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Via STRATFOR (subscription required), further analysis of the disputed $3.5 billion Xayaburi dam project in Laos’ northern province:

The Thai company hired to build a massive hydroelectric dam for Laos on the Mekong River announced Jan. 23 that it was pushing ahead on construction of the project, which has drawn severe criticism from Laos’ neighbors and could contribute to regional tensions. Downriver countries such as Cambodia and especially Vietnam fear that the 1.2 gigawatt dam will cause ecological damage and change agricultural patterns that will affect tens of millions of people in the Mekong Basin. Though Vietnam has called for a halt in the dam’s construction, it also wants to avoid a rift with Vientiane and does not want to give other potential patrons, including China or Thailand, an opportunity to undermine Vietnamese influence in Laos. Hanoi will find it has few ways to exert pressure on Laos without damaging bilateral relations.

Analysis

CH. Karnchang, one of the largest construction firms in Thailand, said work at the $3.5 billion Xayaburi dam in Laos’ northern province was already about 10 percent complete. Controversy has surrounded the project since 2010, when Laos and Thailand first signed an agreement to build the dam, the terms of which stipulate that Thailand’s state power company will receive 95 percent of the electricity the dam generates. The Mekong River Commission — a four-nation body representing Vietnam, Laos, Cambodia and Thailand tasked with managing regional developments — carried out a review in April 2011 calling for an environmental study and a delay in construction. Nonetheless, Vientiane decided to move forward on the project with the support of the Thai government, and a groundbreaking ceremony for Xayaburi was held in November 2012.

To Vientiane, the Xayaburi project and the other hydroelectric dams planned along the Mekong River represent one of the most promising prospects for its economic future. With a population of 6.2 million and per capita gross domestic product of $1,320, Laos remains one of the least developed countries in Asia. Nonetheless, Laos’ mountainous geography and numerous rivers make it a potential generator of hydroelectric power; its total hydropower potential is estimated at around 18 gigawatts, of which 12.5 gigawatts could be generated by the Mekong Basin.

Vientiane hopes to use this hydropower capacity to produce revenue and investment opportunities by supplying electricity to neighboring countries where demand for energy is growing, thereby transforming the landlocked nation into the “battery of Southeast Asia.” In 2010, the government announced an ambitious plan to build 20 hydropower plants, including nine along the Mekong River, over the next 10 years, bringing its total hydropower capacity to 8 gigawatts from the current level of 2.5 gigawatts.

However, even at the early stages, Laos’ ambitions for hydropower dams encountered significant oppositions due to concerns from downriver countries about the environmental impact of the Xayaburi dam. Vietnam and Cambodia, which rely on the Mekong Delta for more than half their total food sources, were concerned that the dam would disrupt fish migrations, block nutrients for farming and allow saltwater to creep into the Mekong River Delta by slowing the river’s flow (though the actual reduction of flow is still being studied).

The objections by other countries in the region to Vientiane’s plans illustrate the country’s geographic constraints. Confined by mountains and surrounded by more powerful neighbors, including China, Vietnam, Thailand, Cambodia and Myanmar, Laos’ location determines a development path largely based on external factors. This has led Laos to either pursue major benefactors or play its neighbors, which view Laos as a buffer, off one another to Vientiane’s advantage.

In particular, Vientiane’s hydropower ambitions risk straining ties with Vietnam, which has long been Laos’ biggest patron. Despite its own power needs, Hanoi strongly opposes the Xayaburi dam, saying it will damage Vietnam’s agriculture production and aquaculture. Vietnam’s opposition also stems from fears that the Xayaburi dam will set a precedent for the other 10 dams, including two in Cambodia, planned for the lower Mekong River. Any reduction or change in the flow of the Mekong River would almost certainly affect Vietnam’s agriculture sector, which employs about half the population and depends on the river’s waters.

Despite its opposition, Hanoi has few options to pressure Laos over the dam project. Recent increased attention from outside powers on Laos has Vietnam concerned about the possibility of losing influence in the country, which Hanoi consider a strategic buffer region protecting its narrow midsection from threats to Vietnam’s west. In the past decade, China has used its economic strength to expand its influence in the region, becoming one of the top foreign investors in Laos in recent years. Thailand has also long wanted to increase its influence in Laos as part of its regional economic strategy and has invested substantially in Laos. The Xayaburi dam is one project that reveals this strategy. With its own economic and political influence in the region waning, Vietnam fears that the growing rift with Laos could create greater space for other countries to expand their influence there at the expense of Hanoi.

Because Laos is determined to push forward with its dam projects, strained ties with neighboring countries — especially Vietnam — are likely unavoidable. While Vietnam retains strong influence over Laos, it will have to deal with increased competition from Thailand and China, which a rift between Laos and Vietnam would likely accelerate.