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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
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