DAEWOO TO SELL SHWE GAS TO CHINA BY 2011

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000003

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E.O. 12958: DECL: 01/03/2018
TAGS: ECON ENRG PGOV EPET BM
SUBJECT: DAEWOO TO SELL SHWE GAS TO CHINA BY 2011

REF: A. 07 RANGOON 746


B. 07 RANGOON 600

C. 07 RANGOON 1036

D. 07 RANGOON 1035

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


1. (C) Summary. After months of negotiation, Daewoo has
agreed to sell gas from its Shwe fields to PetroChina by

2011. Although the companies have yet to ink the contract,
Daewoo officials confirmed that PetroChina has begun drafting
plans for the construction of two pipelines - one for gas and
one for oil - that will connect Kyauk Pyu in the Bay of
Bengal to Kunming, China. During the next three years,
Daewoo plans to drill 15 wells in the A1 and A3 offshore
blocks, build a well head platform, and install production
facilities in Kyauk Pyu. Company officials estimate that
once operational, the Shwe gas field will produce up to 500
million standard cubic feet of gas a day. While Daewoo is
prepared to meet the 2011 target date, officials remain
skeptical that PetroChina can build the pipelines within that
timeframe. Officials also informed us of Daewoo's plans for
new exploration in offshore blocks, as well as an interest in
investing in Burma's onshore oil and gas fields in 2008-2009.
End Summary.

Gas to China by 2011
--------------


2. (C) Daewoo, after months of speculation and negotiation
with PetroChina, has confirmed that it will sell gas from the
offshore Shwe gas fields to China by 2011 (Ref A). Although
Daewoo and PetroChina have yet to sign the final agreement,
Daewoo Drilling Manager Bruce Leach informed us on December
31 that both companies have agreed on the price of the gas,
but still have several minor details, such as the quality of
the gas, to iron out. Leach believes the formal announcement
will come in January 2008.


3. (C) According to Leach, Daewoo expects to produce an
average of 500 million standard cubic feet a day from the
Shwe gas fields by 2011; 450 million standard cubic feet will
be sold to China with the remainder going to state-owned
Myanmar Oil and Gas Enterprise (MOGE). Cognizant that the
Burmese Government has failed to pay other petroleum
companies for gas produced and consumed (Ref C),Leach
explained that Daewoo intends to negotiate an agreement with
the GOB that will allow Daewoo to collect all revenues from
the export of gas to PetroChina. To ensure GOB payment,
Daewoo will deduct the cost of MOGE's gas purchases from the
GOB's share of PetroChina revenues.

Preparing for Production
--------------


4. (C) While Daewoo is committed to meeting the 2011
production deadline, Leach opined that production and export
of gas to China may likely be delayed until 2012. Both
Daewoo and PetroChina have large obstacles to overcome, he
asserted. In the next two years, Daewoo must complete an
engineering design for the well head platform in the A1
block, lay pipeline to connect the platform to Kyauk Pyu, and
find a rig that will pump the gas. By April 2010, Daewoo
plans to start drilling 15 wells, 11 in the A1 block and 4 in
the A3 block. Leach explained that drilling will take at
least 16 months; if all goes according to plan, the Shwe gas
fields should start to produce gas for export by July 2011.

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5. (C) Daewoo's biggest problem, according to Leach, is its
current difficulties in securing a rig for production.
Daewoo officials have approached several Indian and Chinese
companies about rental contracts to no avail. Leach noted
that Chinese rigs are busy drilling in the South China Sea
and even though India has several rigs available,
Indian-owned Oil and Natural Gas Company Videsh Ltd. (OVL)
refuses to rent to Daewoo in retribution for Daewoo's
decision to sell Shwe gas to China rather than India. Daewoo
may be forced to hire a more costly rig from Europe, which
would delay production by several months.


6. (C) Leach also opined that constructing two pipelines -
one for gas and one for oil condensate - from China to the
Bay of Bengal over Burma's mountainous terrain could cost
PetroChina more than $1 billion. While PetroChina has begun
drafting plans for pipeline construction, it has yet to
announce whether the contract would go to a Chinese or a
Burmese construction company. Daewoo officials noted that,
regardless of whom gets the contract, the Burmese Government
must also assist in the building of the pipelines, hinting
that the GOB might use forced labor for the construction
project.

A Bright Future Ahead
--------------


7. (C) Daewoo remains committed to working in Burma, and
Shwe gas production by 2011 is only one of Daewoo's projects,
Leach informed us. Daewoo will continue exploration in its
offshore blocks A1, A3, and deep sea block AD7 (adjacent to
A1). Leach affirmed that the seismic data for AD7 is
promising, and Daewoo plans to drill two exploration wells in
the AD7/A1 region, as well as five wells in the shallow areas
of A1 and A3. Once Daewoo is able to secure a rig for deep
sea drilling, the company plans to build exploration wells in
the deeper part of the A3 block, estimated at 1300 meters
deep. Leach estimated that Daewoo's exploration plans for
2008 could cost more than $50 million, with deep sea
exploration accounting for $20 million of the total.


8. (C) Daewoo would also like to drill for oil in onshore
blocks, which are mostly reserved for Burmese companies,
Leach said. Current onshore oil production of 10,000 barrels
a day is abysmal, and Daewoo believes it has the technology
to produce at least 50,000 barrels a day. The onshore oil
reserves are great, Leach declared, but MOGE and other
onshore producers such as Focus Energy are unable to tap the
reserves because they lack the technology and knowledge of
how to drill in high pressure areas (Ref D). Daewoo Managing
Director Su-Yeong Yang has met with the Ministry of Energy to
petition for two of MOGE's onshore blocks in Magwae Division.
While the Ministry of Energy has yet to make a decision,
Daewoo has begun researching seismic data for Central Brma.


9. (C) Leach also informed us of Daewoo' long-term
production plans for the Shwe gas fiels. By 2023, Daewoo
plans to drill another nine ells in the A1 and A3 blocks;
these structures hve estimated gas reserves of 4.7 trillion
cubic eet. Once drilling commences, Daewoo will look for
available markets for export.

China: Desire for Gas, But Limited Experience
--------------


10. (C) In our discussions about China and its desire for
gas, Leach noted that while several Chinese firms - CNOOC,

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CNPC, and Sinopec - have concessions for both offshore and
onshore blocks, none of the companies have begun exploration.
Although CNOOC is the only Chinese company with deep sea
drilling experience, it does not have rights to any deep sea
blocks. CNPC controls deep sea blocks AD1, AD6, and AD8
(which surround the Shwe gas fields) but lacks the technical
ability to explore such depths (1300 meters and deeper),
Leach explained. According to its production sharing
contract, CNPC has five years to explore the blocks before it
loses the concession. CNPC has approached several companies,
including Daewoo, to assist with exploration, but according
to Leach, did not offer profitable contract terms. CNPC is
still looking for a partner, but refuses to work with CNOOC,
despite CNOOC's experience and tchnical capability.

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


11. () Despite Burma's ongoing economic and humanitaria
crises, Daewoo not only remains committed to woking in
Burma, but plans to increase its investmet if given the
opportunity. Company officials blieve that there are
profits to be made, which gven the absence of world-class
competition from .S. and European companies, makes good
business ense. Now is the time that we should urge the
Soth Korean Government to recommend Daewoo put any epansion
plans on hold. Oil and gas revenues, whch totaled more than
$2 billion in 2007, go diretly to Than Shwe and his regime.
He has not spen these increasing revenues to address the
deterioating conditions facing the Burmese people. Insted,
he has chosen to use the revenues to tighten is hold on
power and fill his pockets and those f his cronies. Daewoo
has already learned firstand that the Than Shwe regime is
no motivated by business sensibility, but rather uses its
resources to reward whomever it considers important (like the
Chinese) at the moment. The lure of potential profits blinds
Daewoo to the reality of the Than Shwe regime.

VILLAROSA