US embassy cable - 05RANGOON327

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000327 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 03/15/2015 
TAGS: ENRG, PREL, ECON, PGOV, BM, Economy 
SUBJECT: BURMA: GOVERNMENT STYMIES EFFORTS TO DEVELOP AGING 
ONSHORE FIELDS 
 
REF: RANGOON 146 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.4 (B,D) 
 
1. (C) Summary: Burma's onshore oil fields are decrepit, old, 
and produce very little.  Western oil companies decided 10 
years ago that new onshore prospects were not promising. 
Nonetheless, high world oil prices have created a wave of new 
foreign investment in onshore development and exploration. 
The GOB's response to this unlikely mini-boom?  After 
allowing in a few prospectors, ban all new foreign investment 
in onshore fields.  End summary. 
 
Burmese Oil Production is Museum Quality 
 
2. (SBU) A recent visit to one of Burma's four largest 
onshore oil fields, Yenanchaung, clearly illustrated the 
decrepit state of Burma's oil industry.  Yenanchaung in Magwe 
Division 150 miles southwest of Mandalay, was first developed 
in 1887 -- two years after the last Burmese king was ousted 
-- and its peak production came in 1918 (16,000 barrels/day). 
 The field is covered with antiquated rigs, pumps, and other 
machinery -- much of it still in operation.  Now, its 140 
wells are producing a paltry 1,880 barrels/day -- below its 
GOB-designated target of 2,000 b/d.  Since 1997, Yenanchaung 
has been operated by a JV between the parastatal Myanmar Oil 
and Gas Enterprise (MOGE) and a foreign partner (now a 
French-Indonesian venture called Goldpetrol, formerly an 
Indonesian firm called Goldwater).  Mostly this JV has 
focused on using technology to improve recovery of remaining 
oil from existing wells.  However, in the past couple of 
years it has drilled four new wells, which are now producing 
273 b/d, and in October 2004 Goldpetrol announced it would 
invest $8 million to dig six new test wells in 2005. 
According to the MOGE geologist at Yenanchaung, there are 
still 290 million barrels worth of reserves under the field 
(though he did not break out recoverable reserves from this 
figure), which could be tapped if deeper wells -- 7,500-8,000 
feet -- are drilled. 
 
3. (SBU) New investment in old fields is flowing into two of 
Burma's other onshore oil fields -- Mann and 
Htaukshabin/Kanni.  They are also producing at low levels and 
are well past their peak production years.  However, in the 
past several months, the private operators of these fields 
(to date only servicing or enhancing production at existing 
wells) have expressed interest in drilling new test wells. 
Focus Energy, a British Virgin Islands company operating the 
Htaukshabin/Kanni fields, announced in October 2004 it would 
invest $4 million to drill nine new wells.  At the same time, 
the Rangoon-based, but Singpore-registered, Myanmar Petroleum 
Resources, Ltd. announced it would invest $9 million to sink 
five new wells in the Mann field (which produces about 2,400 
b/d). 
 
Onshore Exploration Planned 
 
4. (SBU) On top of the new interest in squeezing more from 
existing fields, there has also been foreign interest in 
exploring for new onshore deposits.  Such interest has been 
rare in Burma since foreign energy firms flooded into the 
country in the 1990s looking for onshore and offshore gas and 
oil.  With a few exceptions, these companies subsequently 
deserted the country due to poor results or a poor business 
climate -- or both.  Nonetheless, on January 26, the Chinese 
National Offshore Oil Corporation (CNOOC), alongside Golden 
Aaron Pte., Ltd of Singapore and China Huanqiu Contracting 
and Engineering Corporation, signed a production sharing 
contract (PSC) with MOGE to explore two large onshore blocks 
north of Mandalay.  CNOOC and its partners also signed a PSC 
to explore an Andaman Sea offshore block north of the Yadana 
field.  This same consortium also signed PSCs in 2004 with 
MOGE for exploration in two Bay of Bengal blocks off the 
Rakhine State coast, southeast of the Daewoo blocks (reftel), 
and a large block in the Andaman Sea off the Tanintharyi 
coast north of the Yetagun field. 
 
5. (C) Based on previously poor results of onshore 
explorations, and the long lull in new exploration that's 
been marked only by a worsening investment climate, the 
renewed interest in onshore exploration and expanded 
production is a bit unexpected.  However, according to one 
foreign oil man in Burma, the global price of oil is driving 
activity even in marginal areas.  He said that one barrel can 
be extracted from Burma for around $10 at an onshore well. 
Thus, smaller energy exploration firms are seeking even a 
marginal amount of additional oil because the profit margin 
is so large.  The explanation for the larger Chinese state 
firms is less clear, though he speculated it was simply due 
to a campaign of these firms to seek everywhere for new 
sources of oil -- no matter how remote the chance of 
discovery. 
GOB: Cease and Desist 
 
6. (C) The expanding interest in Burma's onshore oil fields 
in late 2004 and early 2005 has sparked a curious response by 
GOB energy authorities.  On March 7, the Ministry of Energy 
sent notice to all foreign investors that henceforth onshore 
blocks would be reserved exclusively for MOGE exploration and 
development.  The proclamation does not appear to apply to 
existing onshore investments, and does not mention FDI in 
offshore fields.  Authorities gave no reason for this 
unexpected announcement, though one energy source guessed 
that senior SPDC leadership was unhappy with paying scarce 
hard currency to foreign investors for their expertise and 
believed that MOGE could "do it just as well," with less 
foreign exchange outflow (though of course it cuts off 
foreign exchange inflow as well). 
 
Comment: Snatching Defeat from Victory 
 
7. (C) The decision to exclude foreign firms from future 
onshore exploration and development is a foolish decision in 
the midst of a multi-million dollar mini-boom in foreign 
investment in a sector that has been moribund for nearly a 
decade.  Instead of maximizing the benefits of historically 
high oil prices and regional companies' hunger for new 
sources, the GOB has decided to pursue a misguided plan it 
thinks will save money and support an inefficient state-owned 
enterprise.  Sadly this is only the latest of many illogical 
energy policy decisions -- not the least of which is the 
GOB's stubborn refusal to use any of its significant offshore 
gas reserves to remedy chronic and economically debilitating 
power shortages across the country.  End comment. 
Martinez