US embassy cable - 03RANGOON178

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000178 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB/ESC 
COMMERCE PASS ITA JEAN KELLY 
TREASURY PASS OASIA JEFF NEIL 
CINCPAC PASS FPA 
 
E.O. 12958: DECL: 02/09/2013 
TAGS: ENRG, ECON, EINV, BM, Economy 
SUBJECT: BURMA'S ENERGY POLICY: BETTER LUCKY THAN GOOD 
 
REF: A. 02 RANGOON 1340 
     B. 02 RANGOON 651 
     C. 01 RANGOON 1819 
     D. 01 RANGOON 783 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) 
 
1. (C) Summary: Burma may have found a patch for its energy 
problems in 2003.  A slower decline at the aging A'Pyauk gas 
fields (about 50 miles north northwest of Rangoon), 
unexpectedly large finds of gas in the recently developed 
Nyaungdon field (about 20 miles northwest of the capital), 
and better than expected performance by the pipeline from 
Kanbauk (in Tanintharyi Division) to Hpa'an (in Kayah State) 
and Rangoon, apparently have lifted supplies of gas in lower 
Burma from 114 mcfd in early 2002 to perhaps as much as 178 
mcfd by the end of February 2003.  Some of these numbers are 
still soft, but, the overall supply of gas and electricity 
should be better (and perhaps far better) in Rangoon in 2003 
than it was in 2002.  There may also be some substantial 
savings of foreign exchange (perhaps as much as $100 million) 
on anticipated oil imports that now will not be required. 
Longer term (meaning 2004), the GOB is banking on hydropower 
to meet its energy needs.  By the end of 2003, the Ministry 
of Electric Power hopes to have an additional 355 megawatts 
of hydropower generating capacity on line, as well as a new 
125-megawatt coal-fired plant. If successful, that could 
produce the first balance between electricity supply and 
demand in Burma that anyone has seen for many years. However, 
it is still too soon to declare Burma's energy crisis over. 
If the new found gas gives out before the GOB can bring on 
line its planned hydropower plants, Burma could find itself 
saddled in late 2003 and early 2004 with the same sort of 
shortages that plagued life here in 2002. End summary. 
 
The GOB's Got Gas... 
 
2. (C) Burma may not face the same problems with electricity 
supplies during the dry season of 2003 as it did in 2002. 
When we reviewed Burma's energy balance last year, the 
situation looked grim (see Ref B).  Nationwide demand for 
natural gas stood at 234 million cubic feet per day (mcfd), 
while supplies were estimated at only about 114 mcfd because 
of the rapid decline in production in the A'pyauk fields, 
which had always provided the vast majority of Burma's 
onshore gas.  The net result was that gas supplies were not 
even sufficient to meet the demands of Burma's gas-fired 
electricity generating facilities, much less that of the 
country's urea, methanol, steel, and other plants.  The GOB, 
as a result, was obliged to shut down a good portion of its 
industrial capacity and convert a number of its gas-fired 
generating plants to diesel.  Even so, day-to-day electricity 
generating capacity dropped to between 550 and 600 megawatts 
during the dry season of 2002; i.e., to only 65 to 70 percent 
of Burma's estimated 800 to 840 megawatt demand.  Blackouts 
and brownouts became the rule throughout lower Burma, 
including Rangoon. 
 
3. (C) Since then, however, the GOB appears to have hit a 
stretch of luck.  While production at the A'pyauk fields 
continues to decline, from 116 mcfd in 1998 to about 35 mcfd 
today, the GOB's development of the Nyaungdon field has gone 
far better than anyone predicted.  Late last year, that field 
was producing only about 25 mcfd.  This year, according to 
government press releases, new discoveries have pushed 
production at Nyaungdon's 14 wells to more than 60 mcfd. 
According to Ministry of Electric Power planners, GOB workers 
are working overtime to replace the current 8-inch pipeline 
with one sufficient to carry the larger flow.  Reportedly, 
that new, larger capacity pipeline should be ready by the end 
of February. 
 
4. (C) At the same time, the pipeline which the government 
installed to carry gas from the Yadana export pipeline at 
Kanbauk to Hpa'an (later extended to Rangoon) has apparently 
performed far better than expected.  When the pipeline was 
first completed in 2001, most western experts judged it would 
never carry more than 10 to 20 mcfd, given its poor quality 
and contract terms which guaranteed only 20 mcfd to the 
government.  However, the Ministries of Energy and Electric 
Power now claim that they are pushing 50 mcfd through the 
pipeline -- more than enough to meet the demand of the new 
cement plant at Hpa'an while still leaving supplies for 
Rangoon's electricity facilities. 
5. (C) The net result of these developments is that Burma 
could have 60 mcfd to 70 mcfd of additional gas over and 
above levels in early 2002, even after allowing for the 
decline in production in the A'pyauk field.  In fact, 
assuming the best-case scenario, the GOB could have available 
as much as 178 mcfd of natural gas (128 mcfd being the total 
onshore production of gas from all fields including A'Pyauk 
and Nyaungdon, plus 50 mcfd from offshore) -- a level not 
seen since 1998. 
 
...But Will the Juice Flow? 
 
6. (C) Of course, it remains to be seen how real and how 
sustainable these increased supplies will prove to be.  The 
full 60 mcfd of gas from Nyaungdon has yet to arrive in 
Rangoon.  Furthermore, the Nyaungdon field in particular 
appears to have been developed entirely with a focus on the 
economy's short-term needs, without any attention to 
sustainability.  If the development program has been too 
aggressive, then that field too could peter out (as the 
A'pyauk field has) far sooner than the GOB now expects. 
 
7. (C) In the case of the Kanbauk-Hpa'an-Rangoon pipeline, 
there are two issues: contract terms and durability.  The GOB 
may now be drawing more than the 20 mcfd it is entitled to 
under its contract.  However, if it is, it is probably 
because of a short-term quirk in the system.  It is possible 
that Thailand cannot, for technical reasons, use all of the 
pre-paid gas that it has available in the stock it has built 
up under its "take or pay" contracts.  Producers in the 
second major offshore gas field, Yetagun, may also not yet be 
ready to use their full share of the pipeline's capacity.  If 
not, this may allow for additional gas to be pumped, from the 
Yadana field, for Burmese consumption.  In either case, Burma 
could shortly find itself squeezed back to the 20 mcfd to 
which it is actually entitled, as Thai drawings increase 
and/or Yetagun production comes up to full capacity.   As for 
durability, the pipeline was not built to the highest 
standards.  In fact, the most common prediction at the time 
it was completed was that it would blow up or blow out every 
time it was filled.  That, in fact, was the result during its 
first weeks of operation.  Since then, it has settled down, 
but there is still the risk that an accident will take the 
pipeline down for several weeks or months. 
 
8. (C) Nevertheless, the bottom line now is that the lights 
are on in Rangoon and they could stay on throughout the dry 
season, if the augmented supplies of gas can be sustained. 
Since October, there have been occasional outages, but we 
have not had anything like the rolling blackouts that plagued 
Rangoon during 2002's dry season.  Equally importantly, if 
the GOB has been able to bring an additional 60 to 70 mcfd of 
gas on-line since early 2002, there will be major savings of 
foreign exchange.  Each 22 mcfd of gas effectively translates 
into 1 million barrels per year of diesel fuel.  At current 
prices, consequently, an additional supply of 65 mcfd of gas 
would mean potential savings of up to 3 million barrels per 
year of diesel worth approximately $100 million - $120 
million.  It would also mean less downward pressure on the 
kyat, which at 1100 kyat/dollar, is still running well above 
the 1200 to 1400 kyat/dollar rate that we predicted for the 
end of 2002 and the beginning of 2003. 
 
I've Got One Word For You: Hydropower 
 
9. (C) The Ministry of Electric Power asserts that the 
long-term solution to all these uncertainties and stop-gap 
solutions is hydropower.  According to the Ministry's 
Director General for Planning, there is now 390 mw of 
installed hydropower capacity in Burma, but this is only 
about 1 percent of Burma's estimated potential.  In its most 
recent 5-year plan, the GOB set the ambitious goal of 
installing an additional 2000 mw of hydropower capacity by 
2006 (pie in the sky at best).  Unlike many older hydropower 
plants, which are located in remote border or mountainous 
areas, many of the new plants are to be constructed in river 
valleys closer to the main power grids around Mandalay and 
Rangoon.  Mini-hydropower and other small plants will also be 
built to electrify more rural areas. 
10. (C) The DG admitted that for the next two years, the 
objective is to patch as quickly as possible current energy 
shortages.  Thus, planners hope that by the end of 2003 the 
Ministry's Myanmar Electric Power Enterprise (MEPE) will have 
completed two hydropower plants with a combined 355-mw 
capacity (the Paunglaung dam in southern Mandalay Division 
with 280 mw, and the Mone dam in central Magway Division with 
75 mw).  They also hope to bring on line one coal-fired 
thermal plant with 125-mw capacity.  This additional 
capacity, once plugged into the grid could make up the 
current deficit in power production in lower Burma, while 
replacing imports of diesel, and reducing the GOB's exposure 
to gas supplies.  By 2005, the planners estimate, the new 
hydropower capacity should be well ahead of total demand, 
allowing strategists to ponder longer-term energy plans. 
 
Comment 
 
11. (SBU) If all goes as planned, for the next several months 
at least supplies of gas and electricity to the capital 
should top the levels available in 2002.  If the planned 
hydropower is actually installed and available as predicted, 
then this additional gas supply may in fact bridge the gap. 
 
12. (C) Of course, there will still be a case for the 
construction of a major pipeline to bring Burma's offshore 
gas onshore for domestic use, if only to fuel now idled 
industrial facilities.  However, accessing that gas will not 
be the sort of critical political event that finding supplies 
of fuel was this year.  Had the citizens of Rangoon had to 
spend one more season in the dark with living standards 
undermined by a rapidly depreciating kyat, this government 
truly could have been in trouble.  Even now, it's not secure, 
but with the energy situation now apparently under control, 
at least to some degree, it may have more breathing space 
than we anticipated several months ago. 
Martinez