* Construction on China side faces 2-3 month delay
* Myanmar looks to coal to meet acute power shortages
* New gas discoveries to be put to domestic use first
By Jason Szep
NAYPYITAW, Myanmar, June 12 (Reuters) - A pipeline connecting western Myanmar to China is ready to carry gas from July, but it won't be fully operational for about three more months due to construction delays in China, Myanmar's energy minister said.
The multibillion-dollar pipeline stretches 870 km (540 miles) from the Indian Ocean to the Chinese border and will deliver oil and gas to energy thirsty western China and generate much-needed revenue for Myanmar's new reformist government.
"The pipeline construction inside Myanmar is 100 percent finished. But the China portion that is over 1,600 km (990 miles) long, they are not able to finish in time," Than Htay said in an interview in the capital, Naypyitaw, estimating a delay of two or three months.
Despite the delay, gas will begin flowing in the $2 billion pipeline from July but it will be used domestically until construction in China is completed, he told Reuters. "For Myanmar's domestic utilisation, we can take (gas) starting from July," he said.
A parallel $2.3 billion 770 km oil pipeline would be completed in September, he added.
China National Petroleum Corp (CNPC), the country's top oil and gas producer, owns the pipelines, which will channel natural gas from the Shwe fields off the coast of Western Rakhine State along with oil originating from the Middle East and Africa.
CNPC said last week it had completed construction of the gas pipeline and 94 percent of the crude pipeline was finished. It also said has completed six oil storage tanks on an island off western Myanmar, with six more due to be finished soon. CNPC could not provide further comment on Wednesday.
The pipelines are China's most strategically important investment in Myanmar, a vital energy security asset that will reduce Beijing's reliance on shipping through the narrow choke-point of the Malacca Strait. Thousands of Chinese workers were enlisted to build them. In some areas of Myanmar, the pipelines have stoked anti-Chinese sentiment, raising security concerns.
In May, ethnic minority guerrillas attacked a compound of the state-owned Myanma Oil and Gas Enterprise near the pipelines in northern Shan State not far from the Chinese border, killing two people and wounding three, according to state media.
That incident added to debate over how well authorities can secure the pipelines, which are capable of carrying 440,000 barrels of oil a day and 12 billion cubic metres of natural gas a year to China's southern Yunnan province, one of its most under-developed regions.
"The security will be strong," said Than Htay. "If necessary, in some areas the armed forces will take charge. In some areas, the police will take charge. In some areas, the pipeline company security personnel will take charge."
DOMESTIC ENERGY SHORTAGES
The project was agreed with Myanmar's former military junta as a way to generate much-needed foreign exchange while the country was under Western economic sanctions. In March 2011, the generals ceded power to a quasi-civilian government that has embarked on a series of democratic reforms including an economic transformation that is projected to vastly increase energy demand.
Than Htay repeated that new energy discoveries would be used to address acute domestic energy supply shortages in Myanmar, a break from the past when the vast majority of Myanmar's energy resources were exported to neighbouring Thailand and China.
At present, just a quarter of Myanmar's estimated 60 million people have regular access to electricity.
Hydroelectric plants have proved unreliable due to seasonal rain patterns and only 12 percent of power generated by Myanmar comes from gas.
"Any new discovery we will use that for our domestic utilisation first ... if we have excess hydrocarbon, it will be considered value-added for selling to other buyers," Than Htay said.
"Power is very much crucial to our transformation process," he said, adding that gas sales contracts signed by the previous government still need to honoured.
Than Htay said Myanmar's domestic requirements for natural gas were 500 million cubic feet per day, but the current supply available after exports was just over half of that, or 270 million cubic feet.
Myanmar would therefore consider following China and Thailand in using coal power in addition to hydro power and gas, he said.
"We need to turn to that option. we need to produce electricity from coal, he said, adding that in terms of fuel, Myanmar had "a huge gap between supply and demand."
Coal is cheaper than natural gas and other Southeast Asian countries, including Thailand, Vietnam and Indonesia, have been turning to the dirtier fuel for power generation despite its higher levels of carbon emissions.
Myanmar is now using nearly 100,000 bpd of liquid fuels such as diesel and motor oil, he also said. Its crude production from both onshore and offshore was a fifth of that, or about 20,000 bpd. (Additional reporting by Aung Hla Tun; Editing by Martin Petty, Tom Hogue and Ed Davies)