Chinese market for Myanmar’s Shwe Gas stalls

02 May 2015
Chinese market for Myanmar’s Shwe Gas stalls
Photo: EPA

The laying of twin oil and gas pipelines cutting through northern Myanmar to China, sparked complaints of poor compensation to villagers and raised environmental concerns during their construction phase from 2010 to mid-2013.
Now, after the first full year of operations, the feasibility of the controversial project has been questioned with the disclosure that Chinese state oil company PetroChina is struggling to sell gas from the Shwe field in the Bay of Bengal, to Chinese clients.
The Shwe field, which supplies PetroChina’s parent company China National Petroleum Corporation (CNPC) exclusively, supplies the natural gas for the 900-kilometer pipeline built from the central coastal town of Kyaukphyu, Rakhine State, to the border town of Ruili, in China’s Yunnan Province.
The pipeline’s capacity is 12 billion cubic metres per year but in 2014 it pumped only 25 percent of this volume into China, according to industry reports.
A key market for the Myanmar gas was meant to be China’s southern Guangxi Province, but sales have been so disappointing that PetroChina is reportedly seeking to sell off its gas distribution system there, raising questions about the future ownership of its Myanmar operations.
“The [Guangxi] region is a market for gas imported via pipeline from Myanmar, but PetroChina has struggled to secure more clients to take those imports,” Interfax Natural Gas Asia said on April 16. “Myanmar piped 2.2 tonnes, or around 3 billion cubic metres, to China in 2014, far below the transmission pipeline’s capacity.”
“PetroChina incurs a loss from selling this gas domestically and would like to see higher prices in Guangxi to narrow the loss, but that would risk collapsing demand. The company lost RMB 1.07 [17 US cents] on average for every cubic metre of Burmese gas sold last year.”
As a result, PetroChina “is quietly divesting gas pipeline assets in south China,” Interfax said.
“PetroChina …will transfer its entire 51 percent shareholding in Guangxi PetroChina Kunlun Natural Gas to a regional government investment vehicle.”
It’s not clear whether a similar divestiture is planned for the ownership of the Myanmar pipeline, which is currently held by a CNPC joint venture with Myanmar Oil & Gas Enterprise. Nor is it clear if the consortium holding the Shwe field gas, will be looking for new markets. Currently, Myanmar is buying 200 million cubic metres of gas for local consumption, although its quota gives the country the chance to by 2 billion cubic metres, according to a recent local media report.
The Shwe Gas project is a joint venture between Daewoo International (51%), ONGC Videsh Ltd of India (17%), Myanmar Oil and Gas Enterprise (15 %), GAIL Ltd of India (8.5%) and Korea Gas Corp (8.5%).
Daewoo did not answer emailed questions from Mizzima Weekly.
Construction of the two pipelines project, at an estimated cost of $2.5 billion, was dogged by complaints of poor land compensation, insufficient environmental impact studies and for hiring more Chinese labourers than Myanmar nationals.
Although China has been importing more crude oil since the collapse of oil prices in the middle of last year, the oil pipeline running alongside the gas line through Myanmar is also underused, primarily because of delays in the construction of a new refinery in Kunming, Yunnan Province, which it was meant to feed.
The refinery was originally scheduled to be completed last year but developer CNPC now says it will be the end of 2016 at the earliest before the 200,000 barrels per day plant is operational. By comparison, Myanmar’s entire refining capacity is only about 50,000 barrels per day.
The slowdown in developing the Kunming refinery reflects massive refining overcapacity in the country, the China Oil & Gas Monitor said.
“China has over capacity in refining and has moved from being a significant net importer of products to an exporter,” Simon Powell, head of Asian oil and gas research at CLSA Asia-Pacific Markets in Hong Kong was quoted in the Monitor on April 16. “We think that China could have 1 to 2 million barrels per day of excess refining capacity.”
This overcapacity is pushing China’s national oil companies into exporting more fuel oils such as diesel and gasoline.
“Sinopec’s big 184,000 barrels per day refinery in southern Hainan island province used up more than 50 percent of its first quarter export quota despite facing losses shipping to foreign markets,” the Monitor said.
Sinopec’s Hainan refinery will export 160,000 tonnes of fuel oil this month, up 10,000 tonnes on March. The exports will be a combination of gasoline, jet fuel and gasoil, the Monitor said. The Hainan refinery managers planned to export a total of 1.78 million tonnes this year, it said, quoting an unnamed company source.
Hainan is one of 11 of China’s biggest state refineries permitted to have export quota licences, reflecting the downstream sector’s overcapacity and sluggish domestic demand. Between them, they have an annual capacity of 152 million tonnes of crude oil.
“The increased fuel oil exports trend will likely continue as China’s industrial growth continues to slow,” the head of research at Nomura Markets in Hong Kong Gordon Kwan was quoted by the Monitor.
“The weak domestic economy has led to disappointing demand for industrial fuels like diesel and fuel oil, prompting the government to introduce more favourable measures such as financial stimulus and expedited export licenses to ensure profitability in the refining sector. Meanwhile, domestic refinery overcapacity remains a structural issue in China. Refineries are fine tuning their product slate to churn out more gasoline and jet fuel, while trimming diesel and fuel oil output to try to restore demand-supply fundamentals,” Kwan said.
China’s runaway refining seems to be driven in part by a national desire to buy more crude from abroad while prices remain so low – even when domestic storage bunkers are full and refinery stocks brimming.
China imported 26.8 million tonnes of crude in March which was almost 5 percent, or 1.26 million tonnes, more than in February, latest data from the General Administration of Customs shows.
However, the slow construction of bunkers for the second phase expansion of China’s strategic petroleum reserve will start to restrict crude oil imports, industry analysts ICIS said on April 12.
The storage capacity built by CNPC at Kyaukphyu to temporarily hold oil imported from the Middle East and Africa is also limited. The transhipment terminal has 12 tanks each with a capacity of 100,000 cubic metres. That would provide storage for up to 7.5 million barrels – equal to about 17 days operation of the pipeline at full capacity.
It looks like China’s expensive trans-Myanmar pipelines, which bore a considerable social cost for the government in terms of disgruntlement among villagers affected by the project, are going to remain underused for some time to come.
This Article first appeared in the April 30, 2015 edition of Mizzima Weekly.
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