Center for a New American Security

Burma’s Shwe Pipeline project could begin delivering oil and natural gas to China as early as 2013, providing China some relief from its so-called Malacca Dilemma and potentially changing its strategic calculus with respect to energy resources in the South China Sea.

The Strait of Malacca has long posed a strategic vulnerability to China. Up to 80 percent of China’s Persian Gulf and African oil imports pass through this energy chokepoint nestled between Indonesia and Malaysia, fomenting anxiety in Beijing that any obstruction of the strait or neighboring sea lanes could have an immediate impact on the Chinese economy and stability.  “[I]f the Malacca Strait were closed for just one day, the disruption in energy supplies might cause social unrest in China, according to a well-placed officer of the People’s Liberation Army,” wrote Patrick M. Cronin and Robert D. Kaplan in a January 2012 CNAS study on the South China Sea.

China’s Malacca Dilemma has exacerbated fears over assured access to energy resources and could be influencing Beijing’s assertive behavior in the South China Sea. Despite the uncertainty over how much oil and natural gas actually lays beneath the South China Sea, policymakers in Beijing appear to be making a bet that those energy resources could provide some strategic relief from its energy problems elsewhere, particularly the Strait of Malacca. Moreover, China’s vast infrastructure of overland energy pipelines from Central Asia carries strategic risk as well. Those energy resources must cross through vulnerable transit states like Pakistan and are delivered to western China, where Beijing’s influence waxes and wanes.

Burma, also known as Myanmar, was ruled for decades by a military junta until reversion to nominal civilian control in 2011. President Thein Sein’s openness and reform agenda has led Europe, the United States and others to ease or suspend sanctions.  Recent months have seen the election of Aung San Suu Kyi and members of her National League for Democracy (NLD) in April 2012 parliamentary by-elections as well as the nomination of Derek Mitchell in May to become the first U.S. ambassador to Burma since 1990. Our very own Dr. Patrick M. Cronin, Senior Advisor and Senior Director of the Asia-Pacific Security Program at CNAS, had the opportunity to travel to the country recently. He offered his thoughts on a broad range of issues, including natural resources and the environment.

Daniel Katz (DK): Burma has been touted by some as the potential energy crossroads of Southeast Asia, with plans for pipelines and offshore oil and natural gas development that could contribute to strong economic growth over the next decade. What do you see as the most important political, social and environmental challenges to robust energy development in the near term?

Patrick Cronin (PC): Well, Burma or Myanmar, is rich with resources, not just hydrocarbons but obviously jade, gold, timber and other resources and it is certainly being eyed not just by China but by the entire world potentially to tap its oil and gas reserves.  First, from China’s perspective, completing the oil pipeline by next year in 2013 is seen as critical for redrawing the map of Asia and providing China some relief from its so-called Malacca Dilemma, under which all of its trade and resources must go through a narrow choke point in the Strait of Malacca.  This will allow major oil and gas to flow from the Persian Gulf and Africa as well as out of Myanmar itself to China.  This is very important.  Now, as for extractive industries being open to the international market as sanctions are lifted or suspended, there’s a great deal  of interest in this, but unfortunately some of the early bids have been coming from countries that have companies that may not be the most high-standard, not exactly the gold standard of transparency.  I know there was one deal just made with Thailand.  Thailand may be better than most.  I’m talking about some other countries where these companies will only contribute to the so-called “resource curse” that so many developing countries with resources have faced in the past, especially when they have a couple commodities that are extracted.  It’s so easy for those resources to leave the country for good and for all of the profits to go into the hands of a very small group of people.  Hitherto, this has been the military top leadership and they’re still sitting on treasure troves of money from their rich resources.  So one of the big political challenges on development is to ensure that they build institutions in Myanmar going forward that have much more transparency over extractive industries overall, including oil and gas, and that outside companies that come in to develop it must try to build a much more transparent system for the good of Myanmar.  I think they can.  I think this will be a big boon to Myanmar’s development and to regional development.  But we’ve seen so many horror stories in the developing world and they’re trying to do so much so quickly in Myanmar that this is a big challenge.

Power shortages across Myanmar are contributing to small-scale demonstrations throughout the country, according to a report in The New York Times on Sunday. “Numerous small protests have arisen in Myanmar over persistent power shortages as the past year’s democratic reforms have led to rising expectations from a long-suppressed population,” the report said. “Demonstrations in the past week in Myanmar’s two largest cities and several towns could be seen as an indicator of the new openness under President Thein Sein, who has overseen the country’s emergence from decades of authoritarian rule.”

Despite Myanmar’s abundance of energy resources –particularly natural gas – the country suffers from major infrastructure challenges that could slow the country’s economic growth. “A poor power distribution infrastructure has lagged even more as the economy has grown,” according to The New York Times. Consequently, this poor infrastructure could constrain the country’s expected growth as the government continues to enact political reforms that encourage Western governments to ease economic sanctions and give rise to foreign direct investment in nascent industries, including in oil and natural gas production.

Moreover, political protests could potentially spook the government as it continues to gradually enact political forms. Although the demonstrations over power shortages are still small and rather peaceful – with the largest demonstrations including only between 200 and 300 protestors – the government is likely to keep a watchful eye as these and other political demonstrations develop over concerns that the country’s gradual political opening could embolden opposition groups and threaten the military establishment and long-time authoritarian leaders. “The most recent uprising, led by monks in 2007, began as small protests over fuel price increases,” The New York Times added, suggesting that there is a recent history of political demonstrations escalating beyond a point that the government finds acceptable. Although there is little to suggest that these protests will escalate and prompt a response from the government, the challenges over energy infrastructure are likely to be a defining feature of the political and economic landscape in Myanmar in the years ahead. 

On Friday, the Burmese government announced that it would halt the construction of a Chinese-backed dam on the Irrawaddy River, marking a significant setback for China that has increasingly relied on Burma for access to energy and natural resources to feed its growing economy.

(Note: I first saw the report on The Wall Street Journal on Friday, but was glad to see it make it into the weekend news with a report by The New York Times on Saturday. Both reports are worth a read.)

As I noted on Twitter on Friday, the Burmese government’s announcement is an interesting departure from its close partners in Beijing, and may signal a growing rift between the two states. “The dam’s suspension was a blow to China, long considered a benefactor to the government in Myanmar,” The New York Times reported. “China Power Investment, a state-run Chinese company, was leading the construction of the project, which would have delivered electricity to southern China. It is unclear how the suspension will affect six other Chinese-led hydroelectric projects in northern Myanmar.”

China has increasingly relied on close ties with the Burmese government in order to secure access to natural resources and to gain rights to develop overland energy pipelines to deliver natural gas and other fossil fuels to southern China. Indeed, Burma has become a critical energy transit state for China that is busily developing a portfolio of overland pipelines and access to maritime resources as part of its overall energy strategy. For example, as the Times reported, “A pipeline that would carry natural gas and oil from the Bay of Bengal to southern China is currently under construction.”