Myanmar: Myanmar’s Parliament Adopts Foreign Investment Law
The recent adoption by Myanmar’s Parliament of the long anticipated Foreign Investment Law (FIL) is expected to result in more favorable ground rules for foreign companies planning to invest in Myanmar. Legal and economic reforms, in particular with respect to the energy sector of the economy, have followed on the heels of the appointment of Thein Sein as Myanmar’s President in February 2011 and the participation of the National League for Democracy in the April 2012 by-election. Most recently, on 19 September 2012, Aung San Suu Kyi, in a speech in Washington, urged support for the reform process by the further easing of sanctions.
In July 2012, U.S. sanctions against Myanmar were amended to allow investment by U.S. persons in Myanmar, subject to certain remaining restrictions. These remaining restrictions include a prohibition on new investment if it involves the Myanmar Ministry of Defense or any state or non-state armed group, and U.S. persons involved in new projects will have a reporting requirement to the U.S. government. Similarly, the majority of the E.U.’s sanctions programs in respect of Myanmar have been suspended for a one-year period.
Based on discussions with industry players, we believe that Myanmar offers significant potential for oil and gas exploration and development. According to reports, Myanmar has extensive undeveloped gas reserves; only 12.4 billion cubic meters of the 0.2 trillion cubic meters of proven natural gas reserves were produced in 2011.1 Myanmar’s domestic energy shortage should create opportunities for the oil and gas industry; in 2011, the consumption of petroleum products and the direct combustion of crude oil in Myanmar stood at 40.62 thousand barrels per day, while total domestic crude oil production was only 20.79 thousand barrels per day.2 Investment opportunities also lie in the substantial upgrading or replacement of the existing energy infrastructure in Myanmar, including refineries, pipelines, and electricity-generating and transmission facilities, some of which date back more than 50 years.
2011 and 2012 Bidding Rounds for Oil and Gas PSCs
According to the Myanmar Ministry of Energy (MOE), 19 onshore blocks and 22 offshore blocks are currently operated by multinational companies in Myanmar, including CNOOC, SIPC Myanmar, North Petro-Chem, Essar, and Total. The MOE expects a further 34 onshore blocks and up to 29 offshore blocks, the majority of which are deep water blocks, to become available for bidding by investors. A first round of licensing for the award of onshore petroleum blocks occurred in 2011 when, according to reports, of the 18 onshore blocks offered, nine were taken by foreign investors. A second petroleum licensing round is expected in 2012, and further information on timing and terms should become available in the near future. We also understand that there may also be opportunities for the grant of licenses by MOE on an ad-hoc basis outside the main bidding rounds.
Other offshore blocks may become available for production following the 14 March 2012 judgment of United Nations International Tribunal for the Law of the Sea concerning the delimitation of the maritime boundary between Bangladesh and Myanmar in the Bay of Bengal. The judgment appears to have resolved the long running border dispute between the two countries with respect to the territorial sea, the exclusive economic zone, and the continental shelf. According to reports, this will allow Myanmar to begin exploration in the resource-rich Bay of Bengal and may result in increased offshore exploration and development activity.
Notwithstanding the current reform programme, companies investing and doing business in Myanmar face hurdles in dealing with the government and bureaucracy. However, to date, the experience of the oil and gas industry has been reported to be generally positive.
As noted above, Myanmar’s Parliament has recently adopted the long-anticipated FIL, which should lay out the ground rules for foreign companies planning to invest in Myanmar. We understand that President Thein Sein has not yet signed the FIL into law, and there may still be differences between the President and Parliament on the terms of the FIL. Although the complete text of the FIL is not publicly available as of this date, we also understand that foreigners will be allowed to invest in a wide range of businesses through joint ventures with local partners, although restrictions have been retained by Parliament on majority ownership by foreigners.
In Myanmar, foreign investment in the oil and gas sector is usually by way of a production sharing contract (PSC) with the Myanma Oil & Gas Enterprise, which falls under the umbrella of the Ministry of Energy. The PSCs, although negotiable, generally provide that the Myanmar government retains ownership of oil and gas until delivery and that the contractor bears all risk and costs of exploration, development, and production in exchange for cost recovery and production sharing. The 2011 bidding rounds for PSCs saw the introduction of new contractual terms under the PSCs, including an increase in the royalty rate payable by the contractor to 12.5 percent of the value of the “available petroleum.”
Dispute resolution in Myanmar is a major issue facing foreign investors due to the Myanmar legal system and the country’s nascent efforts in developing an effective rule of law. International companies should be aware that as a matter of practice, the Myanmar authorities may require that contracts are governed by the laws of Myanmar, and Myanmar is designated as the place of arbitration pursuant to the Myanmar Arbitration Act. We understand that there are plans for Myanmar to become a signatory to the New York Convention on the Recognition of Foreign Arbitration Awards. Although Myanmar has entered into very few bilateral investment treaties (BITs) with other countries, Myanmar is a party to the 2009 ASEAN Comprehensive Investment Agreement signed on 26 February 2009, and which entered into force in March 2012. The agreement provides certain protections to investments made by ASEAN investors in other ASEAN countries.
A highlighted above, the Myanmar Parliament has recently passed the FIL, although the final text of the law is not yet public. Provided the law is approved by the President, the FIL is expected to result in more favorable ground rules for investment in Myanmar. The relaxation of sanctions by the U.S. and E.U., and the possibility that Myanmar may become a signatory to the New York Convention should also have a positive effect on the investment climate. If the early promise of these reforms is fulfilled, an exciting new chapter in the development of Myanmar and its energy sector may offer attractive opportunities for the international oil and gas industry.