Attractive Risk/Rewards Ratings Highlight Country Strengths

BMI View : Our new Risk/Rewards Ratings (RRRs) for Myanmar clearly reflect the country's emerging potential but also the risks when operating in the domestic oil and gas sector. Overall, Myanmar ranks highly in our updated Upstream Asia RRR, coming in third place at a regional level. The country scores particularly well for the Country Rewards and Industry Risks components of the ratings, reflecting increasingly investor-friendly regulations, an improvement in ownership rights and better fiscal conditions compared to its neighbours. An increasingly competitive and diversified upstream sector and a more attractive regulatory environment should help bolster the country's hydrocarbons production prospects, notably for gas, which could be widely present in Myanmar's offshore.

A Healthy Upstream Sector

Overall, we remain bullish on Myanmar's hydrocarbons potential. The removal of international sanctions and the government's ongoing efforts to improve the country's licensing procedures and enhance the regulatory environment are reflected in our high country rewards and industry risks ratings.

Government Efforts Lift Upstream Country Rewards And Industry Risks To New Heights
Myanmar and Asia Regional Upstream Risk&Rewards

Attractive Risk/Rewards Ratings Highlight Country Strengths

BMI View : Our new Risk/Rewards Ratings (RRRs) for Myanmar clearly reflect the country's emerging potential but also the risks when operating in the domestic oil and gas sector. Overall, Myanmar ranks highly in our updated Upstream Asia RRR, coming in third place at a regional level. The country scores particularly well for the Country Rewards and Industry Risks components of the ratings, reflecting increasingly investor-friendly regulations, an improvement in ownership rights and better fiscal conditions compared to its neighbours. An increasingly competitive and diversified upstream sector and a more attractive regulatory environment should help bolster the country's hydrocarbons production prospects, notably for gas, which could be widely present in Myanmar's offshore.

A Healthy Upstream Sector

Myanmar Shines In Regional Risk Rewards Upstream Ratings
Country Upstream Risk/Rewards Ratings
Australia 68.6
Vietnam 62.2
Myanmar 61.8
Papua New Guinea 60.5
China 56.5
Pakistan 55.7
Thailand 55.4
Philippines 54.0
Malaysia 52.5
India 52.2
Japan 45.4
Indonesia 38.3
Singapore 37.3
Hong Kong 37.1
South Korea 33.8
Taiwan 14.3
Source: BMI

Overall, we remain bullish on Myanmar's hydrocarbons potential. The removal of international sanctions and the government's ongoing efforts to improve the country's licensing procedures and enhance the regulatory environment are reflected in our high country rewards and industry risks ratings.

Government Efforts Lift Upstream Country Rewards And Industry Risks To New Heights
Myanmar and Asia Regional Upstream Risk&Rewards

The country's healthy country rewards score is bolstered by an increasing amount of non-state competitors and the limited state-ownership of assets in the upstream sector. Myanmar's excellent industry risks score has improved notably over the past few years. For its new offshore licensing round, the country has made efforts to take into account the consequences of the mitigated onshore tender in 2011: the main challenges identified at the time were the limit on foreign ownership, a lack of transparency and the close ties between MOGE and the military junta.

Shortly after the schedule for the offshore tender was announced, the Ministry of Energy declared that there would be no local ownership requirements for foreign investors working in deepwater blocks. In September 2013 the ministry also announced that when preparing bids, companies could suggest their own terms for profit sharing. This is a marked improvement on the standard Production Sharing Contracts (PSC) that the ministry published in September 2012. The ministry has also said that it will consider tax cuts and tax holiday extensions to further incentivise exploration companies. We also highlight the country's plan to limit ownership by each company to three blocks as a positive development - bringing strong competition and skills diversification to the country's upstream.

These positive developments have translated into strong investor interest in the country's two licensing rounds, launched in 2013. Both the latest onshore and ongoing offshore licensing rounds have attracted bids from major international oil companies (IOCs). The results of the onshore licensing round were announced in October, with major oil companies such as India's ONGC Videsh, Italy's Eni and Malaysia's Petronas awarded blocks; providing upside risk to crude production. Results from the country's offshore round are expected in March 2014 and will be crucial to growth in exploration for Myanmar, with extensive upside risk to our gas reserves and production forecasts. Results will also be critical in confirming whether the country's above-ground improvements will allow explorers to tap below-ground potential. Thus far, notable offshore block bidders include ExxonMobil, Total, Eni, Shell, Repsol and BG Group, signalling improved investor sentiment in response to the recent developments in the industry.

Shining Gas Production Prospect, With Large Upside Risk
Myanmar Oil (000b/d) and Gas (bcm) Production, Consumption and Net Exports

The country's shining industry risks and country rewards scores are indicative that further exploration and production (E&P) in the country will likely go forward in the near future, and is reflected in our forecast for the country's gas production and its healthy industry rewards score: we expect production to ramp-up throughout the decade, with output having started on the Shwe project and the Zawtika project due to start production in early 2014. Total gas production could hit 20bn cubic metres (bcm) per annum as early as 2016. Strong upside risk to reserves and production exists due to the growing IOC presence in the country and the ongoing offshore licensing round.

But Risks Still Widely Present

However, there are still significant risks when operating in the country, which could render certain international companies more hesitant. Myanmar is clearly still in transition from rule by military junta, and while the continued political reform could boost its risk country risk rating in the longer-term, it remains particularly low at the moment. The country's low-level and fragmented physical infrastructure, a lack of local skilled labour and low scores for corruption and the rule of law could temper investor confidence, specifically in the shorter-term.

In addition, although Myanmar could have vast below-ground potential, it has been little tested thus far, bringing considerable below-ground risk. E&P offshore Myanmar will also be costly, requiring advanced technical skills, while concerns over economic viability may have formed barriers to companies with more-limited capital means. These concerns could largely explain why out of the 61 companies initially qualified to bid for the offshore licensing round, 30 ultimately decided against bidding. That several smaller companies pulled out of the round would seem to support this view.

In addition, an important risk to note is the fact that the country's gas production is largely contracted for export, which could in the long-term create conflict as domestic gas consumption surges. The attitude of the government in directing production toward domestic demand will be a crucial risk factor to watch: there will be fast-growing domestic consumption as we forecast the country's real GDP to grow by between 7 and 7.7% year-on-year (y-o-y) over the next five years. As consumption is on the rise, we have already seen a reduction of exports to Thailand. In spite of the country's apparent will to maintain its international contractual obligations, the Deputy Minister of Energy, Htin Aung, announced in an interview in 2013 that, 'now with development, we need oil and gas for domestic use'. Any new discoveries, he said, 'will be prioritized toward domestic supply.'

Lastly, Political instability remains an inherent risk. The recent development and rapid opening of the country is promising, but the continued dominance of the military junta, together with growing tensions in the country's north-east region, could create risks to the sustainability of business-friendly policies; the 2015 elections will be an important milestone here, with a managed political transition signalling broader political stability.

However, BMI's Country Risk team anticipates that the political and economic environments will continue to improve, fuelling expectations that additional large companies will enter the market over the coming years. As long as this policy trend remains stable, we see a higher likelihood that IOCs will take final investment decisions (FIDs) on smaller fields.

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