The New China Silk Road

Changing the face of oil & gas in Southeast Asia


China is seeking more efficient ways to deliver oil and gas, bypassing the Malacca Strait. Photo: EPA 

There has been much commentary surrounding the development, conception, and now the roll out of the New Silk Road (One Belt One Road) by China. Much of this commentary has focused on whether it will happen and the commercial viability of such an audacious plan. 

In my view, it is already happening and what commentaries miss is that the scope of the New Silk Road extends beyond simply building infrastructure. It is a logistics and transportation network that focuses on those regions promising high economic growth with strategic resources, such as iron, concrete and gas that also links manufacturing with key markets. Furthermore, it does not only connect East and West but joins Asia with Southeast Asia – a market that has 600 million people and is nine times the scale of Central Asia.

Myanmar has a pivotal role to play in this new strategic footprint and has the potential to become the West Coast of China that bypasses the risks associated with trade through the Malacca Straits. Before going on to the reasons why Myanmar will play a key strategic role, we must first get an understanding of what the NewSilk Road is.

A Bit of History – Malacca Straits, a natural competitive advantage or man-made?

The first version of the “Silk Road” was based on developing inland routes, connecting the west with the east. The transportation network that passed through the likes of India and Indochina, enabled China to become a leader in international trade as it was at both the beginning and end point of key transport nodes. These nodes were efficient and linked key trade markets in Asia and Europe. This was also assisted by the poor conditions in hazardous maritime transportation sector of the time. As shipping conditions improved and navigation more trustworthy, the Straits of Malacca became more navigable. Trade routes shifted from the inland regions to the southeast coastal parts of the region, with Singapore taking advantage of this shift.

Singapore has played an important role in assisting shipping and oil &gas exploration expansion in the ASEAN region. Shipping routes, as well as its location to regional oil fields, has enabled Singapore to become an important hub in terms of finance, logistics, and marine transportation to support this sector. Being a small country and being able to leverage its key strategic location, particularly with regards to the Malacca Straits, it could capitalize on available funds for infrastructure development. This has given Singapore a competitive advantage over the likes of Malaysia, Indonesia, and Thailand who did not have access to such funds. But this is all about to change. The Asian Infrastructure Investment Fund and China’s $63bn commitment to the building of the new Silk Road (One Belt, One Road Strategy) will level the playing field in terms of key infrastructure and at the same time question the once strategic importance claimed by the Malacca Straits. This, in turn, will also bring about a change in how and from where the offshore oil &gas sector will receive support services as well as change how they will manage their supply chains.

It would appear that using the Malacca Straits was not always a first option for trading countries and was regarded as a less efficient transport corridor. The debate has gone on for over 400 years, with the first thoughts of bypassing the straits with a canal system, similar to what we have in the Suez Canal, through Southern Thailand being spoken of in 1677. King Narai was the first to explore the possibility of building a waterway connecting Sungkhla and Myanmar, which would jointhe Gulf Of Thailand with the Andaman Sea. This was to be known as the Kra Canal orKra Isthmus Canal, but referred to as the Thai Canal in the One Belt, One Road strategy discussions. Cost and expertise were reasons why this development was put aside historically. The idea was revisited in 1793 by King Chakru and essentially renounced for the same reasons given earlier. The issue of the Malacca Straits came to a head in 1897, and agreement was reached between the Thai and British governments not to proceed with the Thai Canal but to protect the regional dominance of the Port of Singapore. It can be arguedthat the use of the Malacca Straits was based on political expediency and not for optimal efficiency.

Current situation

With 15 to 16 million barrelsper annum passing through the Malacca Straits and the cost of using the Straits being put at approximately US$0.10 per barrel, alongside other issues raised earlier, there is now a renewed look at resurrecting the Thai Canal to supplement and enhance the progress that has been made on delivering the One Belt, One Road strategy.

There have been reports that an MOU has been signed on the 15 May 2015, between China and the Thailand Infrastructure Investment Development Company in Guangzhou. The MOU covers a feasibility study and projects that the cost of the canal would be in the region of US$20billion and take 10 years to construct. Although there has been a denial by both the Chinese and Thai governments, there are a number of indicators that the project is progressing. These include the following:

  • The “People’s Daily” reported on May 20th that a senior official has stated that the Thai Canal is considered an important part of the One Belt, One Road Strategy
  • Chinese Oil Companies have already activated the key oil &gas pipeline connecting Myanmar with China in Yunnan province
  • Precedent has now been set with the commencement of the Nicaragua Canal funded by Chinese private enterprise but also part of the One Belt, One Road strategy (this canal is more expensive and longer and connects the Pacific and Atlantic Oceans)

The canal will connect key ports, special economic zones, and roads between Thailand and Myanmar that are in the process of being developed.

The first Silk Road based on inland routes and to the north enabled China to be the leader in international trade as it carved out key transport nodes. These transport nodes were efficient and linked the key trade markets between the east and Europe. This was partly assisted by the poor conditions in maritime transportation, not just in vessel design but in infrastructure support. This all changed with improvements in the maritime sector and trade routes shifted to the southeast coastal region of the country as shipping grew in stature– with Singapore taking advantage of this shift.

China responded to this shift in shipping and maritime paradigms, clearly demonstrated by their recent achievements in shipping, all of which has set China to re-emerge as the world’s leading trade nation. Some of these achievements include the following:

  • Shanghai and Hong Kong are world leading cargo hubs.
  • Of the top 10 container ports, 7 are along the Chinese coast.
  • China shipyards are more competitive and now lead the likes of Singapore.

Why would China want to go back to inland routes?

With all this progress having taken place, the obvious question is why would China want to re-instate the inland route? I would contend that the answers provided to this question highlight the challenge that will soon confront the likes of Singapore and why countries such as Myanmar can replace Singapore’s current status as being China’s West coast. The reasons for the change include:

  • With China losing its low cost advantage in terms of manufacturing, it needs to structurally align its manufacturing to be closer to low cost producers such as Myanmar, Laos, Cambodia, Bangladesh, and Vietnam. Not only do these countries offer a source of low cost labour, it also helps realign the economic disparity created by the maritime road impact on China’s growth over the last decade, during which we have seen population shifts in the region move from rural to urban that has created an economic disparity.
  • It returns capital and employment to the impoverished western region and enables the reducing of social tensions that have emerged during the China growth phase.
  • Strategically wants to replace maritime trade with inland trade as it will reduce its perceived threat of USA control over sea routes via their allies in Singapore, Japan, and Korea. Consider this in the light of the ongoing territorial disputes in the South China Sea. Arguablythe Silk Road or inland route strengthens China’smaritime position as it enhances trade capability to Europe.
  • Reduces the dependency on maritime or sea trade and energy imports.
  • It eliminates the security risks, particularly with regard to oil & gas supply, associated with increased piracy and dangers in using the Malacca Straits.

  1. Drivers in the region that are specific to oil &gas that shape the thinking

Approximately 17% of the global daily oil production is transported via the Straits of Malacca. This delivers oil from the Middle East to the likes of China, Japan, and South Korea. Issues that are becoming problematic with this trade route include:

  • Increasing piracy in the Malacca Straits, hence the push for an adjustment to the Maritime Silk Route to that of the “String of Pearls “route shown in the map above,
  • Longer steam times between ports,
  • Port and channel congestion – particularly in Singapore.
  1. Significant oil &gas exploration activities in the Bay of Bengal and Andaman Sea, particularly in the countries of Myanmar and India that would address Chinese future energy security needs. The Silk Road brings all of these markets closer.

The Importance of the Thai Canal and Myanmar’s role

The canal is central to the String of Pearl route and places Myanmar at the center of oil &gas trade and shipping. Issues that are key considerations for China looking to bypassing the Malacca Straits include: ,

  • The Malacca Strait has a significant chokepoint at the Phillip Channel with the canal narrowing down to a width of 2.8km and runs for a length of just over 2km.  When one considers that 200 vessels per day / 60,000 vessels per year pass through the channel, this risk profile presents problems when taking account of potential for collisions, delays and piracy.
  • With 25% of world oil trade passing through Malacca, the Thai/Myanmar solution strategically presents an alternative route that reduces the risks associated with the Phillip channel chokepoint.
  • Currently 70% of China’s energy (Oil and Gas) imports pass through Malacca, placing their energy security at risk. Myanmar’s role thus reduces the dependency on maritime / sea trade and energy imports via Malacca.

Why is Myanmar an important player

  • New road, rail, and air Infrastructure provides the central city of Kunming better access, particularly ocean access, to the likes of Myanmar, India, and Europe. It appears that  Kunming is already replacing Singapore as SE Asia transport hub with Singapore becoming a feeder into the hub as will be China, Myanmar, Laos, and Vietnam. From a Chinese and Kunming perspective, the better access to Dawei and Kyaukpyu in Myanmar draws a major trading partner close, India.
  • Deep water port facilities and oil&gas pipeline at Kyaukpyu in Myanmar, connecting Yunnan Province and has already seen the start of shipping direct from China to Kyaukpyu via the Malacca Straits. This has significantly reduced steam time as they can now bypass Singapore, but does not address the security and other issues associated with the Straits.
  • China has already invested heavily in oil and gas pipelines that run through Myanmar, as an alternative energy route. The Kyaukphyu / Yunnan Province pipeline is indicative of how China is using infrastructure development within Myanmar to promote energy security.
  • Dawei port development with related improved infrastructure linking it with Bangkok, again improving shipping and transport times.
  • The opening of the Chongqing rail route, the cheapest of 5 railway routes from China to Europe, with this mode of transport being twice as fast as shipping and is a more effective method of moving hi-tech and automotive parts.
  • Myanmar is strategically located between two economic giants – China and India, and offers access to a 2.3 billion consumer base across all its neighboring countries. Additionally, in the domestic market, opportunities abound for investors in the booming automotive, construction, and electronic sectors, with demand being largely met through imports currently. Large multinational companies (MNCs) such as Lafarge and Ball Corporation have invested in the country’s manufacturing sector mainly to cater to local demand.
  • With a population of over 50 million and a healthy GDP growth rate of 8.05 percent, according to the International Monetary Fund (IMF), there are significant untapped opportunities in the domestic market, which is gradually transitioning away from being a primarily agriculture based economy. The industrial sector’s share of GDP in Myanmar increased from 11 percent in 2008 to 21 percent in 2014.
  • Low labour wages and favorable tax exemptions allow firms to lower their operating costs, reinforcing their competitiveness, especially in the regional market. To highlight the significant benefits, if not all, under the Foreign Investment Law, investors can claim a corporate tax exemption of five years and a custom duty exemption on imported raw material for the first three years of commercial operation.
  • Under the Special Economic Zones (SEZ) Law, five to seven years of corporate tax exemption is granted depending on the business type and custom duty exemption is granted for imported raw materials and machinery for the first five years of commercial operation. Timing remains critical and investors are certainly rushing in with the total manufacturing FDI in 2014-15 amounting to $1.5 billion, a third of which comes from investment in Thilawa SEZ.

Challenges for Myanmar to take advantage of these developments

  • Infrastructure continues to be a major challenge in the facilitation of upgrades and improvements in the manufacturing sector. Although infrastructure development projects are underway, approximately 70 percent of the roads are still unpaved. Though sea trade handles more than 80 percent of the overall trade, the ports are not able to cater to big vessels above 20,000DWT, requiring manufacturing firms to maintain high inventory. Being a part of the Silk Road and associated infrastructure development will reduce the challenge and improved transportation routes will reduce reliance on holding large inventory costs.
  • Myanmar is also in dire need of electrical power, which is essential for commercial and industrial development. Currently, almost all manufacturing companies are using back-up power generators due to the unsteady and low-voltage supply of electricity. There are a number of initiatives currently underway to improve supply and the national power grid, with recent announcements by MOEP that significant projects have been agreed, for example a 230MW solar farm with 11 micro grids to support Chin and Shan States. These developments are aided by funds such as a $400-million financial aid package from the World Bank.
  • At this moment there is uncertainty around the "One Road, One Belt" initiative, as no one Country fully understands the purpose of this initiative. Furthermore the initiative is going to require a high level of integration of processes and systems by those countries involved. Cabotage laws / regulations will be key to the success of the maritime leg, and Myanmar can play a leading role in facilitating an alignment of these laws, particularly between China/Thailand and India. Once we have deeper integration along the Silk Road, the cabotage laws will surely come into focus.
  • With ongoing reform in the Country, it is well placed to assist China capture new markets, and with China’s history dating back to the sixties, of being involved in Myanmar, places China at a distinct advantage over Western countries. However, the complex conflict within Myanmar, particularly between the center and the periphery , could well prove to be the real challenge. This is highlighted by the center (mainly Burmese) having the seat of power and access to gas  and the periphery (mainly the ethnic states) having control over jade, hydropower and timber resources. This sensitivity was highighted by the recent clashes with the Kokang rebels and the military.
  • The infrastructure deficits needed to support not only oil &gas but manufacturing, evident in SE Asia, are being addressed by the Asian Infrastructure Fund through the One Belt, One Road strategic initiative. I would anticipate that the impact of this on the regional oil &gas sector will result in:
    • Offshore support services will move from Singapore to Myanmar, Thailand, and India as they will be in closer proximity to new oil &gas fields, particularly in the area of Offshore Supply Base developments,
    • Supply of parts will be more efficient as there will be an integrated transportation service allowing faster  and more efficient supply of parts leading to lower inventory holding costs as new and key markets are made more accessible,
    • Shipping time across the north will be greatly reduced as a result of an integrated transport network, particularly oil supply from the Middle East to China.

With this in mind, I would suggest that providers of field services to offshore operators would need to engage with the Region and start establishing a footprint in countries such as Myanmar, as the landscape in support services is changing. Whilst Singapore may still be the preferred hub at the present time, the dynamics and playing field is about to undergo fundamental change. These changes will assist the oil patch to reduce cost not only by improved supply chain and logistics but by allowing business to develop and commissioned in low cost countries.

In conclusion, the infrastructure deficit currently in Southeast Asia is being addressed by the Asian Infrastructure Fund. This initiative promotes capital and technology investment into the necessary ports and transport routes that will better facilitate trade in the region. Furthermore, the strategic interests of China in terms of securing its energy future, including the new Silk Road and bringing much needed development in rural areas, would see Myanmar as a central and key player. Other beneficiaries of the Silk Road will be the likes of Thailand, Cambodia, and Laos. Myanmar, with its strategic link between China and India, and it’s key location with regards offering a solution to the current chokepoint that is the Malacca Straits, is set to be the biggest beneficiary of thisdevelopment.

Andre Wheeler is CEO of Asia Pacific Connex

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