Out-Law News 5 min. read
03 Jul 2014, 2:40 pm
This guide was last updated in October 2014
There are colonial-era laws (pre 1948), parliamentary laws (1948 to 1962), revolutionary council laws (1962 to 1988), military regime laws (1988 to 2011) and laws of the newly elected government (2011 onwards). Although new petroleum laws are being considered, investors should be aware of the existing legislation, especially since amendments to the Oilfields Act 1918 and Petroleum Act 1934 were passed as recently as 2010.
Hydrocarbons in Myanmar
The Burmah Oil Company, a precursor to today's BP, operated in Myanmar from 1886. Standard Oil was also present in the country in the 19th century. Although many Western exploration and production (E&P) companies left Myanmar after 1962, some such as Total stayed on. Otherwise the majority of oil & gas foreign investment has come from regional countries such as Thailand and China.
Today, Myanmar has proven reserves of 50 million barrels of crude oil and 283 billion cubic metres of natural gas. The US Energy Information Agency puts daily oil production at 20.8 thousand barrels per day. Total gross natural gas production is estimated at 442 billion cubic feet (single year) estimates 226 million barrels of crude oil and 457 billion cubic metres of natural gas. It is these numbers that are luring E&P companies back to Myanmar after a long hiatus.
October 2013 saw the successful auction of 18 onshore blocks in Myanmar. Although some western majors were dissuaded from bidding because of reasons such as local content requirements, Italy's ENI and Canada's Pacific Hunt Energy took part in the process, marking the first steps by western companies into a market traditionally dominated by Chinese, Thai and Indian companies.
Then in March 2014, 10 deep water and 10 shallow water offshore oil and gas blocks were awarded. Winners, including Royal Dutch Shell, Statoil, ConocoPhillips and Total SA, are expected to invest at least $3bn after production-sharing contracts are signed. There is reported to be a two year exploration period allowed for the deep water blocks, after which E&P companies can walk away. If hydrocarbons are located, E&P companies have a further three years to start production. The timescales are shorter for shallow-water blocks.
In June 2014 MOGE invited interested parties to bid for Joint Venture partnerships for a number of hydrocarbon-related projects, including onshore pipeline construction and maintenance services.
Most recently, on 29 October MOGE announced the auction of a further four shallow and five deep water blocks. MOGE claims that 65% of the shallow blocks have proven hydrocarbons.
Foreign Investment Regulation and Legislation
The Ministry of National Planning and Economic Development (MNPED) is the government ministry responsible for foreign investment, whilst the Myanmar Investment Commission (MIC) carries out an administrative and regulatory function. In June 2014, MIC became an independent organisation and it is hoped that this change will further encourage foreign direct investment in Myanmar.
Foreign investment laws have recently been reformed. The regime is made up of three components:
Myanmar Foreign Investment Law (2012) (FIL)
Ministry of National Planning and Economic Development No.11/2013, Foreign Investment Rules (FIR)
Myanmar Investment Commission Notification No.1/2013 (MIC Notification)
The State Law and Order Restoration Council Law No.9/89 (SOEEL)
The FIL applies to businesses which are not expressly prohibited and are listed economic activities under the MIC Notification. Foreigners must invest in oil and gas through a joint venture with a Myanmar citizen (which could be an individual or corporation), with a shareholding split of 80% to 20%, although this can be amended by MIC and there is anecdotal evidence to suggest that the provision is not strictly enforced, especially with regard to more technical areas such as deep water offshore E&P activities, so long as there is a degree of local content. Under the SOEEL, investment in oil and gas is only permissible following approval from the government and Myanmar's Ministry of Energy (MOE).
In order to obtain a permit from MIC, an oil and gas investor must first apply for a recommendation from MOE. Under the FIR, within seven days of the receipt of a recommendation request, MOE must then give its recommendation or otherwise to MIC for a final investment decision. Under draft environment regulations, which are applied in practice, as well as provisions contained in the MIC Notification, the application for MIC approval must now contain the Initial Environmental Examination (IEE). The permit from MIC must be given within ninety days from the date of receipt of MOE recommendation. The further content of the government's approval and recommendation is not precisely specified in the MIC Notification.
Acquiring oil and gas assets in Myanmar
In addition to its commercial decision making process, an investor seeking to acquire or farm-in to a block in Myanmar needs to consider several important factors:
Local partner due diligence: companies which have been awarded onshore blocks require a local partner under the FIR. MOGE will also be a party to and have an interest in the (PSC) and joint operating agreement (JOA). It is important that the farmee or acquirer performs due diligence on local partners and ensures that there will be no objection from any of the other parties to the contractual documentation.
Government approval: government approval and a recommendation from the MOE is required in order for a foreigner to invest in oil and gas. The content and timing of this approval in relation to investors for new blocks is not precisely specified (except for provisions mentioned above), nor is it specified whether later foreign investors would need approval. Approval is probably required, and is preferable, where a farminee is taking a direct contractual interest in exploration and production activities in a particular block through a JOA.
Change of control: approval is required under the FIR where there is a change of control through a transfer of shares in the local JV; however, it is unlikely that approval would be required where there is a transfer of shares at HoldCo level. The rationale for this might be that a joint venture shareholder could be directly responsible for E&P activities, whereas an investor in HoldCo would be more likely to be simply providing funds.
If the transfer of shares in a Myanmar company is to a foreigner, they will require additional registration. Tax exemptions and reliefs available to the transferor under the FIL continue after the transfer but the time period for those exemptions and reliefs is not reset as a result of the transfer. The Stamp Duty Tax on the transfer of shares in a foreign currency has been reduced from 1% to 0.3% in a tax reform in April 2014.
Tax: many foreign investors in Myanmar are using structures which include incorporating a HoldCo in Singapore. This arrangement not only benefits from geographical proximity and Singapore's emergence as an oil and gas hub, but also from the double taxation treaty with Myanmar which allows for repatriation of profits. As Singapore is an international financial centre, foreign investors in Myanmar can then easily remit earnings onwards to their home jurisdiction.
Following the tax reform in April 2014, Myanmar’s capital gains tax for oil and gas assets will be based on Burmese Kyat. Up to now, the tax and the tax brackets were calculated in US$. As such changes in the value of the Burmese Kyat cause uncertainty for E&P company's tax on disposal and farm-outs In Myanmar.
Dispute resolution: Myanmar became a signatory to the New York Convention on the Recognition and Enforcement of Arbitral Awards in 2013. While Myanmar is yet to introduce domestic legislation giving effect to its obligations, the Draft Arbitration Bill was published on May 25. Myanmar is also a member of the ASEAN Comprehensive Investment Agreement (ACIA) and the ASEAN-Australia and New Zealand Free Trade Agreement, as well as a number of bilateral investment treaties, all of which provide protection to investors who have incorporated in applicable jurisdictions. The ACIA does not cover oil and gas exploration.
The laws affecting oil and gas exploration in Myanmar are:
The Oilfields Act 1918
The Oilfield Rules 1936
The Petroleum Act 1934
The Petroleum Rules 1937
The Essential Supplies and Services Act 1947
The Oilfields (Labour and Welfare) Act 1951
The Petroleum Resources (Development Regulation) Act 1957
The Law Amending the Petroleum Resources (Development Regulation) Act 1969
The Myanmar Petroleum Concession Rules 1962
Environmental Conservation Law 2012