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Myanmar's strategic location attracts China's energy giants

This oil storage facility in Kyaukpyu, western Myanmar, serves as the starting point of a 2,400km oil pipeline to the Chinese city of Chongqing.

YANGON -- Situated on the Indian Ocean, Myanmar is in a prime location to aid China in its quest for an alternative oil transport route from the Middle East.

    Major Chinese energy companies are already working on large projects in the Southeast Asian country, building pipelines and other facilities.

     A major energy artery linking western Myanmar with China was completed in late January. The 2,400km pipeline took more than four years to build -- construction began in the summer of 2010, when the Myanmar was still ruled by a military junta.

     The pipeline starts in the port town of Kyaukpyu in the western state of Rakhine and runs through the northern border town of Muse on the Myanmar side and Kunming in China, terminating in the southwestern Chinese city of Chongqing. It enables China to receive more than 20 million tons of Middle Eastern crude oil a year, equivalent to nearly 10% of the country's annual crude oil imports.

     This pipeline significantly reduces the shipping distance of crude from the Middle East, since the traditional route requires tankers to sail through the Malacca Straits and continue all the way to China's Pacific coast. With domestic demand growing strongly each year, Beijing has been putting considerable efforts into ensuring stable energy supplies. This makes the Kyaukpyu-Chongqing pipeline strategically important to the country.

Growing presence

Looking to boost its energy security, China has been steadily building up its foothold in Myanmar. China National Petroleum Corp. has been sending natural gas from a gas field off the coast of Kyaukpyu to China via another pipeline since the autumn of 2013. In addition, the state-owned oil and gas company began explorations in a deep-sea oil and gas field in the southern part of Rakhine earlier this year.

     Further south, in the city of Dawei, Guangdong Zhenrong Energy is working toward building an oil refinery. The company, a major Chinese player, is holding talks with the Myanmar government to move the $3 billion project forward. If all goes well, a facility with an annual refining capacity of 5 million tons will go up.

     Dawei is a port city near the border with Thailand. With the Myanmar and Thai governments considering developing a deep-water port there, this underdeveloped city could be transformed into a major hub for transporting oil from the Middle East and the Indian Ocean to Southeast Asia.

     The city could also become home to large-scale petrochemical production facilities. Guangdong Zhenrong, having noticed Dawei's potential early on, has been working to build up its presence there ahead of rivals.

Fulfilling its potential

It may look like China leveraging its economic might to wring concessions from Myanmar, but the reality is different.

     Myanmar Oil & Gas, a state-owned enterprise under control of the Ministry of Energy, put up a half of the roughly $2.5 billion cost of China National Petroleum's Kyaukpyu-Chongqing pipeline by providing land and making other contributions in kind.

     Union of Myanmar Economic Holdings, a business associated with Myanmar's military, is a partner in Guangdong Zhenrong's oil refinery project.

     Both endeavors are structured in a way that provides considerable economic benefits for Myanmar through continuous dividend payments to the government or its affiliated enterprises.

     Myanmar's location as a gateway to the Indian Ocean means it can serve as a key energy transportation hub for China and Southeast Asian countries, allowing them to receive energy without sending tankers through the Malacca Straits.

     During military rule, the country was unable to capitalize on its strategic importance, as the junta kept the country virtually closed to the outside world. Myanmar's recent democratization and opening up of the economy have made it possible for the country to make the most of its potential as an energy transportation hub.

     Chinese companies are not the only ones taking note. A major Thai resources company and Japanese trading houses have also built or are considering building oil refineries and pipelines in Myanmar.

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