On July 11, 2012, the United States formally eased certain
sanctions relating to "new investment" in the Union of
Myanmar ("Myanmar") and on the exportation of financial
services to Myanmar.1 This change in the scope of the
Burmese Sanctions Regulations,2 implemented by General
License Nos. 16 and 17 and issued by the U.S. Department of the
Treasury's Office of Foreign Assets Control ("OFAC"),
will allow, under certain circumstances, U.S. individuals and
entities to invest in Myanmar's oil and gas sector for the
first time in 15 years.
The decision to ease sanctions was presaged by announcements by
President Barack Obama and Secretary of State Hillary Clinton in
May of this year and followed the announcement in April by the
Council of the European Union that it was suspending the majority
of the EU's separate, multilateral sanctions program in respect
of Myanmar for a period of one year.3 Australia, Canada,
and Norway also significantly eased their respective sanctions
against Myanmar, and Japan announced that it planned to forgive
some $3.7 billion of Myanmar's debt and resume full-fledged
development aid as a way to support the country's democratic
and economic reforms.
This Commentary will focus on the impact of General
License No. 17 ("GL-17") on investments in the Myanmar
oil and gas sector, including areas in which the sanctions regime
has been unaffected.4
Myanmar Sanctions Regime
Since 1990, the United States has imposed an array of trade
sanctions and restrictions against Myanmar, which derive from
various federal laws5 and Presidential Executive Orders
that are now codified in the Burmese Sanctions
Regulations.6 Some sanctions that initially arose out of
Executive Orders have persisted by way of extensions granted
through presidential proclamations under the International
Emergency Economic Powers Act of 1997,7 which allows the
U.S. President to extend certain sanctions where a national
emergency finding is made. The key prohibition that affected the
oil and gas sector has been the prohibition on "new
investments," which is found in 31 CFR § 537.204 and
originated in Executive Order No. 13047 issued by President Bill
Clinton on May 20, 1997. It is an interesting turn of fate that
President Obama delegated to Secretary of State Hillary Clinton the
authority to lift the ban imposed by an Executive Order issued by
her husband 15 years earlier.
Taken together, these federal laws and Executive Orders
cumulatively have precluded virtually all commerce between the U.S.
and Myanmar since 1997. In addition to prohibiting "new
investments"8 in Myanmar, the Burmese Sanctions
Regulations also prohibited, among other activities, the
exportation or re-exportation of financial services to Myanmar from
the U.S.;9 the importation into the U.S. of any
"products of Burma"; the facilitation, for example
through financing or guaranteeing, of any prohibited transactions;
and attempts to evade or avoid the prohibited
activities.10 The Burmese Sanctions Regulations also
nullified transactions with certain Specially Designated Nationals
and blocked their accounts. Exemptions included activity pursuant
to an agreement in place before May 21, 1997, personal
communications, distribution of information materials, or personal
travel to Myanmar.
Prominent among the industries affected by the Burmese Sanctions
Regulations has been the energy industry, where the Regulations
have had a direct effect on resource development contracts,
resource project management agreements, and equity investments in
resource companies.11 Oil and gas investments of any
form, be they upstream, midstream, or downstream, whether directly
with the Myanmar government or through equity in an investment
vehicle, have been prohibited by the Burmese Sanctions Regulations.
The major exception to this prohibition related to
petroleum-related contracts entered prior to May 21, 1997 (in which
case those activities were "grandfathered," subject to
certain importation restrictions provided in the Burmese Sanctions
Regulations12). However, U.S. persons that were parties
to these contracts were precluded from expanding their investment
beyond their status as of May 20, 1997 unless options to do so were
specifically contemplated by their grandfathered
contracts.13 Another twist is that the exemption also
does not remove the prohibition on imports into the U.S. of
"products of Burma," which would include crude oil and
natural gas from Myanmar.14
Authorization of New Investment by General License No. 17
On July 11, 2012, the director of the OFAC issued GL-17, which
served to lift the prohibition on "new investment" in
Myanmar that had been in place since President Clinton issued
Executive Order No. 13047 on May 20, 1997. A "General
License" authorizes a particular type of transaction for a
class of persons. (In contrast, a "Specific License" is
issued to a particular person or entity on the basis of a license
application for a particular transaction.) Normally, a general
license is issued following a governmental determination, pursuant
to explicit conditions described in the regulations, that national
interests overcome a regulatory prohibition.15 The
operative provision of GL-17 is paragraph (a), which provides
simply: "New investment in Burma by U.S. persons is
authorized, subject to the limitations and requirements set forth
in paragraphs (c), (d), and (e) of this general license."
GL-17 basically operates to reverse the prohibition on all
"new investment" and now authorizes new investment
activities in Myanmar, irrespective of the sector, that have been
banned since 1997.
Pursuant to GL-17, U.S. persons may now, subject to certain
limitations:
- Enter into contracts that include the economic development of resources located in Myanmar;16
- Enter into contracts providing for the supervision and guarantee of another person's performance of a contract that includes the economic development of resources located in Myanmar;17
- Purchase equity interests in the economic development of resources located in Myanmar;18
- Enter into contracts providing for the "participation in royalties, earnings, or profits in the economic development of resources located in Burma, without regard to the form of the participation";19 and Enter into a contract to perform or finance contracts to sell or purchase goods, services, or technology relating to the above activities.20
"Economic development of resources located in Burma" is
defined as "activities pursuant to a contract the subject of
which includes responsibility for the development or exploitation
of resources located in Burma...."21 While
"resources in Burma" includes everything from human
capital to agricultural resources, the Burmese Sanctions
Regulations specifically include as an example "a contract
conferring rights to explore for, develop, extract or refine
petroleum, natural gas, or minerals in the ground in
Burma...."22 In Myanmar, title to all hydrocarbons
vests in the state,23 and the government has the sole
right to explore, extract, and sell petroleum and natural gas.
24 Myanmar law authorizes Myanma Oil and Gas Enterprise
("MOGE"), a division of the Ministry of Energy, to enter
into joint ventures on behalf of the government with private
domestic and foreign entities for the exploration, development,
production, and transportation of hydrocarbons on behalf of the
state.25 Myanmar implements these joint venture
arrangements by entering into the following types of contractual
arrangements through MOGE:
- Production sharing contracts ("PSC") (based on the Indonesian PSC),
- Improved petroleum recovery contract/performance compensation contracts (akin to a risk service contract), and
- Reactivation of suspended fields contracts.
Thus, while there may be other reasons to restructure the energy
sector, there should be no need to redefine or restructure the
current contractual structure to fit the forms of investment
authorized by GL-17 as "new investment" in the
"economic development of resources in Burma."
Limitations on GL-17
Caveat Investor: Burmese Sanctions Regulations Not Repealed.It is important to note that GL-17 does not repeal the broad
sanctions regime comprising the Burmese Sanctions Regulations or
the various federal laws and Executive Orders that underlie the
Regulations, all of which are still in effect.26 As
emphasized in the Treasury Department's Press Release,
"The core authorities underlying our sanctions remain in
place."27 Instead, the President invoked his
authority to waive the ban on new investment and authorized the
issuance of a general license permitting new investments in
Myanmar. GL-17 has no stated duration, either by law or its own
terms, and may be revoked by OFAC at any time, which would have the
effect of reinstating the prohibition on new investments in
Myanmar, including oil and gas investments. Any future action along
these lines would likely be dictated by the pace and direction of
political and economic reform by the Myanmar government, whose
progress prompted suspension of the ban on new investment in the
first place.
Restrictions on Transactions with Ministry of Defense and
SDNs. It is important to observe that GL-17 has not lifted
the ban on new investments with all counterparties in Burma. GL-17
proscribes new investments through the Burmese Ministry of Defense,
including the Office of Procurement, any state or non-state armed
group, and any entity in which any of the foregoing owns a 50
percent or greater interest.28 GL-17 preserves the ban
on new investments with any person named in the Specially
Designated Nationals and Blocked Persons List ("SDN
List") published by OFAC.29
Given the recent political and military history in Myanmar, it is
not surprising that these restrictions on new investments have been
included in GL-1730 and thus should not be taken
lightly. Although the standard avenue of investment in the oil and
gas sector in Myanmar is through public auction or direct
negotiation with MOGE, if a U.S. investor wishes to acquire an oil
and gas interest in Myanmar through farm-in or share acquisition,
it will be important to ensure that any such new investment is
sufficiently diligenced to ensure that it does not trigger one of
these exceptions to GL-17. It also will be important for new
investors to be able to demonstrate to OFAC, if challenged, that
sufficient inquiry has been done to avoid dealings with
unauthorized parties.
Reporting Requirements. GL-17 imposes two sets
of mandatory reporting requirements applicable to "new
investments" that will apply to new investments in the Myanmar
oil and gas sector, and it incorporates by reference the Department
of State's "Reporting Requirements on Responsible
Investment in Burma."31 Notably, the Department of
State, rather than OFAC, has jurisdiction over this reporting
regime.
MOGE Investment Notification. Any U.S.
person who has undertaken a new investment pursuant to an agreement
entered with MOGE must notify the Department of State in writing
within 60 days of its investment.
the moment, the interpretation of "new investments"
that are subject to the reporting requirement remains unclear.
OFAC's definition of "new investments" contemplates
both direct and indirect investments, and, as a result, we believe
it is likely that OFAC would interpret the reporting requirement to
include farm-ins and share purchases. However, the Department of
State has not yet indicated that OFAC's definition and guidance
regarding "new investments" will apply to the new
reporting regime.
Annual Reporting Requirement. In
addition to the MOGE reporting requirement, GL-17 imposes an annual
reporting requirement affecting all new investments, whether in the
oil and gas sector or elsewhere, which is due on April 1 each year.
One report is required to be made available to the public
("Public Report"), and the other report is required to be
provided only to the government ("Government Report").
The annual reporting requirement is intended to help the U.S.
government assess the effects of investments made under the new
sanctions regime. The reporting scheme also allows investors to
claim an exemption under Exemption 4 of the Freedom of Information
Act ("FOIA") and establishes a process to prevent the
disclosure of such information to the public.
Public Report
The following principal information must be included in the Public Report:
- An overview of operations in Myanmar;
- The policies and procedures related to the submitter's operations and supply chain in Myanmar;
- Arrangements with security service providers; and
- An acknowledgement that the Public Report will be made public, and that the submitter has redacted any information it considers exempt under FOIA.32
In addition to providing the foregoing information, where the
investment is for (i) the purchase of real property or the lease of
any rights related to real property (which could be interpreted to
include an oil and gas interest) for more than $500,000 or (ii) the
purchase or lease of more than 30 acres of real property, then
additional information must be submitted, principally relating to
the dislocation or resettlement of citizens caused by the
investment.33
Finally, details of all payments to each governmental (national or
local) entity of Myanmar or subnational or administrative entity
asserting authority over the submitter's new investment
activities in Myanmar must be reported. Each relevant payment must
be reported by payment type, including royalties, tax obligations,
and fees. Aggregate annual payments to a particular governmental
entity below $10,000 do not need to be reported.34
Government Report
For the Government Report, the investor will need to include all
the information provided in the Public Report except for the public
disclosure acknowledgement. There are additional reporting
requirements, including whether the submitter has had meetings or
other communications with the armed forces of Myanmar or other
armed groups that are material to the submitter's investment in
Myanmar, as well as details of such
communications.35
Conclusion
Relaxing the sanctions on new investment in Myanmar,
particularly in the oil and gas sector, has been long awaited by
the U.S. petroleum industry and the international petroleum
industry at large. Whether the authorization granted in GL-17 is
the dawn of a new era of foreign investment in Myanmar's energy
resources could be first tested by the industry's participation
in the next round of bidding for open blocks, which the Ministry of
Energy has indicated will be announced in early September 2012.
This follows on the heels of the last licensing round in 2011,
which resulted in an award of contracts on nine onshore
blocks.36 According to MOGE, there currently are 12
foreign-operated onshore blocks and 29 foreign-operated offshore
blocks.37 With one exception, the foreign operators are
all Asian entities. Total, the one exception, operates the large
Yadana gas field, in which Chevron is a non-operating participating
owner, and the related pipeline that transports natural gas to the
Myanmar–Thailand border. Chevron is the only U.S. company
with oil and gas interests in Myanmar, which were grandfathered by
Executive Order No. 13047.
The Ministry of Energy has identified 14 deepwater blocks in the
Rakhine Area and two in the Moattama/Tanintharyi Offshore Area as
open for foreign investment. There are also offshore blocks in more
shallow waters that the government of Myanmar has promised to open
to foreign investment. MOGE claims Myanmar has approximately 215
million barrels of proved oil reserves, split evenly between
onshore and offshore, and more than 15 trillion cubic feet of
proved natural gas, nearly all of which lies offshore.38
In contrast, the U.S. Energy Information Administration places
proved oil reserves at 50 million barrels and proved gas reserves
at 10 trillion cubic feet. 39
Meanwhile, GL-17 is only one piece of the Myanmar petroleum
puzzle. Numerous other practical and legal reforms are required
before most U.S.-based and other international oil companies are
likely to be comfortable with making significant investments in
Myanmar. Such measures include the establishment of essential
infrastructure for business, as well as changes to the legal
framework to support the fiscal regime underpinning oil and gas
exploration and development and to ensure that foreign arbitral
awards will be enforceable in Myanmar. And for U.S. persons,
challenges to entering the market are still seen in the
unavailability of political risk insurance through the Overseas
Private Investment Corporation and the absence of a bilateral
investment treaty between the U.S. and Myanmar.40
Nevertheless, the relaxation of sanctions by GL-17 and the
equivalent relaxation of trade sanctions by other countries should
provide sufficient incentive and encouragement to enable the
international petroleum industry to work with Myanmar to identify
and exploit Myanmar's full petroleum potential.
FOOTNOTES
1 General License No. 16 and General License No. 17 issued by the Office of Foreign Assets Control, Department of the Treasury ("OFAC") on July 11, 2012; Executive Order 13619, "Blocking Property of Persons Threatening the Peace, Security or Stability of Burma," 77 Federal Register 41243-41245 (July 11, 2012).2 The Burmese Sanctions Regulations were codified in 2005 in Title 31, Part 537 of the Code of Federal Regulations.
3See Council Decision 2012/225/CFSP 2012 O.J. (L 115/25) (April 26 2012) (available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:115:0025:0026:EN:PDF).
4 In this Commentary, we refer to the Union of Myanmar as "Myanmar," except where the U.S. documents lifting the ban or explaining it or the Burmese Sanctions Regulations refer to "Burma," in which case we use the nomenclature utilized in those documents.
5 Customs and Trade Act of 1990 (P.L. 101-382); Foreign Assistance Act of 1961 (P.L. 87-195); Foreign Operations, Export Financing, and Related Programs Appropriations Act of 1997 (P.L. 104-208); Burmese Freedom and Democracy Act of 2003 (P.L. 108-61); and Tom Lantos Block Burmese JADE (Junta's Anti-Democratic Efforts) Act of 2008 (P.L. 110-286).
6 Executive Order 13047, "Prohibiting New Investment in Burma," 62 Federal Register, 28301-28302 (May 20, 1997); Executive Order 13310, "Blocking Property of the Government of Burma and Prohibiting Certain Transactions," 68 Federal Register, 44853-44856 (July 28, 2003); Executive Order No. 13448, "Blocking Property and Prohibiting Certain Transactions Related to Burma," 72 Federal Register, 60223-60226 (October 18, 2007); and Executive Order 13464, "Blocking Property and Certain Transactions Related to Burma," 73 Federal Register, 24491-24493 (April 30, 2008).
7 P.L. 95-223.
8 The term "new investment" is defined at 31 CFR § 537.311.
9 Concurrently with the issuance of GL-17, OFAC issued GL-16, which authorizes "the exportation or re-exportation of financial services to Burma, directly or indirectly, from the United States by a U.S. person, wherever located...." General License No. 16, issued July 11, 2012.
10 31 CFR 537, Subpart B–Prohibitions.
11 31 CFR § 537.311(a).
12 31 CFR § 210(c). 31 CFR § 537.203 prohibits the importation into the United States of any article that is a product of Burma, unless otherwise authorized.
13 31 CFR § 537.409.
14 U.S. Customs and Border Protection ("CBP") relies on a body of established CBP regulatory and legal precedents to confer origin on an import if the matter is in doubt. A good shall originate in the territory of a party where the good is wholly obtained or produced entirely in its territory, including mineral goods extracted in its territory.
15 In the case of the sanctions on "new investments," the President is authorized by Section 570 of the Foreign Operations, Export Financing, and Related Programs Appropriations Act of 1997 (P.L. 104-208) to waive the prohibition on new investments "if he determines and certifies to Congress that the application of such sanction would be contrary to the national interests of the United States." Presidential waiver of the ban on new investments was set in motion by way of Executive Order 13619, dated July 11, 2012, in which President Obama delegated to the Secretary of the Treasury, in consultation with the Secretary of State, authority that resulted in the issuance of GL-17 by OFAC.
16See 31 CFR § 537.311(a)(1).
17See 31 CFR § 537.311(a)(2).
18See 31 CFR § 537.311(a)(3).
19See 31 CFR § 537.311(a)(4).
20See 31 CFR § 537.311(b).
21 31 CFR § 537.302.
22 Id.
23 Section 37(a) of Burma Constitution (2008). English translation accessed on July 25, 2012 at http://www.burmalibrary.org/docs5/Myanmar_Constitution-2008-en.pdf.
24 Chapter II, Section 1.3. of the State-owned Economic Enterprises Law (1989). English translation accessed on July 25, 2012 at http://www.burmalibrary.org/docs12/SOEAct.pdf.
25 Chapter II, Section 2 of the State-owned Economic Enterprises Law (1989). English translation accessed on July 25, 2012 at http://www.burmalibrary.org/docs12/SOEAct.pdf.
26 For example, sanctions on the imports of "products of Burma" remain in place, which could pose an issue for U.S. oil and gas companies that wish to import production to the U.S. See 31 CFR § 537.203. The prohibition on the import of "products of Burma" in Section 3(a)(1) of the Burmese Freedom and Democracy Act of 2003 was extended as of July 26, 2011, for an additional year. At the time of this publication, H.R. 5986, a bill to extend the import restrictions for another three-year period, was being considered by the House. However, as a practical matter, it is likely that regional markets will readily absorb any production coming out of Myanmar in the near term.
27 Joint Fact Sheet from U.S. Treasury and State Departments: "Administration Eases Financial and Investment Sanctions on Burma," July 11, 2012 ("Joint Fact Sheet").
28 Paragraph (c), GL-17.
29 Paragraph (d), GL-17. See also Executive Order No. 13619, issued July 11, 2012. The SDN List is accessible through OFAC's web site at http://www.treasury.gov/sdn.
30 The Joint Fact Sheet states that the "United States remains concerned about ... the role of the military in the Burmese economy."
31 Paragraph (e), GL-17 and "Reporting Requirements on Responsible Investment in Burma," accessed at http://www.humanrights.gov/wp-content/uploads/2012/07/Burma-Responsible-Investment-Reporting-Reqs.pdf ("Reporting Requirements"). The Reporting Requirements are pending approval by the Office of Management and Budget as of July 11, 2012.
32 Part II of the Reporting Requirements.
33 Part II, paragraph 7 of the Reporting Requirements.
34 Part II, paragraph 8 of the Reporting Requirements.
35 Part II, paragraph 10 of the Reporting Requirements.
36 Thu, M. "Government Calls for Offshore Block Investment," The Myanmar Times (May 28–June 3, 2012).
37 Myanma Oil and Gas Enterprise dated July 2011 at http://www.energy.gov.mm/moge.pdf.
38Id.
39See http://www.eia.gov/countries/country-data.cfm?fips=BM&trk=p1.
40 Myanmar has investment treaties with China, India, Laos, the Philippines, Thailand, and Vietnam, with the only ones entered into force being those with China, India, and the Philippines. See the UNCTAD Database of Bilateral Investment Treaties provided by the United Nations Conference on Trade and Development, available at http://www.unctadxi.org/templates/DocSearch.aspx?id=779.
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