Feasibility Study for Introduction of LNG Receiving. Facilities in Myanmar

Transcription

1 Study on Economic Partnership Projects in Developing Countries in FY2013 Feasibility Study for Introduction of LNG Receiving Facilities in Myanmar Final Report February 2014 Prepared for: The Ministry of Economy, Trade and Industry Ernst & Young ShinNihon LLC Japan External Trade Organization Prepared by: The Japan Research Institute, Limited Mitsui O. S. K. Lines, Ltd. JGC Corporation Sumitomo Mitsui Banking Corporation

2 Reproduction Prohibited

3 Study on Economic Partnership Projects in Developing Countries in FY2013 Feasibility Study for Introduction of LNG Receiving Facilities in Myanmar February 2014 The Ministry of Economy, Trade and Industry, Ernst & Young ShinNihon LLC, Japan External Trade Organization Prepared by: The Japan Research Institute, Limited

4 Preface The report summarizes the results of the Study on Economic Partnership Projects in Developing Countries in FY2013, entrusted to The Japan Research Institute, Limited, Mitsui O. S. K. Lines, Ltd., JGC Corporation and Sumitomo Mitsui Banking Corporation by the Ministry of Economy, Trade and Industry. This study entitled Feasibility Study for Introduction of LNG Receiving Facilities in Myanmar was carried out in order to assess the feasibility of the project to construct FSRU, jetty and pipeline at total cost of around 77 billion yen. The aim of this project is to solve the problem of gas supply shortage for power generation in Myanmar. We sincerely hope this report will contribute to the implementation of the aforementioned project and provide practical information to parties concerned in Japan. February 2014 The Japan Research Institute, Limited Mitsui O. S. K. Lines, Ltd. JGC Corporation Sumitomo Mitsui Banking Corporation

5 Project Site Map Proposed Site for FSRU and Pipeline Routes Source:Prepared by Study Team

6 Details of Proposed Pipeline Routes Source:Prepared by Study Team

7 List of Abbreviation Abbreviation ADB CDM CSO EIA EIRR EMC EPD ESE FIRR FSRU HPGE IEE IFC IPP JBIC JETRO JICA LNG MECF MEPE MIC MOE MOEP MOF MOGE MOT MOU MPA MPPE MPE NEMC NLD NPV ODA PPA SAIFI Full Name Asian Development Bank Clean Development Mechanism Central Statistical Organization Environmental Impact Assessment Economic Internal Rate of Return Energy Management Committee Energy Planning Department Electricity Supply Enterprise Financial Internal Rate of Return Floating Storage and Regasification Unit Hydropower Generation Enterprise Initial Environmental Examination International Finance Corporation Independent Power Producer Japan Bank for International Cooperation Japan External Trade Organization Japan International Cooperation Agency Liquefied Natural Gas Myanmar Environmental Conversation and Forestry Myanmar Electricity Supply Enterprise Myanmar Investment Commission Ministry of Energy Ministry of Electric Power Ministry of Finance Myanmar Oil and Gas Enterprise Ministry of Transport memorandum of understanding Myanmar Port Authority Myanmar Petroleum Products Enterprise Myanmar Petrochemical Enterprise National Energy Management Committee National League of Democracy Net Present Value Official Development Assistance Power Purchase Agreement System Average Interruption Frequency Index

8 SLORC SPDC SRV VGF YESB State Law and Order Restoration Council State Peace and Development Council Shuttle Regasification Vessel Viability Gap Funding Yangon City Electricity Supply Board

9 Table of Contents Preface Project Site Map List of Abbreviations Table of Contents Executive Summary (1)Background and Necessity of the Project S-1 1. The Myanmar Government s Development Programs in the Gas and Electricity Sectors; Priorities of Projects Based on Future Prospects S-1 2. Project Scope and Expected Users S-2 3. Effects of the Project S-3 (2) Parameters/ Items in Determining Project Details S-4 1. Demand Forecast S-4 2. Identifying and Analyzing Issues before Exploring and Determining Project Details S-5 (3) Project Outline S-6 1. Project Site S-6 2. Specifications for Equipment Introduced S-6 3. Project Cost S-7 4. Financial and Economic Evaluation S-7 (4) Project Implementation Schedule S Preconditions for project implementation S Project Schedule (Proposed) S-12 (5) Feasibility to Implement the Project S-13 (6) Potential Business Scheme S-15 (7) Technical and Economic Advantage of Japanese Companies S-17 (8) Maps, which shows the site for the project in the country surveyed S-19 Chapter 1 Overview of the Host Country and Sector (1) Economic and Financial Status Myanmar: Summary Society and Economy of Myanmar 1-4 (2) Summary of Targeted Sectors Energy Related Organizations in Myanmar Primary Energy Composition in Myanmar Gas Demand Situation in Myanmar Electricity Supply and Demand in Myanmar Efforts and Issues to Resolve Electricity Shortages in Myanmar 1-12

10 (3) Situation in Subject Areas Current Situation of Gas-Fired Power Plants and Gas Pipeline Network in Yangon The Current Situation of Yangon River Basin and Andaman Sea 1-16 Chapter 2 Study Methodology (1) Scope of Works 2-1 (2) Study Methodology and Structure Study Methodology Structure of the Team 2-3 (3) Study Schedule 2-9 Chapter 3 Justification, Objectives and Technical Feasibility of the Project (1) Project Background: Why the Project Is Needed The Myanmar Government s Development Programs in the Gas and Electricity Sectors; Priorities of Projects Based on Future Prospects Project Scope and Expected Users Issues Expected in Case of Absence of the Project Effects and Impacts of the Project Alternatives to the Import of LNG 3-4 (2) Upgrading and Streamlining Energy Use 3-6 (3) Factors to Examine for Determining Project Contents Demand Forecast Identifying and Analyzing Issues before Exploring and Determining Project Details Examination of the Proposed Project Site: Conclusion How to Source LNG Technical Approaches (compared to alternatives) 3-19 (4) Project Plan Outline Basic Policies for Determining Project Details Conceptual Design and Specifications of Applied Facilities and Equipment Proposed Project Details (Site and Investment Cost for the Project) Issues on Proposed Technologies and System;Solutions 3-31 Chapter 4 Evaluation of Environmental and Social Impacts (1) Analysis of Environmental/ Social Aspects Project Areas Future Forecast 4-2 (2) Environmental Improvement Achieved through Project Implementation 4-2 (3) Environmental and Social Impacts Associated with the Project Reviewing Environmental and Social Considerations The Environmental Impacts of the Alternative Proposals 4-18

11 3. Result of Information Collected on Environmental and Social Impacts 4-18 (4) Overview of the Country s Environmental and Social Related Regulations and Necessary Measures Overview of Regulations and Schemes Related to the Environment EIA Related Matters 4-20 (5) Requirements to Deliver Projects in This Country (by Implementing Organizations and Related Organizations) 4-21 Chapter 5 Financial and Economic Evaluation (1) Estimated Project Costs Cost Estimate Breakdown Project Costs Disbursing Plan of the Project Costs 5-4 (2) Summary of the Result of Preliminary Financial/ Economic Analysis Financial Analysis Economic Analysis 5-8 Chapter 6 Planned Project Schedule (1) Project Implementation Schedule Preconditions for Project Implementation Project Schedule (Proposed) 6-1 Chapter 7 Implementing Organization (1) Relevant Ministries Agencies and Their Roles 7-1 (2) Required Capabilities for the project implementation 7-2 Chapter 8 Technical Advantages of Japanese Company (1) Assumable Forms of Participation by Japanese Enterprises 8-1 (2) Superiority of Japanese Enterprises in Implementing This Project (Technologically and Economically) 8-5 (3) Measures Necessary to Help Japanese Enterprises Win Contracts 8-6 Chapter 9 Potential Funding Source for the Project (1) Reviewing Fund Sources and Financing Plans 9-1 (2) Feasibility of Fund-Raising ODA by the Japanese Government Investments by Japanese Companies Loans/ Guarantees from Japanese Export Credit Agencies 9-5 (3) Cash Flow Analysis Financial Analysis Economic Analysis 9-9

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13 Executive Summary

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15 (1) Background and Necessity of the Project 1. The Myanmar Government s Development Programs in the Gas and Electricity Sectors; Priorities of Projects Based on Future Prospects a. Ministry of Energy s gas production and supply plans Myanmar produces natural gas. The Ministry of Energy (MOE), which is responsible for oil and gas sector from gas exploration and production to distribution, has been promoting the development of offshore gas fields; for example, Zawtika and Shwe fields are expected to start gas production in 2014, and M3 field in Most of the produced gas within Myanmar, however, is exported to China and Thailand, so the domestic gas demand cannot be sufficiently satisfied. b. Ministry of Electric Power s power development plan The Ministry of Electric Power ( MOEP ) has drawn up power development plan that covers years up to The Ministry plans to increase power capacity in tandem with the demand growth. The MOEP plans to build several new gas-fired power plants to secure short-term power sources, especially for the dry season in Yangon where electricity demand is very large. These plants are scheduled to start operating sometime between 2013 and February 2016, with their planned capacity up to about 4.2 GW (see the chart below). The IPPs plan to build three new power plants (BKB, UREC, Hydrolanchang) and are in discussion with MEPE for the signings of MOUs (Memoranda of Understanding) for the Feasibility Study and/or PPA (Power Purchase Agreement). S-1

16 Table Summary-1: Gas-Fired Power Plants Being Built or To Be Built in Myanmar Yangon Other area in Myanmar Name start year Capacity (MW) Zeya Hlawga Hydrolanchang (IPP,China) Ywama MSP EGAT Ahlone Toyo-Thai CIC BKB Thaketa (IPP,Korea) UREC (IPP,China) Hlaingtharyar Thilawa Ayeyarwaddy Mawlamyaing Myanmar Lighting Kyaukphyu/Rak hine State MOEP Kanpouk Dawei Power Utilities Myin Gyan Myin Gyan Kyause Rental Source: Created by the research team based on information provided by the MEPE and an interview with the NEWJEC Although the MOEP and IPP projects have been proceeding with the construction of additional gas-fired power generation facilities, they have been unable to increase the natural gas supply for the power generations, owing to the tight gas supply-and-demand situation in the country. Under these circumstances, the MOEP asked for a public bidding for importing LNG for gas-fired power generation in July The study team interviewed the MEPE and found out that this was to obtain gas for IPPs that are supposed to newly engage in gas-fired power generation mainly in the Yangon area. Applications are received and reviewed by the Yangon Electricity Supply Board (YESB), which is a Yangon-based government entity owned by the MOEP. 2. Project Scope and Expected Users This study firstly examined the LNG supply chain from the LNG purchase to its consumption, and then clarified certain project to be developed using expertise of private sector, in which Japanese enterprises will support to S-2

17 install storage and regasification facilities (i.e., facilities for receiving LNG) and facilities for gas transport to the point of demand or the point of delivery designated by gas users. It is difficult to analyze future national gas demand with limited research period, which is acceptable for the investment decision of LNG import facility,. Therefore, this research assumes that imported gas is used to meet the demand only for gas-fired power generation based on the master plan developed by MEPE The MEPE owned by the MOEP purchases from the MOE home produced gas supplied to existing gas-fired power plants. Through the interview with the MEPE and other relevant entities, the study team concludes that MEPE will be able to play the same role for not only domestic gas produced but also imported LNG. Namely, MEPE becomes the purchaser from LNG supplier and distributor to IPPs. Since MEPE is the sole entity to import LNG in Myanmar, it is expected to have bargaining power to negotiate the LNG price with suppliers. 3. Effects of the Project As stated earlier, domestic demand for natural gas has not been filled in Myanmar. Natural gas is used not only for power generation, but also for petroleum refining, fertilizer production, iron manufacturing, utility gas, and other purposes. The natural gas supply is vital for Myanmar, in order to accelerate the economic development. Installation of FSRU will enable Myanmar to receive LNG with a relatively short lead time. This will contribute to balancing natural gas supply-demand, hopefully bringing the following effects: The operating rates of gas-fired power plants will rise and more electricity will be generated, which will make outages shorter and less frequent. Increased electricity supply will enlarge the national industrial platform increasing manufacturing and production capacity of the country that will lead to improve standard of living of the population. There will be larger domestic supplies of gas for petroleum refining, fertilizer production, iron manufacturing and utility gas, which will strengthen cost competitiveness and increase industrial production volumes. S-3

18 (2) Parameters/ Items in Determining Project Details 1. Demand Forecast Demand estimation for LNG gas using the formula below: Demand for LNG import = Quantity of gas needed for gas-fired power generation Domestic gas production x Percentage of gas distributed to electric power sector Quantity of gas needed for gas-fired power generation As mentioned before, the MOEP has drawn up power development plans that cover years up to This study assumes that additional gas-fired power plants will be built according to the plans. The current plans state that additional power plants will be completed by 2016 or 2017, and that the government will ensure steady electricity supplies mainly through hydropower generation plants that require some development period. With regard to the domestic gas production, many onshore and offshore projects are underway as mentioned above, although many of them have not specified when production will begin and how much gas they aim to produce except for certain gas fields. This study assumed only the production volumes from the ZawtikaShwe, and M3 gas fields, for which the MOE is scheduled to launch development projects additional domestic gas production volumes. The supply from domestic gas fields will be 290 BBtud between 2013 and 2014, and then 476 BBtud between 2020 and 2021.According to the MOE, how much domestic gas production will be distributed for electricity generation in the future has not yet been decided, while 60 to 80 percent of the domestic gas production has usually been reserved for electricity supply. This study assumed that the 65 percent of gas to be supplied by the MOE will be distributed to electricity sector during 2013 and Additionally, although specific LNG supply sources have yet to be determined, the team assumed that the calorific value of LNG is 1,040 Btu/cf, which is the typical level in the market. Given these assumptions, LNG demand for gas-fired power generation is expected to rise to 72 mmscfd between 2013 and 2014, and then to 354 mmscfd between 2016 and From 2020 onward, the demand will depend on trends in the development of new domestic gas fields, while it is expected to be around 350 to 450 mmscfd. S-4

19 Figure Summary-1: Demand for Imported LNG in Myanmar Source: Created by the research team 2. Identifying and Analyzing Issues before Exploring and Determining Project Details To define the detail of the project, the below items are studied/ studied; Site to install FSRU and specification Options for ownership FSRU Options for introducing an FSRU Jetty design Pipeline construction route and specifications Financing pipeline construction LNG procurement S-5

20 (3) Project Outline To overcome electricity shortage as soon as possible, MOEP is considering LNG import for electric power generation. As the demand forecast shows, the amount of gas needed is meant to fill the gap between domestic gas supply and gas demand based on the capacity of gas-fired power plants in the power development plan. Given this background, MOEP intends to realize quick start of LNG import. However, further discussion on the detail including required cost to be held through, among MOEP and relevant entities. In this study, the team examined project details in accordance with the physical and financial restrictions mentioned earlier, and with the needs of the various Myanmar government organizations. 1. Project Site Taking into account such factors as the intention of the Myanmar government physical constraints and economic efficiency, FSRU should be installed 80km offshore from the Yangon River, and a gas pipeline route will be laid up to South Dagon in the existing pipeline network in Yangon. The water depths should be at least 13m for a regular LNG carrier to safely approach. However, as detailed data on the depth of water from recent years is unavailable, the team used a nautical chart to pick areas about 15 m deep just to be on a safer side. The team regard to pipeline, analyzed the three cases, considering location of an FSRU, the distance and route to the land, ensuring that the route between S. Dagon and Thilawa is in line with the Myanmar government s expansion plan. The required length of onshore pipeline on the route will be 50 km. The Myanmar Port Authority (MPA) in charge of the Yangon River requested that the offshore gas pipeline route bypass the Yangon River (i.e., the pipeline should not run across the riverbed)), if possible The team took this request into account in selecting recommended pipeline route. With regard to the offshore pipeline, we based our examination on the parts immune from the plan for building the large deep-water port and other plans. 2. Specifications for Equipment Introduced a. FSRU specifications The team assumed a newly-built FSRU with the tank capacity of 173,000 m 3, which is close to the capacity of 150, ,000 m 3 that many of the countries placed their orders in the recent years. b. Jetty design The location of FSRU will be as far away as 80 km from the port, which makes it difficult for tugboats to be deployed for quick rescue should the FSRU has to leave the jetty in an emergency. Therefore, the study team assumes the design based on the cross-jetty system. S-6

21 c. Size of pipelines From the viewpoint of minimizing the initial cost, and from the required capability of the gas transportation, it is suggested that 24 inches pipeline size needs to be set. 3. Project Cost The total investment cost is about US$624 million, and the annual running cost about US$24.0 million. Table Summary-2: Initial Cost of the Project Expense Items Cost Foreign Currency Local Currency ($1 million) ($1 million) (1 million Kyat) Construction/Equipment Cost Total ,503 FSRU ,622 Jetty ,936 Pipeline (offshore) ,945 Consulting Cost ,748 Interest in construction period and handling fee 69 Tax for capex 25 Initial cost total 624 Source: Created by the research team 4. Financial and Economic Evaluation a. Preconditions of financial analysis The following table shows the preconditions set for the project. S-7

22 Table Summary-3: Financial Analysis Preconditions Project period 25 years Research/Construction period 5 years Operating period 20 years Regasification capacity 360 mmscfd Profit Charter FSRU, Jetty, and offshore pipeline (including fuel cost of FSRU operation of USD 10.8 million per year: assumed LNG unit price: approx. $14/mmbtu): $135 million/year Initial cost 624MMUSD Operating cost 24.0 MMUSD /year Capital ration 25% Interest rate on borrowing Initial rate 10% (incl. handling fee), 3% during the loan period Payback period of borrowing 18 years from date of draw down Depreciation period FSRU, jetty: 20 years, Pipeline: 10 years (Straight-line depreciation for both. Salvage value after the closure of the business is not estimated). Corporate tax rate 25% Commercial tax 5% Custom duties 0.5% Hurdle rate of FIRR 10% (Long-term interest rate in Myanmar as of October 2012) Sensitivity analysis Case1: The location of the FSRU is 100 km offshore (80 km for the base case) Case2: The operational period is 10 years.: Sources: Created by the research team The following table shows profitability of the project. Table Summary-4: Result of Calculation of Performance Indicators NPV(discount rate 12%) 132MMUSD B/C (discount rate 12%) 165% IRR 11.5% (Long-term interest in Myanmar 10%) Case1: IRR_offshore100km 10.5% Case2: IRR_operation period is % years Sources: Created by the research team Based on the result above, it is estimated that the project has good financial viability even if the FSRU is constructed 100km offshore, with a higher rate than the long-term interest of 10% in Myanmar. S-8

23 If the duration of operations is cut by 50% to 10 years with the chartering cost unchanged, IRR will remain at 6.9%. b. Economic Evaluation The advantage that the implementation of the project could bring to the economy of Myanmar is the financial effect delivered through increased electricity supply and avoidance of power outage. To calculate the economic effect of the project, it is necessary to evaluate the difference by comparing the effect of the project with a baseline case, where the project does not take place. This study made a rather conservative assumption that in the case where the project did not materialize, the hydropower generation plants would be developed instead, generating the equivalent amount of electricity per year. However, Myanmar has a dry season for 3 months, and therefore it was also presumed that there will be rolling power cuts caused by electricity shortage, deriving from the inability of hydropower generation especially in the last half of the dry season. The difference in economic effect between the baseline case and the case the project is implemented can be the difference created by avoiding power failures during the dry season, as well as the difference between the construction and operational costs of hydropower plants and the operational costs of gas-fired power plants. Capex and opex of new onshore pipelines that MOGE may build and own are assumed to be covered by MOGE, not by the project. c. Evaluation of economic feasibility The preconditions for economic analysis are as below. S-9

24 Table Summary-5: Preconditions for Economic Analysis Project period 25 years Research/Construction period 5 years Operation period 20 years Regasification capacity 360 mmscfd Profit Reduction of the cost of power cut in last half of the dry season (1.5 months) (Power shortage amount in the dry season1,555 GWh $1/kWh 1 )-(New land gas pipeline costs +operational costs of gas-fired power plant construction/operational costs of a hydropower plant) Initial cost 624 MMUSD Operational cost 24.0 MMUSD/ year Hurdle rate of FIRR 12% (Average figure of opportunity cost in developing countries 2 ) Sensitivity analysis Case1: The location of the FSRU is 100 km offshore (80 km for the base case) Case2: The operational period is 10 years. Sources: Created by the research team To estimate the volume of power shortage during the dry season, the expected output of gas-fired power plants is calculated based on the below assumptions; (i) the electricity volume generated from 360mmscd of gas with a generating efficiency of 40% for 18 hours per day excluding off- peak season for 1.5 months (46 days) (ii) transmission loss (21%) 1 The operational cost of a gas-fired power plant (excluding fuel costs), construction/operational costs of hydropower plant are adopted from the average operational cost in China (gas fired: 10.88/kWh, hydropower: $36/kWh) in the Projected Costs of Generating Electricity 2010 Edition by the OECD. For the fuel cost of a gas-fired power plant, this study team applied the price deducing $0.5/mmbtu (=equivalent of the transport cost between Myanmar and Japan, assuming it will be transported from the Middle East,) from Japanese LNG prices described in the New Policies Scenario in the IEA s World Energy Outlook The price is drifting at $14/mmbtu during the operational period. 1 Source: FY 2011 Infrastructure System Export Promotion Investigations (Project formation of yen loan/private infrastructure investigations), Study on the substation rehabilitation project in Yangon, the Republic of the Union of Myanmar (November, 2012) 2 Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations, ADB (2006) S-10

25 The profitability of the project is as below. Table Summary-6: Result of Calculation of Performance Indicator NPV(discount rate 12%) 632MMUSD B/C (discount rate 12%) 504% IRR 28.0% (opportunity cost for developing country 12%) Case1: IRR_100 km 26.2% offshore Case2: IRR_Operational 26.6% period is 10 years Sources: Created by the research team As shown in the above table, the result exceeds a 12% opportunity cost under the both cases where we assume FSRU is located 100km offshore or project period of 10 years. However, the calculation of the above performance indicators are based mainly on various assumptions, as including matters and elements outside the scope of the study and therefore contains some uncertainties in its result, It is necessary to conduct further detailed study in the future. 5. Analysis of Environmental/ Social Aspects (1) Analysis of Environmental/ Social Aspects Except for some items in which relevant permits are needed in the future as Myanmar is now under the process to making relevant laws and regulations, most check items were not applicable for this project, or its effect is expected to be relatively small. (4) Project Implementation Schedule 1. Preconditions for project implementation For the successful completion of the project, the following preconditions need to be decided by the relevant companies/entities or by the discussion among them. The determination of these preconditions will expedite the project. Appointment for the responsible entity of the project, and the main body of the counterpart governments for charter ship contract Decisions of basic conditions of fuel gas procurement (quantity/gas components etc.) Decision of gas delivery point Change of the gas delivery point influences on the whole project design of gas pipeline including project schedule, etc. Policy on fund sourcing S-11

26 Development of appropriate financing plan related FSRU / pipeline introduction, the LNG purchase. Schedule of legislation for Environmental Impact Assessment ( EIA ) Affected by preparation of the EIA process and progress of parliamentary approval 2. Project Schedule (Proposed) From basic development plan to gas delivery, the project is composed of three stages: 1. From making basic development plan to final investment decision (FID) 2. From FID to installation of FSRU, jetty facilities and pipelines 3. Connecting the facilities to the existing gas pipeline network The schedule in this study is made based on the assumptions that the above preconditions have been appropriately satisfied at each stage, and that the schedule of one stage does not influence on that of other stages each other. Figure Summary-2: Detailed Schedule for Project Implementation LINE DESCRIPTION Main Milestone 2 Basic planning 3 4 Basic plan 5 Basic design 6 Comfirmation of project base 7 Collect additional data and survey marine data 8 Write EIA report 9 Environmental approval received work 10 Inquiry plan 11 Inquiry Select sub-constructor Basic planning Complete of basic design Start of the Project Start of the Construction LNG Receiving Detailed design Final Investment Decision Order sub-constructor Lower side of jetty 21 Contract 22 Detailed design Construction design 23 Site work ipper side of jetty 26 Detailed design 27 Equipment purchase 28 Equipment carried 29 Installation and piping, electrical 30 and instrumentation work 31 Offshore Pipeline Contract 32 Material purchase /on-site installation FSRU 35 Contract 36 basic design 37 detailed design 38 Production design 39 Construction and manufacturing 40 Transport and installation to the site 41 Preparation for operation Whole system inspection 43 Ready For LNG Receiving Source: Created by the research team Followings are the estimated duration in the main tasks: Basic Plan: 3 months Basic Design/Ministries approval: 12 months Detailed Design: 6 months (part of this work can begin earlier) FSRU: LNG reception can begin 33 months after order placement Jetty Facilities: complete in 31 months after order placement, in 23 months after the start of construction Setting up of Pipeline and Valve Station: complete in 30 months after order placement S-12

27 (5) Feasibility to Implement the Project FSRU business has been implemented in several countries with the good track records of bankable finance scheme.. Such project will become feasible when reliable equipment, operation, funding, etc. are provided by experienced parties through the cooperation of the host country s government. Considering the roles of related ministries and agencies as well as implementation capabilities needed for this project, it is suggested that the MOEP/ MEPE/ YESB and the MOE/ MOGE need to collaborate each other. However, based on the fact that the MOEP requires immediate import of LNG to overcome the domestic energy shortages mainly due to the rapid increase of electricity consumption, it would be beneficial to unify the business contact window of the government, to promote this project quickly. Currently, since the LNG import is mainly for gas-fired power plant, it is suggested MOEP should be the primal contact window for project participants/stakeholders. Although the MOEP has appointed the YESB as the managing body of a public bidding for LNG import, it would be very challenging for YESB because it is an unprecedented project in Myanmar, thus YESB does not have any past experiences. This may become one of the obstacles for companies to enter into this market. In addition, inadequacy of transmission and the distribution network also will be an obstacle in electricity supply, which generates another risk to newcomers. Therefore, to enhance the feasibility of the project, well-organized development plan and project management for not only power generation plants but also transmission/distribution grid expansion are critical. Considering the abovementioned aspects, new organization under MOEP would be required, whose missions are to become the supervisory agency for firepower sector and LNG import, to manage this project and relevant agencies such as the transmission sector of the MEPE and YESB. MEPE is an organization with an implementation capability and robust operating competency for the plan. Furthermore the firepower sector of the MEPE has signed a memorandum of understanding about the gas-fired power generation plan with South Korean and Chinese companies, so it would be suitable for MEPE supervisees the IPP players power plant developing plans. So, MOEP can control the power generation plan by supervising the MEPE to the implementation of the IPP business as planned. This study suggests that the MEPE should be the purchaser of the LNG, which has the contract directly with LNG supplier because of the two main reasons. First, MEPE is already the purchaser for domestically produced natural gas to fuel gas-fired power plants. Therefore, MEPE would be able to play the role in adjusting domestic demand and supply gap for the consumption of gas-fired power plants. Second, sole entity to purchase the natural gas from overseas can be expected to have a bargaining power to acquire the lower LNG price, contributing to supply cheaper electricity price to consumers. S-13

28 About the chartered ship to the FSRU and also the pipeline transportation service, the MEPE would favorably be a contract entity, in terms of consistency of the contract, as well as the unification of the business access posts. Furthermore, capacity building would be necessary for the MOEP/MEPE, to manage and supervise IPP players, realize the electric power development as planned, and enable the operators to carry on business in a stable manner because the delay of the construction and/or the critical problems of the operation would adversely affect the FSRU project as well. In addition, for the success of the power plant development, financial assistance would be vital. Especially, it is necessary to complement the revenue shortages for purchasing gas, in order to make it cover costs. Financial enhancement by the government guarantee, secured by the MOF, is needed. Lastly, to involvement of the MOE/MOGE, would be important because of their expertise of the development, and provision of on-shore pipeline to support the MOEP/MEPE. Though this project assumes that the imported LNG is utilized only for gas-fired power plant, LNG would be supplied to other consumers such as petrochemical industry in the future. Considering this, MOE/MOGE should be involved at the early stage of this project to understand the logistics of imported gas and to get the know-how to handle the gas, because the role of these entities will be very important to distribute natural gas to such different users in the future. Based on the above, the chart below shows the suggestion of role sharing in the LNG import & transport project Figure Summary-3: The Suggestion of Role Sharing in the LNG Import & Transport Project Source: Prepared by Study Team S-14

29 (6) Potential Business Scheme There will be two ways for how to cover the costs: owning the FSRU and the pipeline on its own, or chartering FSRU from the owner of the FSRU and requesting wheeling through the pipeline. The advantage of the owning FSRU is that the possessor can fully customize and upgrade the specifications during the period of operation as per the requirement of the terminal. This allows for the configuration flexibility with respect to regasification capacity, layout, shore integration and any future enhancements. While this case has the disadvantage in increased work burden including higher initial investment, and all ship management tasks to be conducted by the possessor, such as the arrangement and administration of crew. Based on the above study, this project adopts the charter scheme, which holds down initial investment for the counterpart in the case of FSRU, and has low work burden to the counterpart when initially installing FSRU. On the other hand, as to the land pipeline, it will be effective to construct a state-run grid because in most cases, grids are not built by private companies for their inherent purposes, but are built as national common-use infrastructure in nature, when building pipelines in terms of responding to wide-ranging gas demand not only for this electricity generating purposes, but also for commercial use except electricity generation in the medium and long run. In addition, it will be desirable for private operators and the entire economy in Myanmar for MOGE with a track record of construction and operation to own a pipeline for constructing and operating it, though the initial costs are higher, considering that the compulsory purchase of land will become an issue for private operators in building pipelines. MOGE will be incentivized with increased profit through wheeling and an increase in the utility value of the entired related infrastructure, with the extended pipeline networks and capacity. Regarding offshore pipelines, which are different from land pipelines in nature, it is difficult to plan their diversification and development except their main purpose, and existing sea pipelines were commissioned to foreign private companies. Considering that MOGE has no experience of constructing them, it will be desirable for the counterpart to use wheeling in view of the work and initial investment burdens, as in the case of FSRU. A unit of SPC in which Japanese companies invest is considered to own, maintain, and operate FSRU and offshore pipeline and lease the facility to charterer. The FSRU receives LNG from tankers, regasify the LNG and transports gas to such points of delivery as designated by charterer. Our team assumed the buyer of gas from an LNG portfolio supplier will be MEPE as mentioned before, which has operated gas-fired power plants, in addition to procuring gas domestically. Based on the above, the table below shows a plan of introduced equipment and player make-up, assumed by this study team. S-15

30 Figure Summary-4: Introduced Equipment and Player Make-up (Planned) Source: Prepared by Study Team Regarding financing, it is necessary for FSRUs, the pipeline and the SPC to secure funds as the initial investment for the project. The SPC is assumed to raise funds from Japanese financial institutions, including Export Credit Agencies and commercial banks, as well as investment from Japanese and foreign companies. In addition, it is assumed that MEPE as the off-taker or its upper organization MOEP will supply equity in the SPC because such financing may help enhance the prospect for realizing this business from the viewpoints of easing the investment burden and risk that foreign companies may face, as well as lowering the risk bar for the off taker arising out of cancelation of the project. However, generally speaking, under this arrangement, conflict may occur about how to handle the assets for liquidation after the project is over, or the realistic and best structure in terms of tax cannot be made because of government involvement. (For instance, there may be restrictions which do not allow establishment of an SPC in low-tax countries like Singapore, making the requirement that it must be a Myanmarese corporation possible.) Also, quick decision-making can be compromised by governmental influence over operating the SPC. The above can be disadvantageous to this arrangement. As after all, this is only one option of schemes. Therefore, it is necessary first to judge whether MOEP intends to invest in this project or not, from the viewpoint of acquiring technology/know-how for similar projects in the future. If so, it will be necessary to investigate the ratio of ownership, roles, rights, obligations, etc., of each parties. If MOEP invests in the SPC, utilizing the back finance of the funds by ODA to secure financing, will be useful bringing down the initial costs of the Myanmar side, and in reducing the risk of investors (a risk of investment shortage). Furthermore, it is necessary to study how to procure LNG and finance FSRU chartering. It will be desirable to enter a contract with MEPE in consideration of integrating the contacts for actual work of procuring LNG, chartering FSRU, and pipeline wheeling. MEPE will be able to reduce the initial investment in equipment and facilities related to receiving LNG, by chartering FSRUs under the scheme that was proposed by this study. Also, as the imported LNG through this project will be eventually used for generating electricity, fees for use of FSRU and the pipeline should be paid S-16

31 basically by government subsidies. However, given that it is not easy to raise electricity rates due to objection among the population, and that government finances are tight, there is a possibility that this project cannot secure enough profits to be viable only with additional funds from the Myanmar side (a possible gap between costs and profits). Viability gap funding, as a measure to help fill the gaps, the back financing of this fund by ODAs can be utilized. With the above issues sorted out, the table below shows a project scheme Figure Summary-5: Project Scheme (Proposed) Source: Prepared by Study Team (7) Technical and Economic Advantage of Japanese Companies a. Provision of highly reliable long-term operation services for the FSRU Since the contract period of providing FSRU chartering and operation services persists over a long period of time, ranging from a few years to 20 years, stability and reliability of operator are essential elements required to provide constant services during the contract period. As the world s largest LNG carrier, Mitsui O.S.K. Lines has established top-level know-how of LNG transport, handling technologies and vessel management know-how all essential for the operation of the FSRU. While there are currently only a few companies that enjoy a track record of offering operation services of regasification through FSRU on a global basis, Mitsui O.S.K. Lines has accumulated unique know-how on FSRU since participating jointly in the shipboard LNG regasification project on the east coast of North America ( Neptune project ) with a partner shipping company in Norway from 2006, and independently signed a S-17

32 long-term charter party for FSRU with a subsidiary of GDF Suez S.A., a French company, in October 2013, to make a full-scale entry into the FSRU business. Among FSRU operators, Mitsui O.S.K. Lines has more stable financial foundation compared with other providers, and high reliability in provision of long-term services. b. Support in fund securing To materialize the project, funding arrangement to pay costs for implementation of the FSRU, jetties and pipelines is necessary, and it is essential to realize investment and lending to the planned SPC. SMBC, a Japanese financial institution, has a strong track record in LNG-related project finance including FSRU, and may possibly take part in this business as a financial advisory, or in the form of lending. Having a record of participation to the investment in two LNG ships with shipboard regasifiers (FSRU) (investment ratio: 48.5%) in the Neptune project described above, Mitsui O.S.K. Lines might have strong interest of investment for the project. In addition, advantage of Japanese companies includes a possibility of securing ODA loan by Japanese government, and the Japanese export credit agencies. Such experience enables the company to offer services for the entire LNG value chain that includes financing. S-18

33 (8) Maps, which shows the site for the project in the country surveyed Figure Summary-6: Proposed Site for FSRU and Pipeline Routes Source: Prepared by Study Team S-19

34 Figure Summary-7: Details of Proposed Pipeline Routes Source: Prepared by Study Team S-20

35 Chapter 1 Overview of the Host Country and Sectors

36

37 (1) Economic and Financial Status 1. Myanmar: Summary The Republic of the Union of Myanmar (hereinafter, Myanmar) is located in South East Asia, bordered by Thailand and Laos on the east, and India and Bangladesh on the west. The population is around 60 million (2010), of which around 70% is Bamar with the rest comprised of a number of ethnic minorities. The capital city is Naypyidaw and its economic center is its largest city, Yangon. 1-1

38 Figure1-1: Myanmar Summary Naypyidaw Yangon Time Difference between Japan and Myanmar -2.5 hours *No daylight savings time Exchange Rate Capital City 1MMK (kyat) = 0.10 yen <Source> Trade Statistics of Japan Foreign Exchange Rate ( ) Naypyidaw National Territory Area 676,578 km 2 *1.8 times larger than Japan Ethnic Groups Bamar - about 70% Religion Buddhist: 89.4%, Christian: 4.9%, Islam: 3.9%, Hindu: 0.5% Language Government Burmese (official language) Presidential, Constitutional Republic *Head of State President, Thein Sein Total Population million (2010) (according to documents released by the Government of Myanmar) Source: Prepared by Study Team based on various sources 1-2

39 Average temperature( ) Average precipitation (mm) Figure1-2: Weather at Yangon Average precipitation Average minimum temperature Average maximum temperature Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Prepared by Study Team based on various sources Myanmar has long been criticized by the international community for its suppression of democracy by the long serving military regime, since its independence in However, after achieving the transition to civilian rule, there has been an increased interest from the international community in its large population and potential economic growth. 1-3

40 Table1-1: History of Myanmar Year Month Events Gained independence, becoming the Union of Burma Established the Socialist Republic of the Union of Burma. General Ne Win as President The Socialist government, which lasted for 26 years, was brought down by pro-democratic demonstrations Military forces suppressed pro-democratic demonstrations and formed the State Law and Order Restoration Council (SLORC), which then seized power May A general election was held, with the National League for Democracy (NLD) led by Aung San Suu Kyi winning the majority; with the SLORC rejecting transfer of power Joined ASEAN, and the SLORC was dissolved, with the State Peace and Development Council (SPDC) established Mar Announced the Seven-Step Roadmap to Democratization May The ratification of the new constitution by referendum, with a general election to take place in Nov Changed the name of the country to the Republic of the Union of Myanmar Nov Held a general election in accordance with new constitution. Jan The first assembly was called, and the Vice President was elected Mar In a shift to civilian rule, the new government led by President Thein Sein was founded. Nov US President Obama visited, announcing a partial trade embargo lift Jan Ceasefire agreement with the Karen National Union after 60 yearlong conflicts made. Nov Established the Union of Myanmar Foreign Investment Law 2013 May Japanese Prime Minister Abe visited, deciding to provide yen loans to the country after a gap of 26 years Chairmanship of ASEAN (planned) Source: Prepared by Study Team based on various sources and press reports 2. Society and Economy of Myanmar The population of Myanmar is steadily increasing, and reached around 60 million as of 2010, according to information provided by the Government of Myanmar. 10% of the total population is concentrated in the Yangon Region, with the numbers gradually increasing. Statistics from international institutions show that GDP per capita of Myanmar as of 2012 is 868 USD which is relatively low in comparison to other ASEAN countries. This figure is expected to grow rapidly to 1,344 USD (estimate) in 2018, which will still be low compared with other ASEAN countries, however, a high pace of growth is expected to continue following in the footsteps of Laos and Cambodia, with expectations for future growth linked to its large population. 1-4

41 Gross domestic product, constant prices(%) Gross domestic product, constant prices (%) Figure1-3: Total Population and Change in Percentage of Population in Yangon Division Source: Prepared by Study Team based on Statistical Yearbook 2011 by Central Statistical Organization Nay Pyi Taw, Myanmar Figure1-4: Comparison of GDP, GDP per Capita, and Growth Rate of GDP (estimate) 9 9 Lao 8 Cambodia Phillipines 7 Myanmar Thailand 6 Indonesia Bangladesh Vietnam 5 Malaysia Lao Cambodia Myanmar Bangladesh Indonesia Phillipines Vietnam Thailand Malaysia 4 0 5,000 10,000 15,000 Gross domestic product per capita, current price(usd) 4 0 5,000 10,000 15,000 Gross domestic product per capita, current price (USD) *Bubble shows GDP (current prices) of the country. Source: Prepared by Study Team based on World Economic Outlook October 2013 by IMF There has been a change in industrial structures after 2003, as the percentage of GDP accounted for by primary industry dropped more than 10%. On the other hand, however, the proportion influenced by the manufacturing and transportation sectors has increased. 1-5

42 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure1-5: Change in the Percentage of GDP Accounted for by Primary Industry Commercial Other Services Social/ Administrative Service Financial Business 7% 8% 8% 11% 11% 12% 12% 12% Communication 10% Transportation 11% 11% 14% 15% 16% 9% 17% 9% 19% Construction 10% 8% 8% Electricity 8% 8% 7% Manufacturing Industry 42% 41% 40% 37% 36% 34% 32% Mining 30% Energy Forestry Stockraising/ Fishery Agriculture *Standard Year = FY1985, 2000, 2005 (From April to March) Source: Prepared by Study Team based on JETRO website (2) Summary of Targeted Sectors 1. Energy Related Organizations in Myanmar There are various ministries and agencies associated with natural gas. The main stakeholders in this study are the MOE (the Ministry of Energy) and the MOEP (the Ministry of Electric Power). The MOE has 4 lower branches, of which the counterparts for the current study are the Energy Planning Department, which is responsible for the planning of gas production and supply, and the MOGE (the Myanmar Oil and Gas Enterprise), which is responsible for building and operating the pipeline from E&P in the domestic gas sector. The MOEP also has public corporations beneath it, each responsible for electric power generation, electric power transmission and the delivery of electricity. The counterparts for this study are the MEPE (Myanmar Electric Power Enterprise), which is responsible for development and operation of gas-fired power plants, as well as supplying gas to IPPs (Independent Power Producers), the YESB (Yangon City Electricity Supply Board) which is responsible for controlling delivery of electricity in the Yangon Region, and has also acted as the public offering office for LNG imports, which will be referred to later in the study, and the MOEP. 1-6

43 Figure1-6: MOE Organization Chart and Division of Major Roles Ministry of Energy (MOE) Energy Planning Department (EPD) Myanmar Oil and Gas Enterprise (MOGE) Myanmar Petrochemical Enterprise (MPE) Myanmar Petroleum Products Enterprise (MPPE) Regulation Adjustment of plans Gas production and distribution management Gas development and production Pipeline construction and operation CNG production Petroleum refinery Production of fertilizer, LPG, CO2 and methane Marketing and sale of petroleum products Source: Prepared by Study Team based on MOE materials Figure1-7: Operating Structure of MOEP Public corporations under the umbrella of MOEP Electricity generation HPGE (Hydraulic and coal-fired) MEPE (Gas/oil thermal) IPPs Electricity transmission MEPE Electricity distribution YESB (Yangon) ESE (Outside Yangon) Consumers Source: Prepared by Study Team based on MOEP materials 2. Primary Energy Composition in Myanmar Primary Energy Composition in Myanmar is dominated by biomass, which makes up around 70% of the total, followed by natural gas that makes up around 20%. 1-7

44 Figure1-8: Primary Energy Composition Hydro Power 2% Coal 1% Oil 10% Natural Gas 18% Biomass 69% Source: Prepared by Study Team based on Myanmar Energy Sector Initial Assessment (2012) by ADB materials 3. Gas Demand Situation in Myanmar The transition in the volume of domestic natural gas production shows that it has increased dramatically after the 2000, 2 years after offshore production began. Myanmar exports most domestically produced natural gas, and the ratio between export and domestic consumption is 86:14. Exports account for 85-90% of total production, which has remained unchanged over the past 10 years. This is because the Government of Myanmar promoted the development of resources with the aid of foreign capital, intending to secure foreign currency, despite economic sanctions. Resources development in Myanmar was advanced under a scheme where companies provided the capital to develop resources in Myanmar, maintaining complete control over the use of said resources, on condition that they would provide 10% of the output for domestic use. This still remains the case, and most of the country's output is exported outside the country. 1-8

45 Figure1-9: Natural Gas Production History of Myanmar Source: MOE materials (2013) Figure1-10: Change in Percentage of Domestic Use and Export of Natural Gas (million ft 3 ) 500, , , , , , , , ,000 50, % (Year) Domestic Use (Left) Export (Left) Percentage of the Domestic Use (Right) 18% 16% 14% 12% 10% 8% 6% 4% 2% Source: Prepared by Study Team based on Myanmar Energy Sector Initial Assessment (2012) by ADB As described before, domestic demand for natural gas is much greater than supply in Myanmar, as the country exports most of the natural gas produced in the country overseas. 1-9

46 Figure1-11: Gap in Demand and Supply of Natural Gas (mmcfd) 1, Suuply Demand FY FY Source: MOE materials (2013) The main use of natural gas produced in Myanmar is for electricity generation, accounting for 65%. Figure1-12: The Main Use of Nnatural Gas Produced in Myanmar (July 2013) 0.9% 0.2% 1.5% 1.9% 7.2% 7.9% 20.0% 60.4% Electricity Government Factories Fertilizer CNG Refinery LPG Private Factories Others Source: MOE materials (2013) 4. Electricity Supply and Demand in Myanmar The amount of electricity generated in Myanmar increased dramatically after 2010, seeing the average annual growth rate of 12.7% from 2009 to 2012, as opposed to 4.3% from 2003 to

47 (million kw) 12,000 10,000 8,000 6,000 4,000 2,000 0 Figure1-13: Change in Generation of Electricity 5,426 5,608 6,064 6,164 6,409 6,622 6,971 8,633 10,424 10,965 (Year) Source: Prepared by Study Team based on MOEP materials (2013) The main source of power generation in Myanmar is hydropower, which makes up most of total power generation. The breakdown in was 72% hydropower, 21% for gas and 7% for steam and diesel. Figure1-14: Change in Power Generation by Source (GWh) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,625 6,964 6,398 6,622 6,064 6,164 5,608 5,118 3,762 2,643 Deasel Steam Gas-fired Hydro *Number above the graph shows the total power generation. Source: Prepared by Study Team based on Statistical Yearbook 2011 by Central Statistical Organization of Myanmar 1-11

48 Due to the dependence on hydropower generation, the electricity supply drops in drier seasons, creating shortages with supplies falling below demand to the extent that timed outages takes place regularly every dry season; especially in Yangon city. Figure1-15: Demand and Supply for Electricity and Supply by Season (Estimate) (MW) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Demand Supply (dry season) Supply (rainy season) 2,060 1,841 2,509 2,420 3,911 3, ,584 Source: Prepared by Study Team based on MEPE materials (2013) 5. Efforts and Issues to Resolve Electricity Shortages in Myanmar As described above, due to electricity shortages in drier seasons, the MOEP plans to change the electricity source structure from one centered on hydropower generation, to one more focused on gas-fired power generation. The plan is to focus on developing around 2GW of power resources in Yangon. 1-12

49 Figure1-16: Plan for Developing Power Resources ( ) (MW) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 The Others Hydro 470 Gas-fired (except Yangon) Gas-fired (Yangon) 2, ,099 2, , (year) Source: Prepared by Study Team based on MEPE materials (2013) While expansion of gas-fired power generation facilities by the MOEP and IPP projects is moving forward, the situation nevertheless remains that they cannot increase the electric-generation capacity of gas-fired power plants, as natural gas supplies for power generation cannot be increased, due to the strains on domestic gas supplies. For this reason, the MOEP asked for a public offering for LNG imports for thermal power plants in July (3) Situation in Subject Areas The subject area of this study is the Yangon Region, where there is a plan for building large scale gas-fired power plants, that requires the government s actions for gas imports. 1. Current Situation of Gas-Fired Power Plants and Gas Pipeline Network in Yangon Currently gas-fired power plants are located in four areas in Yangon: Hlawga; Ywama; Thaketa; and Ahlon, and power plant expansion is in progress in each of these areas. The capacity of power plants was around 470 MW before 2012, however, there are 5 more power plants (Zeya, MSP, EGAT, Toyo-Thai and CIC) that will start operation or are planned to start operating between 2013 to September 2014, making total capacity around 520 MW. Furthermore, the IPPs plan to build three new power plants (BKB, UREC, Hydrolanchang) and are in discussion with MEPE for the signings of MOUs (Memoranda of Understanding) for the Feasibility Study and/or PPA (Power Purchase Agreement), being discussed with the thermal power section of MEPE. There also are construction plans in Thilawa, Hlaingtharyar and Ayeyarwaddy. 1-13

50 Table1-2: Gas-Fired Power Plants in Yangon (Existing and Planning) Hlawga Ywama Ahlone Thaketa Hlaingtharyar Thilawa Ayeyarwaddy Name Start year Capacity (MW) Existing GT/ST 1996/ Zeya Hydrolanchang (IPP,China) Existing GT/ST 1980/ MSP EGAT Existing GT/ST 1995/ Toyo-Thai Existing GT/ST 1990/ CIC BKB (IPP,Korea) UREC (IPP,China) Source: Prepared by Study Team based on information provided by the MOEPE and an interview with the NEWJEC Existing gas-fired power plants are connected to gas pipelines, and gas is also supplied from the offshore gas field in Yadana. Expansion and the additional construction of pipelines is needed to enlarge gas supply capacity, as there is no extra capacity in existing pipelines in Yangon city. According to what have been heard by the team from the MOGE, the construction of a 30-inch gas pipeline network is planned on the same route as the existing 14-inch gas pipeline. It has also become clear that to connect an external pipeline to the existing gas pipeline network, it will have to be connected from the South Dagon Junction near the Thaketa power plants. 1-14

51 Figure1-17: Flow of Gas Supply in Yangon Source: Prepared by Study Team based on information provided by the Yangon Electricity Supply Board (YESB) 1-15

52 Figure1-18: Pipeline Network in Yangon Source: MOGE materials 2. The Current Situation of Yangon River Basin and Andaman Sea The Yangon River runs from Yangon into The Andaman Sea. The Yangon River is navigable for seagoing vessels, and ships run via a pilot station in the estuary region to Yangon Port, near Yangon city and Thilawa Port, 25km south of Yangon. The difference between the high and low tides of the Yangon River is extreme 3, and there is an extensive outflow of soil. As a result, the colour of the river is muddy as far as the estuary mouth, as the soil carried away creates a shallow sea bed. It is presumed that soil is suspended in the sea where the sea bed is shallow. According to observations of the Yangon River area by the study team, there were no signs of large fishing boats operating, or of plants such as mangroves often found in the tropics. The Yangon River, Yangon Port and Thilawa Port are managed by the MPA (the Myanmar Port Authority). 3 According to interviews in the local area, the water depth is 6.4m at high tide, and 0.3m at low tide at Elephant Point (where the water depth is shallowest). 1-16

53 Figure1-19: Map of Yangon River and its Basin Source: Prepared by Study Team 1-17

54

55 Chapter 2 Study Methodology

56

57 (1) Scope of Works The objective of this study is to improve energy supplies in the Republic of the Union of Myanmar as Myanmar is considering importing liquefied natural gas to improve the current domestic energy supply situation. This will be done by comprehensively considering their needs such as: improvement of the existing facilities at lower costs; a speedy commencement of operations; the suitability of temporary operations; reviewing the intake of LNG off the shore from Myanmar (The Andaman Sea); and installation of a Floating Storage and Regasification Unit (hereinafter, FSRU) and the improvement of energy supply in the country while also linking this facility to the onshore gasification of the Myanmar Bay facilities. Myanmar has promoted the development of natural resources through foreign capital, as a way to obtain foreign capital while under the economic sanctions imposed at a time Under the usual scheme for natural resources development, the Government of Myanmar (Myanmar Oil and Gas Enterprise), authorized schemes to be executed with capital provided by foreign sources, while controlling over the resources developed, on condition that 10% of output be shared for domestic use. Development of natural resources has advanced in Myanmar under this rules and ordinances, with which the most of output are exported overseas, while domestic supply has remained tight. Suppression of public dissatisfaction by the military government collapsed after democratization, and the quick improvement of the current energy supply situation became necessary to improve living standard of the population. Furthermore, development of LNG sourced has become the most important issue, due to the rise of popular movements after nationwide democratization and sentiment against building new power generating facilities that have large environmental impact, such as hydropower and coal-fired power. Given the situation above, Myanmar is now planning to further drive the development of domestic natural resources to improve supply and demand balance of primary energy. However, since the development of natural resources requires a long period of time from planning to the start of production, even in an optimistic scenario, actual improvements in the development of domestic natural resources could only take place after For this reason, the government of Myanmar is planning to import LNG to improve the present balance of supply and demand, while concurrently developing resources in order to improve the mid to long-term balance of supply and demand. As offshore gas field development in Myanmar is progressing and pipeline networks are, to a certain extent, in place, the important factors for realizing LNG imports are functioning for the creation of new LNG intake facilities quickly and at lower costs, as well as assisting in dealing with the temporary strain on the balance of supply and demand (around 10 years operation could be sufficient). Taking the above situation into consideration, this study reviews energy supply and demand balance in Myanmar forecast (including the current shortfall), options for LNG importation and LNG receiving facilities and operational schemes, in addition to related issues for commercialization(e.g. decision of pipeline possession). Below is the scope of work i. Summary of the country and sectors ii. Understanding the priorities of the commercialization process 2-1

58 iii. Reviewing the sophisticated and rational use of energy iv. Demand predictions v. Reviewing the contents of the project and technical aspects vi. Reviewing the environmental/social aspects vii. Financial/economic feasibility viii. Implementation schedule of the project ix. Capability of the country s implementing organizations x. The technical superiority of Japanese companies xi. Project fund securing forecasts xii. Action plans and issues for implementation 2-2

59 (2) Study Methodology and Structure 1. Study Methodology Below are the methods used for the study: Collecting information through the Internet (desk research in Japan) Collecting information and data from companies and related Ministries in Japan Collecting information and data from counterparts in Myanmar such as the Ministry of Energy (hereinafter, MOE), Myanmar Oil and Gas Enterprise (hereinafter, MOGE) and Myanmar Electric Power Enterprise (hereinafter, MEPE). Collecting information and data by Field Research in Myanmar Collecting information and data from Hearing Sessions and Discussions with counterparts in Myanmar Figure2-1: Flow Chart of Study Methodology Source: Prepared by Study Team 2. Structure of the Team The Structure of the Study Team and Myanmar Counterparts are as below. 2-3

60 Table2-1: Members of the Survey Team and Areas in Charge Company Name Role Department / Position Koichiro Danno Project Manager Society & Industry Design Senior Manager Analysis of Society & Industry Design Yutaka Miki Environmental/Social The Japan Research Senior Manager Aspects Institute, Ltd Society & Industry Design Yasuhiro Yamamoto Survey Team Consultant Yuko Kinoshita Survey Team Society & Industry Design Researcher Yasushi Noma Survey Team General Manager, Offshore Business Office, LNG Carrier Division Deputy General Manager, Offshore Mitsui O. S. K. Kazuya Sasaki Survey Team Business Office, LNG Carrier Lines, Ltd. Division Assistant Manager, Offshore Shinsuke Umada Survey Team Business Office, LNG Carrier Division Toru Itabashi Survey Team Senior Manager, Business Development Department, Business Promotion & Execution Division Hiroaki Nakamura Survey Team Group Leader, Business Development Department, Business JGC Corporation Promotion & Execution Division Tomohito Moteki Survey Team Project Engineer, Business Development Department, Business Promotion & Execution Division Yoshio Yatsuhashi Analysis of Technical Technical Adviser, LNG & Offshore aspects Strategy Department Division Noboru Kato Analysis of Economic/ General Manager, Financial aspects Investment Banking Asia Analysis of Economic/ First Vice President, Project Finance Sumitomo Mitsui Takehisa Manabe Financial aspects Investment Banking Asia Banking Corporation Investment Banking Asia Wijnand Van Eck Analysis of Economic/ Head of Oil & Gas, Project Finance Financial aspects Investment Banking Asia 2-4

61 Sumitomo Mitsui Banking Corporation Akira Hiyama Analysis of Economic/ Financial aspects Teiko Kudo Analysis of Economic/ Financial aspects Kenji Baba Analysis of Economic/ Financial aspects Shinji Isono Analysis of Economic/ Financial aspects Yoshiyuki Morii Analysis of Economic/ Financial aspects Wint Sandar Analysis of Economic/ Financial aspects Source: Prepared by Study Team Investment Banking Asia Vice president, Project Finance Investment Banking Asia Project & Export Finance Department (Tokyo) Head of Group, Growth Industry Cluster Department, Project & Export Finance Department Vice President, Growth Industry Cluster Department, Project & Export Finance Department Chief Representative, Yangon Representative Office Yangon Representative Office 2-5

62 Table2-2: Counterpart in Myanmar (Members who Participated in this Survey and Discussions) (Pre-Field Survey) Date Organization/ Company Department / Position 11 September Yangon Electricity Supply Board Chief Engineer (YESB) Executive Engineer, Chairman Office Director, EPD Ministry of Energy (MOE) Deputy, Director, EPD General Manager (Pipeline), MOGE Director(Planning), MPE 12 September Ministry of Electric Power (MOEP) Deputy Director General Power System Department, Myanmar Electric Power Enterprise Director(finance), Myanmar Electric Power Enterprise Myanmar Oil and Gas Enterprise (MOGE) Director (Planning) General Manager (Pipeline) Myanmar Petrochemical Enterprise (MPE) Director (Planning) Ministry of Finance (MOF) Deputy Director General, Budget Dept. Deputy Director General 13 September Central Statistical Director Organization(CSO) Deputy Director Source: Prepared by Study Team 2-6

63 Table2-3: Counterpart in Myanmar (Members who Participated in this Survey and Discussions) (First Field Survey) Date Organization/ Company Department / Position Myanmar Oil and Gas Enterprise (MOGE) Director (Planning) Director (Engineering) Director (Production) Director (Finance) 30 October Myanmar Electric Power Enterprise Managing Director (MEPE) Executive Engineer Deputy Chief Engineer Deputy Director, Environmental Conservation Dept. Myanmar Environmental Director (Policy and Planning), Environmental Conversation and Forestry (MECF) Conservation Dept. Master Attendant, MOT & MPA Chief Civil Engineer, MPA 1 November Myanmar Port Authority (MPA) Deputy Chief Civil Engineer Chief Engineer Source: Prepared by Study Team Table2-4: Counterpart in Myanmar (Members who Participated in this Survey and Discussions) (Second Field Survey) Date Organization/ Company Department / Position Ministry of Electric Power (MOEP) Deputy Director General Chief Engineer Thermal Power Plant Department Deputy Director DEP Executive Engineer Thermal Power Plant Department Deputy Minister 3 December Ministry of Energy Director General, Energy Planning Department (MOE) Managing Director for MOGE Managing Director for MPE Myanmar Oil and Gas Enterprise (MOGE) General Manager(Pipeline) Planning Deputy Director General Department of Meteorology and Director Hydrology (DMH) Deputy Director 4 December MPA (Myanmar Port Authority) Master Attendant, MOT & MPA Source: Prepared by Study Team 2-7

64 Table2-5: Counterpart in Myanmar (Members who Participated in this Survey and Discussions) (Third Field Survey) Date Organization/ Company Department/ Position Myanmar Petrochemical Enterprise (MPE) Managing Director Director Assistant Director Assistant Director Energy Planning Department (EPD) Staff Officer Staff Officer Director (Planning) Myanmar Oil and Gas Enterprise (MOGE) Director (Planning) Myanmar Oil and Gas Enterprise (MOGE) Director (Production) Assistant Ex. Engineer (Production) Assistant. Ex. Engineer ( Production) General Manager (Pipeline) Executive Engineer (Mechanical) Assistant Ex. Engineer (Transport) Deputy Director Department of Electric Power Assistant Director (DEP) 16 January Staff Officer Deputy Chief Engineer Executive Engineer Myanmar Electric Power Enterprise (MEPE) Assistant Engineer Assistant Engineer Assistant Engineer Assistant Engineer Executive Engineer (Chairman s office) Executive Engineer Yangon City Electric Supply Board (YESB) Junior Engineer Staff Officer Staff Staff Foreign Economic Relation Department (FERD) Advisor for Aid Coordination Directorate of Investment & Co., Administration (DICA) Deputy Director General Directorate of Industry Deputy Director 2-8

65 Assistant Director Ministry of Environmental Conservation and Forestry Ministry of Science and Technology Ministry of Finance and Revenue Director Staff Officer Deputy Director Deputy Director Deputy Director, Budget Department Source: Prepared by Study Team (3) Study Schedule This study was conducted from September 27th in FY 2013 to February 21st in FY Table2-6: Study Schedule Preparation for the field survey/ Information gathering Pre-field survey Preparation for the field survey/ Information gathering The first field survey Analysis of the result of the survey/ Preparation of the draft report Mid-term reporting session The second field survey Analysis of the result of the survey/ Preparation of the draft report Submission of the draft report Preparation of the final report The third field survey Submission of the final report Final reporting session September October November December January February Source: Prepared by Study Team Table2-7: Schedule for Pre-Field Survey Date City Visiting place 10 September (Tue) Japan Yangon Time for traveling 11 September (Wed) Yangon Naypyidaw YESB, Japan Embassy, JETRO Time for traveling 12 September (Thu) Naypyidaw MOE, MOEP, MOGE, MPE 13 September (Fri) Naypyidaw MOF, CSO 14 September (Sat) Naypyidaw Yangon Japan Time for traveling Source: Prepared by Study Team 2-9

66 Table2-8: Schedule for the First Field Survey Date City Visiting place 29 October (Tue) Japan Yangon Time for traveling 30 October (Wed) Yangon Naypyidaw MOGE, MEPE, MECF Time for traveling 31 October (Thu) Naypyidaw Yangon JICA, JETRO Time for traveling 1 November (Fri) Yangon Japan MPA Time for traveling Source: Prepared by Study Team Table2-9: Schedule for the Second Field Survey Date City Visiting place 2 December (Mon) Japan Yangon Time for traveling 3 December (Tue) MOEP, MOE, MOGE, DMH Yangon Naypyidaw Yangon Time for traveling 4 December (Wed) JETRO, MPA Yangon Time for traveling 5 December (Thu) MPA (Site visit) Yangon Japan Time for traveling Source: Prepared by Study Team Table2-10: Schedule for the Third Field Survey Date City Visiting place 15 January (Wed) Japan Yangon Time for traveling 16 January (Thu) Yangon Naypyidaw Yangon MOE, MOGE, MPE, MOEP, MEPE, YESB, MST, MECF, MOF Time for traveling 17 January (Fri) Yangon Japan Time for traveling Source: Prepared by Study Team 2-10

67 Chapter 3 Justification, Objectives and Technical Feasibility of the Project

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69 (1) Project Background: Why the Project Is Needed 1. The Myanmar Government s Development Programs in the Gas and Electricity Sectors; Priorities of Projects Based on Future Prospects a. Ministry of Energy s gas production and supply plans As stated in Chapter 1 herein this document, Myanmar produces natural gas. Most of the produced gas within Myanmar, however, is exported to China and Thailand, so the domestic gas demand cannot be sufficiently satisfied. The MOE, which is responsible for oil and gas sector from gas exploration and production to distribution, been promoting the development of offshore gas fields; Zawtika and Shwe fields are expected to start gas production in 2014, and M3 field in 2020 (see the demand forecasts for specific production volumes). Since the country s economic growth is anticipated to increase the demand for gas, the development of additional gas fields is currently underway. The MOE has divided onshore and offshore fields into blocks, and selected a developer for each of the blocks through a bidding process. Figure3-1: Gas Fields Field Development Zones in Myanmar Source: Publicly available information from the MOGE (2012) 3-1

70 b. Ministry of Electric Power s power source development plans The Ministry of Electric Power ( MOEP ) has drawn up power development plan that covers years up to The Ministry plans to increase power capacity in tandem with the demand growth. The MOEP plans to boost power source capacity in tandem with an increase in demand, assuming that the demand for electricity will continue to grow. As stated in Chapter 1, the MOEP plans to build more gas-fired power plants to secure short-term power sources for the dry season, especially in Yangon where electricity is in great demand. These plants are scheduled to start operating sometime between 2013 and February 2016, with their planned capacity up to about 4.2 GW (see the table below). Table3-1: Gas-Fired Power Plants Being Built or to be Built in Myanmar Yangon Other area in Myanmar Name start year Capacity (MW) Zeya Hlawga Hydrolanchang (IPP,China) Ywama MSP EGAT Ahlone Toyo-Thai CIC BKB Thaketa (IPP,Korea) UREC (IPP,China) Hlaingtharyar Thilawa Ayeyarwaddy Mawlamyaing Myanmar Lighting Kyaukphyu/Rak hine State MOEP Kanpouk Dawei Power Utilities Myin Gyan Myin Gyan Kyause Rental Source: Prepared by Study Team based on information provided by the MEPE and the NEWJEC Although the MOEP and IPP projects have been proceeding with the construction of additional gas-fired power generation facilities, they have been unable to boost the natural gas supply for power generation, owing to the tight gas supply-and-demand situation in the country. 3-2

71 Under these circumstances, the MOEP asked for a public bidding for importing LNG for gas-fired power generation in July The team interviewed the MEPE and found out that this was to obtain gas for IPPs that are supposed to newly engage in gas-fired power generation mainly in the Yangon area. Applications are received and reviewed by the Yangon Electricity Supply Board (YESB), which is a Yangon-based government entity owned by the MOEP. 2. Project Scope and Expected Users This study firstly examined the LNG supply chain from the LNG purchase to its consumption, and then clarified certain project to be developed using expertise of private sector, in which Japanese enterprises will support to install storage and regasification facilities (i.e., facilities for receiving LNG) and facilities for gas transport to the point of demand or the point of delivery designated by gas users. It is difficult to analyze future national gas demand with limited research period, which is acceptable for the investment decision of LNG import facility,. Therefore, this research assumes that imported gas is used to meet the demand only for gas-fired power generation based on the master plan developed by MEPE The MEPE owned by the MOEP purchases from the MOE home produced gas supplied to existing gas-fired power plants. Through the interview with the MEPE and other relevant entities The study team concludes that MEPE will be able to play the same role for not only domestic gas produced but also imported LNG. Namely, MEPE becomes the purchaser from LNG supplier and distributor to IPPs. Since MEPE is the sole entity to import LNG in Myanmar, it is expected to have bargaining power to negotiate the LNG price with suppliers. 3. Issues Expected in Case of Absence of the Project Should LNG cannot be imported, or is imported with significant delay, the following problems could take place: A drop in the operating rates of gas-fired power plants, which eventually lead to frequent power failures and longer outages An increase in hydropower and coal-fired power generation as long-term alternatives a. A drop in the operating rates of gas-fired power plants, which then lead to frequent power failure and longer outages In Myanmar, the MOE allocates a supply of domestically produced gas to each sector for domestic consumption. In recent years, 60 to 65 percent of the gas is allocated, and practically there is no policy or plan intending to cut the gas supply to other sectors for increasing the percentage of gas for electric power generation. This is likely to lead to a shortage of gas for gas-fired power plants, and eventually to severe electricity shortages. In Myanmar, power supplies to plants and offices are opt to be cut if electricity for households is in short supply. During the serious power shortages that were caused by lengthy outages in the dry season in 2012, industrial parks had no electricity supply for the entire month of May. If power fails frequently for a prolonged period, Japanese 3-3

72 companies currently operating or planning to operate in Myanmar will not be able to launch and continue their economic activities. b. An increase in hydropower and coal-fired power generation as long-term alternatives As stated in Chapter 1, there is a development plan for hydropower generation expected to begin in If LNG cannot be imported and power shortages continue even longer than expected, it is likely that the required power for hydropower generation will increase and more coal-fired power generation plants will be built. As details are mentioned in Chapter 4, the development of hydropower generation may cause such problems as eviction of residents in the mountainous regions and the destruction of the environment, and the development of coal-fired power generation may trigger air pollution and coal ash disposal. 4. Effects and Impacts of the Project As stated above, domestic demand for natural gas has not been met in Myanmar. Natural gas is used not only for power generation, but also for petroleum refinery, fertilizer production, iron and steel manufacturing, utility gas, and other purposes. The natural gas supply is vital for Myanmar, in order to accelerate the economic development. Adopting an FSRU will enable Myanmar to receive LNG with a relatively short lead time (two to three years). This will contribute to balancing natural gas supply-demand, hopefully bringing the following effects: The operating rates of gas-fired power plants will rise and more electricity will be generated, which will make outages shorter and less frequent. Increased electricity supply will enlarge the national industrial platform increasing manufacturing and production capacity of the country that will lead to improve standard of living of the population. There will be larger domestic supplies of gas for petroleum refining, fertilizer production, iron manufacturing and utility gas, which will strengthen cost competitiveness and increase industrial production volumes. 5. Alternatives to the Import of LNG There are three alternatives to importing LNG using the FSRU: buying back exported gas, building onshore facilities for receiving LNG and adopting a Shuttle Regasification Vessel (SRV). To buy back exported gas, changes must be made to the sales contract signed with the importer country. The contract is basically of long-term nature, so making changes to it may require the Myanmar government to make bilateral compensation. Additionally, it requires time and money to build long-distance gas pipelines between gas fields and Yangon, although the Myanmar government has already invested in to export gas to China and Thailand. If this alternative is chosen, the government will be unable to recover part of the construction costs, or will have to shift the unrecovered costs to domestic users because it is assumed the pipeline construction cost is recovered from gas sales revenue. Building onshore facilities for receiving LNG offers advantages over using an FSRU as onshore facilities can be expanded without much trouble whilst being operated much stably than floating vessel operation off the shore 3-4

73 As stated above, however, the Myanmar government hopes to import gas for gas-fired power plants as soon as possible to meet the greatly increasing demand for electricity, and so installing an FSRU is an even more attractive option, in light of time for completion for a vessel installation. Also, there is still a possibility that LNG imports will not be needed if the development of new gas fields leads demand for imported gas fluctuate, and more gas is domestically produced than planned. For example, two FSRUs (Golar Winter and Golar Spirit) in Golar LNG s project in Brazil are designed to be used at both the Pecém terminal and Guanabara Bay in Brazil. Once installed, an installed FSRU can be relocated for a different project, so the government may sign a contract for a fixed-term charter with a termination clause specified, assuming that there will be no more demand for imported gas. In terms of cash flow, operating an FSRU is lower in capital expenditure (capex) and higher in operating expenses (opex) than running onshore facilities. To compare an SRV with an FRSU, the partner government s requests, as well as the depth of water in the area must be considered as physical constraints. The followings are findings of the team. As the figure below shows, shallow waters extend from the shore of Yangon. They are 10m deep about 40 km offshore, and 15m deep about 80 km offshore. To receive LNG, the water around the port needs to be at least 13m deep, so that an average LNG carrier can enter safely. An SRV, on the other hand, moors at a floating structure called a turret buoy as the regasification facility. The SRV and the buoy are connected offshore to regasify LNG onsite (see the figure below). To moor the buoy, the water needs to be at least 100m deep. This means that an SRV needs to travel 100 km from Yangon, so using the regasification facility in the Andaman Sea is not a realistic option for Myanmar. Besides, building onshore facilities on the Yangon River is impossible because the water is not deep enough, so LNG needs to be received at a location far from Yangon, and transported to the places of consumption in the form of gas or electricity. Figure3-2: Image of Turret Buoy Connected to an LNG Carrier Source: Research on Offshore Bases for Receiving Natural Gas through an LNG Carrier with Regasification Equipment, The Cooperative Association of Japan Shipbuilders; Japan Ship Technology Research Association,

74 It is worthy of note that an SRV should be one of the likely options for waters with adequate depths, as the vessel requires less equipment, time and money to be adopted than an FSRU. Figure3-3: Options for Receiving LNG Source: Prepared by Study Team (2) Upgrading and Streamlining Energy Use A steady supply of natural gas leads to the construction of natural gas-fired power plants, which will contribute to meeting an ever-increasing demand for electricity. The adoption of natural gas-fired power generation also means departure from that of coal-fired power generation, which will help reduce CO2 emissions. As previously stated, there has not been a sufficient supply of electricity to meet demand in Myanmar. The country developed mainly hydropower generation and coal-fired power generation, which caused serious damage to the environment. Thus these power sources met opposition from the public, especially the communities of ethnic minorities that suffered directly, and the development efforts have not made any progress since. So the government of Myanmar is trying to shift its focus to conserving the environment, and it is likely that natural gas-fired power generation will be adopted as an option that will enable the government to meet electricity demand and protect the environment. (3) Factors to Examine for Determining Project Contents 1. Demand Forecast Demand estimation for LNG gas using the formula below: Demand for LNG import = Quantity of gas needed for gas-fired power generation Domestic gas production x Percentage of gas distributed to electric sector a. Quantity of gas needed for gas-fired power generation As mentioned earlier, the MOEP has drawn up power source development plans that cover years up to This study assumes that additional gas-fired power plants will be built according to the plans. The current plans 3-6

75 demonstrate that additional power plants will be completed by 2016 or 2017, and that the government will ensure steady electricity supplies mainly through hydropower generation plants that require some development period. The team calculated the volume of gas needed until 2017 in accordance with the planned capacity of power generation above. The calculations are based on information provided by the MOEP, and findings by NEWJEC and the Kansai Electric Power Company, which have been entrusted by JICA with The Preparatory Study for Electricity Development Program in Myanmar. it is assumed that gas-fired power generation plants will stay at high operation rates (75%), meaning that gas demand will remain the same from 2017 onward (see the figure below). Figure3-4: Forecast of Gas-Fired Power Plants Capacity and Demand for Gas for Power Plants Source: Prepared by Study Team based on information provided by the MOEP (2013) and research findings by NEWJEC With regard to the domestic gas production, many onshore and offshore projects are underway as mentioned above, although many of them have not specified when production will begin and how much gas they aim to produce except for certain gas fields. This study assumes only the production volumes from the Zawtika, Shwe, and M3 gas fields, for which the MOE is scheduled to launch development projects, as additional domestic gas production volumes. The supply from domestic gas fields will be 290 BBtud between 2013 and 2014, and then 476 BBtud between 2020 and If no more new gas fields will be developed thereafter, the supply may drop as production volumes from existing gas fields decrease (see the chard below). 3-7

76 Figure3-5: Domestic Gas Supplies in Myanmar Source: Prepared by Study Team based on information provided by NEWJEC According to the MOE, how much domestic gas production will be distributed for electricity has not yet been planned, while 60 to 80 percent of the gas production has always been reserved for electricity purposes. This study assumed that the 65 percent of to be supplied by the MOE will be distributed to electricity during 2013 and Besides, although specific LNG supply sources have yet to be determined at this point, the team envisaged that the calorific value of LNG will be 1,040 Btu/cf. Given these assumptions, LNG demand for gas-fired power generation is expected to rise to 72 mmscfd between 2013 and 2014, and then to 354 mmscfd between 2016 and From 2020 onward, the demand will depend on trends in the development of new domestic gas fields, while it is expected to be around 350 to 450 mmscfd. 3-8

77 Figure3-6: Demand for Imported LNG in Myanmar Source: Prepared by Study Team 2. Identifying and Analyzing Issues before Exploring and Determining Project Details This section shows what needs to be examined prior to implementation of the project. a. Where to install an FSRU The waters where an FSRU is installed need to be at least 13m deep, so that a regular LNG carrier can make safe entry and leave. Additionally, as the FSRU and an LNG carrier that comes alongside the FSRU need to berth safely, it is desirable that the waters do not have much traffic, including fishing boats. For stable regasification operations, the climate should be calm and the water should have as little floating sludge as possible, so that the mud will not clog the equipment (e.g., seawater pumps). Also, it would be ideal for the location to be close to an existing industrial port, and that, considering costs for building a pipeline, it is close to the place where there is a demand for gas consumption. b. Finalizing FSRU specifications A FSRU s tank capacity, capability and specifications of regasification equipment, and a cost estimate will be finalized in accordance with the volume of LNG to be received, and of the regasified LNG to be delivered. The exact volume have yet to be determined, so the team will need to work closely with our counterparts to set out more detailed specifications. c. Options for holding an FSRU To opt for a form of holding an FSRU desirable for the counterpart in terms of costs (i.e., cash flow), the prospective user of the FSRU needs to consider whether they will own the vessel, or charter it from the owner. Options for holding an FSRU need to be carefully considered in terms of costs. The user of the FSRU has an option of owing it or chartering it. 3-9

78 d. Options for introducing an FSRU Another economic issue to examine the adoption of an FSRU is whether to have a new FSRU built, or to convert an old LNG carrier as an FSRU with refurbishment and retrofit of regasification equipment and extra plumbing on board. e. Jetty design To determine how to moor an FSRU by a jetty, the flexibility, stability, safety and the size of LNG vessel must be considered, in addition to the conditions of contract for LNG and the marine meteorology. f. Pipeline construction route and specifications The construction route is determined in accordance with where the FSRU is installed, where regasified LNG is delivered, and geographical and social conditions between the location of the FSRU and the point of delivery. The pressure applied at the place of delivery, required components and heat value, and whether or not the pipeline will be shared with the MOGE (i.e., whether it will be used for different purposes) are also factors determining required facilities and equipment, a construction period and costs. Whether the pipeline route to the place of gas supplying can be selected, designed, permitted and built at the right time is the major challenge. g. Financing pipeline construction This project estimates USD514 million for adopting the provision of an FSRU, building a jetty and constructing a pipeline. How to secure the fund needs to be carefully examined. Chapter 9 deals with this issue. h. How to obtain LNG As stated in the section relevant to the project scope, sale and procurement of LNG is outside the scope of this project. However, since whether or not LNG can be secured has a major impact on the feasibility of this project, it should be examined. 3. Examination of the Proposed Project Site: Conclusion To determine the site of an FSRU installation, the team examined the distance to the pipeline connection point (i.e., the place for delivering regasified LNG), while exploring the possibility of installing the unit offshore or at the Yangon estuary. As previously stated, the waters need to be at least 13 m deep for a regular LNG carrier to safely enter and leave. However, detailed data on the depth of water from recent years is unavailable, so the team used a nautical chart to pick areas about 15 m deep just to be on the safer side. To determine the location for installation, one must set out a detailed chart that shows the depth of waters in the proposed site before detailed designing. The team have selected the area 80 km off the Yangon estuary as the proposed site (see the figure below), after examining the required water depth, the pipeline connection point the restrictions on pipeline routes to the point (details will be provided later), and port facilities in the Yangon area now and in the immediate future. The area is at the exterior of port area under the jurisdiction of the MPA, and is controlled by the government and the military. 3-10

79 Figure3-7: Depth of Water in and off the Yangon Estuary and Site for the FSRU Source: Prepared by Study Team To supply regasified LNG to the gas-fired power plant in Yangon, the MOGE has requested that the pipeline route be connected to S. Dagon in the Yangon region s gas pipeline network that the MOGE plans to develop as the owner (see the figure below). 3-11

80 Figure3-8: Flow of Gas Supply in Yangon Source: Prepared by Study Team based on information provided by the YANGON Electricity Supply Board (YESB) The project also needs to be consistent with the future expansion plans for the pipelines that the MOGE owns and manages. The MOGE currently plans to construct pipelines from S. Dagon to Syrium, and then down to Thilawa. This project prefers to transport gas via the same route from Thilawa to S. Dagon, the connection point, so some adjustment will be needed during the planning phase. Currently, there is no pipeline expansion plan below Thilawa, yet the team needs to check for any plans to build a domestic gas pipeline network associated with the development project in Dawei, a city in the south of Myanmar. With regard to pipeline, the team analyzed the three cases, considering location of FSRU, the distance and route to the land, ensuring that the route between S. Dagon and Thilawa is in line with the Myanmar government s expansion plan. The required length of the onshore pipeline on the route will be 50 km (see the figure below). 3-12

81 Figure3-9: Proposed Site for FSRU and Pipeline Routes Source: Prepared by Study Team 3-13

82 Figure3-10: Details of Proposed Pipeline Routes Source: Prepared by Study Team The Myanmar Port Authority (MPA) in charge of the Yangon River requested that the offshore gas pipeline route bypass the Yangon River (i.e., the pipeline should not run across the riverbed)), if possible. In addition, with the support by the Japanese government, Myanmar is exploring the possibility of building a large deep-water port with good water depth just outside of the Yangon estuary 4. One of the ideas relevant to a berthing facilities is to build a jetty 35km off the coast, and to ensure that the water be maintained at least 14m deep by dredging; the other is to dredge mud to lay a 40km waterway to the area, with the depth of 11m. Both ideas envisage road construction as transport infrastructure between the large deep-water port and the land, and set pipeline routes that bypass the road. With the request from the MPA in mind, the team has adopted the third suggestion as the proposed idea. The team will need to make adjustments to the onshore pipeline network in accordance with the pipeline network planned by the MOGE, and to conduct detailed study on the routes below Thilawa considering the progress of the development of the surrounding areas. With regard to the offshore pipeline, the team examined on the parts immune from the plan for building the large deep-water port and other plans. If there is any possibility that a 4 Research on the Possibilities of Port-Related Projects in Myanmar, the Ministry of Land, Infrastructure, Transport and Tourism, February

83 new waterway will run across the pipeline, one must consider burying part of the pipeline to a depth that will not hamper the plan. 4. How to Source LNG To carry out this project, the feasibility of importing LNG along with installing LNG supply facilities must be examined. a. Potential LNG Sellers Given that LNG should be sourced promptly, potential sellers are countries/regions that already serve as major LNG exporters. Most LNG purchase agreements are long-term ones, which mean that, even if the country/region exports a large quantity of LNG, Myanmar cannot buy the portions secured for other importers with long-term contracts. Therefore, the most likely candidates will be countries/regions that will agree a certain number of short-term and/or spot sale contracts. The figure below shows the countries LNG exports, and how much of the exports were sold in accordance with long-term, short-term, or spot agreements in As can be seen, Qatar sold the largest quantity of LNG under short-term and spot agreements, with the amount being almost triple Nigeria s that is the second-largest. Myanmar needs 1 to 3 Mtpa2 5, and Qatar sells up to 21 Mtpa based on short-term and spot agreements. Besides, Nigeria has 9 Mtpa and Trinidad and Tobago 5 Mtpa (third-largest) saved for meeting expected demand based on short-term and spot agreements, and these countries might be able to afford to sell some of the LNG to Myanmar (how to buy the LNG will be examined later in this document). The distance over which the tanker transports LNG also influences the procurement cost, although the cost is not correlated with the final gas price. Of these three likely candidates, Qatar is the prime candidate, with its geographical proximity to Myanmar and its capability to become the largest supplier. 5 Calculated on the assumption that the operating rate of the FSRU is 70 percent for 150 and 500 mmscfd. 3-15

84 Figure3-11: LNG Exports by Country in 2012 * A short-term agreement refers to a contract for a period of up to four years. Source: Prepared by Study Team based on The LNG Industry by GIIGNL Qatar enters into many short-term and spot agreements for sale of LNG as she made a huge investment in liquefaction plants to export LNG to the United Kingdom and the United States (see the figure below) until 2011, and today Qatar has to review its plans to sell the gas to the United States, that has begun to produce shale gas. If Qatar finds another customer who will buy a large quantity of LNG, it may agree on sale that includes long-term fixed contracts. 3-16

85 Figure3-12: Capacities of Gas-Liquefying Facilities in Major LNG Exporter Countries Source: Created by the research team based on The Multi-polarization of the Asia-Pacific LNG Market and the Evolution of Business Models by Japan Oil, Gas and Metals National Corporation (JOGMEC) In the mid- and long-term, the capacity of Australia s liquefying facilities will increase, so LNG imports from Australia will rise; the import of LNG from the Island of Mozambique in East Africa will also begin; and so will the export of shale gas from North America to East Asia. If these lead to a situation where there is extra gas produced in Australia and East Africa, Myanmar may switch over to purchasing gas from these regions. Nevertheless, in the short-term, it is unlikely that Australia will become a source of imported LNG for Myanmar because the gas that Australia exports is mostly tied to long-term agreements. Besides, the development of the liquefying facilities may be delayed, so it is difficult to predict extra gas and sales prices. Hence, if LNG is to be bought directly from a party with interests in a gas field, Qatar is the prime candidate at the moment. b. LNG procurement There are three major means to buy LNG: Gaining interests in a specific gas field, or establishing a long-term contract with a party that has interests in the field On the spot deal Purchasing through the source from more than one gas field/region through a portfolio supplier Gaining interests in a specific gas fields or signing a long-term contract with a party that has interests in the field is more likely to promise a steady gas supply at a fixed rate than the other options, while it requires that the volume to purchase be determined several years before the supply begins when the contract is signed. Since demand may fluctuate as the construction of power plants proceeds during this project, a gap may appear between LNG supply and demand. Besides, the demand that this project deals with is relatively low, so investment for gaining interests may not be accepted. 3-17

86 India and South American countries obtain LNG through spot deals. They often have to buy the energy source at high prices as LNG demand that tends to increase followed with risk of fluctuated price. Also, depending on the trend in supply and demand shifts, there may be no bidders and the amount of gas needed may not be secured. Certain know-how is required to watch shifts in supply of and demand for gas and alternative energy sources around the world, so that advantageous bids will be received regularly. Given that the government of Myanmar has never imported LNG, spot bidding is too risky for the government to opt for at this time. Singapore and other countries source LNG from more than one gas field/region through a portfolio supplier. In this approach, the business that has interests in the gas fields/regions or liquefaction facilities obtains the amount of gas needed in accordance with the supply-demand balance and prices at a time. The buyer can hedge to the portfolio supplier the risks involved in obtaining the amount of gas needed. The buying price may be higher than that offered through a long-term contract with a specific gas field/country, because this particular mode of business takes the risks of sourcing LNG, whereas this strategy allows the purchaser to arrange the volume of purchase more flexibly than they can through a long-term contract, when the buyer is not certain about his requirement in quantity. If LNG is sourced through a portfolio supplier, the gas obtained may vary in component and caloric value. This study foresees that such variation is unlikely to cause operational problems because this project is for providing gas for gas-fired power plants. Table3-2: Means of Sourcing LNG by Comparison Source: Prepared by Study Team Big Oil that refers to BP, BG, Shell, and other oil and gas companies in the West are major portfolio suppliers. For example, BP is capable of providing at least 10 Mtpa. Some leading Japanese electricity and gas enterprises also have track records as portfolio suppliers. If LNG is purchased through a portfolio supplier, gas purchased through long-term agreements that the portfolio supplier has already established, and gas purchased through short-term and spot agreements are consolidated for sale. Shipping costs do not always correlate with gas prices, depending on individual interests in gas and market conditions; to hold down shipping costs, each supplier s interests in gas fields and liquefying facilities, along with geographical relationships between the fields and/or facilities and Myanmar, are vital. Japanese utility 3-18

87 companies also have built purchase portfolios that center on the Middle East and Southeast Asia to source LNG for their Japanese customers, so they have geographical advantages in shipping LNG to Myanmar 6. In this project, the scale of demand is not very substantial. When the supplier purchases gas from a new seller like Qatar, making a joint purchase of gas to meet demand from somewhere else will also help save the supplier s hardship that accompanies buying gas from a new seller, and boosting the capacity of sourcing LNG will help hold down Myanmar s LNG procurement costs. These are likely to become major options that will bring advantages to both parties. In this light, suppliers with customers in Japan, the Middle East, and other Asian regions are prime candidates. Bearing all these factors in mind, purchasing gas from the portfolio suppliers existing supply sources, and from Qatar as necessary, to supply it to the counterpart as a one-stop service is a realistic choice for the Myanmar government that has not imported LNG when required time and effort along with risks involved in purchasing are considered, even as the particular approach is likely to cost somewhat more than other options. Therefore, suppliers capable of providing gas from regions geographically close to Myanmar are likely candidate sellers. 5. Technical Approaches (compared to alternatives) The team examined technical approaches to adopt the installation of an FSRU. The table below shows the details and alternatives. Table3-3: Technical Approaches (Compared to Alternatives) Item to Examine Suggestion Alternative Advantage of Suggestion Site for FSRU and Pipeline Route East side of the estuary West side of the estuary The pipeline will not run across the Yangon River, which the MPA prefers. Options for FSRU Facilities A newly-built FSRU An old LNG carrier converted to an FSRU The specifications are highly flexible; the use of the vessel can be ensured for a given period at a certain price; opex can be held down, and the vessel is fuel-efficient. Design of Jetty Cross-jetty Side-by-side Since the FSRU will be installed off the coast, the suggested design offers safety when help from tug boats cannot be received immediately. Size of Pipeline 24 inches 30 inches Tailoring the size to demand helps hold down costs. Source: Prepared by Study Team 6 For example, Osaka Gas had bought LNG from Qatar, Oman, Malaysia, Indonesia, Australia, and Papua New Guinea by

88 a. Options for using an FSRU A Converted FSRU, which is an old LNG carrier refurbished and retrofitted as an FSRU will constitute one of the options. Costs of used and not-so-old LNG carriers in good condition, however, are on the rise as the LNG market is bullish, and is likely to be on the same trend. Considering the following factors, the cost merit that a converted FSRU offers is not much greater than that of a newly-built FSRU: The engineering work for conversion needs to be customized to the LNG carrier. If the carrier is an old vessel, extensive repairs and life extension work, such as mounting durable outer panels, will be needed in addition to works for conversion. Additionally, using newly-built FSRUs has become mainstream in recent years, owing to the following disadvantages of an FSRU converted from an LNG carrier: There are some constraints on the selection of specifications of a converted FSRU. An FSRU converted from an LNG carrier requires higher maintenance and fuel costs than a new FSRU when operation begins. There will be some restrictions on receiving LNG carriers that have become increasingly larger in recent years. The chart below shows the qualitative analyses of new and converted FSRUs: Table3-4: Features of New and Converted FSRU Items New FSRU Remodeled FSRU Service Life Long Medium Flexibility of Specifications Customized Constrained Maintenance Cost Low High Capital Expenditure High/Middle Middle Fuel Efficiency Low Middle/High Flexibility of Size of LNG Carrier to Receive High Middle/Low Source: Prepared by Study Team b. FSRU specifications The team assumed a newly-built FSRU with the tank capacity of 173,000 m 3, which is close to the capacity of 150, ,000 m 3, which represents the most popular case in capacity so far exercised. As mentioned above, FSRU, having tank capacities of 130,000 to 150,000 m 3 have been mostly in use, while the 173,000 m 3 capacity tanks have become a standard size that has been ordered frequently in recent years. Also, given that no engineering work is necessary, that the building time is short, and that costs can be bottom lined, using a newly-built FSRU can therefore be the most desirable selection (see the table below). 3-20

89 Table3-5: Materialized FSRU Projects Launched in Project Tank Capacity 2007 Teesside Gasport (UK) 135,000 m Northeast Gateway (USA) 145,000 m Bahia Blanca Gasport (Argentina) 151,000 m Mina Al-Ahmadi Gasport (Kwait) 151,000 m Petrobras VT1 (Pecem, Brazil) 128,000 m Petrobras VT2 (Guanabara, Brazil) 138,000 m Neptune (USA) 145,000 m Dubai LNG (UAE) 125,000 m GNL Escobar (Argentina) 151,000 m West Java (Indonesia) 125,000 m 3 Source: Prepared by Study Team Year of Completion Table3-6: Ordered FSRU Projects Project Location Tank Capacity 2013 Italy 138,000 m Petrobras VT3 (Guanabara, Brazil) 173,000 m Puerto Rico 170,000 m Jordan 160,000 m Lithuania 170,000 m Indonesia 170,000 m Chile 170,000 m TBD 170,000 m TBD 170,000 m TBD 170,000 m 3 Source: Prepared by Study Team 3-21

90 For your information, the following are examples of FSRU projects. Figure3-13: FSRU Project 1: Side-by-Side Approach (Escobar, Argentina) Source: Mitsui O.S.K. Lines Figure3-14: FSRU Project 2: Cross Jetty Approach (Pecem, Brazil) Source: Golar As for the capability of regasification equipment, team will consider how much gas the equipment can process to meet the projected demand mentioned above. From the expected demand up to 2025, three pieces of the regasification equipment in operation should be capable of supplying 360 mmscfd. Besides, since the demand is projected to increase up to around 440 mmscfd, supplying up to 480 mmscfd should be possible at peak hours when the fourth piece is put into operation. The regasification equipment on an FSRU is designed on the 3-22

91 assumption that an extra piece is put on standby to ensure certain operating rates, to fill demand at its provisional peak, and to keep the regasification process running while maintenance is done for the main equipment. This project also adopts this assumption for the design of suitable equipment. An FSRU may or may not have an engine capable of navigation. The FSRU adopted in this project will have an engine, so that it has a capability to be used as an LNG tanker in the future, if it is desired. c. Jetty design The study team will further need to conduct detailed research on the submarine geology, the hydrographic conditions, and the weather around the proposed site for FSRU installation. The team has so far learned through an interview with the meteorological bureau that one or two typhoons hit the waters annually where the site is located, yet these typhoons pass the continent to the east of the Andaman Sea before they reach the waters, and thus they are relatively weak and predictable. With this information in mind, the jetty design is carried out on the assumption that the hydrographic conditions are mild, and the FSRU will be moored by the jetty. To boost the FSRU s operating rates, the hydrographic conditions need to be mild. Provision of breakwaters may have to be considered depending on the hydrographic conditions. If the conditions are harsh, the tower yoke mooring system will be used instead of jetty mooring,; although the tower yoke system will lift up the cost. Suitable mooring system will be designed after collecting and examining specific information in relevance. There are two types of jetty mooring systems. One is called side-by-side in which an LNG carrier as a shuttle is moored alongside the FSRU anchored by the jetty; the other is called cross-jetty in which the FSRU and an LNG carrier as a shuttle are moored on either side of the jetty. The side-by-side system has a clear cost advantage, while the cross- jetty system offers the following advantages: It can receive LNG carriers of any size, regardless of the size of the FSRU. It offers greater stability of moored ships during loading and unloading than the side-by-side system. It allows moored vessels to leave swiftly in an emergency. 3-23

92 Figure3-15: FSRU Mooring Systems (Top: Side-by-Side; Bottom: Cross-Jetty) Source: Prepared by Study Team The location of FSRU will be as far away as 80 km from the port, which makes it difficult for tugboats to quickly come to the rescue should the FSRU has to leave the jetty in an emergency. Therefore, the study team will assume the design based on the cross-jetty system. Besides, a piled structure can be considered to build the jetty. The team assumed the loading arms which can stand against wave heights and tides. d. Size of pipelines As previously stated, the MOGE plans to extend the pipeline from S. Dagon to Thilawa. The right size of the pipeline that this study assumes depends on whether the team considers only the use of gas regasified from imported LNG on the FSRU, or the team also considers the use of gas from a different source transported through the existing pipeline connected to the extension. When the team considers only transporting gas through the pipeline to S. Dagon, 24 inches can be an option to have a good balance with pressure and boost-up. On the other hand, the MOGE currently plans to develop a pipeline network along the existing one in Yangon to supply gas to IPPs newly engaging in gas-fired power generation, and the size of the pipelines for the network is 30 inches. A larger size means higher operational flexibility and scalability, and greater costs. Despite the MOGE s choice to use 30-inch pipelines for the network, the team has adopted 24 inch pipelines because, as supply lines for 3-24

93 regasified LNG, they do not require much initial cost, and they have an extra transport capacity that can be tapped into when gas will be carried for different purposes (e.g., consumer use) sometime in the future. (4) Project Plan Outline 1. Basic Policies for Determining Project Details To solve electricity shortages as soon as possible, MOEP is considering LNG import for electric power generation. As the demand forecast shows, the amount of gas needed is meant to fill the gap between a domestic gas supply and gas demand based on the capacity of gas-fired power plants in the power source development plan. Given this background, MOEP has intention to realize quick start of LNG import. However, further discussion on the detail including cost needs to be held through an organization with decision-making authority. In this study, the team determined project details in accordance with the physical and financial restrictions mentioned previously, and also with the needs of the various Myanmar government organizations which the team had learned of through interviews. 2. Conceptual Design and Specifications of Applied Facilities and Equipment Facilities and equipment that this project uses are broadly classified into the following: a. a. FSRU b. b. Jetty c. c. Pipelines a. FSRU The figure below is the schematic diagram of FSRU processes. 3-25

94 Figure3-16: Schematic Diagram of FSRU Processes Source: Prepared by Study Team The table below shows the specifications of the FSRU based on the technical approaches to be adopted: Table3-7: Main FSRU Specifications Length Overall m Breadth Molded 46.4 m Depth Molded 26.5 m Scantling Draft 12.8 m Dead Weight About 83,200 metric tons Tank Capacity 173,000 m 3 Service Speed 18.0 Knots (21% sea margin) Boil-off Rate 0.15% Propulsion Engine DFDE (Dual Fuel Diesel Electric) Fuel Boil off gas, HFO, MDO Source: Prepared by Study Team 3-26

95 Table3-8: Specifications of Regasification System Regasification Technology Regasification Capacity Gas Discharge Pressure LNG Cargo Loading Rate Gas Send-Out Temperature Sea Water heating with shell & tube vaporizer 120 mmscfd x 4 machines Maximum send-out amount: 480 mmscfd (4 machines combined) Regular send-put amount: 360 mmscfd (3 machines, 1 on standby) Minimum: 40 barg; Maximum: 100 barg. 8,000 m 3 / hour 5.0 degrees celsius Source: Prepared by Study Team b. Jetty The team examined the technical approach and put together the following as summaries of required equipment. The jetty is designed to receive an LNG tanker from which LNG is transferred to the moored FSRU, so that the regasification equipment on the FSRU generates gas with the required pressure in accordance with demand at the time, and the high-pressure loading arm sends out the gas into the pipeline. The following are the pieces of equipment used in the process: Imported LNG receiving loading arms (LNG: 2 sets; vapor: 1 set; common spare: 1 set) LNG transfer loading arms (LNG: 2 sets; vapor: 1 set; common spare: 1 set) High pressure natural gas send-out loading arm(s) (1 set if can possible to be produce) Valve manifold related to the above Emergency shutdown system Nitrogen connection and piping Loading arm operation system Knock-out drums for vapor Drain pump Electric power distribution panel and system (utilities and power source will be received from the FSRU) The following pieces of equipment will be in place as part of the jetty facilities: Breasting dolphins Mooring dolphins Navigation aid Radio communications, etc. 3-27

96 As stated in the section that explores the capacity of an FSRU, the size of the LNG tanker receiver is unidentified at this point, because the seller from which Myanmar will buy LNG has not been selected. Hence, the team considered the size that ranges between 125,000 m 3 and 160,000 m 3 to envisage the structures of the jetty and the dolphins. The system flow of the equipment and the schematic diagram are as shown below: 3-28

97 Figure3-17: System Flow of Jetty Equipment Source: Prepared by Study Team 3-29

98 c. Pipelines The pipelines will be laid offshore (subsea) and onshore. The onshore pipeline will have a shutdown valve, and a valve station for connecting branched parts in accordance with the design specifications defined by relevant codes and regulations. The onshore pipeline route that this project plans crosses the large river at two points, so the pipeline will need to be buried at an adequate depth. The right size of pipeline may vary depending on the use, so the team will need to discuss it with the MOGE. For the purpose of examination in this study, the team envisaged that it will be 24 inches, which is the same as the pipeline circling through the Yangon Region planned by the MOGE. There are pipelines that the MOGE has already installed in accordance with its specifications. The team will need to keep checking with the MOGE to ensure that the pipeline that this project builds is consistent with the specifications. At this moment, the team envisages that the MOGE s pipelines follow international standards. The figure below is the schematic diagram of the pipeline. Figure3-18: FSRU Pipeline System Schematic Diagram Source: Prepared by Study Team 3. Proposed Project Details (Site and Investment Cost for the Project) a. Project site An FSRU should be installed80km offshore from the Yangon River, and a gas pipeline route will be laid up to South Dagon in the existing pipeline network in Yangon. Please see Chapter 4 (3) 3 for details. 3-30

99 b. Investment cost The initial investment cost is approximately US$624 million, and the annual running cost say US$2.57 million. The project cost does not include the costs for the construction and operation of the onshore pipelines, assuming that the MOGE will bear these costs. The team also estimated that the initial expenses would be US$66 million if the project was to be launched in Japan. Please see Chapter 5 for details. 4. Issues on Proposed Technologies and System; Solutions a. Project site and specifications The project site and the specifications are set out in accordance with the followings: Details stated in the MOEP s public offering for LNG imports asked in July 2013 and the needs behind the call Requests from concerned organizations based on the call Technical and system reviewed basing on the physical constraints shown in existing literature The Myanmar government s needs may change as the development of domestic gas fields and of power sources goes on, and detailed research on hydrographic conditions and other physical constraints may locate something new, which may suggest a better place for installing the FSRU, and/or better technologies to apply. The study must continue to find out with eye for wider range of subjects. In any case, this study at this junction of time will serve as a benchmark for future discussions. Besides, the study further needs detailed information about the water depths, the hydrographic conditions and the climate in the area for more detailed consideration of the location for installing the FSRU, project expenses, and running costs. And the team presume that earth and sand from the Yangon River are floating in the stretch of shallow water. If the FSRU was to be installed in a dredged area with shallow water, the team would need to take technical measures to prevent the plumbing in the FSRU from becoming clogged with the floating earth and sand. b. LNG berthing operation A large vessel like an LNG shuttle tanker becomes difficult to steer and cannot easily change direction on its own when it slows down, so tugboats will help LNG carriers to steer and control their speeds as they arrive at, and leave the jetty. In general, four 3,000 to 4,000 h.p. tugboats will help an LNG carrier as it arrives at, and leaves the jetty. Through an interview with the Yangon Port Authority, the team discovered that tugboats at Yangon Port, which is a river port, have only 1,500 horsepower each, that is, the port does not have any tugboats with engines powerful enough to navigate the ocean. For the new jetty to receive LNG carriers, new tugboats and crews of the boats must be arranged, and where to anchor the boats and how to operate them around the jetty must be determined. As the offshore location is fairly far away from land, further study must be done to locate reliable sources of weather forecasts, and predictions of hydrographic conditions. 3-31

100

101 Chapter 4 Evaluation of Environmental and Social Impacts

102

103 (1) Analysis of Environmental/ Social Aspects 1. Project Areas The Andaman Sea and the Gulf of Martaban where the construction of the FSRU is planned alongside Yangon and Thilawa Ports are particularly important areas. One of the key characteristics of the Gulf of Martaban is the significant fluctuation of the sea level. The sea level varies from 4m to 7m at its highest. Tidal range at the time of spring tide is 6.6 m, and the size of the areas affected is 45,000 km 2. Even at the time of the neap tide, the tidal range is about 3m and the size of the areas affected is 15,000 m 2. The FSRU must be constructed where there is a certain water depth level (15 m), and for areas with shallow-water such as Yangon Port (9 m) and Thilawa Port (10 m), it will be impossible to construct. The MPA is in charge of a fixed distance offshore of the Gulf of Martaban. This is a shallow-water area with 1m deep tidal flats at the estuary of the Yangon River. It will be necessary to identify the appropriate spots from the marine area, which is under the jurisdiction of the Navy, outside the areas of MPA jurisdiction in order to secure appropriate water depth for the FSRU. The Gulf of Martaban is a maritime area with shoals, and its water depth is 5 m at 10 km from the shore and 8 m at 25 km from the shore. It is currently assumed that 15m water depths can be secured 80 km offshore. The Andaman Sea provides good fishing grounds, and fishing and marine product processing industries have developed in the South of Myanmar, including the Tanintharyi Division and Mon State. It is assumed that there are rich marine resources and precious marine ecosystems such as coral reefs in the area where the FSRU will be constructed. It is therefore necessary to further investigate the effect on the natural environment in the project site, in order to make appropriate arrangements as necessary. The use of the marine area under the Navy s jurisdiction is strictly limited. It is necessary to exclusively own the marine area under the jurisdiction of the navy to construct the FSRU while consulting with the Ministry of Transport: MOT and the Navy, as it is the case with existing offshore gas fields. The Ministry of Livestock, Fisheries and Rural Development is in charge of the fisheries industry, and issues three types of licenses for coastal fishing, inshore and deep-sea fisheries. It is not known yet whether there are fishermen, who operate in the FSRU construction marine area, but it will be confirmed and the impact on fishermen will be assessed in the process of creating an Environmental Impact Assessment. 4-1

104 Figure4-1: Plan of the Constructions of FSRU and Pipelines Source: Prepared by Study Team based on the materials provided by the MOGE and interviews of the MOGE and MPA 2. Future Forecast The government of Myanmar is conducting early research into construction of a large deep-water port to be built downstream of the Yangon River, although the concrete plan is yet to be concrete. There is a possibility that the pipeline that connects FSRU with the existing pipeline network may interfere with the deep-water port project depending on its location. Currently, the proposed plans include creating it by constructing an artificial island offshore of the east of the estuary of the Yangon River, and creating it in the area of the Western channel (water route used by ships to and from the Yangon Port). In case it is created by constructing an artificial island on the east side, it is assumed that both will be affected, depending on the route of the pipeline. (2) Environmental Improvement Achieved through Project Implementation FSRU is one of the fastest methods to achieve LNG imports from overseas. The imported LNG will be used mainly for power generation. Therefore, it is not expected that in comparison to the current situation, there will be direct improvements in environmental measures such as emissions of pollutants or greenhouse gases. On the other hand, if importing LNG is not possible or delayed considerably, it is anticipated that there will be an increase in the construction of hydropower and coal-fired thermal power plants as alternative options to cover power supply 4-2

105 shortages. Hydropower has the advantage of reducing emissions of pollutants and greenhouse gases, compared to thermal power. On the other hand, it will mainly be constructed in the mountainous regions, it is expected that there will be destruction of the natural environment through development, as well as the eviction of residents from the region. This has been the case with hydropower plants constructed in the past, where many residents were forced to relocate. With coal-fired thermal power plants, it is expected that air pollution and greenhouse gas emissions will be reduced to some degree, if Advanced Ultra-Supercritical (A-USC) coal fired plants (the use of which is increasingly supported in Japan) are chosen, and various measures for contamination control are implemented. However, considering how it tends to be applied in ASEAN countries, contamination control is unlikely to be sufficient and there is a high possibility that a Supercritical (SC) coal fired plant could be selected as the most efficient of this type of plant, though it is less efficient compared to A-USC. There will also be an issue of coal ash disposal with the use of a coal-fired power plant. If natural gas-fired plants cannot be developed, hydropower and coal-fired thermal plants are likely to be promoted, and the associated risks of environmental pollution and destruction will be counted for. The environmental improvement associated with this project will be environmental conservation, where hydropower is the baseline scenario, and the reduction in emissions of pollutants and greenhouse gas where coal-fired power is the baseline. In terms of qualifying environmental improvements, taking the increased construction of coal-fired thermal power plants as the baseline, quantifying the reduction in greenhouse gas emissions by applying CDM is possible. Below are the methodologies applied to this study: AM0029 Baseline methodology for grid connected electricity generation plants using natural gas AM0087 Construction of a new natural gas power plant supplying electricity to the grid or a single consumer (3) Environmental and Social Impacts Associated with the Project 1. Reviewing Environmental and Social Considerations In order to assess the environmental and social impact of the project, and clarify the environmental and social considerations required at the next stage of this research, we have evaluated items following a List of Environmental Checklists of the JBIC Guidelines for Confirmation of Environmental and Social Considerations, and the JICA Guidelines for Environmental and Social Considerations. The following tables are the result of the evaluations. 4-3

106 Table4-1: Evaluations by List of Environmental Checklists for Other Infrastructure Projects in the JICA Guidelines for Environmental and Social Considerations Category Environmental Item Main Check Items Confirmation of Environmental Considerations (Reasons, Mitigation Measures) (a) Have EIA reports been already (a), (b), (c): An EIA has not been prepared in official process? prepared for the project. (b) Have EIA reports been approved by (d): Legal systems related to the authorities of the host country's environment, including EIAs are government? being developed, and it is anticipated (1) EIA and Environmental Permits (c) Have EIA reports been unconditionally approved? If conditions are imposed on the approval of EIA reports, are the conditions satisfied? that obtaining permits will become necessary. (d) In addition to the above approvals, have other required environmental 1 Permits and Explanati on permits been obtained from the appropriate regulatory authorities of the host country's government? (a) Have contents of the project and the potential impacts been adequately (a), (b): Information disclosure and consultation with residents and explained to the Local stakeholders stakeholders has not been conducted, (2) Explanation to the Local Stakeholders based on appropriate procedures, including information disclosure? Is understanding obtained from the Local stakeholders? as the project is still at the planning stage. (b) Have the comment from the stakeholders (such as local residents) been reflected to the project design? (3) (a) Have alternative plans of the project (a): The project is one of several Examination of been examined with social and being planned including onshore LNG Alternatives environmental considerations? construction. (a) Do air pollutants, (such as sulfur (a), (b): It is expected that mainly oxides (SOx), nitrogen oxides (NOx), natural gas will be used for FSRU 2 and soot and dust) emitted from the operation, and emission of polluted Pollution (1) Air Quality proposed infrastructure facilities and materials and greenhouse gases are Control ancillary facilities comply with the expected to be limited. The emissions country's emission standards and and environmental standards have not ambient air quality standards? Are any been established at this stage. 4-4

107 (2) Water Quality (3) Wastes (4) Soil Contamination (5) Noise and Vibration (6) Subsidence (7) Odor mitigating measures taken? (b) Are electric and heat source at accommodation used fuel which emission factor is low? (a) Do effluents or leachates from various facilities, such as infrastructure facilities and the ancillary facilities comply with the country's effluent standards and ambient water quality standards? (a) Are wastes from the infrastructure facilities and ancillary facilities properly treated and disposed of in accordance with the country's regulations? (a) Are adequate measures taken to prevent contamination of soil and groundwater by the effluents or leachates from the infrastructure facilities and the ancillary facilities? (a) Do noise and vibrations comply with the country's standards? (a) In the case of extraction of a large volume of groundwater, is there a possibility that the extraction of groundwater will cause subsidence? (a) Are there any odor sources? Are adequate odor control measures taken? (a): Cold water emitted from FSRU operation could result in lowered water temperatures. The degree of impact and measures to reduce impact will be reviewed in an impact evaluation, which will be carried out through an EIA at a later stage and in discussion with stakeholders, including fishermen. The emissions and environmental standards have not been established. (a): The amount of waste materials emitted by FSRU operation will be minor, and likely to be disposed of appropriately. (a): Not applicable as FSRU is an offshore facility. (a): Noise and vibrations are expected to be generated by FSRU operation. The country in question does not have fixed standards. It is assumed that impact will be relatively small as the facility is offshore. (a): Not applicable as FSRU is an offshore facility. (a): Not applicable as no odor is expected through LNG receipt with the use of vaporization equipment. 4-5

108 (a) Is the project site or discharge area (a): There are no protected areas near located in protected areas designated by or within the project areas. (1) Protected the country's laws or international Areas treaties and conventions? Is there a possibility that the project will affect the protected areas? (a) Does the project site encompass (a), (b), (c), (d): As FSRU is an primeval forests, tropical rain forests, offshore facility, it is possible to ecologically valuable habitats (e.g., coral construct and operate the facility reefs, mangroves, or tidal flats)? while avoiding primeval forests, (b) Does the project site encompass the tropical rain forests and ecologically protected habitats of endangered species valuable habitats. However, it is designated by the country's laws or possible that such areas could be international treaties and conventions? affected by construction of the marine (c) Is there a possibility that changes in pipeline and land facility. The impact, localized micro-meteorological and measures to reduce impact, will 3 Natural (2) Ecosystem conditions, such as solar radiation, temperature, and humidity due to a be clarified in an impact evaluation which will be carried out through an Environ large-scale timber harvesting will affect EIA at a later stage. ment the surrounding vegetation? (d) Is there a possibility that the amount of water (e.g., surface water, groundwater) used by the project will adversely affect aquatic environments, such as rivers? Are adequate measures taken to reduce the impacts on aquatic environments, such as aquatic organisms? (a) Is there a possibility that hydrologic (a): Not applicable as FSRU is an (3) Hydrology changes due to the project will adversely affect surface water and groundwater offshore facility. flows? (a) Is there a possibility the project will (a): Not applicable as FSRU is an (4) Topography and Geology cause large-scale alteration of the topographic features and geologic structures in the project site and offshore facility. surrounding areas? 4-6

109 (a) Is involuntary resettlement caused by (a), (b), (c), (d), (e), (f), (g), (h), (i), project implementation? If involuntary (j): Not applicable as FSRU is an resettlement is caused, are efforts made offshore facility. to minimize the impacts caused by the resettlement? (b) Is adequate explanation on compensation and resettlement assistance given to affected people prior to resettlement? (c) Is the resettlement plan, including compensation with full replacement costs, restoration of livelihoods and living standards developed based on socioeconomic studies on resettlement? (d) Is the compensations going to be 4 Social Environ ment (1) Resettlement paid prior to the resettlement? (e) Is the compensation policies prepared in document? (f) Does the resettlement plan pay particular attention to vulnerable groups or people, including women, children, the elderly, people below the poverty line, ethnic minorities, and indigenous peoples? (g) Are agreements with the affected people obtained prior to resettlement? (h) Is the organizational framework established to properly implement resettlement? Are the capacity and budget secured to implement the plan? (i) Are any plans developed to monitor the impacts of resettlement? (j) Is the grievance redress mechanism established? (a) Is there a possibility that the project (a): As FSRU is an offshore LNG 4 Social Environ ment (2) Living and Livelihood will adversely affect the living conditions of inhabitants? Are adequate measures considered to reduce the receiving facility, it could have an impact on fishermen operating in the area, by causing changes to fish impacts, if necessary? catches. It is possible to reduce the 4-7

110 (3) Heritage (4) Landscape (5) Ethnic Minorities and Indigenous Peoples (6) Working Conditions (a) Is there a possibility that the project will damage the local archeological, historical, cultural, and religious heritage? Are adequate measures considered to protect these sites in accordance with the country's laws? (a) Is there a possibility that the project will adversely affect the local landscape? Are necessary measures taken? (b) Is there a possibility that landscape is spoiled by construction of high-rise buildings such as huge hotels? (a) Are considerations given to reduce impacts on the culture and lifestyle of ethnic minorities and indigenous peoples? (b) Are all of the rights of ethnic minorities and indigenous peoples in relation to land and resources respected? (a) Is the project proponent not violating any laws and ordinances associated with the working conditions of the country which the project proponent should observe in the project? (b) Are tangible safety considerations in place for individuals involved in the project, such as the installation of safety equipment which prevents industrial accidents, and management of hazardous materials? (c) Are intangible measures being planned and implemented for negative impact by clarifying the causes of the impact on fish catches, such as lowered water temperatures from cold water emissions, and putting forward measures to reduce such impacts. (a): Detailed research has not yet been conducted as the project is still at the planning stage. (a), (b): FSRU will be constructed in a relatively distant offshore area, and the effect on the local landscape is considered to be minor. (a), (b): There are no ethnic minorities or indigenous peoples nearby, or in the subject project areas. (a), (b), (c), (d): Working conditions, safety considerations and safety and health training will be clarified in an impact evaluation that will be conducted through an EIA at a later stage. 4-8

111 5 Others (1) Impacts during Construction (2) Monitoring individuals involved in the project, such as the establishment of a safety and health program, and safety training (including traffic safety and public health) for workers etc.? (d) Are appropriate measures taken to ensure that security guards involved in the project not to violate safety of other individuals involved, or local residents? (a) Are adequate measures considered to reduce impacts during construction (e.g., noise, vibrations, turbid water, dust, exhaust gases, and wastes)?(b) If construction activities adversely affect the natural environment (ecosystem), are adequate measures considered to reduce impacts?(c) If construction activities adversely affect the social environment, are adequate measures considered to reduce impacts? (a) Does the proponent develop and implement monitoring program for the environmental items that are considered to have potential impacts? (b) What are the items, methods and frequencies of the monitoring program? (c) Does the proponent establish an adequate monitoring framework (organization, personnel, equipment, and adequate budget to sustain the monitoring framework)? (d) Are any regulatory requirements pertaining to the monitoring report system identified, such as the format and frequency of reports from the proponent to the regulatory authorities? (a), (b), (c): The impact during the construction period will be clarified in an impact evaluation which will be conducted through an EIA at a later stage. (a), (b), (c): An EIA has not been conducted for this project. (d): There are no legally binding rules on the methods and frequency of reporting monitoring results. 4-9

112 (a) Where necessary, pertinent items (a), (b): Not applicable described in the Roads, Railways and Bridges checklist should also be checked (e.g., projects including access roads to the infrastructure facilities). Reference to (b) For projects, such as installation of Checklist of telecommunication cables, power line Other Sectors towers, and submarine cables, where necessary, pertinent items described in 6 Note the Power Transmission and Distribution Lines checklists should also be checked. (a) If necessary, the impacts to (a): Not applicable transboundary or global issues should be Note on Using confirmed (e.g., the project includes Environmental factors that may cause problems, such as Checklist transboundary waste treatment, acid rain, destruction of the ozone layer, or global warming). Sources: List of Environmental Checklists for Other Infrastructure Projects in the JICA Guidelines for Environmental and Social Considerations with added comments by Study Team 4-10

113 Table4-2: Evaluation by List of Environmental Checklists for Other Infrastructure Projects in the JBIC Guidelines for Confirmation of Environmental and Social Considerations Category Environmental Item Main Check Items Confirmation of Environmental Considerations (i) Have EIA reports been officially completed? (ii) Have EIA reports been approved by authorities of the host country s 1 Permits and Explanation (1) EIA and Environmental Permits government? (iii) Have EIA reports been unconditionally approved? If conditions are imposed on the approval of EIA reports, are the conditions satisfied? (iv) In addition to the above approvals, have other required environmental permits been obtained from the appropriate regulatory authorities of the host (i), (ii), (iii) An EIA has not been prepared for the project. (iv): Legal systems related to the environment, including EIAs are being developed, and it is anticipated that obtaining permits will become necessary. country s government? (i) Are contents of the project and the potential impacts adequately (2) Explanation to the Public explained to the public based on appropriate procedures, including information disclosure? Is understanding obtained from the public? (ii) Are proper responses made to (i), (ii): Information disclosure and consultation with the residents and stakeholders has not been conducted, as the project is still at the planning stage. comments from the public and regulatory authorities? 2 Mitigation Measures (1) Air Quality (i) Do air pollutants, (such as sulfur oxides (SOx), nitrogen oxides (NOx), and soot and dust) emitted from the proposed infrastructure facilities and ancillary facilities comply with the country s emission standards and ambient air quality standards? (i): It is planned that mainly natural gas will be used for FSRU operation, with emissions of polluted materials and greenhouse gases expected to be limited. The emissions and environmental standards have not yet been established. 4-11

114 (i): Cold water emitted from FSRU operation could result in lowered water temperatures. The degree of (i) Do effluents or leachates from impact and measures to reduce these various facilities, such as impacts will be reviewed in an (2) Water infrastructure facilities and the impact evaluation which will be Quality ancillary facilities comply with the carried out through an EIA at a later country s effluent standards and stage, and in discussion with ambient water quality standards? stakeholders, including fishermen. The emissions and environmental standards have not yet been established. (3) Wastes (i) Are wastes from the infrastructure facilities and ancillary facilities properly treated and disposed of in accordance with the country s standards? (i): The amount of waste materials emitted by FSRU operation will be minor and likely to be disposed of appropriately. (i) Are adequate measures taken to (4) Soil Contamination prevent contamination of soil and groundwater by the effluents or leachates from the infrastructure (i): Not applicable as FSRU is an offshore facility. facilities and the ancillary facilities? (i): Noise and vibrations are expected to be generated by FSRU operation. (5) Noise and (i) Do noise and vibrations comply The country in question doesn t have Vibration with the country s standards? fixed standards. It is assumed that impact will be relatively small as the facility is offshore. (i) In the case of extraction of a (6) Subsidence large volume of groundwater, is there a possibility that the extraction of groundwater will cause (i): Not applicable as FSRU is an offshore facility. subsidence? (i) Are there any odor sources? (i): Not applicable as no odor is (7) Odor Are adequate odor control measures expected with LNG receipt and with taken? the use of vaporization equipment. 3 Natural Environmen t (1) Protected Areas (i) Is the project site located in protected areas designated by the country s laws or international (i): There are no protected areas within or near the project areas. 4-12

115 treaties and conventions? Is there a possibility that the project will affect the protected areas? (i) Does the project site encompass primeval forests, tropical rain forests, ecologically valuable habitats (e.g., coral reefs, mangroves, or tidal flats)? 3 Natural Environmen t (2) Ecosystem and biota (ii) Does the project site encompass the protected habitats of endangered species designated by the country s laws or international treaties and conventions? (iii) If significant ecological impacts are anticipated, are adequate protection measures taken to reduce the impacts on the ecosystem? (iv) Is there a possibility that the amount of water (e.g., surface water, groundwater) used by the project will adversely affect aquatic (i), (ii), (iii), (iv): As FSRU is an offshore facility, it is possible to construct and operate the facility while avoiding primeval forests, tropical rain forests and ecologically valuable habitats. However, such areas could be included in the land facility. The impact, and measures to reduce impact, will be clarified in an impact evaluation which will be carried out through an EIA at a later stage. environments, such as rivers? Are adequate measures taken to reduce the impacts on aquatic environments, such as aquatic organisms? (i) Is there a possibility that (3) Hydrology hydrologic changes due to the project will adversely affect surface (i): Not applicable as FSRU is an offshore facility. water and groundwater flows? (i) Is there a possibility the project (4) Topography and Geology will cause large-scale alteration of the topographic features and geologic structures in the project (i): Not applicable as FSRU is an offshore facility site and surrounding areas? 4-13

116 4 Social Environmen t (1) Resettlement (2) Living and Livelihood (i) Is involuntary resettlement caused by project implementation? If involuntary resettlement is caused, are efforts made to minimize the impacts caused by the resettlement? (ii) Is adequate explanation on relocation and compensation given to affected persons prior to resettlement? (iii) Is the resettlement plan, including proper compensation, restoration of livelihoods and living standards developed based on socioeconomic studies on resettlement? (iv) Does the resettlement plan pay particular attention to vulnerable groups or persons, including women, children, the elderly, people below the poverty line, ethnic minorities, and indigenous peoples? (v) Are agreements with the affected persons obtained prior to resettlement? (vi) Is the organizational framework established to properly implement resettlement? Are the capacity and budget secured to implement the plan? (vii) Is a plan developed to monitor the impacts of resettlement? (i) Is there a possibility that the project will adversely affect the living conditions of inhabitants? Are adequate measures considered to reduce the impacts, if necessary? (i), (ii), (iii), (iv), (v), (vi), (vii): Not applicable as FSRU is an offshore facility. (i): As FSRU is an offshore LNG receiving facility, it could have an impact on fishermen operating in the area by causing changes to fish catches. It is possible to reduce these possible negative impacts by clarifying the causes of the impact on 4-14

117 fish catches, such as lowered water temperatures from cold water emissions, and putting forward measures to reduce such impacts. (i) Is there a possibility that the project will damage the local archeological, historical, cultural, (i): Detailed research has not yet been (3) Heritage and religious heritage sites? Are conducted as the project is still at the adequate measures considered to planning stage. protect these sites in accordance with the country s laws? (i) Is there a possibility that the (i): FSRU will be constructed in a (4) Landscape project will adversely affect the local landscape? Are necessary relatively distant offshore area, and the effect on the local landscape is measures taken? considered to be minor. (i) Does the project comply with the (5) Ethnic Minorities and Indigenous Peoples country s laws for rights of ethnic minorities and indigenous peoples? (ii) Are considerations given to reduce the impacts on culture and lifestyle of ethnic minorities and (i), (ii): There are no ethnic minorities or indigenous peoples nearby or in the subject project areas. indigenous peoples? (i) Is the project proponent not violating any laws and ordinances associated with the working 4 Social Environmen t (6) Working conditions conditions of the country which the project proponent should observe in the project? (ii) Are tangible safety considerations in place for individuals involved in the project, such as the installation of safety equipment which prevents industrial accidents, and management of (i), (ii), (iii), (iv): Working conditions, safety considerations and safety and health training will be clarified in an impact evaluation that will be conducted through an EIA at a later stage. hazardous materials? (iii) Are intangible measures being planned and implemented for individuals involved in the project, such as the establishment of a safety 4-15

118 and health program, and safety training (including traffic safety and public sanitation) for workers etc.? (iv) Are appropriate measures being taken to ensure that security guards involved in the project do not violate safety of other individuals involved, or local residents? 5 Others (1) Impacts during Construction (2) Monitoring (i) Are adequate measures considered to reduce impacts during construction (e.g., noise, vibrations, turbid water, dust, exhaust gases, and wastes)? (ii) If construction activities adversely affect the natural environment (ecosystem), are adequate measures considered to reduce impacts? (iii) If construction activities adversely affect the social environment, are adequate measures considered to reduce impacts? (i) Does the proponent develop and implement monitoring program for the environmental items that are considered to have potential impacts? (ii) Are the items, methods and frequencies included in the monitoring program judged to be appropriate? (iii) Does the proponent establish an adequate monitoring framework (organization, personnel, equipment, and adequate budget to sustain the monitoring framework)? (iv) Are any regulatory requirements pertaining to the monitoring report system identified, such as the format 4-16 (i), (ii), (iii): Impact during the construction period will be clarified in an impact evaluation which will be conducted through an EIA at a later stage. (i), (ii), (iii): An EIA has not been conducted for this project. (iv): There are no legally binding rules on the methods and frequency of reporting monitoring results.

119 and frequency of reports from the proponent to the regulatory authorities? (i) Where necessary, pertinent items described in the Roads, Railways and Bridges checklist should also be checked (e.g., projects including access roads to the infrastructure facilities). Reference to (ii) For projects, such as installation Checklist of (i), (ii): Not applicable of telecommunication cables, power Other Sectors line towers, and submarine cables, where necessary, pertinent items described in the Power 6 Note Transmission and Distribution Lines, and Pipelines checklists should also be checked. (i) If necessary, the impacts to transboundary or global issues should be confirmed (e.g., the Note on Using project includes factors that may Environmental (i): Not applicable cause problems, such as Checklist transboundary waste treatment, acid rain, destruction of the ozone layer, or global warming). Sources: List of Environmental Checklists for Other Infrastructure Projects in the JBIC Guidelines for Confirmation of Environmental and Social Considerations with added comments by Study Team 4-17

120 2. The Environmental Impacts of the Alternative Proposals We have presented three proposals in Chapter 3 as alternatives to LNG import using FSRU: buying back exported gas; building onshore facilities for receiving LNG; adopting a Shuttle Regasification Vessel (SRV). Below are the expected possible environmental impacts of each proposal. Table4-3: The Environmental Impacts of the Alternative Proposals Alternative Proposals Buying back exported gas Building onshore facilities for receiving LNG Adopting SRV Possible Environmental Impacts Currently, the only gas pipeline available is used for export purposes, and it would be necessary to lay a long distance gas pipeline from the gas field to Yangon. It is possible that constructing the pipeline could cause mid to long term impact on the environment through causing a disturbance to the ocean bed, depending on the pipeline route. Environmental impacts could include an impact on the landscape, involuntary relocation of the residents and groundwater pumping, all caused by the construction of major facilities on the ground. It is necessary to construct a Turret Buoy regasification facility in the marine area at depths of more than 100m to use a SRV, which will have to be constructed 100km offshore in the case of the Andaman sea marine area. It is technically and financially difficult to send natural gas from turret buoy facilities and even if possible, a long distance gas pipeline would have to be laid -possibly causing mid to long term environmental impacts, through construction disturbances to the ocean bed. Source: Prepared by Study Team It is necessary to carry out a detailed investigation of each alternative plan through concrete research. Given the conditions of the marine area of the Yangon River and the Andaman Sea, it is anticipated that the facilities will have to be constructed farther away from the area where the FSRU is expected to be constructed, and also from Yangon, whichever alternative plan were to be realized. In this case, it could be the case that the environmental impact will be larger compared to the construction of the FSRU. 3. Result of Information Collected on Environmental and Social Impacts According to an interview with the Myanmar Environmental Conservation and Forestry Ministry (MECF) which is responsible for environmental administration in Myanmar, projects that are expected to conduct an EIA (Environmental Impact Assessment) are those that exceed a project size, determined according to types of projects. Those projects smaller than a certain size, are expected to be followed with an IEE only (Initial Environmental Examination). It is anticipated that even for those operations taking place on the shore, the same EIA process of MECF will be applied. Below are the details of the types and sizes of projects, accordingly. For gas-fired power generation, an IEE is required for 5-50 MW plants, and an EIA is required for those over 50 MW. For gas pipelines, an IEE for under 10km and an EIA for over 10 km. 4-18

121 With regard to FSRU, there is no criterion at present. Like for instance, for an oil storage facility, the IEE process is required for sizes from 100,000 to 1,000,000 liters, and the EIA process is required for sizes over 1,000,000 liters. The MECF will review and make decisions as to whether the EIA process is required, or not, on currently running projects. This project consists of 3 components that are, FSRU, underwater gas pipelines and above ground pipelines, and MECF s view is that these can be addressed together in one EIA report. Apart from MECF s regulations, MIC (Myanmar Investment Commission) Law and MIC regulations require submission of a report during the business approval process of large scale operations, such as oil and gas businesses, hydropower generation business and electricity transmission business. Therefore, an EIA has already been partly applied in certain businesses. Currently, EIA consultants who conduct EIA internationally, and are registered with EIA consultants agencies etc. are asked to submit reports to the government, though MECF does not have registered EIA consultants. For example, the offshore gas production business which is already in operation in Yadana has submitted an EIA report. MECF uses the report of this business operation as a good example. As for examples of projects cancelled due to rejected EIAs, one project was cancelled, as there was a possible risk of destruction of national cultural heritage by its hydropower generation business. 4-19

122 (4) Overview of the Country s Environmental and Social Related Regulations and Necessary Measures 1. Overview of Regulations and Schemes Related to the Environment MECF, which is responsible for administration of environmental matters, was established in The Environmental Conservation Law was established in 2012 in order to deliver sustainable development and conservation of the environment. The Government of Myanmar has shown a proactive approach, partially revising the law after its introduction. Myanmar s environmental conservation rules are currently under development and the EIA process is being reviewed during this process. The EIA process is being drawn up with support from JICA and ADB, referring to international regulations laid by the ADB and the IFC. 2. EIA Related Matters It is likely that the EIA process will need to be checked by third party environment consultants who have been approved and registered by MECF. However, the criteria for approval of environmental consultants are currently being discussed and the detailed list of consultants is yet to be compiled. Since no standard has currently been issued related to EIA by MECF, each business operator selects its own standard when submitting EIA reports to MIC. Therefore, some business operators use IFC standard to compile EIA reports or use their countries standards when submitting EIA reports. The EIA process will be the same regardless of the types of owners of businesses, whether it s governmental organizations or private businesses. However, specific operations such as nuclear power generation are an exception and the parliament will make the decision on approval. It is assumed that the EIA admission process will be completed within 90 days of MECF receiving EIA reports. The 90 days include public hearing process. It is assumed that IEE admission process will be completed within 60 days. 4-20

123 (5) Requirements to Deliver Projects in This Country (by Implementing Organizations and Related Organizations) To construct FSRU and start the receiving of LNG in Myanmar, it is necessary to get permission and authorization from the related ministries including MIC, which requires submission of EIA reports. Also, although the EIA-related process and liability are yet to be confirmed, it is currently under discussion and it is assumed that the legal system will be developed in a few years. Below is the list of items that are the necessary course of actions to be taken by the Myanmar side as to the execution of the project, from an environmental and social point of view. Development of EIA and IEE, as well as other emission standards and environmental standards Registration and training of EIA consultants Implementation of EIA and IEE (based on the above legal development) Collaboration and promotion of agreement with project related groups (energy related organizations and managers of harbors), local governments. Provide thorough explanations and occasions to discuss for stakeholders such as fishermen. 4-21

124

125 Chapter 5 Financial and Economic Evaluation

126

127 (1) Estimated Project Costs 1. Cost Estimate Breakdown The costs of project include the following cost elements: a. Production and Construction Costs 1) Equipment costs Equipment costs include design/production/material purchases/inspection and transport. The main cost components of costs includes FSRU, jetty and sea pipelines. See Chapter 3 (4) for detailed specifications of equipment. 2) Construction work costs Construction work costs for the above equipment and buildings b. Consulting services and fee c. Operating costs This cost includes the operational costs of the FSRU, jetty and pipeline including labor, utilities, repair, insurance and general management costs. d. Other costs and expenses (interest and taxes) Taxes and financial levies, such as interest, corporation, and commercial taxes, as well as custom duties have been included. Inflation has also been factored in. However, such costs should be verified during an upcoming examination, as they may be subject to further taxation. 2. Project Costs a. Production and construction costs Illustrated below is the brief breakdown of the project cost assuming that each equipment/construction project includes construction at site for a certain period of time, the cost is partly shown in the local currency. The costs below include a contingency. Costs for constructing and operating land pipelines are not included in the operational costs by assuming they will be paid by MOGE. However, just in case that our side has to assume these costs, the initial cost was estimated at US$ 66 million. 5-1

128 Table5-1:Plan of the Constructions of FSRU and Pipelines Expense Items Cost (converted USD$1 million) Foreign Currency (USD$1 million) Local Currency (1 million Kyat) Construction/Equipment Cost Total ,503 FSRU ,622 Jetty ,936 Pipeline (offshore) ,945 1USD =973MMK Sources: Created by the research team b. Consulting services costs/fee Mentioned below is the consulting service cost/ fee. Table5-2: Consulting Cost Expense Items Consulting Cost/fee in total 1USD =973MMK Cost (converted USD$1 million) Foreign Currency Local Currency (USD$1 million) (1 million Kyat) ,748 Sources: Prepared by Study Team c. Operating costs The cost given hereunder below includes those cost elements needed for a trial operation period, during which time, a trial will be conducted on the condition that one regasification facility runs for a month including spare facilities. The cost below is based on operating three regasification facilities after the operation has started. Utility costs include the cost of fuel for FSRU operation, and are subject to change according to the number of regasification facilities in operation. 5-2

129 Table5-3: Operational Costs Trial Operation Period (USD$1 million) Operating Period (USD$1 million/year) Labor Costs Utility Costs Repair Costs General Management Costs/Expenses Insurance Premium USD =973MMK Sources: Prepared by Study Team Table5-4: Utility Costs according to the Number of Regasification Facilities in Operation Number of regasification facilities in operation (per plant) Regasification Capacity (mmscfd) Utility Cost (USD$1 million/year) USD =973MMK, Fuel price assumption: LNG Price at $14/mmbtu Sources: Prepared by Study Team The above operating costs are subject to the LNG purchase contract, and are based on the assumption that the contract is to purchase LNG at the CIF price, and does not include costs related to the handling of jetty docking/undocking of LNG tankers (tug boats chartering costs, etc.). The Myanmar Port Authority does not own enough tug boats to handle LNG tankers, and the cost of purchasing 4 tug boats is presumed to be around 32.0 MMUSD in total, in the case that a new business operator makes the purchase. d. Taxes and financial levies Borrowing rate Set the beginning rate at 13% (including ECAs guarantee charge and banking establishment handling fee), and 3% during the loan period. Corporate tax Set at 25% on assumption that a corporation will be set up under the foreign investment law. Commercial tax (value-added tax) The tax rate differs according to the items. While daily commodities are non-taxable, tax for items for personal consumption (cigarettes) is 8-100%. It is assumed that the project falls under other items, and the assumed tax rate is 5%. Custom duties 5-3

130 All imported goods are subject to custom duties. A rate of 0.5% of the import price, which is the basic rate of assessment for imported goods, has been applied. Inflation rate The team have applied the average 2011, 2012 figure of 2.8% from the IMF statistics. 3. Disbursing Plan of Project Costs Below is the plan of the costs disbursement until the commencement of the project. Table5-5: Project Cost Contribution Plan Unit:MMUSD Business year Construction/Equipment costs Consulting fees Commercial taxes Custom duties Handling Fee of Interest Interest during construction Total USD =973MMK Sources: Prepared by Study Team 5-4

131 (2) Summary of the Result of Preliminary Financial/ Economic Analysis 1. Financial Analysis The feasibility of the business under the project, which is to construct and operate the FSRU/pipeline and transport the supplied LNG to the spots designated by the consumers, has been identified. The cash flow was developed under certain preconditions to work out the NPV, B/C and FIRR. a. Preconditions of financial analysis The following table shows the preconditions set for the project. Table5-6: Financial Analysis Preconditions Project period 25 years Research/Construction period 5 years Operating period 20 years Regasification capacity 360 mmscfd Profit Charter FSRU, Jetty, and offshore pipeline (including fuel cost of FSRU operation of USD 10.8 million per year: assumed LNG unit price: approx. $14/mmbtu):$135 million/year Initial cost 624 MMUSD Operating cost 24.0 MMUSD /year Capital ration 25% Interest rate on borrowing Initial rate 10% (incl. handling fee), 3% during the loan period Payback period of borrowing 18 years from date of draw down Depreciation period FSRU, jetty:20 years, Pipeline: 10 years (Straight-line depreciation for both. Salvage value after the closure of the business is not estimated). Corporate tax rate 25% Commercial tax 5% Custom duties 0.5% Hurdle rate of FIRR 10% (Long-term interest rate in Myanmar as of October 2012) Sensitivity analysis Case1: The location of the FSRU is 100 km offshore (80 km for the base case) Case2: The operational period is 10 years. Sources: Prepared by Study Team 5-5

132 b. Result of evaluation The following table shows profitability of the project. Table5-7: Result of Calculation of Performance Indicators NPV(discount rate 12%) 132MMUSD B/C (discount rate 12%) 165% IRR 11.5 (Long-term interest in Myanmar 10%) Case1:IRR_offshore100km 10.5% Case2:IRR_operation period is % years Sources: Prepared by Study Team This study has revealed that the project has good viability in terms of financial aspect even if a chartering cost per year is USD 165 million and even if the FSRU is installed 100km offshore, reaching the level of the long-term interest of 10% in Myanmar. If the duration of operations is cut by 50% to 10 years with the chartering cost unchanged, IRR will remain at 6.9%. If the chartering cost is changed to USD 200 million per year, the IRR will be 10.0%. (Refer to the table below.) Table5-8: IRR Analysis for Several Chartering Cost(Case2: The Operational Period is 10 years) chartering cost (USD$1 million) IRR % % % % Sources: Prepared by Study Team 5-6

133 The tables below show the project cash flow. Table5-9: FIRR Calculation Cash Flow (Base case) Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD IRR % 11.5% Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD Sources: Prepared by Study Team Table5-10: FIRR Calculation Cash Flow (Case1: The Location of the FSRU is 100 km) Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD IRR % 10.5% Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD Sources: Prepared by Study Team 5-7

134 Table5-11: FIRR Calculation Cash Flow (Case2: The Operational Period is 10 years) Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD IRR % 6.9% Sources: Prepared by Study Team 2. Economic Analysis a. Potential profit generated by the project The advantage that the implementation of the project could bring to the economy of Myanmar is the financial benefit delivered through increased electricity supply and avoidance of power outage. To calculate the economic effect, it is necessary to evaluate the difference by comparing the effect of the project taking place by setting the case that the project does not happen as a baseline case. This study made rather conservative assumption that in the case where the project did not materialize, the hydropower generation plants would be developed strongly, generating the equivalent amount of electricity per year. However, as described in Chapter 1, Myanmar has a dry season for 3 months, and therefore it was also presumed that there will be rolling power cuts caused by electricity shortages, deriving from the inability of hydropower generation especially in the last half of the dry season. The difference in economic effect between the baseline case and the case the project is implemented can be the difference created by avoiding power failures during the dry season, as well as the difference between the construction and operational costs of hydropower plants and the operational costs of gas-fired power plants. Capex and opex of new onshore pipelines that MOGE may build and own are assumed to be covered by MOGE, not by the project. b. Evaluation of economic feasibility On the basis of the above, the preconditions for economic analysis are set as below. 5-8

135 Table5-12: Preconditions for Economic Analysis Project period 25 years Research/Construction period 5 years Operation period 20 years Regasification capacity 360 mmscfd Profit Reduction of the cost of power cut in last half of the dry season (1.5 months) (Power shortage amount in the dry season 1,555 GWh $1/kWh 7 )-(New land gas pipeline costs + operational costs of gas-fired power plant construction/operational costs of a hydropower plant) Initial cost 624 MMUSD Operating cost 24.0 MMUSD /year Hurdle rate of FIRR 12% (Average figure of opportunity cost in developing countries 8 ) Sensitivity analysis Case1: The location of the FSRU is 100 km offshore (80 km for the base case) Case2: The operational period is 10 years. Sources: Prepared by Study Team To estimate the volume of power shortage during the dry season, the expected output of gas-fired power plants is calculated based on the below assumptions; (i) the electricity volume generated from 360mmscd of gas with a generating efficiency of 40% for 18 hours per day excluding off- peak season for 1.5 months (46 days) (ii) transmission (21%) 1. The operating cost of a gas-fired power plant (excluding fuel costs), construction/operating costs of hydropower plant are adapted from the average operating cost in China (gas fired: USD10.88/kWh, hydropower: USD 36/kWh) in the Projected Costs of Generating Electricity 2010 Edition by the OECD. For the fuel cost of a gas-fired power plant, this study team used the price deducing USD 0.5/mmbtu (=equivalent of the transport cost between Myanmar and Japan, assuming it will be transported from the Middle East,) from Japanese LNG prices described in the New Policies Scenario in the IEA s World Energy Outlook The price varies at USD 14/mmbtu during the operational period. c. Evaluation results The profitability of the project is as given below. 7Source: FY 2011 Infrastructure System Export Promotion Investigations (Project formation of yen loan/ private infrastructure investigations), Study on the substation rehabilitation project in Yangon, the Republic of the Union of Myanmar (November, 2012) 8 Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations, ADB (2006) 5-9

136 Table5-13: Result of Calculation of Performance Indicator NPV(discount rate 12%) 632 MMUSD B/C (discount rate 12%) 503 % IRR 28.0 % (opportunity cost for developing country 12%) Case1:IRR_100 km 26.2 % offshore Case2:IRR_operational 26.6% period is 10 years Sources: Prepared by Study Team As shown in the above table, the result exceeds the above 12% opportunity cost under the both cases where we assume FSRU is located 100km offshore and project period of 10 years. However, the calculation of the above performance indicators are mostly based on various assumptions, as including matters and elements outside the scope of the study and therefore contains some uncertain elements in its result. It is necessary to conduct further detailed study in the future. The cash flow of the project is shown as below. Table5-14: EIRR Calculation Cash Flow (Base Case) Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,844 1,829 1,834 1,838 1,842 1,847 1,851 1,856 Cost of gas MMUSD 1,538 1,523 1,527 1,532 1,536 1,541 1,545 1,550 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD EIRR % 28.0% Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,860 1,865 1,869 1,874 1,876 1,878 1,880 1,883 1,885 1,885 1,885 1,885 Cost of gas MMUSD 1,554 1,558 1,563 1,567 1,570 1,572 1,574 1,576 1,579 1,579 1,579 1,579 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD Sources: Prepared by Study Team 5-10

137 Table5-15: EIRR Calculation Cash Flow (Case1: The Location of the FSRU is 100 km) Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,844 1,829 1,834 1,838 1,842 1,847 1,851 1,856 Cost of gas MMUSD 1,538 1,523 1,527 1,532 1,536 1,541 1,545 1,550 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD EIRR % 26.2% Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,860 1,865 1,869 1,874 1,876 1,878 1,880 1,883 1,885 1,885 1,885 1,885 Cost of gas MMUSD 1,554 1,558 1,563 1,567 1,570 1,572 1,574 1,576 1,579 1,579 1,579 1,579 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD Sources: Prepared by Study Team Table5-16: EIRR Calculation Cash Flow (Case2: The operational period is 10 years) Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,844 1,829 1,834 1,838 1,842 1,847 1,851 1,856 1,860 1,865 Cost of gas MMUSD 1,538 1,523 1,527 1,532 1,536 1,541 1,545 1,550 1,554 1,558 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD EIRR % 26.6% Sources: Prepared by Study Team 5-11

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139 Chapter 6 Planned Project Schedule

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141 (6) Project Implementation Schedule 1. Preconditions for Project Implementation For the successful completion of the project, the following preconditions need to be decided by the relevant companies/entities or by the discussion among them. The determination of these preconditions will expedite the project. Appointment for the responsible entity of the project, and the main body of the counterpart governments for charter ship contract Decisions of basic conditions of fuel gas procurement (quantity/gas components etc.) Decision of gas delivery point Change of the gas delivery point influences on the whole project design of gas pipeline including project schedule, etc. Policy on fund sourcing Affected by developing situation trends of appropriate financing plan related FSRU/pipeline introduction, the LNG purchase Schedule of legislation for EIA Affected by preparation of the EIA process and progress of parliamentary approval 2. Project Schedule(Proposed) From basic development plan to gas delivery, the project is composed of three stages: 1. From making basic development plan to final investment decision (FID) 2. From FID to installation of FSRU, jetty facilities and pipelines 3. Connecting the facilities to the existing gas pipeline network The schedule in this study is made based on the assumptions that the above preconditions have been appropriately satisfied at each stage, and that the schedule of one stage does not influence on that of other stages each other. It is assumed that after the completion of this study, while firming up the basic conditions with counterpart organizations, it will take less than 18 months for the final investment decision. The required tasks are the development of the basic project design, EIA approval, and so on. This will, then, be followed by the confirmation of implementation, namely the project will be ready for commencement. In parallel, after order placement of EPC of FSRU, jetty facilities and offshore pipeline, it will take about 33 months for the commencement of FSRU operation after the construction begins. It is now assumed that pipelines for the project will be connected to the existing pipeline network at the S. Dagon Station owned by the MOGE. As described above, if the receiving facility is made ready through this process, after the installation of FSRU, jetty facilities and pipelines, it will require additional two months to be connected to the network. Overall, the period from the launch of the basic plan to the completion of the gas supply system is about 53 months in total. 6-1

142 In addition, climate at the project site and hydrographic and geological conditions will influence on the project development schedule. Additional study will be required in this respect. If the favorable research results are obtained, it will potentially contribute to shorten the project development period. The project development period can be shortened by several factors 1. If it is counted from the start of the basic development plan until its implementation, given the necessary information or agreement related to providing information for the design, 6months 2. If the existing FSRU design, which is previously made by other project, is ready-to-use, 2 months 9 It is possible to shorten the process by 8 months overall, and to achieve gas delivery within 45 months from the basic development plan implementation. Figure6-1: Detailed Schedule for Project Implementation LINE DESCRIPTION Main Milestone 2 Basic planning 3 4 Basic plan 5 Basic design 6 Comfirmation of project base 7 Collect additional data and survey marine data 8 Write EIA report 9 Environmental approval received work 10 Inquiry plan 11 Inquiry Select sub-constructor Basic planning Complete of basic design Start of the Project Start of the Construction LNG Receiving Detailed design Final Investment Decision Order sub-constructor Lower side of jetty 21 Contract 22 Detailed design Construction design 23 Site work ipper side of jetty 26 Detailed design 27 Equipment purchase 28 Equipment carried 29 Installation and piping, electrical 30 and instrumentation work 31 Offshore Pipeline Contract 32 Material purchase /on-site installation FSRU 35 Contract 36 basic design 37 detailed design 38 Production design 39 Construction and manufacturing 40 Transport and installation to the site 41 Preparation for operation Whole system inspection 43 Ready For LNG Receiving Source: Prepared by Study Team Followings are the estimated duration of the main tasks: Basic Plan: 3 months Basic Design/Ministries approval: 12 months 9 However, possibility that the existing FSRU design is ready-to-use is not high. It is more probably to need to redesign. 6-2

143 Detailed Design: 6 months (part of this work can begin earlier) FSRU: LNG reception can begin 33 months after order placement Jetty Facilities: complete in 31 months after order placement, in 23 months after the start of construction Setting up of Pipeline and Valve Station: complete in 30 months after order placement 6-3

144

145 Chapter 7 Implementing Organization

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147 (1) Relevant Ministries Agencies and Their Roles The entity mainly controlling the energy sector in Myanmar is the Ministry of Energy (hereinafter, MOE). The MOE has four organizations, namely the Energy Planning Department (hereinafter, EPD), Myanmar Oil and Gas Enterprise (hereinafter, MOGE), Myanmar Petrochemical Enterprise (hereinafter, MPE) and Myanmar Petroleum Products Enterprise (hereinafter, MPPE). Relevant Ministries/Agencies for this project are the MOE, which is in a position to supervise the entire energy sector including natural gas, the MOGE that constructs and operates the pipeline to transport gas and the MPE that could be the major LNG consumer in the future. Electric Power generation and transmission/distributions are supervised by the Ministry of Electric Power (hereinafter, MOEP), which owns two enterprises, that is, Hydropower Generation Enterprise (hereinafter, HPGE) which is in charge of hydraulic and coal-fired power generation, and the Myanmar Electric Power Enterprise (hereinafter, MEPE), responsible for development and operation of gas-fired power plants and supply of gas to IPPs. The transmission part is undertaken exclusively by the MEPE, which also supplies electricity to the Yangon City Electricity Supply Board (hereinafter, YESB) that manages the power distribution network in the Yangon Region and the Electricity Supply Enterprise (hereinafter, ESE), an electric distribution public corporation that manages the power distribution outside Yangon. The YESB is in charge of a public offering process of the LNG import described before. Figure7-1: MOE Organization Chart and Major Roles of Each Division Ministry of Energy (MOE) Energy Planning Department (EPD) Myanmar Oil and Gas Enterprise (MOGE) Myanmar Petrochemical Enterprise (MPE) Myanmar Petroleum Products Enterprise (MPPE) Regulation Adjustment of plans Gas production and distribution management Gas development and production Pipeline construction and operation CNG production Petroleum refinery Production of fertilizer, LPG, CO2 and methane Marketing and sale of petroleum products Source: Prepared by Study Team based on MOE materials 7-1

148 Figure7-2: MOEP s Structure Public corporations under the umbrella of MOEP Electricity generation HPGE (Hydraulic and coal-fired) MEPE (Gas/oil thermal) IPPs Electricity transmission MEPE Electricity distribution YESB (Yangon) ESE (Outside Yangon) Consumers Source: Prepared by Study Team based on MOEP materials (2) Required Capabilities for the Project Implementation Myanmar does not have experience in the LNG import yet. However, each of the related ministries and agencies would partly have the capabilities of supporting this project. The MOE/MOGE has several experiences to develop offshore gas fields such as Yadana, and build and operate gas supply infrastructure for export to Thailand etc. These experiences will be able to contribute to this project and LNG import. Specifically, the MOGE has designed and built the on-shore gas pipeline by itself, thus it would be technically not so difficult for it to construct the onshore pipeline of this project, though the size of the pipeline would be bigger than that of MOGE has experienced before. In addition, the MEPE is also experienced entity to procure natural gas from the MOE and receive gas through the pipeline owned and operated by the MOGE for gas-fired power business. This experience would be able to assist LNG import using FSRU as well. This study suggests project implementation formation, considering to the roles and capabilities of the related ministries and agencies. Firstly, of course, it is suggested that the MOEP/MEPE/YESB and the MOE/MOGE need to collaborate each other. However, based on the fact that the MOEP requires immediate import of LNG to overcome the domestic energy shortages mainly due to the rapid increase of electricity consumption, it would be beneficial to unify the business 7-2

149 contact window of the government, to promote this project quickly. Currently, since the LNG import is mainly for gas-fired power plant, it is suggested MOEP should be the primal contact window for project participants/stakeholders. Although the MOEP has appointed the YESB as the managing body of a public bidding for LNG import, it would be very challenging for YESB because it is an unprecedented project in Myanmar, thus YESB does not have any past experiences. This may become one of the obstacles for companies to enter into this market. In addition, inadequacy of transmission and the distribution network also will be an obstacle in electricity supply, which generates another risk to newcomers. Therefore, to enhance the feasibility of the project, well-organized development plan and project management for not only power generation plants but also transmission/distribution grid expansion are critical. Considering the abovementioned aspects, new organization under MOEP would be required, whose missions are to become the supervisory agency for firepower sector and LNG import, to manage this project and relevant agencies such as the transmission sector of the MEPE and YESB. MEPE is an organization with an implementation capability and robust operating competency for the plan. Furthermore the firepower sector of the MEPE has signed a memorandum of understanding about the gas-fired power generation plan with South Korean and Chinese companies, so it would be suitable for MEPE supervisees the IPP players power plant developing plans. So, MOEP can control the power generation plan by supervising the MEPE to the implementation of the IPP business as planned. This research suggests that the MEPE should be the purchaser of the LNG, which has the contract directly with LNG supplier because of the two main reasons. First, MEPE is already the purchaser for domestically produced natural gas to fuel gas-fired power plants. Therefore, MEPE would be able to play the role in adjusting domestic demand and supply gap for the consumption of gas-fired power plants. Second, sole entity to purchase the natural gas from overseas can be expected to have a bargaining power to acquire the lower LNG price, contributing to supply cheaper electricity price to consumers. About the chartered ship to the FSRU and also the pipeline transportation service, the MEPE would favorably be a contract entity, in terms of consistency of the contract, as well as the unification of the business access posts. Furthermore, capacity developing would be necessary for the MOEP/MEPE, to manage and supervise IPP players, realize the electric power development as planned, and enable the operators to carry on business in a stable manner because the delay of the construction and/or the critical problems of the operation would adversely affect the FSRU project as well. In addition, for the success of the power plant development, financial assistance would be vital. Especially, it is necessary to complement the revenue shortages for purchasing gas, in order to make it cover costs. Financial enhancement by the government guarantee, secured by the MOF, is needed. 7-3

150 Lastly, to involvement of the MOE/MOGE, would be important because of their expertise of the development, and provision of on-shore pipeline to support the MOEP/MEPE. Though this project assumes that the imported LNG is utilized only for gas-fired power plant, LNG would be supplied to other consumers such as petrochemical industry in the future. Considering this, MOE/MOGE should be involved at the early stage of this project to understand the logistics of imported gas and to get the know-how to handle the gas, because the role of these entities will be very important to distribute natural gas to such different users in the future. Based on the above, the chart below shows the suggestion of role sharing in the LNG import & transport project (refer to Chapter 8 for a SPC s detail role). Figure7-3: The Suggestion of Role Sharing in the LNG Import & Transport Project Source: Prepared by Study Team 7-4

151 Chapter 8 Technical Advantages of Japanese Company

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153 (1) Assumable Forms of Participation by Japanese Enterprises Japan s enterprise will participate in the following fields: Procurement of major plant equipment Design and construction of plants Launch, operation and maintenance of plants Technology transfer to local workers Fund securing There will be two ways for how to cover the costs: possessing the FSRU and the pipeline on its own, chartering a ship from the owner of the FSRU and requesting wheeling through the pipeline. The advantage of the owning FSRU is that the possessor can fully customize and upgrade the specifications during the period of operation as per the requirement of the terminal. This allows for the configuration flexibility with respect to regasification capacity, layout, shore integration and any future enhancements. While this case has the disadvantage in increased work burden including higher initial investment, and all ship management tasks to be conducted by the possessor, such as the arrangement and administration of crew (refer to the following table). Table8-1: Comparison Result by Type of FSRU/PL Possession Items Owned FSRU Chartered FSRU Customization High Middle/low Amount of Initial Investment High Low Work Burden High Middle/low Source: Prepared by Study Team Based on the above study, this project adopts the charter model, which holds down initial investment for the counterpart in the case of FSRU, and has low work burden to the counterpart when initially installing FSRU. On the other hand, as to the land pipeline as mentioned in Chapter 7, it will be effective to construct a state-run grid because in most cases, grids are not built by private companies for their inherent purposes, but are built as national common-use infrastructure in nature, when building pipelines in terms of responding to wide-ranging gas demand not only for this electricity generating purposes, but also for commercial use except electricity generation in the medium and long run. In addition, it will be desirable for private operators and the entire economy in Myanmar for MOGE with a track record of construction and operation to own a pipeline for constructing and operating it, though the initial costs are higher, considering that the compulsory purchase of land will become an issue for private operators in building 8-1

154 pipelines. MOGE will be incentivized with increased profit through wheeling and an increase in the utility value of the entired related infrastructure, with the extended pipeline networks and capacity. Regarding offshore pipelines, which are different from land pipelines in nature, it is difficult to plan their diversification and development except their main purpose, and exiting sea pipelines were commissioned to foreign private companies. Considering that MOGE has no experience of constructing them, it will be desirable for the counterpart to use wheeling in view of the work and initial investment burdens, as in the case of FSRU. An unit of SPC in which Japanese companies invest is considered to have a possession and operation of the FSRU and offshore pipeline. The SPC receives LNG from tankers, does regasification of the LNG and transports gas to such points of delivery as designated by users. Furthermore, concerning the scheme of the FSRU chartering contract between SPC and the counterpart, there will be two scheme: merchant and tolling agreements. Merchant agreement is a scheme for providing gas procurement and sales, combined with chartering FSRUs. It is a one-stop solution for the counterpart to realize LNG importation. This scheme is adopted by land re-gasification facilities and equipment. However, there are a limited number of business operators (or consortiums) that can carry out LNG procurement, FSRU procurement and operation at the same time. Further, no FSRU chartering business has adopted this scheme to our knowledge, which may increase the risk in financing arrangements or become costly business. On the other hand, tolling agreement consists of chartering FSRUs, re-gasifying the LNG that the counterpart procured, and supplying the gas to the counterpart. This scheme has been often taken up by FSRU projects in other countries. It will realize the business in tandem with LNG procurement from an LNG portfolio supplier that has a low procurement risk. Please note the buyer of gas from an LNG portfolio supplier will be MEPE, which has operated gas-fired power plants, in addition to procuring gas domestically. (Refer to Chapter 7 for details) Based on the above, the table below shows a plan of introduced equipment and player make-up, assumed by this study team. 8-2

155 Figure8-1: Introduced Equipment and Player Make-up (Planned) Source: Prepared by Study Team Regarding financing, it is necessary for FSRUs, the pipeline and the SPC to secure funds as the initial investment for the project. The SPC is assumed to raise funds from Japanese financial institutions, including Export Credit Agencies and commercial banks, as well as investment from Japanese and foreign companies. In addition, it is assumed that MEPE as the off-taker or its upper organization MOEP will supply equity in the SPC because such financing may help enhance the prospect for realizing this business from the viewpoints of easing the investment burden and risk that foreign companies may face, as well as lowering the risk bar for the off taker arising out of cancelation of the project. However, in general, under this arrangement, conflict may occur about how to handle the assets for liquidation after the project is over, or the realistic and best structure in terms of tax cannot be made because of government involvement. (For instance, there may be restrictions which do not allow establishment of an SPC in low-tax countries like Singapore, making the requirement that it must be a Myanmar s corporation possible.) Also, quick decision-making can be compromised by governmental influence over operating the SPC. The above can be disadvantageous to this arrangement. As after all, this is only one option of schemes. Therefore, it is necessary first to judge whether MOEP intends to invest in this project or not, from the viewpoint of acquiring technology/know-how for similar projects in the future. If so, it will be necessary to investigate the ratio of ownership, roles, rights, obligations, etc., of each partiers. If MOEP invests in the SPC, utilizing the back finance of the funds by ODA to secure financing, will be useful bringing down the initial costs of the Myanmar side, and in reducing the risk of investors (a risk of investment shortage). Furthermore, it is necessary to study how to procure LNG and finance FSRU chartering. As mentioned in Chapter 7, it will be desirable to enter a contract with MEPE in consideration of integrating the contacts for actual work of procuring LNG, chartering FSRU, and pipeline wheeling. MEPE will be able to reduce the initial investment in equipment and facilities related to receiving LNG, by chartering FSRUs under the scheme that was proposed by this study. Also, as the imported LNG through this project will be eventually used for generating electricity, fees for use of FSRU and the pipeline should be paid 8-3

156 basically by government subsidies. However, given that it is not easy to raise electricity rates due to objection among the population, and that government finances are tight, there is a possibility that this project cannot secure enough profits to be viable only with additional funds from the Myanmar side (a possible gap between costs and profits). Viability gap funding, as a measure to help fill the gaps, the back financing of this fund by ODAs can be utilized. With the above issues sorted out, the table below shows a project scheme Figure8-2: Project Scheme (Planned) Source: Prepared by Study Team 8-4

157 (2) Superiority of Japanese Enterprises in Implementing this Project (Technologically and Economically) Japanese enterprises have the following superiority: a. Provision of highly reliable long-term operation services for the FSRU Since the contract period of providing ship chartering and operation services persists over a long period of time, ranging from a few years to 20 years, stability and reliability in every aspects of business are required to continuously provide services during the contract period. As the world s largest LNG carrier, Mitsui O.S.K. Lines has top-level know-how of NG transport, handling technologies and vessel management know-how all essential for the operation of the FSRU. While there are currently only a few companies that enjoy a track record of offering operation services of regasification through FSRU on a global basis, Mitsui O.S.K. Lines has accumulated unique know-how on FSRU since participating jointly in the shipboard LNG regasification project on the east coast of North America ( Neptune project ) with a partner shipping company in Norway from 2006, and independently signed a long-term charter party for FSRU with GDF Suez S.A., a French company, in October 2013, to make a full-scale entry into the FSRU business. Among FSRU operators, Mitsui O.S.K. Lines has more stable financial grounds compared with other providers, and high reliability in provision of extended services. b. Support in fund securing To implement the project, fund arrangement of finance costs of the project is necessary, and more importantly, such funds can be invested to the SPC. SMBC, a Japanese financial institution, has a strong track record in LNG-related project finance including FSRU, and may possibly take part in this project as a financial advisory, or in form of lending. Having a record of participation in the investment in two LNG ships with shipboard regasifiers (FSRU) (investment ratio: 48.5%) in the Neptune project described above, Mitsui O.S.K. Lines may have a possibility of investment in this project as well. In addition, as an advantage to Japanese enterprises consideration of using ODA by the Japanese government and Japanese Export Credit Agencies as a fund source for the SPC in terms of businesses that benefit Japan.. Such experience enables to offer services to solve operational issues for the entire LNG supply chain, including financing. 8-5

158 (3) Measures Necessary to Help Japanese Enterprises Win Contracts As mentioned in Chapter 7, it is necessary to establish a system for managing the procurement of LNG in all stages to plan electricity generation for enhancing the feasibility of realizing this business. Japan s proactive support to the counterpart through enterprises that are technologically, economically versed in operations from LNG procurement, to electricity generation planning will lead to swiftly and properly assess and identify the entire project, matching with the request to promptly introduce LNG imports. Specifically, such support includes assistance in collaboration among ministries and agencies on cross-sectional examination issues, building relevant bidding processes and a study of the evaluation items and criteria. This support will lead Japanese companies to secure contract by incorporating their superior specifications and scope of works into bid documents and conditions to reasonable extent that can eventually demonstrate a greater advantages and competitiveness. 8-6

159 Chapter 9: Potential Funding Source for the Project

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161 (1) Reviewing Fund Sources and Financing Plans In implementing this project, funds for investment for FSRU and construction of pipelines as well as for operation and maintenance of such equipment are required. However, a specific funding source and financing plan have not so far been confirmed through interviews with governmental agencies of Myanmar. As for the bids for the import of LNG, invited by YESB, the study team learned that no concrete proposal on financing source has been made. Because substantial amount of costs will be incurred for introduction of the project and purchase of LNG in the early stages and during the operation period, securing appropriate funding sources is a highly crutial factor to materialize the import of LNG. Given that FSRU and associated equipment in this project are necessary for natural gas used for gas-fired power generation, costs and expenses related to the project are assumed to be covered primarily by (1) increase in electric tariff and (2) an increase in government subsidies. However, in light of the fact that a hike in electricity rates announced in October 2013 was temporarily suspended due to protests from the people, it is not considered easy to increase electric tariff. Furthermore, it would be also difficult to significantly raise government subsidies in view of the fiscal status of Myanmar. Therefore, utilization of loans and investments from foreign governments and companies is expected to play an important role in fund-raising. Specifically, three means can be deemed as potential sources: A. Official Development Assistance (ODA) by foreign governments, B. investments and loans from foreign companies, and C. finance utilizing investments and loans and guarantees from export credit agencies and international organizations such as the World Bank. A. ODA by foreign governments Myanmar government has received ODA from multiple foreign governments, and such assistances contribute to a wide range of sectors including infrastructure development and education. The Japanese government has also provided ODA totaling of approximately 600 billion yen in the form of past yen loans and free financial aids. In addition, the Japanese government takes a positive attitude about ODA for Myanmar, as the government confirmed a commitment to the provision of ODA totaling 91 billion yen by the end of fiscal year 2013 in the Japan-Myanmar summit in May B. Investments from foreign companies As Myanmar and its neighboring countries utilize business scheme called IPP, in certain infrastructure projects, private sector owns/operates infrastructure using their investment funds without a government doing business by itself nor holding assets. In many cases, foreign companies establish special purpose companies and invest in these companies to set up and operate projects over a given period of time. 9-1

162 C. Loans and guarantees from export credit agencies and international organizations Governments provide funds through direct finance and/or guarantees to loans from private financial institutions through export credit agencies and international organizations. (2) Feasibility of Fund-Raising Although it seems that a financing plan for this project has not been decided as described above, the following shows possibilities and challenges of fund-securing by the Japanese government/organizations/companies in terms of the fund sources presented in Section (1). This section is based on the assumption that Japanese companies execute projects related to FSRU and associated equipment, assuming the figure of business scheme in Chapter ODA by the Japanese Government The following two structures can be assumed as a fund-raising mechanism utilizing ODA by the Japanese government. a. Equity back financing When MOEP intends to make investment into a SPC, the investment funds would be required as initial investment cost. ODA loans can be utilized as back finance for these investment funds. Detailed schemes including setting of the borrower are yet to be studied. For example, as a possible scheme, Ministry of Finance and Revenue ( MOF ) can be the borrower of loans from the Japanese government and on-lends the funds to MOEP (or a government-run company including MEPE) (the same shall apply to the following Viability Gap Fund explained below). Figure 9-1: Equity Back Financing Scheme Source: Prepared by the Study Team 9-2

163 b. Back finance of Viability Gap Funding (VGF) Generally, VGF is a subsidy provided by government to make an unprofitable project commercially viable. This scheme is to provide back finance for such VGF through ODA loans. Since LNG imported under the project is eventually used to generate electricity, expenses for using FSRU and pipelines should be primarily covered by an increase in electricity rates and government subsidies. However, it may be possible that the sustainable level of revenue cannot be obtained (there will be a gap between costs and income) because of difficulty of an increase in electric tariff and restriction in Myanmar government s fiscal budget. This scheme can be used to fill part or full of the gap. Although a specific lending scheme needs to be further studied, a mechanism with certain realities to provide finance for the part of the cost increase due to the introduction of this project, which cannot be passed on to electricity price or subsidy, in the form of covering the price of electricity. Nevertheless, in the case where the loan is made available to fill such gap, it will be necessary to establish a system in MOEP and/ or MEPE to precisely recognize the gap between costs and income by taking into account the cost with relation to the project as a part of electric-generating cost. This also needs to be studied in the light of the Japanese government s applicable criteria in implementing ODA. In addition, it should be considered whether the finance can be linked to payment of ship charter and usage fees. Even if it were possible, it would be necessary to implement a transparent structure which can secure clear linkage (e.g., by use of an account used exclusively for loans for this project and payment of the costs and expenses from the account). Figure 9-2: VGF Scheme Source: Prepared by the Study Team In either scheme, there will be two merits from the viewpoint of Myanmar government. 9-3

164 First, the cost of loan interest can be minimal since interest rates of ODA loans are usually set at a low level. For ODA loans extended by the Japanese government for which the agreement was signed with Myanmar government in January 2013, the lending rate is extremely low at 0.01%. Second, cash requirement in a short run will be reduced by setting a grace period in the repayment schedule to ease the immediate cash requirement on Myanmar s government and defer the financing burden on repayment of the loans to the future. The above-mentioned ODA extends the grace period of 10 years and the repayment period of 40 years. Some comments by Myanmar government in the interview under this study indicate that this feature would be effective for Myanmar. The selection of the scheme needs to be considered in light of the intention of the MOEP to invest in an SPC, a level of gap between an increase in costs with relation to LNG import and increase of electricity tariff. Yet, back finance of VGF seems to be the more advantageous option because (a) in equity back financing, the use is limited to certain portion of investment by Myanmar s government (If MOEP makes a 25% investment in the SPC on the assumption described in (3) below, the amount is approximately 50 million U.S. dollars at most.) and (b) in VGF, conditions which would be acceptable for investors in terms of payment of ship charter and usage fees for pipeline during the entire term can possibly be established, which can make the project feasible and bankable to investors and loan providers for the entire project period. However, further analysis is required after clarifying the roles of ministries and agencies in Myanmar government to see whether the government can establish a scheme that can meet VGF s applicable requirements as stated above. Moreover, since ODA is a form of financing provided to help developing countries grow their society and economy and improve their welfare, it will be important to formulate a highly feasible implementation plan of the entire value chain including import of LNG through generation and transmission of electricity, so that the realization of this project does contribute to improvement of the nation s economy and welfare of the population. 2. Investments by Japanese Companies Japanese enterprises will set up special purpose companies, to own, maintain, operate FSRU and associated equipment, and lease the FSRU and the pipeline to MEPE. The cash required for Myanmar government on initial capital expenditure can be reduced by inviting investments from Japanese companies. 9-4

165 Figure 9-3: Investments by Japanese Companies Source: Prepared by the Study Team In order for foreign companies including Japanese companies to make investments, the following requirements need to be satisfied. a. Development of a framework for charter contract that meets international standards. In order for Japanese companies to carry out investments, a framework with Myanmar s government needs to be built in terms of appropriate risk sharing in charter contract that meets international standards. b. Credit enhancement by Myanmar government including MOF If a state owned entity is an off-taker, credit enhancement may be required to attract foreign financial institutions, including guarantees provided by the MOF for performance of contractual obligations of such state owned entity. c. Appropriate level of investment income In order for Japanese companies to carry out investments, it is required to set charter fees and pipeline usage fees that ensure appropriate returns on investments taking the country risk of Myanmar into account. 3. Loans/ Guarantees from Japanese Export Credit Agencies Loans and guarantees by Japanese export credit agencies (Japan Bank for International Cooperation/Nippon Export and Investment Insurance) enables investors to secure funding required to implement the project and an improvement in the rate of return on investments for investors described in B. above. From Myanmar s point of view, initial cash required to implement the project can be reduced. 9-5

166 Figure 9-4: Loans/ Guarantees from Export Credit Agencies Source: Prepared by the Study Team It is expected that credit enhancement by MOF and other agencies of the Myanmar government as described in B above may be required in order for Japanese export credit agencies to provide loan and/or guarantee. However, according to Myanmar s MOF, Myanmar has not yet offered a guarantee which covers contractual obligations of state owned entities or a debt guarantee. In view that such mechanism can be extended to other infrastructure development in the future, it is also desirable to establish an appropriate framework. In addition, it will be necessary to build an appropriate legal framework including enforceability of security. The above issues are related to raising funds necessary for FSRU and associated equipment. It is important to also consider financing for purchase of LNG, which requires a larger amount of funds than those funds. (3) Cash Flow Analysis 1. Financial Analysis The feasibility of the business under the project, which is to construct and operate the FSRU/pipeline and transport the supplied LNG to the spots designated by the consumers, has been identified. The cash flow was developed under certain preconditions to work out the NPV, B/C and FIRR. a. Preconditions of Financial Analysis The following table shows the preconditions set for the project. 9-6

167 Table 9-1: Financial Analysis Preconditions Project period 25 years Research/Construction period 5 years Operating period 20 years Regasification capacity 360 mmscfd Profit Charter FSRU, Jetty, and offshore pipeline (including fuel cost of FSRU operation of USD 10.8 million per year: assumed LNG unit price: approx. $14/mmbtu):$135 million/year Initial cost 624 MMUSD Operating cost 24.0 MMUSD /year Capital ration 25% Interest rate on borrowing Initial rate 10% (incl. handling fee), 3% during the loan period Payback period of borrowing 18 years from date of draw down Depreciation period FSRU, jetty:20 years, Pipeline: 10 years (Straight-line depreciation for both. Salvage value after the closure of the business is not estimated). Corporate tax rate 25% Commercial tax 5% Custom duties 0.5% Hurdle rate of FIRR 10% (Long-term interest rate in Myanmar as of October 2012) Sensitivity analysis Case1:The location of the FSRU is 100 km offshore (80 km for the base case) Case2:The operational period is 10 years. Sources: Prepared by Study Team b. Result of evaluation The following table shows profitability of the project. Table 9-2: Result of Calculation of Performance Indicators NPV(discount rate 12%) 132MMUSD B/C (discount rate 12%) 165% IRR 11.5 (Long-term interest in Myanmar 10%) Case1:IRR_offshore100km 10.5% Case2:IRR_operation period is % years Sources: Prepared by Study Team 9-7

168 This study has revealed that the project has good viability in terms of financial aspect even if a chartering cost per year is USD 165 million and even if the FSRU is installed 100km offshore, reaching the level of the long-term interest of 10% in Myanmar. If the duration of operations is cut by 50% to 10 years with the chartering cost unchanged, IRR will remain at 6.9%. If the chartering cost is changed to USD 200 million per year, the IRR will be 10.0%. (Refer to the table below.) Table 9-3: IRR Analysis for Several Chartering Cost (Case2: The Operational Period is 10 years) chartering cost (USD$1 million) IRR % % % % Sources: Prepared by Study Team The tables below show the project cash flow. Table 9-4: FIRR Calculation Cash Flow (Base Case) Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD IRR % 11.5% Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD Sources: Prepared by Study Team 9-8

169 Table 9-5: FIRR Calculation Cash Flow (Case1: The Location of the FSRU is 100 km) Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD IRR % 10.5% Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD Sources: Prepared by Study Team Table 9-6: FIRR Calculation Cash Flow (Case2: The Operational Period is 10 years) Sales Amount MMUSD Operation Management Maintenance Cost MMUSD Depreciation cost MMUSD Income MMUSD Repayment of Interest MMUSD Profit for the Quarter before Tax MMUSD Corporation Tax MMUSD Profit for the Quarter after Tax MMUSD Cash Inflow MMUSD Cash Outflow MMUSD DSCR Fixed Property MMUSD IRR % 6.9% Sources: Prepared by Study Team 2. Economic Analysis a. Potential profit generated by the project The advantage that the implementation of the project could bring to the economy of Myanmar is the financial benefit generated through increased electricity supply and avoidance of power outage. To calculate the economic benefit, it is necessary to evaluate the difference by comparing the effect of the project taking place by setting the case that the project does not happen as a baseline case. This study made rather conservative assumption that in the case where the project did not materialize, there will be emphasis on the promotion for additional provision of hydropower generation plants, generating the equivalent amount of electricity per year. However, as described in Chapter 1, Myanmar has a dry season for 3 months, and therefore it was also presumed that there will be rolling power cuts caused by electricity shortages, deriving from the inability of hydropower generation especially in the 9-9

170 last half of the dry season. The difference in economic effect between the baseline case and the case the project is implemented can be the difference created by avoiding power failures during the dry season, as well as the difference between the construction and operational costs of hydropower plants and the operational costs of gas-fired power plants. Capex and opex of new onshore pipelines that MOGE may build and own are assumed to be covered by MOGE, not by the project. b. Evaluation of economic feasibility On the basis of the above, the preconditions for economic analysis are set as below. Table 9-7: Preconditions for Economic Analysis Project period 25 years Research/Construction period 5 years Operation period 20 years Regasification capacity 360 mmscfd Profit Reduction of the cost of power cut in last half of the dry season (1.5 months) (Power shortage amount in the dry season 1,555 GWh $1/kWh 10 )-(New land gas pipeline costs + operating costs of gas-fired power plant construction/operating costs of a hydropower plant) Initial cost 624 MMUSD Operating cost 24.0 MMUSD /year Hurdle rate of FIRR 12% (Average figure of opportunity cost in developing countries 11 ) Sensitivity analysis Case1: The location of the FSRU is 100 km offshore (80 km for the base case) Case2: The operational period is 10 years. Sources: Prepared by Study Team To estimate the volume of power shortage during the dry season, the expected output of gas-fired power plants is calculated based on the below assumptions; (i) the electricity volume generated from 360mmscd of gas with a generating efficiency of 40% for 18 hours per day excluding off- peak season for 1.5 months (46 days) (ii) transmission (21%) 1. 10Source: FY 2011 Infrastructure System Export Promotion Investigations (Project formation of yen loan/private infrastructure investigations), Study on the substation rehabilitation project in Yangon, the Republic of the Union of Myanmar (November, 2012) 11 Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations, ADB (2006) 9-10

171 The operating cost of a gas-fired power plant (excluding fuel costs), construction/operating costs of hydropower plant are adapted from the average operating cost in China (gas fired: USD10.88/kWh, hydropower: USD 36/kWh) in the Projected Costs of Generating Electricity 2010 Edition by the OECD. For the fuel cost of a gas-fired power plant, this study team used the price deducing USD 0.5/mmbtu (=equivalent of the transport cost between Myanmar and Japan, assuming it will be transported from the Middle East,) from Japanese LNG prices described in the New Policies Scenario in the IEA s World Energy Outlook The price varies at USD 14/mmbtu during the operational period. c. Evaluation results The profitability of the project is as given below. Table 9-8: Result of Calculation of Performance Indicator NPV(discount rate 12%) 632 MMUSD B/C (discount rate 12%) 503 % IRR 28.0 % (opportunity cost for developing country 12%) Case1:IRR_100 km 26.2 % offshore Case2:IRR_operational 26.6% period is 10 years Sources: Prepared by Study Team As shown in the above table, the result exceeds the above 12% opportunity cost under the both cases where we assume FSRU is located 100km offshore and project period of 10 years. However, the calculation of the above performance indicators are mostly based on various assumptions, as including matters and elements outside the scope of the study and therefore contains some uncertain elements in its result. It is necessary to conduct further detailed study in the future. The cash flow of the project is shown as below. 9-11

172 Table 9-9: EIRR Calculation Cash Flow (Base Case) Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,844 1,829 1,834 1,838 1,842 1,847 1,851 1,856 Cost of gas MMUSD 1,538 1,523 1,527 1,532 1,536 1,541 1,545 1,550 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD EIRR % 28.0% Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,860 1,865 1,869 1,874 1,876 1,878 1,880 1,883 1,885 1,885 1,885 1,885 Cost of gas MMUSD 1,554 1,558 1,563 1,567 1,570 1,572 1,574 1,576 1,579 1,579 1,579 1,579 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD Sources: Prepared by Study Team Table 9-10: EIRR Calculation Cash Flow (Case1: The Location of the FSRU is 100 km ) Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,844 1,829 1,834 1,838 1,842 1,847 1,851 1,856 Cost of gas MMUSD 1,538 1,523 1,527 1,532 1,536 1,541 1,545 1,550 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD EIRR % 26.2% Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,860 1,865 1,869 1,874 1,876 1,878 1,880 1,883 1,885 1,885 1,885 1,885 Cost of gas MMUSD 1,554 1,558 1,563 1,567 1,570 1,572 1,574 1,576 1,579 1,579 1,579 1,579 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD Sources: Prepared by Study Team Table 9-11: EIRR Calculation Cash Flow (Case2: The Operational Period is 10 years) Profit from Avoidance of Power Failure MMUSD 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555 Profit from Ggas-fired Power Generation MMUSD Cost of Ggas-fired Power Generation MMUSD 1,844 1,829 1,834 1,838 1,842 1,847 1,851 1,856 1,860 1,865 Cost of gas MMUSD 1,538 1,523 1,527 1,532 1,536 1,541 1,545 1,550 1,554 1,558 Cost of Hydropower Generation MMUSD Profit from Hydropower Generation MMUSD Benefit Total MMUSD Initial Investment Cost MMUSD Operational Cost MMUSD EIRR % 26.6% Sources: Prepared by Study Team 9-12