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Licensed to drill (FEER 8.8.91)

/* posted 9 Jan 10:00pm 1997 by drunoo@xxxxxxxxxxxx in igc:reg.burma */
/* ----------------" Licensed to drill (8/8/91) "--------------- */

Foreign oil companies are coming up dry in Burma
By Janathan Friedland in Rangoon and Bertil Lintner in Bangkok

Two years after 10 foreign companies signed production-sharing agreements
with state-run Myanmar Oil & Gas Enterprise (MOGE) and began exploring
Burma's vast underdeveloped interior, no new oil has been recovered. While
foreign oil-company executives in Rangoon are optimistic about the
potential for a big strike, they admit that working conditions are more
difficult than expected and the cost of recovery greater than anticipated.

Assumptions of a bonanza, however, appear to be based solely on a 1988 UN
Development Programme report based o government estimates that places total
rserves at 3-5 billion barrels. Known reserves are estimated at a modest 51
million barrels, or less than Japan's.

Meanwhile, the presence of hundreds of foreign oil workers replete with
helicopters and four-wheel-drive vehicles has excerbated Burma's energy
crisis: the companies together are now the largest user of oil in Burma
after the military.

The companies are Petro-Canada; Amoco and Unocal of the US; Idemitsu Oil of
Japan; Yukong of South KOrea; Kirkland Resources, Premier Oil and a joint
venture between Croft Exploration and Clude Petroleum of Britain; Royal
Dutch/Shell Group, a British-Dutch joint venture; and Broken Hill
Proprietary (BHP) of Australia.

Analysts estamates that Burma's oil fields, operated by MOGE, are producing
only 12,000 barrels per day(bpd) -- down from 30,700 bpd in 1985 -- because
of mismanagement and the use of outdated equipment.

The entrance of foreign drillers provided a brief fillip tp Burma's
foreign-exchange reserves i the form of hefty signature bonuses ranging
from US$5-15 million each. But the country is now importing more petroleum
than it is producing.

Diplomats say overall supply is roughly two thirds less than what
consumption demands. Cooking fuel, diesel and petrol are in short supply,
particularly in rural areas where tractors stand idle for lack of fuel.

Moreover, frequent power shortages have hampered already poor industrial
productivity. According to the latest figures available, kerosene
production decreased 55% between 1983 and 1988. The decline resulted in
greater -- and ecologically harmful -- dependence on fuel-wood and

Petrol and kerosene smuggled into the country from China are occasionally
available, particularly in Mandalay and towns further north. But these
fuels are of poor quality and cost more than US$3 a litre, more than 100%
higher than a year ago. Observers say higher fuel prices were primarily
responsible for an increase in the inflation rate to 60% in the first five
months of this year.

To help redress the shortages, MOGE is soon expected to open its fields in
the country's central belt near Prome to production-sharing agreements. ON
4 July, the MOGE approved a general proposal on enhanced oil recovery.
Although terms have not been disclosed, foreign oil companies are expected
to be encouraged to bid for service contracts with payment to be provided
to MOGE in the form of a percentagel of crude extracted. The split is
expected to be 80-20, with MOGE taking the lion's share. It is likely that
MOGE will demand some form of signature bonus even on service contracts.

Foreign oil-company executives are enthusiastic about the proposal,
especially since their operations have slowed because of domestic fuel
shortages. They note, nowever, that even though output from MOGE's fields
would climb to the 35-40,000 bpd level within three years because of
improved exploration and drilling techniques, the logistical problem of
transporting and refining crude will still be a large one.

Burma has three main refineries, which in 1988 had a combined
crude-procesing capacity of 56,000 bpd, but capacity utilisation is low at
36%, while processing costs, as a result , are high. MOGE insists on having
crude processed in these refineries, which are outdated and inefficient
even in the best of times. Getting crude to the refineries by tanker-barge,
the only feasible way, is difficult. Also, siltation on the Irrawaddy River
makes delivery time-consuming and expensive.

Foreign oil-company executives gove MOGE and its director-general, Tin Tun,
high marks for a cooperative attitude. They also laud the relative
generosity of the initial concessions, particularly in light of the Ne Win
regime's antipathy towards foreign investors. But they complain of
unpredictablity on the part of other government functionaries, particularly
local military officials in concession areas near or within rebel-contested

Other gripes centre around Burma's nightmarish telecommunications and air
travel network, its inadequate legal system, and nettlesome rules and
regulations that seem almost designed to add costs. Companies are obliged,
for instance, to process seismic date in RAngoon at three to four times the
cost of doing so in Singapore.

Diplomats say that for all their complaining, oil companies have escaped
much of the corruption and bureaucratic rigidity that plague Burma's other
foreign investors. "The oil companies are not particularly concerned about
the government's vacillating attitides towards foreign investment because
they know they the golden goose," an Asian diplomat in Rangoon says. "The
SLORC [the State Law and Order Restoration Council] still harbours the
belief that they will strike a lot of oil and the country's financial
problems will disappear."

Foreign oil-company executives say they have always been prepared for a
tough road in developing one of Asia's last uncharted oil patches. Aside
from the security problems created by a dozen or so ethnic insurgent
movements and the inherent difficulty of dealing with a heavy-handed
military regime despised by the populace, they knew from preliminary
studies that most new hydrocarbon discoveries would be at expensive depths
of 5,400-6,600 m.

What they had not reckoned with, however, was the complicating factor of
numerous subterranean high-pressure zones that make drilling dangerous.
Yukong, the first foreign oil company to sign a production agreement and to
begin drilling, spent large sums to airlift drilling mud by helocopter
from Singapore after a well it spudded last year threatened a blow-out.
Observers say the well, which was recently capped, cost the company at
least US$20 million.

Ohter companies have not had much better luck. Analysts say both Amoco and
BHP have drilled and capped dry wells. Six to eight exploration wells are
expected to be in operation by the end of 1991, but the prognosis that any
will tap into recoverable reserves remains ucertain. Together, oil
companies have poured an estimated US$415 million into their exploration

Observers say the day of reckoning will soon be coming for several oil
companies, particularly for smaller concerns such as Kirkland Resorces and
Premier. Kirkland Resources is exploring in an area near the Thai border
that is disputed by Mon and Karen insurgents, and Premier is exploring in
an onshore area and in the Gulf of Martaban. A singapore-based analyst
says, "1992 will be the year when most [companies] make their minds up."

But the risks of doing business in Burma is not appear to bother some
companies. MOGE is evaluaging tenders for five onshore blocks. Three lie
along the Arakan Coast southwest of Rangoon, while another is southeast of
the capital.

The fifth and potentially most promising block is in Kachin state, in an
area where the Kachin INdependence Army operates. At present, the
government controls only garrison towns in the area and the roads between

MOGE is also expected to open offshore concessions to bidders in the Gulf
of Martaban for the first time since 1977. Originally, 13 blocks were
licensed to Japanese, West German, French and Italian companies on
production-sharing terms in 1973. HOwever, the concerns relinquished their
concessions after finding little oil worth exploiting.

Companies bidding to explore the offshore area are believed to include
British GAs, Idemitsu and Mitsubishi Corp. of Japan, Total of France and
Nebsco of Australia. Analysts expect MOGE to grant the concessions by

Burma's military government has agreed to a Thai proposal for the
development and production of natural gas in the Gulf of Martaban. The
project, which will cost US$1 billion, includes the construction of a
pipeline to transmit natural gas from Burma's southeastern coast to
Thailand via Three Pagoda Pass.

The size of natural-gas reserves in the Gulf of Martaban is estimated to be
306 trillion cu-ft. The deal has been agreed upon by the Petroleum
Authority of Thailand's Exploration & Production Co. and MOGE.