Page 1 MYANMAR LNG PROJECT UPDATE: OBSERVATIONS ON THE WORLD BANK’S WORKSHOP OF 10 NOVEMBER 2016 Highlights of this note Workshop organized as approximately 100 Expressions of Interest were received This is a big, big deal And a complex deal No long term LNG contracts to purchase LNG? They seem focused on an FSRU, for now Possible sites for the FSRU It’s all about the pipeline How about the schedule for the Project? How about the schedule for the Project? When can we expect the Request for Proposal? What about the integrated power angle? Some key Myanmar issues to consider Myanmar’s big LNG deal is slowly taking shape. The World Bank organized a workshop in Nay Pyi Taw to report on the outcome of a pre-feasibility. Here in our analysis. Client briefing note | 25 November 2016 We are a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. Our general areas of practice are corporate, finance and disputes. Our principal specialized areas of practice are energy and infrastructure, real estate, telecom and taxation. There are three things you need to know about our approach: 1. We deliver the ultimate in ground connectivity. 2. Our quality is trusted by the most discerning. 3. We never give up. Workshop organized as approximately 100 Expressions of Interest were received The World Bank organized a workshop in Nay Pyi Taw on 10 November 2016 (the Workshop) to report on the outcome of a pre-feasibility study done by MJM Energy for the World Bank. The study focused on options for LNG purchase by Myanmar and on the prima facie merits of three designated possible LNG terminal sites. The workshop comes after the newly formed “LNG Business Tender Committee” of the Ministry of Electricity and Energy (MOEE) requested for Expressions of Interest (EOI) in the “bulk supply and/or terminal” of LNG in Myanmar (the Project). By the deadline, which passed Friday last week on 28 October 2016, the MOEE received approximately one hundred EOIs from traders, upstream companies, shipping companies, infrastructure providers and combinations of the above. Although the Workshop was definitely about the LNG project, it was not about the tender process. The World Bank executives did not want to entertain any questions about commercial or timing aspects of the tender, which is not surprising since the IFC will be taking the lead on that aspect of the project. Nevertheless, the assumptions and opinions expressed by the study group do indicate some direction for the forthcoming Project, although we do need to understand that these are just indications. In this memo, we provide our observations
Transcript
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MyanMar LnG Project UPdate:observations on the WorLd bank’s WorkshoP of 10 noveMber 2016
Highlights of this note
Workshop organized as approximately
100 Expressions of Interest were
received
This is a big, big deal
And a complex deal
No long term LNG contracts to purchase
LNG?
They seem focused on an FSRU, for
now
Possible sites for the FSRU
It’s all about the pipeline
How about the schedule for the Project?
How about the schedule for the Project?
When can we expect the Request for
Proposal?
What about the integrated power angle?
Some key Myanmar issues to consider
Myanmar’s big LNG deal is slowly taking shape. The World Bank organized a workshop in Nay Pyi Taw to report on the outcome of a pre-feasibility. Here in our analysis.
Client briefing note | 25 November 2016
We are a network of leading law and tax advisory firms with offices in cambodia, indonesia, Laos, Myanmar and vietnam.
our general areas of practice are corporate, finance and disputes.
our principal specialized areas of practice are energy and infrastructure, real estate, telecom and taxation.
there are three things you need to know about our approach:
1. We deliver the ultimate in ground connectivity.
2. our quality is trusted by the most discerning.
3. We never give up.
Workshop organized as approximately 100 Expressions of Interest were received
the World bank organized a workshop in nay Pyi taw on 10 november 2016 (the Workshop) to report on the outcome of a pre-feasibility study done by MjM energy for the World bank. the study focused on options for LnG purchase by Myanmar and on the prima facie merits of three designated possible LnG terminal sites. the workshop comes after the newly formed “LnG business tender committee” of the Ministry of electricity and energy (Moee) requested for expressions of interest (eoi) in the “bulk supply and/or terminal” of LnG in Myanmar (the Project).
by the deadline, which passed friday last week on 28 october 2016, the Moee received approximately one hundred eois from traders, upstream companies, shipping companies, infrastructure providers and combinations of the above.
although the Workshop was definitely about the LnG project, it was not about the tender process. the World bank executives did not want to entertain any questions about commercial or timing aspects of the tender, which is not surprising since the ifc will be taking the lead on that aspect of the project. nevertheless, the assumptions and opinions expressed by the study group do indicate some direction for the forthcoming Project, although we do need to understand that these are just indications. in this memo, we provide our observations
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on the World bank Workshop and we look ahead to the tender for the Project planned for next year.
This is a big, big deal
officially, at this stage only a pre-feasibility study has been done. so, we do not know for sure what LnG volume we are talking about for the Project, and the World bank is not yet taking any position on actual demand. but the capacity of the fsrU which was featured in the study is 500 MMscfd, which is nearly 3.5 MtPa. that is larger than we expected and larger than any of the existing LnG receiving terminals in indonesia right now, to name a place (nusantara regas satu has a 3 MtPa capacity, Lampung fsrU has 1.8 MtPa and arunregas has 1.5 MtPa capacity).
one of the key uncertainties, the study group explained, is that no one knows for sure yet how much gas Myanmar will really need to generate power in the future. that is to say, it is clear that (i) the demand for electricity far exceeds current supply, and will grow at least 15% per year and (ii) the production of domestic gas in yadana and Zawtika is already declining. but many of the other elements we need to make an informed decision are unknowns, and some will stay that way for a while. for starters, when will recent discoveries in a6 and a7 translate into more domestic gas becoming available, perhaps eliminating the need for imported LnG? it is hard to predict when this will happen, and what the volumes will be.
one factor we could actually narrow down is how much of the electricity
supply gap needs to be taken up by gas-fired power plants. that is a matter of Government policy, and it depends on how many hydro’s and coal will get through. the existing energy plans (including the ones provided by e.Gen and Meti) assume that coal and hydro will provide the main source of generation. it is now increasingly clear that those plans are no longer current. Large scale hydropower projects may present social challenges the likes of which are new to Myanmar. Plus, it seems coal projects are all but dead in the water, until further notice. so how much gas is needed to fill the gap left by (possible delays in) hydro and coal? to illustrate the uncertainties, consultants at the workshop pointed out that the competing energy plans’ findings vary from 1.8 MtPa to 8.4 MtPa when it comes to need for LnG import. as was mentioned above, the World bank did not take a view on actual LnG demand.
anyway, if this number ends up in the rfP, this would be the largest energy project in Myanmar, by far. at this kind of capacity, including the storage and the needed pipelines (more on that see below), excluding any power infrastructure, the World bank consultants calculated about up to a billion Us$ in capex and discounted expenditure, much of which is pipeline costs.
And a complex deal
it is not only a big deal, it is also a complex deal. Much more complex than Myanmar is used to in the few years the country has been opened to foreign investment in the energy sector. this is project upon project upon project. We have power generation facilities, we have a pipeline (could be more than 500 km) and we have the terminal/fsrU (which will need marine facilities).
all of these three projects, needed to match seamlessly, are still in the very early stages. as for the power generation, the ones that need to purchase the natural gas, we believe that more concessions will be needed than the ones currently granted. in other words, not all the offtakers have been given a license yet. and for those that do have a license, most did not yet reach financial close. so, they might not exist yet by the time we kick off the tender.
this is all doable, but it is not easy. especially not in Myanmar (see below for more details).
No long term LNG contracts to purchase LNG?
the invitation to submit an eoi did not betray whether the Project would be primarily about LnG supply or about infrastructure. it called for companies with experience in both.
at the Workshop this moved quite a bit into the infrastructure direction. it was revealed that if it is up to the consultants, there is no need for Myanmar to procure LnG under long term contracts. increasing volumes of LnG are available on the spot market. Myanmar could purchase LnG on the spot market or under 1 or 2 year contracts. in due course, Myanmar could develop a portfolio of purchase contracts at various tenures in stages, like Pakistan, the experts argued.
separately from the supply, the Government (or the natural gas off-takers) would conclude a tolling agreement with the terminal for the regasification, and the Government could build, or have built, the necessary pipelines.
now, there is no way of knowing whether the actual rfP will drop medium-to-long term LnG supply in favor of spot. With gas taking over a large portion of the planned electricity supply, the Moee might choose for energy security.
They seem focused on an FSRU, for now
the study looked both at an onshore terminal and at an fsrU solution. the fsrU solution came out as better in line with the Government’s timing expectations. the discussion of the suitability of the possible sites from thereon focused on the fsrU, most likely a lease. With these kinds of volumes, that is perhaps not surprising. the duration of the Project, more than 5 year and less than 15 year, is also conducive of a temporary solution rather than a permanent one.
the preliminary site studies all focused on, for a large part, whether it was suitable to place an fsrU there in terms of met-ocean, navigation and weather conditions.
during the workshop some questions were raised by the attendants on transmission versus pipeline, and smaller quantities, but the experts could say little about it as these were outside of the scope of this particular study.
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Possible sites for the FSRU
the Government gave the consultants 3 potential areas to look at and compare. each area had two or more potential sites.
the Government gave the consultants 3 potential areas to look at and compare. each area had two or more potential sites.
1. three sites in rakhine2. two sites in ayawaddy3. three sites in Mon state
after comparing metocean, navigation, weather, pipelines, local infrastructure and environmental and social aspects, the consultants came to the preliminary finding that the sites rakhine and Mon state would both be suitable, and the sites in ayawaddy somewhat less so. however, for the site in rakhine the pipeline would be very long, making that site almost certainly more expensive from a capex perspective than the sites in Mon state. so, that would leave one of the sites in Mon state as the better choice from the three for now.
however, the World bank made it clear that alternative sites might be possible. We think it is likely bidders can propose their own site as well.
It’s all about the pipeline
the most important factor in the capex of the Project is the new pipeline which will be needed. for a certain site access to the shwe pipeline could be negotiated, but even then a new 30’’ pipeline would have to be installed on existing routes to yangon as the existing one is too small. the Mon state site offers the possibility of deploying a subsea cable, which may be easier in terms of obtaining rights of way, and shorter, but it is also relatively more expensive.
Site Length of pipelinein km
1 rakhine between 475 to 557
2 ayawaddy 235
3a Mon state (over land) 410
3b Mon state (subsea) 225
How about the schedule for the Project?
the study group took the view that a solution could be in place within (at least) 3 years. one year for studies, permitting and financing and two years of engineering, procurement and construction. that is “if all goes well”.
based on our experience, it is likely that more than one year is needed in Myanmar to reach to financial close on a project of this nature. Lead times for land acquisition and land permitting, port terminal permits and for obtaining the critical Government guarantee (which may require parliamentary approval, and a budget cycle in and of itself takes nearly 1 year) are substantial. by comparison, the Myingyan gas-fired power project, also with ifc support, took quite a bit more than one year to get through and that project is much smaller and less complex than what is contemplated here.
When can we expect the Request for Proposal?
the World bank would not say. based on what the Moee tells us, mitigated with our own experience with other Moee tenders, our best guess is that the rfP might come out at the earliest in april 2017. as everything else right now, that date must be read with plenty of flexibility.
What about the integrated power angle?
of course, the Project is all about gas-to-power. but, in the site analysis, no mention was made of the need or the possibility to add an iPP near the terminal. nevertheless, there are some indications that in the context of this Project, additional concessions for ccGts will
have to be granted.
first of all, the Moee would have to compensate for all but eliminating coal fired plants from the energy master plans, if that is indeed what is happening. secondly, the volume of LnG to be imported which the Moee and the World bank used in the pre-feasibility, although just a working assumption, is aimed at approximately 2,500MW. assuming that there will still be a significant portion of domestic gas available as well in the future, this is more than currently in the works around yangon.
but whether an iPP would be included in the tender itself, that is a whole other question. at this stage, it seems unlikely to us. based on what we know of the internal workings of the Moee, it would be more likely that new iPPs will be tendered by the dePP, or that the dePP will simply take up a newly negotiated proposal from an iPP.
Some key Myanmar issues to consider
as i pointed out on the panel at the Workshop, there are a few key Myanmar legal issues that require particular attention in connection with the Project, at least the way it is (preliminarily) shaping up.
• Government guarantees, more than likely needed, are largely untested and may determine the schedule: actual Government guarantees (to be distinguished from contractual commitments) in Myanmar are governed by the Public debt Management Law 2016 (“PdML”). such guarantees are largely untested
ContaCtedwin vanderbruggen is the senior partner of vdb Loi in Myanmar. he and his team assist the Myanmar Government with transactions and privatizations in the energy, transport and communications areas. he has advised 4 of the supermajors on their oil and gas interests, worked on several farm-in’s in recent years and is acting on the proposed purchase of a producing gas and pipeline interest.
edwin is “highly praised by peers and clients alike as a seasoned and informed professional” (asia Law) with “very high standards” (Legal 500) while the firm is “widely considered a power house” (asia Law).
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in practice as the budget is now on a strictly cash basis. Under the PdML, which confirmed a practice already in place with the annual national budget Laws, “the Ministry of finance can provide guarantees or something resembling a guarantee for debt to any person, association of persons or project in accordance with such terms and conditions as may be approved by the Government and the [national assembly]” (s. 30 PdML). “Government debt” means “all the debt obligations arising from the borrowing or the promise of payment by central bodies, Union Ministries and organizations in their charge, the Government or government-guaranteed debt…” (s. 2 PdML). the budget cycle, with the financial year ending 31 March of each year, will have an impact on the schedule of the Project. so, the Ministry of finance (now the Ministry of national Planning and finance) can indeed provide guarantees but within yet to be drafted “terms and conditions” which need to be approved by the national assembly.
• securing land rights for the site and for the pipeline may be challenging: although nearly all the land in Myanmar is state-owned, the Moee does not manage much of it. in most cases, land rights for sites must be secured from other state actors such as states and regions (Myanmar is a Union of 14 states and regions) or other national ministries. this is very a long process. furthermore, right of way for pipelines and transmission has become increasingly difficult in recent years amid social opposition (“not in my backyard”) and environmental concerns. We think that a subsea pipeline solution is therefore all the
more promising.
• coordination with other Ministries will be key: Many more state departments will be needed to get a project of this nature through, and it can be recommended to get them involved from the planning stage. of particular note is the Myanma Port authority and the ship registration department, both of the Ministry of transport and communications, which will regulate the jetty, the terminal, the fsrU and the vessels supplying the LnG. also of note is the Ministry of commerce which needs to issue the LnG import licenses. finally we should bring in the customs department and the internal revenue department, needed to narrow down the current uncertainties concerning the tax imposts on the Project.
• Will the Government want an equity stake? as we explained in our previous note on the Project, the Moee, particularly the energy side, has traditionally received an equity stake in its projects with foreign investors. the previous Union Minister even supported this practice by introducing regulations under the foreign investment Law requiring foreign investors in certain energy sectors to conclude joint ventures with the Moee. one of the more recent such joint ventures is national energy Puma aviation, a joint venture between one of the soes of the Moee and Puma. the Managing director (Md) of the MoGe, U Myo Myint oo, brought this up when he joined the panel at the Workshop, raising speculation that there might be some expectations or plans in this regard. the Md also touched upon possibly seeking financing to construct the pipeline as well as to fund the equity stake into the Project company.
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