In mid-March 2007, Myanmar declared that it would export gas by pipeline from discoveries in off-shore block A-1 and potential reserves in A-3 block to China instead of India. This event is another setback to India's energy diplomacy in Myanmar. India had been wanting to import gas from these blocks by pipeline since 2003. Indian state-owned oil companies Oil and Natural Gas Limited (ONGC) and Gas Authority of India Limited (GAIL) have a 30% stake in the A-1 and A-3 block, which is operated by the South Korean Daewoo with 60% of the shares. Ko-Gas of Korea holds 10% of the shares. The A-1 and A-3 blocks are situated in the Shwe gas field (Rakhine coastline) in the Bay of Bengal and hold an estimated gas reserve of 4 to 6 trillion cubic feet. India was exploring various options for importing gas from these blocks.

India faced the first hurdle when the proposed Myanmar-Bangladesh-India pipeline could not materialize due to Bangladesh's reluctance. Although both India and Myanmar were enthusiastic, Bangladesh adopted a non-commercial attitude, demanding a number of concessions from India in return for allowing its territory to be used for the pipeline. India refused Bangladesh's demands on the grounds that bilateral issues should not be part of any trilateral agreement.

However, due to the delay in the gas deal with India, Myanmar went ahead and signed a MoU with PetroChina for the sale of gas from the Shwe gas field to China by overland pipeline to Kumning in China's Yunnan province. However, to explore alternative routes bypassing Bangladesh, GAIL had also envisaged the import of gas through a 1573 km overland pipeline from Myanmar via the northeastern Indian states of Mizoram and Assam to West Bengal and finally to Gaya in Bihar. GAIL along with China and Thailand had submitted their bid to the state owned Myanmar Oil and Gas Enterprises (MOGE) to import gas from the A-1 and A-3 blocks through pipelines. MOGE found the bids for selling gas by pipeline to either China, India or Thailand inadequate, and called for bids to sell 3.5 million tons per annum as Liquefied Natural Gas (LNG) from the A-1 and A-3 blocks. GAIL also bid for this, but its bid was not the highest. Marubeni of Japan and KoGas of South Korea were the top bidders for importing this gas in form of LNG. All the bids were under evaluation, and Myanmar had assured India that it would look for export options when the survey of gas reserves in A-3 blocks was completed by July 2007.

However, in March, Myanmar unexpectedly declared that it would be supplying gas to China from its A-1 and A-3 blocks. Myanmar's decision appears to be in reciprocation for the Chinese veto in the UN Security Council favoring Myanmar against the US resolution. In January 2007, Error! Hyperlink reference not valid. along with Russia had vetoed a US resolution in the UNSC, calling on Myanmar's military government to release all political prisoners, speed up progress toward democracy, and stop attacks against ethnic minorities. According to China and Russia, the Security Council was not the proper place to discuss Myanmar because the country did not pose a threat to international peace and security.

Access to Myanmar's energy resources permits a reduction in China's dependence on oil supplies through the Malacca Straits. About 80% of all oil supplies to China are shipped by tankers through these Straits and China is apprehensive about energy supplies through them in times of conflict with Japan or the US or any regional state. Therefore, Myanmar serves as an alternative energy supply route for China bypassing the Malacca Straits.

Increasing Chinese access to Myanmar's energy resources is a matter of concern for India because of its strategic implications. Due to growing Sino-Myanmarese energy ties, China is investing heavily in developing ports in Myanmar, gaining greater access to the Indian Ocean. It might cause difficulties for India if its improving relations with China deteriorate in future.

Myanmar's latest move indicates that China is miles ahead of India in tapping Myanmar's energy potential. Although India and China are cooperating in some energy areas to avoid costly rivalries, the case of Myanmar is different. It is not just on the energy security that both Asian giants are locking horns, but their larger strategy to bring this geo-strategically critical nation into their sphere of influence by engagement in the energy sector. Myanmar prefers China to India because China can protect Myanmar's military regime with its veto from the American shadow in the UNSC. Now, with India having lost the battle for the A-1 and A-3 blocks, the A-7 block is the last hope for India. However, this will again be tough for India's energy diplomacy due to the China factor.