Gas pains for China and Myanmar

Since the Sino-Myanmar natural gas pipeline commenced fuel deliveries in late July 2013, the 793-kilometer energy transportation route has operated well below its total capacity. The underutilization has resulted in an estimated annualized loss of 1.7 billion yuan (US$280 million) and raised pressing questions about the China National Petroleum Corporation (CNPC)-led joint venture’s future commercial viability.

Data about the US$1 billion pipeline’s first year of operations have become public in recent months. According to a CNPC report released in July, the pipeline transferred a total of 1.87 billion cubic meters of natural gas to southern China and 60 million cubic meters for local consumption in Myanmar during its first year of deliveries. The 2.47 billion transferred translates to around 20% of the pipeline’s total capacity, which is designed to carry 12 billion cubic meters annually.

According to annual and bi-annual reports published by PetroChina, a CNPC subsidiary, the company imported and sold 409 million cubic meters of natural gas from Myanmar in 2013 at a total loss of 420 million yuan. During the first half of 2014, the company sold another 1.3 billion cubic meters of Myanmar’s natural gas at a loss of 1.3 billion yuan. At those cost-price differentials, PetroChina loses on average 1 yuan for every cubic meter of natural gas imported from Myanmar.

Some Myanmar observers suspect that the state-owned CNPC has artificially kept shipment levels low to symbolically demonstrate Beijing’s displeasure with Myanmar’s recent perceived as anti-China policies. Some in China, on the other hand, have insinuated that the underutilization and financial losses have been deliberately caused by the Myanmar government to serve the United States’ strategic interests vis-a-vis China, including the US’s ability to block the majority of China’s fuel imports at the Malacca Straits in any future conflict scenario.

Such strategic critiques and conspiracy theories, however, overlook more intuitive and direct economic explanations for the pipeline’s underperformance. China’s imported natural gas market has never been a profitable business due to government-imposed below-market price subsidies aimed at fueling fast economic growth. While China’s state-linked energy companies receive some tax subsidies on their foreign-sourced supplies, most of them incur major financial losses due to the distortion between local and international prices.

In the case of natural gas imported from Myanmar, Chinese Ministry of Commerce data shows that the import price is around 2.68 yuan per cubic meter. However, the local gas price in Yuxi, a township in the southern province of Yunnan, ranges from 3.36 yuan to 4.7 yuan per cubic meter. The cost of shipment through only the Myanmar section of the pipeline is 3 yuan per cubic meter, structurally narrowing the pipeline’s potential profitability under the distorted price structure.

Unprofitable pipes
Designed to bolster China’s national energy security, nearly all Chinese invested gas pipelines operated overseas lose money. Compared with other pipelines run by PetroChina, the Sino-Myanmar gas pipeline is neither the only nor the largest money-loser. That distinction is reserved for China’s Central Asian gas pipelines. In 2013 and the first half of 2014, PetroChina imported and sold a total of 41.5 billion cubic meters of natural gas from Central Asia at a total loss of 36 billion yuan.

The more natural gas China imports from Myanmar and elsewhere, the more state-linked energy companies stand to lose. That market fact explains why all of China’s foreign pipelines are operating well below their designed capacities. For instance, China’s Central Asian pipelines are operating below 50% of their designed annual 55 billion cubic meter capacity. In 2013, China’s total pipeline losses amounted to 41.9 billion yuan, according to official statistics.

As these losses mount, there is growing pressure from energy companies for the Chinese government to reform its natural gas pricing system toward a more market-based orientation. Beijing is clearly concerned that a drastic gas price hike might jeopardize the government’s popularity and rock social stability. Residential users have grown accustomed to low gas prices, while industrialists generally oppose price reform due to concerns it will negatively impact on their profits and competitiveness.

The strategic value of maintaining low gas prices at the expense of inefficient pipelines transcends plain commercial and financial considerations. The pipelines and the steady stream of imported natural gas they supply, despite their high costs, are viewed by Beijing as important safeguards of energy security. They provide a crucial diversification of sources and transportation routes for China’s current overreliance on Middle Eastern fuel sources that travel through the congested and the easily blockaded Malacca Strait. The Sino-Myanmar gas pipeline is also viewed as a crucial energy supply source for China’s landlocked and economically laggard southwestern region.

As the exporting country, Myanmar is no doubt weighing the financial and strategic costs of the pipeline’s early underperformance. According to the two sides’ agreement, the pipeline is supposed to deliver 20% of its annual 12 billion cubic meter capacity to Myanmar. At last year’s rate of underutilization, Myanmar received only 60 million cubic meters, or about 2.5% of the pipeline’s total deliveries, well below the 20% contractually promised.

It will be interesting to see if energy-starved Myanmar will push China for larger natural gas deliveries to local markets during its second year of operations. Whether frustrations over the pipeline’s operations will impact on other areas of the bilateral relationship is still hard to gauge but entirely possible as Myanmar moves closer to the West and further from China.

Source: Asia Times

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