Identifier
Created
Classification
Origin
08RANGOON253
2008-04-07 11:19:00
CONFIDENTIAL
Embassy Rangoon
Cable title:  

BURMESE TAX ISSUES DELAY SHWE GAS SALES

Tags:  ECON ENRG PGOV EPET SENV BM 
pdf how-to read a cable
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C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000253 

SIPDIS

SIPDIS

STATE FOR EAP/MLS; INR/EAP; OES FOR JMIOTKE AND ACOVINGTON;
EAP FOR JYAMAMOTO; EEB FOR TSAEGER
PACOM FOR FPA;
TREASURY FOR OASIA:SCHUN

E.O. 12958: DECL: 09/21/2016
TAGS: ECON ENRG PGOV EPET SENV BM
SUBJECT: BURMESE TAX ISSUES DELAY SHWE GAS SALES

REF: A. RANGOON 156


B. RANGOON 003

C. RANGOON 222

RANGOON 00000253 001.2 OF 003


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

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000253

SIPDIS

SIPDIS

STATE FOR EAP/MLS; INR/EAP; OES FOR JMIOTKE AND ACOVINGTON;
EAP FOR JYAMAMOTO; EEB FOR TSAEGER
PACOM FOR FPA;
TREASURY FOR OASIA:SCHUN

E.O. 12958: DECL: 09/21/2016
TAGS: ECON ENRG PGOV EPET SENV BM
SUBJECT: BURMESE TAX ISSUES DELAY SHWE GAS SALES

REF: A. RANGOON 156


B. RANGOON 003

C. RANGOON 222

RANGOON 00000253 001.2 OF 003


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


1. (C) Summary. According to company officials, Daewoo
remains committed to selling Shwe gas to PetroChina and could
finalize a sales contract within the next two months.
However, the Burmese Government's recent demands that Daewoo
pay additional taxes - up to 10 percent more on production
revenues - has put the final memorandum of understanding with
PetroChina on hold. Daewoo continues to negotiate with the
Ministry of Energy, and expects to resolve the tax issue and
ink the final contract by August. Production and delivery of
Shwe Gas should begin by 2012, which will bring in an
estimated $1.8 billion a year for the regime, double its
current revenues. By early 2009, China plans to construct
two 900-mile pipelines - one for oil and one for gas - that
will connect the Bay of Bengal with Kunming. China also
plans to build a crude oil port in the Bay of Bengal, which
will receive and transport via pipeline crude oil from the
Middle East to refineries in southwestern China. End Summary.

Further Delays in Shwe Gas Contract
--------------


2. (C) Despite announcements that Daewoo would sell Shwe
gas to China (Ref B),Daewoo and PetroChina have yet to ink
the final sales contract, Daewoo Principal Process Engineer
Andrew Hay confirmed. Daewoo has been negotiating with
PetroChina for more than a year but the two companies have
yet to agree on the gas price. Hay denied rumors that there
were insufficient reserves for a sale (Ref A),and informed
us that the price of the gas will be based on the 2.6
trillion cubic feet of proven probable reserves.
High-ranking officials from Daewoo and PetroChina will meet
in four weeks to discuss progress; Daewoo Myanmar Managing

Director Dr. Su-Yeong Yang is confident that a final
agreement between the two companies will be ready by the end
of May.


3. (C) Although Daewoo-PetroChina agreement could be ready
in a matter of weeks, the GOB's recent demands on Daewoo may
further delay the agreement, Hay explained. In January, the
Ministry of Energy hinted that because Daewoo would profit
handsomely from the Shwe Gas deal, it should pay additional
taxes to the Burmese Government. Daewoo officials largely
ignored the implications, as the company's production sharing
contract (PSC) with the Myanmar Oil and Gas Enterprise (MOGE)
clearly laid out its tax burden of 10 percent. Three weeks
ago, the Ministry of Energy upped the stakes, demanding that
Daewoo and the GOB sign a side letter, requiring Daewoo to
pay a tax rate of 20 percent on production profits.


4. (C) According to Hay, Dr. Yang told the Minister of
Energy that the company would not sign such an agreement.
Additionally, he told the Minister that Daewoo would not
finalize its sales agreement with PetroChina until the matter
was resolved, thereby delaying the GOB's income from the sale
of Shwe gas. While Daewoo and the Ministry of Energy
continue to negotiate the tax issue, Daewoo officials express
confidence that the regime will drop the issue because it
wants to collect revenues on Shwe gas sales - estimated at
$1.8 billion per year for thirty years - as soon as possible.



RANGOON 00000253 002.2 OF 003


Speedy Delivery...Or Not
--------------


5. (C) Assuming that Daewoo and PetroChina sign the final
sales agreement by August 2008, the earliest Daewoo could
begin production and delivery of gas would be 2012, Daewoo
Drilling Manager Bruce Leech declared. The company has
sorted out many of its previous problems, including the lack
of a rig for oil well drilling (Ref B),and can begin design
and construction after the monsoon season ends in
October/November 2008. Successful delivery depends on
whether the Chinese can construct the gas pipeline in time,
Leech explained. Hay noted that while PetroChina has yet to
sign the official MOU with the GOB for construction of the
900-mile pipeline from Ramri Island to Kunming, contractors
have begun surveying Burma's topography to determine where to
place the pipeline. Additionally, PetroChina has decided to
use spiral pipe, which is cheaper to produce but less solid
than seamless pipe, for the underground pipeline. PetroChina
remains committed to spending only $1 billion to build the
pipeline and may cut corners to maintain its budget, Leech
opined.


6. (C) PetroChina plans to construct the pipeline - which
will span remote areas including mountainous terrain and
jungle - within two years. Daewoo officials are skeptical,
calculating that it will take closer to three years to
complete the onshore and offshore pipelines and perfect the
delivery systems. PetroChina's decision to use low quality
materials for the pipeline may be problematic and speedy
construction coupled with shoddy materials could create
future delivery problems, Hay explained. Spiral pipes tend
to leak and are difficult to maintain. However, the Chinese
appear to be more focused on getting the job done quickly and
cheaply rather than doing it well. It may come back to haunt
them, he predicted.

China Interested in Oil
--------------


7. (C) The Chinese are interested in more than just
purchasing Shwe gas, Leech commented. China relies on
imported oil from the Middle East, which must be shipped
through the Straits of Malacca, costing time and money.
According to Daewoo officials, the Chinese, who want a
quicker, more secure way to obtain oil, plan to build a crude
oil port on Burma's Made Island in the Bay of Bengal in 2009.
Instead of making the long journey to China (approximately
16 days travel from the Port of Rangoon),tankers from the
Middle East will be able to dock at this deep water port on
the Made River and unload oil. At the same time as it is
building both the port and the natural gas pipeline,
PetroChina will construct a 24-inch diameter oil pipeline,
which will connect the oil port to refineries in southwestern
China. PetroChina, which plans to spend an estimated $2
billion on both the port and the oil pipeline, expects to
complete the job by 2011. Hay mentioned that PetroChina is
looking for a Burmese partner for the port construction
project. Embassy sources tell us that the GOB has encouraged
the Chinese to partner with Steven Law's Asia World for all
pipeline-related construction projects (Ref C).

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


8. (C) While Daewoo officials may be correct in thinking
that the regime's desire for increased revenues will overcome
its demand that the company pay more taxes, this is not the

RANGOON 00000253 003.2 OF 003


first time the GOB has placed unfair tax burdens on foreign
investors. Several other companies, including Canadian
mining company Ivanhoe, refused to pay additional taxes, but
either caved when the GOB stopped issuing licenses or chose
to divest. The regime's contradictory behavior - encouraging
Daewoo to finalize its sales agreement while undermining
final approval with unrealistic demands for increased tax
revenue - shows the erratic policymaking environment that
investors must handle. Regardless of the outcome of Daewoo's
negotiations with the Ministry of Energy, one thing remains
clear: the earliest the regime will get its hands on Shwe
gas revenues is 2012. Another potential problem we have
heard is that the forced relocation of villagers from the
pipeline route could increase the likelihood of sabotage
against the pipeline. A poor quality pipeline makes that all
the more likely.

VILLAROSA