BURMA: ONSHORE OIL PRODUCTION LIMITED

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000112

SENSITIVE
SIPDIS

STATE FOR EAP/MLS; INR/EAP; OES
PACOM FOR FPA;
TREASURY FOR OASIA:SCHUN

E.O. 12958: DECL: 02/20/2019
TAGS: ECON ENRG PGOV EPET PINR BM
SUBJECT: BURMA: ONSHORE OIL PRODUCTION LIMITED

REF: A. 07 RANGOON 1036

B. 08 RANGOON 162

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

Summary
--------------


1. (C) Although the GOB claims Burma has untapped oil
reserves of 3.5 million barrels, actual production continues
to fall far short of the country's domestic needs. In 2008
onshore production averaged 10,000 barrels a day, forcing the
GOB to import up to 20,000 barrels a day of oil and diesel.
While state-owned Myanmar Oil and Gas Enterprise (MOGE)
controls more than 70 percent of onshore fields, three
private companies account for more than two-thirds of daily
production. Industry analysts agree that Burma's onshore
blocks contain substantial oil reserves; however, operational
costs and a lack of technology and infrastructure make it
nearly impossible to extract. Despite MOGE requests to
develop Burma's more remote blocks, private companies have no
plans for new investments, and several Chinese companies have
withdrawn from their contracts. End Summary.

Producing Black Gold
--------------


2. (C) According to the Ministry of Energy, Burma has oil
reserves totaling more than 3.5 million barrels within its
territory; industry analysts estimate the true amount to be
far lower, perhaps less than one million barrels (septel).
Despite alleged substantial reserves, Burma's current onshore
oil production is a paltry 10,000 barrels a day, the majority
of which is produced by three private companies --
Singapore-based (and Burmese owned) Myanmar Petroleum
Resources Ltd. (MPRL),Indonesian-French Gold Petrol, and
Swiss-owned Focus Energy. (Note: these companies are able to
successfully produce because the fields continue to have oil
reserves and they are using newer, efficient technology. End
Note.) Burma receives 10,000 barrels of oil condensate a day
from the offshore Yetagun gas fields, which means the GOB
must import an additional 20,000 barrels/day from Malaysia
and Indonesia to meet local demand.

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Burma's Major Onshore Oil and Gas Fields
2008 Production
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Company Field State/ Production Claimed
Name Division Daily Reserves
-------------- --------------
MOGE Nyaungdon Rangoon 1069 barrels 297 bil/CF
Apyauk Rangoon 220 barrels 483 mil/CF
Myanaung Irrawaddy 51 barrels 76 mil/bar
Letpando Magwe 668 barrels 16 mil/bar
Thargyitaung Magwe 493 barrels 138 mil/bar
Chauklanywar Magwe 541 barrels 400 mil/bar
MPRL Mann Rangoon 2000 barrels 433 mil/bar
Focus Kanni Magwe 1900 barrels 56 mil/bar
Htaukshabin Magwe 607 barrels 157 mil/bar
CNPC Pyitaung Bago 201 barrels 50 mil/bar
Gold- Yenangyaung Magwe 1800 barrels 540 mil/bar

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Petrol
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Total 9550 barrels
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Source: MOGE, 2008
Note: CF is cubic feet, bar is barrels


3. (C) Ye Myat Soe, Focus Energy Technical Coordinator,
told us that although MRPL, Gold Petrol, and Focus -- the
three largest oil producers -- have production contracts for
their respective blocks, MOGE has indicated an interest in
becoming the operator for these blocks. Focus Energy's
contract for the MOGE-2 block expires in May 2009; Focus is
under negotiations with MOGE to renew its contract for an
additional 11 years but Focus officials have been told that
the contract extension was "not guaranteed." While Gold
Petrol's contract for the IOR-2 and MOGE-1 blocks is valid
for several more years, the company's Acting Director Raymond
Bona told us that the company may divest because it has not
been paid since December 2007 (Ref A). (Note: MPRL
confirmed that MOGE waits approximately one year before
paying outstanding invoices. All private onshore companies
face the same problem. End Note.) MPRL has a production
contract for block MOGE-2 through 2014 and is not concerned
with losing its block to MOGE, Country Director Terry Howe
told us.


4. (C) Although seismic data shows that there are still oil
and gas deposits in Burma, they are located deep beneath the
surface under areas of high pressure, according to officials
from MPRL, Gold Petrol, and Focus Energy. To tap into the
remaining reserves, investors would need to employ the newest
drill technology, digging on a diagonal to avoid high
pressure areas. This type of drilling is not economical,
particularly given Burma's infrastructure challenges -- for
example, no access roads to the sites and no electricity or
diesel stations to power machinery -- and the declining
value of oil on the world market. Ye Myat Soe commented that
the three private companies have no plans to expand
production in 2009 and 2010, despite MOGE pressure to do so.

Seeking Private Investors
--------------


5. (C) Under Burmese law, only the state can invest in the
onshore oil and gas sectors; if a foreign company wants to
invest, it must enter into a joint venture with MOGE, the
state-owned enterprise responsible for oil and gas
production. According to Ye Myat Soe, all private companies
with contracts to work or explore onshore have joint ventures
with MOGE. MOGE also independently operates the remaining
onshore fields. He stated that MOGE's ownership percentage
varies by company and contract, but is usually between 25-50
percent. Although the joint venture contracts state that
MOGE will provide funding for the projects, in all cases MOGE
provides only antiquated equipment and labor and no capital,
Ye Myat Soe explained. So even though the companies have JVs
with MOGE, they do all the work but must share the profits.


6. (C) During the past two years, MOGE, which has limited
resources, technology, and experience to develop Burma's oil
and gas resources, has opened tenders on more than a dozen
onshore blocks. The majority of these blocks are located in

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remote areas, Silverwave Energy General Manager Minn Minn
Oung told us. (Note: Silverwave, which is financed by regime
crony Tay Za (Ref B),signed a production contract for block
B-2 in 2008. End note.) Ye Myat Soe confirmed that MOGE
wants private companies to invest in the more remote blocks
because of the high operational costs and difficulties
accessing these areas. However, MOGE's plan has seemingly
backfired: CNPC in late 2008 withdrew from its production
contract because it found only gas, which is not economically
viable. Other companies, such as CNOOC and Chinnery Assets,
informed us that initial exploration in their blocks was too
difficult given the high pressure areas and was too expensive
to continue.


7. (C) Below is a list of current private onshore operators
and the status of their investments:

-- Gold Petrol, producing in blocks IOR-2 and MOGE-1 (Magwe
Division);
-- MPRL, producing in block MOGE-2 (Magwe Division);
-- Focus Energy, producing in block MOGE-2 (Mann Field in
Magwe Division);
-- Burmese-owned Silverwave Energy, exploring in block B2
(Sagaing Division);
-- Indian-owned Essar, exploring in block L (in Rakhine
State);
-- Chinese-owned Sinopec, doing data collection in block D
(in Sagaing Divisions); and
-- Chinese National Offshore Oil Company (CNOOC),contract
for blocs C-1, C-2 (Sagaing Division),and M (Rakhine State).

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


8. (C) The Burmese Government has done little long-term
planning for the development of its onshore fields, many of
which have been in production since the late 19th and early
20th centuries. Now that many of its onshore fields are
drying up, MOGE continues to push private investors to
develop new fields in increasingly remote areas. MOGE's
efforts will likely fall far short of expectations, as
companies are instead choosing to withdraw from existing
contracts and pay the penalties rather than invest in costly
and difficult exploration with little confidence of success.
As the world financial crisis hits companies' pocketbooks and
the world price of oil and gas continues to drop, the
opportunity costs of exploring Burma's onshore blocks will
increase and more companies will likely rethink their
investment plans.

DINGER