Aug. 28 (Bloomberg) -- Myanmar’s army seized control of a rebel-held town on its border with China, raising concern a 20- year ceasefire accord could collapse, threatening planned oil and gas projects in the region.

Rebels attacked Myanmar police patrolling a border gate in the Kokang-controlled area of northeastern Shan state, killing at least one, the Washington-based U.S. Campaign for Burma said in a statement late yesterday. Businesses are closed and more than 10,000 Kokang refugees have fled across the border into China on concern fighting will break out, the group said.

“The junta should withdraw its additional troops sent to Kokang,” Peng Jiasheng, who heads the local rebel army, said in a statement released through U.S. Campaign for Burma. He called a new committee set up by the regime to administer the area “illegal and illegitimate.”

Myanmar has Asia’s seventh-largest natural gas reserves, an energy source China is keen to tap to help fuel economic growth. South Korea’s Daewoo International Corp. said this week it would invest 2.1 trillion won ($1.68 billion) in a Myanmar gas project to supply China National Petroleum Corp., that country’s largest oil company.

Myanmar has increased its foreign currency holdings fourfold since 2004 to $3.6 billion, mostly on oil and gas sales to China and Thailand. Talks continue on how construction costs for an 825-kilometer (513-mile) overland gas pipeline may be split, Daewoo International said.

Border Guards

Myanmar’s military rulers have been attempting to persuade armed ethnic groups to become border guards partially under their control. The Kokang and other minorities have resisted the junta’s request to lay down their weapons and form political parties.

“The Burmese are surrounding the ceasefire groups so they cannot move unless they fight their way out or surrender,” said Khuensai Jaiyen, director of the exiled Shan Herald Agency for News based in northern Thailand, referring to the country by its former name. “The groups fear that China will close the border and then they will have to fight to the death.”

China has asked the ceasefire groups not to start shooting at Myanmar’s army because it “doesn’t want a civil war right at its borders,” Jaiyen said. “That’s bad for business.” Chinese security forces have clashed with ethnic minorities in Tibet and western Xinjiang in recent years.

Drug Trade

Four allied ceasefire groups said in an Aug. 21 statement released by the Washington-based U.S. Campaign for Burma that the junta was threatening them under the guise of a campaign to eradicate illicit drugs. The groups, who have pledged to help each other in the case of war, encouraged peaceful dialogue with the government and pledged to “never secede and announce independence,” the statement said.

“In anticipation of a resurgence of war, tens of thousands of ethnic minorities have fled to the border,” Aung Din, executive director of the U.S. Campaign for Burma, said in the statement.

Myanmar’s constitution, passed by a referendum last year, calls for a unitary state and says “all the armed forces in the Union shall be under the command of the Defense Services,” the International Crisis Group said in an Aug. 20 report.

Ceasefire groups are reluctant to become border guards because that “would greatly reduce their autonomy and would represent a major concession in return for which they are being offered no political quid pro quo by the regime,” the Crisis Group said in the report. Myanmar officially recognizes 135 ethnic groups.

Border clashes would also jeopardize national elections planned for next year that Myanmar’s government hopes will enhance its international legitimacy. Earlier this month, a court sentenced opposition leader Aung San Suu Kyi to three years with hard labor for violating her detention order. The sentence was immediately commuted to 18 months of house arrest.

To contact the reporter on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net

Last Updated: August 27, 2009 21:54 EDT