Global Insight Perspective | |
Significance | Sinopec has revealed that China plans to start building a crude oil pipeline to Myanmar later this year and plans are still afoot to establish a gas pipeline between the two countries. Meanwhile, Pakistani Prime Minister Shaukat Aziz suggested his country could also contribute to China's energy needs with a new gas pipeline. |
Implications | Myanmar's apparent turn to China will leave prospective clients from India to Japan and South Korea frustrated. This is a new play by Pakistan, but one that is very much in keeping with the country's ambitions to rise as a regional energy-trading hub. |
Outlook | Official confirmation of the news from Myanmar is pending, but one can see few obstacles standing in the way of China emerging as Myanmar's biggest oil and gas client. Pakistan's strategy is based on imports from Iran and that introduces a considerable measure of uncertainty to the proposal Aziz made. |
Myanmar Makes its Choice
The race to secure a piece of China's import-oriented energy markets has been afoot for some time now, but news over the weekend suggests that there could be some late entries. The first major item that has come up today indicates that China will be receiving crude oil from Myanmar. While previous stories have raised the possibility of a robust natural gas supply relationship developing between these countries in the future, (see Myanmar: 27 February 2007: Myanmar-China Gas Pipeline Plans Gain Momentum), crude is apparently now on the table as well. Reuters has picked up an item run in the Chinese state media that indicates construction of an oil pipeline between Myanmar's deepwater port at Sittwe to Kunming in China's Yunnan province. This would allow for China's more remote south-western markets to gain unparalleled supply access, while easing the need for sea-bound imports from the Middle East. Details are sparse at this point, but it would appear that the National Development and Reform Commission (NDRC) gave its all important approval for the project at the beginning of April and that Sinopec will lead the development. There is no indication of the capacity of the pipeline or when it may commence transmission, but officials in Chongqing have apparently already begun lobbying to have the pipeline extend to support planned downstream developments.
At the same time, the case for a natural gas pipeline between Myanmar and China continues to build. There remain questions about just which of Myanmar's offshore gas fields will support the volumes suggested and indeed, Myanmar has held off on giving the go-ahead for the 8-billion-yuan (US$1.04-billion), 2,380-km gas pipeline while the results from new appraisal wells are being assessed. The final pieces of that picture are due in May, but one can see a major announcement on the horizon. Beyond the major sales represented in the Chinese market, the fact that it has been suggested China will assume the bulk, if not all, of the costs of the gas link effectively trumped rival plans, such as that to develop liquefaction capacity for export to north Asian markets like Japan and Korea, in the short-term. As has proven to be the case on many earlier occasions, the unprecedented upside of the Chinese market and the premiums that are offered by its gatekeepers is virtually irresistible to suppliers.
Pakistan Makes its Pitch
That equation has certainly played a part in the second major supply-side development to come out over the last few days. Pakistan is now considering supplying gas to China for the first time. Upstream Online has cited Prime Minister Shaukat Aziz as saying that his country is looking at building a natural gas pipeline from the Arabian Sea to China. Looking at the rationale for the link, Aziz cited the two countries' long-standing "unique" relationship, the increased activity of Chinese companies in Pakistan, as well as a memorandum of understanding signed last year that was to encourage greater collaborative ventures between China and Pakistna in the energy sector.
The problem is that Pakistan does not have the gas. It would rely on imports from Iran to make this play. As Aziz himself stated, a pipeline can bring gas to Pakistan and then on to China. While quick to note that this supply option would have the advantage of avoiding the heavy congestion of the Malacca Strait, Aziz failed adequately to convey the uncertainty that continues to surround the Iran-Pakistan-India (IPI) international pipeline upon which it would rely to supply China (see. Pakistan: 5 April 2007: India Presses Pakistan to Drop Transit Fees for IPI Gas Pipeline). So the gas might not be there to sell. In fact, while Pakistan would appear to have some surplus volumes available for export on the basis of the 30 MMcm/d that it stands to receive from Iran if the project goes ahead, domestic demand will grow into that surplus in the years to come. One cannot fault Pakistan for its ambition to service the Chinese market given the returns on offer but even in the absence of greater details, in principle this pipeline looks far from convincing as conditions stand. The flexibility afforded by establishing natural gas liquefaction and regasification capacity for exports and imports to cover both short- and long-term domestic and regional markets looks a better fit for Pakistan.
Outlook and Implications
As was the case with the Central Asian producers that flocked to supply China's expansive oil and gas import needs, Myanmar's prospective sales to the Middle Kingdom represent an ideal route to market for the producer. China pays handsomely, for just about as much as can be supplied, without asking too many questions. For an international pariah, those are all the boxes that need to be ticked, even if overland pipelines to China put the bulk of the country's upstream eggs in one basket. On the gas front, Daewoo's upstream involvement and the appraisal work that is ongoing may still swing some gas volumes for the Korean market, but the logistics of processing and transport look relatively cost-intensive (see Myanmar: 27 February 2007: Daewoo Nets Another Exploration Award in Myanmar and 10 August 2006: Following Certification of Reserves, Daewoo Courts Sales Contracts for Myanmar Gas ).
In terms of the crude, it will be interesting to see what further details are offered. One has to remember that we are not talking about Myanmar sourced-crude here. Domestic production tops out at roughly 15,000 barrels per day and is geared for domestic requirements. So the crude will be coming from established supply routes and it remains to be seen whether or not China will put sufficient emphasis on avoiding the traffic and security concerns associated with the Malacca Straits to accommodate what will surely be a costly proposition. The venture raised by Malaysian authorities last week could be a better bet for China to get behind, given that it would be cheaper and also offers secondary processing outcomes (see Malaysia: 16 April 2007: New Pipeline Talk in Malaysia Could Ease Tensions in Malacca Strait). The fact that Pakistan's proposal also relies upon a high Malacca risk assessment is perhaps the least of its worries. Bargaining with funds that the bank has yet to release is either bold or foolish and Pakistan would be better off resolving its transit fee difficulties with India before it starts making promises that it cannot keep otherwise. A piece of the Chinese market has been and will remain an exciting prospect, but one can see that Pakistan has got ahead of itself here.