Report

Energy Rush: Myanmar's Reforms Fuel Hopes of Burmese Boom

The race to attract foreign oil and gas companies could consolidate the transformation of a former pariah state.

Energy executives around the globe rubbed their hands anticipating a new gold rush in Myanmar when that formerly isolated country began opening up in 2011. They're still eagerly waiting, but the fledgling democracy finally seems ready for them.

Before Myanmar, also known as Burma, could fling open its energy reserves, it had to remake its government, overhaul the way it does business -- no more opacity, bribes, and corruption -- and update its crumbling infrastructure.

"People assumed that once sanctions were lifted it would be easy to go in," said Erin Murphy, a former State Department official who started Inle Advisory Group, a consultancy focused on Myanmar. Potential investors thought of it as an emerging market, when really it was much less developed, she said.

International firms were so anxious to get back into Myanmar ahead of a new investment boom that office rental prices in Yangon, or Rangoon, were higher than in New York for a spell last year; exorbitant rates still spark scandal there today.

Foreign investments are inching upward after most international sanctions imposed on the military junta in 1997 were lifted and the country prepares for its first, fully democratic elections in more than two decades. (The military junta ignored the results of the 1990 elections. The 2012 elections only offered opposition parties a handful of seats in parliament.) Incoming investments rose from about $2 billion before the political transition to $2.7 billion last year, showing that Myanmar's efforts to make the country more appealing to international companies by reforming its laws is slowly paying dividends.

For the energy sector, years of anticipation came to fruition this spring when Myanmar finally awarded 20 blocks for offshore oil and gas exploration to foreign firms, a landmark step.

Attracting more outside capital is crucial; and not just to boost energy production and exports, which are a key source of government revenue. In the energy sector especially, greater involvement by foreign companies could actually help solidify Myanmar's nascent political makeover as those enterprises demand more transparency, accountability, and better governance.  

When Myanmar's military rulers began liberalizing restrictive rules on labor unions and the media, freeing political prisoners, and entering talks to end decades of armed conflict with ethnic minorities in 2011, expectations soared that international firms would scramble to invest in a country that many considered akin to the next Vietnam.

For energy companies in particular, Myanmar is ideally situated geographically to supply its fast-growing neighbors in Southeast Asia. And Burma was one of the first countries to export oil, back in the 1850s. For decades, Western firms such as Total and Unocal, later Chevron, extracted natural gas from large offshore deposits in the sprawling Yadana field off the southern coast. The energy sector -- including oil, gas, and power generation -- accounted for the bulk of foreign investment flowing into the country. What's more, many oil firms believe Myanmar holds even greater energy riches that simply haven't been explored because of decades of sanctions and isolation.

Norway's Statoil, for example, joined forces with ConocoPhillips and was awarded one offshore block earlier this year. Despite all the challenges of doing business in Myanmar, and lingering uncertainty over the political transition there, Statoil's motivation was clear. "This is a large and virtually unexplored basin with a proven petroleum system and significant potential upside," said Statoil spokesman Knut Rostad.

That unquantified potential drew almost 70 big international firms to the latest bidding round; 30 actually bid and 20 won rights to begin exploration, including international majors such as Statoil, Shell, Total, Chevron, BG, and Eni.

"In terms of oil and gas exploration, this is really frontier exploration. There haven't been any wells drilled in deep water, so this is really one of the last frontiers that we have seen around the world, and that has recently been made available," said an executive with one Western oil firm recently awarded blocks.

Actually tapping Myanmar's energy potential has been a long, slow slog, which could be a good thing.

Four years after the elections that ushered in an end to total military rule and the beginnings of Myanmar's opening, no production contracts have been signed for those promising offshore blocks; and no new gas fields have started producing. What's more, the foreign rush to explore for oil and gas both onshore and offshore threatens to overwhelm the small number of government officials overseeing the development of dozens of big, complicated projects, potentially causing further delay.

There are other concerns dogging the pace of resource development, especially the lack of data on just what oil and gas resources are really out there and a narrow window of time to carry out geological surveys on the blocks that were awarded. Furthermore, Myanmar's growing appetite for domestic energy, such as natural gas for power generation, raises fears that the government will increasingly make companies dedicate more of what they produce to the less-profitable domestic market.

"Above ground factors have had a significant impact on the pace of Myanmar's upstream development," said Olivia Boyd, who covers Myanmar for energy consultancy IHS. The government delayed awarding the offshore blocks, a process that began in 2012, until earlier this year, largely to bring the whole process up to snuff for international firms that face strict environmental and compliance rules.

For example, Myanmar introduced an industry-wide standard contract to replace the old, individually negotiated, opaque ones. It also undertook tougher environmental reviews. It also overhauled which government ministries are in charge of energy contracts, making shady deals less likely, and approved new legislation to tackle bribery and corruption. Perhaps most importantly, it applied to join the Extractive Industries Transparency Initiative, a global standard pushing more openness in resource development around the world.

"Oil companies have demonstrated that they are treading very carefully when it comes to investing in Myanmar and the government, in turn, has been very active in seeking to address transparency concerns," Boyd said.

U.S. Commerce Secretary Penny Pritzker opened a new commercial office in Yangon this month, touting how American involvement can accelerate Myanmar's reforms. "When our businesses make investments, they bring with them the highest standards, including a commitment to corporate and social responsibility," she said.

All this could go a long way toward helping Myanmar avoid the so-called resource curse, when countries' abundant natural resources fuel corruption and inequality and undermine democracy. Instead, Myanmar could "piggy-back on the more rigorous standards of foreign partners," concluded Cullen Hendrix and Marcus Noland in a recent Peterson Institute of International Economics study.

"It's kind of a gold rush, but with time the boys leave, and the men stay," the Western oil executive said, referring to how the right environment attracts the right kind of investors.


Jamila Trindle contributed to this article.

Paula Bronstein - AFP - Getty

Report

Government Set to Continue Backing Terrorism Insurance

A post-9/11 program meant to be temporary is likely to be renewed until at least 2019.

In the wake of the September 11, 2001, terrorist attacks, after paying out a record $32 billion in claims, many private insurers decided that terrorism was too costly and unpredictable a risk to cover. So lawmakers stepped in with a temporary solution: The government would share the burden with private insurers for the largest losses after major terrorism events.

Now, after 12 years and no additional attacks, the Terrorism Risk Insurance Act, or TRIA, is on the cusp of its third renewal, raising questions about whether it will ever expire.

TRIA was intended as a short-term solution and carrot to keep private insurers writing policies. In contrast, many other countries went with permanent government programs that collect premiums from private insurers in exchange for a promise that taxpayers will pick up the tab for claims in excess of a fixed amount.

"There is a benefit overall in somebody collecting premiums and banking those premiums for future use to pay for losses or potential future purchases of reinsurance," said Emil Metropoulos, a senior vice president at Guy Carpenter & Co., the reinsurance subsidiary of insurance giant Marsh & McLennan Cos.

In the event of another major terrorist attack in the United States, private insurers would pay the first $100 million before the federal government steps in.

Many Republicans would like to see the program end or at least be dramatically scaled back. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) grudgingly conceded last week that it's "a needed-but-yet-still-temporary program."

Countries from Sri Lanka to Finland have launched national terrorism insurance programs of one sort or another. Germany, France, and Belgium have schemes that share risk among private insurers, creating a communal pool to draw on for big losses. The U.K.'s insurance pool, Pool Reinsurance Company Ltd., uses the government as an insurer of last resort. Pool Re, as it's known, has paid out more than 600 million pounds for 13 different terrorism incidents since it was started in 1993 in response to attacks by the Irish Republican Army. After the two-day attack in Mumbai in 2008 that killed more than 160 people, the Indian Market Terrorism Risk Insurance Pool, which was started in 2002, paid out 3.77 billion Indian rupees (about $63 million today).

Begun in 2002, the United States' Terrorism Risk Insurance Program has never had to pay out a claim. The $32 billion private insurers shelled out after 9/11 still makes those attacks the most expensive globally, according to data collected by Guy Carpenter & Co.

Congress is about to renew TRIA, the law that authorizes the Terrorism Risk Insurance Program and expires at year's end, for the third time. Program supporters argue that when disaster strikes, whether it's a hurricane or a man-made disaster, the government often ends up paying for most of the damage anyhow. And private insurance companies say the market is not yet ready to stand on its own.

"Terrorism is inherently political," said Janice Ochenkowski, managing director at Jones Lang LaSalle, a firm that advises companies on buying insurance. "Terrorism events occur directly because of government action, inaction, positions, or standards. It's not totally unreasonable that the government would be involved in the solution."

Howard Kunreuther, a professor at the University of Pennsylvania's Wharton School of Business and co-director of the Wharton Risk Center, said the government usually has to step in anyway.

"If you have a major terrorist attack that causes a lot of losses, will the federal government come to the rescue and bail these companies out?" he asked. "It's an open question, but we know in the past there has been a tendency for that to happen."

Insurance companies warn that the market would contract if government support ends, which would mean hotels, stadiums, ports, and other businesses would face increased premiums and restricted policies in high-risk areas. Workers' compensation insurance, which is mandatory in most states, could also become more expensive if the program is not renewed, according to a report issued last month by the Rand Corp., a think tank.

Chip Rodgers, senior vice president of the Real Estate Roundtable, a trade group, warns that if TRIA expires, real estate development will freeze up the way it did after 9/11 because developers won't be able to get the insurance they need to secure loans.

"Our 2002 survey revealed that during the months after 9/11 and before TRIA was enacted, over $15.5 billion of projects in 17 states stalled as a result of a lack of coverage," Rodgers said.

Critics argue that insurers have collected billions of dollars in premiums since then and that the program was never intended to be permanent. Housing and Insurance Subcommittee Chairman Randy Neugebauer (R-Texas) introduced a bill last week that would renew TRIA but put it on a "glide path" toward phasing out government support, he said. The House Financial Services Committee passed his bill Friday, clearing the way for a full House vote later this summer.

The bill would raise the trigger for government support in conventional terrorist attacks from $100 million to $500 million in industry-wide losses. Coverage for nuclear, biological, chemical, or radiological attacks would still kick in after losses of $100 million. The Senate Banking Committee passed a bill earlier this month with a few key differences. The Senate version would extend the program for seven years, for instance, while the House version would only give it five.

With each renewal, Congress has raised the amount insurers must pay out before federal assistance kicks in. It started at $5 million in industry-wide losses, which was raised to $50 million in 2006 and then $100 million in 2007. Lawmakers have also increased the amount that individual insurance companies have to first pay. In 2003, each company had to pay out 7 percent of the previous year's premiums before the government paid anything. That percentage has been rising incrementally and now stands at 20 percent. TRIA also requires insurers repay the government, if there's an event, by collecting additional premiums from future policyholders.

J. Robert Hunter, director of insurance for the Consumer Federation of America, has opposed the program from the beginning. He says it should collect premiums.

"It doesn't charge the people that are actually facing the risk, it charges the people that need it later," said Hunter, who has run other government insurance programs such as the National Flood Insurance Program and the Federal Riot Reinsurance Program, which was created in 1968 to cover urban areas after riots caused many companies to drop out of the market. "The whole thing is put together by Rube Goldberg."

Mark Calabria, a former Republican aide on the Senate Banking Committee who is now at the Cato Institute, said the House bill "is a sign that reform will move quickly and that ultimate passage is essentially guaranteed before the end of the year." Neugebauer said he hopes Congress can reconcile the two versions and pass a renewal before the August recess. 

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