Wednesday, October 3, 2007

It's the Oil and Gas, Stupid

World leaders may be condemning the junta's crackdown, but foreign businesses don't want to lose their pieces of Burma's energy pie. Why the latest sanctions are unlikely to work.

At Newsweek, Melinda Liu writes:

Analysts describe it as the Burmese paradox: How can the rulers of a country so rich in energy, teak, minerals and gems be in such financial trouble? Even as it sits on top of 19 trillion cubic feet of natural gas and billions of barrels of crude oil reserves, the junta had to abruptly hike fuel prices so high in August that it triggered the popular uprising led by Buddhist monks.

Part of the explanation is simply bad governance. The Burmese regime is so arrogant—and inept—that it doesn’t expect citizens to rebel even when they watch their hard-won savings disappear overnight. That’s what happened in the summer of 1988, when the regime's surprise demonetization of the local currency, the kyat, meant a lot of money was suddenly not worth the paper it was printed on. (The kyat has a story all its own: on an astrologer’s advice, former Burmese strongman U Ne Win decided the currency should be denominated in multiples of nine, because 9 was a much more auspicious number than 10. As a result 45- and 90-kyat notes still circulate in Burma alongside multiples of 5 and 10. One gauge of the dire economic situation in Burma is the fact that the official exchange rate is 6 kyat to the U.S. greenback, while the unofficial rate is more like 1,350)

But there’s a more important reason for Burma’s predicament. Before the 1962 coup that installed a military regime in power, Burma had one of Southeast Asia’s highest standards of living. It boasted a well-educated intellectual class. It was one of the world biggest exporters of rice. But today, the country’s infrastructure is so decrepit that the regime cannot adequately exploit its own resources without outside help. Despite the country's lucrative oil and gas sectors, the domestic refining industry is a mess due to half a century of mismanagement, lack of investment and neglect. Local refineries aren’t suited to processing the high sulfur content in Burmese oil. As a result, the government has to import nearly all of its diesel, to the tune of nearly 20,000 barrels daily by 2004.

Combine that hunger with today’s high prices, and you can easily see how the need to import diesel could help prompt a price rise. This wasn’t the first time the regime imposed such a hike, either; two years ago fuel prices shot up ninefold. You don’t have to be a rocket scientist—actually Burma’s junta supremo Than Shwe is a former postal clerk—to know people might be mad about the abrupt Aug. 15 doubling of diesel prices and fivefold increase in the cost of compressed natural gas, a hike passed on to passengers using public transport. Or, indeed, that it’s bad PR to throw a lavish wedding ceremony for your daughter—as Than Shwe did—showing how the gem-encrusted elite parties on (while one in three Burmese children is malnourished, according to the World Food Program).

But the excesses don’t stop there. Paranoia has something to do with why the junta is cash-strapped. The nonsensical transfer in November 2005 of government offices to the new administrative capital of remote Naypyidaw, in a jungly wasteland 300 kilometers (about 190 miles) from Rangoon (apparently to boost government secrecy), is believed to have cost hundreds of millions of dollars. Then, to help compel disgruntled civil servants to go along with the move, the government raised their pay 500 percent. For its part, Burma’s 375,000-man Army—key to the junta’s survival—got a tenfold pay raise. And then there's the construction of another big-ticket item called “the Yadanabon Silicon Valley cyber-city.” This from a regime that’s trying to pull the plug on the Internet in a bid to prevent images of its repression from reaching the outside world.

Burma’s economic picture would be depressing enough without the involvement of Big Oil. One of the key reasons why sanctions against the regime are unlikely to work is because the junta's foreign partners hope to maintain business as usual. Foreign firms have been scrambling for a piece of Burma's oil and gas industry since the regime liberalized investment rules in 1988.

These are not obscure players or small-time plays. Burmese natural gas, worth $2.8 billion, generates one fifth of Thailand’s electricity. China wants to build pipelines and roads through Burma that would allow its oil imports to bypass vulnerable chokepoints in the Malacca Straits, which could be blocked by the U.S. Navy in the event of Sino-U.S. tensions.

State-run Chinese firms are also bidding for contracts in Burmese gas fields, as are South Korean and Indian competitors. India’s oil minister, Murli Deora, was present in Rangoon for energy cooperation talks with junta leaders when antigovernment protests broke out last month. Burma’s partners aren’t all Asian either. When earlier European Union and U.S. economic sanctions were levied against Burma, Total of France and Chevron remained involved in the Yadana gasfield. (At the time, existing investments were exempt; Chevron has a 28 percent stake because of its takeover of Unocal, Total’s original partner.)

Now we hear that the EU has just toughened its sanctions against Burma, expanding the visa bans for junta leaders and suspension of some imports such as timber and gems. But such measures—similar to those announced last week by the United States—will be toothless unless key oil and gas firms climb onboard. Today French Foreign Minister Bernard Kouchner hinted that Total—which extracts more than 17 million cubic meters of natural gas daily from its Burmese fields, according to its corporate Web site—“will not be exonerated” from post-crackdown sanctions. Total officials have argued that the firm has made no new capital expenditures in Burma since 1998 and that any “forced withdrawal” by Total would simply pave the way for rivals to take its place. Which is why China, Thailand, India and Russia have been muted in their condemnation of Burma’s recent bloodletting. They may hate the junta’s repression, but they love the thought of biting off a bigger piece of Burma’s energy pie.