DAEWOO NEGOTIATING WITH CHINA FOR SHWE GAS

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000746

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STATE FOR EAP/MLS
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TREASURY FOR OSIA/SCHUN

E.O. 12958: DECL: 08/15/2017
TAGS: ECON ENRG PGOV EPET BM
SUBJECT: DAEWOO NEGOTIATING WITH CHINA FOR SHWE GAS

REF: A. A) RANGOON 706


B. B) RANGOON 600

C. C) RANGOON 313

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Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4
(b) and (d)


1. (C) Summary. The GOB continues to pressure Daewoo
International Corp., the Korean-based company that holds a
25-year concession to develop and produce Shwe gas, to sell
the gas to the Chinese. Daewoo has two options - to either
sell gas to China or liquid natural gas (LNG) to Korea. The
company already has as tacit agreement to sell LNG to Korea,
but if the Chinese are willing to match the Koreans' terms
and price, Daewoo will sell Shwe gas to China. Daewoo
continues to negotiate with the Chinese and expects to make a
decision by the end of 2007. End Summary.

Shwe Gas to the Highest Bidder
--------------


2. (C) In an August 7 meeting with Econoff, Su-Yeong Yang,
Executive Vice President and Managing Director of Daewoo
International-Myanmar, confirmed that despite press reports
about the sale of Shwe gas to China (Ref B),Daewoo has not
yet decided to whom it will sell the gas. The Burmese
government, Yang noted, continues to pressure Daewoo to make
a deal with the Chinese, but recognizes that the final
decision, per the 25-year concession agreement, is up to
Daewoo.


3. (C) Daewoo Corp. is deciding between two options: to
either sell the gas to China or to export liquefied natural
gas (LNG) to Korea Gas Corporation, which is currently the
highest bidder. Although the company has a tacit agreement
with Korea Gas Corporation, Daewoo, to appease the Burmese
government, is negotiating with the Chinese. Although the
GOB cannot force Daewoo to sell Shwe Gas to China, Yang
underscored, if China meets the price and terms set by Korea
Gas Corporation, Daewoo will sell Shwe gas to China. But, he
continued, the Burmese government understands that if China
fails to match the price, Daewoo will commence with plans to
sell the gas in LNG form to Korea. Daewoo has not set a
timeframe for the end of negotiations, but Yang expects that
a contract will be signed by the end of the year.

Plans for LNG
--------------


4. (C) When asked about the viability of an LNG plant (Ref
A),Yang clarified that Daewoo, which has enough reserves
from its blocks in the Shwe field to service an LNG plant,
has already completed a feasibility study for the
construction of one LNG frame. Daewoo recently obtained
deep-water block AD-7, which is adjacent to the Shwe gas
fields, and will begin drilling in early 2008. The company,
he noted, is confident that it will find additional reserves
to further justify an LNG plant. If Daewoo decides to sell
the gas to China, however, the company will delay plans for
an LNG plant until after it uncovers and begins production of
new gas fields.


6. (C) Despite its success in developing the Shwe gas
fields, Daewoo is not interested in bidding on the seven deep
water blocks available in the Bay of Bengal. Yang noted that

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because the GOB has no seismic data for these blocks,
companies "would be bidding blind on a block that may have no
gas reserves. Only after costly exploration would a company
know whether reserves exist. Foreign companies are currently
unwilling to take the chance." Yang confirmed that the GOB,
which is in no rush to close the bidding process for these
blocks, is waiting for the time when U.S. companies can,
without restriction, invest in Burma's oil and gas sector
(Ref A). Although Yang recognizes that a change in
administration will not mean the immediate lifting of
sanctions, the government, he noted, is "quite optimistic."

Burma's Onshore Drilling:
Lacking Technology to Get the Job Done
--------------


7. (C) While foreign companies are successfully finding new
gas fields offshore, the Burmese continue to struggle with
their onshore oil field operations. Burmese companies
combined only produce 10,000 barrels of oil a day, which is
not enough to meet domestic demand. In 2006, Burma imported
89 percent of crude oil used. Yang noted that state-owned
Myanma Oil and Gas Enterprise (MOGE) has depleted shallow oil
reserves and must drill deeper to reach the oil reserves
below. However, deep formation drilling, which requires
drilling through a high pressure joint, is dangerous and the
MOGE lacks the technology, equipment, and wherewithal to
conduct such operations. The GOB, which limits the rights of
foreign companies to drill onshore, in recent years granted
exceptions to several Chinese and Russian companies in the
hope that they would be able to expand onshore production.
Yang noted that these efforts have largely failed, as the
Chinese and Russians place more emphasis on developing their
offshore blocks.

Comment
--------------


8. (C) The Burmese continue to use natural resources as a
way to maintain Chinese support for the regime. The Chinese,
in turn, expect the Burmese to sell these natural resources
at a low price. If Daewoo and the Chinese fail to reach an
agreement, the Burmese government may find itself in an
awkward position - unable to follow through on its promises
to the Chinese and unable to legally force Daewoo into an
agreement it does not want. Despite Yang's belief that the
GOB will not force Daewoo into business with the Chinese
doubt they will make it easy for Daewoo to sell to Korea.
VILLAROSA