Singapore, 2 December 2011

Myanmar may be coming in from the political cold, but it will take resource companies several years to ramp up production from the impoverished nation. Hillary Clinton, on the first visit to the Southeast Asian country by a U.S. secretary of state for 50 years, has held out hope that Western sanctions on the former Burma could be eased if progress is maintained towards democracy, moving away from military rule.

This has sparked speculation that Myanmar is going to be open for business soon, and is ripe for the plucking by global resource companies. It's true that the nation of about 50 million people that boasts Southeast Asia's second-largest land mass has considerable potential in both natural gas and agricultural products.

But even if Myanmar is opened up for business, it's also doubtful the size of opportunities will outweigh the risks and costs of investing, especially given the caution many companies are displaying in the face of the world economy's poor outlook.

Let's get the main obstacle to doing business in Myanmar out of the way first. The country is ranked the third worst in the world for corruption, beating only North Korea and Somalia, according to Transparency International. Imagine trying to go to the board of any corporation and proposing to sink billions of dollars into a blue-sky project in Myanmar and explaining how safe your investment is likely to be.

Not too many boards will be interested, at least not until the Myanmar government builds a better track record for honesty, not to mention human rights.

But let's assume your board is into taking risks and decides to seize the chance of getting in early on the expected Myanmar commodity boom. The gas sector offers the most hope, but there are still several problems. Myanmar, India and Bangladesh all want a piece of the action in the Bay of Bengal and relations between the three neighbours are all strained, leading to uncertainty over the safety of your exploration rights.

Myanmar closed its biggest oil and gas tender in years in August, but industry sources say interest was lukewarm and regional players and smaller firms are likely to be the only companies interested in getting the blocks. Chinese companies have been active in Myanmar, with China National Petroleum Corp., the parent of PetroChina, laying two pipelines to connect Myanmar's coast with China's southwestern province of Yunnan.

One of these pipelines is designed to ship as much as 440,000 barrels a day of crude oil that arrives in Myanmar from the Middle East across the country to China, thus avoiding a longer sea journey through the Straits of Malacca. The other is to send 12 billion cubic metres of gas a year from Myanmar's fields to China.

These projects are under construction and are targeted to come online in 2013. But the experience of other Chinese projects in Myanmar has not been quite so successful, with CNPC withdrawing from some exploration blocks, while Sinopec and CNOOC are said to be lukewarm towards expanding in the region.

Relations between Myanmar and China have also been strained since September when the government halted work on a hydroelectric project being built with Chinese help. Still, Indian and Malaysian companies may be willing to step in and explore for gas offshore, even as existing producers in the country, such as France's Total, say they don't plan on investing more until democracy takes hold. But even if you do take the risks and drill, it will take several years to prove up reserves and make any meaningful production. Myanmar's proved gas reserves amount to 300 billion cubic metres as of 2010, a figure that hasn't changed since 1990, according to the BP Statistical Review of World Energy.

The country produced just 0.4 percent of the world's gas in 2010, or about a fifth of Malaysia's output. While this shows there is probably lots of potential gas off Myanmar, it also means the industry is vastly underdeveloped and unlikely to attract sufficient investment as long as the big players remain reluctant.

Myanmar also has significant potential in agriculture, with the country being the biggest rice producer in the world in the 1930s. Now it produces enough to feed its own people and export small amounts, estimated at 500,000 tonnes in 2010-11, and potentially nearly 1 million tonnes in the current fiscal year.

But this pales in comparison to Thailand's exports of as much as 10 million tonnes of rice a year. The problem for Myanmar is that its rice farms tend to be too small, the mills are old and the quality of grain produced is lower than that of competitors. It's the same with natural rubber, where Myanmar producers around 80,000 tonnes a year, a tiny fraction of top producer Thailand's 2.86 million tonnes.

These problems can be solved with investment, but again, the risks may outweigh the potential rewards. The risk for Myanmar's rulers is that they may be caught in a Catch-22 situation. They need the money and jobs generated by exploiting natural resources in order to maintain stability and grow the economy.

But they won't get the investment until they show they are serious about moving towards democracy and transparency. Doing the democracy bit first may well lessen the generals' grip on power before the income from resources can kick in.

Ends --

By Clyde Russell, Reuters market analyst – for Commodities Now with permission.

The views expressed here are his own.