipeline terminal in Myanmar from Saudi Arabian ports in the Red Sea are still highly vulnerable to attacks around the coast of Yemen. Unless supplies for the pipeline come from Saudi Arabian ports in the Persian Gulf, the pipeline is not likely to significantly reduce the likelihood of disruptions from piracy. Moreover without an estimate of the pipeline's capacity, it is difficult to assert whether it can supply significant quantities of oil to markedly reduce the amount being transported through the Strait, although the construction of storage tanks at Kyaukpyu suggests that China may be planning to stockpile supplies near the port. The oil pipeline is likely to reduce China's oil transportation costs (particularly as the latest pirate attack is likely to increase insurance premiums on freight rates) as well as reducing the crude transit times by around a week.
According to some reports, China is interested in using pipeline projects to revive its own economy in the face of the financial crisis and global economic slowdown. Previous reports have suggested that the oil pipeline is due to provide crude for a possible new refinery in Yunnan, which could provide jobs and revenues from the sale of fuel products. However, the recent scale back in refinery throughput capacity in China, a result of domestic demand decreases, raises some concerns over the immediate viability of the refinery project and indeed of the oil pipeline as a whole(see China: 18 November 2008: China Cuts Diesel and Gasoline Imports as Fuel Demand Drops). The fact that China plans to invest US$2.5 billion in the pipeline project at a time when domestic energy demand is falling and global liquidity is tight suggests that the country’s long-term aim to gain access to Myanmar's 21.29 tcf of gas reserves and to strengthen its strategic foothold in the country, outweighs current financial concerns and those relating to the falloff in domestic energy demand. Myanmar stands to gain considerably from the pipeline projects as they promise to increase government revenues, both from gas exports and from transit fees on both pipelines. Previously it was also reported that China would grant Myanmar a loan of HK$650 million (US$83.8 million) for the development of its oil industry, possibly boosting economic growth in Myanmar, although it is unclear whether the loan will still be granted. The advantages to Myanmar of its energy partnership with China have already been demonstrated in the hydroelectric sector, where China Power Investment Corp. is building seven plants with a combined generating capacity of 13,360MW which will help boost electricity supplies to the domestic market as well as state revenues(see Myanmar: 18 November 2008: Development of Hydroelectric Power Emphasised in Myanmar). The pipeline project is also likely to reduce the political isolation of the regime in Myanmar, allowing it to resist western criticism of its human rights record more easily through cementing its strategic relationship with China.
Outlook and Implications
Feasibility studies for the pipeline appear to have been completed and funding looks to have been earmarked, suggesting that pipeline construction may be able to commence on schedule next year. However, development of supplies for the pipeline from the A1 and A3 blocks in Myanmar (thought to hold 8.6 tcf in recoverable reserves) are still ongoing. This combined with the pipeline’s extended construction period suggests that it will be some years before the pipeline can begin supplying gas.
The pipeline projects are likely to further strengthen China's position as an economic partner to Myanmar ahead of its regional rival India, while paving the way for future agreements to increase Chinese exploitation of Myanmar's other resources including timber, coal, and precious minerals.