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Southeast Asia

Indonesia's natural gas dilemma
By Bill Guerin

JAKARTA - Although Indonesia is winning global natural-gas supply contracts hand over fist, the world's biggest producer and exporter of gas is inexorably losing its grip on the market in its own back yard. Indonesia pioneered and dominated the regional market for 25 years through its state-owned energy company, Pertamina.

In earlier days Pertamina was Southeast Asia's only supplier on the market and had the power to dictate prices. But the entry of new players from Malaysia, Australia, Brunei and Qatar in the late 1980s heralded a new buyer's market that remains to this day. Pertamina lost its monopoly for handling the marketing of Indonesian liquefied natural gas (LNG) overseas in 2001.

Now Malaysia, Australia, Qatar and Russia are all threatening Indonesia's regional LNG export markets. Qatar, with its huge gas reserves, has been able to lower LNG production costs, making its gas cheaper than other countries'. Qatar offered a price for a Taiwanese contract that was even lower than the Indonesian domestic price, said Minister of Energy and Mineral Resources Purnomo Yusgiantoro.

China, bent on enhancing its own energy security, started to change the equation in Asia's regional energy market when it awarded a highly contested tender to supply liquefied natural gas to Guangdong province to a consortium led by Australian energy giant Woodside Petroleum Ltd. China did follow up with a second contract for Fujian province to Tangguh LNG, an Indonesian project in Papua. Nonetheless, Australian Prime Minister John Howard, who had visited Beijing to lobby for the Australian bid, hailed China's announcement of the Guangdong contract as "a new energy partnership between our two nations".

Indonesia averages production of 2.8 trillion cubic feet of natural gas. Some 1.5 trillion cubic feet are exported via pipeline, LNG and liquefied petroleum gas (LPG), with the remainder flowing to the domestic market.

Golkar, now in opposition after having ruled Indonesia during the entire length of former president Suharto's reign, castigated the government of President Megawati Sukarnoputri for weak lobbying and for sending a delegation headed by Megawati's husband Taufik Kiemas to Beijing to push for the Guangdong contract, China's first deal to import foreign natural gas (see Indonesia's First Man, August 17, 2002). 

The shock waves have reverberated through Indonesia's gas industry, prompting Resources Minister Purnomo to warn that Indonesia could no longer rely on its old paradigms for selling LNG. The warning has not been ignored and, 12 months later, amid a stream of bad news for the country's LNG exports, the government has prepared to bite the bullet, face the loss of part of its traditional markets, and focus on domestic demand.

There could be more bad news coming. Japan, the world's largest LNG importer, Taiwan and South Korea have been buyers for Indonesian LNG for decades. Combined demand in the three countries is likely to increase by some 35 million tonnes by 2010. Though they still take most of Indonesia's LNG exports under long-term contracts of between 20 and 30 years, these will expire in the next few years.

One 8.4-million-tonne contract with Japan expires in 2010 and another, of 3.6 million tonnes, in 2011. Sales contracts with Kansai Electric, Kyushu Electric, Nippon Steel, Tohoku and Tepko, amounting to a total of 10.15 million tonnes per year, are set to expire in 2010.

Also, Japan's Tohoku Electric Power Co moved the goalposts this month by shortening a long-term LNG import contract with Pertamina and slashing the volume from 3 million tonnes to 830,000 a year. Megawati herself, on an official visit to Tokyo, vainly lobbied the Japanese government to urge Japanese buyers to extend their purchase contracts.

A week earlier Taiwan's state-owned Taiwan Power Co (Taipower) had awarded an $8.6 billion contract to its state-owned Chinese Petroleum Corp (CPP) to supply LNG to its Tatan power plant. The LNG will come from Qatar's Ras Laffan (Rasgas) project. United Resources, which lost the bid, would have sourced LNG from Tangguh.

Tangguh's gas fields contain 14.4 trillion cubic feet of proved and certified natural-gas reserves. The plant is designed to have an installed capacity of 7 million tonnes per year from two initial processing facilities, but is desperately seeking supply contracts to supplement the minor "runner up" contract to supply Fujian.

The project includes development of gas fields and construction of the LNG plant, tankers, related infrastructure and pipelines, but delivery of gas from Tangguh will not be before early 2007, coinciding with the completion of China's Fujian gas terminal.

This left the plant, where construction is expected to get under way next year, with only the one confirmed order, although a new deal, still being negotiated with Japan's Western Buyer, may give Tangguh a 2.6-million-tonnes-a-year LNG supply contract starting from 2010. Japan, to guarantee stable supply, wants the 6.0-million-tonne-a-year contract to stipulate that LNG will be supplied by two producers - Bontang and Tangguh. The whole deal would bring Indonesia $8.5 billion over 25 years.

The two major facilities, Arun at Lhokseumawe, in Aceh, and Badak, in Bontang, condense natural gas by refrigerating it to one-six-hundredth of its volume for shipment in tankers. Both plants were built in the late 1970s under supply contracts to Japan, although excess production was sold to other buyers. They have combined production capacity of 31.6 million tonnes. Bontang accounts for 22.25 million tonnes of that, and this output alone accounts for some 25 percent of the Asian LNG market.

However, neighboring Malaysia is expanding output this year from its third LNG venture at Bintulu in the north of Borneo that could boost its capacity to 23 million tonnes a year, leaving Bontang in second place. The Bontang plant uses a pool of natural gas piped from the offshore East Kalimantan fields operated by Total, Unocal and Vico. It is owned 55 percent by Pertamina, 20 percent Vico, 10 percent Total and 15 percent by Japan Indonesia LNG Co (JILCO).

Total, the world's fourth-largest energy firm, has said the future of its business in Indonesia would depend on Japanese buyers' readiness to extend their LNG purchase contracts from the Bontang plant. Total supplies 65 percent of the feed gas to the eight refineries at Bontang. LNG and LPG products are exported and the condensate is returned to Unocal facilities in Santan, East Kalimantan.

Pertamina plans a ninth production line, Train-I at Bontang, to compensate for falling output from the Arun plant, which liquefies gas supplied by Exxon Mobil Corp. But Total chief executive officer Thierry Desmarest has said the company is unlikely to build the new train until it can confirm that Japanese buyers would extend their contracts.

"It is more important for us to confirm that our existing trains have a market," he warned. This ninth train, if it goes ahead, would add 3 million tonnes' capacity and cost about $550 million to build. The Bontang plant can also expect a much longer production period than originally predicted, with discoveries of new reserves in East Kalimantan still continuing. One of Korea Gas's two contracts to buy LNG from Arun, for 2.3 million tonnes a year, ends in 2007 and the Tohoku Electric contract for 3 million tonnes a year ends in December 2004.

All the signs are that the government is fundamentally rethinking its domestic energy strategy. Moving to natural gas from the expensive, mostly imported, fuel oils would redress a situation where the country's domestic gas sector, despite extensive reserves, remains almost undeveloped compared with its neighbors.

Investment is planned in pipelines and LNG receiving terminals to supply the essential infrastructure for domestic distribution. The Indonesian government is currently negotiating with a consortium to build two receiving terminals, expected to be completed by 2007.

State-owned gas-distribution company Perusahaan Gas Negara (PGN) and state-owned power utility Perusahaan Listrik Negara (PLN) will join the consortium to build the terminals, one near Jakarta and the other at Surabaya, the country's second-largest city and industrial area.

LNG could not compete with oil-based fuels for years in the local market because of the government's subsidy policy. International Monetary Fund insistence on the gradual scrapping of the fuel subsidies has also helped to bring the domestic gas market into planner's radar screens.

Major customers include PGN, the state fertilizer producer, which processes it into ammonia and urea, and scores of large industrial users throughout Java. PLN has now been persuaded to look on natural gas as the fuel of choice for several of its power plants. Increasing the amount of LNG and piped gas sold in Java and other areas of the country that face energy shortages makes real sense, with annual power demand estimated to be growing by about 10 percent annually.

Proper development of the country's domestic gas market would not only produce enormous savings, but would also deliver an environmentally clean fuel.

Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
 
Jul 22, 2003



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(May 23, '03)

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