Myanmar, shunned since the 1990s for tolerating corruption and human trafficking, is set for record foreign investment in 2012 led by oil companies after the southeast Asian nation took its first steps toward democracy.

The country plans its biggest auction of exploration blocks for oil and gas by year-end. Oil & Natural Gas Corp. (ONGC) of India probably will bid, an ONGC executive said in an interview. This month France’s Total SA (FP), one of the few foreign companies that operated under the old dictatorship, said it bought 40 percent of an offshore permit, while Coca-Cola Co. made its first shipment in more than 60 years to Yangon, the biggest city.

“Myanmar is very under-explored,” said Managing Director D.K. Sarraf of ONGC Videsh Ltd., the Indian oil company’s overseas unit. “We think there are large reserves of both oil and gas that are yet to be found,” Sarraf said by phone from New Delhi. “We expect intense competition for assets there.”

The U.S. dropped economic sanctions in July after elections and other democratic moves, and the International Monetary Fund forecast direct foreign investment into the country formerly known as Burma will rise 40 percent to a record $3.99 billion this year. Natural gas is Myanmar’s biggest revenue earner, and without new discoveries it will struggle to reverse an average 15 percent annual depletion in reserves of the commodity.

Cameron Visit

President Barack Obama in July authorized U.S. businesses to invest in Myanmar after President Thein Sein started a democratic process that saw opposition leader Aung San Suu Kyi elected to parliament following years of house arrest and prompted visits by U.K. Prime Minister David Cameron and India’s Manmohan Singh.

The deals carry extra risk for investors in a nation sandwiched between China and India that’s seeking to emerge from 50 years of economic and political isolation. Ranked No. 180 of 183 nations in Transparency International’s 2011 corruption index, Thein Sein’s government will be challenged to find a balance between attracting capital and limiting a flood of money from mostly benefiting an elite.

“Companies will be careful before investing because many policies are still very uncertain, and once in place there’s no certainty they won’t change,” Andrew Gilholm, Singapore-based head of Asia analysis at Control Risks, a global business risk consultancy which also advises companies investing in Myanmar, said in an interview in New Delhi Sept. 13. “A stable and secure investment environment is a long-term project.”

Disclose Payments

Myanmar plans to implement the Extractive Industries Transparency Initiative, which calls for governments to disclose all payments from oil, gas and mining companies, Industry Minister Soe Thane said June 8.

“Pressing the button on transparency will help attract major western companies to invest in Myanmar to a certain degree. It shows the willingness of Myanmar’s authorities to fight widespread corruption and provide much-needed regulatory clarity for foreign investors,” said Siddik Bakir, a London- based energy analyst for the Middle East and South Asia at IHS Energy. “Western oil companies interested in Myanmar’s hydrocarbons industry need safety because they know the risks involved.”

With existing drillers Total and competitors such as Thailand’s PTT Exploration & Production Pcl (PTTEP) pumping more gas than they’re discovering, Myanmar’s known reserves dropped an average 15 percent from 2007 to 2011, to 7.8 trillion cubic feet from 21.2 trillion cubic feet, BP Statistical Review 2012 data show. Production declined 8.2 percent to 11.2 million metric tons of oil equivalent in the period, according to the data.

Economic Frontier

Myanmar, called Asia’s “next economic frontier” by the IMF, is trying to fund the government better by luring companies from BP Plc (BP/) to Royal Dutch Shell Plc. (RDSA) OAO Gazprom, the world’s biggest gas producer, is in discussions with the Myanmar government to participate in energy projects in the country, according to the Moscow-based company’s website, without giving details.

Hundreds of foreign investors met in Myanmar’s capital last week as they scout opportunities in the country even as Coca- Cola Co. and MasterCard Inc. increase their presence.

Fifteen years ago, companies were rushing out. PepsiCo Inc., under pressure from shareholders and activists to withdraw from Myanmar because of human rights violations there, stopped operations in 1997. Apple Computer Inc., Carlsberg A/S, the Walt Disney Co. and Hewlett-Packard Co. were among companies that also pulled out at that time.

Ruby Ban

The U.S. banned the import of rubies from Myanmar in 2008 to protest human rights violations. The ban still exists. The southeast Asian nation is potentially the world’s greatest source of high-quality rubies and jadeite jade.

“Foreign investment is crucial for Myanmar’s economic growth,” Ba Hla Aya, Charge d’Affaires of the Myanmar embassy in New Delhi, said at a conference in India’s capital city Sept. 13. “But the economy faces challenges in terms of shortage of human resources, lack of efficient services and non-availability of adequate financing facilitates.” He said auctions of exploration blocks this year should rise to a record.

Myanmar had its most inclusive elections in two decades on April 1, lawmakers are revamping the financial system and President Thein Sein, who took over from Than Shwe in March 2011, signed a preliminary cease-fire with the country’s largest armed rebel force in a move to end the world’s longest civil war.

House Arrest

Suu Kyi, who was under house arrest for 15 of the last 20 years before she was elected to parliament in April, said during a visit to Europe in June that “transparency is the key” to attracting investments in the oil and gas sector. She cautioned companies from entering into joint ventures with Myanmar Oil & Gas Enterprise, the national oil monopoly, which she said lacked transparency.

Myanmar was listed last year among nations that do not comply with minimum standards in combating human trafficking in an annual U.S. State Department report along with 22 other countries including North Korea, Iran and Yemen. Tension among its more than 100 ethnic groups “remains a potentially destabilizing factor,” the Asian Development Bank said in an Aug. 20 report.

Natural gas exports increased to about $3 billion last year and are set to rise in 2013 as more gas fields and pipelines become operational, according to the Asian Development Bank. Chevron Corp. (CVX), Total and China National Petroleum Corp. are among companies with oil and gas investments in Myanmar.

Offshore Project

Myanmar is estimated to hold between 11 trillion and 23 trillion cubic feet of natural gas and currently produces around 19,600 barrels per day of oil and 1.475 billion cubic feet (41.77 million cubic meters) per day of gas, IHS Energy’s Bakir said. Output may rise by 300 million cubic feet a day next year when PTT Exploration & Production starts the offshore Zawtika project. Projects operated by South Korea’s Daewoo International Corp. in the Rakhine Basin may add 500 million cubic feet a day at a peak rate, he said.

The economy may expand 6 percent this year from 5.5 percent in 2011, the IMF said in its April 2012 World Economic Outlook Report. That compares with 4.4 percent in Malaysia, 5.6 percent growth in Vietnam and 6.1 in Indonesia. China’s is projected to expand 8.2 percent this year, according to IMF.

Myanmar was under military rule for about five decades until President Thein Sein took office last year. The dictatorship led to economic sanctions by the U.S. and the European Union. This resulted in economies including Singapore and Thailand outpacing Myanmar, which became Southeast Asia’s poorest nation.

In 2011, the gross domestic product of Myanmar, with a population of 62 million, was $54.8 billion, while Singapore with 5.2 million people had $180 billion. Back in 1969 Myanmar’s GDP was about $6 billion, compared with $8.8 billion for Singapore, according to World Bank and International Monetary Fund data.

Backtracking on Democracy

President Thein Sein’s attempt to open the economy to foreign investments is not the first time Myanmar’s leadership has taken steps toward restoring a democracy only to backtrack. The junta released Suu Kyi from house arrest in May 2002, prompting the UN

to call it a “major development” toward national reconciliation. By June 2003, Suu Kyi was back in detention.

In September, Thein Sein halted work on the $3.6 billion Myitsone hydropower dam across the Irrawaddy being built with China Power Investment Corp., saying the project was against the will of the people.

“The Myanmar government is genuinely keen to carry out the reform and opening-up process the right way,” Gilholm of Control Risks said. “They want top energy companies to come in with their technology and expertise, not only to explore and exploit resources but also to pass on best practice know-how.”

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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