Sunday, August 20, 2017

Doubts raised over Chinese oil refinery plan

A Chinese-led US$3 billion plan to build Myanmar’s largest oil refinery near the southern city of Dawei has raised questions about China’s strategic intentions in launching apparently commercially unviable projects, while local groups have already signalled their opposition.

A sign offers directions to a planned deep sea project in Dawei in 2012. Photo: EPAA sign offers directions to a planned deep sea project in Dawei in 2012. Photo: EPA

Guangdong Zhenrong Energy Co, a Chinese state-controlled commodity trader, said the Myanmar Investment Commission (MIC) had signed its approval at a ceremony in Nay Pyi Taw on March 29 – the last full day in office for U Thein Sein’s government.

That day Guangdong Zhenrong also signed an agreement to take a 70 percent stake in the project consortium with military-linked Myanmar Economic Holdings Limited, state-owned Myanma Petrochemical Enterprise (MPE) and Yangon Engineering Group which is controlled by Htoo Group. The MIC confirmed it had signed its approval.

The headline figure of $3 billion would put the project among the biggest single foreign investments for Myanmar and mark another step in China’s “One Belt One Road” strategy of developing overseas markets through mega-infrastructure projects.

It would also pit China against other Asian interests on the narrow strip of land between Thailand and the Andaman Sea. Thailand has long been in discussions to build a deep-sea port in Dawei as part of a special economic zone and Japan has also said it would invest.

An official of what was the ministry of energy – now merged by the new government with the ministry of electric power – said the Chinese company had been aiming for this project for seven years. He said MPE, which runs Myanmar’s three small ageing refineries, had joined the project because of an MIC ruling in 2015 that foreign investments in petro-chemicals had to be joint ventures.

Industry rivals who had considered but rejected a similar project told The Myanmar Times that the Chinese-led venture, which includes an oil terminal, did not make sense.

“Dawei does not make sense for a deep water port,” said one industrialist who asked not to be named, having estimated it would cost some $1 billion to build because of problems of sandbars and dredging. “The refinery is too small to be viable,” his business partner added.

The planned refinery would have an output of 100,000 barrels per day (bpd) – more than the combined output of Myanmar’s existing refineries, but still not big enough to compete with refineries in Asia operating on slim margins but with an output of at least 600,000bpd.

The industrialists and analysts also noted that China had meanwhile cancelled, or indefinitely postponed, plans to build a refinery in Kunming, the provincial capital of Yunnan, that would have used oil coming through the pipeline that crosses Myanmar to the Indian Ocean off Rakhine State.

As a result that pipeline is now little used, raising further questions about the sense of some of China’s flagship projects in Myanmar.

A Yangon-based lawyer, who asked not to be named, said the Myanmar government had been trying “desperately” to get a refinery “despite most investors warning that, due to low prices and existing surplus in China and India, it might not be easy to make it profitable”. He also noted that the deal had not been the result of a competitive tender.

“A project such as this requires a lot more permits and approvals such as environmental, land use, zoning [and] operating permits. So if a new government wanted to, it can stop the project from going further without too much difficulty. I am not saying they will, just that they could,” he added.

Analysts said China’s main priority appeared to be its plans to build a special economic zone in Rakhine’s Kyaukphyu with its natural deep harbour and access to the oil and gas pipelines leading to Yunnan. They also expect China to drop the controversial Myitsone dam project, as it stands, in northern Kachin State. Apart from its location close to conflict zones and its deep unpopularity, some analysts have also questioned its economic viability.

The Dawei project might only make sense, they said, if the refinery was bigger and had access to a pipeline cutting eastward across to the Gulf of Thailand to tap the Thai market and for onward shipment to southern China.

“Why was it approved?” asked an investment analyst who requested anonymity, noting that it came on the last day of the outgoing military-backed government, suggesting that China “had some favours to call in”.

“Why such a big investment when the commodity market is on its knees, and projects are being shelved everywhere? It’s a nonsensical investment at this stage, but China does not seem to be concerned about cycles,” he added.

A few analysts do see the project as feasible, however. BMI Research, part of Fitch Ratings Group, gave the plan a positive assessment.

“Although the exact timeline for the project is not available, we remain confident that the project will go ahead for the following reasons: The investment is aligned with the strategic interests of both China and Myanmar. The project would allow Guangdong Zhenrong to make inroads into a growing Myanmar market. It will help to alleviate Myanmar’s yawning fuels deficit, which domestic refinery output is not able to meet,” BMI said.

It said chronic under-utilisation of Myanmar’s three ageing refineries meant the country had to import to cover over 60pc of its annual fuel requirements.

BMI estimated that consumption of refined products would rise from under the current 50,000bpd to 60,000bpd by 2020.

President of KWR International Keith Rabin said Myanmar needs a deep sea port and the area is already closely linked to Thailand in terms of its local economy.

“Further, having a refinery in that location which promises to allow petroleum supply from the Middle East to offload and be refined and sent to Thailand as well as Myanmar and other markets makes conceptual sense and can promise benefits in terms of added value, employment and broader economic development – though obviously it will not be easy,” he said.

Commercial or strategic sense aside, the project is likely to face strong local headwinds.

Ko Thant Zin, coordinator of the Dawei Development Association, a civil society group, said the Chinese company had approached the local community four years ago and even took some residents to China.

“But they failed to get our welcome,” he told The Myanmar Times.

The refinery and port would involve moving villages and would pose environmental risks to communities depending on fishing and hopeful of developing tourism.

“Among the community there were strong protests against the project. They did not even let them know about the agreement and approved it within the last minutes of the government transition. It is very strange and can’t be acceptable,” Ko Thant Zin said.

Daw Lae Lae Maw, the new chief minister of Tanintharyi who has worked as a doctor giving free health- care in remote villages, told The Irrawaddy that her priorities would be to develop agriculture and retrieve land confiscated by the former government and military-related holdings.

She also said she would reassess investments in the Dawei seaport project. “If it doesn’t benefit the residents, we have no reason to accept it,” she was quoted as saying.


Additional reporting by Su Phyo Win, Aung Shin and Steve Gilmore